On June 29, the Department of Justice’s Antitrust Division (DOJ) challenged Booz Allen Hamilton’s (Booz Allen’s) $440 million dollar acquisition of EverWatch, alleging that, as the only two viable suppliers of “signal intelligence” services to the National Security Agency (NSA), the transaction not only would result in harm to competition for the services post-close, but also that the mere entry into the transaction agreement caused the parties to reduce the intensity with which they were competing for an upcoming NSA contract for signal intelligence services, even before the transaction closed. The District Court rejected DOJ’s challenge on October 11, and the parties closed the transaction on October 14.
The case stands out for DOJ’s attempt to use Section 1 of the Sherman Act to challenge the alleged pre-closing competitive harm. Traditionally, the US antitrust agencies rely on Section 7 of the Clayton Act, which is specifically designed to address mergers – however in Booz Allen, DOJ also alleged a Section 1 claim. In evaluating DOJ’s claims, the court addressed themes that have arisen from some of DOJ’s other recent merger challenges, namely, the government’s buyer power as a countervailing factor against merging parties’ incentive and ability to harm competition post-close, as well as what constitutes a proper market definition.
DOJ’s Use of Section 1
DOJ argued not only that the transaction would harm competition in the future (under Section 7), but also that the competitive process was already harmed (under Section 1) because the parties —the only two bidders for an upcoming NSA contract — were no longer aggressively competing for the contract in anticipation that the post-close entity would have won the contract either way. DOJ argued that once the parties entered into the transaction agreement, they faced “reduc[ed] incentives to compete.” DOJ argued that it takes a significant investment of time and resources to craft a compelling bid, and post-signing neither company was as invested in the bid process as they would have been absent the agreement. Ultimately, the court rejected DOJ’s argument, finding that “[c]ompetition exists now” and “[l]ittle evidence suggests the companies, or their capture-team employees, intend to give the NSA anything less than their best proposal.” Interestingly, DOJ relied heavily on communications between low-level employees to establish that the parties would no longer aggressively compete for the NSA contract. Importantly, the court dismissed these statements as “[b]anter” that “reflect[ed] the individual perception of specific employees, not broad corporate strategy.” Further persuaded the agreement had not impacted competition, the court determined the “message from executives was clear: the race for [the NSA bid] was ‘full steam ahead.’”
Government Buyer Power
The court also placed significant weight on “countervailing incentives that protect and sustain competition” that would remain post-close, noting that “[s]ome competitive incentives stick even when one incentive fades.” The primary countervailing factor was the US government’s own buyer power with court citing the importance of Booz Allen’s reputation with the government for its longevity in defense contracting and the small value of the present NSA bid relative to future opportunities: “Booz Allen likely would not jeopardize its long-term financial interests for a trivial payout on a single project.” NSA’s buyer power including the ability to control contracting terms, including “award[ing] zero dollars” and procurement regulations requiring all contracts to be “fair and reasonable.” In the court’s words, “the NSA can mitigate the Government’s worst-case scenario, so significant competitive harm is unlikely to materialize.” Booz Allen’s history of follow-on contract awards in which it was the single bidder supported this finding, given that “price increases [were] not inevitable” in those awards. This embrace of market realities is a common theme in recent merger litigations, including in US Sugar, in which the court sided with the merging parties, highlighting the importance of commercial realities such as the government’s own ability to mitigate the potential for supra-competitive pricing.
Courts Continue to Challenge Overly Narrow Product Markets
Typically, DOJ and the FTC define product markets as narrowly as possible. This case was no exception, with DOJ defining a market around one contract for one customer. Ultimately, the court rejected this market, noting the “commodity” here—modeling and simulation services—has a much broader market than the Government suggests. Unlike other products that are only available for military use (e.g., F-18 aircrafts, aircraft carriers, tank ammunition), here, the court found that “modeling and simulation services exist in a substantial market beyond the NSA.” In the court’s view, the NSA’s application of the service was reasonably interchangeable with signaling services in the commercial segment. The court did not reject all customer or contract specific markets: “To be clear, the court does not suggest a single contract can never be a relevant market.” Though Booz Allen and EverWatch were the only two bidders for a specific upcoming award, the court noted that the NSA identified over one hundred companies as potential contractors for the upcoming bid and fourteen that had expressed interest in participating.
Takeaways
- The antitrust agencies are using every tool available to enforce the antitrust laws. In statements by DOJ Assistant Attorney General Jonathan Kanter and FTC Chair Lina Khan, both agencies have articulated their commitment “to litigating cases using the whole legislative toolbox,” and the DOJ’s invocation of Section 1 in the M&A context is further evidence of this trend.
- Recent court decisions demonstrate that courts are amenable to embracing market realities that appear likely to offset potential competitive harms, including countervailing buyer power.
- The antitrust agencies continue to consider narrow, and even single customer, product markets, but courts have shown a willingness to test these theories and have pressured the government on its burden to establish the boundaries of relevant antitrust markets.
