The role of efficiencies in telecommunications merger review.

The FCC also appears to consider efficiencies in a manner consistent with the DOJ's approach, (65) but then recognizes in certain transactions a broader range of potential benefits as being in the "public interest." Moreover, given the more recent public pronouncements by various U.S. antitrust officials suggesting that at least during the investigative stages a broader range of benefits might be recognized, the distinctions between the FCC's broader public interest-based grounds for permitting a transaction and the DOJ's efficiencies grounds may be blurting.

B. European Union

EU competition policies are set out in Articles 3, 81, and 82 of the European Community Treaty, under which the overall objective is to "[ensure] that competition in the internal market is not distorted." (66) In 1989, the European Council adopted the ECMR in order to provide the Competition Directorate of the European Commission ("EC") express authority to review mergers and other concentrations. Under the ECMR:

[The EC is required to] determine whether the transaction is

"compatible with the common market." If a merger creates or

strengthens a dominant position such that effective competition

would be significantly impeded in the common market or in a

substantial part of it, the transaction is [determined to be]

"incompatible with the common market" and may be prohibited. The

ECMR merger review framework operates under standards less explicit

than those established in the United States. (67)

C. Canada

Traditionally, anticompetitive behavior in the Canadian telecom industry has been regulated by the Canadian Radio-television and Telecommunications Commission ("CRTC") through the enforcement of policies under the Canadian Telecommunications Act, (68) such as just and reasonable rates, equal access, and nondiscrimination. However, the CRTC has no independent authority to review and approve telecom mergers; such mergers fall under the ambit and jurisdiction of the Canadian Competition Bureau ("Canadian Bureau"). The Canadian Bureau and the CRTC share a common goal of fostering the growth of competitive communications markets. The two government agencies have regarded their respective roles as "complementary," particularly in the transition from an environment of regulated telecom monopolies to one of unregulated multiple competitive networks. (69)

The overall analytical framework adopted in Canada for M&A review is similar to that adopted by U.S. antitrust authorities. The Canadian Competition Act (70) is administered by the Commissioner of Competition ("Canadian Commissioner"), who is appointed by the federal cabinet and oversees the Canadian Bureau. The Canadian Bureau focuses on market power by adopting a hypothetical-monopolist approach (71) to market definition and a generally similar approach to the analysis of barriers to entry and other qualitative assessment criteria. After the Canadian Bureau assesses a proposed merger, the Canadian Commissioner decides whether to approve the merger or to challenge the merger before the Competition Tribunal ("Tribunal"), a quasi-judicial body comprised of judges and lay members (typically economists or individuals with business experience). The Tribunal acts independently and separately from the Commissioner and the Bureau and has exclusive jurisdiction to adjudicate mergers.

IV. TREATMENT OF EFFICIENCIES IN ANTITRUST MERGER REVIEW

A. United States

1. From Hostility to Skepticism to Cautious Acceptance

As stated above, U.S. competition authorities have been historically hostile to M&A that increased market share concentration significantly, regardless of whether they produced efficiencies. In the 1960s and mid-1970s, the enforcement agencies and courts viewed the creation of efficiencies as potentially anticompetitive. Today, while the hostility has for the most part disappeared, the road to acceptance has been, and continues to be, a difficult one.

The governing substantive statute for U.S. M&A review is Section 7 of the Clayton Act. (72) This section prohibits transactions in which the effect may be "substantially to lessen competition" or to tend to create a monopoly. (73) However, the section is silent on the issue of efficiencies. Thus, in 1995, the role of efficiencies in M&A antitrust review was examined in the Global Competitive Hearings conducted by the U.S. Federal Trade Commission ("FTC"). The resulting report ("FTC Global Report") (74) endorsed integrating further efficiencies into the competitive effects analysis. Following issuance of the FTC Global Report, the FTC and the DOJ formed a joint task force to examine the role of efficiencies which culminated in the adoption of the 1997 Efficiencies Amendment to the 1992 Guidelines ("U.S. 1997 Revisions"). (75) The U.S. 1997 Revisions tied efficiencies directly to the competitive effects analysis, recognizing that lower costs may reduce the likelihood of coordinated interaction or the incentive to raise prices unilaterally. The list of recognized efficiencies was expanded to include improved quality, enhanced service, or new products. Efficiencies arising from anticompetitive reductions in output, service, or other competitively significant categories, such as innovation, were specifically excluded from the U.S. 1997 Revisions.

Pursuant to the U.S. 1997 Revisions, efficiencies must be "cognizable," i.e., they must be: (1) merger-specific, (76) (2) verified, (77) and (3) not the result of anticompetitive reductions in output. The merger-specific requirement is significant because "[i]nstead of requiring proof that claimed efficiencies could not be achieved through some hypothetical alternatives such as unilateral expansion or competitor collaborations, [the U.S. antitrust authorities] have committed to evaluate claimed efficiencies against other practical alternatives." (78)

The U.S. 1997 Revisions incorporate a sliding scale approach under which the agencies will require proof of greater efficiencies as the likely anticompetitive effects of the transaction increase. The stronger the case for potential anticompetitive effects of a transaction, the greater the burden on the merger parties to demonstrate cognizable efficiencies. In a transaction suggesting strong anticompetitive potential, the parties shoulder a very high burden of proof that credible efficiencies will overcome the potential anticompetitive effects. Thus, the U.S. 1997 Revisions embrace the principle that efficiencies almost never justify a merger to monopoly or near monopoly.

Today, it is clear that the U.S. antitrust authorities, as a matter of their prosecutorial discretion, will consider efficiencies in close cases. (79.) In the courts, however, the authorities appear to be still arguing that efficiencies cannot, and do not, trump high concentration levels. Since 1990, only four U.S. courts of appeals have considered the role of efficiencies in an M&A context. (80) In addition, in about a half-dozen M&A challenges, the district court considered whether efficiencies rebutted the government's prima facie showing of anticompetitive effects based solely on market share and concentration. (81) In almost all court proceedings, the government has won on its prima facie case because the very high concentration levels asserted resulted in an insurmountable level of reluctance, if not hostility, against acceptance of the efficiencies proffered by the merging parties.

The recent Heinz case (82) illustrates this judicial deference to concentration levels and concomitant hostility toward efficiencies in the United States. In an FTC preliminary injunction challenge to the transaction, the U.S. District Court for the District of Columbia found that the merger parties had rebutted the presumption created by the high and increasing market concentration by proving "extraordinary" efficiencies. (83) Subsequently, the FTC sought and obtained from the D.C. Circuit Court a stay of the district court's decision and an injunction of the merger, pending appeal. After a hearing, the D.C. Circuit Court found the efficiencies evidence insufficient, both as a defense and as a basis for showing postmerger coordination unlikely, thereby effectively killing the transaction. Although the D.C. Circuit Court exhibited extreme skepticism and hostility to efficiencies due to the concentration levels that would exist postmerger, it did leave open the possibility that, at least in some cases, an efficiencies defense could succeed. The court held that the high market concentration levels present in Heinz required, in rebuttal, proof of "extraordinary" efficiencies. (84)

2. Signs of Acceptance