On 15 September 2021 the Federal Trade Commission (FTC) held its third open meeting under the leadership of Chair Lina Khan. As expected, the Commissioners voted along party lines to rescind the Vertical Merger Guidelines (2020 VMGs) that were jointly issued by the FTC and Department of Justice (DOJ) (the Agencies) in June 2020. Shortly after the conclusion of the open meeting, Acting Assistant Attorney General Richard Powers released a statement acknowledging the FTC’s decision, and noting that the DOJ is in the process of conducting a “careful review” of both the 2020 VMGs and the 2010 Horizontal Merger Guidelines “to ensure they are appropriately skeptical of harmful mergers.” Until that review process is complete and any updates to the guidelines are officially made, the 2020 VMGs will remain at place at DOJ.

Republican Commissioners Christine Wilson and Noah Phillips dissented to the FTC’s decision to rescind the 2020 VMGs before a revised version has been approved to take their place. And while DOJ has announced that it intends to “work closely with the FTC to update [the 2020 VMGs] as appropriate,” the fact that DOJ has not agreed to officially rescind the 2020 VMGs adds considerable uncertainty for merging parties regarding how the two agencies may diverge in their assessment of proposed vertical mergers.

Decision to Reconsider 2020 VMGs

The Agencies issued the 2020 VMGs1 on 30 June 2020 to replace the 1984 Non-Horizontal Merger Guidelines that had long been recognized as outdated.2 According to Makan Delrahim (Assistant Attorney General for the DOJ Antitrust Division at the time), the update was intended to “give greater predictability and clarity to the business community, the bar, and enforcers” with respect to the Agencies’ process for reviewing vertical mergers. In a joint press release, the Agencies stated that the 2020 VMGs were drafted to avoid “unnecessary interference with mergers that either are competitively beneficial or likely will have no competitive impact on the marketplace."3 The 2020 VMGs apply to strictly vertical mergers as well as "diagonal" mergers and also identify vertical issues that can arise in mergers of complements. They provide that the Agencies will specify one or more "related products"4 if a potential competitive concern is identified in a relevant market. In addition, the 2020 VMGs indicate that the Agencies will consider efficiencies resulting from the merger that may benefit competition, including the elimination of double marginalization (EDM), streamlined production, inventory management or distribution, and increased innovation. The 2020 VMGs do not enumerate a specific market share resulting from a vertical merger that is likely to raise competitive concerns. Instead, the guidelines note that while the Agencies do not rely on thresholds "as screens for or indicators of competitive effects from vertical theories of harm," they will consider "high concentration in the relevant market [as potential] evidence about the likelihood, durability, or scope of anticompetitive effects in the relevant market."

Critique of 2020 VMGs from Democratic FTC Commissioners and Biden Administration

The vote to approve the 2020 VMGs in June 2020 fell along party lines, with Democratic Commissioners Rohit Chopra and Rebecca Slaughter issuing dissenting statements. Chopra criticized the guidelines for failing to adequately address the harms that may result from vertical mergers, including "the many ways that vertical transactions may suppress new entry or otherwise present barriers to entry."5 Commissioner Slaughter took issue with what she perceived to be the guidelines' "failure to disavow the false assertion that vertical mergers are almost always procompetitive,"6 and criticized the guidelines for emphasizing the benefits of vertical mergers, failing to identify merger characteristics that are most likely to be problematic, providing favorable treatment of EDM, and omitting important competition concerns including buy-side power, regulatory evasion, and remedies.

On 9 July 2021, in response to President Biden’s Executive Order on Promoting Competition in the American Economy (which included a recommendation that the Agencies “review the horizontal and vertical merger guidelines and consider whether to revise those guidelines” in order to address “consolidation of industry in many markets across the economy . . .”)7 Chair Khan and Acting Assistant AG Powers released a joint statement in which they committed to launching a joint review to determine whether the current merger guidelines are overly permissive “with the goal of updating them to reflect a rigorous analytical approach consistent with applicable law.”8

FTC Commissioners Vote along Party Lines to Rescind 2020 VMGs

At the FTC’s 15 September 2021 open meeting, Chair Khan, Commissioner Chopra, and Commissioner Slaughter voted in favor of rescinding the 2020 VMGs, with Commissioners Phillips and Wilson voting to oppose their withdrawal. Chair Khan opened the discussion by noting what she perceives to be “serious deficiencies” in the guidance, including the “improper[] suggest[ion]” that “efficiencies may rescue an otherwise unlawful transaction.”

Statement of FTC Majority in Favor of Rescinding 2020 VMGs

In a statement9 released following the hearing, the majority acknowledges that while the 2020 VMGs substantially improved upon the 1984 guidelines by addressing relevant issues such as raising rivals’ costs, foreclosure, and misuse of competitively sensitive information, their “flawed discussion of the purported procompetitive benefits (i.e. efficiencies) of vertical mergers merits the guidelines’ immediate withdrawal” to avoid the courts citing them and creating precedent that will be “difficult to correct.” Specifically, the majority criticizes the 2020 VMGs’ devotion of an entire section to a discussion of efficiencies, arguing that this contravenes the text of the Clayton Act, which prohibits mergers that “may” substantially lessen competition, but does not contain explicit exceptions for mergers that may lessen competition but create efficiencies. The majority argues that the 2020 VMGs erroneously interpret the statute as allowing for an “efficient” merger to be approved even if it may lessen competition. The majority was especially critical of the 2020 VMGs’ contention that EDM “often” results in vertical mergers benefitting consumers.” The majority called the 2020 VMGs’ reliance on EDM “theoretically and factually misplaced,” arguing that it is inappropriate for the analysis of “whether a transaction may lead to a substantial lessening of competition to assume that EDM is likely to exist.”

The majority’s statement also provides an overview of what it considers to be the FTC’s priorities as it determines what guidance should replace the 2020 VMGs. One such priority will be to assess potential market structure-based presumptions for non-horizontal mergers and identify objective factors that presumptively indicate that a merger is likely to reduce competition in an effort to “focus judicial attention on readily observable market characteristics . . .” The majority consider the development and implementation of market structure screens (that are used to assess horizontal mergers) to be imperative in allowing the agency to provide “clear and administrable guidance on the characteristics of [vertical] transactions that are likely unlawful.” The majority will assess the prevalent harms that may result from vertical mergers, and will look to provide guidance on how the FTC will analyze a merger’s impact on labor markets. The agency will also evaluate past remedy practices in order to determine which remedies are most effective. The review will also focus on characteristic features of firms in the modern economy, including in digital markets.

Statement of Commissioners Wilson and Phillips in Opposition to Rescinding 2020 VMGs

In dissent, Republican Commissioners Wilson and Phillips argue that the majority’s decision will “sow[] confusion regarding the legality of vertical mergers” and “threatens to chill legitimate merger activity and undermine attempts to rebuild our economy in the wake of the pandemic.” Wilson and Phillips criticize the majority’s decision to rescind the 2020 VMGs on both substantive and procedural basis. Substantively, the Republican Commissioners argued that vertical mergers do not directly eliminate competition—as they combine firms that are in a buyer-seller relationship, and “are not mergers of competitors.” Noting that the Clayton Act prohibits only those mergers that may “substantially . . . lessen competition, Wilson and Phillips argue that vertical mergers are more likely to improve efficiency, bolster competition, and benefit consumers. The minority cite EDM as one “immediate and positive effect of a vertical merger,” that leads to lowered manufacturing costs and lower prices, and benefits consumers. They also argue that the 2020 VMGs effectively outline the ways that certain vertical mergers may harm competition and describe “the framework that the FTC and DOJ have developed, over decades of experience, to analyze both the anti- and procompetitive effects of vertical mergers.” The minority claim that courts have found that “procompetitive effects may render a competition-eliminating merger procompetitive on the whole” and that “a successful efficiency defense, i.e., that the proposed’ merger’s efficiencies would likely offset the merger’s potential harm to consumers, is sufficient to save a merger.” The minority also criticize the decision to remove the 2020 VMGs with no public input, minimal notice, and without providing any new guidance, arguing that the decision will create uncertainty that is “particularly pernicious” and “threatens to slow unnecessarily the American economy’s recovery [from the pandemic] by denying law-abiding businesses the guidance they need to know what actions are permissible as they try to respond to supply shortages.”

Conclusion

The FTC’s decision to rescind the 2020 VMGs without clear guidance as to what will replace them leaves questions about how the agency will assess vertical mergers until new guidelines are adopted. And the Chair’s statements about efficiencies raises questions about the current Commission’s views about the viability of long-standing efficiencies defenses. The FTC’s decision also creates potential substantive differences between merger reviews at the antitrust agencies and could make it difficult for courts to know whether they should rely on the 2020 VMGs in their decisions. While Commissioner Slaughter qualified her vote to rescind the 2020 VMGs by expressing concern that there was not yet a replacement to fill this gap, she confirmed that the agency would not be “returning to the 1984 [vertical merger] guidance, and that the Commission “will be guided by the law expressed in statute and jurisprudence as they investigate these transactions.” This statement further exacerbates the uncertainty that merging parties face if their transaction is reviewed by the FTC rather than DOJ and raises the risk of merger clearance for vertical transactions going forward.