Antitrust Laws: Private Companies And Legal Boundaries

Antitrust laws are intended to deter anticompetitive actions and permit pro-competitive actions by companies. In the United States, antitrust laws are enforced by the Antitrust Division of the Department of Justice and the Federal Trade Commission. These agencies are responsible for representing consumers and addressing concerns about the impact of acquisitions by private companies on competition. Private companies directly harmed by anticompetitive actions also have the right to sue under antitrust laws, which can lead to treble damages. While this encourages private enforcement, it also raises concerns about the potential for strategic abuse of antitrust laws by firms pursuing their interests. The applicability of antitrust laws to private companies is a complex issue that requires careful consideration of market dynamics and the potential benefits and drawbacks of private enforcement.

Private antitrust litigation: pro-competitive or anti-competitive?

Private antitrust litigation can be both pro-competitive and anti-competitive.

Private antitrust litigation is when firms directly harmed by anti-competitive acts take legal action under antitrust laws. The Clayton Act, which offers treble damages to the plaintiff, makes such private litigation very attractive.

Private firms will generally pursue antitrust actions when it is in their interest, which may diverge from the social interest. They may have the incentive to use antitrust laws strategically, which may hinder competition. For example, firms may use antitrust laws to improve contractual conditions or extort profitable settlements from rivals.

However, private firms also have strong incentives to initiate antitrust lawsuits against rival firms that have violated antitrust laws. This provides a strong deterrent against anti-competitive actions.

To prevent the private abuse of antitrust laws, the scope of private enforcement should be reduced, and the scope of public enforcement should be expanded. Damage awards can also be multiplied so that a losing defendant is required to pay a multiple of the damages they caused.

Private equity companies and their acquisitions

Private equity firms are under scrutiny from antitrust enforcers at the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ). This is due to their acquisition strategies and their potential impact on competition. Private equity firms often employ a roll-up strategy, acquiring multiple players in a single industry through a series of small transactions that may avoid antitrust scrutiny. This has raised concerns about the potential for increased market concentration and the inappropriate sharing of sensitive information.

Private equity firms are known for their focus on cost-cutting and short-term returns, which can be at odds with robust competition and innovation. They also often rely heavily on debt to finance their acquisitions, which can saddle the acquired company with unsustainable debt. This has led to criticism that private equity firms are strip miners of corporate assets, only interested in short-term financial gains.

However, supporters of private equity argue that these firms play a crucial role in the economy by infusing capital into struggling companies and preserving jobs. They also have the financial resources and strategic expertise to carry out necessary changes and drive growth. Private equity firms are often strict financiers or passive investors, relying on management to grow the company and generate returns. But some consider themselves active investors, providing operational support and helping to build a better company.

Private equity firms have a range of investment preferences and strategies, including leveraged buyouts (LBOs) and venture capital (VC) investments. LBOs involve buying a company with funds collateralized by the target's operations and assets, allowing the firm to assume control while only putting up a fraction of the purchase price. VC investments, on the other hand, involve taking significant stakes in young companies in less mature industries, with the potential to evolve into powerhouses.

Private equity firms typically aim to maximize returns for their investors, which can involve implementing operational improvements, expanding market reach, or innovating products and services. However, they may also take more aggressive approaches, such as asset liquidation, stringent cost-cutting, and imposing debt on the acquired company. These strategies can lead to substantial financial gains for investors but may also have negative consequences, such as job losses and reduced investment in the company's long-term growth.

The Clayton Act and interlocking directorates

Antitrust laws apply to both private and public companies. In the United States, the Antitrust Division of the Department of Justice and the Federal Trade Commission enforce the antitrust laws on behalf of the public.

Section 8 of the Clayton Act prohibits "interlocking directorates" – simultaneous service as an officer or director of competing companies. Interlocking directorates can allow inappropriate sharing of competitively sensitive information and lead to reduced incentives to compete.

The Clayton Act was amended in 1990 to increase the jurisdictional threshold for application of the section to corporations from $1,000,000 in net worth to $10,000,000 in net worth. It also created three "de minimis" exceptions to applications of the section in cases of insignificant competitive overlaps.

In October 2022, the Department of Justice interpreted Section 8 broadly to prohibit not only the same individual from serving on the boards of both competitors but also the service by different people representing the same company on the boards of competitors. This interpretation will be of obvious interest to private equity companies with stakes in competing companies that might come with board representation.

The Federal Trade Commission has also taken action to resolve antitrust concerns surrounding interlocking directorates. In one case, the FTC approved a $64.5 billion acquisition of oil producer Pioneer Natural Resources by Exxon Mobil Corporation, but only after a former Pioneer CEO stepped down from an Exxon board seat.

In another case, the FTC took action to prevent an interlocking directorate arrangement and an anticompetitive information exchange between private equity firm Quantum Energy Partners and natural gas producer EQT Corporation.

Private rights of action: benefits and challenges

Private rights of action are an essential component of antitrust enforcement in the US, alongside public enforcement by the Department of Justice's Antitrust Division and the Federal Trade Commission. Private rights of action allow those harmed by anticompetitive actions that violate the Sherman or Clayton Act to bring a private cause of action for treble damages, attorney's fees, and costs. This system of private enforcement is relatively unique to the US and has its benefits and challenges.

Benefits of Private Rights of Action

One of the main benefits of private rights of action is increased enforcement. The US system of antitrust enforcement relies on private enforcement to fill in the gaps left by public enforcement. This generally works well because the interests of a wronged business usually overlap with the interests of consumers. Additionally, private rights of action provide compensation for damages caused by anticompetitive actions.

Another advantage of private rights of action is that they reduce the need for large government investments in enforcement. There are concerns that government enforcement is underfunded, and the availability of private enforcement eases this burden. Private parties can pursue their claims directly in the courts without waiting for government intervention.

Challenges with Private Rights of Action

One of the main challenges with private rights of action is the potential for overuse or strategic abuse of the antitrust laws. Private firms may have incentives to use the antitrust laws for their own interests, which may diverge from the social interest and hinder competition. For example, firms may use the antitrust laws to improve contractual conditions or respond to existing private actions.

Another challenge is the question of whether private rights of action should be a substitute or a complement to public enforcement. It is unclear whether private enforcement should only act when government agencies do not or if optimal deterrence is caused when both pursue a case on the same conduct.

In conclusion, while the US system of private rights of action has its benefits, there are also challenges and criticisms that need to be addressed to ensure effective and fair antitrust enforcement.

The Chicago school's consumer welfare approach

Under the consumer welfare standard, a corporate merger is deemed anti-competitive only when it harms both allocative efficiency and raises the prices of goods above competitive levels or diminishes their quality. This contrasts with earlier frameworks of antitrust theory, which took an interventionist approach and viewed "market power" with skepticism. The consumer welfare standard does not condemn corporate consolidation as inherently negative but instead stipulates that it is not harmful to consumers as long as a merger does not lead to higher prices for consumers.

The consumer welfare standard was influenced by microeconomic theory and is related to the economic theories of the Chicago school of economics. The adoption of this standard by courts and regulatory agencies has been credited with a sharp drop in antitrust enforcement in recent decades. However, critics argue that it has led to less competition and an increase in the average market share of firms within a given sector.

Proponents of the Chicago School counter that abandoning the consumer welfare standard would be a misguided return to the incoherent antitrust regime of the mid-20th century. They argue that antitrust law should focus on economic efficiency rather than economic populism.

Frequently asked questions