When the Federal Trade Commission launched an extensive probe into Amazon’s $8.5 billion deal to buy MGM — its first major decision since President Joe Biden installed Lina Khan as chair in June — the agency appeared to summarily reject the past four decades of U.S. antitrust enforcement.
Since the early 1980s, maximizing consumer welfare has been the North Star for antitrust enforcers and the judiciary. And the Amazon-MGM deal looks like a winner for consumers. Amazon Prime’s nearly 150 million U.S. members, who get Prime Video as a side benefit, could enjoy James Bond and the rest of MGM’s entertainment library. Upping Prime Video’s game in the highly competitive video streaming industry also might help check future price hikes from leaders like Netflix (NFLX) and Disney (DIS) service Disney+.
Yet the 32-year-old Khan argues that the narrow focus on economic efficiency and low prices “has warped America’s antimonopoly regime.” The House antitrust panel’s October 2020 report on competition in digital markets, which Khan helped author, laid out her philosophy, which some refer to as “hipster antitrust.” Congress intended antitrust law to “protect not just consumers, but also workers, entrepreneurs, independent businesses, open markets, a fair economy, and democratic ideals,” the report asserts.
Antitrust Enforcement A Top Biden Priority
President Biden isn’t just embracing progressives’ battle to rein in Big Tech. He’s made rolling back corporate power a central plank of his economic policy. But it will hinge on an expansive regulatory agenda that may be headed for an epic clash with a conservative Supreme Court.
“We’re now 40 years into the experiment of letting giant corporations accumulate more and more power,” Biden said July 9, as he signed an order targeting agriculture, airlines, banks, telecom, shipping, rail, hospitals, pharma, real estate and more. “Bringing fair competition back” will lower prices, raise wages and help ensure the economy “works for everybody.”
Yet others see potential for a far-less-uplifting outcome if Khan’s view of antitrust takes hold. The “attack on low prices as a central antitrust goal is going to hurt consumers, but it is going to hurt vulnerable consumers the most,” antitrust scholar Herbert Hovenkamp argued in a 2020 paper.
Khan’s views on antitrust enforcement are well-known. She’s been a progressive star since publishing Amazon’s Antitrust Paradox in 2017 as a law student. The Yale Law Review article accused the e-commerce giant of predatory pricing to cement its first-mover advantage. The surprise is that Biden is singing the same folk song.
So how well does Khan’s and Biden’s economic diagnosis stand up to scrutiny? And what are the prospects for their “fair competition” pitch if conservative-tilted courts are ultimately calling balls and strikes?
Facebook, Amazon Stock Defy Wrath Of Khan
The Amazon-MGM deal is under scrutiny not least because Amazon.com (AMZN) is under scrutiny. Amazon, Apple (AAPL), Facebook (FB) and Google “have abused their role as intermediaries to further entrench and expand their dominance,” concluded the House antitrust panel’s digital markets report that bears Khan’s imprint.
In February, the FTC launched an investigation into Facebook’s $1 billion deal to buy chat-based customer-service software maker Kustomer. That’s going on as the Khan FTC pushes ahead with the agency’s bid to break up Facebook that was initiated at the end of the Trump administration.
Investors don’t seem to see a major threat. Google parent Alphabet (GOOGL), Apple and Facebook stock have hit all-time highs this month. After Khan’s ascension as FTC chair, Amazon stock ran to a record, before its second-quarter revenue miss briefly halted its momentum.
Recent antitrust rulings help explain the apparent lack of concern.
The Supreme Court’s June opinion rejecting NCAA limits on educational benefits for student-athletes reads like a celebration of noninterventionist antitrust law, William Kovacic, who chaired the FTC under President George W. Bush, told IBD.
“Markets are often more effective than the heavy hand of judicial power when it comes to enhancing consumer welfare,” Justice Neil Gorsuch wrote. Courts examining business dealings should take care not to “set sail on a sea of doubt,” he added, elevating William Howard Taft’s warning of the danger of a “shifting, vague and indeterminate” antitrust standard.
The words seemed to carry a not-too-subtle message for the Biden team, Kovacic says. “Until the Congress changes the law, we will continue to endorse the approach we have taken for the last 40 years,” he said.
Can Parties Unite On Antitrust Law?
The House Judiciary Committee narrowly passed a package of antitrust measures in June called the Ending Platform Monopolies Act. Amazon has warned of massive disruption from restrictions preventing the biggest online platforms from favoring their own goods and services. “These bills would jeopardize Amazon’s ability to operate a marketplace for sellers, potentially resulting in hundreds of thousands of small and medium-sized businesses losing access to Amazon’s customer and services.”
Another measure would shift the burden of proof for Big Tech acquisitions under antitrust law. Companies with a market cap of $600 billion or more — including Apple, Amazon, Facebook and Google — would have to prove that a proposed merger wasn’t anticompetitive.
GOP Sen. Josh Hawley’s antitrust bill goes much further, essentially banning acquisitions by companies with a market cap over $100 billion.
Skepticism about Big Tech and excessive corporate power is clearly bipartisan. That helps explain why Khan’s nomination as commissioner sailed through the Senate with 21 Republican votes. Yet Biden didn’t reveal until after the vote that he intended to name Khan FTC chair, which might have given some senators pause.
Fundamental changes to antitrust law are unlikely to pass the closely divided Congress this year, Goldman Sachs analysts say. Some Democratic lawmakers have voiced opposition to the House antitrust package. Meanwhile, Hawley’s Trust-Busting for the 21st Century Act has zero co-sponsors.
Antitrust Enforcement Losing Streak
As the Biden administration aims to ramp up antitrust enforcement, it inherits something of a losing streak. Even cases that seemed winnable have been lost, Skadden antitrust attorneys Steve Sunshine and Julia York wrote.
The Justice Department failed to block the AT&T (T) takeover of Time Warner in 2018. New York lost its bid to stop T-Mobile (TMUS), the No. 3 wireless carrier, from buying No. 4 Sprint. The upshot: “Merely establishing a presumption of likely anticompetitive effects does not guarantee a government plaintiff a litigation victory.”
Khan wrote after a 2018 Supreme Court ruling for American Express (AXP) that it had “dealt a huge blow” to antitrust enforcement. The ruling would make it “easier for dominant firms — especially those in the tech sector — to abuse their market power with impunity.”
AmEx’s contracts prohibited merchants from steering customers to a payment type with a lower transaction fee. To compensate, merchants charged higher prices. Yet a 5-4 majority found that wasn’t sufficient to prove consumer harm. AmEx’s rewards to cardholders and indirect benefits to merchants complicated the analysis.
Kahn Rejects Antitrust Enforcement ‘Rule Of Reason’
Khan’s strategy to achieve a better win-loss record — despite the courts — is taking shape.
Prior antitrust regulators, when they emerged from the dugout, strictly played defense. Khan has served notice that she’ll be a hurler.
At her first meeting as chair on July 1, the commission voted 3-2 to rescind a 2015 Obama-era policy statement on Section 5 of the FTC Act. Kahn said that policy “doubled down on the Commission’s long-standing failure to investigate and pursue ‘unfair methods of competition.’ “
Section 5 of the FTC Act, passed in 1914, empowers the agency to police corporate conduct that hadn’t yet violated the Sherman and Clayton Acts, but could if left unchecked, according to Khan. Yet the Obama-era FTC essentially decided to put its Section 5 power in a drawer and lock it away.
That ill-defined, rarely used authority made Obama-era antitrust enforcers uneasy. Why? Because, as Kovacic has written, it comes with an “absence of limiting principles.”
Courts have an entrenched, if murky, “rule of reason” standard for judging alleged antitrust violations. They assess all pro-competitive and anti-competitive factors to gauge whether the behavior is contrary to consumer welfare.
With antitrust cases proving hard to win, Khan and her Democratic colleagues are rejecting a “rule of reason” framework. In other words, they’re trying to expand the strike zone for antitrust enforcement.
Because cases brought under Section 5 shield defendants from liability for treble damages in private litigation, courts might be more open to finding fault.
But what should be the limiting standard in antitrust law? As it is, the consumer welfare standard is hard to interpret. But courts might view Khan and Biden’s “fair competition” standard as too fuzzy, like “setting sail on a sea of doubt.”
EU Google Antitrust Fines
Section 5 cases could look like the European Union’s more proactive enforcement regime for “dominant” firms.
The European Union fined Google $2.8 billion in 2017, charging that its search results favored its own comparison-shopping site. The FTC ended its probe covering similar ground in 2013 without taking action.
Berin Szoka, president of think tank TechFreedom, criticized the fine, saying it showed that European rules were “about protecting some companies against more successful ones, not about protecting consumers,” who liked Google’s service. While Google is still appealing, it complied with an order to halt the practice. Rivals argue its modified behavior isn’t much better.
In all, the EU has hit Google with $10 billion in antitrust fines. That includes a $5 billion penalty for using its Android mobile operating system to preserve its search dominance. Google is appealing that one too, but gave up its default search position in Europe in the meantime.
In 2020, the Justice Department filed a Google antitrust suit for maintaining search and internet advertising monopolies through anticompetitive means. The U.S. v. Google antitrust case won’t go to trial until late 2023. Extended appeals could follow.
FTC Competition Rules
U.S. antitrust law is a slowly evolving patchwork made up of case-by-case decisions. But Khan argues that drawn-out cases and ambiguous rule-of-reason opinions invite dominant firms to abuse their market power.
So to keep companies on the straight and narrow, she plans to erect a series of U.S. competition rules. The Biden executive order calls for FTC rules covering a broad spectrum of practices said to contribute to lower wages or higher prices.
The FTC might restrict employers from requiring workers to sign noncompete agreements. Right-to-repair rules could break the lock companies place on repairing their goods, from Apple iPhones to John Deere tractors. Biden wants rules covering internet marketplaces and online data collection and surveillance. Agreements between drugmakers to delay market entry of a competing product are another focus. FTC competition rules also could limit occupational licensing restrictions and exclusionary real estate practices.
There’s bipartisan concern about a number of these areas. Yet writing competition rules would be a huge departure from the agency’s usual quasi-judicial process focused on specific facts in individual cases.
Courts Reining In Regulators
FTC commissioner Noah Phillips, a Trump appointee, sees a historical parallel in the New Deal-era National Industrial Recovery Act, which the Supreme Court struck down in 1935. The ruling held that Congress couldn’t delegate broad legislative authority allowing regulators to draw up “codes of fair competition.”
Khan’s rule-making agenda “may present the most stark and real nondelegation controversy of our time,” Phillips told a recent forum.
In an April case involving payday lender AMG Capital, all nine justices agreed that the FTC had wrongly assumed authority to impose financial penalties that wasn’t explicitly provided by Congress. That could be a precursor to a harsh judicial reception for Kahn’s FTC rule-making, Kovacic wrote.
In striking down the Centers For Disease Control’s eviction moratorium on Aug. 26, the conservative majority issued a loud call for regulators to narrowly interpret their mandates. “We expect Congress to speak clearly when authorizing an agency to exercise powers of ‘vast economic and political significance.’ “
Industry Consolidation Impact Mixed
Apart from the legal underpinnings of Biden’s antitrust push, how strong is the economic case for combating corporate consolidation?
Consolidation has increased in 70% of industries since the late 1990s, Goldman Sachs economists find. Nearly 20% of industries now qualify as “highly concentrated,” based on DOJ and FTC criteria.
“Highly concentrated” industries include interactive media and services, led by Facebook and Google. Telecom services, airfreight and the beverage industry also qualify. Tech hardware, pharma and airlines fall a bit short of that threshold.
Lax antitrust enforcement only partly explains consolidation trends, Goldman says. High-productivity firms also have won market share from less-productive rivals.
Further, as big players like Walmart (WMT) entered more markets from 1990 to 2014, local industry concentration actually fell, Richmond Fed economists have shown.
Because “the local market is most relevant for most consumer purchases,” Goldman’s Joseph Briggs and Alec Phillips reach a much different conclusion than Biden and Khan. “The increase in national concentration likely increased consumer choice and welfare,” the Goldman economists write.
Even so, they add, the growing scale and clout of national players “might have been harmful to small sellers and input producers.”
Where consolidation has significantly reduced local competition, consumers appear to have suffered. The small-government-oriented American Action Forum finds a strong case that hospital mergers raise costs without raising quality. The group highlighted studies showing that prices tend to rise 20%-40% when hospitals within the same market merge.
Merger Activity Ramps Up
Wall Street’s early reaction to the Biden administration’s attempt to stiff-arm M&A activity has been to step on the gas. The FTC said in August that it’s struggling to stay abreast of a “tidal wave” of mergers. The 2,436 deal filings through August have already blown past the elevated annual totals from 2017-2019.
Despite a skeptical, if not hostile, attitude among antitrust enforcers, the vast majority of these deals are likely to go through.
While Congress may increase funding for merger enforcement, the FTC and DOJ are already devoting significant resources to the Facebook and Google antitrust cases. “They can only fight so many battles,” Kovacic said.
Khan Uses Bully Pulpit, Bulls Like Big Tech
That’s not to say the Biden team won’t create major headaches for merging parties. More mergers will face reviews and the probes will last several months longer. And where concerns arise, the agencies will be less likely to negotiate a fix.
To make deals approvable, regulators have long consented to divestitures. Sometimes regulators settle for behavioral remedies. To seal the T-Mobile-Sprint merger, the Justice Department relied on Dish Network’s commitment to build out a national wireless network. But Khan says the track record of both types of fixes isn’t great.
“The antitrust agencies should more frequently consider opposing problematic deals outright,” Khan wrote Aug. 6. She was responding to a letter from Sen. Elizabeth Warren, who had raised concerns about defense mergers. The news added to doubts that the FTC will clear the pending Lockheed Martin (LMT) acquisition of rocket engine manufacturer Aerojet Rocketdyne (AJRD).
When regulators do decide to negotiate, “expansive divestiture demands could result in a remedy that frustrates the purpose of the deal,” warned antitrust attorneys at tech-focused law firm Wilson Sosini.
Khan is clearly using her bully pulpit to the utmost, trying to dissuade merger talks from reaching fruition.
But right now it’s all talk. She has turned a few heads, but the S&P 500 and Big Tech leaders have kept cruising. Facebook stock is up 12% since Khan took the FTC’s helm on June 15, while Apple has climbed 15% and Google stock 17%. That’s despite reports that the Justice Department is preparing to file a second Google antitrust suit over its ad dominance.
The new antitrust enforcement regime may not change all that much “until they show that they can sue and win,” Kovacic said.
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