Antitrust Enforcers Take Aim at Vertical Collusion in Defense Industry

By Sarah Bayer

United States antitrust enforcers are stepping up their defense of competition in the defense industry to protect it from vertical—not just horizontal—anticompetitive acts.

U.S. national security depends on a competitive defense industry to attract and cultivate top talent and deliver cutting-edge technology at the best value to taxpayers.  Recent actions by federal antitrust enforcers highlight the different ways firms near the top of the food chain take advantage of their dominance over lower-level suppliers, to the detriment of competition within the industry as a whole.  Enforcement agencies are increasingly scrutinizing the potential for vertical collusion within the defense industrial base, and the attendant risks posed to competition.

The recent Federal Trade Commission challenge to Lockheed Martin Corporation’s proposed acquisition of Aerojet Rocketdyne Holdings elaborated on the ways that vertical integration can hurt competition in the defense sector.

The FTC’s complaint alleged that Lockheed, a prime contractor in multiple weapons markets, could foreclose its competitors by acquiring Aerojet, a manufacturer of critical propulsion technologies for missiles.  The combination of Lockheed’s work with Aerojet’s sole competitor, and Aerojet’s work with Lockheed’s competitors raised competitive concerns.  As a result of these dealings, the merged entity would have access to competitors’ competitively sensitive information, such as technologies, pricing, and development schedules.  This information could be used to foreclose competitors from the market.

In addition, the FTC alleged that the combined firm would have no incentive to allow Aerojet to devote research and development resources to bids being developed by other prime contractors, since these would result in less profit than bids awarded to Lockheed.   In the face of the FTC’s challenge, the companies abandoned the proposed deal.

Raytheon’s subsidiary Pratt & Whitney, a manufacturer of military aircraft engines, has itself attracted the attention of antitrust enforcers for unfairly boosting its competitive position by manipulating its suppliers.

In December 2021, the Department of Justice announced the indictment of officials from Pratt & Whitney and five of its subcontractors, alleging a conspiracy among the defendants not to recruit or hire each other’s engineers and other high-skilled workers.  By stemming the flow of personnel among the companies, the conspirators were able to avoid raising wages to attract or retain talent.  This, in turn, provided Pratt & Whitney with an unfair labor cost advantage over its competitors.  The conduct alleged in the indictment is now the subject of private lawsuits by the affected workers against Raytheon, Pratt & Whitney, and the subcontractors.  These allegations show how even when defense firms are not able to acquire or merge with key suppliers, they still have the ability to rig the competitive landscape by conspiring with upstream firms.

Even the Department of Defense is ringing alarm bells on the lack of competition in the defense industry.  On February 15, 2022, the DoD released a report titled “State of Competition within the Defense Industrial Base.”  The report, issued in response to President Biden’s Executive Order on Promoting Competition in the American Economy, highlighted a range of competitive concerns, most notably the risks posed by vertical mergers and acquisitions in the defense industry.

Vertical mergers allow prime contractors to cut off their competitors’ access to nascent, specialized manufacturers who can provide necessary expertise to develop programs such as hypersonic missile technologies, the report noted.  Given that prime contractors compete primarily for a single customer, the DoD, they can effectively foreclose competitors from the entire market by locking up strategic suppliers through vertical acquisition.  The report concluded that consolidation in the US defense industry poses a threat to national security and recommended closer scrutiny of mergers and acquisitions in the aerospace and defense industries.

The DoD’s report expresses concern over the consolidation of the United States over the last 30 years.  Through a series of mergers and acquisitions, the defense industrial base has shrunk to only five prime contractors from 51 in 1993.

As vertical mergers and acquisitions in this industry are increasingly challenged because of their potential anticompetitive effects, we can expect to see more enforcement actions—from both the federal government and private suits—in this critical sector.

Written by Sarah Bayer

Edited by Gary J. Malone

Tagged in: Antitrust Enforcement,