On June 30, 2020, the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released the final version of new joint-agency Vertical Merger Guidelines (VMGs). The final version of the VMGs follows a draft version released for public comment earlier this year, and replaces the prior guidelines that have been in place since 1984.
The new Vertical Merger Guidelines represent a much-needed update to the now-defunct prior guidance, and memorialize changes that have been occurring on a case-by-case basis over the last 30 years.
What Are the Vertical Merger Guidelines?
Vertical mergers are acquisitions involving companies at different levels of the same supply chain. The VMGs are a bit of a misnomer since they also cover mergers of complements (goods that don’t compete but where demand for one increases demand for the other) and mergers of firms in a diagonal relationship (acquiring the supplier of an input good used by a rival of the acquiring firm but not necessarily as an input good for the acquiring firm).
The purpose of joint merger guidelines (including the VMGs and the Horizontal Merger Guidelines (HMGs)) is to explain the analytical approach used by the DOJ and FTC in evaluating potential anticompetitive effects of mergers and acquisitions. Guidelines are explanations of how enforcement agencies will apply their prosecutorial discretion and do not carry the force of law, unlike regulations which are binding on the enforcer and the regulated industry. Agency merger guidelines reflect the best available insights into where enforcers may investigate and prosecute when the case law is not clear—or is silent—on an issue. Moreover, FTC/DOJ guidelines can help shape the law if they provide a coherent framework for courts to follow; the antitrust statutes delegate authority to the federal courts to develop the law on a case-by-case basis and providing judges with economically sound principles have proved to be influential in the past. For example, the HMGs (which were last updated in 2010) are frequently cited by courts, and have been well received for increasing the predictability of merger investigations.
What Do the Vertical Merger Guidelines Say?
The VMGs summarize the broad categories of harm that can result from vertical mergers. The types of harm identified that may warrant an investigation include:
- Foreclosure, where a vertically integrated company refuses to supply an input to a rival if that input is critical for downstream competition and cannot reasonably be obtained elsewhere.
- Raising Rivals’ Costs, which is similar to foreclosure but involves raising the price of needed inputs for a competitor, as opposed to cutting off those inputs altogether. Raising rivals’ cost can be illegal if it results in less competition and higher prices in the downstream market.
- Sharing Competitively Sensitive Information could allow the merged firm to learn its rivals’ pricing or strategic plans, thereby allowing it to harm or otherwise reduce competition with the rival firm.
- Coordinated effects could result from a vertical merger if the acquired firm acted as an industry maverick that disciplined market pricing, or if the vertically integrated firm could better coordinate pricing or output with downstream rivals.
The VMGs do not have bright-line predictive thresholds, such as market concentration based on the Herfindahl-Hirschman Index (HHI), because unlike horizontal mergers, vertical mergers do not directly increase market concentration. Although the draft version of the VMGs included a soft safe-harbor provision for mergers where the relevant market shares were under 20%, the agencies ultimately removed this safe-harbor provision from the final version of the guidelines.
The VMGs also recognize that most vertical transactions do not cause competitive harm, and many such deals create efficiencies. Because vertical deals are not inherently anticompetitive, and traditionally have carried a strong presumption of creating efficiencies, very few vertical transactions are investigated—estimates are that only 2-3% of all merger investigations in the United States each year involve vertical transactions.
Analysis and Context
The new VMGs replace guidance from 1984, although the old Guidelines have not been an accurate statement of enforcement policy for some time. Moreover, the agencies have litigated a vertical merger case only once in the last 40 years, so it’s fair to question why the new VMGs were a priority for the FTC and DOJ.
We have seen an uptick in vertical merger enforcement over the past two years—the agencies have investigated mergers between AT&T/Time Warner, Staples/Essendant, Optum/DaVita, and CVS/Aetna—so it makes sense to explain the new thinking behind the enforcement push. More generally, antitrust theory continues to evolve; the lack of enforcement until recently was driven by late 1970s and ’80s scholarship, especially Robert Bork’s seminal 1978 book The Antitrust Paradox.
A self-described “post-Chicago” academic movement, starting in the 1990s and continuing until today, updated and sometimes undercut Bork’s theory regarding vertical merger enforcement. Antitrust enforcers have taken note. Over the last 30 years, vertical merger cases from both the DOJ and FTC evolved to reflect the concerns of the 1984 Guidelines less and less. By 2018, Assistant Attorney General Makan Delrahim publicly stated that the DOJ no longer used the 1984 Guidelines when assessing vertical mergers, and in 2019 Commissioner Christine Wilson gave a speech declaring that the 1984 Guidelines “have been effectively withdrawn.”
Where Does Vertical Merger Policy Stand After This?
A few important issues remain outstanding after publication of the VMGs. First, the two Democratic FTC Commissioners dissented to the issuance of the guidelines. Commissioner Chopra’s dissent criticized the effort as incomplete, having left out many ways that vertical mergers suppress competition and raise barriers to entry. Chopra lamented that the VMGs support “the status-quo ideological belief that vertical mergers are presumptively benign, and even beneficial.” Commissioner Slaughter’s dissent shared the same substantive concerns, adding that the VMGs also should have received another round of public comments, as the final version differed substantially from the published draft. Slaughter also criticized the VMGs’ over-optimistic treatment of efficiencies and the failure to address buy-side concerns, remedies, or regulatory evasion.
The FTC approved the guidelines on a 3-2 vote, with the three Republican Commissioners issuing a joint statement separate from the DOJ. Given the clear Republican-Democrat divide over whether the guidelines go far enough, there is room for speculation that the new VMGs may not survive a Democratic presidential administration. But the mere fact that vertical merger guidelines have been considered and acted upon, regardless of differing opinions on substance, sends a soft signal that the agencies may be more willing to dedicate resources to vertical merger cases going forward.
The greatest issue left open by the VMGs is that of remedies. Unlike horizontal merger cases, which are often resolved before litigation if the merging parties can divest the overlapping assets, no such clean fix is available for a vertical merger. The FTC and DOJ have a long-standing policy preference for structural remedies (e.g., divestitures) because they do not require ongoing supervisory or regulatory oversight (e.g., monitors or periodic compliance reporting) to enforce. With vertical transactions, a clean divestiture settlement will rarely be possible, leaving the enforcers only one option: suing to block the entire transaction even though, as explained above, the deal may also have significant pro-competitive efficiencies associated with it. For example, in the recent AT&T/Time Warner litigation, the DOJ’s “all-or-nothing” case to enjoin the merger fell short in light of the merging parties’ voluntary efforts to adopt the same protective measures the government allowed when approving the Comcast/NBCU merger in 2011, including “baseball-style” arbitration with distributors to mitigate foreclosure concerns. See United States v. AT&T, Inc., 916 F.3d 1029, 1035 (D.C. Cir., 2019). The VMGs do not provide insight on when an enforcer will move to block a deal if it has the promise of significant pro-competitive efficiencies as well as potential anticompetitive effects.