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A 1950s-era legal theory is drawing renewed interest since UAL Corp. announced its $11.6 billion acquisition of US Airways Group Inc. Known as the incipiency doctrine, it authorizes regulators to block mergers that could result in copycat deals. The doctrine has surfaced at a Senate hearing, is the subject of new research and was referenced indirectly in a recent letter to the Justice Department by two prominent lawmakers. “Antitrust has a lot of mothballed battleships,” said Robert Lande, a University of Baltimore law professor who is researching the theory. “That is what the incipiency doctrine is.” And just like the mighty ships of a bygone era, the incipiency doctrine is potent enough to sink any pending deal. The theory permits regulators to block a merger even if the deal does not harm competition. All that is required is a belief that the merger will spark a round of consolidation. “It is supposed to be a powerful tool,” said Albert Foer, president of the American Antitrust Institute. “The Supreme Court has interpreted it that way.” It is just this power that Foer and others questioning the UAL-US Airways deal are trying to tap. At a June 22 Senate Commerce Committee hearing, Foer said the incipiency doctrine imposes an obligation on regulators to at least partially base their decision in the UAL/US Airways deal on whether it will trigger more consolidation. “Once an industry has become as concentrated as air transportation, it makes no sense to treat each merger on an ad hoc basis without a larger vision of where we are headed,” said Foer, whose nonprofit group advocates tougher antitrust enforcement. Several prominent lawmakers already have demanded that regulators take the potential of copycat deals into account. Within days of the airline announcement, Senators Mike DeWine, R-Ohio, and Herb Kohl, D-Wis., wrote a letter to Assistant Attorney General Joel Klein asking him to take a broad view of the industry. “We believe it is important to factor into your review the possibility that this deal may start a round of consolidation that could dramatically change the face of competition in the airline industry,” they wrote. DeWine is chairman of the Senate Judiciary antitrust subcommittee, and Kohl is the panel’s ranking member. “In other words, an examination of this deal should consider its immediate implications for competition and more generally its potential to spur consolidation in the near future.” The concerns of DeWine and Kohl could turn out to be well founded. Within hours of the unveiling of that deal, rumors surfaced about other potential pairings in the airline sector, such as Dallas-based AMR Corp. combining with Atlanta-based Delta Airlines and London-based British Airways merging with Dutch-based KLM Royal Dutch Airlines. More recently, Trans World Airlines Inc. and Orlando, Fla.-based Air Tran Airways Inc. appear to be courting each other. Some activists argue that the doctrine should have been used in several deals in the past year. Public Citizen, for example, argues that British Petroleum’s acquisition of Amoco prompted Exxon Corp. to acquire Mobil Corp., which then caused BP Amoco to feel that it had to purchase Atlantic Richfield Co. This very concern was raised by several senators and interest groups. In an October 1999 report, Public Citizen warned the FTC that it should expect more mergers if it approves Exxon-Mobil and BP Amoco-Arco. “Oil companies with smaller assets may have to merge to survive, which could result in fewer companies, less competition and higher prices for consumers,” the group said in the study, “Black Gold Merger Mania.” Follow-up mergers have been seen in other industries. For instance, Albertson’s Inc.’s 1998 deal to acquire American Stores Inc. prompted Kroger & Co.to acquire Fred Meyer Stores Inc. and Royal Ahold NV to attempt to purchase Pathmark Stores Inc. Worries also have been raised in the media sector, where some observers have argued that the merger of America Online and Time Warner Inc. will force other media companies to link up to remain viable against such a giant, leaving only four or five large media companies within the next few years. “Democracy depends on citizen access to a wide and diverse range of views and information,” said Sen. Paul Wellstone, D-Minn. “Democracy depends on the existence of a free and independent media that will hold both public and private power accountable to the people. The dramatic surge in media concentration makes it more and more difficult for our media to perform these essential functions.” These same worries about concentration were shared by the predecessors to Wellstone, DeWine and Kohl. Congress in 1948 was upset with a Federal Trade Commission study showing the massive consolidation in the country. Lawmakers responded in 1950 with the Celler-Kefauver Act, which for the first time let regulators challenge mergers under an already existing law, the Clayton Act, passed by Congress in 1914. The difference between challenging a deal under the Sherman Act and the Clayton Act is enormous. The Sherman Act required definitive proof of an effort to monopolize trade; the Clayton Act only requires a showing that a deal “may” impair competition. The 1950 law sparked an antitrust crackdown that resulted in the prosecution of Brown Shoe Co., which wanted to merge with G.R. Kinney Company Inc. The government alleged the deal would spark significant consolidation in the industry and sought to block the transaction. The fight went all the way to the Supreme Court, which in 1955 upheld the validity of the incipiency doctrine. Chief Justice Earl Warren wrote for the majority that Congress passed the Celler-Kefauver Act because it believed “unchecked corporate expansions through mergers” were a danger to the economy. Lawmakers also feared the loss of local control over industry, he said. “Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets,” the chief justice wrote. “It resolved these competing considerations in favor of decentralization.” To encourage decentralization, lawmakers empowered regulators to arrest mergers “at a time when the trend to a lessening of competition in a line of commerce was still in its incipiency,” Warren wrote. He called this power a “keystone” in Congress’s effort to stymie the rising tide of concentration. “Congress saw the process of concentration in American business as a dynamic force,” the chief justice wrote. “It sought to assure the Federal Trade Commission and the courts [that they have] the power to brake this force at its outset before it gathered momentum.” Warren also said Congress established a general test for determining when a deal should be stopped because of the potential of copycat mergers. This included whether the market was fragmented or concentrated, whether there was easy access between suppliers and buyers and for buyers to suppliers and whether barriers to entry impeded competition. “Mergers with a probable anti-competitive effect were to be prosecuted by this act,” the chief justice wrote. The incipiency doctrine reigned for another decade. But by the late 1960s, economic analysis of mergers had advanced, and policymakers began to realize that consumers often benefited from mergers. The doctrine was banished in 1968 when the Department of Justice released the first horizontal merger guidelines. Though rewritten several times, these guidelines form the basis for today’s antitrust enforcement regime. They provide an economic framework for analyzing the competitive effects of a merger, including use of the Herfindahl-Hirschman Index of market concentration. Not included was the notion that a regulator should block an otherwise permissible deal just because it could trigger copycat mergers. But the incipiency doctrine was never voided by the Supreme Court and technically remains in force. This has led some legal experts to speculate that regulators could try to revive the theory to stop mega-mergers. “The only way you could stop a merger like in the airline case from happening is through the incipiency doctrine,” said the University of Baltimore’s Lande. Still, regulators give no indication that incipiency will be revived. FTC Chairman Robert Pitofsky said regulators often suspect one deal will force other companies to pair up. But he said it would be “unfair” to the merging companies to speculate over whether these other deals really will happen. He also said some consolidation in a sector may benefit consumers. “There are so many rumors about so many deals,” Pitofsky said. “We don’t take those into account.” Mary Lou Steptoe, a partner at Skadden, Arps, Slate, Meagher and Flom who is on sabbatical, said each deal should be judged on the makeup of the industry at the time the transaction is unveiled. “The general standard is to look at the industry as it is now and not to worry about follow up deals,” she said. Yet both she and Pitofsky said regulators may want to consider copycat deals if the transactions have been formally announced while the merger review is pending. For instance, in the drug wholesalers case, McKesson Corp. announced a deal with AmeriSource Health Corp. That prompted a quick merger announcement from Cardinal Health Inc., which tried to buy Bergen Brunswig Corp. As a result, the FTC evaluated the deals together and went to court in 1998 to block them. The antitrust institute’s Foer said it is no more unfair to block the first companies in an industry who want to merge than it is to kill the third or fourth industry merger. “You are not punishing them,” Foer said. Copyright �2000 TDD, LLC. All rights reserved.

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