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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