GOVERNMENT CONTRACTING INSIGHTS DEFENSE CONTRACTING
DoD’s Antitrust Battle Ends Peacefully
Photo: iStockSince late last September, defense industry observers have witnessed an unusual public display of discord between the Department of Defense and the antitrust enforcement agencies, the Department of Justice and the Federal Trade Commission, over the standards for determining whether a merger of defense contractors should proceed.
The clash became public when Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall announced that the department would seek independent authority to approve or disapprove mergers involving the defense industrial base for national security reasons, thus introducing a review process separate from that of the antitrust enforcement agencies.
Kendall’s announcement followed Lockheed Martin’s acquisition of Sikorsky Aircraft, the helicopter division of United Technologies Corp. Kendall stated that a review focused exclusively on the competitive impact of a transaction does not guard against other potential harms caused to the industrial base by the absorption of a smaller company into one of the major prime contractors.
He noted that while the absorption of a smaller platform provider into a larger company may not technically reduce competition, the transaction may not be in the best interests of the Defense Department or U.S. taxpayers. He expressed concern that the largest companies in the defense industrial base use their size and accompanying clout to their economic advantage, which he reasoned may reduce competition and innovation, limit sources of supply, increase barriers to entry for newcomers to the market and result in increased costs to the taxpayers.
Kendall stated that to address these concerns, the department would pursue legislation to obtain express authority to block transactions if it found them to have a negative impact on national security.
Not surprisingly, many in the defense industry reacted negatively to Kendall’s suggestion. However, DoD did indeed draft a legislative proposal that — while never made public — was reportedly designed to create such a DoD-controlled national security review in addition to the review performed by the antitrust enforcement agencies.
The draft legislative proposal was then submitted to the Office of Management and Budget for the required interagency clearance before being transmitted to Congress. This interagency process includes review by the Justice Department.
In a surprise move, and as an apparent collective response to the legislative proposal, the Department of Justice and the Federal Trade Commission April 12 issued a joint statement explaining the standard of review that the antitrust enforcement agencies use when evaluating proposed transactions in the defense industry. The agencies asserted that by protecting competition, they are in fact protecting national security by maintaining multiple sources of products and services and the most innovative technologies to support our military personnel, all at competitive prices. In other words, the joint statement confirmed that the separate review sought by the Defense Department would be redundant.
The antitrust agencies further explained that during a merger review, they account for all the factors about which Kendall has expressed concern, “such as high barriers to entry, the importance of investment in research and development, and the need for surge capacity, a skilled workforce and robust subcontractor base.”
Indeed, they point out that based on their “substantial experience applying the [DOJ/FTC 2010 Horizontal Merger] guidelines to defense industry mergers and acquisitions,” they are very capable of addressing all the issues that Kendall has cited as requiring new Defense Department authorities, including “ensuring that defense mergers will not adversely affect short- and long-term innovation crucial to our national security and that a sufficient number of competitors, including both prime and subcontractors, remain to ensure that current, planned, and future procurement competition is robust.”
After the release of the statement, the Defense Department withdrew its controversial legislative proposal. Its decision to withdraw it appears to signal that the department is willing to continue working within the current antitrust review structure, providing its insights and concerns to Justice and the FTC as part of the standard antitrust review.
Commentators differ on the importance of this chain of events. Some see the joint statement as an implicit capitulation by the antitrust agencies to the DoD concerns, while others speculate that it and the concomitant withdrawal of the DoD draft legislative proposal are the bureaucratic equivalent of a negotiated truce.
What is clear, however, is that DoD will continue to play an active role in merger activity by the defense industrial base. Further, it will need to express its national security concerns about transactions in antitrust terms, for example, by explaining the impact the transactions will have on competition, innovation and maintenance of the defense industrial base.
The relationship between Defense and the antitrust enforcement agencies has been largely symbiotic since its inception in the mid-1990s. As examples, DoD provides the agencies access to subject matter and market experts in transactions involving the defense industry, and the antitrust enforcement agencies define markets and competitive timelines in a manner consistent with the federal budgeting process and the many restrictions on DoD’s ability to purchase.
The resolution of this interagency spat indicates a recognition that by working together, the agencies can continue their long-standing practice of preserving a competitive landscape in the defense industry that protects innovation, industrial capacity and cost competition into the future, which in turn protects national security.
Scott Freling is a partner in the government contracts practice at Covington & Burling LLP. Kathy Brown is a special counsel in the government contracts, CFIUS and antitrust practices at the firm.