In light of increased consolidation in the defense industry, the US Department of Justice (DoJ) and the Federal Trade Commission (FTC) released a joint statement on Tuesday, April 12, 2016, to explain their standard of review under the antitrust statutes for proposed transactions within the industry. The Joint Statement also merits consideration with respect to contractor teaming and other joint business arrangements.

Key Points from the Joint Statement

The DoJ and the FTC are the two federal agencies responsible for reviewing mergers in the defense industry under Section 7 of the Clayton Act, which prohibits mergers where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”

Their joint statement notes that "[m]any sectors of the defense industry are already highly concentrated. Others appear to be on a similar trajectory." They reaffirmed their vigilance in cooperation with the US Department of Defense (DoD) to ensure that this consolidation does not make it harder for DoD to acquire needed equipment and services at competitive prices in both current and future procurements. To that end, the statement emphasized the agencies’ focus on “short- and long-term innovation” and noted that the Clayton Act’s “incipiency standard” calls for stepping in even when anticompetitive effects are not certain.

DoJ and FTC explain that they analyze defense industry mergers under the 2010 Horizontal Merger Guidelines, which they described as "sufficiently flexible" to address the particular characteristics of the defense industry, including high barriers to entry, R&D investment, a need for surge capacity, and a skilled workforce. The agencies state that their goal in enforcing the antitrust laws is to maintain competition for the products and services purchased by DoD, and also note the need to promote “robust” competition at both the prime and subcontractor levels of the government procurement process.

Throughout their joint statement, DoJ and FTC reiterate that, as they have done in the past, they will “rely on DoD’s expertise, often as the only purchaser, to evaluate the potential competitive impact of mergers, teaming agreements, and other joint business arrangements between firms in the defense industry.”

Consolidation’s Impact on Competition Has Been a Concern Before

A similar concern about competition in the defense industry was raised in the late 1990s after a period of consolidation that restructured the industry at the behest of DoD.

In 1993, Secretary of Defense Les Aspin initiated a “bottom-up review” of the defense industry that determined the industry needed to be restructured. Deputy Secretary of Defense William J. Perry explained to assembled industry leaders, at what has come to be referred to as the “Last Supper,” that DoD would encourage consolidation. A massive reorganization took place throughout the rest of the decade, transforming the defense industry.

However, in 1998, DoD reversed course as concerns arose over the impact of consolidation on competition. Then, DoD urged the Department of Justice to reject the proposed merger of Lockheed Martin and Northrop and the General Dynamics’ proposed acquisition of Newport News Shipbuilding.

Team Arrangements were a Focus of the Earlier Attention, and Might Be Again

Concern over consolidation and competition is not limited to mergers, and the joint statement also refers to potential effects on competition of team arrangements and other joint business arrangements. Contractors frequently forge these more limited alliances to compete on defense contracts, and attention to the potential competitive effects of team arrangements is not new. One reason for this attention is that competition for large procurements generally is team versus team, and not just company versus company. This is because many procurements require the combination of a variety of complementary capabilities in order to satisfy a broad range of requirements.

On January 5, 1999, Under Secretary of Defense for Acquisition and Technology Jacques S. Gansler issued a policy aimed at heightening the scrutiny of team arrangements and joint ventures in an attempt to ensure adequate industry competition. Noting that the government’s preference is to allow private companies to form teams and subcontract without government involvement, Gansler pointed out that circumstances might require intervention to assure adequate competition.

One concern to DoD was that exclusive team arrangements might cause inadequate competition. A revision to the Defense Federal Acquisition Regulation Supplement was proposed to add exclusive team arrangements to the list of practices that might be evidence of a violation of the antitrust laws; however, the rule was withdrawn as a result of numerous comments and the fact that many team arrangements are pro-competitive. Although forming teams might appear to reduce the number of competitors, the recognized reality is that collaborating and combining forces can produce a credible competitor in situations where individual companies would not be able to compete. The benefits of collaborative efforts among companies have been noted by the DoJ and the FTC. In their joint 2000 Antitrust Guidelines For Collaborations Among Competitors (the Guidelines) the federal antitrust agencies explain how they compare potential benefits against potential harms to competition in several kinds of collaborations, including R&D, production, and marketing joint ventures. The exclusivity of the arrangement is one factor considered by the federal antitrust agencies.

In the defense industry, exclusivity in team arrangements is common to justify greater investments in programs, which can result in potentially reduced costs and bid prices by reducing uncertainty about the commitment of the parties and their respective returns on investment. In addition, exclusive arrangements help address concerns when competitive or technical sensitive information must be shared before and during the program. Such benefits are among the factors that the federal antitrust agencies consider when analyzing competitor collaborations pursuant to the Guidelines. Other factors include the extent to which the participants and the collaboration itself have the ability and incentive to compete independently, the extent to which the collaboration confers or enjoys control over key assets or capabilities, and the duration of the collaboration and the ability and incentive of parties to compete after it winds up. In assessing the exclusivity’s competitive effect, the Guidelines note that the antitrust agencies take account of any procompetitive benefits of exclusivity and the agencies consider whether significant “sunk investments” were made in reliance on the exclusivity.

The joint statement is a reminder to contractors of the need to consider the potential effects on competition as they contemplate exclusive team arrangements in connection with the pursuit of government contracts.