ARTICLES

Commentary: What Is the Proper Level of Judicial Review for Mergers?

David T. Blonder
The Deal
January 17, 2007

The controversy surrounding Judge Emmet Sullivan's review of the merger consent decrees entered into among Verizon Communications Inc., AT&T Corp. and the U.S. Department of Justice is shining the spotlight both on the boundaries of independent judicial review in assessing the impact of antitrust consent decrees on market competition, and on the implications of a more stringent evaluation of future mergers.

Sullivan, of the U.S. District Court in Washington, has delayed a ruling on whether to grant his required approval of the SBC Communications Inc.-AT&T Corp. and Verizon Communications-MCI Inc. mergers. The judge recently took umbrage at comments from a Verizon attorney who said that company's merger would not be undone by the court, and he vowed to finish his independent review. The Antitrust Procedures and Penalties Act, 15 U.S.C. §16, referred to as the Tunney Act, was enacted in 1974 to prevent the federal antitrust agencies from entering into any settlement agreement that was contrary to the "public interest." In 2004, in response to a widespread perception that judges were simply "rubber-stamping" antitrust consent decrees, Congress amended the act to require courts to more closely scrutinize settlement agreements entered into by the DOJ, making the public interest evaluation mandatory. The amendments also allowed courts to evaluate the impact that the consent judgment might have on market competition and whether any ambiguity exists in the consent judgment.

At press time, the outcome of Sullivan's proceedings was unknown, but sideline spectators wonder whether the case will change the role of courts operating under the "new and improved" Tunney Act and whether courts may consider the need for remedies for violations not alleged in the complaint. Commentators claim that increased judicial scrutiny may alter how merging parties negotiate settlement agreements with the DOJ. If the prospect of settlement dims due to increased oversight, the parties' negotiating tactics may change, and the incentives for either side to make early concessions may be eliminated. This might further create a perception that the DOJ has to litigate cases even though a structural settlement is available to remedy competitive harm.

The facts, however, seem to belie the inference that settlements are less likely. Judicial review of the decrees that have followed the Tunney Act amendments suggests that Sullivan's role in these proceedings is anomalous to that of other courts. Since the amendments, courts, including the D.C. court, have approved at least eight merger settlement agreements. Of these, no court engaged in the type of review that Sullivan is contemplating.

As evidenced by the telecom mergers, greater judicial scrutiny of merger agreements is providing parties' competitors a second bite at the apple through their judicially blessed "amici-intervenor" status. If competitors don't like the proposed remedy, they can go to court and throw stones at the DOJ. While competitors may choose this path, it is questionable whether judges would view this as an efficient use of limited resources, whether it would benefit consumers or whether Congress intended such a result in amending the Tunney Act. This is significant, as third-party intervention is not expressly mandated by the act. In merger investigations, competitors are often subpoenaed for information and data relevant to competition in the affected market and often have significant access to agency staff to present their case. If competitors are permitted active involvement in the review process, they clearly may pursue strategic action to further delay approval of the merger and to extract concessions from the merging parties. In the end, it is suspect whether this aids the review process or even helps consumers. When competitors aren't entirely happy about a merger remedy but readily line up to purchase divestiture assets, it may signal that the settlement is tailored adequately to the competitive harm and is a favorable result for competition. Despite best intentions to comply with mandates, busy district court judges are generally ill-equipped to evaluate the merits of a complex merger settlement agreement without conducting a protracted and fact-intensive investigation of the competitive dynamics of an entire industry. This is presumably why the antitrust agencies (not judges) conduct investigations, develop industry expertise and are therefore better situated to make these determinations. The judge's role is to evaluate the harm as articulated in the complaint and competitive impact statement and to review whether the settlement meets the public interest. The scope of a court's review cannot be unlimited, and anything more might be considered constitutional overreaching into executive enforcement discretion.

It seems unlikely that Congress intended the Tunney amendments to effectively eliminate the utility of negotiated merger settlements or to put judges in the role of Monday morning quarterback. More important, the "public interest" standard itself is an amorphous concept. The current judicial hullabaloo likely is limited to the confines of Judge Sullivan's courtroom. Only time, and possibly a decision from an appeals court, will tell whether Sullivan is ushering in a new era for merger settlement review or whether this exercise was simply much ado about nothing. This interested spectator thinks it will be the latter.