Securing Competitive Access: The Role of Supply Agreements in Mitigating Input Foreclosure Risks

by Alexander S. Greenberg*

This Contribution examines the important role that contractual supply agreements can play in addressing input foreclosure risks in vertical mergers. By analyzing the Microsoft/Activision merger and the Illumina/Grail acquisition, this Contribution assesses the efficacy of behavioral remedies such as supply agreements in preserving access to essential market inputs. The discussion highlights the adaptability of supply agreements in dynamic markets and their potential advantages over structural remedies. FTC v. Microsoft Corporation demonstrates how well-crafted supply agreements can facilitate regulatory approval by guaranteeing rivals’ access to crucial inputs. In contrast, the Federal Trade Commission’s rejection of Illumina’s Open Offer in Illumina, Inc. v. FTC underscores the limitations of broad behavioral remedies that fail to adequately prevent secondary harm. This Contribution argues that, when thoughtfully structured, supply agreements can serve as a powerful tool to mitigate vertical foreclosure concerns in rapidly evolving markets.

Section 7 of the Clayton Act prohibits mergers “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”¹ In the 1950 amendments to the Clayton Act, Congress clarified that § 7 applies “not only to mergers between actual competitors, but also to vertical and conglomerate mergers whose effect may tend to lessen competition in any line of commerce in any section of the country.”² Still, over seventy years later, there is a paucity of judicial precedent on vertical mergers.³

The U.S. Supreme Court has stated that “[t]he primary vice” of a vertical merger is the risk to competitors of foreclosure from a market segment previously open to them.⁴ Foreclosure comes in two flavors: customer foreclosure and input foreclosure.⁵ Customer foreclosure occurs when the downstream division of an integrated company refuses to purchase from rival input suppliers.⁶ Input foreclosure, on the other hand, occurs when the upstream division of an integrated firm harms its downstream competitors by withholding, raising the price, or degrading the quality of an input its competitors need to compete.⁷ For example, imagine a large car manufacturer that owns its own tire company and refuses to purchase tires from other tire suppliers. If that tire company sells its tires at a lower price to its owner than to its owner’s competitors, it may be partaking in input foreclosure.

Contractual supply agreements have emerged as a potential strategy to address input foreclosure concerns and thereby lessen scrutiny about otherwise anticompetitive vertical mergers.⁸ These agreements between upstream firms and downstream competitors provide continued access to inputs with negotiated terms specifying duration, exclusivity, volume commitments, and pricing structure. The importance of getting these terms right distinguishes the success of the supply agreement in the Microsoft/Activision merger from the failure thereof in the Illumina/Grail acquisition.⁹ When properly structured, supply agreements can be a critical tool in proactively countering antitrust concerns and should be taken seriously by companies and enforcement authorities alike.

Microsoft’s acquisition of Activision is a strong case study in how carefully crafted supply agreements can effectively address concerns about input foreclosure. In January 2022, Microsoft moved to acquire Activision Blizzard, aiming to expand its gaming services market and subscription service offerings, particularly through Xbox Game Pass and cloud gaming.¹⁰ The proposed merger faced intense antitrust scrutiny worldwide.¹¹ Regulators including the U.S. Federal Trade Commission (“FTC”), the U.K.’s Competition and Markets Authority (“CMA”), and the European Commission raised concerns that the acquisition could stifle competition by enabling Microsoft to withhold Activision’s popular titles, namely Call of Duty, from rival platforms or to disadvantage competitors in emerging markets.¹² Despite regulatory pushback, including lawsuits from the FTC and an initial block by the CMA, Microsoft ultimately completed the acquisition in October 2023 after resolving regulatory concerns through a well-structured supply agreement.¹³

To counter regulatory concerns, Microsoft proactively offered long-term contractual commitments which ensured that Call of Duty and other Activision titles would remain available on rival platforms under fair and non-discriminatory terms.¹⁴ Microsoft signed agreements guaranteeing the availability of Call of Duty on various console and gaming platforms, including on Sony’s PlayStation consoles.¹⁵ The supply agreements served as evidence that Microsoft did not intend to monopolize access to Activision’s gaming portfolio.¹⁶ By ensuring rival platforms could continue offering Activision games, Microsoft undercut arguments that the merger would lead to input foreclosure.

While Microsoft’s concrete supply commitments and history of fair dealing paved the way for regulatory approval, regulators often treat behavioral remedies, like supply agreements, as less practical than structural ones, like divestitures, which don’t rely on monitoring the behavior of the parties involved.¹⁷ After all, monitoring compliance over a 10-year period requires oversight, and one could imagine that Microsoft might subtly disadvantage rivals while still technically complying with its commitments. Even with a formal supply contract, Microsoft could theoretically prioritize Xbox users through technical advantages, early access, or exclusive features.¹⁸

Despite these concerns of unreliability, behavioral remedies are particularly useful in dynamic markets like gaming, where structural remedies could stifle innovation or fail to address evolving market dynamics.¹⁹ For example, requiring a divestiture that removes the upstream firm from operational control can threaten access to shared proprietary information and strain important market relationships. Supply agreements ensure access to inputs while allowing upstream firms to retain operational control. Independent monitoring can promote compliance, increasing the credibility of these remedies.²⁰ One could imagine agreements that include enforceable penalties for non-compliance, ensuring that breaches would carry financial and reputational consequences. Furthermore, one could imagine tailoring behavioral remedies to address specific competitive concerns. This reduces ambiguity and enhances enforceability. Finally, as the CEO of Microsoft Gaming testified at trial, agreements can include provisions that adapt to changing technologies.²¹ For instance, licensing commitments might specify that they apply to any successor technologies or platforms, ensuring that rivals can compete in emerging markets.

While supply contracts face valid criticisms, their limitations can be mitigated through detailed commitments, independent oversight, and adaptive mechanisms. In the Microsoft/Activision merger, as noted above, contractual supply agreements played a pivotal role in alleviating foreclosure concerns and securing regulatory approval in several jurisdictions.²² By addressing enforcement challenges, supply contracts serve as an effective tool to maintain competition in dynamic markets while enabling firms to pursue procompetitive synergies.

Doctrinally, supply contracts inform the ability-and-incentive analysis that lies at the heart of vertical foreclosure analysis. This is because a well-structured supply contract can eliminate a company’s ability to foreclose while also providing insight into its market intentions. In certain cases, the upstream division of a merged firm may have the incentive to withhold an input from its downstream division’s competitors if (i) withholding the input results in sales being diverted to its downstream division (because, for example, the absence of the input worsens the quality of competitors’ products) and (ii) the value of the additional downstream sales exceeds the value of the lost upstream revenues.²³ Where data is available, input foreclosure incentives can be scored using various quantitative methodologies.²⁴ The incentive to foreclose is considered in conjunction with the ability to foreclose.²⁵

The ability-and-incentive analysis considers the context of the company’s past business practices.²⁶ The credibility of supply agreements, therefore, depends in part on whether the company has foreclosed or attempted to foreclose an important input in the past. For example, in United States v. UnitedHealth Group, Inc., the court found that Optum, a subsidiary of United Health Group, was unlikely to foreclose on a technology because Optum “ha[d] never withheld a product from external payers” and “ha[d] never sold one version of a product to [UnitedHealthcare] while selling a degraded version to other customers.”²⁷

While tailored and enforceable supply contracts can provide effective safeguards against input foreclosure, contracts that are ambiguous or lack adequate enforcement mechanisms raise legitimate concerns about the anticompetitive impact of mergers. These weaknesses were on display in the recent Illumina/Grail merger, where the relationship between supply contracts and input foreclosure was a central issue.²⁸ The FTC challenged leading biotechnology company Illumina’s  acquisition of Grail, another biotechnology company focused on cancer detection, because of concerns that Illumina could foreclose Grail’s competitors by restricting their access to Illumina’s next-generation sequencing (NGS) technology, an essential input for multi-cancer early detection tests.²⁹ To address these concerns, Illumina introduced the “Open Offer,” a standardized supply contract intended to provide all U.S. oncology customers, including Grail’s competitors, with access to its NGS technology on the same terms as Grail.³⁰ This offer aimed to demonstrate that Illumina would not engage in discriminatory practices post-merger.

The FTC rejected the Open Offer as an inadequate means of addressing input foreclosure concerns.³¹ The FTC emphasized that the Open Offer was a behavioral remedy, which inherently required ongoing monitoring and enforcement.³² Such remedies are less favored than structural solutions because they rely on merged firms adhering to the terms voluntarily over time, without sufficient guarantees that anticompetitive conduct could be avoided. The FTC expressed concerns that Illumina could still subtly disadvantage Grail’s competitors, even under the Open Offer, by delaying access to new technologies, providing inferior service or support, or engaging in other non-price discriminatory practices that could increase rivals’ costs or reduce their competitiveness.³³

The Illumina/Grail merger underscores the challenges in designing effective supply agreements to address vertical foreclosure concerns. Unlike the Microsoft/Activision merger, where supply contracts were accepted as sufficient safeguards, the Illumina/Grail Open Offer was rejected because it lacked enforceability and credibility. In the Microsoft/Activision merger, as noted above, regulators viewed the supply agreements as concrete, enforceable commitments that ensured competitors would retain access to Activision’s gaming titles, a critical input in the gaming ecosystem.

In contrast, the Open Offer in the Illumina/Grail merger was criticized for being insufficiently robust. While it promised non-discriminatory access to Illumina’s NGS technology, the FTC expressed skepticism over the monitoring and enforcement mechanisms, or lack thereof.³⁴ The Open Offer failed to incorporate strong penalties for non-compliance or clear provisions for independent oversight. Moreover, the FTC argued that Illumina’s prior conduct and its dominant position in the NGS market heightened the risk that Illumina could still subtly disadvantage Grail’s competitors.³⁵

The different outcomes of these cases demonstrate that the efficacy of supply agreements in addressing input foreclosure concerns lies in their design and implementation. Agreements which are detailed, enforceable, and adaptive to market dynamics are more likely to gain regulatory approval, whereas agreements that are vague, lack robust enforcement mechanisms, or fail to address secondary harms are unlikely to succeed. If thoughtfully crafted, supply contracts can serve as a win-win for companies seeking to achieve efficiencies and regulatory bodies charged with rooting out anticompetitive behavior.

* Alexander S. Greenberg is a J.D. Candidate (2025) at New York University School of Law. This Contribution is a commentary on the problem at the 2024 Law & Economic Center Invitational Antitrust Moot Court Competition, hosted by Antonin Scalia Law School. One of the questions presented was whether a diagnostic machine manufacturer’s proposed acquisition of a vial manufacturer constitutes an anticompetitive vertical merger. This Contribution distills one side of the argument, and the views expressed herein do not necessarily represent the author’s views.

1. 15 U.S.C. § 18.

2. Brown Shoe Co. v. United States, 370 U.S. 294, 317 (1962).

3. See United States v. AT&T, Inc., 916 F.3d 1029, 1037 (D.C. Cir. 2019).

4. Ford Motor Co. v. United States, 405 U.S. 562, 570–71 (1972) (quoting Brown Shoe, 370 U.S. at 323–24).

5. See Michael H. Riordan & Steven C. Salop, Evaluating Vertical Mergers: A Post-Chicago Approach, 63 Antitrust L.J. 513, 527–28 (1995).

6. See id. (discussing the anticompetitive exclusionary conduct that results from vertical mergers).

7. See id. at 527–29 (explaining the anticompetitive effects associated with input foreclosure, including increased prices and less efficient use of inputs by competitors).

8. See, e.g., AT&T, 916 F.3d at 1034–35 (analyzing the enforceability of irrevocable arbitration agreements with no “blackout” guarantees offered by Turner Broadcasting to approximately 1,000 distributors).

9. See FTC v. Microsoft Corp., 681 F. Supp. 3d 1069, 1090–91 (2023); Illumina, Inc. v. FTC, 88 F.4th 1036, 1055–57 (2023).

10. See Microsoft, 681 F. Supp. 3d at 1077.

11. See Michael Halperin, The Future of Merger Control in Technological Markets as Revealed in Recent Merger Cases, 38 Antitrust ABA 73, 75 (2023).

12. See id.

13. See Kellen Browning & David McCabe, Microsoft Closes $69 Billion Activision Deal, Overcoming Regulators’ Objections, N.Y. Times (Oct. 13, 2023).

14. See Microsoft Corp., 681 F. Supp. 3d at 1090–91.

15. See id.

16. See id. (crediting supply agreements as the reason Microsoft did not have an incentive to foreclose Call of Duty).

17. See, e.g., Makam Delrahim, Assistant Attorney General, Antitrust Division, U.S. Dep’t of Justice, Antitrust and Deregulation, Remarks as Prepared for Delivery ABA Antitrust Fall Forum at 8 (Nov. 16, 2017), available as of Jan. 2, 2018 at www.justice.gov/opa/speech/file/1012086/download (“Behavioral remedies presume that the Justice Department should serve as a roving ombudsman of the affairs of business; even if we wanted to do that, we often don’t have the skills or the tools to do so effectively.”).

18. See, e.g., Competition & Mkts. Auth., Merger Assessment Guidelines (2021), https://assets.publishing.service.gov.uk/media/61f952dd8fa8f5388690df76/MAGs_for_publication_2021_–_.pdf (“The CMA’s assessment of the ability of the merged entity to foreclose its rivals is unlikely to place material weight on contractual protections, for example, to continue supplying both the current version and future upgrades of the input.”).

19. See, e.g., Makam Delrahim, Assistant Attorney General, Antitrust Division, U.S. Dep’t of Justice, Antitrust and Deregulation, Remarks as Prepared for Delivery ABA Antitrust Fall Forum at 8 (Nov. 16, 2017), available as of Jan. 2, 2018 at www.justice.gov/opa/speech/file/1012086/download (“[W]here an unlawful vertical transaction generates significant efficiencies that cannot be achieved without the merger or through a structural remedy, then there’s a place for considering a behavioral remedy. . . .”)

20. See, e.g., Washington v. Nat’l Express Grp. PLC, No. 2:12-cv-757 RSM, 2012 U.S. Dist. LEXIS 82266, at *10–11 (W.D. Wash. 2012) (requiring defendants to pay plaintiff attorney fees to oversee and monitor compliance with remedies).

21. See Microsoft Corp., 681 F. Supp. 3d at 1091 (noting testimony of Microsoft’s commitment to keep Call of Duty available on PlayStation even as new versions are released).

22. See Microsoft Corp., 681 F. Supp. 3d at 1090–91; Kellen Browning & David McCabe, Microsoft Closes $69 Billion Activision Deal, Overcoming Regulators’ Objections, N.Y. Times (Oct. 13, 2023).

23. See Steven C. Salop & Daniel P. Cully, Revising the U.S. Vertical Merger Guidelines: Policy Issues and an Interim Guide for Practitioners, 4 J. Antitrust Enf’t 1, 24–27 (2015).

24. See id. at 27–29  (applying three different methodologies, vertical arithmetic, vertical GUPPIs, and merger simulation).

25. See id. at 19.

26. U.S. Dep’t of Justice & Federal Trade Comm’n, Merger Guidelines § 2.5 (2023), https://www.justice.gov/atr/2023-merger-guidelines.

27. 630 F. Supp. 3d 118, 153 (D.D.C. 2022).

28. See Illumina, Inc., 88 F.4th at 1052–57.

29. Id. at 1051–52.

30. Id. at 1044.

31. Id. at 1045.

32. Illumina, Inc., and GRAIL, Inc., No. 9401, slip op. at 66 (FTC Apr. 3, 2023).

33. See id. at 66–69.

34. Id.

35. Id. at 52–53.