Originally published by Aerospace & Defense Law360, Competition Law360, Mergers & Acquisitions Law360, Technology Law360
On June 5, 2018, the Federal Trade Commission conditionally approved Northrop Grumman's acquisition of Orbital ATK.1 Northrop Grumman, a missile system provider to the U.S. government, sought to acquire a missile component supplier, Orbital ATK. The Northrop/Orbital ATK merger is a vertical merger — the combination of a supplier and a customer — rather than a horizontal merger that combines two competitors. The FTC conditioned its approval of the transaction on several behavioral remedy commitments, rather than requiring a structural remedy, such as a divestiture.
The transaction is notable because it illustrates that, despite the antitrust authorities' preference for structural remedies, the FTC is willing to consider behavioral or conduct remedies in vertical deals in certain circumstances. The FTC recognizes that vertical mergers, unlike horizontal mergers, do not "reduce competition on their face" because the transaction will not eliminate a competitor.2 In addition to the vertical nature of the Northrop Grumman/Orbital ATK combination, the merger also presented several specific factors that the FTC indicated made a behavioral remedy appropriate in this case. Accordingly, the settlement offers important insights for merging companies seeking to obtain antitrust approval without structural remedy requirements in vertical deals — at least at the FTC. Whether the U.S. Department of Justice in some circumstances would be amenable to merger remedies that are primarily behavioral in vertical deals is yet to be seen.
Northrop Grumman is an aerospace and defense company that provides the U.S. Department of Defense and other U.S. government agencies with missile systems. According to the FTC, these missile systems are "essential" for national defense.3
Orbital ATK develops and supplies solid rocket motors, or SRMs, which provide thrust to propel missiles to their targets. The FTC focused its review on SRMs used in defense systems, although Orbital ATK SRMs are also used in commercial and scientific applications. The FTC characterized the SRMs as an "essential input" to the missile systems offered by both Northrop and Northrop's competitors.
In September 2017, Northrop reached an agreement to acquire Orbital ATK for approximately $7.8 billion.4 The FTC investigated the transaction for over nine months, focusing on the merger's potential impact on the supply of missile systems to the U.S. government for national defense purposes. Specifically, the FTC noted that Northrop was one of only a few competitors capable of competing to provide missile systems to the U.S. government, and that Orbital ATK was one of only two companies providing SRMs for most U.S. missile systems. The FTC also noted that the missile products at issue required technological expertise and specialized facilities that made it difficult for new competitors to enter the market.
Ultimately, the FTC was concerned that, post-merger, the vertically integrated company could disadvantage Northrop's missile system competitors by denying or limiting their access to Orbital ATK SRMs. The FTC alleged that this might in turn force Northrop's competitors to raise prices for missile systems or compete less aggressively to win missile programs.5 Although not directly stated in the FTC's complaint, the FTC also expressed concern that the merger might provide the combined company access to competitors' sensitive confidential information.6 Specifically, the FTC noted that any missile system competitors working with Orbital ATK had to share proprietary information when purchasing SRMs. The FTC stated that, post-merger, Northrop might be able to access this proprietary information through its ownership of Orbital ATK. Similarly, Orbital ATK's competitors share proprietary information with Northrop when working on SRMs for Northrop missile systems, and the FTC was concerned that, post-merger, Orbital ATK might be able to access its competitors' information.
To ameliorate these concerns, the FTC imposed behavioral remedies on the combined company, including provisions requiring:7
- Nondiscrimination. The FTC required the combined company to make Orbital ATK SRM products and services available to missile system competitors on a nondiscriminatory basis. The consent agreement requires the companies to commit to nondiscrimination across a variety of terms, including price, schedule, quality, data, personnel, investment, technology, innovation, design and risk.
- Firewalls. The FTC required the combined company to implement firewalls to ensure that confidential information obtained from competitors could not be misused. Specifically, the company is required to implement firewalls between: (A) the Orbital ATK team offering SRMs to competing missile system providers; and (B) the Northrop team offering missile systems to the United States government using competing SRM providers.
- Compliance Monitor. The settlement set out that the DOD would appoint a compliance officer to oversee the combined company's compliance with the decree. The compliance officer will have the power to investigate any third-party complaints regarding Northrop/Orbital ATK's compliance with the FTC's decree.
- Compliance Program and Reporting. The FTC required the merging parties to implement a compliance program and create regular compliance reports, to be submitted to the FTC, the DOD and the compliance officer.
The FTC's consent decree has a term of 20 years. Although this is longer than the FTC's typical merger decree time period (typically 10 years), the FTC has imposed 20-year terms in other merger consents where the remedy is primarily behavioral in nature.8
In a departure from typical procedure, FTC Bureau of Competition Deputy Director Ian Conner published a statement on the merger and settlement.9 (Normally, the commission or individual commissioners issue statements on FTC actions.) The deputy director touted the cooperation between the FTC and DOD in the merger investigation. The deputy director also reiterated that, despite the settlement, the FTC still "disfavors behavioral remedies," except in "rare cases."
The FTC and the DOJ Antitrust Division have long stated a preference for structural remedies, rather than behavioral or conduct conditions, to resolve certain competition concerns. Nevertheless, in many cases involving vertical mergers, both the FTC and the DOJ have accepted behavioral remedies.
Recent public statements raised questions as to whether the FTC or DOJ might now be unwilling to consider behavioral remedies even for vertical mergers.10 The FTC's decree in this transaction shows that under certain circumstances — as described in the statement published by Conner — the FTC may be willing to consider behavioral remedies in vertical cases.11
Characteristics specific to the relevant industry — here, the defense industry — may have encouraged the FTC to be more willing to accept behavioral remedies.
The FTC noted several unique features of the relevant industry at issue in Northrop/Orbital ATK — national defense — which may have lead the FTC to be more willing to accept behavioral remedies.
The national defense industry is unique in that there is only one buyer — the United States government. The FTC specifically noted that the federal government purchases the missile products at issue and frequently funds research and development in the area.12 The presence of a powerful customer has been noted by the authorities as a force that may be able to constrain any post-merger attempts to increase prices.13 Here, the fact that the combined company would be competing for the business of a single buyer that appears to have supported the transaction likely made the FTC more willing to accept behavioral conditions, as compared to a merger that implicated a market with many smaller buyers.
Additionally, Conner also cited the long history of imposing conduct remedies to resolve potential concerns associated with defense industry mergers as a factor weighing in favor of imposing behavioral remedies in this case. In particular, he cited the FTC's review of a proposed joint venture between Boeing Corp. and Lockheed Martin in 200614 and the DOJ's review of Northrop Grumman's 2002 acquisition of TRW Inc.15 Both cases were resolved with behavioral remedies similar to those in the Northrop/Orbital ATK deal, which focused on preventing the merging parties from discriminating against competitors. This history provided "ample precedent" for accepting behavioral remedies in the present case.16
The DOD involvement in the merger review and decree enforcement process may have caused the FTC to be more willing to consider a conduct remedy.
The involvement of the Department of Defense as a "specialist" agency may have also weighed in favor of behavioral remedies in this case. Not only did the DOJ work closely with the FTC in evaluating the merger,17 but the settlement also anticipates that the Department of Defense will be engaged in oversight and enforcement of the decree.18 The DOJ and FTC have both criticized conduct remedies as potentially involving the antitrust authorities in a "regulatory" role of monitoring conduct and compliance.19 With the involvement of the Department of Defense in the selection of a compliance officer to monitor the parties' ongoing adherence to the decree, the FTC may have been more willing to accept behavioral remedies.
Merger efficiencies remain critical for FTC review.
Finally, the recent settlement highlights that merger efficiencies remain an important factor for the FTC when it evaluates the potential competitive effect of a merger. Vertical mergers in general often offer significant efficiencies — the FTC has noted that "the majority of vertical mergers are beneficial because they reduce costs and increase the intensity of interbrand competition."20 In this case, it appears that the vertical combination of Northrop and Orbital ATK presented significant efficiencies. For example, the deputy director noted that the DOD expected "substantial benefits from the merger, including increased competition for future programs and lower costs."21 This factor may have encouraged the FTC to consider behavioral remedies. For example, conduct remedies can be an "effective option when a structural remedy would eliminate the merger's potential efficiencies."22 Indeed, the deputy director noted that the behavioral remedies accepted still "preserv[ed] procompetitive benefits" of the merger.23
The FTC's approval of the Northrop/Orbital ATK merger shows that, despite recent policy announcements and a long-standing preference for structural remedies, the FTC is still willing to consider behavioral remedies to resolve potential concerns associated with vertical mergers.
1 Press Release, FTC Imposes Conditions on Northrop Grumman's Acquisition of Solid Rocket Motor Supplier Orbital ATK Inc., June 5, 2018, available at https://www.ftc.gov/news-events/press-releases/2018/06/ftc-imposes-conditions-northrop-grummans-acquisition-solid-rocket (hereinafter Northrop/Orbital ATK Press Release).
2 D. Bruce Hoffman, Acting Director, Bureau of Competition, Vertical Merger Enforcement at the FTC, Credit Suisse 2018 Washington Perspectives Conference (Jan. 10, 2018), available at https://www.ftc.gov/system/files/documents/public_statements/1304213/hoffman_vertical_merger_speech_final.pdf (hereinafter Hoffman, Vertical Merger Enforcement).
3 Complaint, at 2, In the Matter of Northrop Grumman Corp. and Orbital ATK, Inc., FTC No. C-4652 (June 5, 2018), available at https://www.ftc.gov/system/files/documents/cases/1810005_c-4652_northrop_grumman_orbital_complaint_6-5-18.pdf (hereinafter Northrop/Orbital ATK Complaint).
4 Northrop/Orbital ATK Complaint.
6 Analysis to Aid Public Comment, at 3, In the Matter of Northrop Grumman Corp. and Orbital ATK Inc., FTC No. C-4652 (June 5, 2018), available at https://www.ftc.gov/system/files/documents/cases/1810005_northrop_grumman_orbital_analysis_6-5-18.pdf (hereinafter Northrop/Orbital ATK Analysis to Aid Public Comment).
7 Decision and Order, In the Matter of Northrop Grumman Corp. and Orbital ATK Inc., FTC No. C-4652 (June 5, 2018), available at https://www.ftc.gov/system/files/documents/cases/1810005_c-4652_northrop_grumman_orbital_decision_and_order_public_version_6-5-18.pdf (hereinafter Northrop/Orbital ATK Decision and Order).
8 See, e.g., Decision and Order, In the Matter of PepsiCo Inc., FTC No. C-4301 (Sept. 27, 2010), available at https://www.ftc.gov/sites/default/files/documents/cases/2010/09/100928pepscodo.pdf; Decision and Order, In the Matter of The Coca-Cola Co., FTC No. C-4305 (Nov. 3, 2010), available at https://www.ftc.gov/sites/default/files/documents/cases/2010/11/101105cocacolado.pdf.
9 Statement of Bureau of Competition Deputy Director Ian Conner on the Commission's Consent Order in the Acquisition of Orbital ATK Inc. by Northrop Grumman Corp., File No. 181-0005, available at https://www.ftc.gov/system/files/documents/cases/1810005_northrop_bureau_statement_6-5-18.pdf (hereinafter Northrop/Orbital ATK Statement).
10 For example, then Bureau of Competition Acting Director Bruce Hoffman announced in January, 2018 that "no one should be surprised if the FTC requires structural relief" in some vertical transactions. Hoffman, Vertical Merger Enforcement. DOJ officials have made similar statements in recent months. See, e.g., Andrew C. Finch, Principal Deputy Assistant Attorney Gen., Dep't of Justice, Trump's Antitrust Policy After One Year, Remarks at the Heritage Foundation (Jan. 23, 2018) available at https://www.justice.gov/opa/speech/principal-deputy-assistant-attorney-general-andrew-c-finch-delivers-remarks-heritage; Makan Delrahim, Assistant Attorney Gen., Dep't of Justice, Remarks at the Antitrust Division's Second Roundtable on Competition and Deregulation (Apr. 26, 2018) available at https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-antitrust-divisions-second.
11 Generally, the settlement appears consistent with the FTC's past practice. For example, it is largely similar to conditions imposed on another vertical merger in late 2017, the combination of Broadcom Limited and Brocade Communication Systems. Analysis to Aid Public Comment, In the Matter of Broadcom Limited and Brocade Communication Systems, Inc., No. 171-0027 (July 3, 2017), available at https://www.ftc.gov/system/files/documents/cases/1710027_broadcom_brocade_analysis.pdf.
12 Northrop/Orbital ATK Complaint, at 2.
13 Horizontal Merger Guidelines, Department of Justice and Federal Trade Commission (Aug. 19, 2010), available at https://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf.
14 In the Matter of Lockheed Martin Corp., The Boeing Co., and United Launch Alliance LLC, FTC No. 0510165 (May 8, 2007), available at https://www.ftc.gov/enforcement/cases-proceedings/0510165/lockheed-martin-corporation-boeing-company-united-launch.
15 US v. Northrop Grumman Corp. and TRW Inc., 1:02-cv-02432 (D.D.C. June 10, 2003), available at https://www.justice.gov/atr/case/us-v-northrop-grumman-corp-and-trw-inc.
16 Northrop/Orbital ATK Statement.
18 Northrop/Orbital ATK Decision, at VII. As noted above, the FTC also required the combined company to submit compliance reports to both the FTC and the DOD. Id.
19 Hoffman, Vertical Merger Enforcement ("If those won't work — or will be too difficult and problematic for us to be confident that they will work without an excessive commitment of FTC resources where we are effectively turned into a regulator — then there should be no surprise if we seek to block the merger"); Andrew C. Finch, Principal Deputy Assistant Attorney Gen., Dep't of Justice, Trump's Antitrust Policy After One Year, Remarks at the Heritage Foundation (Jan. 23, 2018) available at https://www.justice.gov/opa/speech/principal-deputy-assistant-attorney-general-andrew-c-finch-delivers-remarks-heritage ("because behavioral conditions are fundamentally regulatory, imposing ongoing government oversight on what should preferably be a free market.").
20 Hoffman, Vertical Merger Enforcement.
21 Northrop/Orbital ATK Statement.
22 Antitrust Division Policy Guide to Merger Remedies, at 7, U.S. Department of Justice, June 2011, available at https://www.justice.gov/sites/default/files/atr/legacy/2011/06/17/272350.pdf.
23 Northrop/Orbital ATK Statement.