Companies that engage in government contracting, particularly in the defense industry, face sector-specific antitrust compliance challenges and must navigate carefully to manage antitrust risk across a range of business conduct. First, antitrust merger review in this space has a distinct feature – the U.S. government is often the sole or primary buyer – which has a significant impact on which deals are challenged and how remedies are structured. Second, industry participants commonly enter into teaming agreements, which often generate pro-competitive benefits but also require careful antitrust analysis. Third, contractors must be sensitive to antitrust risk associated with personnel issues, including in particular the risk generated by agreements among competitors or potential competitors not to solicit or hire each other's employees.
Government Contracting Merger Review
The defense and contracting industry is an active space for mergers and acquisitions, and federal antitrust approval is a key aspect of any significant transaction. There have been several notable defense industry mergers in the last few years: The Federal Trade Commission cleared the combination of Safran SA and Zodiac Areospace in 20171, and in June 2018 the FTC conditionally approved Northrop Grumman's acquisition of missile component supplier Orbital ATK. United Technology Corporation's acquisition of Rockwell Collins is still under review.2
Antitrust review of mergers in the government contracting industry is significantly impacted by the fact that the merging parties often have only one major customer – the U.S. government. While the U.S. Department of Justice and the FTC routinely consider evidence from the customers of merging parties3 and in particular evaluate the possibility that a powerful customer or customers may prevent potentially anti-competitive post-merger price increases,4 the agencies give special consideration to the views of the government in defense industry deals and pay close attention to whether the purchasing agency supports the proposed combination.
The FTC and DOJ have stated explicitly that the U.S. Department of Defense has a particularly important role to play in their review of defense industry mergers, noting that the DOD is in a "unique position to assess the impact of potential defense industry consolidation," and that the antitrust agencies will give "substantial weight" to the DOD's views when evaluating the potential competitive effects of a proposed merger in the defense industry.5 Further, while the view of the purchasing agency may not be dispositive as a matter of antitrust analysis, as a practical matter it creates a significant litigation hurdle for the FTC or DOJ if it does not have supportive testimony from the merging parties' most significant (or only) customer.6 Thus, in this industry even more so than others, convincing the primary customer to support a deal makes it far more likely that the antitrust authorities will not challenge the transaction.
The FTC's consent decree in the Northrop Grumman/Orbital ATK deal illustrates how the views of the purchasing agency may convince the antitrust agencies to take a different approach to certain defense industry deals than they might with most other types of transactions. Both antitrust agencies generally prefer structural remedies to address any potential anti-competitive effects of proposed transactions. Despite this institutional preference, the FTC accepted a conduct remedy to resolve its concerns about the Northrop Grumman/Orbital ATK transaction, likely at least in part because it was a defense industry deal and the DOD supported the transaction.7
FTC Bureau of Competition Deputy Director Ian Conner made clear that that DOD's support was a significant factor in the FTC's decision to accept a conduct remedy. Conner took the relatively unusual step of publishing a statement on the settlement, and noted that there was "ample precedent" for imposing conduct remedies to resolve competitive concerns in the defense industry (including precedent involving the merging parties themselves).8 The statement detailed the close cooperation between the FTC and DOD in assessing the proposed merger9 and cited the DOD's expectation that the deal would provide "substantial benefits ... including increased competition for future programs and lower costs"10 as a basis for the FTC decision. Conner went on to indicate that the FTC "carefully tailored" a behavioral remedy to "preserve the benefits of the transaction for DOD."11 The involvement of the DOD in oversight and monitoring of the decree may also have assuaged FTC concerns regarding decree enforcement.12
Teaming Agreements
Another aspect of competition in the government contracting space that often raises antitrust issues is the use of competitor collaborations and teaming agreements. Both the DOD and antitrust authorities have recognized the pro-competitive value of teaming agreements and have provided specific guidance regarding how they evaluate such arrangements.[[N:See FAR 9.602; FTC and DOJ Antitrust Guidelines of Collaborations Among Competitors, FTC and DOJ; Memorandum for Secretaries of the Military Departments from Under Secretary of Defense Jacques Gansler Re: Anti-Competitive Teaming, Jan. 5, 1999 (noting that "[t]hese teaming agreements have the potential of resulting in inadequate competition for our contracts" and directing contracting offers to "scrutinize" exclusive teaming agreements). This memo was implemented by the Defense Contract Audit Agency Guidance, which directs auditors to report instances of anticompetitive teaming. DCAA Contract Audit Manual ¶ 4-705 (January 2004); 41 No. 16 GOVTCONT ¶ 180.]]
This guidance and the case law, however, also note the potential anti-competitive harms that may come from these agreements. Teaming agreements may face enhanced government scrutiny if they remove a competitor or potential competitor from the bidding process, increase the ability or incentive of other contracting companies to raise prices or reduce output, or facilitate collusion among team members who might otherwise be competitors.13 These sorts of arrangements can be particularly risky in the defense industry or other segments in which there are few viable competitors for certain types of business or contracts.
Thus, despite their potential pro-competitive efficiencies, it is not uncommon for teaming agreements to receive scrutiny. The DOJ and FTC have periodically challenged teaming agreements.14 And as recently as 2015, European authorities took action against government contractors for teaming arrangements, when the Danish Competition Council determined that two road-marking companies, LFK Vejmarkering A/S and Euristar Danmark A/S, violated competition regulations by forming a bidding consortium and winning a public tender to provide road markings across Denmark.15 The Danish Competition Council determined that the two companies were both capable of bidding independently for the project and that the consortia likely increased prices for road-marking services.16
To mitigate potential antitrust risk associated with teaming agreements, government contractors can employ several strategies. First, fully document the pro-competitive benefits of the arrangement (such as lower prices, increased efficiency, or improved research and development). This is particularly important in higher-risk teaming agreements, such as those in which both companies are capable of bidding for the contract independently and there is limited alternative competition for the bid. Second, consider making the customer agency aware of the teaming arrangement in advance – as with mergers and acquisitions, it is less risky to enter into a teaming agreement if the customer affirmatively supports it or at least does not object to it. Finally, be sure that the area of cooperation between the two companies is strictly limited to what is required to perform the joint bid. For example, do not allow the cooperation to "spill over" into other areas where the companies may still be competitors, do not share confidential business information unrelated to the teaming agreement, and do not agree to restrict or limit competition on other bids.
Employee and Personnel Issues Can Raise Antitrust Concerns
Finally, the antitrust agencies have recently increased their scrutiny of employee and personnel issues, particularly in industries characterized by limited pools of qualified workers. Although some restrictions on the hiring or solicitation of employees are likely acceptable – for example, imposing reasonably tailored restrictions on a company engaging in due diligence to acquire another company or as part of a legitimate joint venture or teaming agreement – "naked" agreements between companies not to compete for employees are violations of the antitrust law.
In late 2016, the DOJ and FTC released guidance intended to sensitize companies to potential antitrust issues related to employee hiring and compensation practices. The guidance emphasized that companies compete not only to sell their products and services, but also to hire and retain employees. In that regard, it noted that "competition among employers helps actual and potential employees through higher wages, better benefits, or other terms of employment."17 This guidance served notice that antitrust authorities would carefully scrutinize agreements that may constrain wages or salaries. In fact, the agencies also announced that they would likely consider naked agreements not to hire another company's employees (so-called "no poach" arrangements) as per se violations of the antitrust laws.18
Since issuing this guidance, the antitrust authorities have become increasingly active in investigating and challenging conduct that might adversely affect competition for employees and personnel. In January 2018, Assistant Attorney General Makan Delrahim commented that he was "shocked" by some of the no-poaching agreements the DOJ had observed.19 Soon after his statement, the DOJ brought suit against Knorr-Bremse AG and Westinghouse Air Brake Technologies Corporation, alleging that the two companies had agreed not to solicit, recruit or hire each other's employees. The DOJ alleged that these agreements "reduced competition for employees to the detriment of workers in this important US industry."20 The DOJ described the industry at issue as being characterized by a "high demand for and limited supply of skilled employees who have rail industry experience" and other specialized skills.21 The companies agreed to a consent decree prohibiting them from forming or enforcing any future "no poach" agreements and requiring them each to create an antitrust compliance program.22
The FTC also has been active in this area. In July 2018, the FTC challenged an agreement between two Texas therapist staffing services, alleging that the two companies (Your Therapy Source and Fit 4 Life Therapy) shared confidential information about therapist pay rates with each other and agreed to lower the pay rates for their therapists.23 The FTC further alleged that the companies invited other competitors to join the arrangement as well, in an effort to prevent therapists from switching to competing staffing companies for higher rates. The staffing services entered into a consent order with the FTC, which prohibits them from any further exchange of information or attempts to fix or stabilize therapist pay rates.24
Government contractors often compete in market segments with a limited number of workers with specialized skills or qualifications (such as security clearances) and thus should be particularly careful with regard to any agreements that may impact competition for employees. Similarly, government contracting firms may face enhanced risks related to sharing confidential details regarding employee compensation, especially given the prevalence of teaming arrangements in this industry. Although, as discussed above, it is often appropriate to exchange this type of information to further a legitimate purpose (such as forming a joint venture or conducting due diligence for an acquisition), companies should still exercise caution when exchanging detailed salary information.
Conclusion
Government contractors and other companies in this space should be aware of the particular antitrust risks and challenges they face when considering acquisitions or other business conduct. Companies should seek guidance from antitrust counsel when engaging in activities that may present heightened antitrust risk, including considering a merger or acquisition, forming a teaming agreement, or considering an agreement that might restrict the hiring or compensation of employees. As noted above, careful compliance efforts may mitigate the risk of a potentially costly and time-consuming antitrust enforcement investigation or action.
Footnotes
1 Early Termination Notice, 20180032, FTC.
2 UTC Gains EU Antitrust Approval to Buy Rockwell Collins, Reuters (May 4, 2018). The transaction gained approval in the EU in May 2018. Press Release, Mergers: Commission Approves Acquisition of Rockwell Collins by UTC, Subject to Conditions, European Commission (May 4, 2018).
3 See Horizontal Merger Guidelines, at 2.2.2., DOJ and FTC, Aug. 19, 2010. In particular, as part of their investigations, the DOJ and FTC often seek to understand how customers "would likely respond to a price increase, and the relative attractiveness of different products or suppliers." Id.
5 Joint Statement of the Department of Justice and the Federal Trade Commission on Preserving Competition in the Defense Industry, DOJ and FTC.
6 The antitrust agencies routinely rely on customer testimony when they are challenging a proposed merger, but the government has also litigated merger cases without significant reliance on customer testimony. For example, the government did not rely heavily on customer testimony in US v. Bazaarvoice – and even though the merging parties presented evidence that customers were not opposed to the transaction – the judge found for the government and explained that he did not rely heavily on the customer testimony because customers often do not engage in a "specific analysis of the effects of the merger." See 2014 WL 203966, at *61.
7 Northrop Grumman/ATK Orbital was a vertical transaction – i.e., a deal between companies on different levels of the distribution chain – and those deals are routinely considered by the antitrust agencies as less likely to create potential competitive harm than "horizontal" deals between direct competitors. See, e.g., D. Bruce Hoffman, Acting Director, Bureau of Competition, Vertical Merger Enforcement at the FTC, Credit Suisse 018 Washington Perspectives Conference (Jan. 10, 2018) at p.2-3. The vertical nature of the transaction likely also contributed to the FTC's willingness to accept a conduct remedy, but even for vertical deals the FTC prefers structural remedies. See id. at p. 7.
8 Id.
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.
12 For example, the FTC decree anticipates DOD involvement in the selection of a Compliance Officer to monitor the company's compliance with the decree. The decree also requires the combined company to submit regular compliance reports to the FTC, the Compliance Officer, the Under Secretary of Defense for Acquisition and Sustainment and the Office of the General Counsel of the Department of Defense. See Decision, In the Matter of Northrop Grumman Corporation and Orbital ATK, Inc., FCC File No. 181-0005 (June 5, 2018).
13 Id.
14 For example, in 1994, the DOJ challenged a teaming agreement between defense companies Alliant Techsystems and Aerojet-General. The DOJ alleged that the two companies were the only qualified providers of combined effects munition for a 1992 US Army procurement effort. Alliant and Aerojet formed a teaming arrangement to fulfill the procurement, allegedly reducing the number of potential competitors in the bidding process from two to one. Complaint, US v. Alliant Techsystems Inc. and Aeorjet-General Corporation, No. 941-1026 (C.D. Ill Jan. 19, 1994). The defendants reached a settlement agreement with the DOJ, with each paying a fine of over two million dollars and agreeing to implement an antitrust compliance program. See Final Judgment, em>US v. Alliant Techsystems Inc and Aerojet-General Corporation, No. 941-1026 (C.D. Ill 1994). The FTC has brought similar challenges. For example, in 1993, the FTC brought a case against four school bus companies which submitted joint bids to a school district. The FTC alleged that the companies agreed not to compete for the school district busing contracts – although the companies claimed to be a joint venture, the FTC alleged that there was no significant integration among the companies or efficiencies offered by the collaboration. FTC v. B&J School Bus Services, Inc., 116 F.T.C. 308 (1993). em>See also Northrop Grumman v. McDonnell Douglas, 705 F.2d 1030, 1050-54 (9th Cir. 1983). Although not in the government contracting space, the DOJ has also challenged joint bidding arrangements among potential purchasers at government auctions. In 2012, the DOJ challenged a bidding arrangement among two natural gas exploration and development companies, Gunnison Energy Corporation and SG Interests (SGI). The two companies formed a Memorandum of Understanding, agreeing to not bid against each other to acquire natural gas leases auctioned by the Bureau of Land Management. Complaint, US v. SG Interests I, LTD., et al., 1:12-cv-00395 (D. Co. Feb. 15, 2012). The companies reached a settlement with the DOJ, agreeing to pay a penalty of $275,000 each and establish an antitrust compliance program. See Final Judgment with Respect to Defendant Gunnison Energy Corporation, US v. SG Interests I, LTD., et al., 1:12-cv-00395 (D. Co. April 22, 2013); Final Judgment with Respect to Defendants SG Interests I, LTD., et al., US v. SG Interests I, LTD., et al., 1:12-cv-00395 (D. Co. April 22, 2013).
15 The Danish Competition Council Decides, that Consortia Agreement Between Two Road-Contractors is Illegal, Europa (Dec. 17, 2015).
16 Id.
17 Id.
18 Department of Justice and Federal Trade Commission, Antitrust Guidance for Human Resource Professionals, Oct. 2016.
19 See Matthew Perlman, Delrahim Says Criminal No-Poach Cases are in the Works, Law360 (Jan. 19, 2018).
20 Complaint, US v. Knorr-Bremse AG and Westinghouse Air Brake Technologies, 1 :18-cv-00747 (D.D.C. April 3, 2018).
21 Id. at 5, 6.
22 Proposed Final Judgment, US v. Knorr-Bremse AG and Westinghouse Air Brake Technologies, 1 :18-cv-00747 (D.D.C. April 3, 2018).
23 Complaint, In the Matter of Your Therapy Source, et al., FTC No. 171-0134 (July 31, 2018).
24 Decision and Order, In the Matter of Your Therapy Source, et al., FTC No. 171-0134 (July 31, 2018).
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