DOD Contractor Collaborations: Proposed Procedures for Integrating Antitrust Law, Procurement Law, and Purchasing Decisions

• Author: Major Francis Dymond
• Pages: 03

96 MILITARY LAW REVIEW [Vol. 172

DOD CONTRACTOR COLLABORATIONS:

PROPOSED PROCEDURES FOR INTEGRATING ANTITRUST LAW, PROCUREMENT LAW, AND PURCHASING DECISIONS

MAJOR FRANCIS DYMOND1

1. Introduction

   Despite improvement due to acquisition reform, the [DOD] acquisition process continues to be overly risk averse, which inhibits innovation and access to creative, high technology solutions . . . The oversight community, at the operating level, continues to function with an inadequate understanding [of] the realities and changing dynamics of the market or industry.2

   One of the most pervasive changes in the U.S. defense industry and procurement markets has been the rapid growth in Department of Defense (DOD) contractor collaborations in both "systems" (or major end-items)3 and other nonsystems procurements.4 While the trend in the general U.S. economy has been to scrutinize such business practices under antitrust laws,5 the DOD has only just begun a dialogue on the impact of such contractor behavior on its procurements.6 Likewise, DOD only recently began to include measurements of market and industry competitiveness, the cornerstone of antitrust policy, as significant high-level planning factors in the

   monopsonist DOD "systems" procurement process.7 Although DOD, the

   Department of Justice (DOJ), and the Federal Trade Commission (FTC) in the last decade settled on antitrust enforcement coordination procedures for DOD contractor mergers and acquisitions,8 the debate over the competitive effects of contractor collaborations and consequent enforcement procedures needs a concerted push. Even DOJ and FTC recently acknowledged that contractor collaborations "require antitrust scrutiny different from that required for mergers."9

   In a defense industry that is consolidating and changing to a new paradigm after the Cold War downsizing,10 one of the most significant DOD contractor behavioral adjustments is the use of collaborative contracting. Collaborations among competing DOD contractors, whether called "teaming arrangements," "joint ventures," "strategic alliances," "subcontracts," "associations," licensing arrangements," "partnering," or "leader-follower agreements," provide a variety of benefits to market participants in winning and keeping DOD contracts. Industry observers predicted such benefits (or arguably, business necessities) even as the post-Cold War "peace dividend" appeared.11

   Of course, the defense industry downsizing and related consolidation were not the exclusive causes of this behavioral trend. As DOJ and FTC have stated: "In order to compete in modern markets, competitors sometimes need to collaborate. Competitive forces are driving firms toward complex collaborations to achieve goals such as expanding into foreign markets, funding expensive innovation efforts, and lowering production and other costs."12 Even DOD's nonsystems markets, including base services and other commercial items, are experiencing these "forces."13

   With more strident competition, particularly in the defense systems industrial base, antitrust experts and observers over the past decade cautioned against the anticompetitive risks of collaboration. These commentators assert that companies seeking market monopolies or groups seeking to restrain trade to an advantageous end can abuse overly restrictive collaborative arrangements.14 Because of such cautionary antitrust scholarship, the business community at large has also shown risk aversion toward collaborations.15 Therefore, "[a] perception that antitrust laws are skeptical about agreements among actual or potential competitors may deter the development of pro-competitive collaborations."16

   The two forces of defense procurement reform and sensitivity toward unclear antitrust standards for collaborations fueled a firestorm of controversy recently when DOD proposed a new set of rules prohibiting what it perceived was a particularly anticompetitive contractor collaboration- exclusive teaming arrangements.17 These arrangements exist when one contractor with a unique asset agrees to participate in a DOD procurement

   with one or more other contractors, provided that the collaborators agree not to work with nonparticipants. Such collaborations subjugate collaborators to the unique asset owner and, therefore, violate antitrust law, according to the DOD position. The ensuing industry comments reveal a deep chasm in the defense community's understanding and respective interests in the enforcement structure of antitrust law to contractor collaborations and its role in the procurement process.18

   This article reviews the three overlapping general aspects of government action that govern the level of collaboration among DOD contracts, and the procedural enforcement regimes used within each. First, DOJ and FTC apply antitrust laws to the private conduct of contractor collaborations.19 These agencies take into account the unique DOD regulatory and monopsony powers to inform their assessments, but so far have relied little on DOD for coordinating their enforcement efforts. The DOD defers on matters of antitrust laws to these agencies. Second, the various federal procurement statutes provide a host of requirements for achieving competition during DOD procurements and punish contractors financially for violating antitrust laws.20 In addition, a host of exceptions may contradict or limit the application of antitrust competition standards.21 Finally, as a buyer (market participant or market-maker), DOD's purchasing decisions play a significant role in shaping the behavior of its contractors.22

   With the aid of realistic hypothetical collaborations, this article critiques the effectiveness of the three procedural enforcement regimes as they apply to anticompetitive collaborations. Specifically, this article

   addresses the following missing or ineffective interrelationships: (1) the role and effect of DOD buying behavior and its agents' representations in the application of antitrust law to contractor collaborations; (2) the procedures used by DOD under its procurement system to monitor, assess, report to, and assist DOJ and FTC with potentially illegal collaborations among DOD contractors; and (3) the lack of effective procedures within DOD to assess and incorporate the results of an antitrust review of potential collaborations into particular procurements or buying decisions and practices.

   This article proposes a new set of procedures that fill in the enforcement procedural gaps outlined above, and synchronize agency actions on contractor collaborations. This article evaluates the proposed procedures by: (1) their ability to assist contractors in predicting government reactions to collaborations; (2) the efficiencies and flexibility gained through more rapid and responsive coordination of enforcement activities, including decreased transactional costs to both DOD and its contractors; (3) their relative ease of implementation and application, including training of DOD personnel; and (4) their overall effect in fostering competitive behavior and achieving other DOD industrial capability goals.

   This article outlines three distinct proposals. First, through a critique of the current system, this article discusses the unmitigated disadvantages of maintaining the existing enforcement system. Second, this article outlines a set of procedures based upon a centralized DOD analytical review model. Finally, this article recommends the incorporation of antitrust concepts and review procedures into the existing decentralized and specialized purchasing and budgeting systems, or "centers of excellence." The proposed procedures focus on coordination of procurement procedures and law enforcement procedures, including investigations, with regard to the distinction between "per se" violations of antitrust law and those subject to reasonableness tests, the efficiencies gained in collaborations, the types of anticompetitive harm to be considered within specific industry conditions, and the balancing of anticompetitive harm and benefits in collaborations.

2. Background

   A. The Defense Industrial and Procurement Environment

   Scholarly application of antitrust laws to DOD contractor business activity historically focused only on the "defense industry." Defining the

   "defense industry" in the twenty-first century, however, is becoming more difficult. The financial world generally views this industry as a distinct and powerful group of companies serving global aerospace and national defense "systems" (that is, vehicle, weapons, information technology, and similar) needs. Within the United States, the industry comprises manufacturing and service segments and sub-segments based on the nature of the output, variously categorized as: commercial and military;23 defense, commercial aircraft, and space;24 commercial "off-the-shelf" and specialized;25 by product function;26 and other services.27 For antitrust purposes, DOJ and FTC define "market" as a particular product (or service) market28

   within a geographical market.29

   Since the early 1990's, the defense budget reductions have reduced the number of defense industry companies by about half. Now one or two

   large firms dominate each "systems" industry sub-segment,30 despite marginal financial performance.31 The DOD has worked closely with DOJ, FTC, and other agencies to oversee this reduction by shaping the industry's mergers and acquisitions in hopes of obtaining significant procurement cost savings.32 The DOD largely realized the savings from this activity,33 but with consolidation nearly complete, the focus is changing. Thus, the defense industry is entering a new paradigm.34

   The Defense industrial and technology base has undergone a fundamental change over the past decade. DOD traditionally relied on a largely defense-unique industrial base comprised of dozens of suppliers and technology leaders. In the future, the Department must increasingly access the commercially driven...