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19 Antitrust 20 (2004-2005)
Oracle and the Future of Unilateral Effects

handle is hein.journals/antitruma19 and id is 134 raw text is: COVER STORIES Oracle and the Future of Unilateral Effects BY MARC G. SCHILDKRAUT N ITS ATTEMPT TO ENJOIN ORACLE 'S acquisition of PeopleSoft, the Antitrust Division offered up the conventional Section 7 analysis, which did not completely avoid a coordinated analysis but focused primarily on poten- tial unilateral effects. To establish adverse unilateral effects, the Division attempted to prove the typical prima facie case by defin- ing the market, establishing that entry was difficult, and showing high concentration. It also tried to establish that the merging firms had a market share of at least 35 percent and that the merging firms were close competitors. The Division topped off the analy- sis by trying to prove anticompetitive effects directly. Yet the Division lost.- Was there really no likely lessening of competition to support an injunction? Reasonable people could differ on this, and as an outsider to the proceedings, I cannot offer the definitive analysis. But a reading of the court's opinion sug- gests that many of the conventional tools used to establish anti- competitive effects got in the way of the Division proving its case. The Division might have been better off relegating the prima facie analysis to a secondary role and simply establishing that the acquisition was anticompetitive through the direct evidence it had developed on the price effects. The Division could not take this approach because pursuing such a strategy would have required undercutting its own Merger Guidelines and much of the case law underpinning the Guidelines.2 The Guidelines, of course, are not fixed in stone. As I discuss below, to have a better chance of prevailing in cases like Oracle, the antitrust agencies first need to modify the Merger Guidelines to permit direct effects to trump prima facie analysis and then they need to educate the antitrust community on the importance of this change. To understand this approach, some explanation of the application of the prima facie case and the Merger Guidelines to the Oracle case is required. The Merger Guidelines and the Prima Facie Case The Prima Facie Case. In the early years of enforcement of Section 7 of the Clayton Act, enforcers must have found them- selves in quite a quandary about how to prove that an acquisition is likely to lessen competition substantially. The Act was intend- Marc Schildkraut is a shareholder in the law firm of Heller Ehrman White & McAuliffe LLP. ed to prevent anticompetitive effects before they happened. What sort of crystal ball could enforcers use to prevent anticompetitive effects in their incipiency? That crystal ball was discovered by economists who were developing a paradigm of competitive effects that started with the structure of the industry. Based on empirical analyses of the relationship between concentration and price, a near consensus developed that high concentration in a market resulted in anticompetitive conduct and concomitant poor economic performance. If market concentration could be measured, it would be pos- sible to predict whether that market was likely to perform poorly. Enforcers could also predict whether an acquisition would increase concentration enough to raise concerns about such poor perfor- mance. To measure concentration, the analysis had to start by defining the market. But if enforcers defined the market improp- erly, the measure of concentration would also be off the mark. As a result, after the Supreme Court adopted the paradigm in Philadelphia National Bank,3 many Section 7 cases became a battle over the market definition. Over time, more and more economists began to doubt the pri- macy of the concentration-conduct-performance paradigm. These doubts did not result in the wholesale abandonment of Philadelphia National Bank prima facie analysis. Instead, these doubts crept into Section 7 analysis by making it easier to rebut the paradigm. Even if the market was properly defined, the con- centration might not accurately measure future competition,4 or entry might be easy,5 or there might be no reasonable story sup- porting anticompetitive coordination.6 For the courts, this resulted in more shifting of the burden of proof. If the plaintiff established the prima facie case, the burden would shift to the defendant to show that the prima facie proof did not accurately predict the outcome of the merger at hand. If the defendant met its burden, the burden would shift back to the plain- tiff to prove anticompetitive effects more directly.7 Nor did doubts about the paradigm result in the abandon- ment of the prima facie case for the antitrust agencies (although the agencies never supported the explicit shifting of the burden of proof back and forth). The Guidelines still required the agen- cies to establish well-defined markets and measure concen- tration. The agencies, like the courts, did make clear, however, that they would not challenge mergers without a convincing effects analysis.8 C 0 M M E N T A R Y

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