Key Takeaways
- The failing firm defense can save an otherwise anticompetitive merger if the target faces imminent failure, cannot reorganize in bankruptcy, and made good-faith efforts to find a less anticompetitive buyer.
- The search for an alternative buyer willing to pay at least liquidation value is often the hardest element to prove.
- The weaker flailing firm argument, that a target's market share overstates its future strength, is one factor courts and agencies may weigh but is rarely decisive on its own.
If a company is about to go under, should antitrust law stop its biggest competitor from buying it? Or is a merger better than letting the company's assets disappear from the market?
In this TalksOnLaw Brief, Joel Cohen talks with Julie Elmer, a partner in the antitrust and litigation practices at Freshfields and a former trial lawyer in the Justice Department's Antitrust Division, about the failing firm defense and its cousin, the flailing firm argument.
Why the Defense Exists
Elmer explains that the failing firm defense can allow a merger that might otherwise be deemed anticompetitive, often between direct competitors. The rationale is that it is better for a firm's assets to stay in the market through a merger than to exit altogether, which would mean lower output and higher prices, the very effects antitrust law aims to prevent. The federal agencies review mergers of a certain size under the Hart-Scott-Rodino Act and clear most of them, but the Federal Trade Commission or the Justice Department can sue in federal court to block a deal. Merging parties can raise the defense in court and also use it to persuade the agencies not to sue in the first place.
The Three Elements
The test is tough. The parties must show that the target faces a grave probability of imminent failure, that it cannot reorganize under Chapter 11 of the Bankruptcy Code, and that it made good-faith efforts to find an alternative purchaser willing to pay at or above liquidation value who would be less harmful to competition. Elmer says the third prong hangs up firms the most, because many have never actually shopped the company that way. An attractive price does not by itself show the target is healthy, she notes, since a buyer may pay more to eliminate a competitor. But if the target holds objectively valuable assets, agencies and courts tend to be skeptical, because the firm could likely improve its management, raise capital, or find another buyer.
The Flailing Firm Argument
The related flailing firm argument says that a target's current market share overstates its competitive strength going forward. If the government counts a combined 65 percent share, the parties argue that the target's 25 percent is really heading toward 5. Evidence of falling shares, lost customers, inability to invest in infrastructure or research, and worsening financial results over several quarters can help, and the argument carries more weight alongside other factors such as new entry, efficiencies, or proposed remedies. Elmer adds that in FTC v. Peabody Energy, the court rejected the idea that general decline in an industry justifies an anticompetitive merger.
What to Know Now
The standards Elmer describes remain in force. The 2023 Merger Guidelines, which the FTC and Justice Department confirmed in 2025 would continue to guide merger enforcement, retain the same three failing firm elements. Courts still apply them strictly, although in 2024 a federal district court in North Carolina declined to block Novant Health's purchase of two struggling hospitals, giving weight to their financial condition, before the Fourth Circuit temporarily enjoined the deal and the parties abandoned it. Elmer's practical advice still holds: assess critically whether the high bar can be met, hire financial experts to evaluate restructuring options and run a real sale process, and remember that agencies will review marketing documents, investor statements, and even executives' tweets that tout the company's health.
