Businesses need legal and regulatory certainty to invest and innovate. Across the economy, legal predictability allows companies to allocate risk, to invest resources for the long term, and, with luck, one day to reap the rewards of successful new products.
Unfortunately, an ongoing federal lawsuit threatens to undermine that certainty for large swaths of the business community. In a trial that began last week, the Federal Trade Commission (FTC) seeks to unwind two deals that closed more than a decade ago, Meta’s (then Facebook’s) acquisitions of Instagram in 2012 and WhatsApp in 2014. Although the FTC carefully reviewed and raised no objections to either deal at the time, the agency now speculates that, but for the deals, those companies could have grown into viable separate businesses. But the hidden costs of this “retroactive regulatory revisionism” are high – undermining capital formation, innovation, and growth.
Imperiled Investment and Innovation
Setting aside the suit’s merits, the case could damage the nation’s innovation ecosystem by discouraging companies from investing in startups and smaller firms out of concern that, years later, the government could attempt to unwind those deals. Such investments often promote competition by providing small companies with critical financing and technical expertise, while allowing larger companies to bring new products to market more quickly.
In the early 20th Century, for example, John Deere sold planters and buggies, but its tractors flopped in the marketplace. To satisfy its customer base, in 1918, Deere purchased a smaller company that had developed the first successful gasoline tractor. This investment benefited consumers: in its first year, Deere’s distribution network and marketing expertise roughly tripled the tractor’s sales and over time Deere’s investments turned its green tractors into global icons.
Other examples abound. In 1926, General Motors purchased an auto body company to secure its supply chain. In 1928, Boeing Air Transport purchased a west coast airline to expand its national reach. In 1987, Microsoft purchased Forethought, the creator of PowerPoint, to integrate into its software suite. And in 2006, Google purchased YouTube, which had started as a dating app that paid women $20 to upload videos, as an investment in user-generated content. In every instance, the acquiring company invested significant resources to improve and expand delivery of the acquired company’s products, and in every instance, consumers benefited from increased output and innovation.
Notwithstanding each merger’s pro-competitive effects, the government could have challenged each one on grounds that, but for the merger, the acquired firm would have grown to compete with the acquiring company in the same markets. This type of speculative prognostication could have discouraged many beneficial mergers and, going forward, could chill pro-competitive investments.
Reduced Stability
The lawsuit also could undermine public confidence in the stability of the antitrust agencies. In announcing that the revised Merger Guidelines would stay in place, for now, the FTC explained that “stability across administrations of both parties has thus been the name of the game … no business can plan for the future on the basis of guidelines they know are one election away from rescission … stability is also good for the enforcement agencies. The wholesale rescission and reworking of guidelines is time consuming and expensive.”
The FTC’s current lawsuit, however, contravenes the importance of stability. In 2012 and 2014, the FTC carefully reviewed and raised no objections to either purchase, consistent with the congressional design of the Hart-Scott-Rodino Act. Now, many years later, the FTC is using scarce taxpayer resources on a months-long trial to reverse a prior decision, one made with care, and one that a company relied upon to invest billions of dollars in innovations.
Of course, this is not to say that a consummated merger should never receive scrutiny after the fact, but such reversals should happen very rarely and for good cause, such as some sort of misrepresentation, particularly after so much time has passed. As a federal court recently explained in evaluating some ad tech mergers, “it would be a substantial step to find that an acquisition violated the Sherman Act after it was reviewed and approved by federal antitrust regulators.”
Given that the FTC is now looking back more than a dozen years, nothing prevents today’s enforcers from looking back even further in time, or future enforcers from reviewing today’s cleared transactions. Are any mergers ever truly secure?
Empowered Overzealous Regulators
Finally, the FTC’s lawsuit also disregards another concept embraced by the current Administration: regulatory humility. The recent Executive Order to Restore Competition to U.S. Markets ordered agency heads, in coordination with the FTC and Department of Justice (DOJ) to identify any regulations that impose anti-competitive restraints. At the same time, DOJ created a task force to “advocate for the elimination of anticompetitive state and federal laws and regulations that undermine free market competition and harm consumers, workers, and businesses.”
The lawsuit, on the other hand, empowers current and future antitrust enforcers to play regulatory roulette with the economy. If the lawsuit succeeds, government agencies will have a greater ability to unwind prior deals, second-guess their predecessors, and ignore robust evidence about increased output and innovation, all based on their belief that they could have organized entire industries better than the private sector or their predecessors.
In his 1974 speech accepting the Nobel Prize in Economics, Friedrich von Hayek, the author of The Road to Serfdom, urged economists and regulators to exercise caution in light of limits of human knowledge. As he explained, “[i]f man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in [economics] . . . he cannot acquire the full knowledge which would make mastery of the events possible.” In the face of such uncertainty, the government should exercise significant caution before it attempts to rewrite the past.
