On January 10, 2020, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released draft guidelines outlining the framework that the US antitrust authorities will use to analyze vertical mergers. (Draft Vertical Merger Guidelines).1 The Draft Vertical Merger Guidelines are intended to supplant the 1984 DOJ Non-Horizontal Merger Guidelines,2 which did not reflect the actual analysis used by the DOJ and FTC in recent years. Simultaneously, the agencies officially withdrew the 1984 Guidelines.3 The agencies have announced a 30-day comment period for the Draft Vertical Merger Guidelines.

The Draft Vertical Merger Guidelines echo current agency practice and are consistent with the past speeches by FTC and DOJ officials,4 but they do not offer as much guidance and detail as the 2010 Horizontal Merger Guidelines. Moreover, two FTC Commissioners dissented from the decision to issue these draft guidelines,5 signaling the potential for dissents to the final version of the guidelines. However, the final guidelines will reflect the views of a majority of the Commission as to the agencies' analytical approach to vertical mergers and thus almost certainly will be followed by staff. Any dissents to the final version likely suggest that those Commissioners may also dissent as to the resolution of vertical transactions6 and the guidelines could be withdrawn if the composition of the Commission changes (or there is new leadership at DOJ).

The Draft Vertical Merger Guidelines Echo Agency Practice and Recent Agency Leadership Statements

The draft vertical guidelines "should be read in conjunction with the Horizontal Merger Guidelines" and offer "principles and analytical frameworks" to analyze vertical mergers.7 A transaction is characterized as vertical when the merging firms operate at different levels of the supply chain. A common vertical scenario is found when one company produces a product used as an input to make the other company's product. As the guidelines set forth, the agencies will first identify relevant markets in which the merger might lessen competition, assessing the parties’ market shares and overall concentration in the impacted markets. The authorities will assess any evidence that the transaction might cause adverse competitive effects in the impacted markets, and weigh this potential harm against any procompetitive benefit of the deal.

In assessing the impact on competition, the Draft Vertical Guidelines articulate what case law and US antitrust enforcement have long reflected—that vertical mergers typically present less risk of potential competitive harm than do transactions between competitors (i.e., horizontal mergers), and because vertical transactions "combine complementary economic functions and eliminate contracting frictions, they have the potential to create cognizable efficiencies that benefit competition."8 The guidelines also offer a discussion of potential benefits associated with the elimination of double marginalization. As the Draft Vertical Merger Guidelines note:

Elimination of double marginalization can occur when two vertically related firms that individually charge a profit-maximizing margin on their products choose to merge. Absent the merger, the downstream merging firm would ignore any benefit to the upstream merging firm from setting a lower downstream price and making higher sales. But if the two merge, the resulting firm will benefit from both margins on any additional sales, and capturing the upstream margin, through merger, may make the price reduction profitable even though it would not have been profitable prior to the merger. Elimination of double marginalization may thus benefit both the merged firm and buyers of the downstream product or service.9

At the same time, the Draft Vertical Merger Guidelines outline three theories of potential anticompetitive harms that the US authorities have long considered: (1) whether the newly combined entity would have the ability and incentive to disadvantage a rival company by withholding or increasing the price of an input or distribution channel; (2) whether the combined firm could gain access to sensitive business information about an upstream or downstream competitor; and (3) whether the transaction is likely to increase the risk of coordination and diminish competition.10 These potential concerns are largely consistent with the authorities' existing investigative focus and have formed the basis of recent vertical enforcement efforts. The potential concerns included in the new Guidelines include:

  • Foreclosure. DOJ raised concerns regarding Anheuser-Busch InBev's ability to foreclose rivals' beer distribution via its 2016 acquisition of SABMiller plc and prohibited the combined company from discouraging independent distributors from working with rivals.11 Similarly, in the 2011 Comcast acquisition of NBC Universal, Inc., DOJ prohibited Comcast from employing certain restrictive content licensing terms and mandated that Comcast submit to binding arbitration regarding distributors' access to NBC content.12 FTC expressed similar concerns in its review of a 2007 joint venture between Boeing and Lockheed Martin, requiring the joint venture to provide launch services to competing space vehicle providers on a non-discriminatory basis.13
  • Access to Confidential Information. Concerns regarding access to or exchange of confidential information were raised in Broadcom Limited's 2017 acquisition of Brocade Communication Systems, Inc,14 where FTC required the combined company to create firewalls to prevent Brocade from accessing confidential information of Broadcom's other major customer. In GrafTech's 2011 acquisition of Seadrift Coke, DOJ imposed firewalls and restrictions on the company's contracting practices to ensure that Seadrift could not access the confidential information of GrafTech's other significant supplier.15
  • Less Competition Due to Coordination. In 2017, DOJ filed a complaint alleging that Danone's acquisition of WhiteWave would give the combined company an incentive to coordinate with a WhiteWave competitor that had a partnership with Danone.16 The transaction effectively brought together White Wave and that competitor, the top purchasers of raw organic milk and the producers of the leading brands of fluid organic milk. DOJ required the combined company to divest a brand, severing the Danone supply/licensing agreement.

Another way in which the Draft Vertical Merger Guidelines remain consistent with existing practice is by closely hewing to the approach of the Horizontal Merger Guidelines. The Draft Vertical Merger Guidelines specifically discuss employing the analytical tools of the Horizontal Merger Guidelines and make clear that the Draft Vertical Merger Guidelines "should be read in conjunction with the Horizontal Merger Guidelines" and that the "principles and analytical frameworks used to assess horizontal mergers apply to vertical mergers."17

Notably, one theory of harm identified in the 1984 Guidelines—that a vertical merger might allow a public utility to circumvent rate regulation18—is not included in the new Guidelines.19

A Number of Open Questions Remain:

The Draft Vertical Merger Guidelines leave open some important issues relating to the analysis of vertical transactions, including:

  • 20% Market Share "Presumption"? The Draft Vertical Merger Guidelines state that the FTC and DOJ are unlikely to challenge a vertical merger where the market share of the relevant products is less than 20%. The "unlikely" language is less definitive than "absent extraordinary circumstances" language seen in other agency guidance.20 Moreover, the 20% market share standard is significantly less forgiving than: (1) the European Union vertical merger guidelines, which offer a safe harbor at a 30% share;21 (2) US Supreme Court precedent indicating that exclusive dealing at a 30% share does not raise Sherman Act Section 1 problems;22 and (3) US case law in vertical cases reflecting the view that market power is unlikely to exist for companies with less than a 30% share.23 Notably, the 1984 Guidelines implied that supply foreclosure concerns could not present a problem in a vertical merger involving an upstream supplier with less than a 33% market share.24 Further, the 20% threshold appears to be significantly lower than the shares held by companies in vertical mergers that have been challenged by the authorities in the past, which have tended to implicate "highly concentrated" markets.25
  • Remedies. FTC Commissioner Wilson, in an early 2019 speech, highlighted her desire for vertical guidelines that cover potential remedies,26 but the Vertical Merger Guidelines are silent on the question of potential remedies to address issues created by vertical mergers. Thus, an important question that the Draft Vertical Guidelines leave unanswered is whether, and under what circumstances, the authorities might be willing to consider behavioral or conduct remedies for transactions that implicate vertical issues.27
  • Double Marginalization. The Vertical Merger Guidelines anticipate that the authorities will evaluate the "net effect" of a transaction, taking into account both potential price incentive changes as well as the potential benefits associated with the elimination of double marginalization.28 The agencies note that they: "will not challenge a merger if the net effect of elimination of double marginalization means that the merger is unlikely to be anticompetitive in any relevant market."29 In her concurring statement, FTC Commissioner Christine Wilson sought comments on a number of other questions related to double marginalization, including a query as to whether or not the authorities should expect that the procompetitive benefit of eliminating double marginalization will be obtained as often as the potential anticompetitive effect associated with raising a rival's cost.30
  • Innovation Effects. Over the last several years some commentators and agency representatives have voiced concerns that antitrust enforcement was not sufficiently protecting and encouraging innovation.31 Although the Vertical Merger Guidelines reference the potential impact of vertical foreclosure on competitor innovation, the Guidelines do not delve into the topic in detail. This omission is notable, as the potential impact of vertical mergers on industry innovation has been raised recently by agency leadership32 and past merger enforcement has noted potential concerns associated with the impact of vertical transaction on innovation and entry.33

What to Expect Next

There is now a thirty-day period, ending on February 11, 2020, during which comments on the draft guidelines can be submitted by members of the public. While the final guidelines may reflect some changes based on the comments, unless those changes are significant it seems unlikely that the final guidelines will garner the unanimous support of the FTC Commissioners.

Footnotes

1. Draft Vertical Merger Guidelines (Jan. 10, 2020), {hereinafter 2020 Draft Vertical Merger Guidelines}.

2. 1984 Non-Horizontal Merger Guidelines.

3. 2020 Draft Vertical Merger Guidelines, at 1, n.1 ("These Guidelines supersede the extant portions of the Department of Justice's 1984 Merger Guidelines, which are now withdrawn and superseded in their entirety").

4. See Antitrust Division Deputy Assistant Attorney General Jon Sallet, American Bar Association Fall Forum, The Interesting Case of the Vertical Merger  (Nov. 17, 2016) {hereinafter Sallet, The Interesting Case}; Acting Director, FTC Bureau of Competition, Credit Suisse 2018 Washington Perspectives Conference, Washington, D.C., Vertical Merger Enforcement at the FTC (Jan. 10, 2018) {hereinafter Hoffman, Vertical Merger Enforcement}.

5.  Specifically, Commissioner Slaughter expressed two primary concerns:  first, she disagreed with the "effective safe harbor" for transactions with a less than 20% market share, and second, she expressed concern that the guidelines suggest an unduly high degree of certainty is required before bringing an enforcement action.  Statement of Commissioner Rebecca Kelly Slaughter, FTC-DOJ Draft Vertical Merger Guidelines (Jan. 10, 2020),.  Commissioner Chopra expressed concerns that the guidelines are too dependent on theoretical models and do not take into account the Commissioner's view of the current day economy, which he argues is characterized by "increasing concentration" and "declining new firm formation."  Statement of Commissioner Rohit Chopra, Regarding the Request for Comment on Vertical Merger Guidelines (Jan. 10, 2020).

6. The dissenting Commissioners also dissented to the FTC resolution of the Staples acquisition of Essendant and the Fresenius acquisition of NxStage over vertical issues.  See, e.g., Statement of Commissioner Rohit Chopra, In the Matter of Sycamore Partners, Staples, and Essendant, 181-0181 (Jan. 28, 2019); Statement of Commissioner Rebecca Kelly Slaughter, In the Matter of Sycamore Partners, Staples, and Essendant, 181-0181 (Jan. 28, 2019); Dissenting Statement of Commissioner Rebecca Kelly Slaughter, In the Matter of Fresenius Medical Care AG, et al, 171-0227 (Feb. 19, 2019); Dissenting Statement of Commissioner Rohit Chopra, In the Matter of Fresenius Medical Care AG, et al, 171-0227 (Feb. 19, 2019).

7. 2020 Draft Vertical Merger Guidelines, at 1.

8. 2020 Draft Vertical Merger Guidelines, at 9; Accord Sallet, The Interesting Case ("And here it's worth emphasizing that vertical integration can create significant efficiencies that benefit suppliers, distributors, and consumers alike."); Hoffman, Vertical Merger Enforcement ("In contrast, vertical mergers do not combine substitutes, and in fact often involve complements, such as a product plus distribution or a critical input to a complex device. Where horizontal mergers reduce competition on their face—though that reduction could be minimal or more than offset by benefits—vertical mergers do not.").

9. Id. at 7, 9.

10. Id.

11. Complaint, US v. Anheuser-Busch InBEV SA/NV, et al., 1:16-cv-01483 (D.D.C. July 20, 2016).

12. Complaint, US, et al. v Comcast, et al., 1:11-cv-00106 (D.D.C. Jan. 18, 2011).

13. In the Matter of The Boeing Company, et al., No. 051-0165 (May 1, 2007).  See also Complaint, In the Matter of General Electric Company, No.131-0069 (Aug. 27, 2013).

14. Complaint, In the Matter of Broadcom Limited, et al, No. 171-0027 (Aug. 17, 2017).; see also, Similarly, in PepsiCo, Inc.'s 2010 acquisition of two independent bottling companies, the FTC imposed firewalls to prohibit Pepsi employees from accessing a competitor's confidential information through the bottling companies.  Complaint, In the Matter of PepsiCo, Inc., No.091-0133 (Sept. 27, 2010).

15. Complaint, US v. Graftech International Ltd, et al., 1:10-cv-02039 (D.D.C. Nov. 29, 2010).

16. Complaint, US v. Danone S.A. et al., 1:17-cv-00592 (D.D.C. April 3, 2017).

17. 2020 Draft Vertical Merger Guidelines, at 1.

18. 1984 Non-Horizontal Merger Guidelines, at 30.

19. See, e.g., Statement of Commissioner Rebecca Kelly Slaughter, at 4, FTC-DOJ Draft Vertical Merger Guidelines (Jan. 10, 2020).

20. See, e.g., DOJ and FTC Horizontal Merger Guidelines, at 5.3 (Aug. 19, 2010); DOJ and FTC Statements of Antitrust Enforcement Policy in Health Care (Aug. 1996), ("The Agencies will not challenge, absent extraordinary circumstances, any joint purchasing arrangement among health care providers where two conditions are present: (1) the purchases account for less than 35 percent of the total sales of the purchased product or service in the relevant market...").

21. Guidelines on the Assessment of Non-Horizontal Mergers Under the Council Regulation on the Control of Concentrations Between Undertakings, Official Journal of the European Union (2008/C 265/07) ("The Commission is unlikely to find concern in non-horizontal mergers, be it of a coordinated or of a non-coordinated nature, where the market share post-merger of the new entity in each of the markets concerned is below 30 % and the post-merger HHI is below 2,000....").

22. Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984).

23. Sterling Merchandising, Inc. v. Nestle, S.A., 656 F.3d 112, 123-24 (1st Cir. 2011) ("foreclosure levels are unlikely to be of concern where they are less than 30 or 40 percent..."); Valley Prods. Co. v.  Landmark, 128 F.3d 398, 402 n.3 (6th Cir. 1997) ("30 percent market share is insufficient to confer . . . market power"); United States v. Microsoft Corp., 87 F. Supp. 2d 30, 52-53 (D.D.C. 2000) (foreclosure rate closer to 40 percent is required).

24. See 1984 Non-Horizontal Merger Guidelines, at 27.

25. See, e.g., Complaint, In the Matter of Broadcom Limited, et al, No. 171-0027 (Aug. 17, 2017); Complaint, In the Matter of The Coca-Cola Company, 101-0107 (Nov. 3, 2010); Complaint, In the Matter of PepsiCo, Inc., No.091-0133 (Sept. 27, 2010).

26. Commissioner Christine Wilson, U.S. Federal Trade Commission, GCR Live, 8th Annual Antitrust Law Leaders Forum, Vertical Merger Policy: What Do We Know and Where Do We Go? (Feb. 1, 2019).

27. The authorities have long been clear that structural remedies (such as divestitures) are preferred, but both FTC and DOJ have been willing to accept behavioral or conduct remedies in vertical transactions.  In recent years DOJ has express significant skepticism of conduct remedies by DOJ, while the FTC continues to express some openness to such remedies.  See Kaela Cote-Stemmermann, Behavioral Remedies Okay for Vertical Mergers, Says Hoffman, GCR (Nov. 16, 2018).

28. 2020 Draft Vertical Merger Guidelines, at 4

29. Id. at 7.

30. Concurring Statement of Christine S. Wilson, Publication of FTC-DOJ Draft Vertical Merger Guidelines for Public Comment (Jan. 10, 2010).  See also Commissioner, Christine S. Wilson, Federal Trade Commission, There's Nothing New Under the Sun: Why Professor Roger Blair of the University of Florida Is Still Right About Vertical Integration (Nov. 1, 2019).

31. See, e.g., Jeffrey Wilder, Acting Deputy Assistant Att'y Gen.,  Remarks at the Hal White Antitrust Conference (June 10, 2019); Peter J. Levitas et al.,  Antitrust Scrutiny of High-Tech: What Does It Really Mean?, Arnold & Porter (Aug. 15, 2019).

32. Sallet, The Interesting Case ("That added an important layer of analysis that sometimes arises in vertical transactions:  we look not only at existing products and distribution systems but at how innovation and disruption are changing them to consumers' benefit.").

33. For example, DOJ expressed concerns that Comcast's acquisition of NBC might impact nascent video distribution competition from online video distributors.   Complaint, US, et al. v Comcast, et al., 1:11-cv-00106 (D.D.C. Jan. 18, 2011).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.