The Boeing Company; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 971-0006]

The Boeing Company; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, this consent agreement, accepted subject to final

Commission approval, settles allegations that the Seattle-based defense

and space contractor's acquisition of Rockwell International

Corporation's Aerospace and Defense business would violate antitrust

laws by reducing competition in two markets: High altitude endurance

unmanned air vehicles and space launch vehicles. Boeing and Rockwell

are members of the only two teams currently competing to develop high-

altitude endurance unmanned air vehicles for the Department of Defense.

The agreement would require, among other things, that Boeing deliver to

Teledyne Ryan, which heads the team competing against Boeing, all of

the assets needed to produce Tier II Plus wings for the Teledyne Ryan

team. The proposed acquisition would also make Boeing both a competitor

in the market for space launch vehicles and a provider of the space

launch vehicle propulsion systems used by Boeing and its space launch

vehicle competitors. The agreement prohibits Boeing from making any

space launch vehicle manufacturer's non-public information available to

Boeing's launch vehicle division, and from using a competitor's

proprietary, non-public data in any capacity except as a provider of

launch vehicle propulsion systems.

DATES: Comments must be received on or before February 14, 1997.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, DC. 20580.

FOR FURTHER INFORMATION CONTACT: William J. Baer or George Cary,

Federal Trade Commission, H-374, 6th and Pennsylvania Ave., NW,

Washington, DC 20580. (202) 326-2932 or (202) 326-3741.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Sec. 2.34 of the

Commission's 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 sixty (60) days. The following Analysis to Aid Public

Comment describes the terms of the consent agreement, and the

allegations in the accompanying complaint. An electronic copy of the

full text of the consent agreement package can be obtained from the

Commission Actions section of the FTC Home Page (for December 5, 1996),

on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A

paper copy can be obtained from the FTC Public Reference Room, Room H-

130, Sixth Street and Pennsylvania Avenue, NW., Washington, DC. 20580,

either in person or by calling (202) 326-3627. Public comment is

invited. Such comments or views will be considered by the Commission

and will be available for inspection and copying at its principal

office in accordance with Sec. 4.9(b)(6)(ii) of the Commission's rules

of practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission (``Commission'') has accepted, subject

to final approval, an agreement containing a proposed Consent Order

from The Boeing Company (``Boeing'') designed to remedy the

anticompetitive effects likely to result from Boeing's proposed

acquisition of Rockwell International Corporation's Aerospace and

Defense business (``Rockwell Aerospace and Defense''). The proposed

Consent Order enables Teledyne Ryan, the prime contractor for the Tier

II Plus high altitude endurance unmanned air vehicle (``HAE UAV''), to

replace Boeing as its teammate and wing supplier for Tier II Plus,

without incurring any significant cost or risk, by requiring Boeing, at

Teledyne Ryan's request, to deliver to Teledyne Ryan all of the assets

needed to manufacture wings for the Tier II Plus and provide technical

assistance to Teledyne Ryan. In addition, the proposed Consent Order

prohibits Boeing's space launch vehicle division from gaining access to

any non-public information that Boeing's space launch vehicle

propulsion system division will receive after the acquisition from

competing space launch vehicle providers.

The proposed Consent Order has been placed on the public record for

sixty (60) days for reception of comments by interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreement and any comments received and will decide whether it should

withdraw from the agreement or make final the agreement's proposed

Order.

On or about July 31, 1996, Boeing agreed to acquire Rockwell

Aerospace and Defense for approximately $3.025 billion. The proposed

complaint alleges that the acquisition, if consummated, 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, in the

markets for HAE UAVs and space launch vehicles.

[[Page 66039]]

The proposed Consent Order would remedy the alleged violations in

each market. First, Boeing and Rockwell are members of the only two

teams currently competing in the design and development of HAE UAVs.

Boeing and its teammate Lockheed Martin are currently developing the

Tier III Minus HAE UAV, and Teledyne Ryan and a team of subcontractors,

including Rockwell Aerospace and Defense, are currently developing the

Tier II Plus HAE UAV.

HAE UAVs are unmanned aircraft used to perform high-altitude, broad

area reconnaissance. These aircraft are controlled from the ground and

transmit reconnaissance sensor data on a real time basis. HAE UAVs are

being designed to satisfy the Defense Airborne Reconnaissance Office's

goal of providing the U.S. military with the ability to obtain

responsive and continuous reconnaissance data from anywhere within

enemy territory, day or night, as the needs of the warfighter dictate.

Under its teaming agreement with Lockheed Martin, Boeing is

responsible for providing, among other things, the wings, launch

station and avionics for Tier III Minus. As a subcontractor to Teledyne

Ryan for Tier II Plus, Rockwell is responsible for providing only the

aircraft's wings. The proposed acquisition therefore would position

Boeing as a member of both competing HAE UAV teams while Boeing would

stand to earn a far greater share of the revenue from its participation

on the Tier III Minus team than it could earn from its role as the wing

supplier for the Tier II Plus team.

The acquisition is likely to lead to anticompetitive effects in the

HAE UAV market. Because the proposed acquisition would cause Boeing to

be a member of the only two competing HAE UAV teams, Boeing would be in

a position to raise price and/or reduce quality on one or both teams.

Boeing would not only have the opportunity to diminish competition, but

would also have the incentive to cause the Tier II Plus team to become

non-competitive because Boeing stands to earn significantly more

revenue from its participation in the Tier III Minus program than it

would earn as a supplier of wings to the Tier II Plus team. Moreover,

if the Tier II Plus system became non-competitive, or simply less

competitive, Boeing would then be in a position to also raise the price

of the Tier III Minus system.

The proposed consent agreement resolves the likely anticompetitive

effects of the acquisition in the HAE UAV market by enabling Teledyne

Ryan to replace Rockwell Aerospace and Defense, which would be owned by

Boeing after the acquisition, as the Tier II Plus wing supplier without

incurring any significant costs or risk. As a result, Boeing will

either agree to supply Tier II Plus wings in a competitive manner after

the acquisition or be replaced by Teledyne Ryan.

Specifically, under the terms of the Order, Boeing is required to

deliver, upon request from Teledyne Ryan, to business locations in the

United States designated by Teledyne Ryan, at no cost to Teledyne Ryan,

all of the assets needed to produce Tier II Plus wings, including the

special tooling, special test equipment, engineering data and design

data. Teledyne Ryan can request that Boeing deliver such assets at

anytime prior to six months from the date the Order becomes final,

provided Teledyne Ryan and Boeing have not agreed to a new contract for

Boeing to supply wings for Tier II Plus. This ensures that Boeing will

have the incentive to compete vigorously to remain a supplier of wings

for Tier II Plus. In addition, Boeing is prohibited from asserting or

enforcing any proprietary rights in such equipment or data, or holding

Teledyne Ryan liable for any damages or costs resulting from the

replacement of Boeing as the Tier II plus wing supplier.

In order to ensure a smooth transition of the wing manufacturing to

a new supplier and to offset any lost learning curve efficiencies, the

proposed Order requires Boeing to provide technical assistance, not to

exceed four man years over a one year period, at no cost to Teledyne

Ryan. Because Teledyne Ryan may need Boeing's assistance in resolving

any technical issues that arise during the upcoming Tier II Plus flight

tests, the Order requires Boeing to provide additional technical

assistance through the duration of such tests. Finally, in order to

prevent the anticompetitive flow of competitively sensitive

information, the order establishes a ``firewall'' between Boeing's Tier

III Minus business and the Rockwell North American Aircraft Division

that is currently providing Tier II Plus wings.

Boeing is also a significant competitor in the research,

development, manufacture and sale of space launch vehicles, and is

expected to bid for the upcoming Department of Defense (``DoD'')

Evolved Expendable Launch Vehicle (``EELV'') program. The EELV

competition is expected to produce the next generation of launch

vehicles to replace all current medium to heavy launchers--Lockheed

Martin's Atlas, Titan II and Titan IV series, and McDonnell Douglas's

Delta series--with a single family of vehicles capable of launching

medium and heavy payloads into orbit at a significantly lower cost. The

EELV will handle the bulk of the U.S. government's launch requirements

after the year 2000 and is also expected to be used for commercial

applications. Boeing, McDonnell Douglas, Lockheed Martin and Alliant

Techsystems are currently facing a down-selection from four to two

contractors in the next phase of the EELV program.

Rockwell, through its Rocketdyne Division (``Rocketdyne''), is one

of the world's leading manufacturers of space launch vehicle propulsion

systems. Currently, Boeing and McDonnell Douglas are planning to use

Rocketdyne propulsion systems as part of their EELV proposals. Thus,

the proposed acquisition would vertically integrate Boeing as an EELV

bidder and a launch vehicle propulsion systems provider.

Because an EELV manufacturer that is using a Rockwell propulsion

system must work very closely with Rockwell in order to integrate that

system into its EELV, Boeing and McDonnell Douglas have provided, and

will continue to provide, a wide range of competitively sensitive

proprietary design, performance, cost-related, marketing and business

strategy information to Rockwell.

If DoD selects the Boeing and McDonnell Douglas teams as the

finalists for the EELV competition, Boeing's launch vehicle division

could gain access to the proprietary information that McDonnell Douglas

has provided to Rockwell's launch vehicle propulsion business, which

could affect the prices and services that Boeing would offer. Thus, the

proposed acquisition increases the likelihood that competition between

the participants in the EELV program would decrease.

In addition, Boeing also competes in the commercial market for

space launch vehicles and Rockwell also supplies space launch

propulsion systems to Boeing's commercial space launch vehicle

competitors. As a result, the proposed acquisition may result in

similar anticompetitive effects in future commercial space launch

vehicle procurements. In addition to causing higher prices, the

proposed acquisition may also reduce innovation in the commercial space

launch vehicle market, as Boeing's competitors who use Rockwell

propulsion systems will be less willing to invest in new space launch

vehicle developments for fear that Boeing will be able to ``free-ride''

off their technological developments.

To remedy the proposed acquisition's likely anticompetitive effects

in the

[[Page 66040]]

space launch vehicle market, the proposed Consent Order preserves the

confidentiality of space launch vehicle suppliers' proprietary

information by prohibiting Boeing's division that provides space launch

vehicle propulsion systems from making any proprietary information from

competing space launch vehicle manufacturers available to Boeing's

space launch vehicle division. Under the proposed Consent Order, Boeing

may only use such information in its capacity as a provider of space

launch vehicle propulsion systems. Non-public information in this

context includes any information not in the public domain that is

designated as proprietary information by any space launch vehicle

manufacturer that provides such information to Boeing as well as

information not in the public domain provided by any space launch

vehicle manufacturer to Rockwell prior to the acquisition. The purpose

of the proposed Consent Order is to preserve the opportunity for full

competition in the market for the research, development, manufacture

and sale of space launch vehicles. The Commission has issued similar

orders limiting potentially anticompetitive information transfers

following mergers or acquisitions, including Lockheed Martin, (C-3685)

(September 20, 1996); Raytheon Company, (C-3681) (September 10, 1996);

Lockheed Corporation/Martin Marietta Corporation, (C-3576) (May 9,

1995); Alliant Techsystems Inc., (C-3567) (April 7, 1995); Martin

Marietta, (C-3500) (June 28, 1994).

Under the provisions of the proposed Consent Order, Boeing is

required to deliver a copy of the Order to any space launch vehicle

manufacturer prior to obtaining any information from such manufacturer

that is outside of the public domain. The Order also requires Boeing to

provide the Commission a report of compliance with the provisions of

the Order within (60) days of the date the Order becomes final, and

annually for the next (10) years on the anniversary of the date the

Order becomes final.

In order to preserve competition in the relevant markets during the

period prior to the final acceptance of the proposed Consent Order

(after the 60-day public notice period), Boeing has entered into an

Interim Agreement with the Commission in which it has agreed to be

bound by the proposed Consent Order as of the date the Commission

accepts the proposed Consent Order subject to final approval.

The purpose of this analysis is to facilitate public comment on the

proposed Consent Order, and it is not intended to constitute an

official interpretation of the agreement and proposed Consent Order or

to modify in any way their terms.

Donald S. Clark,

Secretary.

[FR Doc. 96-31806 Filed 12-13-96; 8:45 am]

BILLING CODE 6750-01-P