In recent years, the Federal Trade Commission (FTC) has taken an aggressive stance toward mergers and acquisitions (M&A). In its complaint against Meta’s acquisition of VR-fitness company Within, the agency uses the potential competition doctrine, which has seen little use since the 70s. Though the FTC’s bid to stop Meta’s acquisition was rejected by U.S. District Judge Edward Davila, the potential competition doctrine was not. The interpretation of the doctrine given by the court offers highly lenient terms, lowering the bar for the application of potential competition in the future.

Under the potential competition doctrine, the agency argued that Meta would have entered the VR-fitness market as a competitor without its acquisition of the VR-fitness company, Within. Thus, the merger limits competition by depriving the VR-fitness market of an additional competitor. The court made its decision based on the facts of the case, but it still permitted the doctrine to be used as a standard by which anticompetitive behavior could be judged.

In a Q&A with FTC Chair Lina Khan, Khan acknowledges that she is not concerned with winning every case, but is instead looking to create a legal precedent to build future cases. The judge’s decision to not reject the doctrine — as Meta requested — gave Kahn the precedent she was looking for.

In a legal opinion letter, antitrust expert Steven Cernak examined the court’s decision to apply potential competition. He first examines the two major prerequisites for the doctrine’s application. Firstly, the relevant market must be concentrated, with the acquired firm being dominant. Secondly, the acquiring firm must have a feasible means of market entry aside from the acquisition. This second prerequisite is the primary contention in the Meta decision.

To determine the likelihood that the acquiring firm would have entered the market in lieu of an acquisition, the courts must establish a standard and evidence to use.

There are multiple precedents to develop a standard for evaluating likelihoods in this matter. The Fourth Circuit requires “clear proof,” and the Second Circuit requires evidence the firm “would likely” have entered. At the same time, the Fifth Circuit uses a “reasonable probability” standard that is triggered if the chances of the firm entering the market are “greater than 50 percent.” In the Meta decision, the court opted for the “reasonable probability” standard, the most lenient of the lower court standards.

Regarding what constitutes evidence, there are generally two accepted types. “Objective” evidence only requires the courts to demonstrate that the firm had the capacity to enter the market if not for the acquisition. “Subjective” evidence is based on statements made by the acquiring firm that would point to an entry. The court used both types of evidence. First relying on objective evidence and moving on to subjective evidence when that failed. Because Meta lacked resources in the specific field of VR-fitness technology and made no statement about entering without the acquisition, there was no objective or subjective evidence.

Though the facts did not align with the FTC’s complaint this time, the lenient interpretation of potential competition indicates that the agency could win future cases using this argument. This case creates the precedent the FTC has sought and will likely guide future enforcement actions. Seventh Court Judge Frank Easterbrook wrote on the use of potential competition in South Austin Coalition Community Council v. SBC Communications, Inc. He points out that evaluating the actual potential competition lost in a merger is “difficult for the best economists and would be nearly impossible as a subject for trial.” Especially, according to Judge Eastbrook, when antitrust agencies assert so much control over firm interaction.

The level of discretion given to the antitrust agency becomes a pandora’s box, allowing wide-reaching antitrust actions to take place.

Published in the Medium.