by Nora Whitehead, Haynes and Boone, LLP
Sprint alleged that because the merged entity would control access to over 75 percent of the wireless services market, it would have unstoppable power at the bargaining table when it came time to negotiate input purchase agreements with handset manufacturers. Because the merged entity would control access to a huge subscriber base — i.e., a huge and lucrative market for handsets — handset manufacturers would be more likely to agree to exclusivity deals that conferred competitive advantages to the combined AT&T/T-Mobile.1 As a result, the argument went, Sprint and other smaller carriers would be denied access to the most popular handsets and squeezed out of the wireless services market. The merged entity would be able to leverage its market power in the wireless services market (measured in number of subscribers) to foreclose its competitors' access to an essential input in the handset market, preventing those competitors from effectively competing in the wireless services market.
Although facilitated by the contractual and business practices of the wireless services industry, Sprint's claim is rightly characterized as alleging a merger-to-monopsony in violation of Section 7. The claim represents a new and unique entry into merger-to-monopsony precedent: Sprint alleged not only that the merger would tend to create a monopoly in the wireless services market in violation of Section 7, but that the merged entity's increased market power as a seller would translate — through industry-specific mechanisms like volume discounts and exclusivity agreements — into market power as a buyer in the input market. That market power, which, Sprint argued, would amount to monopsony power, would result in injury to its competitors selling wireless services in the output market.
I. A BRIEF HISTORY OF MONOPSONY CHALLENGES
Just as the monopolist can use its market power to raise the prices it charges consumers, a monopsonist can use its market power to lower the prices it pays for valuable inputs into its production processes. While lower prices may seem procompetitive, in reality, artificially low (as in, lower than the cost of production) input purchase prices are harmful to competition for at least two reasons.
First, forcing input suppliers to sell their product at artificially low prices stifles innovation and production on the supply side and may ultimately drive suppliers out of business. Second, the notion that a monopsonist who procures an input at an artificially low price then passes on that low price is not born out in reality. Instead, the monopsonist who procures its input at an artificially low price will nevertheless sell the finished output at the market-determined price and pocket the additional profit. See, e.g., Roger D. Blair & Jeffrey L. Harrison, Antitrust Policy and Monopsony, 76 Cornell L. Rev. 297, 304-06 and n. 47 (1991).
Like the seller who drives sale prices down to push its direct competitors out of the market with the intention of recouping that investment once it has achieved total monopoly power, the buyer who engages in predatory pricing to cripple its competitors and later leverages its newly gained monopsony power to the detriment of both its suppliers and output consumers is vulnerable to challenge under the antitrust laws.
A predatory bidder ultimately aims to exercise the monopsony power gained from bidding up input prices. To that end, once the predatory bidder has caused competing buyers to exit the market for purchasing inputs, it will seek to “restrict its input purchases below the competitive level,” thus “reduc[ing] the unit price for the remaining input[s] it purchases.”
Private parties may challenge a merger under Section 16 (for injunctive relief) or a consummated merger under Section 4 (for treble damages) of the Clayton Act. In order to prevail under either, a private party must demonstrate not only that the effect of the merger has been or may be to substantially lessen competition but that it has been or will be injured as a result. Without a showing that it has been or likely will be injured, a competitor does not have standing to prevent the merger or, of course, to collect damages. This standing requirement is why Sprint, a horizontal competitor to both AT&T and T-Mobile, alleged that the effect of the proposed merger would be to lessen competition in the wireless services market and that Sprint would no longer have access to an essential input.
II. CASE LAW CITED BY SPRINT
In the context of its discussion of vertical mergers, the court noted that “an important factor for a court to consider when assaying the legality of a merger is ‘the trend toward concentration in the industry.’ ” Id. at *24 (internal citation omitted). In order to demonstrate standing, Six West alleged that the merger caused it antitrust injury by restraining its access to quality motion pictures and depriving it of its ability to compete for first-run films. Because of its increased market share in the film exhibition market, the merged entity had the power to divert more profitable films — an essential input in the film exhibition business — away from Six West's theatres. See id. at *22.
However, the court did not characterize the injury as one of input foreclosure. Instead, the court stated that it must “primarily concern itself with the possibility of market foreclosure, the exact antitrust injury that Plaintiff alleges.” *25 (emphasis added). More importantly, the court expressed concern that the merged entity would foreclose access to films or exhibition space by keeping everything “in house” and refusing to sell such films or acquisition space to the plaintiff:
A decision by [the merged entity's] distributors and exhibitors to restrict availability to their films and to their theatre space could potentially harm competition. This Court, therefore, is worried that “the market presence of the new vertically integrated company [may be] great enough that the potential anticompetitive effects become a significant concern.”
In a Section 7 action challenging an asset purchase agreement between a holding company (May) that operates department stores and a regional department store chain (McCurdy's), the plaintiff alleged that the acquisition of the eight McCurdy's stores by May obstructed entry into the Rochester, New York, traditional department store market by Bon-Ton or any other competitor because May acquired all of the available store in the four major regional malls. See id. at 865. The plaintiff alleged that the acquisition foreclosed Bon-Ton from access to a key input – mall space.
Once again, the court characterized the alleged injury as market, not input, foreclosure. See id. at 878. The court did not characterize this as foreclosure of a key input and neither Bon-Ton nor the court argued that the post-acquisition May would, for example, be able to use its increased power in the department store market to negotiate better or more shopping mall leases in the commercial real estate market. Instead, May would acquire the mall leases and exist in the retail space on day one following the acquisition.
Although the opinion makes reference to shelf space and promotional time slots as non-price predatory strategies, the alleged injury was described in terms of predatory pricing, not input foreclosure:
In any market where Tasty (or another competitor) poses a competitive threat deemed significant, defendants can reduce retail prices (by reducing wholesale prices), distribute promotional coupons, or otherwise make Hostess and Drake products available at prices below the prices that would be established in a fairly competitive market. This creates antitrust injury if defendants' pricing is predatory.
III. THE DISTRICT COURT'S DECISION
Sprint alleged that if the AT&T/T-Mobile merger were consummated, it would substantially lessen competition in both the wireless services market — where the merged entity would enjoy a monopoly — and the input handset market — where the merged entity would enjoy a monopsony. In turn, this monopsony-from-monopoly would injure Sprint in the monopolized market. Although there is some overlap with traditional challenges to monopsony conduct and mergers-to-monopsony, the cases on which Sprint and the district court relied are not a clean fit.
Permitting Sprint to argue that the merged entity's monopoly power in one market would lead to competitive injury in another market would have required the court to try two claims (in two separately-defined markets) in one: the monopsony claim (for which extensive additional discovery would be required to determine the relationships between wireless services providers and handset manufacturers); and the original Section 7 monopoly claim. For example, had AT&T and T-Mobile elected to pursue the merger, the court would have been required to evaluate whether the procompetitive effects of the alleged exclusivity agreements between the merged entity and the handset manufacturers justify their anticompetitive effect (i.e., monopsony power and resulting injury to Sprint). What's more, at the time that Sprint filed its complaint to block the AT&T-T-Mobile merger, the Department of Justice had already filed its own suit seeking the same relief and premised on the injury to consumers and competition in the wireless services market. The Department of Justice alleged that the merged entity would have a monopoly in the wireless services market — exactly what Sprint would have been required to prove in the first half of its merger-to-monopsony claim.
The potential complexities present in a Section 7 challenge to the $39 billion dollar merger were and are undeniable. AT&T and T-Mobile's abandonment of the proposed transaction late last year means that we will never know how Sprint would have been required to conduct discovery and prove its merger-to-monopsony claim, nor how the court would have dealt with the increased burden. As a result, we will have to wait and see whether other district courts are as receptive to similar iterations of Sprint's merger-to-monopsony claim, the latest and newest addition to the small universe of challenges to monopsony power under Section 7 of the Clayton Act.
Nora Whitehead is an associate in the White Collar and Antitrust Practice Groups in the Washington, D.C., office of Haynes and Boone, LLP. She concentrates her practice on antitrust and competition issues and international trade matters.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).