[Federal Register: October 12, 2006 (Volume 71, Number 197)]
[Notices]
[Page 60148-60152]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12oc06-55]
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FEDERAL TRADE COMMISSION
[File No. 051 0165]
The Boeing Company, Lockheed Martin Corporation and United Launch
Alliance; Analysis of Agreement Containing Consent Orders To Aid Public
Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed Consent Agreement.
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SUMMARY: The consent agreement in this matter settles alleged
violations of Federal law prohibiting unfair or deceptive acts or
practices or unfair methods of competition. The attached Analysis to
Aid Public Comment describes both the allegations in the draft
complaint and the terms of the consent order--embodied in the consent
agreement--that would settle these allegations.
DATES: Comments must be received on or before October 31, 2006.
ADDRESSES: Interested parties are invited to submit written comments.
Comments should refer to ``Boeing Lockheed Martin, File No. 051 0165,''
to facilitate the organization of comments. A comment filed in paper
form should include this reference both in the text and on the
envelope, and should be mailed or delivered to the following address:
Federal Trade Commission/Office of the Secretary, Room 135-H, 600
Pennsylvania Avenue, NW., Washington, DC 20580. Comments containing
confidential material must be filed in paper form, must be clearly
labeled ``Confidential,'' and must comply with Commission Rule 4.9(c).
16 CFR 4.9(c) (2005).\1\ The FTC is requesting that any comment filed
in paper form be sent by courier or overnight service, if possible,
because U.S. postal mail in the Washington area and at the Commission
is subject to delay due to heightened security precautions. Comments
that do not contain any nonpublic information may instead be filed in
electronic form as part of or as an attachment to e-mail messages
directed to the following e-mail box: consentagreement@ftc.gov.
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\1\ The comment must be accompanied by an explicit request for
confidential treatment, including the factual and legal basis for
the request, and must identify the specific portions of the comment
to be withheld from the public record. The request will be granted
or denied by the Commission's General Counsel, consistent with
applicable law and the public interest. See Commission Rule 4.9(c),
16 CFR 4.9(c).
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The FTC Act and other laws the Commission administers permit the
collection of public comments to consider and use in this proceeding as
appropriate. All timely and responsive public comments, whether filed
in paper or electronic form, will be considered by the Commission, and
will be available to the public on the FTC Web site, to the extent
practicable, at http://www.ftc.gov. As a matter of discretion, the FTC
makes every effort to remove home contact information for individuals
from the public comments it receives before placing those comments
[[Page 60149]]
on the FTC Web site. More information, including routine uses permitted
by the Privacy Act, may be found in the FTC's privacy policy, at http:/_____________________________________-/www.ftc.gov/ftc/privacy.htm
.
FOR FURTHER INFORMATION CONTACT: Michael R. Moiseyev, Bureau of
Competition, 600 Pennsylvania Avenue, NW., Washington, DC 20580, (202)
326-3106.
SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec. 2.34 of
the Commission Rules of Practice, 16 CFR 2.34, notice is hereby given
that the above-captioned consent agreement containing a consent order
to cease and desist, having been filed with and accepted, subject to
final approval, by the Commission, has been placed on the public record
for a period of thirty (30) days. The following Analysis to Aid Public
Comment describes the terms of the consent agreement, and the
allegations in the complaint. An electronic copy of the full text of
the consent agreement package can be obtained from the FTC Home Page
(for October 3, 2006), on the World Wide Web, at http://www.ftc.gov/os/2006/10/index.htm.
A paper copy can be obtained from the FTC Public
Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., Washington,
DC 20580, either in person or by calling (202) 326-2222.
Public comments are invited, and may be filed with the Commission
in either paper or electronic form. All comments should be filed as
prescribed in the ADDRESSES section above, and must be received on or
before the date specified in the DATES section.
Analysis of Agreement Containing Consent Order To Aid Public Comment
I. Introduction
The Federal Trade Commission (``Commission'') has accepted, subject
to final approval, an Agreement Containing Consent Order (``Consent
Agreement'') from The Boeing Company (``Boeing''), Lockheed Martin
Corporation (``Lockheed''), and United Launch Alliance L.L.C.
(``ULA''). The purpose of the proposed Consent Agreement is to remedy
the anticompetitive effects resulting from the formation of ULA, a
joint venture of Boeing and Lockheed that will provide launch services
to the Department of Defense (``DoD'') and other U.S. government
customers, that are not necessary to achieve the national security
benefits that DoD believes will flow from the creation of ULA. The
proposed Consent Agreement requires that: (1) ULA cooperate on
equivalent terms with all providers of government space vehicles; (2)
the space vehicle businesses of Boeing and Lockheed provide equal
consideration and support to all launch services providers when seeking
any U.S. government delivery in orbit contract; and (3) Boeing,
Lockheed, and ULA safeguard competitively sensitive information
obtained from other providers of space vehicles and launch services.
The Consent Agreement has been placed on the public record for 30
days for receipt of comments by interested persons. Comments received
during this period will become part of the public record. After 30
days, the Commission will again review the Consent Agreement and the
comments received, and will decide whether it should withdraw from the
proposed Consent Agreement or make it final.
Pursuant to a Joint Venture Master Agreement, dated May 2, 2005,
Boeing and Lockheed agreed to form a joint venture to be called ULA
(``Proposed Joint Venture''). The Proposed Joint Venture would
consolidate manufacturing and development of Boeing and Lockheed's
Expendable Launch Vehicles (``ELV''). Sales of launch services to the
U.S. government will also be merged into ULA. Boeing and Lockheed will
not exchange any cash in the transaction, but each party's contributed
businesses are valued in excess of $530.7 million. The Commission's
complaint alleges that the Proposed Joint Venture would violate Section
7 of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the
Federal Trade Commission Act, as amended, 15 U.S.C. 45, by
substantially lessening competition in the U.S. markets for government
medium to heavy (``MTH'') launch services and government space
vehicles.
II. The Parties
Boeing maintains its headquarters in Chicago, Illinois. It is the
world's largest aerospace company and the second largest supplier to
the Department of Defense. Boeing manufactures and sells MTH launch
services to the U.S. government on its two ELVs, the Delta II and Delta
IV. Delta II provides medium lift capability; Delta IV provides heavy
lift capability. Boeing is the third largest supplier of government
space vehicles.
Lockheed, based in Bethesda, Maryland, is the largest defense
contractor in the United States. Lockheed provides MTH launch services
to the U.S. government with its Atlas V ELV. Lockheed is the largest
supplier of government space vehicles.
III. Government MTH Launch Services and Space Vehicles
Government MTH launch services are a relevant product market for
the purposes of assessing the likely competitive effects of the
Proposed Joint Venture. Launch service providers deliver space vehicles
(i.e., satellites, interplanetary spacecraft, and other payloads) into
earth orbit or beyond into outer space. Payloads in excess of 4,150
pounds require, at minimum, a medium lift launch vehicle to attain low
earth orbit, the lowest sustainable orbit. MTH launch vehicles are
generally based on a common vehicle configuration, i.e., the Delta IV
and Atlas V, and are customized to adjust lift capability by adding
``strap-on'' motors or additional booster engines. There is no
alternative technology currently available to deliver satellites and
other payloads to space in the medium and heavy weight classes. Light
launch vehicles cannot be ``scaled-up'' with strap-on motors or booster
engines to increase lift capability. Further, with the U.S.
government's demand for communication and reconnaissance capabilities
increasing, space vehicles are not expected to become lighter in the
future. Accordingly, the U.S. government has no alternatives for the
functions performed by space vehicles and no alternative technology to
deliver MTH payloads to space.
Government space vehicles are a second relevant product market for
the purposes of analyzing the competitive effects of the Proposed Joint
Venture. The United States government purchases space vehicles for a
multitude of unique (and often classified) applications, including
military communications and navigation, reconnaissance, atmospheric
observation, and scientific exploratory missions, among other things.
Other forms of communication, navigation, reconnaissance, and
scientific observation are not substitutes for the unique capabilities
of government space vehicles.
The relevant geographic market is the United States. Federal law
and national security imperatives require that the U.S. government
purchase MTH launch services and space vehicles from domestic
companies.
The U.S. markets for government MTH launch services and government
space vehicles are highly concentrated. In the U.S. government MTH
launch services market, Boeing and Lockheed are the only competitors,
and their consolidation will result in a monopoly. Space Exploration
Technologies Corp. (``SpaceX'') is attempting to enter the
[[Page 60150]]
MTH launch services market, but the timing of its possible entry and
the reliability of its MTH launch vehicles is uncertain. Additionally,
DoD and other government customers would require several validation
launches before purchasing MTH launch services from SpaceX, further
postponing the market impact of SpaceX's potential entry. In the U.S.
market for government space vehicles, three firms, Boeing, Lockheed,
and Northrop Grumman (``Northrop''), account for the large majority of
sales.
IV. Entry
Entry into the government MTH launch services market and the
government space vehicle market is extremely difficult. For MTH launch
vehicles and government space vehicles alike, design and development
alone require many years and cost in excess of a billion dollars.
Government space vehicles cost approximately $1 billion and take
approximately five years to produce. Moreover, because the costs of a
launch failure or a space vehicle malfunction are extremely high in
terms of dollars and delays in vital national security or scientific
services, the U.S. government only procures MTH launch services and
space vehicles from firms with an established track record for success.
As a result, new entry is unlikely to reverse the anticompetitive
effects of the Proposed Joint Venture.
V. Competitive Effects
DoD has contracted with both Boeing and Lockheed to provide MTH
launch services through 2011. Under the current procurement program--
known as ``Buy III''--Boeing's and Lockheed's fixed costs are covered
by DoD, and launch services are purchased at variable cost. The
rationale for this program is grounded in a Presidential Decision
Directive requiring the U.S. Government to maintain ``assured access to
space,'' which is interpreted to require maintaining at least two
independent MTH launch vehicle providers.
Despite the absence of current price competition under Buy III,
significant anticompetitive effects, including the loss of non-price
competition and the loss of potential future price competition, are
likely to occur if the proposed transaction is consummated. Under Buy
III, launches that are more than two years away may be awarded to
either Boeing or Lockheed. As a result, each has an incentive to
improve the capability and reliability of its launch services to
increase the likelihood that DoD will award it future launches. In
addition, Buy III expires in 2011, after which full price and non-price
competition pursuant to DoD's usual procurement process may be
reinstated. Finally, the creation of the Proposed Joint Venture would
deny the government the benefits of a competitive ``down select'' to
either the Delta or Atlas ELV if assured access to space is later
determined not to require two separate families of launch vehicles.
National security issues, however, are also a vital element of an
analysis of the Proposed Joint Venture. To understand the unique
national security implications of the Proposed Joint Venture, the
Commission has consulted closely with the DoD and other Federal
agencies.\2\ Indeed, as the primary customer of government MTH launch
services and space vehicles and the government agency ultimately
responsible for the security of the United States, DoD's views on ULA
were particularly significant. Under these unique circumstances, the
Commission placed a great deal of weight on DoD's position as to
whether ULA would benefit national security and whether the Commission
should challenge the Proposed Joint Venture.
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\2\ See Letter from Michael R. Moiseyev, Assistant Director,
Bureau of Competition, Federal Trade Commission, to Douglas P.
Larsen, Deputy General Counsel (Acquisition & Logistics), Department
of Defense, dated July 6, 2006, and Letter from Honorable Kenneth J.
Krieg, Under Secretary of Defense for Acquisition, Technology &
Logistics, Department of Defense, to Honorable Deborah P. Majoras,
Chairman of the Federal Trade Commission, dated August 15, 2006.
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DoD has informed the Commission that the creation of ULA will
advance U.S. national security interests by improving the United
States' ability to access space reliably. DoD considers access to space
``essential'' given the military's increasing dependence on space-based
reconnaissance, communication, and munitions-guidance systems.
Maximizing the reliability of launch vehicles that provide access to
space is of paramount importance to DoD. A single launch failure can
result in the loss of a mission-critical payload and threaten military
programs by delaying future launches until the cause of the failure is
discovered and remedied.
ULA will improve launch vehicle reliability in several ways. First,
the single ULA workforce will benefit from a launch tempo (the number
of vehicles assembled and launched per year) greater than could be
expected from the two separate Lockheed and Boeing workforces. A single
workforce with more launch experience will be critical in minimizing
mistakes and malfunctions that jeopardize mission success. In addition,
integrating the two firms' complementary technologies will infuse each
firm's launch vehicles with the technical improvements and innovations
of its competitor, further enhancing the reliability of Atlas V and
Delta IV. Under these unique circumstances, the increase in reliability
can be recognized as an efficiency flowing from the joint venture.
After thorough review, DoD has determined that the national
security benefits flowing from ULA would exceed any anticompetitive
harm caused by the proposed transaction. DoD has expressed three
competitive concerns, however, that are not intrinsically linked to
ULA's national security benefits. These vertical issues are
competitively significant because ULA's pricing will be regulated,
rather than competitive, giving ULA the incentive to exert its monopoly
power in related, but unregulated, markets. The first of DOD's concerns
is that ULA will favor its parents' space vehicle businesses to the
detriment of other space vehicle manufacturers, such as Northrop.
Today, competition between Boeing and Lockheed for launch services
induces the companies to cooperate with other space vehicle suppliers,
notwithstanding the fact that each has incentives to favor its own
space vehicle business, out of fear that the other would cooperate and
win the launch. The proposed transaction eliminates that threat, and,
as a result, reduces the incentives for ULA to optimize its launch
vehicles for use with Northrop space vehicles, to the detriment of
Northrop and the government.
Second, DoD believes that Boeing and Lockheed may utilize their
positions in the space vehicle market to raise barriers to entry in the
government MTH launch services market. In this regard, one type of
space vehicle procurement presents a problem. Occasionally, DoD
requires a space vehicle supplier to select a launch service and
provide one price for the space vehicle as well as the launch. In these
so-called ``delivery in orbit'' procurements, DoD is concerned that
Boeing and Lockheed will have an incentive to defend ULA's monopoly by
refusing to consider on equal terms any other launch service
competitors that may emerge, such as SpaceX.
Third, the creation of ULA increases the likelihood that
competitively sensitive information from third parties will be
disclosed among ULA, Boeing, and Lockheed in a manner that harms
competition. For example, as vertically integrated suppliers, Boeing
and Lockheed may have incentives to share confidential Northrop
information obtained as a launch vehicle services suppler with their
respective space
[[Page 60151]]
vehicle businesses. Similarly, Boeing and Lockheed may have an
incentive to share with ULA confidential information that their space
vehicle businesses may learn from any future launch vehicle service
competitors. This concern arises because third parties, such as
Northrop, will no longer be able to utilize competition between Boeing
and Lockheed in the MTH launch services market to negotiate the
creation of firewalls and other protections for their confidential
information.
VI. The Proposed Consent Agreement
To allow the United States to obtain the national security
enhancements offered by ULA, the proposed Consent Agreement does not
attempt to remedy the loss of direct competition between Boeing and
Lockheed Martin under these unique circumstances. Instead, the purpose
of the proposed Consent Agreement is to address ancillary competitive
harms that DoD has identified as not inextricably tied to the national
security benefits associated with the creation of ULA. To ensure that
the provisions of the proposed Consent Agreement are followed, it
provides for a compliance officer who will be appointed by the
Secretary of Defense. The compliance officer will have broad
investigative and remedial powers and may interview respondents'
personnel, inspect respondents' facilities, and require respondents to
provide documents, data, and other information.
To alleviate DoD's concerns in the government space vehicle market,
the proposed Consent Agreement requires ULA to cooperate on equivalent
terms with all government space vehicle providers seeking to win U.S.
government procurement contracts. Because a space vehicle and launch
vehicle require significant integration to achieve successful placement
of a space vehicle into orbit, space vehicle and launch services
providers work closely together pursuant to teaming arrangements when
seeking to win government contracts. Pursuant to the proposed
agreement, ULA must provide all space vehicle suppliers with equal
access to engineering resources, personnel, and technical information.
These provisions ensure that ULA cannot give an unfair advantage to the
space vehicle businesses of its parents during DoD's space vehicle
procurement process.
The proposed Consent Agreement addresses DoD's concern that Boeing
and Lockheed will refuse to support or deal with future competitors to
ULA by requiring Boeing and Lockheed to provide equal consideration,
information, and resources to any launch services competitors of ULA
when bidding on a delivery in orbit contract. These provisions prevent
Boeing and Lockheed from slowing or deterring entry into the MTH launch
services businesses in order to protect ULA's monopoly status. To
ensure the parties' compliance with this requirement, Boeing and
Lockheed must create selection criteria and have those criteria
approved by the compliance officer. Further, the proposed Consent
Agreement prohibits Boeing and Lockheed from selecting ULA as a launch
services supplier without the prior approval of the compliance officer.
To address DoD's concern that competitive harm may occur as the
result of the exchange of confidential information, the proposed
agreement forbids ULA, Boeing, and Lockheed from sharing third parties'
competitively sensitive information. ULA must establish separate teams
to support each space vehicle supplier's efforts to win government
contracts and implement procedures, pursuant to the compliance
officer's oversight, that will ensure that confidential information is
not exchanged among the teams. Additionally, the order requires a
number of prophylactic measures designed to ensure that confidential
information is not exchanged between ULA and its parents. Pursuant to
these provisions, ULA's facilities must be physically separate from
those of Boeing and Lockheed, and employees must be able to access only
the facilities of their respective employer. If ULA requires technical
support from Boeing or Lockheed employees, these employees must sign
confidentiality agreements, which must be provided to the compliance
officer, agreeing not to disclose the confidential information of any
space vehicle supplier teaming with ULA. In addition, for a one-year
period, any such employee may not join or assist a Boeing or Lockheed
project that is competing with a space vehicle supplier whose
confidential information was obtained by the employee during work at
ULA.
The purpose of this analysis is to facilitate public comment on the
proposed Consent Agreement, and it is not intended to constitute an
official interpretation of the proposed Consent Agreement or to modify
its terms in any way.
By direction of the Commission.
Donald S. Clark,
Secretary.
Concurring Statement of Commissioner Pamela Jones Harbour
I concur in the Commission's decision to accept a proposed consent
agreement and allow the formation of United Launch Alliance (ULA), a
joint venture of The Boeing Company (Boeing) and Lockheed Martin
Corporation (Lockheed). I write separately to elaborate on the
reasoning behind my vote.
The Analysis to Aid Public Comment (AAPC) states, and I agree, that
``significant anticompetitive effects, including the loss of non-price
competition and the loss of potential future price competition, are
likely to occur if the proposed transaction is consummated.'' If the
proposed ULA joint venture could be scrutinized solely through a
competition lens, I would have no choice but to vote for a Commission
challenge.
It is impossible, however, to ignore the views of the U.S.
Department of Defense (DoD). DoD unequivocally has communicated its
position to the Commission: the creation of ULA is critical to protect
national security interests, and enabling these unique national
security benefits to flow is more important to the public interest than
preventing the loss of direct competition between Boeing and Lockheed.
It is my understanding that the Commission and DoD share a long
history of cooperation in their review of defense industry
transactions, with each agency contributing its specialized expertise
and insights. In this case, pursuant to established protocol, staff
from the two agencies have worked together for many months to analyze
the proposed joint venture.
Moreover, DoD is the primary purchaser of government medium to
heavy launch services and government space vehicles. In merger cases
outside of the defense context, the Commission and its staff typically
rely on customer testimony (among other sources of information) to
learn about markets, define the scope of potential competitive harm,
and evaluate whether the Commission should take enforcement action.\3\
As a matter of legal
[[Page 60152]]
principle and sound enforcement policy, the views of DoD as a major
customer are entitled to no less respect in this case.
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\3\ See, e.g., Interview with Commissioner Pamela Jones Harbour,
Antitrust Source (March 2006), at 9, available at http://www.abanet.org/antitrust/at-source/06/03/Mar06-HarbourIntrvw3=22f.pdf
(discussing role of customer testimony)
(citing, inter alia, Deborah Platt Majoras, Recent Actions at the
Federal Trade Commission, Remarks Before the Dallas Bar
Association's Antitrust and Trade Regulation Section (Jan. 18,
2005), available at http://www.ftc.gov/speeches/majoras/050126recentactions.pdf.
; Chicago Bridge & Iron Co. N.V., et al.,
FTC Dkt. No. 9300, Opinion of the Commission (2004), available at
http://www.ftc.gov/os/adjpro/d9300/050106opionpublicrecordversion9300.pdf.
; Arch Coal, FTC Dkt. No.
9316, Statement of the Commission (June 13, 2005), available at
http://www.ftc.gov/os/adjpro/d9316/050613commstatement.pdf; id.,
Dissenting Statement of Commissioner Pamela Jones Harbour, available
at http://www.ftc.gov/os/adjpro/d9316/050613harbourstatement.pdf).
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From a purely practical perspective, I must consider the potential
role of DoD testimony if the Commission were to seek a preliminary
injunction over DoD's objections. As a Commissioner, I am responsible
for evaluating litigation risk before sending Commission staff into
court. Customer testimony, standing alone, certainly would not (and
should not) be dispositive, in this or any other merger case. I expect,
however, that DoD's conclusions would influence a judge's decision
whether to grant a preliminary injunction--especially in light of the
national security overlay and DoD's expertise.
The proposed consent order addresses three competitive concerns
that, in DoD's view, are not ``intrinsically linked'' to ULA's putative
national security advantages. The AAPC acknowledges that the proposed
consent agreement ``does not attempt to remedy the loss of direct
competition'' and is, instead, intended to ``address ancillary
competitive harms that DoD has identified as not inextricably tied to
the national security benefits associated with the creation of ULA.''
While I have voted in favor of accepting the proposed consent
agreement, I note a few troublesome aspects. The proposed consent
agreement departs radically from traditional Commission consent orders
in merger cases. Structural remedies are, by far, the preferred way to
resolve competitive problems in the horizontal merger context. Conduct
restrictions, standing alone, generally are viewed as insufficient to
address the underlying market mechanisms from which competitive harm
may arise. Here, in lieu of market-based competition, the monopolist
ULA will be subjected to an elaborate and highly regulatory system of
oversight by a ``compliance officer'' appointed by the Secretary of
Defense. Ordinarily, such a system would not be considered an effective
remedy for the anticompetitive effects alleged in the Commission's
complaint.
I continue to believe that preserving a competitive market
structure is the preferred ``fix'' for an anticompetitive horizontal
merger. Also, I am somewhat unsettled by the notion that the
Commission--an independent, bipartisan federal agency--is, in effect,
delegating away too much of its oversight authority to an executive
branch agency. I recognize, however, that staff from the Commission and
DoD have attempted to craft a workable remedy that will strike an
appropriate balance between competition and broader national security
interests.
In the end, I am faced with a Hobson's choice: accept a complex and
regulatory consent that will prevent some competitive harm; or do
nothing, and allow the joint venture to proceed unrestricted. I lack
the technical expertise to second-guess DoD's conclusion that allowing
the formation of ULA is the best way to preserve national security and
protect the public interest. In light of our agencies' established
protocol for concurrent review of defense industry transactions, I
reluctantly agree that the Commission must give DoD the benefit of the
doubt. I therefore vote to accept the proposed consent agreement.
[FR Doc. E6-16862 Filed 10-11-06; 8:45 am]
BILLING CODE 6750-01-P