FTC Vote to Repeal Vertical Merger Guidelines Signals Shift to Stronger Enforcement
Statue outside the Federal Trade Commission. Photo courtesy of Amaury Laporte via Flikr
The Federal Trade Commission (FTC) voted 3-2 on party lines Wednesday to repeal guidelines for blocking vertical mergers that Democratic commissioners found too permissive. The decision comes after the White House encouraged the FTC and Justice Department (DOJ) to review and revise the agencies’ merger guidelines in a July executive order.
These repealed Trump-era rules set new standards for assessing mergers between corporations from different sectors (i.e., when a grain trader buys a milling company). For more than 40 years, antitrust enforcers have waved through these deals by arguing that they make businesses more efficient. Despite some improvements, the vertical merger guidelines issued by the FTC and DOJ in June 2020 largely upheld this view. But in the food industry and beyond, increased vertical integration has created powerful corporate empires that exclude competitors and squeeze farmers and consumers. A new guard of antitrust enforcers at the FTC want to see stronger stances against vertical integration by dominant businesses, and repealing old guidelines is a symbolic step toward stronger enforcement. The jointly issued 2020 vertical merger guidelines will remain in place at the DOJ, according to a statement.
“Going forward we need to take a hard look at our approach to so-called efficiencies in our merger review,” said Commissioner Rohit Chopra. “We cannot ignore situations where firms in many sectors are becoming too big to fail … and we certainly shouldn’t trade off the many benefits of a competitive market … for a theoretical short-term price cut that sometimes never materializes.”
Federal antitrust agencies started issuing merger guidelines in 1968 to publicize their approach to enforcement and help businesses anticipate merger challenges (so firms would hopefully think twice about merging in the first place). These guidelines do not carry the force of law, but they reflect prevailing legal interpretations. The 1968 guidelines applied to all mergers and focused on clear limits — mergers of a certain size or deals with a “reasonable probability” of harming competition were presumed illegal under the Clayton Act. Prevailing antitrust legal theory in the 1960s also took a strong stance against vertical integration.
But as conservative antitrust theories prevailed in the 1970s and 1980s, enforcers in 1984 issued a separate, more lenient set of merger guidelines for deals between businesses that did not directly compete, or “non-horizontal” mergers. This laissez-faire “Chicago School” theory argued that vertical mergers generally helped consumers. “Vertical mergers are means of creating efficiency, not of injuring competition,” argued legal scholar Robert Bork in his influential book The Antitrust Paradox. By Bork’s logic, combining multiple steps of a supply chain under one corporate roof can improve efficiency, cut unnecessary markups, and allow firms to offer lower prices even if they become dominant.
But these theories overlook many risks in letting dominant firms move into new sectors or take over their supply chains. A report by the Roosevelt Institute argues that decades of vertical deals created “walled garden” corporate networks that force consumers to buy related products from one corporation (such as a seed company that sells accompanying weed killers).
Sprawling conglomerates can also leverage their dominance in one market to take over another and raise costs for competitors. For instance, grain trading and feed giant Cargill vertically integrated into meatpacking through a series of acquisitions starting in 1979. Most recently, Cargill made a joint bid for the third-largest chicken corporation, Sanderson Farms. Cargill can use their grain trading prowess to minimize animal feed costs in their meat business, but theoretically, they also have the power to hurt meat industry competitors by charging them more for feed, given their dominance in that market.
Cargill’s acquisitions were part of a larger trend toward vertical integration in meatpacking, which raised barriers to entry into the industry. It is hard for smaller, independent meatpacking plants to compete with giants that own or control all parts of meat production, from grain to grocery shelf. This facilitates further industry consolidation and forces farmers to sell to a smaller number of powerful meatpackers, which sometimes own the baby animals and feed that they require farmers to use by contract.
Permissive vertical merger policy can also give leading players a foothold in new, potentially disruptive industries. In agriculture, leading agrichemical and equipment giants have acquired dozens of agriculture software startups in a race to corner digital agriculture markets and farmer data. Seed makers want to own the business of data-driven planting advice and software for farmers to better push their products, simultaneously shutting out other seed competitors and new digital agriculture businesses.
Given increasing evidence of the harms of vertical mergers, antitrust scholars and advocates have called on federal enforcers to update the vertical merger guidelines, which the DOJ and FTC eventually did in 2020. The update said enforcers would start to weigh some harms of vertical integration, including foreclosure and access to sensitive business information. But antitrust scholars and economists argued that the guidelines overlooked other risks — eliminating up-and-coming rivals, evading regulation, facilitating collusion, and increasing barriers to entry, among others.
Critics also said that the 2020 guidelines were still too permissive of vertical deals. For one, they allowed corporations to use efficiency justifications to merge. This is weaker than existing case law, which holds that efficiencies cannot be used to justify anti-competitive mergers. “I’m worried that the 2020 guidelines’ misguided discussion of the purported pro-competitive benefits of vertical mergers could become difficult to correct if relied on by courts,” said current FTC chairwoman Lina Khan on Wednesday, opening the vote to repeal the guidelines.
The guidelines also lacked anti-competitive presumptions, according to Steven Salop, a Georgetown professor of economics and law and leading scholar on vertical mergers. This means vertical mergers are presumed to be legal unless enforcers can prove otherwise, rather than saying mergers involving dominant businesses or foreclosure risks are illegal unless the corporations can prove otherwise. “They have an anti-enforcement bias in placing certain burdens on the agencies that should be placed on the merging parties,” Salop said via email.
For these and other reasons, the two Democratic commissioners, Chopra and Rebecca Kelly Slaughter, voted not to adopt the 2020 guidelines, but they were overruled by the three Republican commissioners and the guidelines went into effect late June 2020. On Wednesday, Chopra and Slaughter were joined by Khan in a 3-2 vote overruling that decision.
It is unclear when the Commission will put forward new vertical merger guidelines or what they will contain. Commissioner Slaughter questioned the need to have separate horizontal and vertical merger guidelines altogether.
“I am not convinced that it continues to make sense to have separate guidelines for horizontal and vertical transactions; in my experience, few transactions are purely horizontal or purely vertical,” Slaughter said. “It’s my hope that the agencies can work together, quickly, to develop and consider a single set of merger guidelines that accurately reflect contemporary market realities and economic literature.”
Whatever the FTC puts forth, new guidelines are just one part of a larger effort to reform antitrust enforcement and block more mergers. The next step would be to act on these guidelines and bring more cases. But decades of lax vertical merger policy means that there are few legal opinions for plaintiffs to draw on. The DOJ’s 2018 case against AT&T and Time Warner was the first full trial vertical merger challenge since the 1980s, and the feds lost. “I think the much bigger trick, rather than trying to figure out exactly how to identify a harm in the guidelines … [is] how do you convince a judge to buy it,” says John Newman, a professor at the University of Miami School of Law. “That starts with just bringing cases.”
Though the current federal judiciary tends to favor corporate interests, federal antitrust enforcers can still put forth compelling arguments to try and shape case law. Where bad precedent is too powerful, Congress can also intervene. Last year the House Judiciary Committee recommended that Congress strengthen the law around vertical mergers, such as implementing structural presumptions.
What We’re Reading
The White House published a brief on rising meat prices and the need to address consolidation in the meatpacking industry. (White House/National Public Radio)
A new study by the Institute for Agriculture and Trade Policy found that, between 2010 and 2020, “just 31% of farmers who applied to the Environmental Quality Incentives Program (EQIP) and only 42% of farmers who applied to the Conservation Stewardship Program (CSP) were awarded contracts,” in part due to lack of funding. (The Institute for Agriculture and Trade Policy)
New York’s 65,000 food delivery workers have become targets for violent bike theft, adding another risk to this dangerous, low-paying job with little labor protections. (New York Magazine)