Justice's Antitrust Division: Better Management Information Is Needed on Agriculture-Related Matters
Released: 2001-04-06T00:00:00

Letter

Background

The Division is responsible for promoting and maintaining competition in the American economy by enforcing the federal antitrust laws. To accomplish its mission, the Division has 16 sections in headquarters and 7 field offices located throughout the United States. As of July 21, 2000, the Division had 561 full-time staff and 237 part-time staff onboard; about 29 percent of the full-time staff and about 21 percent of the part-time staff were assigned to the field offices (see app. II for a breakdown of staffing by sections and field offices). The Division’s budget authority for fiscal year 2000 was $114.4 million, about a 16-percent increase, in nonconstant dollars, over fiscal year 1999 funding of $98.3 million. The Division’s appropriations are offset by the fees companies are required to pay when they file premerger notifications under the HSR Act.

The Division is responsible for enforcing the antitrust laws throughout the economy, including industries, such as computers, health care, telecommunications, transportation, and agriculture. Overall, the Division handled over 4,900 matters during fiscal year 1999, 4,642 (about 95 percent) of which were proposed mergers for which notice was filed under the HSR Act. For fiscal year 1999, agricultural industry matters— both mergers and nonmergers—represented about 8 percent (395) of the Division’s total workload.

As previously noted, the basic federal antitrust statutes are the Sherman Act and the Clayton Act. Section 1 of the Sherman Act makes illegal any contract, combination, or conspiracy that results in a “restraint of trade.” The courts have construed the term to cover a variety of horizontal and vertical trade restraining agreements. Horizontal restraints are agreements among competitors at the same level of the production, distribution, or marketing process. Vertical restraints are arrangements among persons or firms operating at different levels of the manufacturing- distribution-marketing chain that restrict the conditions under which firms may purchase, sell, or resell. Section 2 of the Sherman Act prohibits monopolization, as well as attempts, combinations, or conspiracies to monopolize. Although the Sherman Act is both a criminal and civil statute, it is the Division’s policy to criminally prosecute only what the Division considers to be the most egregious per se Sherman Act violations.However, in some situations the Division may not deem criminal investigation or prosecution to be appropriate, even though the conduct may appear to be a per se violation of the law. As examples, the Antitrust Division manual, which outlines the Division’s formal internal practices and procedures, cites situations in which (1) there is confusion in the law; (2) there are novel issues of law or fact presented; (3) confusion reasonably may have been caused by past prosecutorial decisions; or (4) there is clear evidence that the subjects of the investigation were not aware of, or did not appreciate, the consequences of their actions.

Section 7 of the Clayton Act prohibits mergers and acquisitions that may substantially lessen competition or tend to create a monopoly in any market. The HSR Act added section 7A to the Clayton Act, which requires premerger notification of proposed mergers to assist the Division and FTC in investigating whether they would be anticompetitive.

The Division generally shares responsibility for enforcing federal antitrust laws with FTC and state attorneys general. With the exception of criminal enforcement of the Sherman Act, which the Division has sole authority for, the “unfair methods of competition” clause of section 5 of the FTC Act generally allows FTC to reach the same conduct as prohibited by the Sherman Act. Both the Division and FTC are responsible for enforcing Sections 7 and 7A of the Clayton Act, with the exception of certain industries in which FTC’s jurisdiction is limited by statute. For example, Section 5 (a) (2) of the Federal Trade Commission Act of 1914 generally excludes from its coverage activities subject to the Packers and Stockyards Act. FTC also enforces the Robinson-Patman Act, which governs price discrimination in interstate commerce, and section 8 of the Clayton Act (15 U.S.C. 19), which governs interlocking directorates.

As previously noted, the Division is responsible for enforcing the antitrust laws in a broad range of industries. The antitrust laws apply generally throughout the economy, and the Division exercises prosecutorial discretion to determine which matters warrant investigation or enforcement action. According to Division officials, their principal expertise is in antitrust laws, not in specific industries. Some industries also are regulated by government agencies under statutes that go beyond the antitrust laws to establish additional, industry-specific regulatory requirements and standards. For example, USDA’s Grain Inspection, Packers, and Stockyards Administration (GIPSA) regulates sales in the livestock and meat-packing industries. GIPSA generally has the authority to prohibit unfair trade primarily within the livestock industry.

The Division’s policies and procedures manual outlines the processes for investigating potential antitrust violations. Depending on the conduct alleged, the Division can initiate either civil or criminal investigations of these potential violations. The Division may identify possible antitrust violations or proposed mergers through a variety of sources. The Division is made aware of many proposed mergers through filings required of the merging parties by the HSR Act. The Division may learn of a possible antitrust violation from a confidential informant, individuals, or corporations applying for amnesty; complaints and referrals from other government departments or agencies; anonymous tips; or through reviews of newspapers, journals, and trade publications. It may develop information about potential criminal violations through grand jury proceedings. As previously noted, more detailed information and flow charts of the Division’s enforcement procedures can be found in appendix III.

Scope and Methodology

Our objectives were to (1) describe the Division’s interaction with FTC and USDA with regard to antitrust matters in the agriculture industry, (2) provide information on the number of complaints and leads in the agriculture industry received by the Division for fiscal years 1997 through 1999, and (3) provide information on the number and type of agriculture- related matters closed by the Division for fiscal years 1997 through 1999.

As agreed with Senator Grassley’s office, we used SIC codes selected by the Division to define the agriculture industry (see app. I). The SIC codes selected included only those codes specifically related to plant and animal products that originate on land and are commercially cultivated or raised for human or animal consumption.

To obtain information on the Division’s interaction with FTC and USDA, we interviewed officials in the Division, FTC, and USDA. We also reviewed the Division’s policies and procedures for interacting with other agencies, including relevant interagency agreements.

The Division does not maintain divisionwide data on complaints and leads related to possible anticompetitive practices in the agriculture industry. To obtain an estimate of the number of agriculture-related complaints and leads received in fiscal years 1997 through 1999, we interviewed the section or field office chief, assistant section chief, and other knowledgeable Division officials for each of the five legal sections and seven field offices that potentially handle matters in the agriculture industry during this period. These officials provided information on the number of complaints and leads received and the methods they used to record and track them.

To gather information on the number and type of matters closed in the agriculture industry in fiscal years 1997 through 1999, we obtained data on the characteristics of the matters for selected SIC codes and for the relevant time period from the Division’s MTS. However, some of the data in MTS were not accurate and reliable. For example, actions were shown as being taken on matters after the matter had been recorded as closed, or links were not being established between related matters. We also reviewed opening and closing memorandums for matters that were closed without the filing of a complaint to determine the reasons for closing the matters. We did not attempt to determine the appropriateness of the Division’s prosecutorial decisions.

More detailed information about our scope and methodology can be found in appendix I. We performed our work in Washington, D.C., between October 1999 and February 2001, in accordance with generally accepted government auditing standards.

Division’s Interaction with FTC and USDA

As noted earlier, the basic federal antitrust statutes are the Sherman Act and the Clayton Act, and the Division generally shares responsibility for enforcing the antitrust laws with FTC. The interactions between the agencies are generally limited to their roles in enforcing antitrust laws. Officials from the Division, FTC, and USDA said that their agencies maintain a cooperative working relationship with regard to anticompetitive matters in the agriculture industry. According to Division and FTC officials, their agencies’ interactions with respect to specific matters generally occur during the clearance process established between them to determine which agency will investigate potential antitrust violations for which they have joint jurisdiction. According to agency officials, in recent years, the Division and USDA have worked together in a number of respects. For example: The Division obtains useful information from USDA’s AMS and ERS.

With respect to livestock and meatpacking markets, the Division has obtained useful information from USDA’s GIPSA.

The Division has also provided technical assistance to GIPSA on various economic studies and on GIPSA’s competition enforcement program.

During the course of any major antitrust investigation involving agriculture-related markets, the Division typically consults with USDA officials to obtain the benefit of their perspective.

USDA and Division officials have also participated in a number of interagency policy and public outreach efforts regarding competitive conditions in agriculture-related markets.

The Division, FTC, and USDA entered into a Memorandum of Understanding (MOU) on August 31, 1999, that sets forth general policy for interacting, exchanging information, and continuing to work together on competitive developments in the agriculture marketplace. Division, FTC, and USDA officials described the MOU as memorializing a long- standing, cooperative working relationship between the agencies. Under the MOU, each agency agreed to designate a primary contact person to facilitate communication among agency officials. The Division’s designated contact is an attorney-advisor in the Legal Policy Section. However, in practice, this responsibility is shared with the Division’s Special Counsel for Agriculture. FTC’s contact is the Deputy Director in the Bureau of Competition; and USDA’s contact is the Assistant General Counsel, Trade Practices Division. The officials in the three agencies could not determine whether there has been any change in the purpose or frequency of contact since the MOU was signed because they have not tracked, nor do they currently track, communications, coordination, or consultations between the agencies.

To avoid duplication of effort in areas of antitrust enforcement in which FTC and the Division share enforcement jurisdiction, the agencies issued joint clearance procedures, most recently revised in December 1993, to determine which agency will pursue an investigation. According to Division officials, the agencies interact on specific matters mainly around these procedures. Appendix III provides, among other things, information on the clearance procedures.

According to Division officials, the August 1999 MOU is the only formal procedure relating to the interaction between the Division and USDA. FTC has had a formal agreement with USDA since at least 1958 regarding investigations in the wholesale or retail food industry.

According to Division and USDA officials, USDA provides the Division with useful information about agricultural markets that the Division uses in its economic analysis of a particular industry. Additionally, when USDA uncovers conduct that it believes may violate antitrust laws, it has the authority to refer the matter to the Division for possible investigation and enforcement action. Our review of 64 matters that the Division closed after conducting a preliminary investigation (PI) during fiscal years 1997 through 1999 revealed that 1 matter was referred from USDA. Additionally, the Division consulted with USDA on six of the matters.

Division Lacks Reliable Data on Complaints and Leads Received in the Agriculture Industry

Our 1991 review of the Division’s criminal cases found that although the Division had a policy for documenting information on complaints and leads from the public, this policy was not always followed for complaints or leads the Division decided not to investigate. As a result, the Division did not know how many complaints it had received nor did it have complete data on their characteristics. Such problems continued during the period of our review, fiscal years 1997 through 1999. High-level Division officials were not aware of a policy requiring staff to document all complaints and leads from the public, and the Division did not have a uniform database to provide divisionwide information on complaints and leads. During the course of our review, the Division took steps to improve its documentation of complaints and leads. If fully implemented, these steps should move the Division in a positive direction toward addressing the deficiencies we identified. However, the improvements do not allow the Division to track complaints and leads by industry classifications, and on the basis of past history, the information may still be collected inconsistently by the sections and field offices. Thus, better guidance and closer management attention to monitoring the documentation of complaints and leads will be necessary.

We met with high-level Division officials, including the Chief of the Legal Policy Section and an attorney-advisor in that section; the Special Counsel for Agriculture; and the attorney who, according to Division officials, handles the largest number of the complaints and leads in the agriculture industry. We asked them whether the 1980 policy cited in our 1991 report was still in effect. Initially, the officials were not aware of whether such a policy was still in effect. According to the officials, the Division could provide only an estimate of the number of complaints and leads received in the agriculture industry.

On February 29, 2000, the Division’s Chief of Staff issued a memorandum to all section and field office chiefs stating that the Attorney General wanted to ensure that the Department of Justice was answering all of its mail and telephone inquiries in a timely and effective way. The memorandum required all sections and field offices to use the Division’s CCTS to track inquiries from the public to help ensure that the Division was responsive to incoming inquiries. However, in June and July 2000 when we conducted our structured interviews with section and field office staff responsible for documenting and tracking complaints and leads, they were not all using CCTS, and two told us they had never heard of CCTS.

When the Division began implementing CCTS in 1997, the Division encouraged, but did not require, the sections and field offices to use CCTS for general and telephone correspondence. CCTS was designed primarily to record information on controlled correspondence (e.g., correspondence received from the White House; Congress; and federal, state, and local agencies). CCTS includes such information as the complainant’s name, address, phone number, position, and organization; the date received, date assigned, section name, staff assigned, response due date, and date completed; and a description of the complaint and keywords. CCTS does not include specific fields to capture information on SIC codes or related industries or the final outcome of complaints and leads received from the public. Additionally, CCTS is not linked to the Division’s MTS. As a result, CCTS does not have the information needed to analyze patterns of potential anticompetitive behavior that might emerge from complaints and leads related to specific industries or to track the ultimate outcome of a complaint or lead.

Subsequent to our interviews with the five legal sections and seven field offices that would potentially handle complaints and leads related to the agriculture industry, Division officials determined that the July 2, 1980, directive requiring staff to document all complaints and leads was still in effect. The 1980 directive outlined the Division’s policies and procedures for handling all unsolicited contacts of a routine and nonsensitive nature from the general public, whether by letter, telephone call, or personal visit. The directive required that staff ensure that unsolicited public contacts are assigned promptly to the appropriate staff member(s); log basic information about each contact; mail written responses, if warranted, within 20 working days of the date the inquiry was received by the Division; maintain a central file in each section and office of all correspondence and notes on telephone calls and visits; and make all logs and files described in the directive available for review by Division officials.

Reported Data on Number of Complaints and Leads Received

In the absence of a central source of uniform, complete, and reliable data on complaints and leads, the Division agreed to let us contact officials in five legal sections and seven field offices to obtain any available data on complaints and leads received in those sections and field offices.According to the data provided, the Division received 165 agriculture- related complaints and leads in fiscal years 1997 through 1999, 14 of which resulted in a PI being initiated (see table 1). Of these 14, 1 was referred to USDA.

Officials in these sections and field offices provided information derived from a variety of sources, such as automated and manual tracking systems and attorney notes, that varied among the sections and field offices. We did not verify the accuracy or completeness of the information provided. Officials in Transportation, Energy and Agriculture (TEA), which received the largest number of complaints and leads reported to us, indicated that the numbers for fiscal years 1997 and 1998 did not, to their knowledge, include complaints received by phone and that the 1999 data were based on information from the two section attorneys who received “most” of the complaints and leads for the section.

According to Division officials, the Division receives many complaints reporting conduct that is unrelated to antitrust. In these instances, they said that a complaint might be referred to an appropriate federal, state, or local agency. For example, 4 of the 165 complaints and leads the Division received during fiscal years 1997 through 1999 were referred to FTC. On some occasions, they said the Division section may refer an antitrust- related complaint or lead to another Division section, to FTC, or to the appropriate state attorney general’s office. If a Division attorney determines that there are sufficient indications of an antitrust violation to open an investigation beyond discussions with the complainant, he or she is to draft a PI request memorandum.

According to Division officials, staff can generally determine whether the information provided by a complainant merits further investigation. The Division may respond to a complainant by telephone or in writing. Division officials also said that many complaints in the agriculture industry are general in nature, with no information useful for an investigation, and that the Division’s response to such a general complaint typically attempts to educate the complainant on antitrust laws and the Division’s role in enforcing them, describes the type of evidence needed to open an investigation or bring a case, and invites the complainant to come back to the Division with more specific information that might indicate a possible antitrust violation.

On October 24, 2000, the Division rescinded the 1980 policy and issued a new directive requiring all of its sections and offices to (1) use the Division’s CCTS to document and track all unsolicited public contacts (such as complaints and leads) and (2) maintain a central file of these contacts. This directive made section and field office chiefs responsible for ensuring that the procedures are routinely followed. The October 2000 directive was replaced with a November 27, 2000, directive. The only difference between the two directives was that the November directive made reference to an optional word perfect form that staff could use—in addition to CCTS, not in lieu of it—to document information for the section’s or office’s own central file. Consistent with the 1980 directive, neither the October 24, 2000, directive nor the November 27, 2000, directive provided guidance on the information that staff are required to document on each contact. Consequently, it is not clear that the latest directive will resolve the data availability issues discussed above, including inconsistently recorded information on complaints and leads.

Division Also Lacks Reliable Data on Closed Matters

To obtain information on the number and type of closed matters in the agriculture industry for fiscal years 1997 thorough 1999, we relied on data from the Division’s MTS, its primary management information system for tracking the Division’s matters. We encountered several problems with the MTS data, including inconsistencies on matter status and type. For example, there were many matters for which the final disposition was unclear according to our review of the MTS data. For some of the matters we reviewed, the MTS data indicated that actions had been taken on matters after the matters had been recorded as closed. In addition, the dispositions for some of the matters were not appropriate for the particular phase of the matters. We worked with Division officials to resolve these issues wherever possible. Recognizing its limitations, we believe the adjusted MTS data we used can provide a general profile of agriculture-related matters closed by the Division during fiscal years 1997- 1999. We used the MTS data because there is no other comprehensive listing of the Division’s matters and their status.

According to Division officials, there were several causes for the MTS data problems we encountered. Some of the matters we reviewed were entered into the Division’s older system, the Antitrust Management Information System (AMIS), and were incorporated into MTS without change. A 1991 GAO report reported that there were inaccuracies and inconsistencies in the AMIS data. Concerning the matters for which MTS incorrectly indicated that the matter was closed following the PI, Division officials said it is possible to have further action after a matter is closed. Occasionally, evidence associated with a particular investigation would initially prove inadequate for further prosecutorial action. However, several months or years later, evidence may become available, and instead of opening a new PI, the Division would reopen the original investigation. We did not test the MTS data to determine the full nature or extent of the data reliability problems. However, with the corrections made with the assistance of Division officials, the MTS data we used can provide a general profile of the status of agriculture-related matters closed by the Division in fiscal years 1997 through 1999.

Most Closed Matters Involved Hart-Scott- Rodino Filings and Were Not Pursued

MTS data showed that the Division closed 1,050 matters involving mergers and potential antitrust violations in the agricultural industry during fiscal years 1997 through 1999. Of these 1,050 matters, 935 (89 percent) were Hart-Scott-Rodino merger filings. Of these 935 filings, 827 (88 percent) expired within the initial 30-day HSR waiting period. The Division took no formal action, such as opening a PI, beyond reviewing the documents submitted by the merging parties and public sources of information for these 827 matters—a normal outcome for mergers that are permitted to proceed after the required premerger notification period. Table 2 shows the classification of the 1,050 matters closed by the Division during this time period.

As discussed previously, the Division included several SIC codes in its definition of the agricultural industry. The largest number of the 1,050 matters closed by the Division during the 3 fiscal years was in SIC codes for food manufacturing—442, or 42 percent. Table 3 shows the number of matters that were closed by the Division during fiscal years 1997 through 1999 by the agriculture-related SIC categories that make up the Division’s definition for the agricultural industry.

It should be noted that FTC also handles matters in the agriculture industry, so the figures above do not include the entire universe of agriculture antitrust matters and merger filings within these SIC codes. The Division could not provide reliable data on the direct labor costs for agriculture-related matters that were closed during fiscal years 1997 through 1999. According to Division officials, MTS does not contain reliable data on direct labor costs, although such data could be obtained with some effort from other sources.

Phases of Closed Matters

Not all of the matters handled by the Division culminated in a case being filed in civil or criminal court. We analyzed the Division’s MTS database to ascertain how many matters completed the various phases of an inquiry or what the last actions taken were when no inquiry was done. As previously noted, the majority of the 1,050 matters closed by the Division during this period were filings submitted under the premerger notification provisions of the HSR Act. In about 88 percent of these filings, the Division did not initiate any formal investigative inquiries because it concluded that the matters did not appear to raise significant competitive concerns warranting a more thorough review. These matters were closed without further action on or before the expiration of the initial 30-day HSR waiting period expired. Table 4 shows the number of matters closed by the Division by the last phase of inquiry or action taken in the matter. The categories are listed in the general order of resources expended on the matter. For example, HSR filings that expired within the initial 30-day waiting period or that were cleared to FTC would not generally result in a preliminary inquiry. Conversely, a civil investigative demand (CID) would generally be issued following a preliminary inquiry.

To determine any differences among various agriculture-related industries, we arrayed the inquiry phases in table 4 by primary SIC category. Table 5 shows the last phase of each matter by the primary SIC category for all 3 fiscal years. In appendix IV, we also summarize information about the 64 matters shown in table 4 that were closed following a PI with no further action.

Upon reviewing these tables, the Division questioned the category “Non- HSR matters cleared to Justice for which a PI was not initiated” in table 4. We provided the Division with a list of the matters that we placed in that category as a result of our analysis of the MTS database. After additional research of the files and discussions with the attorneys who handled some of these matters, the Division provided additional information on all 25 of the matters in that category.

According to Division officials, of these 25 matters, the last action or phase for 4 was PI, CID or grand jury for 5, and a case filed in court for 3. The officials indicated that the Division initiated a PI memorandum but that a PI was not conducted for one matter; and the Division had considered opening a PI for another, but then decided not to after gathering additional information about the matter. They indicated that the remaining 11 matters involved Division activities that do not require that a PI be opened—5 involved the Division’s responsibilities for granting an export trade certificate, 2 involved judgment enforcement actions, 2 involved judgment modification actions, 1 was a business review letter, and 1 was an internal matter—one field office reviewing another office’s files for ideas on how to approach a possible investigation.

According to Division officials, the 12 matters for which a PI had been opened, a CID issued, a grand jury convened, or a case filed in court should all have been linked in MTS to other matters in the database. They said that the links apparently had not been made in the database and believed that including these matters in our profile would, therefore, be double-counting. As previously noted, we based our profile on the information that was available in the MTS database. Although we understand the Division’s concern about double-counting, we have not dropped these matters from our analysis for mainly two reasons. First, we do not know whether there were additional cases for which the MTS database was missing appropriate links. It is possible that additional case file review and analysis would have resulted in alterations to the MTS data for other matters. Second, removing these 25 matters from our profile would afford them preferential treatment based on detailed Division research and analyses that were not conducted for all agriculture-related matters in the database. Moreover, the fact that the Division had to conduct additional review on these matters to clarify their status further illustrates that the information in the database is not wholly reliable. Given the problems we encountered with the database throughout this assignment, we believe that the data available from MTS cannot be used without the type of time-consuming checking and scrutiny that the Division and we performed. An accurate, detailed picture of the Division’s workload cannot readily be determined using MTS alone until the Division corrects the errors that have been identified and verifies that all of the data in MTS are accurate and reliable.

Conclusions

Although the Division had a specific policy to document all complaints and leads received, the policy was not consistently followed in the past by all sections and field offices. Federal internal control standards, among other things, note that all transactions and significant events should be clearly documented and promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. The Division’s new policy requiring staff to document all complaints and leads in CCTS is a step in the right direction. However, given our 1991 finding that the 1980 policy was not being followed by all sections and field offices and given the findings of our current review, we believe that better guidance and closer management attention will be needed to ensure compliance with whatever policy is in place.

However, even if the new policy is implemented consistently, the CCTS system is inadequate for providing the information needed to assess patterns in complaints and leads by industry or track and analyze the results of complaints and leads. CCTS does not include specific fields for SIC code or the final outcome of complaints and leads received from the public. Furthermore, the Division’s primary management information system for tracking matters, MTS, does not include information on the source of a matter, nor is it linked to CCTS. As a result, Division officials may not have readily available information on the source of matters and the specific industries about which the Division is receiving complaints.

The data in the Division’s MTS, which are used for developing management and budget reports, are not totally accurate and reliable. Errors have been identified that have not been corrected. For example, links were not consistently established between related matters, and actions were recorded after matters had reportedly been closed. Given the problems we encountered with the MTS database throughout this assignment, we believe that MTS information should be used with caution and that an accurate, detailed picture of the Division’s workload cannot readily be determined until the Division corrects the errors that have been identified and verifies that all MTS data are accurate and reliable.

Recommendations

To ensure that (1) all complaints and leads are documented as required by the Division policy; (2) data are readily available on the final outcome of complaints and leads, the source of matters, referrals of matters to other agencies, and the specific industries in which the Division receives complaints and leads; and (3) the Division has an accurate and reliable database that can be used to prepare meaningful management and budget reports, we recommend that the Attorney General direct the Assistant Attorney General for Antitrust to modify CCTS to capture the related SIC code(s); monitor compliance with the November 27, 2000, policy regarding documenting and tracking public inquiries; link CCTS to MTS to provide a mechanism to determine the source of the matter and the ultimate outcome of a complaint; and correct the errors that have been identified in MTS as a result of our work and verify that the MTS data are accurate and reliable.

Agency Comments

Justice’s Antitrust Division provided written comments on a draft of this report. In its comments, which are included as appendix V, the Division stated that our recommendation to incorporate a data field for SIC codes into CCTS was reasonable and that it would also consider our recommendation to link CCTS to MTS to enable the Division to track the results of citizens’ complaints. The Division was silent on our recommendation that it monitor compliance with the November 27, 2000, policy regarding documenting and tracking public inquiries.

The Division took issue with our recommendation to correct errors and improve the accuracy and reliability of MTS data. The Division stated that although data linkages can be improved and data coding reviewed to ensure consistency, MTS is soundly structured, logically presented, and contains fully reliable data. The Division contended that we based our conclusion concerning the reliability of MTS data largely on the results of 25 of 1,050 agriculture-related matters.

We continue to believe that the Division needs to take steps to improve the accuracy and reliability of MTS data. Contrary to the Division’s assertions, the basis for our conclusion goes beyond the 25 matters highlighted in the report. On numerous occasions during our review, we had to ask officials for clarification about data issues because the information as presented was not clear or appeared to be in error. For example, there were many matters for which we could not determine the final disposition on the basis of the data recorded. Division officials needed to devote considerable time and effort to respond to questions and issues we raised. MTS data should not require repeated reviews and refinements to produce accurate data on simple frequency counts of the number of matters closed. The finding of missing database links for 12 of the 25 matters further illustrates the difficulty of creating accurate frequency counts using the MTS database without careful and time-consuming review of the data, sometimes requiring a review of the case files. The Division acknowledged in its letter that it is currently reviewing how best to ensure that any similar linkage issues are identified and corrected, and it is updating MTS as new information becomes available and inaccuracies or gaps are discovered. These statements show that the Division recognizes that information in the MTS database needs improvement.

In connection with its discussion on data reliability problems, the Division mistakenly stated that we found that its reopening of previously closed matters was an indication of incorrect closures. We recognize that closed matters are sometimes reopened in light of new evidence and do not object to the Division doing so. Our point was that the database does not accurately portray this activity, and we noted this as another example of MTS failing to accurately represent Division activity. However, we modified the language in our report to clarify this issue.

The Division also commented on four other items discussed in our report. First, the Division stated that contrary to our assertion, it could report direct labor costs for matters but not from one central data source. During our review a high-level Division official stated that although it is true that MTS does not contain accurate data on direct labor costs for specific matters, such data would be available through various other sources. However, at a meeting to discuss direct labor costs, among other things, this official told us that although the Division could provide us with these data with considerable effort, the data would be incomplete and lack credibility.

Second, the Division indicated that its efforts to improve its documentation of complaints and leads began well before we initiated our review. However, the Division’s response ignores the fact that the problems we identified in tracking complaints and leads were also identified in our 1991 report. Thus, any corrective actions taken over the last 10 years were insufficient to address the deficiencies identified in that report. As noted in our report, at the beginning of our review Division officials were unsure whether the 1980 policy to document and track complaints and leads was still in effect. Further, at the beginning of our review the Division’s sections and offices were not using a uniform system to document and track complaints and leads. The Division issued a memorandum in February 2000 that instructed the legal sections and field offices to use CCTS to track all public inquiries and ensure that they were addressed in a timely manner. In June 2000, we found that 7 out of the 12 sections and field offices were not using CCTS to document and track complaints and leads. Of the five that were using CCTS, three had begun using it only after March 2000. In October 2000, the Division issued a directive requiring all sections and field offices to (1) use the CCTS to document and track all unsolicited pubic contacts and (2) maintain a central file of these contacts.

Third, the Division stated that the draft report gave the impression that if a merger filing under the HSR process did not result in a PI being opened, the Division had taken no action. It was not our intent to give this impression. Our report states that the Division took no formal action in these filings. Further, our report states that it is a normal outcome that PIs are not initiated for the majority of HSR mergers and that such mergers are permitted to proceed at the end of the required waiting period after the Division has concluded that they should be permitted to proceed. However, we modified the language in our report to clarify this issue.

Fourth, the Division commented on the definition of “agriculture” used to determine which matters to include in our review, intimating perhaps that this was a shortcoming of the Division. We did not take issue with the Division’s lack of a working definition of agriculture. We merely stated that because there was no set definition, we needed to determine one to define the constraints of our review. Furthermore, we relied on the Division’s judgment in this matter and accepted its definition as given. In fact, the definition the Division provided was the same one that it used in its April 2000 response to Senator Lugar on another agriculture-related antitrust matter.

The Division also offered technical comments on the draft, which we incorporated where appropriate. However, we disagree with the Division’s characterization of our description of the antitrust legal framework and antitrust enforcement, as the vast majority of its comments were technical suggestions or editorial preferences and not substantive. Moreover, in some cases, the Division’s suggested changes altered wording taken directly from the Division’s written policies and procedures. In such cases, we generally retained the wording from the Division’s official documentation.

We also requested comments from FTC and USDA officials with whom we had met during this review. Both agencies provided technical comments, which we incorporated where appropriate.

We will send copies of this report to Senator Orrin G. Hatch, Chairman, and Senator Patrick J. Leahy, Ranking Member, Senate Committee on the Judiciary; Representative Jim Sensenbrenner, Jr., Chairman, and Representative John Conyers, Jr., Ranking Minority Member, House Committee on the Judiciary; the Honorable John D. Ashcroft, Attorney General; the Honorable Mitchell E. Daniels, Jr., Director of Management and Budget; and other interested parties. We will also make copies available to others upon request. This report will also be available on GAO’s home page at http:/www.gao.gov.

Please contact William Jenkins or me on (202) 512-8777 if you or your staff have questions about this report. Major contributors to this report are acknowledged in appendix VI.

Appendix I: Objectives, Scope and Methodology

Our objectives were to (1) describe the Department of Justice’s Antitrust Division’s (Division) interaction with the Federal Trade Commission (FTC) and the U.S. Department of Agriculture (USDA) with regard to antitrust matters in the agriculture industry, (2) provide information on the number of complaints and leads in the agriculture industry received by the Division for fiscal years 1997 through 1999, and (3) provide information on the number and type of closed matters in the agriculture industry for fiscal years 1997 through 1999.

Because the Antitrust Division does not have a working definition of the agriculture industry, we first had to determine what constituted the agriculture industry. To define what complaints, leads, matters, and cases were related to agriculture, we met with the Division and requestor staff to identify the Standard Industrial Classification (SIC) codes that would encompass agriculture. The Division assigns each matter or case one or more SIC codes. As agreed with Senator Grassley’s office, we used the Division’s selected SIC codes to define the agriculture-related activities. The Division’s selected SIC codes used to define the agriculture industry included those specifically related to plant and animal products that originate on land and are commercially cultivated or raised for human or animal consumption, meaning oral ingestion. If any identified complaint, lead, matter, or case included one of these SIC codes, we included it in our analysis. The SIC codes the Division included in its definition for the agricultural industry, as well as the way we grouped them for analysis purposes, are shown in table 6.

To obtain information on the Division’s interaction with the FTC and USDA, in each of the three agencies, we relied primarily on interviews with key officials in the Division, FTC, and USDA. We relied on these officials’ representation of the agencies’ interaction. We also reviewed the Division’s policies and procedures for interacting with other agencies and relevant interagency agreements, including the 1999 Memorandum of Understanding that addresses cooperation among the Division, FTC, and USDA for monitoring competitive conditions in the agricultural marketplace. In addition, we reviewed Division testimonies, speeches, and press statements that addressed the interaction among the agencies. With regard to merger investigations, we reviewed agreements between the Division and FTC for cases that fell within the joint antitrust jurisdiction of both agencies. These included a 1993 agreement that established clearance procedures for investigations and a 1995 agreement in which the agencies agreed to specific time frames for deciding which agency should investigate a matter.

Because the Division had not collected consistent, divisionwide information on complaints and leads, we relied on data provided by Division officials to obtain information about the agriculture-related complaints and leads the Division received by mail, telephone, facsimile, e-mail, or personal visit during fiscal years 1997 through 1999. To obtain information on the policies and procedures for documenting and tracking complaints and leads, we interviewed the Director of Legal Policy; the Chief of the Legislative Unit; the Executive Officer; the Special Counsel for Agriculture; and the Directors of Criminal Enforcement, Civil Merger Enforcement, and Civil Nonmerger Enforcement. In addition, we reviewed the Division’s directives for tracking complaints and leads. We also held structured interviews with Division officials representing the five headquarters sections or task forces—Civil Task Force; Litigation I section; Litigation II section; Transportation, Energy and Agriculture section, and Merger Task Force—and the seven field offices—Atlanta, Chicago, Cleveland, Dallas, New York, Philadelphia, and San Francisco— that Division officials said would most likely have reviewed anticompetitive matters in the agriculture industry for the period we reviewed. We asked them to describe their policies and procedures for documenting and tracking complaints and leads. We provided them with the agriculture-related SIC codes, and we asked them to provide us with data on, among other things, the total number of agriculture-related complaints and leads received by SIC code for each fiscal year 1997 through 1999 and the outcome of the complaint or lead. Because of the variety of methods used to track complaints and leads within the Division, we could not verify the accuracy or completeness of the data provided to us.

To summarize and describe the matters that were closed during fiscal year 1997 through 1999, we analyzed data from the Division’s Matter Tracking System (MTS). MTS contains information on all civil merger, civil nonmerger, and criminal matters handled by the Division. As each matter goes through various phases in the enforcement process, MTS is to capture each phase and its related disposition. MTS is designed and used primarily for Division management purposes.

We obtained data on the characteristics of the matters for those agriculture-related SIC codes for fiscal years 1997 through 1999. To understand the data elements in MTS and how the Division systematically maintains information on matters during its review of potential anticompetitive conduct, we reviewed the Antitrust Division Manual and the Division’s MTS data dictionary, and we met with officials from the Division’s Information Systems Support Group.

We defined a closed matter as any effort (e.g., a case, an investigation, an inquiry, etc.) in the database that the Division closed during fiscal years 1997, 1998, or 1999. The database defines matters by use of a unique identification number, which tracks efforts that may span multiple years and/or contain multiple phases. We used this number to identify each individual matter.

To provide a profile, we categorized the closed matters in the agriculture industry into the following groups: 1. Hart-Scott-Rodino (HSR) matters that expired by the 30-day limit (under Division purview), 2. HSR matters that were cleared to FTC, 3. non-HSR matters on which a formal PI was not opened (under Division 4. non-HSR matters that were cleared to FTC, 5. matters in which a PI was opened but no further action was taken by 6. matters on which a civil investigation was conducted or a grand jury 7. matters for which a civil or criminal case was filed in court, or 8. business review matters.

The groups were defined on the basis of the last phase recorded in the database for the matter. A matter in group (7), for example, might have originated as an HSR filing; but it was assigned to group (7) because the last phase recorded either indicated that a case was filed, or it gave the outcome (e.g., “won”) of the case.

To augment MTS information for our profile of closed matters, we reviewed Antitrust Division memorandums for matters for which a PI was conducted but no further actions were taken by the Division. Our data collection instrument included the dates that the investigation was authorized to be opened and closed, the type of matter, statute and potential antitrust conduct violated, geographic market, amount of commerce affected, SIC code(s), section assigned to review the matter, reason for closing the investigation, and whether or not there was economic analysis group concurrence.

For those matters for which we were unable to understand the information provided in the memoranda, we spoke with a Division official to clarify the information. We verified summary results with Antitrust Division officials, and we discussed and came to agreement on matters of discrepancy.

Appendix II: Overview of the Department of Justice’s Antitrust Division Staffing and Functions

The Department of Justice’s Antitrust Division’s (Division) mission is to promote and maintain competition in the American economy. According to its manual, the Division’s primary functions and goals include the general criminal and civil enforcement of the federal antitrust laws and other laws relating to the protection of competition and the prohibition of restraints of trade and monopolization; the intervention or participation before administrative agencies functioning wholly, or partly, under the regulatory statutes in proceedings requiring consideration of the antitrust laws or competitive policies; and the advocacy of procompetitive policies before other branches of government.

To accomplish its mission, the Division has 16 sections or task forces in headquarters and 7 field offices located throughout the United States. As shown in table 7, as of July 21, 2000, the Division had 561 full-time staff and 237 part-time staff, of which about 29 percent of the full-time staff and about 21 percent of the part-time staff were assigned to the field offices.

The Assistant Attorney General (AAG) for the Antitrust Division is responsible for leadership and oversight of all Division programs and policies. The Division AAG is nominated by the president and confirmed by the Senate. The AAG’s Chief of Staff is responsible for managing the Office of the Assistant Attorney General, advising the AAG on the formulation and implementation of highly sensitive antitrust policy issues, and coordinating that policy with other federal and state government agencies.

As of November 2000, the Division AAG had has three special counsels— the Special Counsel for Civil Enforcement, the Special Counsel for Information Technology, and the Special Counsel for Agriculture (who was appointed in January 2000). The special counsels are generally responsible for: maintaining expertise in assigned program areas and the competitive advising the AAG and other senior Division management about enforcement priorities in assigned program areas and assisting in the development and implementation of Division policy in these areas; assisting the Division in articulating its views on issues involving assigned program areas before other government entities, the press, the bar, and the public; and participating as appropriate in the identification of potential investigations assigned to program areas and any resulting investigation or enforcement action.

The Division also has five Deputy Assistant Attorneys General (DAAG), at least one of whom has traditionally been a career employee; and three Directors of Enforcement, one of whom serves as the Director of Operations. Each DAAG has a number of components that report to him or her. (See fig. 1.)

The DAAG for Criminal Enforcement, who traditionally has been a career employee, has overall supervisory and management responsibility for the Litigation I Section and the Division’s seven field offices and is primarily responsible for the Division’s criminal enforcement program. The civil enforcement responsibilities are divided among the remaining three legal DAAGs.

The DAAG for Economic Analysis has supervisory and management responsibility for the three economic sections (i.e., Economic Litigation, Economic Regulatory, and Competition Policy). The Economic Litigation Section focuses on general industries that historically have not been regulated; it also has a Corporate Finance Unit, which provides financial analyses of failing firm defenses, divestitures, and efficiencies defenses; makes recommendations as to fines; and reviews financial issues involved in damage analyses and other issues requiring financial, accounting, and corporate analysis. The Economic Regulatory Section focuses on industries that currently are regulated or historically have been regulated (e.g., telecommunications, airlines, and energy matters). The Competition Policy Section assists in matters that have a strong foreign outreach connection as well as matters involving certain specialized industries.

In total, the economic sections are made up of 52 full-time and 3 part-time economists. According to a Division official, the economic sections have a common pool of staff members. Although economists are assigned to one of the three sections, in practice they work for all three sections. According to a Division official, this practice helps balance workload.

The three Directors of Enforcement—which include the Director of Merger Enforcement, the Director of Civil Non-Merger Enforcement, and the Director of Criminal Enforcement—have direct supervisory authority over the activities of the various litigating sections, task forces, and field offices, each of which is headed by a Chief and Assistant Chief. These sections, task forces, and field offices carry out the bulk of the Division’s investigatory and litigation activities. According to the Division manual, the three Directors of Enforcement work closely with the DAAGs in overseeing Division activities. Four special assistants to the Directors of Enforcement are each assigned several sections and field offices and play a liaison role between those sections and the Directors, in addition to performing other duties as assigned by the Directors. The senior Special Assistant also serves as the Liaison Officer to FTC.

The Director of the Office of Operations, who also serves as one of the Directors of Enforcement, reports to the AAG. The Office of Operations coordinates the policies and procedures governing the Division’s civil investigations and enforcement actions and includes four support units. The Premerger Notification Unit/FTC Liaison Office (commonly referred to as the Premerger Office) receives the Division’s copy of all Hart-Scott- Rodino filings and assigns them to the appropriate sections. The Premerger Office communicates to FTC the Division’s interest in conducting an investigation or its willingness to grant early termination of the filing period. The Freedom of Information Act (FOIA) Unit is responsible for receiving, evaluating, and processing all FOIA requests made of the Division; assisting in the preparation of materials to be provided to state attorneys general; and maintaining and indexing pleadings, business review letters, and other frequently used files. The Paralegal Unit provides paralegal support on request to investigations and cases handled in Washington, D.C., and the field offices. The Training Unit coordinates training opportunities for the Division’s legal and support personnel.

The Division has seven Washington, D.C., litigating sections and task forces, including the following: The Computers and Finance Section enforces antitrust laws and competition policy in the banking, finance, insurance, securities, and computer industries.

The Civil Task Force handles civil nonmerger antitrust enforcement in some assigned industries, in intellectual property matters, and in all industries not specifically assigned elsewhere and handles merger matters in its assigned industries.

The Health Care Task Force investigates and litigates civil merger and nonmerger antitrust law violations involving the health care industry and provides legal guidance to the American health care industry through an extensive business review program.

The Litigation I Section conducts criminal investigations and litigation in conjunction with its field office counterparts.

The Litigation II Section enforces antitrust laws with regard to mergers and acquisitions in unregulated industries; handles some civil nonmerger work in its assigned industries; and reviews, investigates, and litigates matters in a large variety of industries. This section is also responsible for the review of bank mergers.

The Telecommunications Task Force enforces antitrust laws and promotes procompetitive regulatory policies in the communications industry, investigating and litigating violations of antitrust laws within that industry, and participating in proceedings before the Federal Communications Commission.

The Transportation, Energy and Agriculture Section enforces antitrust laws and promotes procompetitive regulatory policies in transportation, energy, and agricultural commodities, investigating and litigating violations of antitrust laws within those industries, and participating in proceedings before a number of federal regulatory agencies, including the Department of Agriculture; and prepares reports to Congress and the executive branch on policy issues related to various transportation, energy, and agriculture industries.

The Division’s seven field offices conduct criminal investigations and litigation. Field offices also handle some civil merger and nonmerger matters, depending on resource availability and particular expertise. The offices act as the field liaison with U.S. Attorneys, state attorneys general, and other law enforcement agencies within their areas of jurisdiction (see table 8).

The Division also has several specialized components, in addition to those included in the Office of Operations, that assist in carrying out the Division’s mission.

The Executive Office formulates and administers the Division’s budget, manages its reporting and records, handles personnel matters, and provides information systems services for all Division activities. This Office includes the Information Services Support Group, which provides automated services and resources to handle information in support of the Division’s attorneys, economists, and managers.

The Appellate Section represents the Division in appeals to the U.S. Courts of Appeals and appeals before the U.S. Supreme Court.

The Legal Policy Section provides analyses of complex antitrust policy matters; coordinates the Division’s legislative program; and handles long- range planning, projects, and programs of special interest to the AAG. This Section includes the Legislative Unit, which coordinates the Division’s relations with Congress and responds to congressional requests and inquiries of the Division.

The Foreign Commerce Section assists other sections in matters with international aspects and is primarily responsible for the development of Division policy on international antitrust enforcement and competition issues involving international trade and investment.

Appendix III: Overview of the Antitrust Division’s Policies and Procedures for Investigating Potential Antitrust Violations

The Antitrust Division is responsible for, among other things, promoting and maintaining competition in the United States by enforcing the federal antitrust laws. It is charged with investigating and prosecuting violations of these laws. The Division’s Antitrust Division Manual is intended to provide a comprehensive source of information about the Division’s mission and investigative and enforcement procedures and practices. The following is a general overview of the antitrust investigative and enforcement processes, up to the point at which an enforcement action is filed, for the three principal types of antitrust enforcement actions brought by the Division—Hart-Scott-Rodino merger enforcement actions, civil enforcement actions, and criminal prosecutions.

Identification of Possible Antitrust Violations

The Division may become aware of a possible antitrust violation through a variety of sources, including a confidential informant; individuals or corporations applying for amnesty; complaints and referrals from other government departments or agencies; an anonymous tip; or through reviews of newspapers, journals, and trade publications. New investigations may also begin with information the Division obtains in other grand jury proceedings, or in merger filings required by the premerger notification provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act, 15 U.S.C. 18a). Economists from one of the Economic Analysis Group sections may also discover a possible anticompetitive activity, which they would then discuss with an attorney in one of the Division’s legal sections.

Preliminary Inquiry Process

When an attorney makes a determination that there is sufficient evidence to open an investigation beyond discussions with the complainant, he or she is to draft a preliminary inquiry (PI) request memorandum to the section, task force, or field office chief describing the conduct involved and the possible violation. For civil matters, the memorandum is also to state whether the economist concurs. The memorandum is to include, among other things a factual summary of the information upon which the request is based, evidence supporting a potential antitrust violation as well as any contrary an evaluation of the significance of the matter from an economic and a description of the proposed course of the investigation.

Additionally, the memorandum is to include basic information on (1) the commodity or service to be investigated; (2) the alleged anticompetitive conduct or merger and, for civil matters, the theory of competitive harm; (3) the relevant statute; (4) the parties involved; (5) the amount of commerce affected on an annual basis; and (6) the geographic area involved.

If the section chief does not agree with the staff’s recommendation to open a PI, no further action is taken. If the section chief agrees with the recommendation, he or she is to submit a request to Operations or, in the case of a criminal PI, to the Office of Criminal Enforcement. The appropriate Director of Enforcement is to approve or disapprove the PI request on the basis of four standards: (1) the facts presented must provide sufficient indications of an antitrust violation; (2) the amount of commerce affected must be substantial, or the matter must have some broader significance or implicate an important legal principle; (3) the investigation should not needlessly duplicate or interfere with other efforts of the Division, FTC, a U.S. Attorney, or a state Attorney General; and (4) Division resources must be available for the investigation.

Because both the Division and FTC have antitrust jurisdiction, they must agree on which agency is to conduct the investigation. To ensure that both agencies are not investigating the same conduct, they have established clearance procedures to determine which agency will investigate a potential violation. If either the Division or FTC objects to the other agency conducting the investigation, the staffs are to follow the clearance dispute procedures to determine which agency will proceed with the investigation. According to Division and FTC officials, clearance disputes are relatively rare.

Clearance must be obtained for all PIs, business reviews, grand jury requests that have not resulted from an existing PI, and any expansion of a previously cleared matter. The agencies cannot begin a PI until clearance is granted. For a typical investigation, the clearance request is to specify, among other things, the parties to be investigated, the product line involved, the potential offenses, and the geographic area. The Division’s Premerger Notification Unit/FTC Liaison Office oversees the clearance process.

The primary determinant of which agency will conduct an investigation is current agency expertise about the product or service market(s) at issue, so that a merger will usually be reviewed by whichever of the two agencies is most knowledgeable about the relevant market(s). According to Division and FTC officials, the Division has investigated the preponderance of mergers affecting agriculture, with a prominent exception being grocery store transactions, in which FTC has substantial experience and expertise. The Division has handled investigations in the cattle, hog, and lamb sectors, and FTC has traditionally handled investigations in the poultry sector.

Once clearance is obtained and the PI is opened, staff are to investigate the merger or alleged conduct through interviewing complainants, customers, competitors, other possible witnesses and victims and reviewing other public sources of information. They may request information on a voluntary basis from any party involved. They also may use a compulsory process to obtain further information and documents.

According to Division officials, the staff determine whether to conduct a criminal or civil investigation early in their deliberations, usually when the PI request is submitted. Where it is unclear whether the conduct in question would be a civil or criminal violation, the Division’s policy is usually to open a civil investigation. This policy stems from two Supreme Court decisions that place restrictions on the government’s ability to use evidence gathered during the course of a grand jury investigation in a subsequent civil case.

After the staff evaluates the results of the PI, the attorneys and economist (in civil matters) are to recommend either closing the PI or proceeding with a civil or criminal investigation. For a civil matter, this means preparing a lawsuit for filing. For a criminal matter, this means convening a grand jury. In making this decision, the staff are to consult with their section or office chief and, in civil matters, the relevant economic analysis group chief to discuss the results of the PI.

To close a PI, the attorney is to prepare a closing memorandum. In a civil matter, the legal staff’s memorandum is to state whether the economist concurs. The memorandum generally is to provide the factual and legal bases for the staffs’ recommendation to close the PI.

Operations or, in criminal matters, the Office of Criminal Enforcement is to review the memorandum and consult with the appropriate DAAG and AAG if the matter involves significant policy questions. The appropriate Director of Enforcement then notifies the cognizant section or office chief of the decision to close the PI. Staff are to then notify the subjects of the investigation that the matter is closed and close the file on the matter.

Hart-Scott-Rodino Merger Enforcement Process

Most mergers and acquisitions that have the potential to raise competitive concerns must be reported to the Division and FTC before they occur. The premerger notification provisions of the Hart-Scott-Rodino Act require companies exceeding certain thresholds of company size and value of the transaction to notify the Antitrust Division and FTC of the proposed merger transaction, submit documents and other information to the agencies concerning the transaction, and refrain from closing the transactions until a specified waiting period has expired.

There are three tests, all of which must be met in order for the transaction to be reportable. The first test is the commerce test, in which either the acquiring party or the acquired party must be engaged in commerce or in any activity affecting interstate commerce, as defined in Section 1 of the Clayton Act. The second test is the size-of-person test. For the period we reviewed, one party to the transaction had to have annual sales or assets of at least $100 million and the other party of at least $10 million. The third test is the size-of-transaction test. Under this test, for the period we reviewed, as a result of such acquisition, the acquiring party had to hold (1) voting securities or assets worth in the aggregate more than $15 million, or (2) voting securities that confer control (50 percent) of an issuer with annual sales of $25 million or more.

HSR merger reviews usually begin with the parties filing a proposed merger. However, the Division also may become aware of a merger prior to the required filing through other sources, such as its own research or notification by a concerned citizen. The Division has up to 30 days (15 days for cash tender offers and bankruptcy filings) from the time of the filing of the proposed merger to review the filing and make a determination as to whether the Division should seek additional information and documents from the merging parties and thereby extend the waiting period to enable further review. Generally, staff should decide within 5 business days of receipt of an HSR filing (3 days in the case of a cash tender offer or a bankruptcy filing) whether the filing raises competitive issues that need to be investigated. According to Division officials, in markets already characterized by high concentration levels, there is a substantially increased likelihood that a proposed merger will be investigated.

The majority of mergers that raise antitrust concerns are horizontal mergers. According to Division officials, the Division’s and FTC’s joint Horizontal Merger Guidelines are a reasonably accurate portrayal of how the Division and FTC generally conduct their analyses of proposed mergers. The guidelines were originally developed in 1982 and were updated in 1992. In 1997, the efficiencies section of the guidelines was expanded. The unifying theme of the guidelines is that mergers should not be permitted to create or enhance market power or facilitate its exercise. The guidelines define a seller’s market power as the ability to profitably maintain selling prices above competitive levels for a significant period of time. Similarly, a buyer’s market power is defined as the ability to profitably maintain buying prices below competitive levels for a significant period of time.

The guidelines outline the five-step analytical process the Division is to use to determine whether a merger is likely to substantially lessen competition and, ultimately, whether to challenge a merger. The Division is to (1) delineate the relevant market and assess whether the merger would significantly increase concentration and result in a concentrated market; (2) identify the market participants, assign shares, and assess whether increased market concentration from the proposed merger raises concern about potential adverse competitive effects; (3) assess whether entry into the market would be timely, likely and sufficient either to deter or to counteract the competitive effects of concern; (4) assess any efficiency gains that cannot be reasonably achieved by the parties absent the proposed merger; and (5) determine whether, but for the merger, either party to the transaction would be likely to fail and exit the market.

A post-merger HHI between 1,000 and 1,800 indicates moderate concentration. Mergers producing an increase in the HHI of less than 100 points in moderately concentrated markets postmerger are unlikely to have adverse competitive effects and generally require no further analysis. Mergers resulting in an increase in the HHI of more than 100 points in moderately concentrated markets postmerger potentially raise significant competitive concerns. A postmerger HHI above 1,800 indicates a highly concentrated market. Mergers producing an increase in the HHI of less than 50 points even in highly concentrated markets postmerger are unlikely to have adverse competitive consequences and ordinarily require no further analysis. Mergers resulting in an increase in the HHI of more than 50 points in highly concentrated markets postmerger potentially raise significant competitive concerns.

When the postmerger HHI exceeds 1,800, the Division assumes that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance market power or facilitate its exercise. However, this assumption may be refuted by showing that other factors in the guidelines make it unlikely that the merger will create or enhance market power or facilitate its exercise, in light of market concentration and market shares. termination” of the waiting period when requested in writing by one of the merging parties.

If the attorney, in consultation with the economist, concludes that the information reviewed raises significant competitive concerns warranting a more thorough review, the attorney is to submit a request to open a PI. The PI request is to be reviewed by the section chief and, if the section chief concurs, by Operations. While deciding whether to authorize the PI, Operations is to request clearance to proceed from FTC. If clearance is granted to the Division, the Director of Merger Enforcement in Operations decides whether to authorize the PI. According to Division officials, Operations generally approves merger PI requests.

If the PI is authorized, the attorney and economist are to investigate the proposed merger during the initial waiting period, generally using voluntary procedures. They are to determine whether the proposed transaction raises issues substantial enough to warrant the issuance of a second request. At this point, the merging parties often begin to meet with Division staff to discuss any problems the Division has with the proposal and to provide their own analysis of the transaction.

If the attorney concludes, in consultation with the economist, that there are no significant competitive concerns, then the attorney is to submit a memorandum to the section chief recommending that the investigation be closed. If the section chief concurs, the memorandum is to be sent to Operations, where the Director of Merger Enforcement makes the final decision on whether to close the investigation. If the attorney concludes, in consultation with the economist, that there are significant competitive concerns that require the Division to obtain additional information to be obtained from the parties to enable a more thorough review, the attorney is to submit a proposed “Second Request” for that information to be submitted to the merging parties before the waiting period expires.

The proposed second request is to be reviewed by the section chief and, if the section chief concurs, by Operations, where the Director of Merger Enforcement makes the final decision whether to approve the second request. According to Division officials, if the second request is not approved, the investigation typically is closed.

If the second request is approved, it is sent to the merging parties. For the period we reviewed, this extended the waiting period until 20 days (10 days for cash tender offers and bankruptcy sales) after the merging parties substantially comply with the second request. In order for the extended waiting period to end, the merging parties must substantially comply with the second request. The attorney also may apply for authorization to issue CIDs to any person. According to Division officials, the attorney and merging parties will likely meet to discuss the competitive concerns as well as any possible modifications to the second request.

When the merging parties have supplied the information requested, they are to certify substantial compliance with the second request. If the attorney does not agree that the parties are in substantial compliance, the attorney is to notify the merging parties of the areas of noncompliance and submit a proposed deficiency letter to the section chief. If the section chief concurs, the letter is to be sent to the merging parties, and the waiting period is further extended.

If the attorney agrees that there has been substantial compliance with the second request, or if the section chief does not concur in sending the deficiency letter, the waiting period is not further extended and comes to an end within the prescribed number of days after certification of substantial compliance.

If the attorney concludes in consultation with the economist that the merger is not likely to substantially lessen competition in violation of the antitrust laws, the attorney is to submit a memorandum to the section chief recommending that the investigation be closed. If the section chief concurs, the memorandum is to be sent to Operations, where the Director of Merger Enforcement decides whether to close the investigation. If the Director of Merger Enforcement approves closing the investigation, the Division typically requests that FTC early terminate the extended waiting period.

If the attorney concludes in consultation with the economist that the merger is likely to substantially lessen competition in violation of the antitrust laws, the attorney is to inform the section chief. If the section chief concurs, Operations is to consider the matter in consultation with the attorney, the economist, the section chief, and the relevant DAAGs. If the section chief does not concur with the attorney’s conclusion, then the investigation is typically closed; or occasionally, it is sent back to the attorney for further work.

If the Director of Merger Enforcement concurs with the attorney’s conclusion, the attorney is to notify the merging parties of the specific competitive concerns and that staff intends to recommend challenging the merger in court if the parties proceed with the merger as proposed. If the Director does not concur, the investigation is closed or, occasionally, sent back to the section for further work.

If the Division determines that the proposed merger is anticompetitive, the merging parties may offer to divest assets in a manner that resolves the competitive concerns. If they do so, the Division files a complaint and proposed consent decree with the court that binds the parties to the arrangement. Alternatively, the merging parties may elect to “fix it first” by divesting the assets of competitive concern before the merger takes place, or to “restructure” the merger by forgoing acquisition of those specific assets in the first place.

If the merging parties do not offer to divest assets in a manner that resolves the competitive concerns, the attorney is to submit a case recommendation package to the section chief. The package is to include the recommendation memorandum, an order of proof with the key documents and other evidentiary support, a draft complaint, and draft motions for temporary restraining order and preliminary injunction. The case recommendation memorandum is to include, among other things: the date by which the Division must file any temporary restraining order or preliminary injunction papers, and any other dates that bear on timing; a brief description of the transaction, including the identity of the merging parties, the form of the transaction, and the consideration; a brief description of the proposed suit, including proposed defendants, the statutes under which the merger is to be challenged, the proposed judicial district, and the relief sought; a general description of the impact of the transaction, including the relevant product and geographic markets, volume of commerce, market shares, and HHIs; a brief description of the basic theory of competitive harm; a short discussion of the weaknesses of the case; any settlement possibilities; and an explanation of why litigation is worth the expenditure of the necessary Division resources.

The economist also provides a memorandum on the key economic issues. These memorandums and accompanying materials are to be forwarded to Operations and to the relevant DAAG. After conferring, they make a recommendation to the AAG.

At this point, the merging parties may request meetings with the Director of Enforcement, the DAAG, and the AAG to discuss the merger. During this period, the merging parties may still offer to divest assets to resolve the competitive concerns. If the parties do not offer to divest assets in a manner that resolves the competitive concerns, and if the AAG approves taking enforcement action, the Division files a complaint and, usually, motions for a preliminary injunction and a temporary restraining order with the court. The preliminary injunction prevents consummation of the transaction before the court can determine its legality. If the AAG does not approve taking enforcement action, the investigation is closed.

Figure 2 shows the general process the Division follows for HSR merger enforcement actions.

Civil NonMerger and Non-HSR Merger Enforcement Process

When alleged conduct would not be appropriate for criminal prosecution but might be found to be anticompetitive, the Division may initiate a civil investigation. Civil investigations differ from criminal investigations in the involvement of the Division’s economists and in the manner of the Division’s interaction with the parties under investigation. The Division generally follows the same procedures for reviewing civil non-HSR mergers and HSR mergers, except that non-HSR merger investigations are not subject to statutorily prescribed waiting periods. The Division’s procedures for reviewing non-HSR merger matters and civil nonmerger matters are also very similar.

Civil nonmerger matters involve the investigation and civil prosecution of a variety of conduct under Sections 1 and 2 of the Sherman Act. According to the Division, such conduct may constitute an illegal restraint of trade or unlawful monopolization or attempted monopolization. Examples of conduct that may raise competitive issues include strategic alliances between companies, joint ventures among suppliers, and misuse of intellectual property rights. According to the Division manual, considerations in civil matters include legal theory, relevant economic learning, the strength of the likely defense, any policy implications, and the potential doctrinal significance of the matter.

The investigative process begins when the Division becomes aware of potentially anticompetitive conduct, or a potentially anticompetitive merger not subject to HSR reporting, and it refers the matter to the appropriate section for handling. Attorney(s) and economist(s) are assigned to assess the conduct or merger using public sources of information. If the attorney, in consultation with the economist, concludes that the conduct or merger raises significant competitive concerns warranting a more thorough review, the attorney is to submit a request to open a PI. Otherwise, the attorney recommends that no action be taken; and, if the section chief concurs, no investigation is opened.

The PI request is to be reviewed by the section chief and, if the section chief concurs, by Operations. Before deciding whether to authorize the PI, Operations is to request clearance to proceed from FTC. If clearance is granted to the Division, the Director of Enforcement decides whether to authorize the PI. According to Division officials, civil PI requests are generally authorized.

If the PI is authorized, the attorney and the economist are to investigate the conduct or merger, generally using voluntary procedures, such as interviews and voluntary requests for documents. The attorney may also apply for authorization from Operations to issue CIDs to parties subject to the investigation and to third parties who may have relevant information. According to the Division manual, a decision to issue CIDs generally involves a significant expansion in resources committed by the Division and should be made only after serious consideration and a thoughtful reassessment of the matter’s potential significance.

If the attorney and economist recommend closing the investigation and if the section chief and Director of Enforcement concur, the investigation is closed. The closing recommendation is to include a description of the conduct or market involved in a violation, an analysis of competitive issues, a development of the facts and law, and recommendations. The Director of Enforcement may send the matter back for further work.

If the attorney, in consultation with the economist, concludes that the conduct or merger can be proven to violate the antitrust laws, the attorney is to submit a case recommendation to the Director of Enforcement. The case recommendation is to include the following information: a brief description of what the prospective case is fundamentally about; a conceptual discussion of the case and why it is an important one for the Division to bring, including the theory and statute(s) on which the case would be based; theories investigated but not recommended to be pursued; and the justifications or defenses likely to be raised by the prospective defendants; an assessment of whether the case is winnable at trial, including a short order of proof (which will typically be attached to the case recommendation as a separate document), a summary of the relative strengths and weaknesses of the evidence supporting the case, and a summary of likely defense evidence and arguments; and a discussion of potential settlement options.

The case recommendation is to be reviewed by the section chief, and if the section chief concurs, the recommendation is reviewed by Operations, in consultation with the attorney, the economist, the section chief, the economic chief, and often the relevant DAAGs. The economist is also to submit a case recommendation memorandum on the key economic issues.

If the Director of Enforcement does not concur, the investigation is closed or, occasionally, sent back to the section for further work. If the Director of Enforcement concurs in the attorney’s conclusion, the attorney is to notify the parties of the Division’s competitive concerns and that staff intends to recommend challenging the conduct or merger in court. Operations is to forward the case recommendation to the relevant DAAGs and to the AAG.

The AAG is to review the case recommendation and consider whether to bring an enforcement action. At this point, the parties may request meetings with the DAAG and with the AAG to discuss the matter. The parties may offer to cease the conduct giving rise to the competitive concerns and take other action as necessary to resolve those concerns, or to restructure the merger to resolve the competitive concerns. If the offer satisfactorily resolves the competitive concerns, the attorney is to file a complaint and proposed consent decree in court. If the parties do not satisfactorily offer to resolve the competitive concerns, and if the AAG approves taking enforcement action, he or she is to sign the pleadings and other documents. The Division then files a case in court and begins litigation. If the AAG does not approve taking enforcement action, the investigation is closed.

Figure 3 shows the general process the Division follows for civil nonmerger and non-HSR merger enforcement actions.

Criminal Enforcement Process

When the Division becomes aware of a possible criminal antitrust violation, it assigns the matter to the appropriate section or office to handle the review. The attorney reviews the information to decide whether to seek authority to open a criminal investigation. If the attorney concludes that there is not sufficient evidence to warrant opening a criminal PI, and if the section or office chief concurs, the Division would not open a criminal investigation, but it might open a civil investigation.

If the attorney concludes that there is not sufficient evidence to warrant opening a grand jury investigation, but there is sufficient evidence to warrant opening a preliminary inquiry, the attorney is to submit a PI request to the section or office chief. (If the attorney concludes that there is already sufficient evidence to warrant opening a grand jury investigation, the attorney may bypass the criminal PI and proceed directly to submit a request for grand jury authority to the section or office chief.) If the section or office chief concurs in the PI request, the request is to be sent to the Office of Criminal Enforcement. If the section or office chief does not concur in the PI request, a criminal investigation is not opened, but a civil investigation might be opened.

If the Director of Criminal Enforcement approves the criminal PI request,the Office of Criminal Enforcement is to request clearance from FTC through the clearance process; and, once clearance is obtained, the attorney is to investigate the potential violation, using voluntary procedures. If the Director of Criminal Enforcement does not approve the criminal PI request, the Division would not open a criminal investigation, but it might open a civil investigation.

If the attorney concludes that the PI does not reveal sufficient evidence to warrant opening a grand jury investigation, the attorney is to submit a memorandum to the section or office chief recommending that the investigation be closed. If the section or office chief concurs with the closing memorandum, it is to be sent to the Director of Criminal Enforcement, who will close the criminal investigation or, occasionally, send it back to the section or office to develop more evidence. If the criminal investigation is closed, a civil investigation might be opened.

If the attorney concludes that the PI reveals sufficient evidence to warrant opening a grand jury investigation (or if the PI phase is bypassed and a grand jury is requested at the outset), the attorney is to submit a memorandum to the section or office chief outlining the evidence and requesting grand jury authority. To the extent possible, the request for grand jury authority is to identify the companies, individuals, industry, or commodity or service involved; estimate the amount of commerce involved on an annual basis; identify the geographic area affected and the judicial district in which the investigation will be conducted; describe the suspected violations, including non-antitrust violations, and summarize the supporting evidence; evaluate the significance of the possible violation from an antitrust explain any unusual issues or potential difficulties the staff has identified; identify the attorneys who will be assigned to the investigation; explain initial steps in the staff’s proposed investigative plan; and estimate the duration of the investigation.

If the request is approved by the section or office chief, the Special Assistant is to prepare a memorandum for the Director of Criminal Enforcement, who makes a recommendation to the Division’s AAG, with a copy to the DAAG. If the AAG does not approve the request, the criminal investigation is closed or, sometimes, sent back to the section or office to develop more evidence. If the criminal investigation is closed, a civil investigation might be opened.

If the grand jury request is approved by the AAG, the Office of Criminal Enforcement is to obtain FTC clearance if it has not already been obtained previously for a PI, or if the scope of the investigation is expanded. Then the attorney is to meet with the local U.S. Attorney’s office, and a grand jury is convened.

The grand jury investigation phase involves (1) issuing a subpoena to companies for records, (2) calling witnesses, and (3) presenting evidence on the alleged violation to the grand jury. After completing the grand jury investigation, the attorneys are to recommend either closing the investigation; proceeding with a criminal case and prosecuting the defendants; or, occasionally, continuing the investigation as a civil matter.

If the attorney concludes that the grand jury investigation does not reveal sufficient evidence to warrant filing criminal charges, the attorney is to submit a memorandum to the section or office chief recommending that the investigation be closed. If the section or office chief concurs with the closing memorandum, it is sent to the Director of Criminal Enforcement, who will either authorize closing the investigation or, occasionally, send it back to the section or office for further grand jury investigation.

If the attorney concludes that the grand jury investigation reveals sufficient evidence to warrant filing criminal charges, and if the section or office chief concurs, the attorney and section or office chief are to submit a memorandum to the Office of Criminal Enforcement recommending criminal action and providing the factual and legal bases of their investigation. The memorandum is to include the following information: a summary of the offense; a list and description of the proposed defendants; a summary of the evidence establishing the offense and a summary of the evidence against each proposed defendant; the names of the persons and companies that were potential targets of the investigations but are not being recommended for indictment; a detailed analysis of the weaknesses of the case, and any anticipated defenses, with appropriate staff responses; and a list of the defense counsel for the proposed defendants, a description of the arguments made to staff, and staff responses to the arguments.

The Director of Criminal Enforcement is to analyze all the related documents, assess the merits of the case, and recommend what action, if any, to bring against the proposed defendant(s). The documents are then to be reviewed by the Division’s criminal DAAG. According to the Division manual, staff will ordinarily inform defense counsel that staff is seriously considering recommending indictment and give counsel an opportunity to present their views to the staff and section or office chief, or to the Director of Enforcement or the DAAG, before the indictment recommendation is forwarded to the AAG. At any time, the party may agree to plead guilty. Defense counsel do not have an absolute right to be heard by the Director of Criminal Enforcement or the criminal DAAG, although it is routine that they are.

If the DAAG (or the Director of Criminal Enforcement) does not concur in the recommendation to proceed with criminal prosecution, the criminal investigation is closed or, occasionally, sent back to the section or office to develop more evidence. If the criminal investigation is closed, occasionally, a civil investigation might be opened. If the DAAG (or the Director of Criminal Enforcement) concurs in the recommendation to proceed with criminal prosecution, the DAAG (or the Director of Criminal Enforcement) is to forward a recommendation to the Division’s AAG. The Division’s AAG is to decide whether to bring a legal action or decline prosecution.

If the AAG does not approve the criminal prosecution, the criminal investigation is closed or, occasionally, sent back to the section or office to develop more evidence. Occasionally, if the criminal investigation is closed, a civil investigation might be opened. If the AAG approves criminal prosecution and the party has not agreed to plead guilty, the Division presents the recommended indictment to the grand jury. If the grand jury returns an indictment, the Division begins criminal proceedings in court. If the grand jury does not indict, the investigation is closed.

If the party has agreed to plead guilty, staff are to prepare a memorandum recommending filing an information and entering a plea agreement with a sentence recommendation. The memorandum is to be forwarded to the criminal DAAG through the Director of Criminal Enforcement if it is the first case to arise from an investigation, or to the Director of Criminal Enforcement if it is not the first case. The memorandum is to include the following informaiton: a brief description of the proposed charges; a description of the illegal conduct and an analysis of the available evidence demonstrating the existence of that conduct; a brief description of the elements of the proposed plea agreement, with a more detailed explanation of any unusual provisions, and an analysis of the potential criminal penalty pursuant to the United States Sentencing Commission’s Federal Sentencing Guidelines; a description of the potential charges faced by the proposed defendant, had the case proceeded to indictment; an analysis of the benefits and disadvantages of the proposed plea agreement, including the impact of the proposed agreement on any continuing investigation or future trial; and a discussion of relevant victims’ rights issues.

The DAAG is to review the memo and forward it to the AAG with a recommendation. If the AAG concurs with the recommendation, the Division files the information, plea agreement, and sentence recommendation with the court.

Figure 4 shows the general process the Division follows for criminal enforcement actions.

Appendix IV: Characteristics of Matters for Which Only a PI Was Done

As shown in table 4 of our report, during fiscal years 1997 through 1999, the Division closed a total of 64 agriculture-related matters in the SIC codes we examined after conducting a PI. We reviewed opening and closing memorandums for all 64 matters to determine, among other things, (1) the source of these matters, (2) the geographic market and amount of commerce affected, (3) the SIC codes for these matters, (4) the number of days the matters were open, and (5) the reasons the matters were closed with no action beyond the PI phase.

For the 64 matters that were closed following the PI, 47 (73 percent) of the PIs were initiated as a result of HSR filings. Of the remaining matters, seven resulted from complaints received from the public; four were referred from another federal agency, including two from the Federal Bureau of Investigation (FBI), one from USDA, and one from FTC; two resulted from an investigation of a related matter; and two were self- initiated. In addition, there were two matters for which there appeared to be more than one source for the investigation. Table 9 summarizes how the Division became involved in each of the 64 matters.

Table 10 shows the distribution of these 64 matters by the geographic market and amount of commerce affected. Forty-three (67 percent) of the matters were regional in scope, and the amount of commerce affected was not shown in the closing memorandums in 16 (25 percent) of the 64 matters. Of the 47 matters in which the amount of commerce was known, 12 (25 percent) involved commerce estimated at between $150 million and $499.9 million.

Table 11 shows the breakdown of the primary SIC categories for each of the 64 PIs. As can be seen, food manufacturing is the largest overall category and accounted for 41 of 64 PIs. No other primary industry code had more than 5 PIs.

Table 12 shows the number of days the PI was open for each matter classification for matters closed after staff conducted a PI. According to the Division manual, the normal time period required to conduct a PI ranges from a few weeks to a few months. Table 12 shows that about 66 percent of the matters were closed within 3 months. All of the matters that closed within 3 months were HSR merger matters. The PI for each of the criminal matters lasted more than 6 months.

As can be seen in table 13, 58 (91 percent) of these matters were closed because the Division found insufficient evidence of potential antitrust violations.

Appendix V: Comments From the Department of Justice, Antitrust Division

Appendix VI: GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgments

In addition to those named above, Chan My J. Battcher, Cathy Hurley, Jan Montgomery, Tim Outlaw, Anne Rhodes-Kline, Maria Strudwick, and Bonita Vines made key contributions to this report.