Today, I will describe two forms of investigations undertaken over the objections of the career staff. First, at the direction of Attorney General Barr, the Antitrust Division launched ten full-scale reviews of merger activity taking place in the marijuana, or cannabis, industry.
These mergers involve companies with low market shares in a fragmented industry; they do not meet established criteria for antitrust investigations. Second, I will detail an investigation – initiated the day after tweets by President Trump – of an arrangement between the State of California and four automakers on fuel emissions.
I have undertaken whistleblower activity, and am here today, because I recognize the imperative for law enforcers to operate even-handedly and in good faith. During my career at DOJ, I have been taught to do the right thing, for the right reasons, in the right way.
Cannabis Merger Investigations
Since March 2019, the Antitrust Division has conducted ten investigations of mergers in the cannabis industry. While these were nominally antitrust investigations, and used antitrust investigative authorities, they were not bona fide antitrust investigations. Nonetheless, they accounted for 29 percent of the Antitrust Division’s full-review merger investigations in Fiscal Year 2019.
Regardless of whether these companies are complying with the Controlled Substances Act, the investigations I will describe are not investigations of potential violations of federal drug law. An appropriations rider restricts the Justice Department from prosecuting medical marijuana usage in states that have legalized it.
The Standard Merger Review Process
The mission of the Justice Department’s Antitrust Division is to protect competitive marketplaces across our entire economy. The Division reviews for potential harm to competition every large-dollar merger taking place in the United States. The Division enforces the Clayton Act, which bars mergers that may substantially lessen competition or tend to create a monopoly.
After companies report their proposed mergers, staff undertakes an individualized examination to identify those most likely to violate the antitrust laws. Staff assesses whether to perform no investigation, a brief investigation, or a full investigation. The Antitrust Division’s Manual identifies as the first factor for staff to consider in determining whether to open an investigation “whether there is reason to believe that an antitrust violation may have been committed.” Our Horizontal Merger Guidelines treat market shares as a key indicator of whether to give routine clearance or to perform the full and most searching examination of the merger by issuing what is called a “Second Request” subpoena. It usually takes high market shares – typically double-digit market shares – to trigger the extended review process. “Unconcentrated markets” require the least review.
Across the entire American economy, the Antitrust Division performs the full Second Request investigation on around 1-2% of the thousands of mergers filed each year – ordinarily, only the most concerning deals. The 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.
Second Request investigations are infrequent because they require companies to respond to burdensome administrative subpoenas – often 15 pages or longer – and produce hundreds of thousands or millions of documents. Pursuant to the Antitrust Division’s Manual, “Since a second request may have substantial consequences for the parties to the transaction, staff should carefully assess both the need for and the scope of the request; if a second request is necessary, staff should tailor it to the transaction and its possible anticompetitive consequences.” Merging companies have essentially no recourse to challenge a Second Request subpoena, and they cannot complete their proposed mergers until they have complied. Second Request investigations also consume DOJ staff resources.
The First Cannabis Investigation: The Merger of MedMen and PharmaCann
Last year, the Antitrust Division reviewed the proposed combination of MedMen and PharmaCann, two companies that supply cannabis. When career staff examined the transaction, they determined that the cannabis industry appeared to be fragmented with many market participants in the states that had legalized the product. As a result, they viewed the transaction as unlikely to raise any significant competitive concerns.
However, on March 5, 2019, Attorney General Barr called the Antitrust Division leadership to his office for a meeting entitled “Marijuana Industry Merger Review.” As a Microsoft Outlook delegate of one of the attendees, I was copied on the calendar appointment but did not attend the meeting. The Antitrust Division political leadership asked staff to prepare a short briefing memo for Attorney General Barr before the meeting. In that memo, staff emphasized in underlined text that in its preliminary view, the transaction was unlikely to raise any significant competitive concerns that would justify issuance of Second Requests.
Rejecting the analysis of career staff, Attorney General Barr ordered the Antitrust Division to issue Second Request subpoenas. The rationale for doing so centered not on an antitrust analysis, but because he did not like the nature of their underlying business.
After the meeting, Division political leadership turned to the career staff to implement Attorney General Barr’s directive. In assembling the paperwork to issue the Second Request, which is normally styled as the career staff’s “recommendation,” career staff declined to recommend either opening an investigation or issuing the Second Request subpoenas. Instead, the staff reiterated its view that the transaction was “unlikely to raise any significant competitive concerns” and that the industry appeared to be fragmented, with many participants. The staff went on to say that, nonetheless, “[t]he Division has decided to open an investigation and issue Second Requests,” for the purported reason that it had “not closely evaluated this industry before.” This rationale – standing alone, without reference to a competition problem – is not described in the Merger Guidelines as a basis for investigating a transaction. The Division’s Front Office negotiated subpoena compliance with the companies, obtaining 1.3 million documents from the files of 40 employees. The investigation confirmed 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. During the course of the Division’s investigation, MedMen’s stock price declined by about one-third.
Nine More Cannabis Investigations and 29% of All Second Requests
The Division went on to conduct similar antitrust investigations of nine other mergers in the cannabis industry. Staff continued to document at the outset of the investigations that the transaction appeared unlikely to raise significant competitive concerns but that the Division (meaning the political leadership) nonetheless had decided to proceed, purportedly because it had not closely evaluated this industry before. This remained the rationale through the tenth investigation.
However, in order to draw less attention to the investigations, the career staff was not permitted to take customary fact-finding steps. For example, staff was instructed not to conduct interviews of customers or competitors – a necessary step in any bona fide antitrust investigation both to assess marketplace conditions and to identify potential witnesses in any enforcement action.
In many of these investigations, staff calculated market shares far smaller than the double-digit shares that ordinarily trigger a full antitrust review. Instead, it calculated, for example, a combined post-merger market share of 0.35 percent.
In two instances, staff determined at the outset that the merging companies operated in different geographies and did not compete at all. In one of these, the parties reevaluated their transaction after the Second Requests subpoenas had issued and determined that their deal’s value fell below the HSR threshold.
In other words, they were able to close their deal without complying with the Second Request subpoena. In closing the investigation, staff noted that they evaluated whether to proceed with the investigation anyway, using the more customary civil investigative demand (CID) subpoena power, “but recommend[ed] against that action because of the likelihood that the parties would successfully challenge the CIDs on the basis that there is no current or future geographic overlap, and thus no threat to actual or potential competition.” In several instances, staff sought to make the investigation less burdensome on the parties by narrowing the subpoenas. ...
At one point, cannabis investigations accounted for five of the eight active merger investigations in the office that is responsible for the transportation, energy, and agriculture sectors of the American economy. The investigations were so numerous that staff from other offices were pulled in to assist, including from the telecommunications, technology, and media offices.
The head of the Antitrust Division, Assistant Attorney General Delrahim, responded to internal concerns about these investigations at an all-staff meeting on September 17, 2019. There, he acknowledged that the investigations were motivated by the fact that the cannabis industry is unpopular “on the fifth floor,” a reference to Attorney General Barr’s offices in the DOJ headquarters building. Personal dislike of the industry is not a proper basis upon which to ground an antitrust investigation.