What’s Missing in Current and Former Officials’ Responses to DOJ Antitrust Whistleblower

As a guy who spent the early years of his legal career as an antitrust lawyer, I can assure you that working as a trust-buster will not make you the most sought-after person at a cocktail party. But what antitrust lacks in glamour, it more than makes up for in importance. Antitrust’s mission is to maintain fair, competitive markets—and, in doing so, to prevent capitalism from devolving into economic and political oligarchy. But if put in the wrong hands, antitrust can turn malignant: it can be, and in the past has been, used to reward friendly companies and industries, and to punish perceived enemies. And now there is mounting evidence that the Trump Administration has engaged in just this sort of corruption.

The Allegations, Defenses, and Rejoinders

On June 24, Trump Administration antitrust official John Elias alleged, in whistleblower testimony before the House Judiciary Committee, that the Trump DOJ is using antitrust as a political cudgel against an industry—cannabis—which the Attorney General dislikes. Specifically, Elias alleges that Attorney General William Barr directed the Department of Justice’s Antitrust Division to launch, in quick succession, ten investigations of proposed mergers in the cannabis industry. Elias says that these investigations, which constituted almost a third of all Antitrust Division merger investigations opened in 2019, had no real antitrust justification. Because the cannabis industry across the states that have legalized the trade was known to be de-concentrated and competitive, the investigations were not expected, Elias alleges, to turn up evidence of any likely harm to competition. Elias says that the real reason for the investigations was political—it was a strategy to spread fear in and impose millions of dollars in legal costs on an industry due to Barr’s “personal dislike.”

Elias’s accusations have attracted attention and support. Bill Baer, who led the Antitrust Division during the Obama Administration as well as the Federal Trade Commission’s Bureau of Competition back in the Clinton era, wrote an op-ed in the Washington Post on June 24 charging that “the whole affair reeks of an effort to use law enforcement to burden an industry Barr dislikes.” And on June 26 a group of 11 antitrust experts (including me) contributed to an article on Just Security, in which experts detailed why they found Elias’s allegations credible, raised very significant concerns about the rationale provided by the Office of Professional Responsibility’s letter rejecting Elias and his fellow whistleblower’s complaints, and called for further investigation by Congress.

The attention has made current Antitrust Division leadership uncomfortable. So much so that the current Assistant Attorney General in charge of the Antitrust Division, Makan Delrahim, felt obliged to issue a statement attempting to rebut Elias’s claims. And on July 13, Delrahim’s former Deputy, Roger Alford, published on Just Security a strenuous denial that the cannabis investigations were politically motivated.

As I said when I first commented on Elias’s allegations in the article this website ran on June 26, as a former Antitrust Division lawyer who has great respect for the professionalism and integrity of the lawyers who work in that part of DOJ, I would ordinarily be inclined to discount the allegations. But here, I am forced to admit that Elias’s testimony has the ring of truth—and nothing I’ve heard from Delrahim or Alford has yet convinced me otherwise. To explain why, let me focus for a moment on how the Antitrust Division does merger enforcement.

Background: Antitrust Review of Mergers and the “Second Request” Process

Either the Antitrust Division or the Federal Trade Commission review every high-value merger that is proposed in the United States. The federal antitrust agencies review these mergers according to the standards set out by the Clayton Act, which bars mergers that threaten to substantially reduce competition or tend to create a monopoly. Under the terms of another federal antitrust statute, the Hart-Scott-Rodino Act (H-S-R), companies involved in mergers above a certain dollar value must report the proposed deals to the Antitrust Division and the FTC. The agencies then divide up responsibility for reviewing the mergers that have been reported to them.

The vast majority of proposed deals pose no substantial antitrust risk and are quickly cleared. But for between 1-2% of the thousands of merger notifications filed each year, the Antitrust Division issues what’s known as a “Second Request”—i.e., a legal demand requiring further information from the merging parties. The Antitrust Division conducted 19 Second Request investigations in Fiscal Year 2018 and 31 in Fiscal Year 2019 from over 2000 transactions filed in each of those years.

The agencies are cautious about issuing Second Requests because they often require companies to produce hundreds of thousands or even millions of documents, and to respond to a complex set of written inquiries. Responding to a Second Request can easily cost $5-10 million, or even more for especially complex deals. Merging companies have essentially no way to challenge a Second Request, and they cannot complete their proposed mergers until they have complied.

Foreground: The Antitrust Division Issues Second Requests for a Series of Cannabis Industry Mergers

The first cannabis industry merger the Antitrust Division reviewed in 2019 was the proposed combination of MedMen and PharmaCann. Elias alleges that when Antitrust Division staff lawyers and economists examined that deal, they saw no antitrust concern. The cannabis industry appeared to be crowded with recent entrants and highly competitive across states that had legalized pot, and this transaction wasn’t likely to change that. As a result, Elias reports that Division staff did not recommend that a Second Request issue. Elias reports, however, that on March 5, 2019, Attorney General Barr summoned Antitrust Division leadership to his office for a meeting entitled “Marijuana Industry Merger Review.” Elias claims that Barr ordered the Antitrust Division to issue a Second Request. The rationale for doing so, according to Elias, centered not on any risk that the merger would harm competition, but because the cannabis industry is unpopular “on the fifth floor”—i.e., the floor of the DOJ headquarters building occupied by the Attorney General’s office.

In response to that Second Request, the merging parties eventually produced approximately 1.3 million documents from the files of 40 employees. The investigation confirmed—as Division staff had suspected from the start—that the markets at issue were unconcentrated and closed in September 2019 without any enforcement action. The merger collapsed nonetheless, with MedMen citing unexpected delays in obtaining regulatory approval. Elias noted in his written testimony that MedMen’s stock price declined by about one-third during the course of the Division’s investigation.

The Division went on to conduct, in quick succession, similar antitrust investigations of an extraordinary nine additional mergers in the cannabis industry. Second Requests were issued in nine of the ten mergers investigated in total, with a Civil Investigative Demand (a process that can be used for mergers too small to meet the H-S-R reporting threshold) issued in a tenth merger. Crucially, not one of these investigations resulted in enforcement action. Second Requests were issued, taxing the merging parties with expensive and distracting compliance obligations. But otherwise the investigations were, Elias alleges, basically shams. Elias alleges that Antitrust Division staff lawyers were instructed not to conduct interviews of customers or competitors—a necessary step in any bona fide antitrust investigation. And as my NYU colleague Harry First notes, the issuance of so many Second Requests without a single merger ultimately being challenged is highly suspicious. A recent study shows that in 2018, the Division and the FTC challenged 82% of the mergers in which a Second Request was issued. But in the cannabis merger investigations, the Division made nine second requests and one Civil Investigative Demand and challenged not a single merger.

The Delrahim and Alford Explanations

So what explains the Antitrust Division’s conduct in the cannabis mergers? Makan Delrahim and Roger Alford offer several explanations.

1) Delrahim notes that the H-S-R process gives the antitrust agencies only 30 days to decide whether to issue a Second Request. Delrahim and Alford claim that due to delay in deciding (in the first of the 10 mergers) whether to open an investigation of an industry that was facially illegal under federal law, and also (for all the mergers) the reluctance of the parties to hand DOJ information that could potentially be used to prosecute them under federal criminal law, DOJ essentially had no choice but to issue nine Second Requests. Delrahim says that the clock forced DOJ’s hand.

This explanation doesn’t make much sense.

If the concern really was the 30-day clock, there is a simple way to handle that. When Antitrust Division lawyers are concerned that the 30-day clock is about to run and they haven’t been able to fully assess whether a Second Request makes sense in a particular deal, they will simply call up the parties and ask them to pull their filing and refile later (with any fees for the re-filing waived). Merging parties usually take that deal, because if they don’t, a Second Request will almost certainly issue, and the delay opens up a conversation between the parties and the Division about how a Second Request can be avoided. Based on information that’s been provided to me by others, the Division did offer a “pull-and-refile” deal to avoid the 30-day clock on the MedMan/PharmaCann deal (i.e., the first of the cannabis mergers). So a concern about the 30-day deadline would not be a reason to issue a Second Request in that case. In the subsequent cases, however, my information is that the DOJ simply issued Second Requests, without ever suggesting that timing was a concern or offering a pull-and-refile deal to stop the 30-day clock.

It’s most curious that neither Delrahim nor Alford even mention this option. Delrahim, in particular, should be asked by Congress and reporters about this apparent omission in the letter he submitted to the House Judiciary Committee.

Although it seems like window-dressing, I also don’t buy the idea that the Division was forced to issue Second Requests because the parties were unwilling or unable to hand over information necessary to confirm that the mergers did not threaten competition. The parties in many of the mergers in question were represented by sophisticated antitrust counsel. These lawyers know that the law gives DOJ the power to get information, and that DOJ also has the authority to hold up the mergers if the parties fail to cooperate. So it is difficult to believe that the parties were unwilling, without a full-blown Second Request, or otherwise unable to give the Division the information it needed to confirm that the mergers were not problematic. Remember that this is not a new industry. Recreational marijuana has been legal in some states beginning in 2012; medical marijuana legalization started in 1996. Moreover, everyone knows that the merging companies sell pot—it is by no means a secret. The Antitrust Division is not in the business of enforcing criminal law outside of the narrow antitrust field, and there is nothing that the merging parties would be likely to give the Antitrust Division through the H-S-R process that the feds couldn’t compel by ordinary criminal process if they were serious about getting into the politically and constitutionally dicey enterprise of prosecuting weed companies that run businesses permitted by state law. In reality, although the feds occasionally engage in some increasingly silly blustering about legal pot, no one expects a criminal enforcement campaign at this point—that horse has bolted the stable.

Delrahim, in particular, should be asked by Congress and reporters about this apparent omission in the letter he submitted to the House Judiciary Committee.

2) Delrahim and Alford also put forward a different explanation: The cannabis mergers, they claim, posed the novel legal question whether the Division should apply the antitrust laws “to protect and promote lower prices and increased output of a substance that is facially illegal under federal law.” In other words, according to Delrahim and Alford, the Antitrust Division faced the decision whether to permit or even encourage monopolization in the pot industry because that would raise prices and restrict output of a bad product. Delrahim told Congress that the Division’s review of the industry’s potential anti-competitive behavior was “consistent with protecting consumers’ access to cannabis products.”

There is an obvious problem with this explanation: Neither Alford nor Delrahim ever explain why the Division needed to issue burdensome process in ten mergers to figure out its position on what seems, frankly, like an academic question. The Division is well aware of what both federal and state law say about the sale of marijuana, and the Division’s decision about whether to enforce the Clayton Act in these markets is unlikely to depend on the kind of information about particular marijuana industry participants that the Second Request process would yield.

In any event, the antitrust policy question Delrahim and Alford identify is in fact not entirely novel. One of my duties at the Division was to sit on a committee that decided when the Division would intervene as amicus in private antitrust cases. At the time there were a series of antitrust actions brought by labor union health funds against tobacco companies. The unions claimed that the tobacco firms were engaged in a cartel, which among other things, had conspired to suppress information about the risks of smoking. As we considered whether to intervene, we too wondered whether it made sense to lend a hand to the busting of an alleged tobacco industry cartel if the likely result would be more competition in the cigarette industry, lower prices, and more smoking. We ultimately decided not to intervene in the union health plan lawsuits, but not because we thought that the tobacco industry should be immune from the antitrust laws—and we didn’t need to issue Second Requests to reach a decision on that question. Not surprisingly, Alford states that the Division reached the same decision with respect to the cannabis industry—i.e., that the Clayton Act applied in full. But, just as in the case of the tobacco companies back when I was at the Division, the Division leadership didn’t need to issue Second Requests to make their decision respecting the value of antitrust enforcement in the cannabis industry. Alford’s explanation just doesn’t hold up.

3) Both Delrahim and Alford suggest that Second Requests were issued because, in Alford’s words, “[t]he Antitrust Division had never analyzed the marijuana industry before, and … it was forced ‘to build out an understanding of the industry from scratch’” (quoting Delrahim’s letter). Respectfully, that explanation does not fit with the facts. As I said in my initial comment on this website reacting to Elias’s testimony, the fact that the Antitrust Division launched ten merger investigations in the cannabis industry in quick succession belies the idea that the Division was just trying to get its bearings. Several of the other antitrust experts raised the same point. In fact, the Antitrust Division does not appear at any time to have formulated a possible theory of how these mergers would harm competition, and issuing Second Requests without a theory of possible competitive harm is not how the Division does business. It’s not just me and other experts saying this. Look at the Antitrust Division Manual, page III-39. That page is where the description of the Second Request process begins. You’ll see that the entire design is premised on the idea that Second Requests are issued only where there is some chance that a proposed merger would cause competitive harm in a well-defined antitrust market. To this day, neither Delrahim nor Alford nor anyone else has articulated a theory of competitive harm respecting any of the mergers for which the Division issued Second Requests.

4) Finally, both Delrahim and Alford attempt to rely on the finding of DOJ’s Office of Professional Responsibility that “[e]ven if the whistleblowers’ allegations were true, … ATR’s Second Requests would not have violated any relevant laws, regulations, rules, policies, or guidelines.” I’ve read the OPR letter many times, and this formulation still shocks me. Put plain, the OPR is suggesting that it’s perfectly okay for the Attorney General to direct that a Second Request be issued even in instances where a merger presents no antitrust concern and the intent is purely to harass companies that the AG dislikes. That is simply an astonishing assertion. One which, as I explained in my previous comment, is at odds with everything I know about how antitrust enforcement, merger investigations, and, in particular, the Second Request process, are supposed to work. It’s also notable, in my view, that OPR appears to have relied solely on submissions from Antitrust Division leadership—there is no indication that OPR spoke with Antitrust Division staff or representatives for the cannabis industry companies that received Second Requests.

This all brings me to my final point, which is about how we should think about Delrahim’s and Alford’s denials in light of the Trump Administration’s tendency to lie about … well, about pretty much everything, from inauguration crowd size to the path of a hurricane to the pace of border wall construction to the likely course of the coronavirus epidemic. Trump and his administration lie about consequential things and also about things that don’t really matter and shouldn’t be worth lying about. They lie designedly, they lie casually, they lie constantly, and—perhaps most importantly—they lie without apparent remorse. And as an iron rule, they never admit that they’ve lied, even when a particular lie is patently obvious to everyone who isn’t blinded by partisan loyalty to the liars.

Lying is, in short, this administration’s brand. And so when men like Delrahim and Alford issue denials, it is frankly difficult for people who don’t want to be played for fools, again, to take those denials simply at face value. Those men have chosen to serve Donald Trump, and that means adopting, or at least acquiescing to some significant degree in, this administration’s “ethics.” If you lie down with dogs, the saying goes, you get up with fleas. And you shouldn’t be shocked that people tend to believe John Elias when he says that the Antitrust Division and William Barr have been playing dirty with the antitrust laws. I’m not ready yet to conclude that William Barr, Makan Delrahim and the Antitrust Division leadership are guilty as charged. In other words, I don’t have sufficient information to conclude whether Elias and his fellow whistleblower or Delrahim and Alford are providing the most accurate account. But I do think it’s obvious that Congress should investigate—even if Donald Trump is thrown out of office in November. And if Elias’s allegations bear out, the people responsible have abused their positions and should face consequences.

Photo credit: Chip Somodevilla/Getty Images

 

About the Author(s)

Christopher Sprigman

Professor of Law at New York University, Former Appellate Counsel in the Antitrust Division of the U.S. Department of Justice, Former Partner at King & Spalding in Washington, DC. Follow him on Twitter (@CJSprigman).