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Antitrust, Vol. 29, No. 3, Summer 2015. © 2015 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not
be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Getting Vertical Mergers Through the Agencies:
“Let’s Make a Deal”
BY JAMES A. KEYTE AND KENNETH B. SCHWARTZ
W
HAT TO DO, IF ANY THING,
about vertical mergers continues to be
debated extensively among scholars and
the enforcement Agencies. One school
of thought advocates for the revision
of the Vertical Merger Guidelines,1 which have not been
changed since 1984. These scholars and practitioners argue
that the Guidelines should be updated to reflect the most current economic wisdom and analysis, garnered over the last
three decades of vertical merger enforcement.2 The notion is
that the case law on vertical mergers is limited and that while
the Agencies continue to scrutinize vertical mergers, they
have provided little in the way of official guidance as to what
informs enforcement decisions.
There has been a significant evolution in the economic
analysis of vertical mergers since the publication of the Vertical Guidelines. Yet practitioners who find themselves advising on a vertical merger in highly concentrated upstream
and/or downstream industries—where the Agencies are more
likely to investigate—can choose a practical path to getting
the deal through Agency review, even without the benefit of
updated Guidelines. That path involves understanding which
customers and/or competitors may express concern to the
Agencies regarding the merger, whether those concerns are
antitrust-related, and, if so, what types of conduct remedies
(as opposed to structural remedies) may adequately address
them. For this, the relevant guidance comes not from the case
law, the Vertical Guidelines, or modern economic theory.
Instead, in this article we offer practical advice informed by
consent orders that reveal both the issues about which the
Agencies are most concerned and how the parties can resolve
those issues with—or at times without—a consent.
In today’s regulatory climate, the Agencies are willing to
litigate horizontal merger challenges with regularity. Vertical
merger investigations, by contrast, rarely proceed to litigation
and are typically resolved through consent orders with conduct remedies, for two interrelated reasons. First, because
James A. Keyte is a partner in the New York office of Skadden, Arps, Slate,
Meagher & Flom, LLP. Kenneth B. Schwartz is counsel in Skadden’s New
York office. The authors thank Peter McCormack, an associate in Skadden’s
New York office, for his help with this article.
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the case law on vertical mergers is outdated, bringing a vertical merger challenge involves considerably more risk and
uncertainty for the Agencies. Second, the Agencies appear to
appreciate the complexity and difficulty of proving that a vertical merger will substantially harm competition or result in
anticompetitive effects given the absence of a structural presumption and the likelihood cognizable, merger-specific efficiencies. As a result, parties to a vertical merger often can pursue a strategy of negotiating with the Agencies (and any
private parties that may be affected by the deal) to agree on
a conduct remedy that mitigates any competitive concerns.
Case Law on Vertical Mergers
The case law on vertical mergers is sparse: the most recent litigated case involving an Agency challenge to a vertical merger, Fruehauf Corp. v. FTC,3 was decided by the Second Circuit
in 1979. In addition, the precedential value of vertical merger cases may be limited, as many vertical merger cases are
premised on bygone legal and economic theories. Indeed, the
Agencies do not appear to place much, if any, weight on
these cases in making enforcement decisions today. Nevertheless, these cases have not been overturned and help contextualize the discussion on vertical merger analysis.
In the 1960s and early 1970s, the Agencies brought a
number of successful challenges to vertical mergers based
predominantly on foreclosure theories, even though in many
of these cases the degree of foreclosure was very minor. In
Brown Shoe Co. v. United States, for example, the Supreme
Court upheld the district court’s opinion enjoining the merger in part on vertical grounds, explaining that “[t]he primary
vice of a vertical merger” is “foreclosing the competitors of
either party from a segment of the market otherwise open to
them.” 4 The Court further explained that the “percentage of
the market foreclosed by the vertical arrangement” typically
is not dispositive (in Brown Shoe, the foreclosure percentage
was approximately 2 percent), and urged courts reviewing
vertical mergers to examine the dynamics of the particular
industry at issue to determine whether the merger may substantially lessen competition.5 The Court’s examination of
those dynamics in Brown Shoe, however, was cursory at best.
Nearly ten years later, in Ford Motor Co. v. United States,
the Court upheld a district court opinion holding that Ford’s
acquisition of an upstream automotive parts manufacturer
violated Section 7 with respect to the manufacture and sale
of spark plugs.6 The Court based its decision on “‘the foreclosure of Ford as a purchaser of about ten percent of total
industry output,’” barriers to entry in the “auto industry” and
the belief that Ford’s acquisition of Autolite would further the
industry trend towards oligopoly.7
In Brown Shoe, Ford Motor, and other cases decided around
that time,8 fact-based (as opposed to economics-based) arguments that a vertical merger had some tendency to foreclose
competition won the day, even if the apparent extent of foreclosure was by today’s standards insignificant and would
unlikely even result in serious Agency review or concern. In
addition, the Supreme Court itself cautioned that in the context of a vertical merger, “[p]ossible economies cannot be
used as a defense to illegality,” 9 and the Agencies responded
in kind by pursuing remedies that ignored efficiencies from
the transactions. The consequences of these Agency victories
were grave for the merging parties: either the merger was
enjoined or a divestiture was ordered, as conduct remedies
were not yet in vogue. And, as a result, the Agencies took a
very active role in prosecuting vertical mergers.
In the mid- to late-1970s, lower courts became more circumspect on the foreclosure issue, primarily because of the
widespread academic criticism of cases like Brown Shoe and
the corresponding development of the Chicago School of
modern antitrust economic and legal theory (including vertical theories of anticompetitive effects). For example, the
Second Circuit in Fruehauf Corp. v. FTC denied the enforcement of the FTC’s order requiring a divestiture to resolve vertical concerns.10 The court emphasized what the Court in
Brown Shoe articulated but seemed to ignore: that foreclosure
itself is not “the proscribed effect” in a vertical merger analysis under Section 7, and that “[a] showing of some probable
anticompetitive impact is still essential” to a finding of
Section 7 liability.11 Applying this framework to the facts, the
court held, “It is true that some market foreclosure may
ensue from the merger, but not one that deprives rivals from
major channels of distribution, much less one that excludes
them from the market altogether.” 12
Perhaps the most significant contributions of Fruehauf
and similar cases decided in the late 1970s13 were the recognition of basic economic principles and the advancement of
a legal analysis of vertical mergers that adequately accounts
for actual marketplace dynamics and effects. In other words,
courts in the late 1970s did not base decisions primarily on
the presence of (or even the mathematics of ) foreclosure,
but rather on what was then viewed as a complete evaluation
of the merger and its likely effects on competition based on
real world facts.14
The 1984 Vertical Merger Guidelines
In addition to the scarcity of vertical merger case law, the
Agencies’ most recent guidelines regarding the analysis of
vertical mergers—the Vertical Guidelines—are over three
decades old, are infrequently cited, and provide only a modicum of insight into how the Agencies currently make
enforcement decisions about vertical mergers.
In the 1960s, the then-current version of the Merger
Guidelines provided that the DOJ would typically challenge
a merger where the applicable percentage of foreclosure was
10 percent or less.15 By the early 1980s, the Agencies appeared
to be taking notice of the emerging economic thinking that
vertical mergers rarely result in a substantial lessening of
competition and typically generate significant procompetitive
efficiencies. Indeed, during the 1980s the Agencies brought
[T]he Agencies’ most recent guidelines regarding
the analysis of ver tical merger s—the Ver tical
Guidelines—are over three decades old, are
infrequently cited, and provide only a modicum
of insight into how the Agencies cur rently make
enforcement decisions about ver tical merger s.
very few vertical merger enforcement actions, in apparent
recognition that vertical mergers hardly ever create competitive concerns. In 1982, the Agencies published revised
Merger Guidelines that updated the 1968 Guidelines to
reflect this philosophy. And, two years later, the publication
of the Vertical Guidelines reinforced the Agencies’ view that
“non-horizontal mergers are less likely than horizontal mergers to create competitive problems.” 16 In the same breath,
however, the Vertical Guidelines also recognize that vertical
mergers are not “invariably innocuous” and provide a description of the theories of competitive harm that may lead to an
Agency challenge.
The Vertical Guidelines address the elimination of specific potential entrants (into the vertically-related market) as one
type of antitrust harm that may arise in some vertical mergers. They explain that a vertical merger may harm competition if the acquiring party, although not competing against
the acquired party, constrains the competitive behavior of
firms in the acquired party’s market by virtue of its potential
to enter. Or, it may harm competition because the acquiring
party is in a position to enter the market of the acquired party
“in a more procompetitive manner” than through the merger.17 The Guidelines are clear that in order for this theory to
apply, (1) the relevant market (whether upstream or downstream) must be highly concentrated, (2) there must be high
entry barriers, (3) the acquiring firm must have some sort of
“entry advantage” and (4) the acquired firm must have at
least a 5 percent market share.18
With respect to the other “competitive problems from
vertical mergers,” the Vertical Guidelines list two: first, “vertical mergers could create competitively objectionable barriS U M M E R
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ers to entry;” 19 and second, vertical integration “may facilitate
collusion in the upstream market by making it easier to monitor price.” 20 The Vertical Guidelines provide that entry barriers are only a basis for antitrust concern only when (1) new
entrants would have to enter both the upstream and downstream market simultaneously, (2) the vertical merger increases the difficulty of such simultaneous entry, and (3) the relevant market is concentrated.21 The Agencies are “unlikely to
challenge a merger” based on the facilitation of collusion
unless there is (1) a highly concentrated upstream market,
(2) a high level of vertical integration by upstream firms into
the retail market, and (3) a large percentage of sales of the upstream product at the retail level.22 In addition, the Vertical
Guidelines consider whether the vertical merger eliminates a
“disruptive buyer” in the downstream market.23
At the same time, the Vertical Guidelines expressly recognize that vertical mergers often create merger-specific efficiencies that the Agencies will take into consideration. The
Vertical Guidelines explain that the Agencies “will give relatively more weight to expected efficiencies in determining
whether to challenge a vertical merger than in determining
whether to challenge a horizontal merger.” 24
The Vertical Guidelines provide a helpful historical perspective on the Agencies’ approach to vertical merger enforcement in the 1980s, but not much else. The utility of the
Vertical Guidelines is limited by their vintage as evidenced by
the fact that they are neither cited by the Agencies with any
regularity nor discussed by the Agencies in any depth. In
addition, the term “foreclosure” does not appear anywhere in
the Vertical Guidelines, even though the concept was frontand-center in almost every Supreme Court and lower court
opinion from the 1960s and continues to be the basis for
more recent Agency enforcement actions. Moreover, in our
experience, efficiencies are not simply given “relatively more
weight” in vertical merger investigations; rather, because the
Agencies appreciate that vertical mergers almost invariably
produce efficiencies, they can play a critical role in the Agencies’ analysis.
In addition to the Vertical Guidelines, the Antitrust Division Policy Guide to Merger Remedies provides significant
and helpful guidance with respect to the types of remedies the
Agencies will accept to resolve concerns that accompany a
vertical merger.25 The Policy Guide explains that “in appropriate vertical merger matters the Division will consider tailored conduct remedies designed to prevent conduct that
might harm consumers while still allowing the efficiencies
that may come from the merger to be realized.” 26 This statement is in complete alignment with Agency consent orders
addressing vertical mergers. Further, the Policy Guide recognizes that structural remedies may be appropriate when “vertical integration is a small part of a larger deal,” and also
observes that “[c]onduct relief can be a particularly effective
option when a structural remedy would eliminate the merger’s potential efficiencies, but, absent a remedy, the merger
would harm competition.” 27
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The Academic Debate
The evolution of vertical merger analysis at the Agencies
(and to a lesser extent, in the courts) has coincided with
more vigorous academic debate as the tools of the trade
become more quantitative and robust. After the wave of successful Agency vertical merger challenges in the 1960s, leading antitrust scholars began to cast aspersions on the rationale courts were using to condemn vertical mergers.28 In
particular, these scholars found that the purported competitive concerns regarding foreclosure arising from vertical
mergers were exaggerated and not based on sound economic theory. In response to this criticism, lower courts began to
engage in a more complete analysis of relevant market
dynamics and to incorporate prevailing economic theory in
decisions (e.g., the concept of eliminating double marginalization, etc.). In turn, the Agencies began to scrutinize vertical mergers less closely; that approach was memorialized in
the 1984 Vertical Guidelines.
In the early- to mid-1990s, after about a decade of little (if
not nonexistent) vertical merger enforcement, the pendulum swung closer to the center.29 One group of leading economists developed a vertical theory of harm around the concept of “raising rivals’ costs,” positing that vertical integration
may allow the merged entity to increase upstream and/or
downstream competitors’ costs, which may lead to higher
prices, lower quality, or reduced output.30 As theories like raising rivals cost gained traction among academics and practitioners, the Agencies themselves gradually ramped up vertical merger enforcement, but not to the same level as the
1960s and 1970s, and with a more pragmatic approach to
resolving competitive concerns.
More recently, the academic discussion has taken a slightly different tenor and focus. Rather than articulating theories
of harm, economists have been developing models to quantify the anticompetitive effects of vertical mergers. For example, Steven Salop, one of the economists who developed the
raising rivals cost theory, also introduced the Vertical Gross
Upward Pricing Pressure Index (vGUPPI) as a method to
“score” the likely effects of a vertical merger by focusing on
unilateral incentives.31
To be sure, Section 7 practitioners should continue to
keep a watchful eye on economic theories and new methodologies for assessing vertical mergers, but this is not where the
most practical solutions are found. For this, we look to the
current decision-making of the Agencies themselves.
Consent Orders and Other Agency Guidance
Practitioners looking for guidance on how the Agencies may
approach a vertical merger may not find practical help from
the case law or the Vertical Guidelines. Agency consent
orders, however, contain a wealth of information regarding
vertical merger enforcement actions, including the theories
underlying such actions and the remedies that have resolved
the Agencies’ concerns. These consent orders are thus an
essential resource.
Recent consent orders and other Agency precedent and
guidance reveal that in vertical mergers the Agencies focus on
(1) whether the post-merger entity will have the incentive to
foreclose downstream competitors from obtaining key inputs
by, inter alia, raising those competitors’ costs of obtaining
such inputs—an inquiry to which barriers of entry are not
only relevant but critical; (2) whether the merger will result
in customer foreclosure; and/or (3) whether the merger will
facilitate collusion in the upstream or the downstream product market. As mentioned above, the Agencies historically
pursued vertical merger challenges based primarily on foreclosure related theories of harm. And, of course, the possibility of collusion is always a concern under the antitrust laws.
Although not the exclusive focus of the Agencies today, the
majority of recent vertical merger enforcement actions are
predicated on these inquiries. Consistent with the Vertical
Guidelines, the Agencies will also carefully consider any efficiency gains that will be realized from the merger.
The types of deals the Agencies are willing to accept take
many forms and are not one-size-fits-all. To achieve an appropriate balance, a majority of consent orders involving vertical mergers contain conduct remedies, such as an obligation
to license or sell an input to customers on commercially reasonable and non-discriminatory terms,32 the extension or
modification of an existing contractual agreement,33 a provision prohibiting retaliatory conduct or conduct interfering
with existing business or contractual relationships,34 and/or
the imposition of firewalls.35 The Agencies typically avoid
requiring a structural remedy to address a purely vertical
merger (i.e., one with no horizontal component), since a
divestiture is usually excessive in light of the nature of the
competitive concerns vertical mergers present and in fact
may eliminate many merger-specific efficiencies. In addition, vertical consent agreements often incorporate longterm agreements negotiated independently (i.e., before or
without Agency involvement) between the merging parties
and any affected parties, most commonly customers that are
now also competitors of the merged entity.
One of the more recent FTC consent orders involving
General Electric Co.’s acquisition of Avio S.p.A. is instructive.36 GE, a global conglomerate that, among other things,
manufactures jet engines for commercial and military aircraft
and sells them through a joint venture with a French manufacturer named CFM, agreed to merge with Avio, a manufacturer of component parts for those engines. One of Avio’s
products, an accessory gearbox (AGB), is a critical engine
component that powers electrical and other aircraft systems
and, importantly here, is customized for each engine. At the
time of the merger, Avio was working with GE’s jet engine
competitor, Pratt & Whitney, on the development of an
AGB for a new engine that P&W had agreed to sell to Airbus
for a specific aircraft, the A320neo. The only other engine
Airbus selected for that aircraft was manufactured by CFM,
in which GE holds a 50 percent stake. The project was in
advanced stages, and P&W had invested significant time
and money, but there was still a long way to go before the
engine could be certified for commercial use. P&W therefore
had no viable alternative to continuing to work on the project with Avio.
The FTC found that the merger between GE and Avio
would provide GE with the incentive to thwart the P&W/
Avio AGB development project, in large part because GE
had an economic interest in the only firm other than P&W
that Airbus selected to manufacture engines for the A320neo.
If GE acted on this incentive, it would not only enrich itself
through CFM, but might also increase its perceived market
power. The FTC concluded that GE “would likely use its
increased market power to raise price, reduce quality or delay
delivery of engines [for the A320neo].” 37
The types of deals the Agencies are willing to accept
take many for ms and are not one-size-fits-all.
To resolve these concerns, GE, Avio, and P&W independently entered into a commercial agreement providing
that Avio will complete the project with P&W unobstructed
by GE’s influence. The FTC, in turn, incorporated this commercial agreement into a consent order resolving its competitive concerns. In addition, the consent order (1) required
GE not to interfere with any P&W project staffing decisions;
(2) allowed P&W to have on-site representatives observe
Avio’s work on the project; (3) required GE to provide transition services that would enable P&W or a third party to produce AGBs for the P&W engine going forward; and (4) mandated the erection of a firewall to prevent the flow of
information regarding the P&W project from Avio to GE.
The FTC’s recent consent order resolving concerns related to Par Petroleum Corp.’s acquisition of Mid Pac Petroleum, LLC is also instructive as to how the Agencies are dealing with foreclosure concerns in enforcement actions.38
Before the merger of Par and Mid Pac, there were four bulk
suppliers of Hawaii-grade gasoline blendstock (HIBOB), the
only grade of gasoline that meets Hawaii’s emissions standards: Par, Mid Pac, Chevron Corp., and Aloha Petroleum,
Ltd. Par, an integrated petroleum products company, owned
one of two refineries in Hawaii capable of producing
HIBOB. The other refinery was owned by Chevron. Like Par
and Chevron, Mid Pac and Aloha supplied, marketed, and
distributed HIBOB throughout Hawaii, but unlike Par and
Chevron, neither Mid Pac nor Aloha owned a HIBOB refinery in Hawaii. Instead, Mid Pac and Aloha each owned a 50
percent interest in Barber’s Point Terminal, the only terminal in Hawaii not owned by Par or Chevron capable of receiving bulk quantities of HIBOB via vessel. Using the capacity
at the Barber’s Point Terminal for storage, both Mid Pac and
Aloha purchased HIBOB either from Par and/or Chevron or
from importers via ocean-going vessel. After Par’s acquisition
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of Mid Pac, however, Mid Pac’s 50 percent stake would be
controlled by Par.
The FTC found that Mid Pac’s and Aloha’s import capabilities via the Barber’s Point Terminal served to constrain
HIBOB prices, and that the transfer of Mid Pac’s 50 percent
share in the terminal to Par would relax that constraint and
thereby lessen competition. Interestingly, the FTC did not
find that the removal of Mid Pac as a competitor in and of
itself would harm competition: the consent order expressly
states that “the evidence did not show that Mid Pac’s participation in bulk supply or downstream markets is competitively
significant.” 39 Rather, the FTC was concerned with the possibility that Par might be able to use its position at Barber’s
Point to thwart Aloha’s ability to use imports to obtain a
lower price of HIBOB (i.e., by Par “parking” petroleum products at the terminal), thereby weakening Aloha as a competitor. Over the dissenting statement of Commissioner Joshua
Wright, who pointed out that such a theory ignores economic reality (i.e., for Par to profit from such exclusionary conduct
would require Chevron’s coordination, and there was scant
record evidence of coordination in the bulk supply of
HIBOB), the FTC and the Parties agreed to a consent order
requiring Par to terminate its rights at Barber’s Point Terminal.
Another recent vertical merger consent order, this time
from the DOJ, involved Google’s acquisition of ITA Software, Inc.40 ITA was a developer and licensor of QPX, a software that performs complex functions enabling users to
search for and compare airfares online. Google, which had no
presence in comparative online travel search prior to the
acquisition, purchased ITA with the intent to develop its
own flight search functionality in competition against existing travel search sites. As the DOJ explained, “Google is
acquiring a critical input not previously owned by a company that is a horizontal competitor to users of ITA[,] . . .
pos[ing] a significant risk that Google could use the acquisition to foreclose rivals or unfairly raise their costs.” 41 The
DOJ observed that ITA had a leading position among online
travel intermediaries (OTIs), a group consisting of online
travel agents (i.e., Travelocity and Expedia) and travel metasearch engines (i.e., Kayak and Trip Advisor). In addition,
because ITA was not vertically integrated, it had no incentive
to favor one OTI customer over another. However, the DOJ
found that post-merger, “Google will have the ability and
incentive to either shut off access to ITA to those competitors, or degrade the quality of QPX that is available to those
competitors.” 42
As with the FTC in GE/Avio, the DOJ resolved its concern that the Google/ITA merger would harm competition
in the downstream market for comparative flight search by
entering into a consent agreement containing several requirements as to Google’s conduct relating to ITA. Among other
things, the order required Google to (1) continue to honor
ITA’s QPX licenses and offer to renew those licenses on the
same terms for a period of five years, (2) offer QPX license
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ry [(FRAND)] terms,” (3) continue upgrading and developing QPX as ITA did when it operated independently, (4)
license any add-ons to QPX in a similar manner, (5) erect a
firewall preventing the flow of information regarding ITA
licensees to Google and (6) report any complaints regarding
any unfair treatment of OTIs. The consent also prohibited
Google from preventing any OTI from using a competing
product to ITA’s QPX. At the same time, however, the consent order does not require Google “to offer OTIs any product, service or functionality that Google develops exclusively for its new travel search service.” 43
Other recent consent orders similarly have resolved Agency
concerns of foreclosure and/or collusion by fashioning conduct remedies tailored to the facts of the case, including the
dynamics of the industry at issue. For example, in the consent
order relating to Comcast’s acquisition of control of NBC
Universal’s (NBCU) video programming content through a
joint venture arrangement,44 the DOJ expressed concern that
Comcast could harm rivals in the video programming distribution market (i.e., direct broadcast satellite providers, telephone companies that provide video services, and online video
distributors (OVDs)) by either withholding NBCU programming entirely or raising its cost. To resolve that concern,
Comcast, NBCU, and GE (which owned NBCU) agreed to
offer OVDs the same content as traditional video programming distributors and to make available to OVDs content
similar that NBCU and Comcast’s peers offer. The consent
order also provides the DOJ with sole discretion to resolve disputes between the JV and an OVD through commercial arbitration, includes anti-retaliation provisions, and requires the
JV to subject itself to Open Internet requirements. In addition, Comcast was required to relinquish control over the
management of a successful emerging OVD, Hulu, to resolve
the DOJ’s horizontal concerns.
In its consent order relating to the vertical merger between
Seadrift Coke L.P., a manufacturer of petroleum needle coke
(PNC), and GrafTech International Ltd., a manufacturer of
graphic electrode products for which PNC is a key input, the
DOJ resolved concerns that the merger would facilitate collusion.45 There, a termination clause in a pre-existing supply
contract between GrafTech and Conoco (one of Seadrift’s
four competitors in the world) provided that upon termination, GrafTech would purchase specified volumes of PNC
from Conoco for a three-year term on a most-favored nation
(MFN) pricing basis. To implement the MFN provision, the
clause also allowed GrafTech and Conoco to audit one another’s books, which contained current cost, pricing, output, and
other competitively sensitive information. As such, the DOJ
cautioned that allowing this provision to apply post-merger
would permit Seadrift to “verify a key rival’s contemporaneous prices, which could facilitate an understanding between
Seadrift and Conoco about the prices to be charged to each
customer, and could be used to enforce that understanding
by deterring cheating,” and would also discourage discounting.46 To resolve these concerns, the DOJ and the parties
agreed to “remove the terms [of the agreement] related to the
ongoing audit rights, sharing of non-public or proprietary
information, and MFN pricing.” 47 In addition, the DOJ
required the parties to provide copies of any agreement relating to the sale of PNC and to erect a firewall to segregate
employees that negotiate with Conoco from employees that
price and produce PNC at Seadrift.
The Antitrust Division Policy Guide to Merger Remedies
advises that conduct remedies must not be vague, lest the lack
of clarity render the remedy impotent to resolve the competitive concern. According to the Guide, the most common conduct remedies in vertical mergers are “firewall, nondiscrimination, mandatory licensing, transparency, and
anti-retaliation provisions, as well as prohibitions on certain
contracting practices.” 48 These conduct remedies have been
applied in the above consents as well as others since the mid1990s.
Playing “Let’s Make a Deal”
Given the last 30 years of Agency enforcement experience,
practitioners representing parties to vertical mergers in concentrated industries should understand that the Agencies
recognize the substantive difficulties of litigating a vertical
merger challenge and are amenable to reaching agreements
with the parties (and any potentially affected third parties)
that address potential competitive harms, while allowing the
marketplace to benefit from the merger-specific efficiencies.
Viewed in this light, practitioners advising clients in the context of vertical mergers where the Agencies may have a strong
argument on foreclosure and/or collusion (especially in markets with high shares) should approach both potential complainants and the Agencies with a negotiator’s mentality.
There are two strategies for resolving antitrust concerns
presented by a vertical merger, both of which have merit.
First, parties to a vertical merger can negotiate with customers and/or competitors directly to reach a private agreement that either obviates the need for Agency review or narrows the issues likely to attract Agency scrutiny. This tactic
has become popular for the same reason that parties to a
horizontal merger with major overlaps often prefer a fix-itfirst structural remedy: a private agreement can moot Agency
concerns and expedite the review process. Two examples of
this approach are the acquisitions by PepsiCo, Inc. and The
Coca-Cola Company of their respective largest bottlers (for
PepsiCo, Pepsi Bottling Group, Inc. and PepsiAmericas, Inc.,
and for Coca-Cola, Coca-Cola Enterprises Inc.), which also
bottled and distributed soft drinks for mutual competitor Dr.
Pepper Snapple Group Inc.’s (DPSG) pursuant to license
agreements.49 After announcing these transactions but before
the transactions were reviewed by the FTC, PespiCo and
Coca-Cola preemptively entered into new 20-year license
agreements with DPSG to ensure that DPSG’s soft drinks
would continue to be distributed following these acquisitions on similar terms as before the acquisitions, rather than
being foreclosed from distribution. When these acquisitions
came before the FTC, the FTC did not require the negotiated
agreement to be part of the consent order. Rather, the FTC
required, in separate consent orders, that PepsiCo and CocaCola implement firewalls to protect competitively sensitive
and confidential DPSG marketing and brand plans from
individuals at the PepsiCo and/or Coca-Cola involved in the
same functions. The benefit of this approach is that it allows
the parties to resolve the specific business issues that may
cause concern—especially foreclosure-related concern—
before getting the Agencies involved. Once an agreement is
in place, the parties can educate the Agencies about how the
agreement adequately resolves any conceivable concerns.
Second, the parties can negotiate directly with the Agencies to reach terms of an agreement that will apply to all customers and/or competitors. This approach may be preferred
when parties to a vertical merger do not believe there are significant vertical concerns—because, for example, the industry is not concentrated, there are several available alternatives
in upstream or downstream markets, there is a low degree of
vertical integration in the industry, entry barriers are low
and it is difficult to monitor prices. In addition, a party may
choose this strategy if it does not want to enter private negotiations and agreements that may go beyond what the
Agencies would otherwise require or if it would be impracticable to enter into multiple agreements.
There is no set time for when to engage in negotiations
with an at-risk customer in a vertical merger. Parties must balance the significance of the risk of Agency review and customer complaints with potential timing considerations. In
many instances, parties will contact customers at or immediately after the announcement of the vertical merger to
begin the process of negotiating contract extensions or other
bilateral arrangements that can minimize or eliminate theoretical competitive harm. A common practice of parties to
vertical mergers likely to be reviewed by the Agencies is to
include express language in press releases and other dealrelated communications clearly stating that the merged company is committed to continuing dealings with all customers,
including (where relevant) on existing or FRAND terms. In
other cases, the parties may take a wait-and-see approach to
determine whether the transaction will be reviewed by the
Agencies before engaging in any customer contacts or negotiations.
The right deal must address the Agencies’ concerns, but
should not be viewed as commercial blackmail. Take an
example where an upstream monopolist of a key input is
acquired by one of three downstream competitors. The
Agencies might theorize that the upstream monopolist, now
under the control of a downstream competitor, may withhold
the input from its competitors, raise the price of the input to
its competitors, or obtain confidential, non-public information about its competitors in the possession of the supplier.
In such a situation, the deal that adequately addresses the
Agencies’ concerns would likely include a guaranteed longterm supply of the input for a reasonable period (for examS U M M E R
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ple, until a new firm enters or a new technology emerges), as
well as implementation of firewalls or other limitations.50
There are times in these types of negotiations when a
competitor alleging that it will be harmed by a vertical merger may overplay its hand, thinking it can either hold up a
transaction by refusing to negotiate with the parties or extract
more favorable prices or deal terms than it would be able to,
absent the transaction. The Agencies are aware of these tactics and are not persuaded by them. If a customer refuses to
negotiate with merging vertical parties that are prepared to
offer the customer a long-term agreement with terms that
address the Agencies’ concerns, it is not uncommon for the
Agencies to inform the customer that it will close its HartScott-Rodino Act investigation by a specified date irrespective of whether the customers have entered into agreements
to extend its contract. In this way, if parties to a vertical
merger can convince the Agencies that a proposed conduct
remedy adequately rectifies competitive concerns, and that a
non-merging third party’s refusal to negotiate is preventing
the parties from implementing that remedy, the parties may
be able to align themselves with the Agencies and achieve an
expedited resolution.
All of this is not to suggest that practitioners should ignore
theoretical and analytical developments in the area of vertical merger analysis. But understanding the issues that complaining parties may raise, and negotiating with all interested parties to resolve those concerns, often is a simpler and less
costly approach that accomplishes the client’s objective of getting the deal through regulatory review. 䡵
1
1
U.S. Dep’t of Justice, Non-Horizontal Merger Guidelines (1984) [hereinafter
Guidelines], available at http://www.justice.gov/atr/public/guidelines/
2614.pdf.
See, e.g., Steven C. Salop & Daniel P. Culley, Potential Competitive Effects
of Vertical Mergers: A How-To Guide for Practitioners, Georgetown University
Law Center (2014), available at http://scholarship.law.georgetown.edu/cgi/
viewcontent.cgi?article=2404&context=facpub.
S T O R I E S
may simply free up that much of the market, in which the merging firm’s
competitors and the merged firm formerly transacted, for new transactions
between the merged firm’s competitors and the merging firm’s competitors.
See 2 P HILLIP A REEDA & D ONALD T URNER , A NTITRUST L AW ¶ 527a (1978).”).
12
Id. at 360.
13
See, e.g., United States v. Hammermill Paper Co., 429 F. Supp. 1271 (W.D.
Pa. 1977).
14
Fruehauf itself articulated a comprehensive summary of the marketplace
factors courts should typically consider in evaluating whether a vertical
merger may harm competition. Those factors include the “the nature and
economic purpose of the arrangement, the likelihood and size of any market foreclosure, the extent of concentration of sellers and buyers in the
industry, the capital cost required to enter the market [and related barriers
to entry], the market share needed by a buyer or seller to achieve a profitable level of production (sometimes referred to as ‘scale economy’), the
existence of a trend toward vertical concentration or oligopoly in the industry, [] whether the merger will eliminate potential competition by one of the
merging parties[,] . . . the degree of market power that would be possessed by the merged enterprise and the number and strength of competing suppliers and purchasers.” 603 F.2d at 353. These factors provide a
helpful reference point for the practitioner; however, no court since Fruehauf
has applied these factors to a vertical merger, and the factors themselves
reveal very little about how the Agencies make vertical merger enforcement
decisions.
15
U.S. Dep’t of Justice, Merger Guidelines (1968), available at http://www.
justice.gov/atr/hmerger/11247.pdf.
16
Guidelines, supra note 1, § 4.0.
17
Id. § 4.112.
18
Id. §§ 4.131–133.
19
Id. § 4.21.
20
Id. § 4.221.
21
Id. § 4.211–213.
22
Id. § 4.221.
23
Id. § 4.222. Although not discussed here, the Vertical Guidelines also discuss the harm to competition from vertical mergers where an upstream entity subject to government regulation acquires a downstream buyer and is
able to deal with the buyer on more favorable terms, effectively circumventing regulation. See id. § 4.23.
24
Id. § 4.24.
25
U.S. Dep’t of Justice, Antitrust Division Policy Guide to Merger Remedies
(2011), available at http://www.justice.gov/atr/public/guidelines/272350.
pdf.
26
Id. at 5; see also id. at 13 (“Tailoring a conduct remedy to the particular competitive concern(s) raised by a vertical merger can effectively prevent harmful conduct while preserving the beneficial aspects of the merger.”).
3
603 F.2d 345 (2d Cir. 1979).
4
370 U.S. 294, 323–24 (1962) (citations omitted).
27
5
Id. at 5, 7.
Id. at 329.
28
P HILLIP A REEDA & D ONALD T URNER , 4A A NTITRUST L AW : A N A NALYSIS OF
A NTITRUST P RINCIPLES AND T HEIR A PPLICATION ¶ 1004 (3d ed. 2009); R OBERT
H. B ORK , T HE A NTITRUST PARADOX : A P OLICY AT WAR WITH I TSELF 232 (1978);
Dennis Carlton, Ver tical Integration in Competitive Markets Under
Uncertainty, 27 J. I NDUS . E CON . 189 (1979); see also Martin K. Perry,
Vertical Integration: Determinants and Effects, in 1 H ANDBOOK OF I NDUSTRIAL
O RGANIZATION 183 (Richard Schmalensee & Robert Willig eds., 1989); Oliver
E. Williamson, Vertical Integration and Related Variations on a TransactionCost Economics Theme, in N EW D EVELOPMENTS IN THE A NALYSIS OF M ARKET
S TRUCTURE 149 (Joseph Stiglitz & G. Frank Matthewson eds., 1986).
29
Herbert Hovenkamp, Post-Chicago Antitrust: A Review and Critique, 2001
C OLUM . B US . L. R EV. 257 (2001); Patrick Bolton & Michael D. Whinston,
The“Foreclosure” Effects of Vertical Mergers, 147 J. I NST ’ L & T HEORETICAL
E CON . 207 (1991); Janusz A. Ordover et al., Equilibrium Vertical Foreclosure,
80 A M . E CON . R EV. 127 (1990); Michael A. Salinger, Vertical Mergers and
Market Foreclosure, 103 Q.J. E CON . 345 (1988).
30
See, e.g., Michael H. Riordan & Steven C. Salop, Evaluating Vertical Mergers:
A Post-Chicago Approach, 63 A NTITRUST L.J. 513, 549 (1995).
6
405 U.S. 562 (1972).
7
Id. at 567–71 (citation omitted).
8
See, e.g., Ash Grove Cement Co. v. FTC, 577 F.2d 1368 (9th Cir. 1978);
Miss. River Corp. v. FTC, 454 F.2d 1083 (8th Cir. 1972); U.S. Steel Corp.
v. FTC, 426 F.2d 592 (6th Cir. 1970); United States v. Sybron Corp., 329
F. Supp. 919 (E.D. Pa. 1971); United States v. Kimberly-Clark Corp., 264
F. Supp. 439 (N.D. Cal. 1967); United States v. Jerrold Elecs. Corp., 187
F. Supp. 545 (E.D. Pa. 1960), aff’d, 365 U.S. 567 (1961); see generally Alan
A. Fischer & Richard Sciacca, An Economic Analysis of Vertical Merger
Enforcement Policy, 6 R ES . L. & E CON . 1, 59 (1984).
9
FTC v. Procter & Gamble Co., 386 U.S. 568, 580 (1967).
10
603 F.2d 345 (2d Cir. 1979).
11
Id. at 352–53; see also id. at 352 n.9 (“[W]e are unwilling to assume that
any vertical foreclosure lessens competition. Absent very high market concentration or some other factor threatening a tangible anticompetitive effect,
a vertical merger may simply realign sales patterns, for insofar as the merger forecloses some of the market from the merging firms’ competitors, it
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31
32
33
34
Serge X. Moresi & Steven C. Salop, vGUPPI: Scoring Unilateral Pricing
Incentives in Vertical Mergers, 79 A NTITRUST L.J. 185 (2013).
See, e.g., Competitive Impact Statement, United States v. Google Inc., 1:11cv-00688 (D.D.C. Apr. 8, 2011) [hereinafter Google/ITA CIS], available at
http://www.justice.gov/atr/cases/f269600/269620.pdf; Competitive
Impact Statement, United States v. Comcast Corp., 1:11-cv-00106 (D.D.C.
Jan. 18, 2011), [hereinafter Comcast/NBCU CIS], available at http://www.
justice.gov/atr/cases/f266100/266158.pdf.
See, e.g., Gen. Elec. Co., 78 Fed. Reg. 45,194 (FTC July 26, 2013) [hereinafter GE/Avio Consent Analysis], available at https://www.ftc.gov/
sites/default/files/documents/cases/2013/07/130719generalelectric
analysis.pdf (analysis of proposed agreement containing consent order to
aid public comment); Google/ITA CIS, supra note 32.
See, e.g., GE/Avio Consent Analysis, supra note 33; Comcast/NBCU CIS,
supra note 32; Google/ITA CIS, supra note 32.
35
See, e.g., GE/Avio Consent Analysis, supra note 33; Google/ITA CIS, supra
note 32; Competitive Impact Statement, United States v. Graf Tech Int’l Ltd.,
1:10-cv-02039 (D.D.C. Nov. 29, 2010) [hereinafter GrafTech CIS], available
at http://www.justice.gov/atr/cases/f264600/264608.pdf.
36
GE/Avio Consent Analysis, supra note 33; Press Release, Fed. Trade
Comm’n, General Electric Agrees to Settlement with FTC that Allows the
Purchase of Avio’s Aviation Business (July 19, 2013), available at https://
www.ftc.gov/news-events/press-releases/2013/07/general-electric-agreessettlement-ftc-allows-purchase-avio%E2%80%99s.
37
GE/Avio Consent Analysis, supra note 33, at 45,196.
38
See, e.g., Par Petroleum Corp., 80 Fed. Reg. 15,605 (FTC Mar. 24, 2015)
[hereinafter Par/MidPac Consent Analysis], available at https://www.
ftc.gov/system/files/documents/federal_register_notices/2015/03/1503
24parpetroleumfrn.pdf (analysis of proposed agreement containing consent order to aid public comment); Press Release, Fed. Trade Comm’n, FTC
Puts Conditions on Par Petroleum Corporation’s Acquisition of Mid Pac
Petroleum, LLC (Mar. 18, 2015), available at https://www.ftc.gov/newsevents/press-releases/2015/03/ftc-puts-conditions-par-petroleumcorporations-acquisition-mid.
39
Par/MidPac Consent Analysis, supra note 38, at 15,607.
40
See Google/ITA CIS, supra note 32; Press Release, U.S. Dep’t of Justice,
Justice Department Requires Google Inc. to Develop and License Travel
Software in Order to Proceed with Its Acquisition of ITA Software Inc. (Apr.
8, 2011), available at http://www.justice.gov/opa/pr/justice-departmentrequires-google-inc-develop-and-license-travel-software-order-proceed-its.
41
Google/ITA CIS, supra note 32, at 2.
42
Id. at 9.
43
Id. at 11.
44
See Comcast/NBCU CIS, supra note 32; Press Release, U.S. Dep’t of
Justice, Justice Department Allows Comcast-NBCU Joint Venture to Proceed
with Conditions (Jan. 18, 2011), available at http://www.justice.gov/atr/
public/press_releases/2011/266149.pdf.
45
GrafTech CIS, supra note 35; Press Release, U.S. Dep’t of Justice, Justice
Department Requires GrafTech International to Make Key Changes to Supply
Contracts in Order to Proceed with its Acquisition of Seadrift LP (Nov. 29,
2010), available at http://www.justice.gov/opa/pr/justice-departmentrequires-graftech-international-make-key-changes-supply-contracts-order.
46
GrafTech CIS, supra note 35, at 7.
47
Id. at 9.
48
Antitrust Division Policy Guide to Merger Remedies, supra note 25, at 13.
49
PepsiCo, Inc., 75 Fed. Reg. 10,795 (FTC Mar. 9, 2010), available at https://
www.ftc.gov/sites/default/files/documents/federal_register_notices/
pepsico-inc.analysis-agreement-containing-consent-order-aid-publiccomment/100309pepsicoanal.pdf (analysis of proposed agreement containing consent order to aid public comment); The Coca-Cola Co., 75 Fed.
Reg. 61,141 (FTC Oct. 4, 2010), available at https://www.ftc.gov/sites/
default/files/documents/cases/2010/09/101004cocacolaanal.pdf (analysis of proposed agreement containing consent order to aid public comment)
50
E.g., GrafTech CIS, supra note 35.
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