On June 30, 2020, the Department of Justice and the Federal Trade Commission released new Vertical Merger Guidelines (“Guidelines”), which explain how the agencies assess mergers and acquisitions of companies at different levels of the supply chain. The new Guidelines mark the first time the FTC and DOJ have issued joint guidelines on vertical mergers. They provide the most significant guidance on vertical merger enforcement policy since the DOJ’s 1984 Merger Guidelines; however, we do not expect them to lead to significant changes in enforcement.
The Guidelines appear to have a modest goal, which is to explain the agencies’ current approach towards vertical merger enforcement. According to Assistant Attorney General Makan Delrahim, the new Guidelines “explain our investigative practices as we apply them today and have applied them in recent years.” Similarly, FTC Chairman Joseph Simons said that “[t]he new guidelines reflect our current enforcement approach.”
The Guidelines strike a generally favorable tone towards vertical mergers, reflecting the agencies’ views that problematic vertical mergers are less common than problematic horizontal mergers. The Guidelines emphasize that vertical mergers often lead to efficiencies and consumer benefits. That said, this is an enforcement document, and the Guidelines make clear that the agencies will seek remedies or block any vertical merger that would cause one of several types of merger-specific harm.
Guidelines Reflect Current Theories of Harm
The Guidelines identify three principal sources of potential anticompetitive effects from vertical mergers:
- Foreclosure and Raising Rivals’ Costs
A vertically integrated firm may have the ability and incentive to harm rivals by raising input costs or blocking inputs altogether (raising rivals’ costs or input foreclosure), preventing or raising the costs of upstream competitors’ access to downstream customers or distributors (customer foreclosure), or reducing the incentive for or ability of competitors to enter a particular level of the supply chain (entry foreclosure).
- Access to Competitively Sensitive Information
A vertical merger can harm competition when it gives a combined firm access to competitively sensitive information, allowing it to moderate its response to a competitor’s procompetitive business action, or preempt a rival’s competitive actions.
A vertical merger may harm competition if it “enabl[es] or encourag[es] post-merger coordinated interaction” that harms consumers. An example of a merger that may make a market more vulnerable to coordination is one that changes market structure or the merged firm’s access to confidential information, which could facilitate reaching a tacit agreement among market participants, detecting “cheating” on such an agreement, or punishing cheating firms.
Changes from Draft Guidelines
The Guidelines include some significant changes from the draft guidelines released earlier in 2020,
- The Guidelines eliminate the proposed “safe harbor” threshold. That provision, under which the agencies were unlikely to bring an enforcement action when the merging parties have a combined share of less than 20% in the relevant markets, elicited sharp criticism during the public comment period even though it was consistent with agency practice.
- The Guidelines add additional theories of foreclosure, including creating the need for two-level entry and foreclosure outside of a strictly vertical context. One theory that has generated particular discussion is the concept of “diagonal mergers,” which involves the combination of firms or assets at different stages of competing supply chains. We do not expect the agencies to bring many cases based on these approaches.
- The Guidelines offer further detail on how the agencies will evaluate any efficiencies associated with the elimination of double marginalization.
Companies may take some comfort in the absence of any radical changes in the Guidelines, given calls by some for more aggressive merger enforcement. However, the FTC passed the Guidelines with a 3-2 vote, with Democratic Commissioners Rohit Chopra and Rebecca Kelly Slaughter dissenting on the basis that the Guidelines are too permissive of potentially anticompetitive vertical transactions. Given the slim majority at the FTC, if political winds change, we may see stricter enforcement of vertical mergers than the new Guidelines suggest.