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The Department of Justice’s aggressive prosecution of illegal cartels is spilling over to merger enforcement, which some antitrust experts contend could make it harder to secure approval for deals. William Kolasky, the deputy assistant attorney general for antitrust, told the American Bar Association antitrust section last week that the division has established that cartels form even when there are six or eight competitors in the market. This is because the fringe companies are willing to go along with the cartel to avoid angering their larger rivals, he said. This conclusion suggests that the antitrust division could block mergers where as many as a half dozen competitors remain in the market. That’s because a goal of the antitrust laws is to prevent collusion among competitors. “I heard this as enforcement-oriented,” said Jonathan Baker, a law professor at American University in Washington, D.C. “He was emphasizing lessons learned that would raise skepticism about common defense arguments.” Intervention when a half dozen competitors remain in the market runs counter to the conventional wisdom, which held that the Bush administration antitrust enforcers would refrain from blocking deals if at least three competitors remained in the market. James Lowe, a partner at Wilmer, Cutler & Pickering in Washington, D.C., said in a subsequent panel discussion at the ABA meeting that prior to recent Department of Justice prosecutions, few believed cartels were so common. “They belie the belief of many that cartels were highly unusual,” he said. If cartels do form frequently, then the government would have an interest in blocking deals where even as many as six or eight competitors remain in a given market. That’s because the deal could lead to collusion. “[Kolasky] is saying that when there is an appropriate case with six to eight firms, they will bring it,” Baker said. Kolasky made his remarks in a speech on coordinated effects, which is one of two theories the government uses to challenge mergers. It holds that mergers are anti-competitive if the remaining competitors are able to raise prices. In the past five years, the coordinated effects theory has been out of favor among antitrust enforcers. Instead the government has relied primarily on the unilateral effects theory, which holds that a merger may enable the resulting firm to raise prices irrespective of what rivals do. This theory is generally considered easier to prove. Kolasky said cartels are more likely when an industry already has undergone one round of consolidation and that the leaders of cartels use their excess capacity as a weapon to ensure other members do not cheat. The division also has concluded that the presence of large, sophisticated buyers does not impede cartel formation, Kolasky said. For example, in the prosecution during the Clinton administration of a cartel controlling the sale of citric acid, one major buyer hurt by collusion in the sector was Coca-Cola Co., he said. In addition, cartels are durable, often lasting 10 years or longer, Kolasky said. Large public companies are no less likely than small private firms to join an illegal cartel, he said. Also, companies that participated in one cartel are more likely to get involved with future cartels, he said. One industry where the Justice Department could apply its criminal cartel enforcement lessons is aluminum processing. Kolasky said that in Alcoa Inc.’s acquisition of Reynolds Metal Co., the antitrust division concluded in 2000 that the markets for smelter and chemical grade alumina were conducive to collusion because there was a history of coordination and price signaling. A dominant producer also had excess available capacity, he said. David Balto, a partner at law firm White & Case in Washington, D.C., said many industries could meet the antitrust division’s definition of sectors that are vulnerable to collusion. These include recorded music, chemicals and gasoline, he said. All are dominated by stable oligopolies and have recently undergone consolidation. Some worry that the Bush administration could use the lessons from the cartel prosecutions to permit more mergers. “This is a matter of raising the bar,” said Andy Gavil, a professor at Howard University law school. Gavil said antitrust enforcers could decide that the risk of a cartel forming exists only when the market contains all factors that were present in the recent prosecutions of the citric acid, vitamins, lysine and graphite electrodes cartels. The problem with this approach is that the Justice Department has yet to uncover scores of other instances of illegal collusion, Gavil said. “The cases of actual coordination may only be the tip of the iceberg,” he said. “So your list is only going to be a partial list, and the problem of coordination may be greater.” But other antitrust lawyers said the message is greater enforcement, not less. “There are two bases for challenging mergers,” one former antitrust official said. “The government has largely ignored one of them. So if they start also using that theory, it could only mean more enforcement, not less.” William Baer, a partner at the Arnold & Porter law firm in Washington, D.C., said dealmakers will not know whether applying cartel enforcement lessons to mergers will result in more challenges until the government brings its first case. “If you demand clear and convincing evidence of the risk of a cartel, then you would not be challenging many mergers,” Baer said. “But if the standard is less than that, then you could be challenging more mergers.” Copyright (c)2002 TDD, LLC. All rights reserved.

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