Antitrust Law Daily FTC, Justice Department issue new Vertical Merger Guidelines
Tuesday, June 30, 2020

FTC, Justice Department issue new Vertical Merger Guidelines

By Jody Coultas, J.D.

This is the first time the Department of Justice and the FTC have issued joint guidelines on vertical mergers. FTC’s Democratic commissioners vote against issuance.

The Department of Justice and the FTC issued new Vertical Merger Guidelines, marking the first time that the antitrust agencies have issued joint guidelines on vertical mergers. This is also the first major revision of the guidelines since the Justice Department issued the 1984 Non-Horizontal Merger Guidelines, which was withdrawn in January. The updated Guidelines more accurately reflect how the FTC and Justice Department currently evaluate the likely competitive impact of vertical mergers and whether those mergers comply with U.S. antitrust law. The Commission vote was 3-2 along party lines with the three Republican Commissioners voting to approve the Guidelines and the two Democrats voting against.

Vertical mergers combine two or more companies that operate at different levels in the same supply chain. The new Guidelines are meant to help the agencies identify and challenge competitively harmful mergers while avoiding interference with mergers that are competitively beneficial and those that will have no competitive impact on the marketplace. To accomplish this, the Guidelines detail the techniques and main types of evidence the agencies typically use to predict whether vertical mergers may substantially lessen competition.

The new Vertical Merger Guidelines should be read in conjunction with the Horizontal Merger Guidelines, according to the agencies. Mergers often present both horizontal and vertical elements, and the agencies may apply both the Horizontal Merger Guidelines and the Vertical Merger Guidelines in their evaluation of a transaction. In addition, if one of the parties to a transaction could use its pre-existing operations to facilitate entry into the other’s market, the agencies may consider whether the merger removes competition from a potential entrant, using the methods described in the Horizontal Merger Guidelines. Thus, the Guidelines should be read in conjunction with the Horizontal Merger Guidelines.

The most significant change is that these Guidelines no longer suggest that certain vertical mergers—those where the merging parties’ share of both a relevant market and related product are less than 20%—are unlikely to be anticompetitive. Also, the Guidelines explain that the parties are expected to provide substantiation for claims that the merging firm will benefit from the elimination of double marginalization, describe how the agencies evaluate whether the elimination of double marginalization is merger specific, and discuss how the agencies will use a common framework to assess the potential harm from full or partial foreclosure and the potential benefits from the elimination of double marginalization. Finally, the Guidelines look beyond vertical mergers to include harms from diagonal mergers (those that combine firms or assets at different stages of competing supply chains) and mergers of complements.

Also, the revised Guidelines:

  • Clarify that its analytical techniques, practices, and enforcement policies apply to a range of non-horizontal transactions, including strictly vertical mergers, "diagonal" mergers, and vertical issues that can arise in mergers of complement.
  • Clarify that when the agencies identify a potential competitive concern in a relevant market, they will also specify one or more related products. A related product is a product or service that is supplied or controlled by the merged firm and is positioned vertically or is complementary to the products and services in the relevant market.
  • Provide detailed discussions, including multiple diverse examples, of the "raising rivals’ costs" and "foreclosure" theories of harm. In recent decades, these theories of harm have been the principle theories investigated in merger reviews.
  • Identify conditions under which a vertical merger would not require an extensive investigation, because the merger does not create or enhance the merged firm’s incentive or ability to harm rivals.
  • Emphasize that analyzing efficiencies is an important part of reviewing vertical mergers.
  • Explain in detail the analysis of the elimination of double marginalization or EDM, which economists emphasize is a frequent procompetitive result of vertical transactions.

The agencies began working on the updates during the FTC’s Hearings on Competition and Consumer Protection in the 21st Century in June 2018. These new Guidelines modify a draft released in January to incorporate 74 substantive comments on the draft from the public.

Reaction from the FTC and DOJ. A statement issued by FTC Chairman Joseph Simons and Commissioners Noah Joshua Phillips and Christine S. Wilson notes that the Guidelines substantially expand on unilateral theories of harm, including harm that may arise from full or partial foreclosure, through input foreclosure, customer foreclosure, and enhanced bargaining leverage that may result from a merger. Also, "the Guidelines present a broader treatment of the ways in which a vertical merger may make coordination more likely. They go beyond theories involving the elimination of a ‘disruptive buyer’ and recognize that harm may result from the weakening or elimination of a maverick firm that played an important competitive role in any relevant market, whether downstream or upstream."

"These new Vertical Merger Guidelines provide transparency in the important area of vertical merger analysis," said Assistant Attorney General Makan Delrahim. "They explain our investigative practices as we apply them today and have applied them in recent years. The Guidelines will give greater predictability and clarity to the business community, the bar, and enforcers. I am grateful for the commitment, thoroughness, and dedication with which staff from both agencies worked on this project. This has been a successful process because of our robust public engagement and our excellent collaborative relationship with the FTC."

Dissents. Commissioner Rohit Chopra dissented "because [the Guidelines] are incomplete and rely too heavily on unproven assumptions." Chopra expressed concern that the Guidelines do not directly address the many ways that vertical transactions may suppress new entry or otherwise present barriers to entry. In addition, he said that the Guidelines make assumptions based on contested economic theories and ideology rather than historical, real-world facts and empirical data in line with modern market realities.

Commissioner Rebecca Kelly Slaughter argued that the "final version the Commission releases today misses the mark on both process and substance." Slaughter’s dissent states her belief that the agencies will view vertical mergers as likely to be procompetitive and use the Guidelines to justify lack of enforcement. The new Guidelines, says Slaughter, (1) over-emphasis the benefits of vertical mergers; (2) fail to identify merger characteristics that are most likely to be problematic; (3) treat the elimination of double marginalization; and (4) omit important competition concerns including buy-side power, regulatory evasion, and remedies.

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