DOJ and FTC Issue Draft Vertical Merger Guidelines
On January 10, 2020, the Department of Justice and Federal Trade Commission released Draft Vertical Merger Guidelines for public comment. Once finalized, the Draft Guidelines will replace guidance on vertical mergers in the DOJ’s 1984 Merger Guidelines. The Draft Guidelines reflect a transformative overhaul of the 1984 guidelines, but we do not expect that the Draft Guidelines, if adopted in their current form, will have any notable effect on the way that the agencies evaluate vertical mergers.
According to Assistant Attorney General Makan Delrahim, “[t]he 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.” Similarly, FTC Chairman Joseph Simons recognized that “[t]he 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.”
The Draft Guidelines identify three principal sources of potential anticompetitive effects from vertical mergers:
- Foreclosure: A vertically integrated firm may raise competitors’ input costs (raising rivals’ costs), reduce the incentive for competitors to enter a particular level of the supply chain (entry foreclosure), or prevent upstream competitors from accessing customers of the combined firm’s downstream business (customer foreclosure).
- Access to Competitively Sensitive Information: A vertically integrated firm may gain access to and have control of business information that can, in some circumstances, be used by the firm to moderate its pricing. For instance, the firm may obtain access to pricing information about its upstream or downstream rivals that was unavailable to it before the merger.
- Coordinated Effects: A vertically integrated firm may make market participants more vulnerable to coordinated interaction between competitors, for instance by eliminating a maverick or facilitating agreements between competitors at a particular level of the supply chain.
The Draft Guidelines contain a limited safe harbor under which the agencies are unlikely to challenge a vertical merger where the parties to the merger have a share in the upstream and downstream markets at issue of less than 20 percent. This “safe harbor” provision was the subject of dissent by FTC Commissioners Chopra and Slaughter, and is likely to generate significant discussion during the comment period.
The Draft Guidelines do not address remedies. Vertical mergers are often seen as efficiency-creating, and the agencies usually seek conduct remedies for problematic vertical mergers rather than seeking to block the deals.
The Broader Context
The Draft Guidelines reflect modern economic thinking and enforcement practice, but they come at a time when some have called for more aggressive vertical merger enforcement and application of less rigorous standards for evaluating these transactions. (We have written in depth about this split here.) As a result, the final guidelines are unlikely to clear up ongoing debates about vertical merger enforcement. Two commissioners abstained from the issuance of the Draft Guidelines and signaled that they would not support issuance of final guidelines absent a significant relaxation of the standards needed to challenge a case on a vertical theory.
The Draft Guidelines are open to public comment for 30 days, after which the agencies will review and consider the comments before issuing final guidelines.
A copy of the Draft Guidelines is available here.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.