The Failing Firm Defense and Miraculous Recoveries: The Federal Trade Commission’s Warning to Merging Parties and Counsel during COVID-19

The Federal Trade Commission has issued a number of statements regarding its intention to enforce United States antitrust laws during COVID-19. The head of the FTC’s Bureau of Competition, Ian Conner, echoed this commitment in his blog post on May 27, 2020. In the post, Conner stated that the FTC will continue to closely scrutinize failing firm claims by merging parties.[1] Consumers, he said, “deserve the protection of the antitrust laws now as much as ever.”[2]

The failing firm defense usually involves the argument that the acquired and the acquiring firms are failing, “which presumably would justify the merger on the basis that if you tie two sinking rocks together, they’re more likely to float.”[3] The idea behind the defense is that although the proposed merger is anticompetitive, “it is preferable to have the assets in the hands of the acquirer than see the assets exit the market completely.”[4]

Conner stated in the blog post that the FTC rarely concludes a firm is actually failing. And, “[s]aying it doesn’t make it so: if you want the Bureau to accept such an argument in your case, you had better actually be failing, and able to prove it.”[5] The FTC, he said, “will continue to apply the test set out in the Guidelines and reflected in our long-standing practice, and in doing so we will continue to require the same level of substantiation as we required before the COVID pandemic.”[6]

Conner had a message for those representing merging parties as well: “think twice before making apocalyptic predictions of imminent failure during a merger investigation. Candor before the agency remains paramount, and it has been striking to see firms that were condemned as failing rise like a phoenix from the ashes once the proposed transaction was abandoned in light of our competition concerns.”[7] Those “who make too many failing-firm arguments on behalf of businesses that go on to make miraculous recoveries may find that we apply a particularly close scrutiny to claims in their future cases.”[8]

[1] Ian Conner, On “Failing” Firms – and Miraculous Recoveries, Federal Trade Commission: Competition Matters Blog (May 27, 2020, 10:13 AM), https://www.ftc.gov/news-events/blogs/competition-matters/2020/05/failing-firms-miraculous-recoveries.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

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