• Unusual Antitrust Agencies’ Guidance on Defense Mergers
  • April 14, 2016 | Authors: Jeffrey P. Bialos; James R. McGibbon
  • Law Firms: Eversheds Sutherland (US) LLP - Washington Office ; Eversheds Sutherland (US) LLP - Atlanta Office
  • The Department of Justice (Justice) and the Federal Trade Commission (FTC) today issued an unusual joint statement that highlighted their continued commitment to preserve defense industry competition by closely reviewing mergers and acquisitions in that sector, in cooperation with the Department of Defense (DoD).

    On one level, the substantive content of the joint statement is largely not new - it essentially reiterates existing antitrust law and policy as applied to mergers and acquisitions within the defense industry. As such, Justice and the FTC note the continued need to focus, in particular, on the effect any proposed defense mergers may have on national security innovations, as well as the need to maintain a “sufficient number of competitors, including both prime and subcontractors,” in order to sustain robust procurement competition and realize the resulting affordability such competition brings.

    Nevertheless, the joint statement is noteworthy for a number of reasons.

    First, the statement puts to rest the DoD’s request for additional legislative authority to review defense mergers that arose out of concerns expressed during the recent Lockheed acquisition of Sikorsky. The joint statement is apparently the result of an inter-agency process that reviewed this request and determined not to proceed with it. Not surprisingly, the DoD has now withdrawn its legislative request and the Administration is no longer expected to seek any additional merger review legislation at this time.

    Second, the joint statement does help to alleviate DoD concerns that its equities will be considered in merger reviews. The wording suggests that the antitrust agencies will afford due deference to DoD concerns about the competitive effects of mergers where the agencies have discretion to do so within the context of antitrust law. As the joint statement notes, while the existing Justice/FTC Horizontal Merger Guidelines are “necessarily general,” they also are “sufficiently flexible to address DoD concerns that reductions in current or future competitors can adversely affect competition in the defense industry and thus, national security.” This statement indicates that the antitrust agencies will seriously consider the DoD’s expressed policy against prime level mergers. In effect, the antitrust agencies have reiterated that the antitrust law is a common law of competition to be shaped and applied by the agencies and the courts, and that they will review DoD’s concerns in the context of particular transactions.

    Third, the joint statement does put the defense industry on notice that the antitrust agencies will continue to be vigilant in preserving competition in defense markets. As Assistant Attorney General William Baer, in charge of the Justice Department’s Antitrust Division, stated: “[i]n light of recent speculation about possible future consolidation, we thought it timely to reinforce that message.” In particular, the joint statement notes that mergers and acquisitions at the prime and subcontractor level will be scrutinized in a context where “[m]any sectors of the defense industry are already highly concentrated” and “[o]thers appear to be on a similar trajectory.” Interestingly, the statement also suggests that the Clayton Act’s incipiency standard (i.e., the prohibition on mergers whose effect “may be to substantially lessen competition”) could be used to address mergers in market sectors that are in the process of consolidating. The intent of this standard was to consider the future effect—not just actual impact—in determining whether a merger is illegal. It remains to be seen how this standard will be applied in practice, and how defense merger scrutiny may change or intensify—especially at the subsystem level—in the future.