DOJ And FTC Issue Vertical Merger Guidelines

• Published date: 16 July 2020
• Subject Matter: orporate/Commercial Law, Anti-trust/Competition Law, M&A/Private Equity, Antitrust, EU Competition
• Law Firm: Arnold & Porter
• Author: Mr Jonathan Gleklen, Debbie Feinstein, Michael B. Bernstein and Peter J. Levitas

On June 30 the US Department of Justice (DOJ) and Federal Trade Commission (FTC) issued their long-awaited Vertical Merger Guidelines. The final Guidelines come almost six months after the DOJ and FTC issued the guidelines in draft form.¹ They reflect a number of changes from the previously-issued draft that respond in part to critiques of the draft from FTC Commissioners Rebecca Slaughter and Rohit Chopra and to the more than seventy comments submitted on the draft. Despite the changes to address some of the concerns of the dissenting Commissioners, Commissioners Slaughter and Chopra each again dissented from the final Guidelines.

The purpose of the Guidelines is to "outline the principal analytical techniques, practices, and enforcement policies" of the DOJ and FTC.² They supersede the 1984 Non-Horizontal Merger Guidelines (originally issued in 1984 to address both vertical and horizontal mergers) which have not reflected the actual analysis applied to vertical mergers by the agencies for many years. The revised Guidelines appear consistent with the agencies' approach in recent vertical mergers, and to that extent are a helpful guide to agency practice. But the Guidelines focus on modes of analysis and do not provide detailed guidance on the agencies' application of the analytical approaches and tools they describe.³ Because merger analysis is highly fact-intensive (and vertical merger analysis perhaps even more so), the agencies' refusal to provide clear safe harbors or to constrain their exercise of discretion to investigate vertical transactions is perhaps not surprising'even if history suggests that few of the many vertical transactions will be challenged, most are likely to be addressed with remedies, and few will be challenged successfully.

The Agencies' Analytical Framework

The Guidelines apply to vertical mergers (those that "combine firms or assets at different stages of the same supply chain"). But'although not mentioned in the Draft Guidelines'the final Guidelines also discuss so-called "diagonal" mergers ("those that combine firms or assets at different stages of competing supply chains," such as a firm that supplies a competitor of its acquirer but not its acquirer) and "vertical issues that can arise in mergers of complements." As we discuss below, it is not clear what "vertical issues" are created by mergers of complements and the agencies' analysis fits into what is typically called conglomerate theories of harm. And while the old Non-Horizontal Merger Guidelines addressed potential competition theories, the Guidelines are clear that the analysis in the Horizontal Merger Guidelines applies to potential competition theories.

The Guidelines emphasize that they should be read in conjunction with the Horizontal Merger Guidelines, which discuss issues such as entry consideration, acquisitions involving failing firms, and partial acquisitions that are relevant to vertical mergers as well.

The Role of Market Definition and Market Shares

Consistent with Clayton Act Section 7's condemnation of mergers only when they may substantially lessen competition "in any line of commerce" and precedent that requires proof of harm to competition in a relevant market, the Guidelines provide that the Agencies will "normally identify one or more relevant markets in which the merger may substantially lessen competition" using the method of the Horizontal Merger Guidelines, while also reiterating the "limitations of market definition" described in the Horizontal Merger Guidelines.⁴ The Guidelines' analysis also looks to one or more "related products," which are "supplied or controlled by the merged firm and are positioned vertically or are complementary to the products and services in the relevant market." These may include input products, distribution channels that provide access to customers, or complementary products or services. The Guidelines emphasize that relevant markets can be both upstream or downstream of the related market For example, the merger of a firm and one of its suppliers can affect competition among distributors (who may lose access to the acquired product) as well as competition among product suppliers (who may lose access to a distributor of their products).

Departing from the old Non-Horizontal Merger Guidelines' emphasis on shares and industry concentration and a 20% share quasi-safe harbor in the Draft Guidelines, the Guidelines note only that the "Agencies may consider measures of market shares and market concentration," but will do so along with other reliable evidence to determine whether the transaction is likely to harm competition. The 20% share threshold in the Draft Guidelines that has been eliminated in the final Guidelines was not an absolute line. The Agencies stated in the Draft Guidelines only that they were "unlikely to challenge a vertical merger" when shares in both the relevant market and related product market were less than 20%. But even with the final Guidelines' abandonment of the 20% share threshold, the Agencies are unlikely to dedicate substantial resources to an investigation where shares are low. That is because the acquisition of one of many input suppliers or one of many distributors (or end customers) by a firm that itself faces effective competition is unlikely to harm competition...