August 12, 2020

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August 12, 2020

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August 10, 2020

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The Failing Firm Defense Is an Absolute Defense to an Otherwise Anticompetitive Merger

The fact that a merger might be anticompetitive is not a reason to prohibit a transaction if all of the elements of the “failing firm defense” are met, as described below.  In fact, the antitrust agencies have long recognized that the failing firm defense will allow some anticompetitive transactions to proceed, noting, in an earlier version of the Merger Guidelines:

The “failing firm defense” is a long-established, but ambiguous, doctrine under which an anticompetitive merger may be allowed because one of the merging firms is “failing.” Because the defense can immunize significantly anticompetitive mergers, the Department will construe its element[s] strictly.

1984 Merger Guidelines § 5.1.

As noted, the agencies carefully scrutinize companies invoking the failing firm defense. To successfully invoke the failing firm defense, a company must satisfy three requirements:

First, the proponent of the acquisition must show that the company to be acquired is in imminent danger of failure.  Second, the failing company must have no realistic prospect for a successful reorganization.  Third, the proponent must demonstrate that there is no other viable alternative purchaser.

DOJ and FTC, Horizontal Merger Guidelines, § 11 (August 19, 2010).

There are two main justifications that courts and commentators give for the failing firm defense: the social impact of letting a firm fail and the economic impact.  The social impact rationale focuses on the impact that letting the firm fail will have on stockholders, creditors, and workers, while the economic rationale focuses on the fact that if the failing firm’s capacity and other assets are allowed to exit the market, this can ultimately lead to higher prices and lower output.

Although economists and commentators have long debated the merits of both the social and economic rationales for the doctrine, it is widely recognized that the failing firm defense is an “absolute defense” to an otherwise anticompetitive merger.  The agencies and the courts continue to recognize that the defense represents a policy determination that certain mergers should be allowed to proceed even if it is possible that they will result in anticompetitive effects. 

©2020 Epstein Becker & Green, P.C. All rights reserved.National Law Review, Volume IX, Number 283


About this Author

John Steren, Epstein Becker Law Firm, Health Care Litigation Attorney

E. John Steren is a Member of the Firm in the Health Care & Life Sciences and Litigation & Business Disputes practices, in the Washington, DC, office of Epstein Becker Green. Mr. Steren devotes a significant portion of his practice to helping health care organizations manage the antitrust risks of joint ventures and other business arrangements. He also focuses his practice on other complex commercial and civil litigation matters.

Patricia M. Wagner, Epstein becker green, health care, life sciences

PATRICIA M. WAGNER is a Member of the Firm in the Health Care and Life Sciences and Litigation practices, in the firm's Washington, DC, office. In 2014, Ms. Wagner was selected to the Washington DC Super Lawyers list in the area of Health Care.

Ms. Wagner's experience includes the following:

Advising clients on a variety of matters related to federal and state antitrust issues 

Representing clients in antitrust matters in front of the Federal Trade Commission and the United States Department of Justice, and state antitrust authorities 

Advising clients on issues related HIPAA Privacy and security

Advising clients on issues related to state licensure and regulatory requirements