The Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released updated Vertical Merger Guidelines for public comment, withdrawing the previous guidelines issued in 1984. Comments for the new guidelines are due by February 11, 2020.
For the first time since 1984, the FTC and DOJ have released draft Vertical Merger Guidelines for public comment (2020 Guidelines), which will withdraw and supersede the 1984 DOJ Non-Horizontal Merger Guidelines. The stated purpose of the 2020 Guidelines is to:
Increase the transparency of the agencies' analytical processes and enforcement decisions for the benefit of the business community and antitrust practitioners.
Help the courts develop framework for applying antitrust laws to vertical merger cases.
The agencies stated that the Vertical Merger Guidelines should be read in conjunction with the 2010 Horizontal Merger Guidelines (HMG), particularly with respect to the beginning sections that apply to both vertical and horizontal mergers and are not included in the 2020 Guidelines, including:
The goals of merger enforcement.
Analytic framework for evaluating market entry.
How the agencies treat an acquisition of:
a failing firm or its assets; and
partial ownership interest.
Market Definition and Related Products
The agencies will use Sections 4.1 and 4.2 of the HMG to define the relevant market for vertical mergers. Once a relevant market is determined, the agencies will specify one or more related products that is:
Supplied by the merged firm.
Vertically related to the products and services in the relevant market.
Of importance to the merged firms' rivals so that access to the product affects competition in the market.
Market Participants, Market Shares, and Market Concentration
The agencies will use Sections 5.1, 5.2, and 5.3 of the HMG to evaluate market shares and concentration in the relevant market as part of the overarching evaluation of competitive effects of a merger. For vertical theories of harm, the agencies will not use changes in market concentration as a screen or test for competitive effects.
Other aspects of competitive effects the agencies may consider include the competitive significance of related products, including what share of the relevant market's output uses the related product. A smaller share may indicate that the merger may be less likely to have a substantial effect on competition in the market. The agencies are not likely to challenge a merger where both:
The parties' share of the relevant market is less than 20%.
The related product is used in less than 20% of the market.
However, a merger with shares below those thresholds may still raise competitive concerns if, for example, the related product is relatively new with a growing share of use in the market. Conversely, a merger with shares exceeding those thresholds will not automatically support an inference that the merger will likely substantially lessen competition; the agencies will use the threshold to identify the mergers for which it is important to examine other factors of competition and competitive effects.
Evidence of Adverse Competitive Effects
The agencies will consider all reasonably available and reliable evidence in evaluating the competitive effects of a vertical merger, including the types of evidence listed in Section 2.1 of the HMG, such as:
Actual effects of consummated mergers.
Direct comparisons, from experience.
Evidence of a merging party's disruptive role.
Other evidence the agencies may consider includes:
Pre-existing contractual relationships.
Market shares and concentration in relevant markets and related products.
Head-to-head competition between one merging firm and the rivals that trade with the other merging firm.
Sources of evidence are the same as those listed in the HMG, including:
Merging parties' documents and statements.
Merging parties' customers.
Other industry participants and observers.
The agencies look for, among others, two common types of unilateral effects arising from vertical mergers, including:
Foreclosure and raising rivals' costs.
Access to competitively sensitive information.
Foreclosure and Raising Rivals' Costs
In evaluating a proposed merger's likelihood of causing unilateral harm to competition through foreclosure or raising rivals' costs, the agencies will consider whether:
Foreclosure or raising costs would cause a rival to lose sales or compete less aggressively for business.
The merged firm's business in the relevant market would benefit from the rival's lost sales.
The foreclosure or raised costs would be profitable for the merged firm, but would not have been profitable before the merger.
The magnitude of the foreclosure or raised costs is not de minimus and substantially lessens competition.
If all of the above conditions are met, the proposed merger may raise significant competitive concerns.
Access to Competitively Sensitive Information
A vertical merger may give the combined firm access to its pre-merger upstream or downstream rivals' competitively sensitive information if, for example, one merged firm was the upstream supplier of the other merged firm's downstream rival. Access to this kind of information may:
Allow the merged firm to make a less competitive response to its rival's competitive actions, which may temper the rival's procompetitive actions.
Deter the rival from doing business with the merged firm, which may lead the rival to be a less effective competitor if they must use less preferable trading partners instead.
Elimination of Double Marginalization
The agencies stated that they will not challenge a vertical merger if the elimination of double marginalization (EDM) will result in the merger being unlikely to have an anticompetitive effect in any relevant market. EDM refers to the effect of reducing the markups from two separate companies in a supply chain to a single markup if those companies merge.
The agencies stated that, as explained in Section 7.1 of the HMG, the agencies are more likely to challenge a merger on the basis of coordinated effects when:
The relevant market seems vulnerable to coordinated conduct.
There is a credible basis for the agencies to find that the merger could increase that vulnerability. Evidence the agencies use for evaluating a market's vulnerability to coordination can be found in Section 7.2 of the HMG.
Theories of harm from a market vulnerable to coordination include, but are not limited to:
Eliminating or injuring a maverick firm that would otherwise be an important deterrent to anticompetitive coordination in the relevant market.
When changes to the market structure or the merged firm's access to confidential information allows for:
market participants to enter tacit agreements;
detecting violations of those agreements; or
punishing cheating firms.
The agencies will use Section 10 of the HMG to evaluate potential efficiencies of vertical mergers, and will not challenge a merger of the efficiencies render the merger unlikely to be anticompetitive in the relevant market.
The FTC vote to release the 2020 Guidelines for public comment was 3-0-2, with Commissioners Chopra and Slaughter abstaining.
Commissioner Wilson issued a statement concurring with the decision to release the 2020 Guidelines draft. Commissioner Wilson stated that the 2020 Guidelines:
Are the result of commentators' almost unanimous request for updated guidelines during the 2018 Hearings on Competition and Consumer Protection in the 21st Century.
Will explain and formalize existing agency practices with respect to vertical mergers, which will promote transparent enforcement.
Commissioner Wilson urged the interested and impacted parties to submit input before the 2020 Guidelines are finalized.
Commissioner Chopra abstained from the vote to release the 2020 Guidelines, stating that though the 1984 Non-Horizontal Merger Guidelines are outdated and should be rescinded, the 2020 Guidelines are inadequate because they:
Are not supported by analysis of past enforcement actions.
Place too much importance on theoretical models.
Do not account for every way competition can be harmed.
Commissioner Chopra believes the new guidelines should better reflect modern economic realities by requiring enforcers to be:
More thorough in assessing a firm's dominance.
Realistic in predicting how a merger will impact the firm's incentives and opportunities to leverage market power.
Mindful of the wide range of harm vertical mergers might cause.
Commissioner Slaughter stated that though she also agrees that the 1984 Non-Horizontal Merger Guidelines should be rescinded and replaced, she has substantive concerns about the 2020 Guidelines in their current form. Commissioner Slaughter's primary concerns are that the 2020 Guidelines:
Effectively create a safe harbor for mergers falling under the 20% thresholds. Commissioner Slaughter's was concerned:
with the setting of a safe harbor generally;
with the choice of 20% as the threshold; and
that there was no corresponding threshold over which harm would be presumed.
Are a major departure from the mandate under Section 7 of the Clayton Act to stop anticompetitive mergers at their incipiency and suggest a high degree of certainty of anticompetitive harm for enforcement.
Commissioner Slaughter was also concerned that the 2020 Guidelines did not emphasize the potential harm vertical mergers might cause by:
Removing a particularly well-positioned entrant.
Failing to mention evading regulatory scrutiny as a theory of harm.
Not explicitly providing the agencies enough flexibility to enforcement strategies based on research, learnings, and retrospectives.
Both Commissioners Chopra and Slaughter urged interested parties to submit input before the 2020 Guidelines are finalized.
Comments on the proposed 2020 Guidelines are due to [email protected] by February 11, 2020.