On Friday, January 10, the Department of Justice's Antitrust Division (DOJ or Division), and the Federal Trade Commission (FTC) announced the release of the 2020 Draft Vertical Merger Guidelines (2020 Draft VMG) for a 30-day comment period, during which the DOJ and FTC will accept comments and suggestions to the draft. Once finalized, these guidelines will supersede the 1984 Non-Horizontal Merger Guidelines, which have not been updated since they were first introduced. As with any guidelines issued by the agencies, the finalized Vertical Merger Guidelines will be instructive for the agencies' review of vertical mergers, and will be persuasive but not binding on courts should a contested merger enter litigation.
As explained in the 2020 Draft VMG, vertical mergers combine firms or assets that operate at different stages of the same distribution chain. In describing a vertical relationship, the stage closer to final consumers is termed "downstream," and the stage farther from final consumers is termed "upstream." By contrast, horizontal mergers are transactions that take place between direct competitors.
The Draft 2020 VMG rely heavily on the legal and economic theories and analytical framework set forth in the 2010 Horizontal Merger Guidelines (2010 HMG), and which are explicitly intended to be read in conjunction with the 2010 HMG. The Draft 2020 VMG state that horizontal considerations such as the analytic framework for evaluating entry considerations, the treatment of the acquisition of a failing firm or its assets, and the acquisition of a partial ownership interest are relevant to the evaluation of the competitive effects of vertical mergers as well.
Addressing the issues specific to vertical transactions, the 2020 VMG include modern approaches such as identifying relevant markets and related products; identifying market participants, market shares, and market concentration; analyzing evidence of adverse competitive effects, unilateral effects and coordinated effects; and efficiencies.
Some of the highlights of the Draft 2020 VMG include:
- creating a presumptive "screen" that a transaction is unlikely to harm competition if the combined parties have less than a 20 percent share of the relevant market and the related product is used in less than 20 percent of the relevant market;
- crediting the potential for increased efficiencies due to the elimination of "double marginalization" (i.e., combining the upstream and downstream profit margins that can result in reduced prices to end users) ;
- analyzing whether the post-merger firm would be likely to have access to its competitors' competitive-sensitive information and raise rivals' costs; and
- no longer relying on econometric analysis of markets via calculation of the Herfindahl-Hirschman Index (HHI) of a proposed transaction.
Commissioner Christine Wilson's concurring statement regarding the Commission's decision to publish the draft guidelines specifically requested the public's feedback on specific topics raised in the 2020 Draft VMG, including:
- Elimination of Double Marginalization (EDM): Should we align our treatment of EDM more closely with the economic literature, which recognizes both its significant benefits and the many reasons that these benefits may not be achieved by contract?
- Symmetry: Relatedly, given their close correlation, should we assess both procompetitive merger effects (EDM) and anticompetitive merger effects (raising rivals costs, or RRC) symmetrically, including the extent to which they are merger-specific?
- Safe Harbor: Given that vertical mergers are often procompetitive, should we limit the area of antitrust concern to oligopoly markets, and therefore should the Guidelines establish a definitive safe harbor when a merger involves only relatively unconcentrated markets? And, if a safe harbor is appropriate, at what threshold should it apply?
- Market Definition: When defining markets, should we continue to define two relevant product markets (one upstream, one downstream), or should we adopt the looser requirement to define one relevant product market and identify a "related product?"
- De Minimis Effects: What magnitude of anticompetitive effects should we view as de minimis, in light of EDM and likely vertical efficiencies?
While all the FTC commissioners agreed that the 1984 Non-Horizontal Merger Guidelines should be withdrawn, Commissioners Rebecca Slaughter and Rohit Chopra abstained from voting on whether to publish the 2020 Draft VMG. Commissioner Slaughter expressed concerns about the current proposed guidelines as creating too high of a standard of review for proposed transactions and not clarifying the various investigatory and enforcement powers the agencies have. Commissioner Chopra, in his separate statement, argued that the draft 2020 VMG do not take into account "modern threats to competition" or consider whether prior enforcement was effective.
Our antitrust group remains at the forefront of representing clients before the DOJ and FTC. We encourage you to contact us if you would like to discuss how the Draft 2020 VMG, if adopted, could impact your future strategic transactions and whether you should consider submitting comments to the FTC and DOJ. The public comment period ends on February 11, 2020.
