Antitrust Scrutiny of Supply Chain Issues Continues
The spring thaw has yet to set in, but Washington this month has been a hotbed of antitrust regulatory activity impacting supply chains. On February 15, the Federal Trade Commission (FTC) announced that Lockheed Martin scrapped a $4.4 billion acquisition of its supplier, Aerojet Rocketdyne, in the face of a complaint the Commission filed earlier this year to block the deal. The complaint alleged that the acquisition would eliminate the last independent U.S. supplier of missile propulsion systems and give Lockheed the ability to cut off its competitors’ access to these key components. The Commission argued the deal would not only harm rival defense contractors but further consolidate markets critical to national security.
The announcement marked the second time in a week that parties walked away from a significant vertical merger under challenge by the FTC. The day before, the Commission announced that Nvidia Corp., a maker of semiconductor chips, was dropping its $40 billion bid to acquire Arm Ltd., two months into litigation with the FTC. Arm creates and licenses designs for computer chips used in a variety of devices, from smartphones to driver-assistance systems. The Commission said the proposed merger would lessen competition by giving Nvidia control over Arm’s chip designs and access to confidential information Arm’s licensees, including Nvidia competitors, shared with Arm. The FTC touted the result as “particularly significant because it represents the first abandonment of a litigated vertical merger in many years.”
The announcements come as the FTC has changed its thinking about vertical mergers, combinations of companies in different stages of the supply chain. In September 2021, the Commission voted to withdraw its approval of the Vertical Merger Guidelines published jointly with the Department of Justice (DOJ) the year before. The Guidelines recognized that vertical mergers “often” benefit consumers because the combined company no longer has to pay the markup required by an independent supplier, a concept known as the “elimination of double marginalization” (EDM). Writing for a three-member majority, FTC Chair Lina Khan expressed skepticism that any savings in input costs are passed on to the consumer, calling the Guidelines’ reliance on EDM “theoretically and factually misplaced” and vowing to overhaul the Guidelines.
Last month, the FTC and DOJ issued a request for information (RFI), seeking public comment on revisions to “modernize” the Guidelines’ approach to evaluating vertical and horizontal mergers. The RFI noted that while DOJ did not withdraw from the Guidelines, it “shares the Commission’s substantive concerns with economic and legal errors in them.” The comment period does not close until March 21, so it remains to be seen what if any impact the revised Guidelines will have on the agencies’ treatment of vertical mergers. The FTC’s statements around the withdrawal together with its enforcement actions against Lockheed and Nvidia may, however, portend greater scrutiny of these transactions.
In another move with potential consequences for supply chains, the DOJ Antitrust Division and FBI on February 17 announced an initiative to investigate and prosecute companies that exploit supply chain disruptions to overcharge consumers and collude with competitors. The announcement warns that individuals and businesses may be using supply chain disruptions from the COVID-19 pandemic as cover for price fixing and other collusive schemes. As part of the initiative, DOJ is “prioritizing any existing investigations where competitors may be exploiting supply chain disruptions for illicit profit and is undertaking measures to proactively investigate collusion in industries particularly affected by supply disruptions.” DOJ has formed a working group on global supply chain collusion and will share intelligence with antitrust authorities in Australia, Canada, New Zealand, and the UK.
With the continued enhanced antitrust scrutiny of all manner of commercial activities, companies considering vertical mergers or price increases to curb supply chain constraints should actively monitor these developments.