On May 31, 2007, the Antitrust Division of the Department of Justice (DOJ) announced a consent decree allowing biotech pioneer Monsanto to buy America’s largest cottonseed grower, Delta & Pine Land. Eight years earlier the parties had failed to win DOJ’s approval for essentially the same merger. This result is noteworthy for high technology and pharmaceutical companies because the consent decree involves significant structural and licensing remedies to prevent foreclosure of Monsanto’s rivals from introducing their own rival biotechnology in the downstream marketplace dominated by Delta. The settlement is also particularly noteworthy both because DOJ rarely concerns itself with vertical issues and because the consent decree takes the unusual step of divesting to one buyer Monsanto’s downstream business as well as part of Delta’s competing downstream business, while requiring the parties to divest the remainder of Delta’s business to a separate buyer.
Monsanto is a leading licensor to seed companies of genetically modified traits, such as herbicide tolerance and insect resistance, subject to patent and other proprietary rights. A trait is incorporated (or multiple traits are “stacked”) into specific seed “lines,” the varieties of germplasm developed through selective breeding to improve quality, disease resistance, yield, and climate suitability. In the MidSouth and Southeast, Delta’s cottonseed germplasm is of such desirable quality that the company has a dominant (79 percent and 87 percent, respectively) share of sales to farmers. Monsanto’s own cottonseed company, Stoneville, is a distant second (17 percent and 8 percent, respectively).
Monsanto is several years ahead of its biotech rivals in placing its genetic traits for cottonseed into commercial production and obtaining lucrative payments from farmers. More than 96 percent of all traited cottonseeds sold in the United States, including Delta’s and Stoneville’s, contain one or more Monsanto inventions, i.e., its Roundup Ready herbicide tolerance trait, its Bollgard insect resistance trait, and/or second generation refinements of these traits. Prior to the Delta merger announcement, however, Delta was also cooperating with several of Monsanto’s GM rivals to enable them to commercialize their traits in Delta elite germplasm. For several years Monsanto rival Syngenta worked with Delta to incorporate Syngenta’s VipCot insect resistance trait into lines of Delta cottonseeds that would be ready for marketing as traited seeds by 2009. Similarly, in 2006 DuPont entered into a joint venture with Delta aimed at commercializing DuPont’s Optimum GAT herbicide tolerance trait in Delta seeds by 2010.
Because the merger eliminated head-to-head competition between Delta and Stoneville for cottonseed sales to farmers and because in that downstream business entry barriers are high and post-merger concentration would be extremely high (well over 90 percent), the consent decree required Monsanto to divest Stoneville. The decree also mandated that Stoneville receive a license for Monsanto’s present and future cottonseed traits on reasonable terms as favorable as Delta had received from Monsanto prior to the merger. These divestiture and licensing remedies are standard fare, designed to reinstate horizontal competition in a form that will persist. The rest of the decree, however, is unusual and precedent-setting.
The DOJ was concerned that Monsanto’s downstream vertical integration with a cottonseed company as competitively significant as Delta would diminish opportunities for other trait developers to incorporate their innovations in the germplasm varieties most demanded by farmers and would lead to fewer choices and higher prices for traited cottonseed than would be the case absent the merger. Monsanto’s biotech rivals needed an alternative “platform” or “partner” to replace Delta. Given the many years and large investment it would take to establish a rival platform of elite cottonseed germplasm varieties, trait developers could not simply start their own cottonseed breeding companies from scratch. Nor could they buy or joint venture with small growers to create a competitively adequate alternative platform.
Rather than sue to enjoin the merger because of these vertical effects, the DOJ crafted a decree requiring additional divestitures and licensing provisions to help create an alternative platform formed around the divested Stoneville business.
- First, the decree required that Stonebridge’s assets be “enhanced” by certain assets currently held by Delta: 20 lines of conventional germplasm suitable for the MidSouth and Southeast.
- Second, Monsanto was required to further enhance Stoneville by divesting to Stoneville’s buyer additional cottonseed germplasm and molecular technology that had been developed separate from Stoneville at Monsanto.
- Third, Monsanto was required to include in the enhanced business being divested certain rights to use the output of a germplasm breeding program Monsanto had developed with small independent cottonseed growers separate and apart from Stoneville.
- Fourth, to ensure a prompt and fully compliant divestiture of the enhanced Stoneville, the decree made clear that Monsanto would be required to rapidly sell off the “crown jewel” it had acquired, namely Delta itself, if Monsanto failed to timely divest the Enhanced Stoneville Assets.
As it happened, Monsanto did timely divest the Enhanced Stoneville Assets to Bayer CropScience.
The decree addressed several other vertical concerns. Prior to the merger, Delta served as a platform partner for inserting Syngenta’s VipCot insect resistance trait into 43 elite Delta cottonseed germplasm varieties that would eventually be commercialized. Given that a Monsanto-owned Delta would have no incentive to foster competition against parent Monsanto’s Bollgard traits, the merger would have the effect of blocking or at least delaying Syngenta’s most promising route to market. Consequently, the decree obliged Monsanto to offer Syngenta, working alone or in conjunction with a partner of Syngenta’s choice, the right to acquire and complete these 43 seed lines for commercialization, including stacking the VipCot trait and cross-breeding to develop additional lines.
Finally, the decree sought to ensure platform/partner opportunities for Monsanto’s rival trait developers by requiring Monsanto to revise its licenses for its widely used traits to allow stacking of non-Monsanto and Monsanto traits in the same seed line. Consequently, even if a seed grower wished to include popular Monsanto traits, it would not be barred from having certain rival traits incorporated into the same seeds.
At bottom, the Monsanto/Delta decree demonstrates that the DOJ will indeed consider vertical foreclosure effects in analyzing mergers and other arrangements and, in the right circumstances, may feel compelled to insist on unusually creative divestiture and licensing remedies as the price for antitrust clearance.