Law360 is providing free access to its coronavirus coverage to make sure all members of the legal community have accurate information in this time of uncertainty and change. Use the form below to sign up for any of our weekly newsletters. Signing up for any of our section newsletters will opt you in to the weekly Coronavirus briefing.
Sign up for our Competition newsletter
You must correct or enter the following before you can sign up:
Thank You!
Law360 (June 19, 2020, 4:38 PM EDT) -- A group of Senate Democrats has urged the U.S. Department of Justice and the Federal Trade Commission to disclose plans for new vertical merger guidelines and called on the antitrust enforcers to get tougher on deals that combine companies operating on different points of a supply chain.
Antitrust subcommittee ranking member Sen. Amy Klobuchar, D-Minn., was joined Thursday by the likes of Sens. Patrick Leahy, D-Vt., and Cory Booker, D-N.J., in a letter arguing that the antitrust enforcers have kept the guidelines, first floated in January, on ice long enough under the COVID-19 pandemic.
When the agencies do resume their considerations, the lawmakers pushed for guidelines that clearly articulate the agencies' approach to judging tie-ups between companies that, although they aren't direct competitors, could disrupt competition by joining different links in the supply chain.
The new policies should reflect "current law and modern economic thinking on vertical integration," the lawmakers said. The guidelines, according to the letter, need to "promote the positive development of the law" in court cases, helping correct the "unsupported assumptions that vertical mergers are inherently or generally procompetitive."
"As many of the public comments reveal, the draft guidelines, in certain respects, fall short of these goals. Although the draft guidelines are undoubtedly a substantial upgrade from the Justice Department's outdated 1984 non-horizontal merger guidelines, there are a number of areas in which the draft guidelines could be improved," the lawmakers said.
Among the wish list of tweaks called for by the Democrats, who also included Sens. Richard Blumenthal of Connecticut and Mazie K. Hirono of Hawaii, is greater clarity on theories of harm used to contest vertical tie-ups and the circumstances that would warrant greater scrutiny of those deals. Right now, the lawmakers argued that the proposed guidelines "offer only very general descriptions" of how vertical tie-ups could harm competition, despite "a substantial body of scholarship" discussing some of the anti-competitive impacts that could be created, such as the ability to block competitors from accessing inputs and customers.
Theories of vertical harm "may be far from evident to a generalist district court judge adjudicating a merger challenge," according to the letter, which warned that judges have little case law on which to rely when mulling the anti-competitive prospects of a vertical combination. The DOJ's failed bid to block the AT&T-Time Warner merger, definitively rejected by the D.C. Circuit in February 2019 after a district court judge tossed the case in 2018, was the first litigated challenge of a vertical tie-up since the late 1970s.
Discussions surrounding that challenge helped solidify the importance of revising guidelines that antitrust enforcers have described as badly outdated, according to FTC Chairman Joseph Simons. In April, Simons said that assertions that vertical tie-ups "were essentially per se legal" based on a presumption that they are generally less anti-competitive than horizontal mergers or at least competitively neutral, helped convince him that new guidelines were necessary "to make clear that is not the case."
The proposed new guidelines, meant to be read in conjunction with the horizontal guidelines for deals between direct competitors issued in 2010, cover topics including how vertical mergers can harm competition and how those harms will be analyzed, as well as the competitive benefits attributed to such tie-ups.
In proposing the guidelines, the FTC and DOJ had planned on an extensive period of public comment, only for the novel coronavirus pandemic to pump the brakes on those efforts, particularly in the cancellation of a second public workshop to discuss the proposals and comments received. The lawmakers on Thursday called for additional public workshops and commentary to be scheduled to discuss "revised draft vertical merger guidelines" that incorporate "useful insights" gleaned from the first round of public comment.
New guidelines are needed now, the lawmakers said, arguing that while merger and acquisition activity has slowed during the crisis, some deals continue to move forward and new transactions are still being announced.
"Going forward, the economic chaos caused by the pandemic may lead to profound structural changes in many industries and a sharp rebound in mergers and acquisitions activity, as cash-rich companies and investors seek to acquire struggling businesses and assets at bargain prices," the lawmakers said. "Many of these transactions will be vertical mergers, and inevitably, some will raise significant antitrust issues."
To address those issues, the lawmakers called for guideline tweaks that also include a removal of what's been derided as a "safe harbor" for vertical mergers: a 20% market share over which deals will be more likely to be scrutinized. The lawmakers acknowledged an agency openness to scrutinize deals involving less than a 20% market share, but they warned that the threshold could nevertheless become "a rigid screen, despite the agencies' original intentions."
The lawmakers also called for a discussion in the guidelines of how the enforcers look at vertical merger impacts on innovation, something they said was left out of the initial draft. They also want the burden placed firmly on merging parties to demonstrate that their deal could yield a pro-competitive benefit called the elimination of double marginalization, meaning that the newly merged entity has an incentive to lower costs thanks to direct access to a needed input.
Other lawmakers have also raised concerns that the draft guidelines give too much importance to potential pro-competitive benefits of these tie-ups while ignoring the realities. In March, Democrats and Republicans in the U.S. House of Representatives argued that recent vertical tie-ups in the health care sector "led to significant anti-competitive harm."
The FTC said Friday it doesn't comment on letters from Congress. The DOJ did not immediately respond Friday to a request for comment.
On Thursday, the senators additionally pushed for the guidelines to include a discussion of potential remedies enforcers might negotiate to mitigate any anti-competitive effects identified in a vertical deal.
Further, the lawmakers directly cited criticism of the proposed guidelines from one of the FTC's two Democrats, who both abstained from the vote by their Republican majority peers to send the draft out for public comment. In criticizing the January proposal for purportedly continuing a trend of permissiveness when it comes to merger enforcement, the lawmakers noted, Commissioner Rebecca Kelly Slaughter said she was concerned that the guidelines only asserted that certain fact patterns in vertical tie-ups "may" deserve scrutiny.
"We agree with her that the mergers described in the fact patterns 'do warrant scrutiny, and may warrant enforcement,' and that the final guidelines should present further examples of vertical mergers that would merit a similar degree of scrutiny," the lawmakers said.
--Additional reporting by Anne Cullen and Matthew Perlman. Editing by Orlando Lorenzo.
For a reprint of this article, please contact reprints@law360.com.
