The Antitrust "Failing Firm” Defense in the Wake of the COVID-19 Crisis

Corporations, Antitrust, & Securities Practice Group Teleforum

Listen & Download

Since 1930, the Supreme Court has recognized a failing firm defense to an otherwise unlawful merger under the U.S. antitrust laws.  The three-part test to prove a failing firm defense generally is met when the company sought to be acquired is in danger of imminent failure, cannot reorganize successfully in bankruptcy, and has made unsuccessful good faith efforts to find alternative purchasers.  In past economic crises, such as the 2008-2009 financial crisis, the U.S. antitrust agencies have not eased merger requirements or the standards governing the failing firm defense.  Will this change with the COVID-19 pandemic shuttering countless businesses?  Could we see litigated merger challenges brought by the U.S. antitrust agencies that turn on the three-part test to prove a failing firm defense?


Greg Eastman, Ph.D., Vice President, Cornerstone Research

George L. Paul, Partner, White & Case LLP

Moderator: Eric Grannon, Partner, White & Case LLP, and former Counsel to the AAG of the DOJ Antitrust Division

Event Transcript



Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at



Greg Walsh:  Welcome to The Federal Society’s Teleforum conference call. This afternoon’s topic is titled, “The Antitrust ‘Failing Firm’ Defense in the Wake of the COVID-19 Crisis.” My name is Greg Walsh, and I am Assistant Director of Practice Groups at The Federalist Society.


As always, please note that all expressions of opinion are those of the experts on today’s call.


Today we are fortunate to have with us Mr. Greg Eastman, Mr. George L. Paul, and our Moderator, Mr. Eric Grannon, a partner at White & Case LLP, and former counsel to the AAG of the Department of Justice Antitrust Division.


After our speakers give their opening remarks, we will go to audience Q&A. Thank you for all sharing with us today. Eric, the floor is yours.


Eric Grannon:  Thank you. Again, welcome everyone to our panel on, “Antitrust Failing Firm Defense in the Wake of the COVID-19 Crisis.” Again, I’m Eric Grannon, a partner in the Washington, D.C. office of White & Case, where I specialize in antitrust. We’ve definitely got two well-known merger experts and specialists on our panel today. Greg Eastman is an economist and Vice-President at Cornerstone Research, based in its Washington, D.C. office. Greg got his undergraduate degree at the University of Kansas and his Ph.D. at Harvard. Among other relevant experience, Greg served as the DOJ’s testifying expert in a litigated merger challenge that turned on the failing firm defense, and that experience will be helpful in addressing our topic today.


      Our other panelist is my law partner, George Paul. George is also based in the Washington, D.C. office of White & Case, where he’s practiced as an antitrust lawyer and merger specialist throughout his career, including working on some of the biggest merger clearances and challenges of the last two decades. George got his undergraduate degree at Mississippi State University and his law degree at Harvard.


      Greg and George are going to walk us through the details of what is known as the failing firm defense and antitrust merger analysis, which is likely to be a significant feature of antitrust enforcement for the rest of this year, and beyond, as companies struggle to survive the pandemic.


      Just as a brief backdrop, merger analysis is unique in antitrust law and separate from competitor agreements that are assessed under Section 1 of the Sherman Act, or monopolization claims that are assessed under Section 2 of the Sherman Act. Mergers are assessed separately under the Clayton Act, where the relevant standard is whether the proposed merger would result in a substantial lessening of competition. There are three quick points to keep in mind for our discussion about mergers today. First, the Clayton Act standard of substantial lessening of competition has been held to focus exclusively on consumer welfare, meaning: will the proposed merger lower prices, or improve products or services, or innovation for consumers? Other economic considerations such as job losses as a result of the merger are not cognizable under the Clayton Act.


      The second point to keep in mind is that proposed mergers of a certain size must be notified to the federal antitrust agencies at the DOJ and FTC for clearance under the Hart-Scott-Rodino Act. If the agencies do not clear the proposed merger, the agencies can seek to enjoin the merger through a litigated court challenge. Now, the governor also has the power to seek undue consummated mergers, but the overwhelming majority of merger enforcement focuses on either clearing or challenging proposed mergers that have not been consummated, and that setting is our primary focus today.


      The third point is that proposed mergers are assessed under merger guidelines published by the federal antitrust agencies. For purposes of our discussion today, at a high level, those guidelines become especially rigorous if a proposed merger would reduce an industry from four to three independent players, and the guidelines generally will presumptively condemn a merger that would reduce an industry from three to two players. The failing firm defense comes into play when parties argue to the agencies that the reduction in the number of players from a proposed merger should not be deemed unlawful, because the company to be acquired would exit the market, in any event, due to the demise of the company, but for the merger. 


      So, with that backdrop, George can you lead us off with a discussion of the elements required to establish the failing firm defense?


George L. Paul: Sure, Eric and thanks for that background. I'll kick it off and here's what I'll do: I'll talk about the elements of the failing firm defense, and then maybe Greg, you could talk a little bit about the agency's use of it and the true application of it. From a legal standpoint, Eric set the tone exactly right. The Department of Justice, and the Federal Trade Commission, as well as the state attorneys general, are tasked with reviewing mergers to ensure that they don't substantially lessen competition or tend to create a monopoly. As Eric said, this is typically the case that can happen in transactions involving say, two of the three largest players in an industry where entry is hard, and you worry about a loss of competition. One way to think of it would be if the market was for just for cola, and Coke and Pepsi merged, you might imagine there would be some concerns about it.


      And that's fine, but what happens if the target company is at death's door and is so financially distressed that the merger that been proposed is their only way to stay in the market and to keep their assets and products on the market? But, the government, or the Federal Trade Commission perhaps, thinks that it would be bad for the two to merge because it would create a monopoly.


      Well, there’s an answer for that and it’s been around longer than even the Hart-Scott-Rodino Act. It’s ninety years old and it comes out of the Supreme Court case, International Shoe from 1930. In that case, the failing firm defense was established under which in any competitive merger can be permitted as an absolute defense to government action, where the failing firm otherwise would exit the market. The rationale is that consumers would be no worse off with the merger than they would have been if the merger were blocked because the target wouldn’t survive and would exit the market. So that, at a minimum, will keep more assets in the market and therefore, no harm, no foul.


      The failing firm supposes that a transaction would have a redeeming quality, and when Eric referred to the consumer welfare standard, there is a general presumption often times that transactions, while perhaps putting pressure on raising prices, typically generate some cognizable efficiencies that can occur. So maybe allowing these mergers to monopoly is slightly better than just allowing the company to disappear.


      That said, the agencies want to be careful in applying the failing firm defense to make sure that the failing firm is really failing. To do that, this really has been a three-prong test that has been established that is a bit ambiguous. So I’ll say these are elements, but each one there is a fair bit of discussion around what they mean and case law fighting over it.


      The first element is for a firm to be failing it’s got to be unable to meet its financial obligations going forward. That’s pretty simple. It means if we’re thinking in a bankruptcy sense, it means that the firm is insolvent and has no net worth or is on the brink of having to declare bankruptcy. If you’re thinking in terms of equity, it would be that the firm is unable to pay its debts that are due. It’s got to be so depleted that the possibility of it coming back is very remote, and it faces the great possibility of just disappearing.


      The second element is one that has been created by the DOJ and the FTC, and it’s not case law created. That is that the failing firm has to be unable to avail itself of Chapter 11 of the Bankruptcy Code and reorganize. Typically, the antitrust agencies are going to look at the failing firm’s business plans going forward, its projected revenues, and its expenses, and vet whether or not they believe it would be possible for the company, rather than to exit, just to, instead declare bankruptcy, reorganize, and come back into the market at a later time.


      Finally, because the merger is presumed to be anticompetitive, we worry about the acquiring party gaining too much market share, and the final element addresses that. It says that there can be no alternative, less anticompetitive buyer out there. And the last question is, is there somebody else that we could allow to acquire the target fast other than this guy who’s going to become the monopolist? And that, often times, trips buyers up because to satisfy this element, it’s important that the failing firm has conducted a very vigorous search for other buyers, and they have bona fide efforts to make itself available and would be willing to accept any reasonable alternative out there.


      If these three elements are met: there really is no other buyer; the company can’t survive; and, its failure is imminent, then the merger will be allowed to proceed going forward. That’s easy to say. Greg, how easy is it to implement and real life?


Greg Eastman: Well, I think that it’s hard to implement in real life. I think that one way to think about it -- well, how do regulators really handle claims of failing firms? I think the regulators start with a position of “no”. They start with this idea that there really is a very high bar to have a failing firm defense because of what you said, which was, that this is really an attempt—and maybe even a last ditch attempt—to get another white hat that can get a competitive merger through, right?


      So they start with this: that there is some sort of presumption of potential harm here, and they really, justifiably, don’t want to pass that on. I think that beyond the, what you might call, philosophical reason why you want to have a very high bar here, is there’s also a little bit of the boy-who-cried-wolf phenomenon. That is, the number of firms have gone in and claimed they’re going to fail, they put forth the failing firm defense, and then the merger is blocked anyway because they haven’t met one of the stringent criteria. These firms go on to live healthy and productive lives, or at least survive for a very long period of time. So that has informed the agencies’ views of how they think about some of the requests that they get, in terms of having this failing firm defense and, therefore, makes it even more difficult to mount an affirmative defense even when you have a legitimate case for it.


      I think one -- so you think about where do these things falter, and one of the ways they falter in addition to the things that you mentioned, George, was that often times the merger is happening at a significant value. That is, the purchaser is paying a significant valuation for the so-called failing firm, and there is a question that gets derived from that. If this firm is really struggling and about to fail—close to failure—why are you paying a large premium for it? Or why are you paying a substantial amount of money? And that, often times, provides a little bit of a stumbling block and a little bit of a reason why -- saying that you have to explain away, in terms of talking to the agencies about it.


      Now, one of the names you mentioned was there could be some sort of cognizable efficiencies that could be gained, or some synergy that could be gained, for the fact that you are combining the assets. That could provide some value, but not necessarily -- it doesn’t have to be a deal breaker, but I think it’s sort of an initial stumbling block for some people off the line.


      Another --


Eric Grannon: Okay --


Greg Eastman: Go ahead.


Eric Grannon: I’m sorry. Go ahead, Greg.


Greg Eastman: No, no, no. That’s it. Go ahead.


Eric Grannon: Okay. Well, thanks Greg. I think that is very helpful background for the audience. George, can you walk us through a couple of examples of actual proposed mergers where the failing firm defense featured prominently?


George L. Paul: Sure, and so the -- we’re focused on COVID now, and that’s important because I think this economic crisis and the pandemic have put tremendous pressure on companies and we’ll see this defense, or iterations of it, being played out more and more before the agencies in these transactions, as “white knights” try to come in and save companies that are on the verge of failing. So the two examples I’ve picked, one I picked from healthcare and it’s a hospital merger and I think it’s very relevant in the COVID setting today. I think we could see a number of hospital failures going forward so you might see this defense play out. The other is from the milk industry, but it’s one that just played out in early 2020. It wasn’t directly related to COVID, but it happened right as COVID was coming into the forefront.


      So let’s start with Sutter Health, which is from about 20 years ago so it’s a bit dated, but the same conditions facing hospitals are relevant. This was a merger between number two and number three of the largest hospitals in San Francisco: Sutter Health, and Summit. As Eric rightly pointed out, three to two mergers between the large players like this are likely to raise concerns, and boy this one did.


      Summit Health was the target here. They believed and asserted they had the great possibility of failing. They had over $9 million in overdue bills, they couldn’t obtain credit to help pay off the bills or invest in the business, and the fair market value of the liabilities was a lot more than any fair market value of their assets. So a pretty good candidate for failing firm defense. Sutter Health was agreeing to buy it and said they would be able to invest and maintain the facility, and improve and innovate, and create new efficiencies and better health care for consumers.


      The government disagreed and sued to block. The California AG in particular argued that Summit Health was claiming a failing firm defense, but it was the result of their own mismanagement. If they had done a better job of taking care of their financial condition and taking care of getting accounts receivable collected immediately, they wouldn’t be at this risk of failure, and that the courts should not reward the past financial mismanagement of the company by permitting the defense to do it and, instead, the hospital should get new management, and figure it out and come up with its own view.


      The court weighed the evidence and then declared that the merger would be permitted to go through and rejected California’s objections saying that it doesn’t necessarily matter why you’re in the bad position; it matters that you’re in bad position. So we’ll expect to see more of these kinds of arguments from particularly rural hospitals that have been really hard hit by COVID, I think, going forward.


      The second involves Dean Foods, which was the nation’s largest dairy processor. They take the milk from the dairy farmers themselves and turn it into butter, milk, and other products. This industry’s been hard hit for a number of reasons, including people just drink less milk than they used to. They went into bankruptcy with the possibility of trying to reorganize. At the same time, another large milk processor, Borden Dairy, was in bankruptcy. So you had two of the three largest milk processors in bankruptcy. At some point, the reorg just wasn’t working out and Dean Foods went on the market and shopped itself to a large number of buyers and ended up with two alternatives: one was Dairy Farmers of America and they are a “Dairy Farm Cooperative” that also runs milk processing. So the deal would be, allegedly problematic at least, from increasing concentration in that milk processing industry, which is important because we don’t want farmers to be disadvantaged and get a fair price for their milk.


      The government really did a very nice job in this one, I think. The Department of Justice considered the financial condition of Dean Foods, its inability to reorganize and weighed that -- an acquisition by DFA against possible bond holders trying to reestablish and reorganize the company in some fashion. It consulted with the debtors in possession, as well as the parties, and others in the industry, before concluding that it would permit DFA, Dairy Farmers of America, to buy Dean Foods out of bankruptcy and control those assets. But it did require some divestitures to address the hardest hit portions of the country where they felt concentration would be too high. In so doing, they accepted a failing firm defense, but got the parties to agree to a settlement that would ameliorate some of the potential harms that could come to consumers, and those other assets would go to another company eventually to through a divestiture process.


So those are two elements where it’s really worked in industries that really hit pocketbooks for average Americans who see it played out, and I think we will see more of those going forward.


Eric Grannon:  George, just a quick follow-up. That kind of hybrid result that you described in the dairy example, is that something you think we can see more of going forward?


George L. Paul:  Yeah, I think you will. There are versions of failing firm that are less than failing, sometimes called a “weakened firm defense” that a failing firm can, kind of, morph into. I think you will see it. What you see is a real desire, mostly on behalf of the agencies, to do the right thing. They recognize that this is an unusual situation and it’s really hard, but as Greg alluded to, they’re skeptical. They don’t want consumers to suffer, particularly parents that are trying to get milk for their kids, and farmers that are trying to sell milk. This is sort of an elegant way of saying, we get it, but since those assets are staying in the market, we think there’s a couple of problems that we’d like for you to address, and if you’ll do that, we’ll bless the deal and we won’t have to go to court. The party, DFA, was more than happy -- more than willing, to accept that deal in exchange for the certainty of being able to move forward on the assets it did acquire.


Eric Grannon:  Okay. So, you know, in explaining some of the tough elements that parties have to meet, you’ve now given us some examples where parties, despite those high hurdles, have been successful in establishing a defense, or at least some version of it.


      Greg, can you share some examples that aren’t successful assertions of the defense, and offer any observations on how they might have gone differently?


Greg Eastman:  Yes, I can. One example is the Department of Justice blocking the EnergySolutions and WCS merger. Again, I was a testifying expert for the DOJ in that matter. I’ll try to make sure I stick with publicly related information. This was a proposed merger between the two providers of nuclear waste disposal and, therefore, was a 2:1 merger: a merger to monopoly. So that, you know, raised presumptive harm, with respect to that. The parties disputed some of that so there was a little bit of a dispute related to that, but they also put forth the failing firm defense because WCS was in a particular situation where they had some arguments that they could make with respect to the failing firm. And one of those being that this was getting, and implementing, and constructing, and permitting a nuclear waste disposal facility was a very long and expensive process. So they had an almost two-decade history of losses all the way through, and they had projections of future losses, at least within the near term. That put forth -- coupled with all of the pressures that go along with that length of losses, that suggested this company was struggling, and was losing money over a significant period of time.


      Offsetting that, to some extent, in one of the places where they got a little bit -- there was a little bit of dispute, was that they were making statements to regulators, statements to customers, that they were going to be okay and they had enough money and they could continue to operate. I think that sort of tension was -- came up in the litigation and provided tension in the litigation. It also provided the lesson for today’s environment, which is that it’s a potential catch-22 for people to keep in mind, like advising companies, and talking to companies.


      In the middle of a crisis, you really need to tell your employees, your suppliers, your customers, that you’re going to be okay, you’re going to survive, things are going to work out okay. Because you can get caught in a self-fulfilling prophesy towards failure. You need to make public statements. On the flip side, you may be struggling, you -- one needs to think about how that would play in the future if some company were going to go in and put forth a failing firm defense. And so having some internal analysis and some distinction on how you play off that tension is going to be important. Thinking about how, for example, you’re going to characterize in a second quarter 2020 results, which, for a lot of firms are going to be very, very bad, how they characterize that publicly, how they characterize that internally, may be important in terms of pushing this, going forward.


      One of the other things that was a stumbling block with respect to the WCS / EnergySolutions and the judge really like -- this was the deciding factor in the judge’s mind -- was, did they perform an adequate shop process? I think that sort of boiled down to this key tension that happened, which is that management tried to find the best value for WCS. They were focused on maximizing the value of the sale from WCS and they had ran a shop process that landed -- you know, existed over a period of time, -- for an earlier period of time, they did a fairly extensive shop process, and they got a number of offers for partial investments or valuations that they didn’t find that they were that happy with, so they stopped, didn’t sell the company, and then started up again.


      Started asking some more people, at a later reporting time, after more losses, and doing it again and then they got a very high offer from somebody: EnergySolutions. Then they didn’t really redo the shop process as fully as they could. In fact, signed an agreement saying that they wouldn’t go and ask some of the other people and they were precluded from talking and shopping it to other people.


      The judge really picked up on that and said, you know, you didn’t really try to go out and find a reasonable, alternative offer above liquidation value, so therefore, you haven’t satisfied the conditions for appropriate shop process. Again, it highlights this tension between what you might think is management’s responsibility to maximize the value of the company, but with the requirements that if you’re going to be involved in a transaction that could otherwise have anticompetitive harm, that there are other requirements that have to be taken into consideration.


      I think with the second case, the Otto Bock case, which is another case Cornerstone worked on, from full disclosure, this was a challenge to what Eric had referred to earlier, which was an already consummated merger and that the FTC was going in to try to unwind. Here a complication arose because of the -- both from the financial failing [inaudible 27:07] that they’re going to be imminent failure. In large part that revolved around the idea that the firm, which was struggling over time, had implemented a turnaround plan, and that turnaround plan was beginning to be successful. The firm itself was starting to show positive momentum and approving financial results. They had some internal stuff on, it would have been -- they were going to become profitable; they were going to be okay, right? That was sort of, in some sense, contradictory to this idea that they were facing imminent failure.


      Again, they also had issues with respect to the shop process, and in the sense of whether did they get a deal in place with the person they wanted to do, and then went through the motion for the shop process to try and -- say they went through the shop process, when in fact they really hadn’t signed a deal at the beginning, or set up the deal in the beginning and sort of did the shop process. Where the agencies would really like to see the opposite of that: go through the whole shop process, and then end up with the person you’re going to merge with, only as a last resort.


Eric Grannon:  Interesting. Do you know, Greg, whether, in the EnergySolutions case, after the merger was successfully blocked, what ultimately became of WCS?


Greg Eastman:  WCS operated on its own for a little while, and this was subsequently sold to another party. The party that had been identified as a potential buyer in the first set of acquisitions; the first set of the shop process.


Eric Grannon:  Okay. So it did not actually just fail then. That’s interesting.


Greg Eastman:  That’s correct. It was ultimately sold to somebody else.


Eric Grannon:  Okay. Well, thanks for that. Let’s just [move] a little bit more concretely to the current pandemic economy. George, has there been any express agency guidance, or enforcement signals, on how the failing firm defense will be viewed by enforcers since the pandemic started?


George L. Paul:  Yeah, I really think there has been here. Sometimes the guidance system is crystal clear as everyone likes it to be, but there’s certainly writing on the wall, here. Two examples that I can think of. It’s really going back to the Dean Foods case again, where are we now? I think you’re going to see a lot more back and forth in settlement from the government on cases that raise failing firm issues, like the Dean Foods case. It’s hard to tell how -- it’s hard for the government to tell sometimes where failing firm can be, but they clearly signal a willingness to work with the parties and enter into a settlement that was speedy and put the problem behind them. I think you’ll typically see more of that. And I take that as a signal that the government is certainly aware of the COVID-19 pandemic and the antitrust authorities, in particular, understand that that will impact the ability of how firms compete and certainly will impact the assessment of mergers. It doesn’t mean every time a defense is asserted or work, but I think it means the government is certainly paying attention.


      The other signal is that they’re only going to go so far, and the example I am thinking of here is playing out in real time as we speak. I don’t know if you’ve seen The Journal today, but the online food delivery service, Grubhub, is on the block and, today, I think the wind’s blowing in favor of a U.K. firm called Just Eat possibly being a winning bidder. Tomorrow or the next day it could swing back to Uber Eats, which is one of the other, along with Grubhub, large players in the online food delivery service. I don’t know about you, but I know that there is many like me. Sometimes when you’re stuck in quarantine, you really just need a Popeye’s chicken sandwich.




      The way to make that happen is calling up Uber Eats or Grubhub. We’ve seen this industry, which is a young industry, take on tremendous importance for people and families as we have been quarantined throughout the crisis, here. In lieu of having to go out and get the food, we’ve had it brought to us and this industry has really blossomed, and I think people realize that it’s an important part of the way our lives are going to be for some time.


      That’s been introduced, but, you know what, it’s a new industry, and like many tech-related industries, nobody is making money yet. So I thought it was interesting as Uber Eats is in the middle of this potential bidding war, or at least expressing interest in these Grubhub assets, that just after they announce their earnings, their CEO went on a podcast and said some pretty interesting things. He said, essentially, asserting not a failing firm defense, but, really, a failing industry defense. He said no one is making money in this business and business has got to be sustainable. It’s got to work for restaurants, it’s got to work for the delivery guys, it’s got to work for Grubhub and Uber Eats, and those of us too. So things are going to have to change, and he explicitly said we’ll listen to what regulators have to say, but there’s got to be a way forward, that this industry needs to survive, and people have to make money.


      Laying the groundwork for Grubhub’s deal, and certainly saying that when an industry’s not making money, that’s good basis for having a failing firm. Well, no sooner than two days later, the FTC responded and Ian Conner, who’s the top litigator at the FTC, he’s the Director of the Bureau of Competition, put out a blog. It just happened to be about the failing firm defense, and just happened to be on the Wednesday after the Uber CEO’s remarks—I’m sure they weren’t relate—and he said, you know, we’ve heard this time and time again that this firm’s failing, the acquiring firm is failing, the whole industry is failing. And his response was, “saying it doesn’t make it so.” He went on to say that if you want the FTC to accept your argument of a failing firm, you better actually be failing, and you better be able to prove it. It was part of his remarks that really were saying that the government is not going to relax the intensity of their scrutiny and they’re not going to be scared of bringing an enforcement action because of COVID-19 is making business hard on some people.


So on the one hand a carrot: a willingness from the DOJ to listen and consider these issues; and on the other hand a stick: from the FTC saying that as a tsunami of these cases probably start pouring in, you’re not going to get away with not proving that you’re really in bad financial condition and you’re going to have to do more than say that the industry’s failing. I thought that was super interesting. We’ll see how the Grubhub deal works out, or if it does at all, but I thought those were some interesting tea leaves coming from the agency recently.


Eric Grannon:  To pick up on something you said earlier about the agencies imposing their own element that doesn’t really come from the case law, and the DFA example that you gave, it sounds like—unlike the example you’re talking about now with the online food delivery—there was, what the enforcers might view as an objective confirmation, because of the ongoing bankruptcy proceeding. How dispositive do you think that was?


George L. Paul:  I think it was certainly an important part of it. They clearly are saying here that if the acquired firm is going to go to nothing. If it’s really going to exit the market and all the assets are going to be gone—not producing milk at all—then we absolutely have to keep those assets alive by allowing the merger to go forward. If you’re going to continue to use those assets though, and it could raise some competition issues, they are going to look for a middle ground to try to minimize any impact that could come out there. And that could be attacking the failing firm defense on the merits and elements as you speak, or morphing it into a weakened firm defense, that’s something a little bit less, where it’s given due consideration, but isn’t seen as a strict, full-on defense to an anticompetitive merger.


Eric Grannon:  Okay, Greg, let’s switch to you. On the same topic, but with your lens as an economist, are there unique features of the pandemic economy, and its after-effects, that you think parties may be able to invoke in establishing the failing firm defense, or some weakened version of it?


Greg Eastman:  I generally think that the pandemic itself -- the pandemic, in and of itself, doesn’t necessarily affect your ability to make a failing firm defense or implement a failing firm defense. I think that it’s really kind of a question of the economic effects of that, and you want to distinguish between having “the pandemic portion” and the residual economic effects, right? Which can be significant and large, and you have you push it down to that level to focus on the underlying economic issues related to that.


Following up on the Grubhub type example, if you go over to the U.K., there was a pending merger in the U.K. with Amazon and Deliveroo, right? It started before crisis and ended up after the crisis and it switched in the way things were going. The Amazon was permitted to complete its purchase for a minority stake in Deliveroo? That was due, in part, to this unprecedented affects in the food industry in the U.K. The need to keep these things -- the recognized need to keep these things in the market.


      There’s this more philosophical question about how you handle this question that George brought up, which is your whole industry is being challenged, right? How you think about this idea that the industry itself is under pressure, as opposed to, normally when you read the horizontal merger guidelines about the failing firm, it’s much more focused on one firm, and what’s going to happen with that one firm, and much less about what’s going to happen to the industry overall. Is the industry failing or not failing is not, in some sense, not a direct question that gets asked, typically. It does say a lot about -- to take into consideration because it says a lot about whether or not you think the assets of the firm will exit or not. So in an industry that’s failing, if one firm fails, nobody else really wants -- it’s easier to make the case that the assets would exit the industry because there’s no point in keeping those assets within the industry because the industry, if it’s failing, and maybe in part because it had an excess amount of assets.


      On the flip side, some of these things -- and to keep in mind, that even if the -- and something that may distinguish between the dairy farmers example and the food take-out delivery example, which is that, ease of entry back into the market. Now, again, this is not something that normally gets considered in the failing firm analysis directly but is still important to think about in terms of the overall competitive effects. Something like the dairy example, there’s more processing plants, there’s a high cost of having those things and operating something like that, whereas in the food delivery it’s much more about having a platform, and being able to create relationships with restaurants and customers, and the entry costs may be different. I think about the future competitive effects in the industry may, in fact, be different.


      The other fundamental question here really has to do with both the speed of which this economic crisis happened, right? It really hit everyone -- it hit some people extraordinarily hard and extraordinarily quickly, in a way that is going to be hard for everyone to process. It makes it hard to use historical comparables as relevant comparables because of the speed at which it happened.


      There’s also this great uncertainty about how long this is actually going to last, right? We all agree that starting from the middle of March through present times things have been very difficult across wide swaths -- or the entire economy -- extraordinarily difficult among certain swaths of the economy, but it’s really hard to predict what’s going to happen. Is this going to be for months? Is it going to be years? A part of this overall predictive effects, you’ve got to think about what is going to happen, what is the process by which you go forward. If I’m going to have imminent failure, what’s the time frame on that and that’s going to be a part on how bad the crisis continues to be.


Eric Grannon:  That’s interesting Greg. So, I’ve got kind of a reaction, and I want to run it by you to see if I’m drawing the right conclusion. I guess I hear you suggesting that in industries with hard assets like plants or airplanes, that kind of thing, that the agencies will not necessarily be as rigorous in those cases. Actually, I should flip it and say agencies will be even more skeptical in hearing a failing firm defense in an industry that doesn’t have such hard assets, like online-based companies, as opposed to ones where there are hard assets and entry can be viewed as a higher hurdle. Is that a generalization that you meant to suggest?


Greg Eastman:  I don’t think I meant to suggest it quite like that. I think that the agencies have different sets of considerations to take into account with respect to the ability of the assets to exit, and that can make it more or less difficult for you to get a failing firm through, right? You could actually think of examples where, because they have significant fixed assets, that it’s unlikely that those assets would exit the industry, even if the firm were to fail because somebody would pick those up in a bankruptcy, or pick them up otherwise, and therefore, that would make it hard for you to prevail in a failing firm defense.


Eric Grannon:  Okay, thank you that. I’m glad I asked for that extra clarification. So, George, you did mention earlier some other, we’ll call them watered-down versions of the failing firm defense, but so far, the discussion has focused on the literal failing firm defense. Can you give us some color around other arguments that parties can make, when they don’t actually -- when they can’t actually establish the legal failing firm defense?


George L. Paul:  Sure, it’s really two major categories that fall short of failing firm, but that are related. The first is called the failing division defense and that gets us to the notion that the whole company is not failing, but they have a distressed business line or set of assets that are -- products aren’t viable anymore, and they’re having decreased profitability. So they want to sell off a portion of that, and highlighting the justifications for why you’re selling off a division like that and that it is not a viable firm use space may help to convince the agencies, or at least the courts, to approve the merger, where the overall business isn’t at risk at failure, but that potential part of that business is. That is something that has been accepted in the past by the agencies in courts and is something that you’ll see as in a post-COVID world firms look to prove the weaker divisions where they’re not going to be able to invest sufficient capital so that they can put the capital to where they’re most likely to be successful. I think you’ll see more of this kind of defense.


      The other really harkens to the T-Mobile / Sprint deal, which certainly garnered a lot of attention. That’s the weakened firm or the flailing firm, as opposed to failing firm, and the addition of that extra “L” makes a big difference. This was -- another Supreme Court case, General Dynamics back in 1974 recognized the fact that when companies are merging, if the parties are able to show that the target firm is flailing and unlikely to be a constraint going forward, that a merger can be approved. The FTC did, obviously, look at this very narrowly, but if you can typically turn the agencies around if you can prove that the current market shares that the firm has overstates competitive significance due to the financial condition. I think that’s really where we’re going to see things head and why I think Sprint / T-Mobile is such an interesting case. It’s a little bit of what we will find coming out of this crisis if you look back at 2008. A lot of companies are going to survive and come through. They haven’t failed, but they’re going to be weakened. I call it like the wounded wildebeest or the old wildebeest on the plain. Those are the ones that the tigers are going to -- and the lions are going to target first and try to go after and beat.


      The question is is that are they now so weakened that they may be the number three firm today, but if we really take a consumer welfare look at this and plan out, are they going to be a constraint on pricing going forward because they’re so weak now they’re inefficient? They can’t afford to keep up with new technologies; they can’t afford to update with efficient equipment. So, in the next three or four years, which is beyond the term that you would at for failing firm, they’re not going to be a competitive constraint. A pharmaceutical company, for instance, that can’t invest in pipeline products, in five years isn’t going to be nearly as significant as its market shares today might suggest.


      That’s the case we saw with Sprint and that was the point of disagreement. The DOJ, the FCC and a majority of states believed that Sprint would be unlikely to be successful going forward as a competitor, and that by combining with T-Mobile, it could survive and the industry is better off by replacing Sprint with Dish to come in as a divestiture buyer and step in his shoes and compete. The judge really felt that Sprint’s weakened condition justified that, and a settlement made things even easier for the judge to figure it out in the end. A coalition of states disagreed and felt that it was -- they should have allowed Sprint the opportunity to try to reverse course and do it on its own, despite what its executives were saying and force it to go out there and compete.


      I think you’ll see that a lot going forward in these cases. In particular, there’s been a rise of progressive antitrust out there that is challenging the use of the consumer welfare standard in merger review and looking for antitrust to take a broader view at what might be problematic beyond a specific price innovation quality measures in a specific market. There I think you’ll see a rising tide of people that are questioning acquisitions on the basis of not wanting the lion to kill the wildebeest and get stronger as a result, and seek out predatory kinds of acquisitions that take out the weak and replace it with the strong.


      It’s the opposite of what happened in 2008 where the government encouraged strong banks to acquire weak ones to keep them afloat. It’s really the opposite. It’s let the weak sort themselves out or try to combine among themselves, but do not let the big get bigger, and that will be the big area of debate going forward as to whether or not we pay attention to weakened firms’ defenses or we seek to prevent bigness as a potentially bad thing.


Eric Grannon:  Interesting, okay, well thanks for that George. Before we open it up for audience questions, I’ve got one final question for Greg. As we move ahead, if you could comment more on the particular industries that you think might be more susceptible to failing firm defense arguments being made, not necessarily being successful, but being made. And then you also commented earlier about an acquisition that was reviewed in the U.K., and I’m wondering whether there are interesting observations that you can offer about mergers that have to be cleared in multiple jurisdictions, and how the failing firm defense might play out in one jurisdiction versus another?


Greg Eastman:  Yes, I can talk about those things. I would  use -- looking forward I would think about -- I would probably say there are four things to really think about going forward. One which would be what you just said. Whether or not there’s going to be a continued divergence between how the U.K. and the E.C. look at mergers, as opposed to what the U.S., and the U.K. and you see they sort of have one additional element, which is what would happen to the sales of the exiting firm? And you have to think about, for those additional sales, what happens, and what impact does that have on competition. And with greater uncertainty the crisis, it just becomes a harder thing to predict and think about. I think that’s one thing to think about.


      You saw this in a recent challenge to the pack by aluminum merger. It was challenged by both the FTC and the CMA and that’s this question about killer acquisitions. So one of the other popular things people have been talking about is this idea of killer acquisitions, and that is when a big incumbent buys a start-up or small, not yet really competitively significant player, but with the idea that, at some point in the future, it could have been competitively significant. It puts a greater emphasis on this idea of that basically the dynamics of competition, or the idea of network economics, or network effects that could mean that in the future that a new entrant, or a new competitor, a relatively small competitor, could actually grow into be a real big colossus of somebody. I think that is interesting to look at.


      This idea of a populous antitrust, that George just mentioned, I think is going to play a big role here, in the sense that you really have these competing forces. In a crisis, there’s a fight to safety among different levels, and sometimes in the sort of real-world economy, that the fight to safety really means the fight to bigness. The fight to the incumbent, the person you know, the person who’s big, who is too big to fail, and that’s going to create tension between the big incumbents and otherwise weakened firms and how everyone handles that going forward, I think, is going to be very interesting.


      The final thing I would raise with respect to this is really where are the deals? Where are the mergers? It’s a crisis and -- well, first of all, it’s really hard to think about having to deal today. A lot of firms are not fully operational themselves, so it’s hard for them to just keep their own operations going, let alone buy someone else. You get this big divergence, in some sense, between the overall stock market there hasn’t been a tremendous fall in stock market values, at least recovered from the earlier fall. So that means valuations for companies are high. Well, at the same time, there’ll be this crisis and you might not have as much capital, or cash, to deal with stuff, and it makes it hard to think about deals at this point in time, so there may a long delay before we get deals, it’s just hard to know. It’s kind of interesting to see if, first we’ve got to get to the deals, and then we can worry about some of these other things.


Eric Grannon:  Okay, well thank you, Greg. Greg Walsh, can you help us turn it over to see if we have any questions from the audience?


Greg Walsh:  Yes, sir. Eric it doesn’t look like we have anybody lining up in the queue. Is there anything else you want to explore while we’re waiting?


Eric Grannon:  Well, I’ll just take a moment to say while we’re giving the audience a chance to dial in star or pound, with any questions they might have, I want to thank Greg and George for their time and preparation, and walking us through the failing firm defense today. And obviously thank all of our listeners. We hope you enjoyed the program and continue to look out for Federalist Society programs that may be of interest.


Greg Walsh:  Keep an eye out for emails announcing upcoming Teleforum calls by consulting the full schedule of our upcoming Teleforum calls on The Federalist Society’s website. Also available there are podcasts of previously recorded Teleforums that you may have missed, as well as on iTunes and Spotify.


      I still don’t see anybody in the question queue. Eric is there --


Eric Grannon:  Then, I think, I’ll just, again, take this opportunity to say thanks to Greg Eastman and George Paul for their work today and take care everyone. Thanks for joining.


Greg Walsh:  On behalf of The Federalist Society, I want to thank our speakers for the benefit of their valuable time and expertise today. We welcome listener feedback by email at: [email protected]. Thank you all for joining us. We are adjourned.




Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at