June 18, 2019

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FTC and DoJ Question DoD’s Proposed National Security Trump Card

In an apparent reaction to recent efforts by the Department of Defense to obtain authority to approve mergers in the defense industry on national security grounds, the Department of Justice and the Federal Trade Commission today issued a Joint Statement explaining the standard of review that the antitrust agencies use when evaluating proposed transactions in the defense industry.  In this Joint Statement, the antitrust agencies assert that by protecting competition, they already are 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.

This Joint Statement follows calls last fall by the Under Secretary of Defense (Acquisition, Technology, and Logistics), Frank Kendall, for legislation that would provide the DoD authority to evaluate and approve mergers from a national security perspective. As we noted last fall, this new authority would give DoD a substantially broader role than the current DoD participation in reviews conducted by the antitrust agencies.  Although Mr. Kendall disavowed any link between the DoJ antitrust division’s approval of Lockheed Martin’s acquisition of Sikorsky and his somewhat strident calls for greater DoD authority in the merger approval process, it is generally accepted that the Lockheed/Sikorsky transaction was the tipping point for Mr. Kendall.  He expressed concern following that transaction that large companies can use their size and financial clout to their economic advantage, which could have negative impacts on the long-term national security.

The Joint Statement appears to be the antitrust regulators’ collective response to the DoD move for statutory approval authority–apart from the authority afforded the antitrust regulators–in mergers affecting the defense industrial base. In the Joint Statement, the agencies explain that, in fact, they do take into account during a merger review all the factors about which Mr. Kendall has expressed concern, “such as high barriers to entry, the importance of investment in research and development (R&D), 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 Mr. Kendall has cited as requiring new DoD 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.”

While the future of any DoD legislative proposal on this topic is at best uncertain as the Obama Administration comes to a close, the Joint Statement reassures DoD and the public that the antitrust agencies are aware of the DoD concerns and not only are they well-positioned to address those concerns, they have been doing so.

© 2019 Covington & Burling LLP

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About this Author

Scott Freling, Government Contracts Lawyer,  Covington Law Firm
Partner

Scott Freling divides his practice between working with civilian and defense contractors on traditional government contracts matters and representing buyers and sellers, including a number of private equity firms, in complex M&A deals involving a government contractor.

Mr. Freling represents contractors at all stages of the procurement process and in their dealings with federal, state, and local government customers. In addition, he counsels clients on compliance matters and risk mitigation strategies, including obtaining SAFETY Act liability protection for...

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