Until now, little reliable authority has existed for businesses to understand how the agencies are likely to view vertical deals. Antitrust counsel widely viewed the 1984 DOJ Non-Horizontal Merger Guidelines, which the DOJ withdrew when the draft guidelines issued, as out of date. There is also a dearth of vertical merger case law. Aside from the recent AT&T/Time Warner merger, the government has not litigated a significant vertical merger case in decades. Meanwhile, the body of economic literature on vertical integration has grown considerably in recent decades and some of the largest deals in recent years have included vertical components (e.g., CVS/Aetna and Cigna/Express Scripts). Given this background, the antitrust bar, and relevant think tanks, have called for updated guidance on vertical mergers. Officials at both agencies acknowledged in recent months that they were developing new guidelines.

According to Assistant Attorney General Makan Delrahim of the DOJ’s Antitrust Division, the 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.”

Theories of Harm and Benefits

The draft guidelines adopt the principles and analytical framework used to assess horizontal mergers, but apply to combinations of firms that operate at different levels of the same supply chain. Like the Horizontal Merger Guidelines, the draft guidelines describe theories of unilateral and coordinated effects. Unilateral effects of a vertical merger could include raising a rival’s cost of an input (or lowering service or product quality) or foreclosing a rival from accessing the input entirely. Or a proposed vertical merger could potentially create a firm that has competitively sensitive business information of its competitors if, for example, a merger creates a combined firm that supplies a competitor in the upstream market while competing against that same firm downstream. The draft guidelines also outline coordinated theories of harm that could arise in vertical mergers, including an enhanced ability to hobble a maverick or an increased ability to use confidential business information to facilitate coordination among market participants.

The draft guidelines also highlight potential benefits of vertical mergers. For example, a merger between vertically related firms may eliminate double marginalization, which occurs when two firms at different levels of the supply chain charge a profit-maximizing margin. That is, the combined firm would enjoy both margins and may find that a price reduction is profitable and thus benefitting consumers. Vertical mergers can also generate a host of efficiencies, potentially streamlining production, inventory management, or distribution. Vertical deals could even facilitate the creation of innovative products.

Safe Harbor

The section of the draft guidelines likely to generate significant discussion is the statement that the Agencies “are unlikely to challenge a vertical merger where the parties to the merger have a share in the relevant market of less than 20 percent, and the related product is used in less than 20 percent of the relevant market.” Commissioner Slaughter, who along with Commissioner Chopra, abstained from the Commission’s vote, raised three concerns about this provision: it may create a safe harbor; it establishes an arbitrary threshold; and there is no accompanying presumption of harm if market shares exceed some threshold. Commissioner Wilson also addressed the issue of a definitive safe harbor and encouraged commenters to weigh in. Noting that vertical mergers are often procompetitive, Wilson queries whether the Agencies should restrict their inquiry to oligopoly markets and, if so, what threshold should apply. In the current form, the draft guidelines state that market realities would inform enforcement decisions even if market shares are below the prescribed thresholds, which could dissuade companies from relying on a safe harbor provision.

Takeaways

The draft guidelines are not yet in final form. The Agencies must receive comments by February 11, 2020, the close of the 30-day public comment period. Companies considering vertical mergers would still be wise to take note of the draft guidelines’ release for two reasons.

First, the draft guidelines provide companies that are considering vertical deals more insight into the Agencies’ analytical framework. While they are not yet final, this guidance puts companies in a better position to analyze deal risk prior to the Agencies’ review.

Second, by highlighting the potential harms and benefits of vertical deals that the Agencies weigh, the draft guidelines could help companies advocate for clearance more effectively. With this information, companies are better situated to proactively address concerns that the Agencies may raise, and to persuasively highlight the benefits of their deal. Companies and organizations interested in commenting on the draft guidelines should reach out to experienced antitrust counsel.

*Not admitted in District of Columbia. Practice supervised by principals of firm admitted to District of Columbia Bar.