Pitofsky's Legacy

Back in the early days of the Clinton administration, as its antitrust team began to take shape, conservatives grumbled about what they predicted would be an unreasonably tough stance on mergers. Exhibit A in their case was Robert Pitofsky, a noted academic on competition policy tapped as chairman of the Federal Trade Commission. Nearly 26,000 mergers later, most antitrust experts say Pitofsky, who will step down in June, was anything but radical. They say he has pursued a centrist antitrust agenda backed by agency-conducted studies, workshops and litigation rather than by ideological tilt. And that will make it much harder for his successor to radically ease merger enforcement. “Under Bob’s leadership, the FTC has become re-engaged in important ways,” said Stephen Calkins, a professor at Wayne State University in Detroit and former FTC general counsel. “It re-engaged with the courts by adjudicating cases internally and in federal court. The FTC re-engaged in the national debate about competition policy. Bob made hearings, workshops and reports a centerpiece of the agency’s mission. “He did this deliberately, drawing on the origins of the agency.” Common sense often described Pitofsky’s philosophy. Eleanor Fox, a New York University law school professor, said Pitofsky managed to look beyond political and economic doctrine to see the real impact of a merger on the public. “He did his best to put antitrust on a track that is not so narrow-minded that it can’t see market processes,” Fox said. “He saw the big picture.” Sitting in a well-worn leather chair in his corner office at the FTC, Pitofsky said he wanted to walk a middle line in merger enforcement, avoiding both the excesses of past Democratic administrations and the paucity of some Republican administrations. STEADY SHIP “My goal across the board was to try to establish a basic enforcement policy that would last and not change dramatically from administration to administration,” Pitofsky said. “We ran a very lively but steady ship.” Pitofsky returned to the FTC in April 1995 for his third stint. He was a commissioner in the Carter administration and director of the bureau of competition in the Nixon administration. True, he arrived with a regulatory vision that could make a libertarian cringe, but one that quickly evolved. Speaking at the American Bar Association’s annual meeting in August 1995, Pitofsky argued that occasionally the FTC should maintain oversight of a merged company to guard against anticompetitive outcomes. “The advantages of this approach are obvious,” he said. “The parties are allowed to complete the transaction and achieve claimed efficiencies, and the commission has an opportunity to observe whether anticompetitive effects actually emerge.” If carried out, the policy could have involved the FTC in the daily monitoring of dozens of companies and changed the agency from a law enforcer to a merger regulator. “He floated that idea and then we talked about it,” a former senior FTC official said. “It was an academic idea.” DISTRUSTFUL AND CYNICAL The idea was also doomed for the scrap heap. Pitofsky appeared more distrustful of corporate executives and less convinced ongoing regulatory oversight could work. “There were plenty of reasons for him to be more cynical about what people were telling him,” the former official said. “There were just lots of instances where the business people would just flagrantly lie to us. They would say if you don’t approve this deal we would be forced to shut down our business and life would be over.” Pitofsky ordered a review of past FTC divestiture orders. The intent was to discover what worked and what failed. The study, released in the summer of 1999, found 25 percent of consent decrees do not restore lost competition. “Three of four is OK in baseball but not in law enforcement,” Pitofsky said in an interview. The result was a series of speeches, culminating in a February 2000 address in New York. Pitofsky said parties are making increasingly complex and ambitious restructuring proposals to win antitrust approval. This causes regulators to debate when a deal is beyond saving, he said. Pitofsky said he considers whether the buyers of the divested assets have the strength, incentive and business plan needed to effectively run the business. He also preferred the sale on entire operating units, rather than a mix-match of assets. He wanted structural remedies, not conduct remedies requiring government oversight. “The FTC has been and remains willing to consider restructuring proposals, even those that are fairly extensive and complicated, if it is likely that the restructuring will preserve competition,” he said. “In recent years, however, we have seen more frequent proposals that are so extensive and complex that it is impossible to predict with any confidence that competition will be restored and consumer welfare protected.” MORE ACCOMMODATING, LESS INSISTENT What followed the study appeared to be a crackdown. The FTC rejected an offer by Royal Ahold NV to divest about half of Pathmark Stores Inc. to secure approval. It also forced Exxon Corp. and Mobil Corp. to divest thousands of gas stations despite little competitive overlap in many of the markets covered. Then came BP Amoco PLC’s acquisition of Atlantic Richfield Co., which only won approval after BP agreed to sell all of Arco’s Alaska assets to Phillips Petroleum Co. Experts expect Pitofsky’s successor, George Mason University professor Timothy J. Muris, to be more accommodating to mergers through the use of divestitures. He may favor requiring fewer upfront buyers, be less insistent on the sale of operating units and be more accepting of conduct-based solutions. But they said the existence of the 1999 divestiture study would make it very difficult for anyone to return the agency to its more hands-off approach of the 1980s when Ronald Reagan’s antitrust enforcers did little to slow consolidation. “There probably will be a swinging back but Tim can read the study and probably will be more skeptical of divestitures than he was before,” Calkins said. Muris declined in a brief interview to discuss divestiture policy, citing his pending confirmation process, but he did praise Pitofsky. “Bob has been an outstanding chairman,” Muris said. “He will be a tough act to follow.” While Pitofsky’s thinking was changing, his agency was also undergoing a transformation. The FTC began holding regular workshops, covering topics from electricity deregulation to international competition policy to slotting allowances to B2B to privacy. CUTTING-EDGE ANTITRUST “He restored the FTC as a place to analyze and report to Congress on antitrust and consumer protection issues,” said William Baer, a partner at Arnold & Porter in Washington, D.C., who served as director of the FTC’s competition bureau during Pitofsky’s first four years as chairman. The result of these programs is an unprecedented amount of data on some of the most cutting-edge topics in antitrust. Academic observers say that, because of the way the chairman interacts with the FTC’s permanent staff of lawyers and economists, this information will serve as the basis for FTC policymaking well into the Bush administration. Pitofsky’s tenure will also be remembered for the large amount of litigation it initiated. Debra Valentine, who just resigned as the FTC’s general counsel to return to the O’Melveny & Myers law firm, said Pitofsky repeatedly stressed the importance of bringing judges into the process. This came in response to complaints from lawyers that the FTC was trying to establish new law via consent decrees. “You had an effort to go to court to get a public articulation of antitrust principles,” she said. He enjoyed perhaps the greatest legal victory April 27 when the U.S. Court of Appeals for the District of Columbia effectively blocked H.J. Heinz Co.’s acquisition of Beech-Nut Nutrition Corp. The ruling clarified how the agencies should evaluate claims of efficiencies and what standard a district court should use in deciding FTC motions for injunctions against mergers. These precedents will apply in nearly all merger litigation. STAFF DIVIDED The case was controversial inside and outside the agency. The staff was divided on whether to even challenge Heinz/Beech-Nut. Its lawyers were committed to other litigation and some believed the deal could bolster competition by creating a stronger No. 2 baby food maker. Many in the antitrust bar, however, saw the case as a test of whether efficiencies could save an otherwise anticompetitive deal. They argued that if the agency, and the courts, could not accept the efficiency defense in this case, then they would be unlikely to permit it in any deal. It took a campaign by Pitofsky to secure a 3-1 vote, with one commissioner abstaining, to proceed with the suit. Then the FTC lost before district court, a ruling that other companies with more controversial deals could have exploited. “If that merger can go through, then I can see it applying to all sorts of other markets,” Pitofsky said. “It would have changed merger law.” Several other merger cases went to trial. In Staples Inc./Office Depot Inc., a judge rejected arguments that the FTC should consider competition from discount stores such as Wal-Mart Stores Inc. when evaluating the impact of office superstore mergers. Another judge sided with the FTC in the so-called drug wholesalers cases, which involved efforts by the four largest drug wholesalers to combine into two companies. Market definitions also were at issue in the Swedish Match case, which centered on whether the FTC was correct in defining separate markets for moist snuff and loose leaf chewing tobacco. The government won. “He established an enforcement posture that was firm but fair,” Baer said. “The commission showed it was not afraid to go to court when it was right and it has enjoyed a remarkable string of victories.” DISGORGEMENT Pitofsky said one of his most important cases was the victory over Mylan Laboratories Inc. The agency forced the company to return $100 million it earned from violating the antitrust laws by seeking to monopolize the market for a generic drug. This was one of the first antitrust disgorgement cases. “When a company violates the antitrust laws and makes a lot of illegal money, it is not enough to come back years later and say ‘Don’t do this,’ ” Pitofsky said. “ You’ve got to make them give the money back.” Disgorgement could be a weapon retained by Muris, despite objections to its use — not just in the Mylan case — by the two other Republicans on the commission. Muris helped develop use of disgorgement while director of the consumer protection bureau. Pitofsky served at a time of unprecedented growth in the number of mergers. Deals reportable under the Hart-Scott-Rodino Antitrust Improvements Act rose from 2,816 in the 1995 fiscal year to 4,926 in the 2000 fiscal year. Reportable deals set a record every year except in 1999, when M&A volume fell by less than 2 percent. Despite the deal explosion, the FTC allowed most mergers to proceed without question. About 2 percent of deals received a second request and even fewer were subject to a consent decree. HIGHER STANDARD Pitofsky oversaw some of the largest mergers ever. These include America Online Inc.-Time Warner Inc., Time Warner Inc.-Turner Broadcasting System Inc., Exxon-Mobil, BP Amoco-Atlantic Richfield and Glaxo Wellcome-SmithKline Beecham. Both Time Warner deals took months to resolve, with the AOL deal nearly winding up in court. Observers said Pitofsky appeared to hold media mergers to a higher standard, believing that the First Amendment changes the equation. That would help explain why AOL took about six months to negotiate despite few obvious overlaps in businesses. While antitrust lawyers praised Pitofsky’s intellect, many faulted him for being unwilling to bend enough to get deals through. Ky Ewing, the chairman of the American Bar Association’s antitrust section, said Pitofsky was too inclined to use the government’s power to intervene in the market. “He had the same bias he had as a commissioner the first time around. He thought the government should intervene in the market,” said Ewing, a partner in the Washington office of the Vinson & Elkins law firm. “I expect fewer cases and fewer transactions to be challenged under the new administration.” The chairman also was the target of criticism on Capitol Hill and on Main street. Republican Sen. Ted Stevens last year accused Pitofsky of intentionally trying to ruin Alaska’s economy by objecting to BP Amoco’s acquisition of Atlantic Richfield, a deal that was eventually resolved through a consent decree. “This process needs to be reviewed if one man can destroy the economy of a state,” the Republican said during a Senate Commerce Committee hearing in February 2000. CORPORATE CRITICISM The chairman of Air Products and Chemicals Inc. blamed Pitofsky last year for causing his company to lose millions of dollars by rejecting a deal after it established a currency swap to finance the transaction while Royal Ahold complained that Pitofsky’s FTC changed divestiture rules in midstream during consideration of the grocer’s eventually unsuccessful acquisition of Pathmark. Some have cited the baby food case as why more companies don’t fight the FTC in court. The companies announced the deal in February 2000 and had to wait until last week for a ruling. If they wanted to continue to pursue the case, the companies would have had to wait months longer for either an appeal to the Supreme Court or conclusion of an administrative process at the FTC. Pitofsky said the criticism is unwarranted, arguing the agency moves much faster than in the past. For example, it has curtailed discovery, offers a 13-month expedited administrative procedure and agrees to quick trials. “My hope is that this is an area where we have made substantial progress,” he said. “There was a time years ago when the period would have been five or six years.” But he said more must be done, especially for high-technology industries where products change so quickly. He urged Muris to find further ways to encourage litigation. CIVIL SERVANT Pitofsky had a comfortable life before Clinton tapped him to serve at the FTC’s 54th chairman. He was professor of law at Georgetown University and of counsel to Arnold & Porter. He will return to both jobs in June. His antitrust primer was considered one of the key textbooks on competition policy. He also already had served the government, with stints as an FTC commissioner from 1978 to 1981 and as director of the bureau of consumer protection from 1970 to 1973. But Pitofsky said he couldn’t resist returning to lead the agency. “I love the public sector,” he said. “I really enjoy the idea of influencing policy.” Copyright (c)2001 TDD, LLC. All rights reserved.