The Federal Trade Commission’s (FTC) recently proposed merger guidelines have broken the mold from prior guidelines by attempting to argue for changes to the status quo instead of simply describing it. Despite the grand nature of the FTC’s guidelines, their arguments overwhelmingly relied on one court decision from 1962, Brown Shoe Co., Inc. v. United States, citing it 14 times. For context, the guidelines were 34 pages long, not including the appendix, of those pages, nine had a Brown Shoe citation. Unfortunately for the FTC, this dubiously decided case does not hold water when tested and provides no real support as the cornerstone for the guidelines.
Brown Shoe involved the merger of two shoe companies in 1956, Brown Shoe Company and G.R. Kinney Co. Their total combined market share for retail shoes, as found on page 370 U.S. 345 of Brown Shoe, would have been 7.2 percent, hardly a market-dominant firm. There were three challenges made by the Department of Justice upon reviewing the merger: 1) the horizontal merger of both stores’ manufacturing. 2) the horizontal merger of both stores’ retail. 3) the vertical merger between their manufacturing and retail, which could foreclose Brown Shoe’s rivals. The courts dismissed the first challenge but affirmed the latter two, and the Supreme Court, under Chief Justice Warren, ordered their divestiture.
The issue with their decision was that the courts upheld that integrated firms had efficiency gains that allowed them to decrease consumer prices. On page 370 U.S. 344, the court stated,
The retail outlets of integrated companies, by eliminating wholesalers and by increasing the volume of purchases from the manufacturing division of the enterprise, can market their own brands at prices below those of competing independent retailers.
Despite this, it was deemed that threats to “viable, small, locally owned businesses” ought to be squashed to fit what the Supreme Court believed was the correct interpretation of Congress’ Cellar-Kefauver Amendment to Section 7 of the Clayton Act. This is despite the fact that the Court admitted, in the same decision, that the Clayton Act was meant to protect “competition, not competitors” and furthermore that some mergers may produce pro-competition and pro-consumer outcomes.
The decision seemed clearly at odds with itself, as pro-consumer results became an argument for anti-competitive effects instead of a defense against it. As stated by Professor C. Paul Rogers III in a paper on the subject,
[In] the upside-down world of the Warren Court, Brown’s defense counsel had apparently felt compelled to argue that the vertical integration would not result in any cost savings or consumer benefit. The Court did not buy it, instead, to the defendant’s chagrin, using efficiency gains as an antitrust sword rather than the potential shield that they should be.
The result of judging pro-consumer benefits as being a detriment to competitors is that today, Kinney no longer remains in business. In its stead, overseas shoe manufacturers have become increasingly dominant in US markets. Cost-saving efficiencies may have helped increase Brown Shoe-Kinney’s ability to compete. Instead, the courts deemed this too threatening to their competitors, possibly dooming these domestic firms to eventual foreclosure.
For this reason, the courts have generally ignored this precedent in Brown Shoe while salvaging other aspects of the case, particularly pertaining to defining relevant markets. The FTC has even admitted that the decision made in Brown Shoe may have resulted in higher prices. It was in the 1974 United States v. General Dynamics Corp. that Justice Stewart outlined a rejection of Brown Shoe’s conditions and interjected consideration for the welfare of the consumer. Since then, the consumer welfare standard (CWS) has become more defined and remains the court’s framework for evaluating mergers.
In the FTC’s continuing effort to undermine the CWS’s role in antitrust litigation, they have resurrected Brown Shoe’s long-dormant and ill-preserved argumentation. Despite this, the courts are under no obligation to uphold any arguments made in these guidelines. The historic role of the merger guidelines is to inform the public about the current state of litigation, not to argue for change.
The integrity of the FTC’s role as an institution is at stake. With the weaponization of the guidelines as a tool for arguing against the status quo of consumer-focused merger litigation, the FTC has damaged its credibility as an institutional actor. As companies review these proposed guidelines, they need not fear whether they violate the law as much as they violate the FTC’s opinion on mergers.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.