FTC withdraws 2020 vertical merger guidelines. Will DOJ follow suit?

The vote was 3-2, with Chair Lina Khan joined by her Democratic peers Rohit Chopra and Rebecca Kelly Slaughter voting in favor. Republicans Noah Joshua Phillips and Christine Wilson voted no. The Commission had telegraphed its intention to withdraw the guidelines when it released its meeting agenda last week.

The 2020 guidelines “identified several harms that can arise from non-horizontal mergers, including the potential for foreclosure, raising rivals’ costs, increased entry barriers, and misuse of competitively sensitive information,” wrote Khan, Chopra, and Slaughter in a majority opinion. The FTC will re-examine how those potential harms could affect mergers between digital-only companies, as well as the labor market.

Vertical mergers between digital-only companies received little attention in the guidelines, the commissioners said, despite their huge share of the market. The effects of vertical mergers on the labor market received no attention at all.

Phillips and Wilson lambasted the agency’s decision in their dissent: “FTC leadership continues the disturbing trend of pulling the rug out under from honest businesses and the lawyers who advise them, with no explanation and no sound basis of which we are aware.” The decision will chill pro-competitive mergers and hurt consumers, they said, and they criticized the Democratic majority as “preferring unchecked regulatory power over guidance.”

In June 2020, the FTC, then under Republican control, approved new vertical merger guidelines in conjunction with the Department of Justice’s (DOJ) Antitrust Division that replaced what both parties agreed was outdated guidance dating back to 1984. The FTC later that year issued commentary on vertical mergers that was also withdrawn Wednesday.

The agency noted in a press release it is working with the DOJ to review and update the guidance.

Richard Powers, acting head of the Antitrust Division, issued a statement after the vote saying the 2020 guidelines “remain in place” at the DOJ, but the division has “already identified several aspects of the guidelines that deserve close scrutiny, and we will work closely with the FTC to update them as appropriate.”

Vertical mergers typically occur between a company and a vendor, such as a cell phone manufacturer and a company that manufactures chips the cell phone manufacturer purchases. They are markedly different from horizontal mergers, where one company buys a competitor. Vertical mergers have long been viewed in antitrust law as benign, buttressed by underlying economic theories that such mergers benefit the market through lower prices and increased efficiency.

Democrats at the FTC, though, have been openly skeptical of that rosy take, said Jeny Maier, partner with D.C.-based firm Axinn.

“I think the majority of the Commission believes the descriptions of competitive harm (in the guidelines) are good but incomplete,” Maier said. “They are skeptical of the efficiency arguments, and they take an expansive view of potential harms from vertical mergers.”

While the FTC and other federal agencies have regularly objected to horizontal mergers on anticompetitive and antitrust grounds, objections to vertical mergers have been rare. In March, the FTC filed its first lawsuit in decades challenging a vertical merger when it issued an administrative complaint to block Illumina’s $7.1 billion proposed acquisition of Grail, a maker of an early detection liquid biopsy test that can screen for multiple types of cancer in asymptomatic patients at very early stages using DNA sequencing.

Maier said businesses contemplating vertical mergers can expect much more scrutiny by the FTC against arguments they are pro-competitive or efficiency-enhancing.

“There is a significant skepticism among a majority of the commissioners that vertical mergers are benign or good, and that has been their mantra for several years,” she said. She expects the FTC and DOJ will still rely on the 2020 guidelines to inform much of their analysis of vertical mergers, but Wednesday’s action gives the FTC, at least, the opportunity to remove some parts and add to others.