On April 12, 2016, the Federal Trade Commission (FTC) and the US Department of Justice (DOJ) issued a joint statement to explain their “standard of review under the antitrust statutes of proposed transactions within the defense industry.” This joint statement regarding the antitrust review standards applicable to a specific industry is highly unusual, and reflects the critical nature of the industry to our national security as well as reinforcing the importance of the US Department of Defense (DoD) in the merger review process.
On April 12, 2016, the Federal Trade Commission (FTC) and the US Department of Justice (DOJ) issued a joint statement to explain their “standard of review under the antitrust statutes of proposed transactions within the defense industry.” This joint statement regarding the antitrust review standards applicable to a specific industry is highly unusual, and reflects the critical nature of the industry to our national security as well as reinforcing the importance of the US Department of Defense (DoD) in the merger review process. In late 2015 and earlier this year, DoD had pushed for legislation to enable a DoD review of defense industry acquisitions independent of the antitrust review. In light of the statement from the FTC and DOJ, and the reinforcement of the importance of the Pentagon and national security interests in the antitrust review process, the Pentagon indicates it will no longer pursue that legislation.
Much of the statement reinforces what has been clear for several decades. Namely, DoD has a very important role in defense antitrust reviews, and the antitrust agencies place great weight on DoD’s views. In addition to those reminders, though, the overall tone of the statement indicates that the agencies may seek to expand the time horizon for antitrust concern and may seek to protect competition if there are ongoing R&D efforts in a particular area even if there is no current or near-term planned competition in which the merging companies would compete to supply a defense system.
The FTC/DOJ statement stresses several elements that, in combination, appear to signal antitrust sensitivities even when firms do not have competing products and are not bidding on current or near-term procurements. First, the statement focuses on the “incipiency” standard of Section 7 of the Clayton Act under which transactions can be challenged even when “certainty about the anticompetitive effect is seldom possible.” Second, the statement notes that a central issue in the antitrust review on which “the Agencies are especially focused” is “ensuring that defense mergers will not adversely affect short- and long-term innovation crucial to our national security.” Third, the statement notes that the agencies are focused on ensuring that “current, planned, and future procurement competition is robust.” The agencies’ review process seeks to protect innovation and R&D activities in the short term to preserve the potential for longer term competition.
At least two different types of transactions could have potential implications for R&D and innovation. First, the agencies can challenge a combination based on the merging parties’ presence as leaders in innovation in an industry. This is illustrated by two recent DOJ merger challenges, in which alleged overlapping R&D activities featured heavily in the DOJ’s objection to the merger. In 2015, the DOJ rejected a proposed divestiture remedy, resulting in Applied Materials, Inc. and Tokyo Electron Ltd. abandoning their planned combination. A senior DOJ Antitrust Division official remarked that “[t]he companies’ decision to abandon this merger preserves competition for semiconductor manufacturing equipment.” She further commented that “[t]he semiconductor industry is critically important to the American economy, and the proposed remedy would not have replaced the competition eliminated by the merger, particularly with respect to the development of equipment for next-generation semiconductors.”
Similarly, in the DOJ’s complaint last week challenging the proposed combination of Halliburton and Baker Hughes, the DOJ alleged that “[c]ompetition . . . would be diminished in the overall business of oilfield services, where there would be one fewer globally-integrated provider competing for the most substantial projects and driving innovation to new solutions.” The DOJ viewed the transaction as combining two of only three significant suppliers. The complaint cited the amount spent on research and development by the merging parties and argued that the remedy proposed by Halliburton would result in the acquirer of the divested assets having “less research and development” and “provid[ing] fewer innovations and customized solutions.”
Second, under the language of the joint statement, the agencies might consider a transaction’s impacts on R&D and innovation if the buyer is not a competitor of the target company, but might have different incentives in relation to R&D spending and innovation. A buyer whose business model focuses on lower levels of R&D investments compared to the amounts the target has been investing could result in less innovation moving forward, even though the buyer is not a competitor of the target. One might say this transaction reduces innovation compared to the level of innovation that would occur without the acquisition. However, challenging a transaction on that basis, where there is neither a horizontal nor a vertical combination, hearkens back to long-abandoned theories of competitive harm, such as conglomerate mergers.
We will have to see how future defense industry antitrust reviews proceed. However, it is clear that the agencies place great weight on preserving competition on price and innovation in this space to protect “national security, American soldiers, sailors, marines and air crews, and our nation’s taxpayers.”