Antitrust UCL and Privacy

A Quick Look at DOJ and FTC Draft Vertical Merger Guidelines

Bob Connolly
Law Office of Robert Connolly

In June 2018 the Antitrust Division, U.S. Department of Justice (DOJ) lost their challenge to the AT&T/Time Warner. The AT&T/Time Warner case was the first vertical merger case litigated by the Antitrust Division or Federal Trade Commission (FTC)  in almost 40 years.  This was a vertical merger as Time Warner was a leading holder of video content and AT&T was a significant distributor of the same. Throughout the litigation many commentators opined that the law and thinking on vertical guidelines had not kept up with the current understanding of the competitive harm that can result from vertical mergers.  DOJ certainly shared that view, especially in defeat.

On January 10, 2020, the Department of Justice withdrew the 1984 DOJ Non-Horizontal Merger Guidelines, and, together with the Federal Trade Commission (FTC), released new draft 2020 Vertical Merger Guidelines (Guidelines)(here) and sought public comment.  Vertical mergers combine two or more companies that operate at different levels in the same supply chain. Importantly, a predominantly  horizontal merger of competitors can also have a vertical component.  The Guidelines outline the government’s principal analytical techniques, practices, and enforcement policy for vertical mergers.

In the press release announcing the Guidelines (here), Assistant Attorney General Makan Delrahim of the Department of Justice’s Antitrust Division said, “The 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. Once finalized, the Vertical Merger Guidelines will provide more clarity and transparency on how we review vertical transactions. I look forward to receiving comments on these draft guidelines and working with the Federal Trade Commission in finalizing them.”  The two Democratic FTC Commissioners abstained from voting on the Guidelines because they did not think they were aggressive enough (here). 

The draft guidelines do not assume vertical mergers are beneficial, but do establish safe harbors.  The government is unlikely to challenge vertical mergers where the market shares are low (below 20% in the “relevant market” and 20% in the “related product”).  “Related products,” are defined as products or services (which could include “for example, an input, a means of distribution, or access to a set of customers”) that are “supplied by the merged firm, [] vertically related to the products and services in the relevant market, and to which access by the merged firm’s rivals affects competition in the relevant market.”  The 2010 Horizontal Merger Guidelines explain how to define a market.   

The Guidelines discuss several ways vertical mergers may be anticompetitive.

Foreclosure and Raising Rivals’ Costs

After a vertical merger, the merged firm may be able to harm competition by refusing to supply competitors with a related product altogether (foreclosure) or raising the cost of the product (raising rival costs).  The Guidelines give many examples. One example is “Company A is a wholesale supplier of orange juice.  Its seeks to acquire Company B, an owner of orange orchards.”  In this case the Agencies will examine whether the merged firm can profitably stop supplying oranges to rival distributors or raise their costs to a point where they cannot effectively compete.

Access to Competitively Sensitive Information

Another competitive concern outlined in the draft guidelines is whether the “combined firm may, through acquisition, gain access to and control of sensitive business information about its upstream or downstream rivals that was unavailable to it before the merger.”  The acquisition of competitively sensitive information may place the rival at a disadvantage, or even facilitate collusion between the firms.

The Guidelines, however, also recognize the potential benefits of vertical mergers including efficiency and eliminating “double marginalization” (“We cut out the middlemen and you get the savings!).  The merging parties bear the burden to demonstrate these efficiencies.

It is important, especially in California, to recognize that the states have a role in merger enforcement and have in fact, challenged vertical mergers.  California v. Valero Energy Co., No. C 17-03786 WHA, 2017 WL 3705059, at *1–3 (N.D. Cal. Aug. 28, 2017) involved an acquisition by an oil refinery of an independent terminal.  In considering a state AG merger challenge, courts generally give limited weight to the respective federal antitrust agency’s decision not to challenge the transaction.  Id. (noting that the FTC had taken no action to block the deal, but finding that the state had “raised serious questions regarding whether the proposed transactions will have anticompetitive effects”).  The California AG brought this action under the Clayton Act and the California Business and Professional Code, arguing that Valero would be able to raise gasoline prices if it gained control of the only remaining petroleum refineries with spare capacity in the state. Faced with this challenge, Valero abandoned the deal.  See also, Complaint, Colorado v. UnitedHealth Group Inc. and DaVita Inc., No. 2019-cv-031424 (El Paso County Dist. Ct. June 19, 2019) (addressing potential foreclosure in healthcare); Petition, Pennsylvania v. UPMC, No. 334 M.D. 2014 (Pa. Commw. Ct. Feb. 7, 2019); Commonwealth v. UPMC, 208 A.3d 898 (Pa. 2019) (vertical conduct in healthcare).

On February 26, 2020 a bipartisan group of 26 state attorneys general submitted comments on the draft Guidelines, expressing support for updating them to acknowledge the competitive harm that can result from vertical mergers. However, the comments make several recommendations on amending the draft Guidelines, suggesting that state attorneys general may emerge as aggressive vertical merger challengers. See, U.S. Department of Justice and the Federal Trade Commission Public Comments of 28 State Attorneys General on Draft Vertical Merger Guidelines February 26, 2020, available at,

https://www.ftc.gov/system/files/attachments/798-draft-vertical-merger-guidelines/state_ags_final_vmg_comments.pdf.

A public workshop on the draft was held at the Department of Justice on March 11, 2020, but a similar workshop at the FTC scheduled for March 18, was cancelled (here).  The draft Guidelines have not yet been adopted and this note will be updated when and if they are.

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