United States: FTC Approves Northrop Grumman's Acquisition Of Orbital ATK With Behavioral Conditions

On June 5, 2018, the Federal Trade Commission (FTC) conditionally approved Northrop Grumman's acquisition of Orbital ATK.1 Northrop Grumman, a missile system provider to the US government, sought to acquire a missile component supplier, Orbital ATK. The Northrop/Orbital ATK merger is a vertical merger—the combination of a supplier and a customer—rather than a horizontal merger that combines two competitors. The FTC conditioned its approval of the transaction on several behavioral remedy commitments, rather than requiring a structural remedy, such as a divestiture.

The transaction is notable because it illustrates that, despite the antitrust authorities' preference for structural remedies, the FTC is willing to consider behavioral or conduct remedies in vertical deals in certain circumstances. The FTC recognizes that vertical mergers, unlike horizontal mergers, do not "reduce competition on their face" because the transaction will not eliminate a competitor.2 In addition to the vertical nature of the Northrop Grumman/Orbital ATK combination, the merger also presented several specific factors that the FTC indicated made a behavioral remedy appropriate in this case. Accordingly, the settlement offers important insights for merging companies seeking to obtain antitrust approval without structural remedy requirements in vertical deals—at least at the FTC. Whether DOJ in some circumstances would be amenable in vertical deals to merger remedies that are primarily behavioral is yet to be seen.

Background

Northrop Grumman is an aerospace and defense company that provides the Department of Defense (DOD) and other US government agencies with missile systems. According to the FTC, these missile systems are "essential" for national defense.3

Orbital ATK develops and supplies solid rocket motors (SRMs), which provide thrust to propel missiles to their targets. The FTC focused its review on SRMs used in defense systems, although Orbital ATK SRMs are also used in commercial and scientific applications. The FTC characterized the SRMs as an "essential input" to the missile systems offered by both Northrop and Northrop's competitors.

In September 2017, Northrop reached an agreement to acquire Orbital ATK for approximately $7.8 billion.4 The FTC investigated the transaction for over nine months, focusing on the merger's potential impact on the supply of missile systems to the US government for national defense purposes. Specifically, the FTC noted that Northrop was one of only a few competitors capable of competing to provide missile systems to the US government, and that Orbital ATK was one of only two companies providing SRMs for most US missile systems. The FTC also noted that the missile products at issue required technological expertise and specialized facilities that made it difficult for new competitors to enter the market.

Ultimately, the FTC was concerned that, post-merger, the vertically integrated company could disadvantage Northrop's missile system competitors by denying or limiting their access to Orbital ATK SRMs. The FTC alleged that this might in turn force Northrop's competitors to raise prices for missile systems or compete less aggressively to win missile programs.5 Although not directly stated in the FTC's complaint, the FTC also expressed concern that the merger might provide the combined company access to competitors' sensitive confidential information.6 Specifically, the FTC noted that any missile system competitors working with Orbital ATK had to share proprietary information when purchasing SRMs. The FTC stated that, post-merger, Northrop might be able to access this proprietary information through its ownership of Orbital ATK. Similarly, Orbital ATK's competitors share proprietary information with Northrop when working on SRMs for Northrop missile systems, and the FTC was concerned that, post-merger, Orbital ATK might be able to access its competitors' information.

To ameliorate these concerns, the FTC imposed behavioral remedies on the combined company, including provisions requiring:7

  • Non-Discrimination. The FTC required the combined company to make Orbital ATK SRM products and services available to missile system competitors on a non-discriminatory basis. The Consent Agreement requires the companies to commit to non-discrimination across a variety of terms, including price, schedule, quality, data, personnel, investment, technology, innovation, design, and risk.
  • Firewalls. The FTC required the combined company to implement firewalls to ensure that confidential information obtained from competitors could not be misused. Specifically, the company is required to implement firewalls between: (A) the Orbital ATK team offering SRMs to competing missile system providers; and (B) the Northrop team offering missile systems to the United States government using competing SRM providers.
  • Compliance Monitor. The settlement set out that the DOD would appoint a Compliance Officer to oversee the combined company's compliance with the decree. The Compliance Officer will have the power to investigate any third party complaints regarding Northrop/Orbital ATK's compliance with the FTC's decree.
  • Compliance Program and Reporting. The FTC required the merging parties to implement a compliance program and create regular compliance reports, to be submitted to the FTC, DOD, and Compliance Officer.

The FTC's consent decree has a term of twenty years. Although this is longer than the FTC's typical merger decree time period (typically ten years), the FTC has imposed 20-year terms in other merger consents where the remedy is primarily behavioral in nature.8

In a departure from typical procedure, FTC Bureau of Competition Deputy Director Ian Conner published a statement on the merger and settlement.9 (Normally, the Commission or individual Commissioners issue statements on FTC actions.) The Deputy Director touted the cooperation between the FTC and DOD in the merger investigation. The Deputy Director also reiterated that, despite the settlement, the FTC still "disfavors behavioral remedies," except in "rare cases."

Takeaways

The FTC and the Department of Justice Antitrust Division (DOJ) have long stated a preference for structural remedies, rather than behavioral or conduct conditions, to resolve certain competition concerns. Nevertheless, in many cases involving vertical mergers, both the FTC and the DOJ have accepted behavioral remedies.

Recent public statements raised questions as to whether the FTC or DOJ might now be unwilling to consider behavioral remedies even for vertical mergers.10 The FTC's decree in this transaction shows that under certain circumstances—as described in the statement published by Deputy Director Conner—the FTC may be willing to consider behavioral remedies in vertical cases.11

  • Characteristics specific to the relevant industry—here, the defense industry—may have encouraged the FTC to be more willing to accept behavioral remedies.

The FTC noted several unique features of the relevant industry at issue in Northrop/Orbital ATK—national defense—which may have lead the FTC to be more willing to accept behavioral remedies.

The national defense industry is unique in that there is only one buyer—the United States government. The FTC specifically noted that the federal government purchases the missile products at issue and frequently funds research and development in the area.12 The presence of a powerful customer has been noted by the authorities as a force that may be able to constrain any post-merger attempts to increase prices.13 Here, the fact that the combined company would be competing for the business of a single buyer that appears to have supported the transaction likely made the FTC more willing to accept behavioral conditions, as compared to a merger that implicated a market with many smaller buyers.

Additionally, Deputy Director Conner also cited the long history of imposing conduct remedies to resolve potential concerns associated with defense industry mergers as a factor weighing in favor of imposing behavioral remedies in this case. In particular, he cited the FTC's review of a proposed joint venture between Boeing Corporation and Lockheed Martin in 2006 14 and DOJ's review of Northrop Grumman's 2002 acquisition of TRW Inc.15 Both cases were resolved with behavioral remedies similar to those in the Northrop/Orbital ATK deal, which focused on preventing the merging parties from discriminating against competitors. This history provided "ample precedent" for accepting behavioral remedies in the present case.16

  • The DOD involvement in the merger review and decree enforcement process may have caused the FTC to be more willing to consider a conduct remedy.

The involvement of the Department of Defense as a "specialist" agency may have also weighed in favor of behavioral remedies in this case. Not only did the DOJ work closely with the FTC in evaluating the merger,17 but the settlement also anticipates that the Department of Defense will be engaged in oversight and enforcement of the decree.18 The DOJ and FTC have both criticized conduct remedies as potentially involving the antitrust authorities in a "regulatory" role of monitoring conduct and compliance.19 With the involvement of the Department of Defense in the selection of a Compliance Officer to monitor the parties' ongoing adherence to the decree, the FTC may have been more willing to accept behavioral remedies.

  • Merger efficiencies remain critical for FTC review.

Finally, the recent settlement highlights that merger efficiencies remain an important factor for the FTC when it evaluates the potential competitive effect of a merger. Vertical mergers in general often offer significant efficiencies—the FTC has noted that "the majority of vertical mergers are beneficial because they reduce costs and increase the intensity of interbrand competition."20 In this case, it appears that the vertical combination of Northrop and Orbital ATK presented significant efficiencies. For example, the Deputy Director noted that the DOD expected "substantial benefits from the merger, including increased competition for future programs and lower costs."21 This factor may have encouraged the FTC to consider behavioral remedies. For example, conduct remedies can be an "effective option when a structural remedy would eliminate the merger's potential efficiencies."22 Indeed, the Deputy Director noted that the behavioral remedies accepted still "preserv[ed] procompetitive benefits" of the merger.23

Conclusion

The FTC's approval of the Northrop/Orbital ATK merger shows that, despite recent policy announcements and a long-standing preference for structural remedies, the FTC is still willing to consider behavioral remedies to resolve potential concerns associated with vertical mergers. Given the fact-specific nature of mergers and potential remedies, companies considering a potential merger should seek antitrust counsel to understand both the potential risks associated with the transaction and whether the authorities may require structural divestitures to ameliorate potential concerns about the transaction.

Footnotes

1 Press Release, FTC Imposes Conditions on Northrop Grumman's Acquisition of Solid Rocket Motor Supplier Orbital ATK, Inc., June 5, 2018 (hereinafter Northrop/Orbital ATK Press Release).

2 D. Bruce Hoffman, Acting Director, Bureau of Competition, Vertical Merger Enforcement at the FTC, Credit Suisse 2018 Washington Perspectives Conference (Jan. 10, 2018) (hereinafter Hoffman, Vertical Merger Enforcement).

3 Complaint, at 2, In the Matter of Northrop Grumman Corp. and Orbital ATK, Inc., FTC No. C-4652 (June 5, 2018) (hereinafter Northrop/Orbital ATK Complaint).

4 Northrop/Orbital ATK Complaint.

5 Id.

6 Analysis to Aid Public Comment, at 3, In the Matter of Northrop Grumman Corp. and Orbital ATK, Inc., FTC No. C-4652 (June 5, 2018) (hereinafter Northrop/Orbital ATK Analysis to Aid Public Comment).

7 Decision and Order, In the Matter of Northrop Grumman Corp. and Orbital ATK, Inc., FTC No. C-4652 (June 5, 2018) (hereinafter Northrop/Orbital ATK Decision and Order).

8 See, e.g., Decision and Order, In the Matter of PepsiCo, Inc., FTC No. C-4301 (Sept. 27, 2010); Decision and Order, In the Matter of The Coca-Cola Company, FTC No. C-4305 (Nov. 3, 2010).

9 Statement of Bureau of Competition Deputy Director Ian Conner on the Commission's Consent Order in the Acquisition of Orbital ATK, Inc. by Northrop Grumman Corp., File No. 181-0005 (hereinafter Northrop/Orbital ATK Statement).

10 For example, then Bureau of Competition Acting Director Bruce Hoffman announced in January, 2018 that "no one should be surprised if the FTC requires structural relief" in some vertical transactions. Hoffman, Vertical Merger Enforcement. DOJ officials have made similar statements in recent months. See, e.g., Andrew C. Finch, Principal Deputy Assistant Attorney Gen., Dep't of Justice, Trump's Antitrust Policy After One Year, Remarks at the Heritage Foundation (Jan. 23, 2018); Makan Delrahim, Assistant Attorney Gen., Dep't of Justice, Remarks at the Antitrust Division's Second Roundtable on Competition and Deregulation (Apr. 26, 2018).

11 Generally, the settlement appears consistent with the FTC's past practice. For example, it is largely similar to conditions imposed on another vertical merger in late 2017, the combination of Broadcom Limited and Brocade Communication Systems. Analysis to Aid Public Comment, In the Matter of Broadcom Limited and Brocade Communication Systems, Inc., No. 171-0027 (July 3, 2017).

12 Northrop/Orbital ATK Complaint, at 2.

13 Horizontal Merger Guidelines, Department of Justice and Federal Trade Commission (Aug. 19, 2010).

14 In the Matter of Lockheed Martin Corporation, The Boeing Company, and United Launch Alliance LLC, FTC No. 0510165 (May 8, 2007).

15 US v. Northrop Grumman Corp. and TRW Inc., 1:02-cv-02432 (D.D.C. June 10, 2003).

16 Northrop/Orbital ATK Statement.

17 Id.

18 Northrop/Orbital ATK Decision, at VII. As noted above, the FTC also required the combined company to submit compliance reports to both the FTC and the DOD. Id.

19 Hoffman, Vertical Merger Enforcement ("If those won't work—or will be too difficult and problematic for us to be confident that they will work without an excessive commitment of FTC resources where we are effectively turned into a regulator—then there should be no surprise if we seek to block the merger"); Andrew C. Finch, Principal Deputy Assistant Attorney Gen., Dep't of Justice, Trump's Antitrust Policy After One Year, Remarks at the Heritage Foundation (Jan. 23, 2018) ("... because behavioral conditions are fundamentally regulatory, imposing ongoing government oversight on what should preferably be a free market.").

20 Hoffman, Vertical Merger Enforcement.

21 Northrop/Orbital ATK Statement.

22 Antitrust Division Policy Guide to Merger Remedies, at 7, US Department of Justice, June 2011.

23 Northrop/Orbital ATK Statement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions