M. Sean Royall is a Partner with Kirkland & Ellis LLP and the WLF Legal Pulse’s Featured Expert Contributor, Antitrust & Competition Policy – Federal Trade Commission. Richard H. Cunningham is a Partner with the firm, and Miata Eggerly is an Associate with the firm.
On January 10, 2020, the Federal Trade Commission and Department of Justice’s Antitrust Division (“the agencies”) announced proposed draft Vertical Merger Guidelines (“VMGs”) for public comment. With the release of the VMGs, the agencies simultaneously announced withdrawal of the 1984 DOJ Non-Horizontal Merger Guidelines, which were widely considered outdated and incongruous with the current Horizontal Merger Guidelines formally adopted in 2010. In our view, the draft VMGs memorialize and reflect current agency practice vis-à-vis vertical transactions, rather than announce new standards of review or theories of harm.
The Draft VMGs Reflect Existing Agency Practice and Recent Enforcement Activity
In recent merger challenges the agencies focused on three concerns, each reflected in the VMGs:
- Foreclosure and Raising Rivals’ Costs. When assessing transactions involving vertically related parties, the agencies will consider to what extent the merged firm has the incentive to prevent downstream competitors from obtaining key inputs, including by raising the cost of obtaining such inputs for downstream competitors. The DOJ previously explored this theory of harm in the AT&T/Time Warner case, where the DOJ argued that AT&T would have the post-acquisition incentive and ability to charge higher rates for Time Warner programming sold to other companies that compete with AT&T’s DirecTV business as a result of the AT&T/Time Warner combination.
- Access to Competitively Sensitive Information. The agencies will consider whether a vertical transaction provides the combined firm with access to sensitive business information about upstream or downstream rivals that was not available before the merger, and to what extent the merged firm will be able to use that information to the detriment of competition. The FTC previously explored informational harm in Staples/Essendant and Northrup Grumman/Orbital ATK observing that where the transaction could result in the merged firm gaining access to competitively sensitive information, such as a competitor’s pricing, the transaction could lead to a decrease in competition. In these cases, the FTC required a firewall to limit access to competitively sensitive information.
- Facilitation of Collusion. The agencies will consider whether a vertical deal may facilitate the ability of either the upstream or downstream entity to coordinate with rivals on post-merger price or output.
The VMGs make clear that these theories will remain the core of vertical merger analysis and that the agencies’ evaluations will be highly deal- and fact-specific. See VMGs at 4-7.
Clarification on Agency Policy and Practice
In addition to memorializing the focus on the three issues discussed above, the VMGs clarify several important points with respect to agency policy and practice:
- A Safe Harbor. The VMGs state that the agencies “are unlikely to challenge a vertical merger” where the parties’ combined market shares in each of the upstream and downstream markets are less than 20%. See VMGs at 3. Although these thresholds are low, a safe harbor will provide parties with a measure of certainty when it applies. And because the threshold is low, the agencies will likely continue to clear deals where the upstream and downstream shares exceed the threshold by a significant margin.
- Acknowledgement of Efficiencies. The VMGs explicitly recognize that vertical mergers often result in merger-specific efficiencies, including the elimination of double marginalization, which often incentivizes the merged firm to reduce prices and expand output downstream. See VMGs at 7. The VMGs (unsurprisingly) place the burden on the merging parties to identify and quantify any deal-related efficiencies, including through empirical and documentary evidence, which reflects long-standing agency practice and is consistent with the efficiencies section of the Horizontal Merger Guidelines.
- A Contemporary Approach to Future/Potential Competition. The 1984 Non-Horizontal Guidelines asserted that competitive harms can result from the acquisition of another firm that is a potential entrant into a market the other party currently participates in. In contrast, the draft VMGs are silent with regard to this theory. Given the recent commentary and enforcement activity involving nascent, future, and potential competition merger harm theories, we view this omission as reflecting the agencies re-categorizing such theories as falling within the rubric of horizontal merger analysis. The current Horizontal Merger Guidelines already include numerous statements directed at such theories. See, e.g., Horizontal Merger Guidelines at 2.1.5 (discussing the “loss” of “potential competition”).
The period for public comment on the VMGs ended on February 26, 2020, and it will be interesting to see what changes, if any, the agencies incorporate into the draft in response to the comments received and any obtained via the public workshops scheduled for March 11 and 18, 2020.