Recently, vertical mergers have been a hot topic in antitrust law, as evidenced by the number of large proposed vertical transactions that have undergone extreme antitrust scrutiny. For the first time since 1984, the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) have released draft 2020 Vertical Merger Guidelines (Guidelines), which are open for public comment until February 26, 2020. The Guidelines describe how DOJ and FTC evaluate whether a proposed merger between companies that operate at different levels in the same supply chain violates the U.S. antitrust laws.
As the federal agencies responsible for antitrust enforcement, DOJ and FTC issue and revise guidelines from time to time (including the companion 2010 Horizontal Merger Guidelines), which set forth the agencies' experience, analytical techniques, practices, and enforcement policy. Such guidelines are intended to assist the business community and antitrust practitioners by increasing the transparency of the agencies' enforcement policy and decisions, including when they are likely to challenge (or not challenge) a particular merger.
More specifically, the Vertical Merger Guidelines describe potential anticompetitive effects resulting from vertical mergers, including both unilateral and coordinated effects. Unilateral effects include the diminished competition that results when a merged firm raises its rivals' costs by charging a higher price for related products or refuses to supply rivals with the related products altogether. Coordinated effects may include the diminished competition that results from post-merger coordinated interaction among firms.
In addition to identifying possible anticompetitive effects, the Vertical Merger Guidelines also recognize that vertical mergers are, in many instances, procompetitive – for example, where a vertical merger allows firms to combine complementary economic functions or bring together assets used at different levels of the supply chain to increase efficiency. Finally, the Vertical Merger Guidelines provide a number of examples to clarify the agencies' analytical methods in evaluating vertical mergers, including the following:
- In discussing how the agencies identify the relevant markets in which a proposed vertical merger may substantially lessen competition, the Guidelines provide the example of a vertical merger in which a retail chain acquires a manufacturer of cleaning products. Two markets are potentially relevant to this merger: (1) the supply of cleaning products to retail customers in a given geographic area; and (2) the supply of cleaning products to retail merchants in a given geographic area.
- The Guidelines discuss the example of a merger between a manufacturer of component parts and a maker of final products in analyzing how such a merger can lead to coordinated anticompetitive effects. If the component manufacturer supplies rival makers of final products, it will have information about the volume of final products that the maker of final products is producing, and will be better able to detect cheating on a tacit agreement to limit supplies. As a result, the merger may make the tacit agreement more effective.
Both DOJ and FTC issued statements in conjunction with the draft Vertical Merger Guidelines. FTC Chairman Joseph J. Simons said, "Challenging anticompetitive vertical mergers is essential to vigorous enforcement. The agencies' vertical merger policy has evolved substantially since the issuance of the 1984 Non-Horizontal Merger Guidelines, and our guidelines should reflect the current enforcement approach. Greater transparency about the complex issues surrounding vertical mergers will benefit the business community, practitioners, and the courts." Assistant Attorney General Makan Delrahim of DOJ's Antitrust Division echoed Chairman Simons's comments, saying, "While many vertical mergers are competitively beneficial or neutral, both [DOJ] and [FTC] have recognized for over 25 years that some vertical transactions can raise serious concern. The revised draft guidelines are based on new economic understandings and the agencies' experience over the past several decades and better reflect the agencies' actual practice in evaluating proposed vertical mergers."
In addition to inviting public comment, DOJ and FTC also announced two half-day workshops on the draft Vertical Merger Guidelines, which will allow for discussion to complement any written public comments about the draft that are submitted to the agencies. The workshops will take place in Washington, D.C., on March 11, 2020, and March 18, 2020.
A company contemplating a merger of any kind should consult with experienced antitrust counsel to evaluate the likelihood of an action by DOJ or FTC challenging the combination, as well as possible filing obligations under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (15 U.S.C. section 18a).