The primary criticism, both then and now, of the guidelines was that they were too lenient toward clearing vertical mergers.
On September 15, 2021, the U.S. Federal Trade Commission (FTC) withdrew its approval of the Vertical Merger Guidelines issued jointly with the U.S. Department of Justice (DOJ) just last year. The 3-2 party-line rescission is another example of the current administration’s focus on modifying antitrust enforcement.
The guidelines were notable in that they were the first major revision to guidance on nonhorizontal mergers since 1984 and were also issued on a 3-2 party-line vote, with the former Republican majority voting in favor of the updated guidance. In part, the guidelines detailed the kinds of unilateral effects that enforcers would be looking for when assessing the competitive prospects of vertical mergers (i.e. mergers between companies on different points in the supply chain as opposed to direct, horizontal competitors), and expanded a section on cost-saving “efficiencies” to highlight the potential procompetitive effects of a vertical combination. At the time the guidelines were passed, FTC Chairman Joe Simons and Assistant Attorney General Makan Delrahim touted them as “an important step forward in maintaining vigorous antitrust enforcement,” as they were intended to “give greater predictability and clarity to the business community, the bar, and enforcers” in the “important area of vertical merger analysis.”
The primary criticism, both then and now, of the guidelines was that they were too lenient toward clearing vertical mergers. According to the newly appointed FTC Chair Lina Khan, the guidelines were “misguided,” “suffered from some serious deficiencies” and “contravened statutory text, improperly suggesting that efficiencies or procompetitive effects may rescue an otherwise unlawful transaction.” Khan’s sentiments echoed concerns issued by FTC Commissioner Rohit Chopra at the time the guidelines were adopted in his dissenting statement: “the newly released vertical guidelines support the status-quo ideological belief that vertical mergers are presumptively benign, and even beneficial.” Commissioner Kelly Slaughter added that rescinding the guidelines was “the right thing to do” because they took the “dangerous” approach of viewing vertical deals as generally positive.
The decision to rescind has already been met with several criticisms. First, the decision was made without any potential replacement guidance from the FTC, leaving companies with no clear idea of how the FTC views vertical deals. Another criticism is that the FTC made its decision unilaterally (i.e. without the DOJ) despite the guidelines being issued jointly by both agencies, leaving it unclear whether the DOJ will use the guidelines in mergers it reviews or whether the DOJ would eventually join the FTC in rescinding them. Perhaps that decision will be made when new leadership is confirmed at the Antitrust Division. The current administration’s nominee to lead the DOJ Antitrust Division, Jonathan Kanter, is still awaiting confirmation. A third criticism is that the FTC has made several changes to its enforcement policies without first putting the modifications out for public comment.
Businesses should note that the FTC’s rescission does not signal a return to the prior nonhorizontal merger guidelines issued in 1984, which Commissioner Slaughter referred to as “dead letter.” The FTC also indicated that, despite the rescission, “the catalogue of harms in the 2020 Guidelines continues to be valid, though non-exhaustive, and that this understanding of harms continues to be critical to [the FTC’s] analysis of vertical mergers.” The FTC has indicated that it hopes to issue new vertical merger guidance that further identifies the characteristics of certain vertical transactions that are likely unlawful, that provides clear guidance on remedies to unlawful vertical combinations, and that expands the types of harms associated with vertical transactions involving modern firms, including the impact on labor markets.
In the interim, businesses should continue to be mindful of the harms of vertical mergers outlined in the rescinded guidelines, but the identified pro-competitive effects may not alone be as persuasive. Practically speaking, this period of uncertainty may not ultimately matter, since challenges by the government to vertical mergers are very rare―U.S. agencies challenged only 52 vertical mergers from 1994 to 2016, and there have only been two litigated challenges in more than 40 years, including one brought this year against DNA sequencing provider, Illumina Inc., which is ongoing.
Competitive issues presented by vertical mergers are typically more complex than in horizontal mergers, making it harder to predict how the agencies would view a particular transaction. Businesses considering a vertical combination should seek counsel to advise them on the potential competitive issues with the transaction and any potential remedies.
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