The New U.S. Antitrust Vertical Merger Guidelines: Five Things You Need to Know
July 08, 2020
5 Key Takeaways
1. The guidelines explain and clarify current agency practices and do not signify a policy shift at the agencies.
2. The guidelines recognize that vertical mergers often generate consumer benefits, creating a promising path for companies to secure antitrust clearance.
3. Diagonal mergers and mergers of complements are introduced as new types of mergers to be scrutinized in the United States.
4. The agencies decided not to include a market-share safe harbor, but addressed Dechert’s comments about the role of market concentration and the availability of substitutes.
5. The agencies did not address remedies, as there may continue to be differences between them in this area.
The final Vertical Merger Guidelines issued on June 30, 2020 provide guidance to the business and legal communities on how the Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”) currently analyze the competitive impact of vertical mergers. The new guidelines apply to strictly vertical mergers (combinations of firms or assets at different stages of the same supply chain), “diagonal” mergers (combinations of firms or assets at different stages of competing supply chains), and vertical issues in mergers of complements. The new guidelines are the first joint DOJ and FTC vertical merger guidelines and replace the DOJ’s 1984 Non-Horizontal Merger Guidelines, which have not been relied upon for many years.
1. The guidelines explain and clarify current agency practices and do not signify a policy shift at the agencies.
Although some members of Congress expressed concern about under-enforcement when calling on the FTC and DOJ to formulate the new vertical guidelines,1 the final version of the guidelines does not change policy regarding vertical merger enforcement. Instead, the guidelines are primarily intended to provide greater transparency around the factors the agencies consider in analyzing vertical, diagonal, and complementary mergers, and secondarily, they provide courts with a framework to consider in ruling on litigation challenges to vertical mergers. The factors considered with respect to purely vertical mergers are not revolutionary – they are largely based on existing case law and economic theory, which constrain the ability of the agencies to overreach.
2. The guidelines recognize that vertical mergers often generate consumer benefits, creating a promising path for companies to secure antitrust clearance.
The guidelines recognize that vertical mergers “often benefit consumers,” including through the lowering of input costs (e.g., through the elimination of double marginalization) which enable the merged firm to lower prices. This statement contrasts with the horizontal merger guidelines, which provide a laundry list of reasons why horizontal merger efficiencies “may be viewed with skepticism.” The guidelines acknowledge that while vertical mergers are not “invariably innocuous,” the agencies “more often encounter problematic horizontal mergers than problematic vertical mergers.”
The elevated acknowledgement of consumer benefits in vertical merger analysis provides companies with a more promising path to securing antitrust clearance. Even in vertical mergers where some harm is predicted to competition (e.g., by enabling the merged company to raise the price of inputs required by rivals), the guidelines state the agencies will assess the “likely net effect on competition.” This “net effect” approach in the vertical guidelines is more favorable to merging companies than the horizontal guidelines, which explain that the agencies “will not simply compare the magnitude of cognizable efficiencies with the magnitude of the likely harm to competition absent the efficiencies.”2
The vertical guidelines therefore make it more important for merging companies to fully develop and document their efficiencies analysis. And it is especially important for companies to understand the types of efficiencies most likely to be credited by the agencies under these guidelines, such as the elimination of double marginalization, eliminating contracting friction, and coordinating complementary assets in the supply chain to improve quality and innovation or to reduce costs.
3. Diagonal mergers and mergers of complements are introduced as new types of mergers to be scrutinized in the United States.
Despite the title, the final Vertical Merger Guidelines introduce the concepts of “diagonal” mergers and mergers “of complements” as additional categories of non-horizontal mergers that may be subject to scrutiny. These non-horizontal mergers are not inherently “vertical,” but they have nevertheless found a place within the Vertical Merger Guidelines.
The guidelines define “diagonal” mergers as “those that combine firms or assets at different stages of competing supply chains” and clarify that such mergers are covered by the guidelines and subject to review for competitive concerns.3 Although the theory of harm is not detailed in the guidelines, the agencies illustrated it through an example in which a company acquires control over an input that it does not use in its own products but which is important to its competitors.4
Similarly, the guidelines do not precisely define mergers of complements and instead illustrate the concept through an example in which a company acquires the manufacturer of a product that can be sold as a complement to the buyer’s own products in a way that may disadvantage the merged company’s rivals.5 The agency concerns with these mergers appear to involve bundling or tying theories of harm that could theoretically apply to many conglomerate mergers where the products are complementary.
While the diagonal merger and merger of complements concepts are new to the U.S. antitrust agency lexicon, they appear to have been borrowed from the Merger Assessment Guidelines in the United Kingdom, which introduced similar concepts for assessing certain non-horizontal combinations in 2010.6
For practical purposes, the diagonal mergers concept may be most relevant for high-tech companies and others in quickly evolving markets where traditional forms of merger analysis may not be a clean fit. Both agencies have brought challenges in recent years to mergers aimed at protecting nascent competition and innovators poised to disrupt existing competitive dynamics. One recent example is the Sabre/Farelogix transaction,7 which was brought as a more traditional horizontal case even though it may have fared better as a vertical challenge.8 In the wake of the DOJ’s loss in Sabre/Farelogix, the agencies may increasingly use the diagonal merger concept as a more defined framework for assessing mergers in quickly evolving markets where business combinations defy easy characterizations as horizontal or vertical.
4. The agencies decided not to include a market-share safe harbor, but addressed Dechert’s comments about the role of market concentration and the availability of substitutes.
The final Vertical Merger Guidelines removed a controversial 20 percent quasi-safe harbor threshold that appeared in the January 2020 draft. This deleted provision stated that the agencies are unlikely to challenge a vertical merger when the merging companies’ shares of the relevant market and related product are less than 20 percent. This threshold was criticized by some as too low and others, including State Attorneys General and FTC Commissioners Rohit Chopra and Rebecca Kelly Slaughter, as too high.9
The removal of the 20 percent quasi-safe harbor threshold, however, does not mean that the agencies are more likely to seek enforcement actions when the merging companies’ market shares are below 20 percent. To the contrary, in line with comments submitted by Dechert on the January 2020 draft,10 the guidelines now explicitly acknowledge that a vertical merger would rarely warrant close scrutiny “if rivals could readily switch purchases to alternatives to the related product, including self-supply, without any meaningful effect on the price, quality, or availability of products or services in the relevant market.”11 This statement recognizes the role that market concentration and the availability of substitutes will continue to play when determining which vertical mergers are challenged by the agencies.
The final guidelines also do not rely on specific market concentration thresholds as the basis for determining competitive effects from vertical mergers, but they do add new language stating that high concentration in the relevant market may provide evidence about likely anticompetitive effects in that relevant market. This guidance implies that low concentration in the relevant market is similarly relevant evidence. As a practical matter, case law and economic theory would make it difficult for the agencies to challenge a vertical merger involving low shares or low market concentration in court absent extreme circumstances.
5. The agencies did not address remedies, as there may continue to be differences between them in this area.
The agencies did not issue any new joint policy statement regarding potential remedies for non-horizontal mergers to go along with the new Vertical Merger Guidelines. This silence likely reflects remaining differences between the agencies on acceptable methods for remedying perceived competitive harms.
In recent years, DOJ has maintained a “skepticism of behavioral remedies for vertical mergers” and continues to insist that “parties can still enjoy the benefits and efficiencies of a merger while completely curing the source of vertical harm, rather than relying on a band-aid of behavioral remedies.”12 Although the FTC has also indicated that it “prefers structural remedies to structural problems, even with vertical mergers,” the FTC has been more willing to publicly acknowledge that, in some cases, “a behavioral or conduct remedy [for vertical mergers] can prevent competitive harm while allowing the benefits of integration.”13
Historically, merger guidelines have not addressed remedy issues. Even so, at a time when the agencies have proposed their first joint Vertical Merger Guidelines since the DOJ issued its own Non-Horizontal Merger Guidelines in 1984, it is notable that the agencies were not able to bridge this gap on remedies by issuing a joint policy statement on non-horizontal remedies to provide more clarity in this area.
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For additional practical advice on what to expect in a vertical merger investigation and how you can improve your prospects for a clearance, watch the recent Dechert Antitrust/Competition Group webinar on vertical mergers.
Footnotes
1) See Letter from Senators Klobuchar, Leahy, Blumenthal, Booker, Hirono, Merkley, Baldwin, and Markey to Makan Delrahim (DOJ) and Joseph Simons (FTC), June 18, 2020.
2) See D. Daniel Sokol & James A. Fishkin, Antitrust Merger Efficiencies in the Shadow of the Law, 64 Vanderbilt L. Rev. En Banc 45 (2011), available at http://scholarship.law.ufl.edu/facultypub/324.
3) Vertical Merger Guidelines at 1.
4) Id. at 9-10.
5) Id. at 9.
6) U.K. Merger Assessment Guidelines (CC 2 Revised), paras 5.6.1 and 5.6.2. Instead of the “merger of complements” terminology, the Merger Assessment Guidelines refer to “conglomerate mergers of two suppliers of goods which do not lie within the same market, but which are nevertheless related in some way. . .” Id.
7) United States v. Sabre Corp., Civil Action No. 1:19-cv-01548-LPS (D. Del. Apr. 8, 2020).
8) James Fishkin & Dennis Schmelzer, Dechert LLP, A Vertical Challenge May Have Fared Better in Sabre Merger, Law360 (May 20, 2020), https://www.law360.com/articles/1274859/a-vertical-challenge-may-have-fared-better-in-sabre-merger.
9) Public Comments of 28 State Attorneys General on Draft Vertical Merger Guidelines, DVMG-0056 (Updated) at 14 16 (Feb. 26, 2020); Statement of Commissioner Rebecca Kelly Slaughter on the FTC-DOJ Draft Vertical Merger Guidelines, File No. P810034, at 3 (Jan. 10, 2020); Statement of Commissioner Rohit Chopra Regarding the Request for Comment on Vertical Merger Guidelines, File No. P810034, at 6-7 (Jan. 10, 2020).
10) See Comments of Dechert LLP on the DOJ/FTC Draft Vertical Merger Guidelines, (Feb. 26, 2020) DVMG-0047 at 5 (“… the agencies … should provide more guidance on how concentration levels factor into their vertical merger analysis”), 6 (“What is perhaps implicit, but not explicit, in the Draft Guidelines is that such a strategy by the merged firm would not be effective if those rivals could readily turn to alternative sources of supply for the related products.”), https://media.justice.gov/vod/atr/comments-draft-vmg/dvmg-0047.pdf.
11) Vertical Merger Guidelines at 5.
12) Assistant Attorney General, Merger Enforcement Decisions Under Uncertainty and Imperfect Information (Jun. 7, 2018), https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-deal-s-third-annual-corporate.
13) Acting Bureau Director, Vertical Enforcement at the FTC (Jan. 10, 2018), https://www.ftc.gov/system/files/documents/public_statements/1304213/hoffman_vertical_merger_speech_final.pdf.
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