The Department of Justice and the Federal Trade Commission this month issued a joint statement reaffirming the importance of preserving competition in the defense industry. 

The antitrust agencies are responsible for reviewing mergers in the defense industry under Section 7 of the Clayton Act, which prohibits mergers whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” Recently, however, the Department of Defense (DoD) has threatened to seek legislation to expand its role in the review of defense industry mergers.

The threat of legislation may have prompted the statement, which outlined the antitrust agencies’ framework for analyzing mergers and acquisitions in the defense industry. The agencies further stressed that they work closely with the DoD, “which is in a unique position to assess the impact of proposed defense industry consolidation on its ability to fulfill its mission,” the Justice Department said.

“Apparently, the statement was effective, as reportedly DoD has withdrawn its legislative proposal,” noted a Jones Day client alert. “But notwithstanding this skirmish, the antitrust agencies traditionally have consulted closely with DOD in their investigations of defense industry transactions.”

In fact, according to the joint statement, the agencies “rely on DoD’s expertise, often as the only purchaser, to evaluate the potential competitive impact of mergers, teaming agreements, and other joint business arrangements between firms in the defense industry.” When assessing proposed consolidation in this sector, the overriding goal in enforcing antitrust laws is to maintain competition going forward for the products and services purchased by DoD, the joint statement said.

The agencies analyze mergers based on the framework set forth in its Horizontal Merger Guidelines, whose unifying theme is that mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise. “A merger can produce these harmful outcomes if it is likely to enhance the ability of one or more firms to raise price, lower output, reduce innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives,” the joint statement stated.

The guidelines “reflect the congressional intent [in Section 7 of the Clayton Act] that merger enforcement should interdict competitive problems in their incipiency and that certainty about the anticompetitive effect is seldom possible and not required for a merger to be illegal.”

The guidelines are necessarily general, as they apply to all industries. They are also sufficiently flexible to address DoD concerns that reductions in current or future competitors can adversely affect competition in the defense industry and thus, national security.

In the joint statement, the agencies further emphasized that the particular aspects of the defense industry—such as high barriers to entry, the importance of investment in research and development and the need for surge capacity—can be central to reviewing defense industry mergers and acquisitions. “In light of our substantial experience applying the guidelines to defense industry mergers and acquisitions, the agencies are able to focus on issues that are central to, and often dispositive in, assessing the competitive effects of such mergers,” the joint statement states.

The joint statement also states that defense industry mergers should not adversely affect short or long-term innovation and must maintain a sufficient number of competitors, including both prime and subcontractors, to ensure that competition for current, planned and future procurement remains robust. 

As part of an investigation, the agencies said they will consider any procompetitive aspects of a proposed transaction, including economies of scale, decreased production costs, and enhanced R&D capabilities. “However, if a transaction threatens to harm innovation, reduce the number of competitive options needed by DoD, or otherwise lessen competition, and therefore has the potential to adversely affect our national security, the agencies will not hesitate to take appropriate enforcement action, including a suit to block the transaction,” the joint statement stated.

“Defense industry firms should recognize that this interagency debate likely foreshadows greater scrutiny of defense industry transactions from both DoD and the antitrust agencies,” the Jones Day client alert stated. “The antitrust agencies’ focus on more nebulous innovation and R&D markets will reassure DoD that the antitrust agencies can be relied on to protect DoD’s policy concerns.”