The Federal Trade Commission has withdrawn its 2020 Vertical Merger Guidelines and accompanying commentary to “prevent industry and judicial reliance on unsound economic theories” that are “unsupported by the law or market realities.” The Commission will work with the Antitrust Division at the Department of Justice to draft new guidance.
A product of the Trump administration, the 2020 Vertical Merger Guidelines provided analytical techniques and enforcement policies for mergers of companies along a supply chain or value chain; for example, a truck manufacturer that purchases a tire manufacturer as opposed to the “horizontal” merger of two truck makers.
The FTC – whose chair was appointed by President Biden – says the 2020 guidelines “improperly contravened the Clayton Act’s language with its approach to efficiencies, which are not recognized by the statute as a defense to an unlawful merger.” The Commission’s majority statement explains that the guidelines adopted a particularly flawed economic theory regarding purported pro-competitive benefits of mergers, despite having no basis of support in the law or market reality.”
The FTC said it will explore how to:
- Provide clear guidance on the characteristics of transactions that are likely unlawful;
- Provide guidance on ineffective remedies, based on an evaluation of past remedy practices and any evidence that past remedies may not have fully restored competition;
- Expand on the harms identified in the 2020 guidelines to consider various features of modern firms, including in digital markets, and impacts of mergers on labor markets.
The Commission voted 3-2 to rescind the policy statement , with the majority issuing a separate statement.
FTC Chair Lina M. Khan, along with commissioners Rohit Chopra and Rebecca Kelly Slaughter, wrote that despite the prohibition of anticompetitive mergers provided by Section 7 of the Clayton Act, there has been too much consolidation in various markets during the last two decades. This has resulted in the formation of fewer new enterprises, a growing chasm between the cost of goods and their prices (or markups), and reduced wages.
Dissent: Separate rules for horizontal and vertical mergers “not justified.”
They wrote: “Market structure screens have been used for decades by agencies when assessing whether horizontal mergers merit a presumption of anticompetitive effects. Since the 1980s, however, vertical mergers have not been subject to similar screens that use readily-observable market features. This distinct analytical approach to horizontal and vertical mergers is not justified: vertical mergers involving concentrated markets likewise have a structural tendency to harm competition. Commenters suggested numerous candidate screens that pick out mergers deserving of additional focus—or a presumption of illegality—based on a variety of market characteristics. In reviewing our approach to merger analysis, we will seek to identify objective factors that presumptively indicate that a merger is likely to reduce competition.”
Commissioners Noah Joshua Phillips and Christine S. Wilson issued a separate dissenting statement, criticizing the majority’s action as partisan and premature.
“Today the FTC leadership continues the disturbing trend of pulling the rug out under from honest businesses and the lawyers who advise them, with no explanation and no sound basis of which we are aware. In the past two months, the FTC has withdrawn just as many bipartisan policies. Now, the partisan majority will rescind the 2020 Vertical Merger Guidelines issued jointly by the FTC and the Antitrust Division and the Commentary on Vertical Merger Enforcement, with the minimum notice required by law, virtually no public input, and no analysis or guidance. Sowing confusion regarding the legality of vertical mergers is particularly troublesome at this time, given American businesses’ ongoing attempts to shore up supply chain vulnerabilities exposed during the COVID-19 pandemic. Today’s action, together with other recent attacks on the Hart-Scott-Rodino merger review process, threatens to chill legitimate merger activity and undermine attempts to rebuild our economy in the wake of the pandemic.”
The majority should have waited to rescind the guidelines until they had a replacement, Phillips and Wilson wrote.
Edited by Tom Hagy for MoginRubin LLP.