The Federal Trade Commission and the Department of Justice’s Antitrust Division have jointly issued long-awaited draft guidelines concerning vertical mergers and are now seeking public comment.
The draft guidelines, which were issued Friday and replace the antiquated 1984 Non-Horizontal Merger Guidelines, describe how federal antitrust agencies review vertical mergers to evaluate whether they violate antitrust law. “The guidelines are intended to assist the business community and antitrust practitioners by providing transparency about the agencies’ antitrust enforcement policy with respect to vertical mergers,” the FTC said.
Vertical mergers combine two or more companies that operate at different levels in the same supply chain. “Challenging anti-competitive vertical mergers is essential to vigorous enforcement,” said FTC Chairman Joseph Simons. “The agencies’ vertical merger policy has evolved substantially since the issuance of the 1984 Non-Horizontal Merger Guidelines, and our guidelines should reflect the current enforcement approach.”
“Greater transparency about the complex issues surrounding vertical mergers will benefit the business community, practitioners, and the courts,” Simons added. “We invite comments from all stakeholders to help ensure that the guidelines clearly and accurately convey the agencies’ antitrust enforcement policy with respect to vertical mergers.”
The draft guidelines follow a November 2018 FTC hearing held at Georgetown University Law Center on vertical mergers. That hearing resulted in hundreds of written comments, including 15 specifically addressed to vertical merger policy. Reports from the American Bar Association’s Antitrust Section and the Antitrust Modernization Commission have also called for additional and updated guidance on the analysis of vertical mergers.
What the guidelines say
The draft guidelines adopt the principles and analytical frameworks in the agencies’ Horizontal Merger Guidelines, including market definition, the analytic framework for evaluating entry considerations, the treatment of the acquisition of a failing firm or its assets, and the acquisition of a partial ownership interest. The draft guidelines describe the analytical and enforcement considerations that are specific to vertical mergers.
The draft guidelines:
- Describe potential anti-competitive effects resulting from vertical mergers, which may include both unilateral and coordinated effects;
- Identify foreclosure and raising rivals’ costs and access to competitively sensitive information as potential elements of antitrust harm under unilateral effects;
- Describe an analytic framework for analyzing potential anticompetitive effects of foreclosure and raising rivals’ costs;
- Discuss how the elimination of double marginalization may mitigate or completely neutralize the potential anticompetitive effects of vertical mergers;
- Discuss cognizable merger efficiencies that are specific to vertical mergers; and
- Provide several examples to supply more clarity about the agencies’ analytical methods in evaluating vertical mergers.
Compliance sticking points
“While many vertical mergers are competitively beneficial or neutral, both the Department and the Federal Trade Commission have recognized for over 25 years that some vertical transactions can raise serious concern,” said Assistant Attorney General Makan Delrahim of the Department of Justice’s Antitrust Division. “The revised draft guidelines are based on new economic understandings and the agencies’ experience over the past several decades and better reflect the agencies’ actual practice in evaluating proposed vertical mergers.”
“Greater transparency about the complex issues surrounding vertical mergers will benefit the business community, practitioners, and the courts. We invite comments from all stakeholders to help ensure that the guidelines clearly and accurately convey the agencies’ antitrust enforcement policy with respect to vertical mergers.”
Joseph Simons, Chairman, FTC
Under the draft guidelines, vertical mergers could be deemed harmful if evidence showed it would help the buyer raise costs for competitors, shut rivals out of markets, or access sensitive information that would give it a competitive edge. As Compliance Week previously reported, however, standards the agencies are looking to codify with these new draft guidelines include some of the very factors the Antitrust Division used in trying to block the merger between AT&T and Time Warner.
The deal was considered a vertical merger, because it brought together, in broad terms, a supplier and distributor. A federal judge in June 2018 ultimately approved AT&T’s $85 billion acquisition of Time Warner. In his June opinion, Judge Richard Leon of the U.S. District Court for the District of Columbia rejected the government’s notion the deal was a violation of antitrust law.
The Commission vote to publish the draft Vertical Merger Guidelines and solicit public comments was 3-0-2, with Commissioners Rebecca Kelly Slaughter and Rohit Chopra abstaining. In a concurring statement issued on the vertical merger guidelines, Commissioner Christine Wilson invited public comment in the following specific areas:
- Elimination of Double Marginalization (EDM): Should we align our treatment of EDM more closely with the economic literature, which recognizes both its significant benefits and the many reasons that these benefits may not be achieved by contract?
- Symmetry: Relatedly, given their close correlation, should we assess both procompetitive merger effects (EDM) and anti-competitive merger effects (raising rivals costs) symmetrically, including the extent to which they are merger-specific?
- Safe harbor: Given that vertical mergers are often procompetitive, should we limit the area of antitrust concern to oligopoly markets, and therefore should the Guidelines establish a definitive safe harbor when a merger involves only relatively unconcentrated markets? And, if a safe harbor is appropriate, at what threshold should it apply?
- Market definition: When defining markets, should we continue to define two relevant product markets (one upstream, one downstream), or should we adopt the looser requirement to define one relevant product market and identify a “related product?”
- De minimis effects: What magnitude of anticompetitive effects should we view as de minimis, considering EDM and likely vertical efficiencies?
However, not all the FTC commissioners were in agreement. The agency’s two Democratic commissioners both said that, while they’re in favor of updating the vertical merger guidelines, they would not support the proposal as written. Commissioner Slaughter said in a statement her “biggest concern” is the guidelines include “what amounts to a safe harbor indicating that the agencies are ‘unlikely to challenge a vertical merger where the parties to the merger have a share in the relevant market of less than 20 percent, and the related product is used in less than 20 percent of the relevant market.’”
Slaughter added: “My apprehensions about this language are three-fold: setting a safe harbor generally; the choice of 20 percent market share for the safe harbor; and the lack of a corresponding presumption of harm, or at a minimum close scrutiny, for mergers involving highly concentrated markets.”
Commissioner Chopra also issued a statement, saying the guidelines “fall short in providing an analytical framework that adequately reflects today’s real-world business environment.” Chopra cited three specific concerns: that the draft guidelines are “not supported by an analysis of how competition has fared under the approach of the last several decades”; “continue to perpetuate an overdependence on theoretical model”; and “do not account for all of the ways that existing dominance can be used to choke off market entry or distort competition.”
The agencies will review and consider the public comments before issuing final Vertical Merger Guidelines. Comments on the draft guidelines can be submitted to VMG Comments and must be received no later than Feb. 11.
“Once finalized, the Vertical Merger Guidelines will provide more clarity and transparency on how we review vertical transactions,” Delrahim said. “I look forward to receiving comments on these draft guidelines and working with the Federal Trade Commission in finalizing them.”