Articles Posted in Antitrust News

Still More “Suddenly Classic” Antitrust Cases from the New Merger Guidelines: General Dynamics, Marine Bancorporation and Procter & Gamble

August 7, 2023 | Bona Law PC

Authors: Steven Cernak and Luis Blanquez

As we explained in a prior post, the new draft merger Guidelines issued recently by the FTC and DOJ cite to several older court opinions that may be unfamiliar to antitrust practitioners who have been focused for decades exclusively on earlier versions of the Guidelines. In the last post, we covered two such cases, Philadelphia National Bank and Pabst. Below, we cover three more of such newly “classic cases:” General Dynamics, Marine Bancorporation and Protect & Gamble.

General Dynamics

It is not surprising that the New Guidelines cite General Dynamics seven times; after all, the case has been cited in hundreds of opinions and even more law review articles and treatises. Nor are some of the citations surprising. For example, one citation (FN 93) quotes the case for the proposition that “other pertinent factors” besides market share might mandate a conclusion that competition would not be lessened by a merger. Similarly, citations about market definition make sense because the definitions of both the product and geographic markets were contentious points in the opinion. But for reasons we explain below, the citations to the case for parts of the New Guidelines that would challenge mergers on the basis of just an increase in concentration, while accurate, seem out of step with the opinion as a whole.

General Dynamics is a 1974 opinion with the 5-4 majority opinion written by Justice Stewart. Eight years before, Justice Stewart had written the dissent in Von’s Grocery. In that dissent, Justice Stewart penned one of his most famous quotes (no, not that one): “The sole consistency that I can find is that, in litigation under § 7, the Government always wins.” More substantively, Justice Stewart took issue with the majority’s market definition analysis. Instead of simply assuming a “Los Angeles grocery” market as the majority did, Justice Stewart would have applied a “housewife driving test” that, despite the antiquated name, was similar to the hypothetical monopolist test of later Guidelines. Also, instead of assuming anticompetitive effects from “high” market shares and increasing competition, as did the majority, Justice Stewart would have considered other pertinent factors, like low barriers to entry, turnover of firms, and changes to the Los Angeles population.

Eight years later, Justice Stewart applied similar concepts in General Dynamics, but this time for the majority. In this case, one Midwest coal supplier gradually purchased the voting securities of another Midwest coal producer. The DOJ produced evidence of high and increasing concentration in coal markets. Depending on the geographic market, the share represented by the top four firms went from 43-55% to 63-75% as the shares were being acquired. The lower court, however, found that there was cross-elasticity of demand among coal and other energy sources, like oil, natural gas, nuclear, and geothermal energy, so the proper product market was a broader “energy market.” Justice Stewart spoke approvingly of such a market analysis but, because of the analysis we describe below, found it unnecessary to opine on market definition. Significantly, the dissent agreed with the lower court that reviewing evidence of cross-elasticity of demand was appropriate; however, it thought that evidence supported a finding of a submarket for coal for certain customers, especially electric utilities. (The majority and dissent had similar disagreements about the geographic market definition.)

More important to the lower court and Justice Stewart were “other pertinent factors” that made shares of past production unhelpful in predicting future competitive effects of the merger. Here, the selling company’s reserves of coal were much smaller than its past or current production. For example, it controlled less than 1% of the coal reserves in Illinois, Indiana, and western Kentucky. As a result, its future competitive strength was much worse than a review of any current market shares would indicate. Again, the dissent did not dispute that such “other pertinent factors” were relevant to the analysis; however, it thought the facts did not support finding the seller to be so weak going forward and that much of that evidence came from post-acquisition transactions.

Given the overall facts and tone of both opinions in General Dynamics, it is odd that the New Guidelines cite it for support for challenging mergers that further a trend toward concentration. The New Guidelines accurately quote Justice Stewart’s opinion:

[The Court’s] approach to a determination of a “substantial” lessening of competition is to allow the Government to rest its case on a showing of even small increases of market share or market concentration in those industries or markets where concentration is already great or has been recently increasing…

But in the opinion, that sentence is followed by these three sentences:

…the question before us is whether the District Court was justified in finding that other pertinent factors affecting the coal industry and the business of the appellees mandated a conclusion that no substantial lessening of competition occurred or was threatened by the acquisition of United Electric. We are satisfied that the court’s ultimate finding was not in error. In Brown Shoe v. United States we cautioned that statistics concerning market share and concentration, while of great significance, were not conclusive indicators of anticompetitive effects … (cleaned up)

The New Guidelines citation to General Dynamics in its footnote 93 for the proposition that “other pertinent factors” besides concentration trends should be considered in merger analysis probably better reflects the overall tenor of the case’s opinions.

Marine Bancorporation

The Guidelines mention Marine Bancorporation seven times to highlight that when a merger eliminates a potential entrant into a concentrated market, it may substantially lessen competition or tend to create a monopoly. Marine Bancorp., 418 U.S. 602, 630 (1974).

The Guidelines explain that to determine whether one of the merging parties is a potential entrant, the Agencies examine:

whether one or both of the merging firms had a reasonable probability of entering the relevant market other than through an anticompetitive merger. The Agencies’ starting point for assessment of a reasonable probability of entry is objective evidence. For instance whether the firm has sufficient size and resources to enter; evidence of any advantages that would make the firm well-situated to enter; evidence that the firm has successfully expanded into other markets in the past or already participates in adjacent or related markets; evidence that the firm has an incentive to enter; or evidence that industry participants recognize the company as a potential entrant Marine Bancorp., 418 U.S. 636–37 (1974); and,
whether such entry offered “a substantial likelihood of ultimately producing deconcentration of [the] market or other significant procompetitive effects.” If the merging firm had a reasonable probability of entering the concentrated relevant market, the Agencies will usually presume that the resulting deconcentration and other benefits that would have resulted from its entry would be competitively significant, unless there is substantial direct evidence that the competitive effect would be de minimis.

This is known as actual potential competition. The Guidelines also describe that under perceived potential competition, the acquisition of a firm that is perceived by market participants as a potential entrant can substantially lessen competition by eliminating or relieving competitive pressure. And in FN 42 the draft includes that this elimination of present competitive pressure is sometimes known as an anticompetitive “edge effect” or a loss of “perceived potential competition.” E.g., Marine Bancorp., 418 U.S. at 639.

Procter & Gamble

The Guidelines mention Procter & Gamble six times to explain how the Agencies examine (i) whether one of the merging firms already has a dominant position that the merger may reinforce, and (ii) whether the merger may extend or entrench that dominant position to substantially lessen competition or tend to create a monopoly in another market.

The Guidelines highlight that to identify whether one of the merging firms already has a dominant position, the agencies look to whether (i) there is direct evidence that one or both merging firms has the power to raise price, reduce quality, or otherwise impose or obtain terms that they could not obtain but- for that dominance, or (ii) one of the merging firms possesses at least 30 percent market share. Procter & Gamble Co., 386 U.S. 568, 575 (1967).

If this inquiry reveals that at least one of the merging firms already has a dominant position, the Agencies then examine whether the merger would either entrench that position or extend it into additional markets. As a mechanism of whether a merger may entrench a dominant position, the Guidelines include, among others, entry barriers. A merger “may substantially reduce the competitive structure of the industry by raising entry barriers and by dissuading the smaller firms from aggressively competing.” Procter & Gamble Co., 386 U.S. 568, 578 (1967).

As in the case of General Dynamics, it is puzzling to see how the Guidelines cherry pick with the citations of Marine Bancorp and Protect & Gamble. Indeed, both cases discuss potential entry in concentrated markets and whether one of the merging firms already has a dominant position that the merger may extend to substantially lessen competition. But they also criticize––at length––the PNB 30% structural presumption and lack of economic analysis, something the Agencies completely ignore in this draft.

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The FTC Keeps Digging Its Own Grave: Microsoft-Activision Merger Deal Can Move Ahead Says Federal Judge in California

July 14, 2023 | Bona Law PC

Authors: Steve Cernak and Luis Blanquez

This week a federal judge in California denied a preliminary injunction to block Microsoft’s $68.7 billion merger with Activision Blizzard Inc. Both parties may now move ahead and close the deal––subject to further clearance in the UK and Canada––before the July 18 contractual deadline. The FTC has decided to appeal the Court order. We do not yet know the grounds for the appeal but the Court hammered hard almost every single argument from the agency.

The Order includes a detailed background of this case. In a nutshell, the FTC alleges in its complaint that Xbox-maker Microsoft would be incentivized to block Sony PlayStation access to crucial Activision games, especially the very popular Call of Duty game. Below we discuss the main three key antitrust issues involved.

Market Definition

If any, this might be the only partial victory for the FTC in this case.

The Judge states in the Opinion that at this stage of the litigation the FTC need only make a “tenable showing” and she must accept the market definition proposed by the FTC: The Gen 9 consoles market––with Microsoft’s Xbox and Sony’s PlayStation as the only competitors. But at the same time, she did not shy away from highlighting her doubt about the FTC’s market definition surviving a full-blown court review and that she would likely also include Nintendo’s Switch. Why? Because despite its content and functional differences with the Xbox and PlayStation, the FTC failed to consider whether its price, portability, and battery are factors the customer balances when deciding which console to purchase, and because many of the most popular Activision games are available on the three consoles.

As to the FTC’s additional proposed markets of the multigame content library subscription services and cloud gaming, the Court assumed––without deciding––they were each their own product market.

This is as good as it gets for the FTC in this Opinion.

The Clayton Act Requires Competition to be Harmed Substantially, Which is a Higher Standard

A vertical merger involves companies at different levels of the supply chain and are usually less problematic from an antitrust point of view. That’s why for almost fifty years neither the FTC nor the DOJ rarely challenged them. But that has recently changed under the Biden administration and the new head of the FTC Lina M. Khan.

Indeed, this case is the third recent challenge to a vertical merger. The other two were the Illumina’s acquisition of Grail (currently on appeal to the Fifth Circuit; Bona Law filed an amicus brief supporting Illumina’s position) and the Meta-Within transaction. The latter was another unsuccessful attempt by this FTC to block a vertical merger.

All of these challenges have one thing in common: the FTC’s aggressive stretching of the Clayton Act’s coverage. And this last case is no different. Here the District Court–– citing the well-known AT&T acquisition of TimeWarner in 2018 (See United States v. AT&T, 310 F. Supp. 3d 161, 189–92 (D.D.C. 2018) states that:

“[T]he outcome “turn[s] on whether, notwithstanding the proposed merger’s conceded procompetitive effects, the [g]overnment has met its burden of establishing, through ‘case-specific evidence,’ that the merger of [Microsoft] and [Activision], at this time and in this remarkably dynamic industry, is likely to substantially lessen competition in the manner it predicts.” See AT&T, 916 F.3d at 1037.

In the Court’s own words: “it is not enough that a merger might lessen competition—the FTC must show the merger will probably substantially lessen competition. That the combined firm has more of an incentive than an independent Activision says nothing about whether the combination will “substantially” lessen competition. See UnitedHealth Grp., 630 F. Supp. 3d at 133 (“By requiring that [the defendant] prove that the divestiture would preserve exactly the same level of competition that existed before the merger, the Government’s proposed standard would effectively erase the word ‘substantially’ from Section 7”).

Thus, like the ALJ in the Illumina case, and the District Court in the AT&T case, Judge Scott Corley once again finds in this case that the FTC did not show anything more than a “mere possibility” of substantial lessening of competition. This is not the right legal test as we have stated in a recent amicus brief in the Illumina case.

Ability and Incentive: Both Necessary to Show a Foreclosure Theory

One of the keystones of the antitrust policy under the Biden-administration has been to challenge previous case law on how to block problematic transactions, both horizontal and vertical. But so far, the agency has not been particularly successful.

Again, in the Court’s own words:

“As a threshold matter, the FTC contends it need only show the transaction is “likely to increase the ability and/or incentive of the merged firm to foreclose rivals.” [ ] For support, it cites its own March 2023 decision in Illumina, 2023 WL 2823393, at *33. The FTC in Illumina reasons:

[t]o harm competition, a merger need only create or augment either the combined firm’s ability or its incentive to harm competition. It need not do both. Requiring a plaintiff to show an increase to both the ability and the incentive to foreclose would per se exempt from the Clayton Act’s purview any transaction that involves the acquisition of a monopoly provider of inputs to adjacent markets. 2023 WL 2823393, at *38 (cleaned up) (emphasis added).

The FTC in Illumina, however, provides no authority for this proposition, nor could it. Under Section 7, the government must show a “reasonable probability of anticompetitive effect.” Warner, 742 F.2d at 1160 (emphasis added). If there is no incentive to foreclose, then there is no probability of foreclosure and the alleged concomitant anticompetitive effect. Likewise, if there is no ability, then a party’s incentive to foreclose is irrelevant.”

Judge Scott Corley makes clear in her Order that to establish a likelihood of success on the merits for a foreclosure theory in this case, the FTC must show that the combined firm (1) has the ability to withhold Call of Duty, (2) has the incentive to withhold Call of Duty from its rivals, and (3) competition would probably be substantially lessened as a result of the withholding.

The Court held that while Microsoft may have the ability to foreclose competition because it would own the Call of Duty franchise, it has no incentive to do so. The Judge supports her conclusion on the fact that: (i) immediately upon the merger’s announcement, Microsoft committed to maintain Call of Duty on its existing platforms and even expand its availability, entering a new agreement to extend Activision’s obligation to ship Call of Duty at parity on PlayStation, (ii) sent Valve a signed letter agreement committing to make Call of Duty available on Steam for ten years, and (iii) expanded Call of Duty to non-Microsoft platforms, bringing Call of Duty to Nintendo’s Switch.

In addition, the Judge noticed that the deal plan evaluation model presented to the Microsoft Board of Directors to justify the Activision purchase price (iv) relied on PlayStation sales and other non-Microsoft platforms post-acquisition, and (v) reflected access to mobile content as a critical factor in favor of the deal.

The Court further concluded that (vi) Microsoft’s witnesses’ testimony consistently confirmed the lack of Microsoft’s plans to make Call of Duty exclusive to Xbox, (vii) Call of Duty’s cross-platform play was critical to its financial success, and (viii) agreed with Microsoft’s arguments anticipating irreparable reputational harm in case of foreclosing Call of Duty from PlayStation.

The judge reached the same conclusion on the likelihood of Microsoft blocking access through online subscription services. As for cloud gaming, the Court was also persuaded by Microsoft’s recent agreements with five cloud-streaming providers to freely license Activision games––including Call of Duty––for ten years, a key factor for the European Commission to also clear the transaction in the EU few months ago.

Following this ruling, Microsoft and UK antitrust officials have agreed to suspend litigation and focus on trying to reach an agreement on how the acquisition might be modified to address any competition concerns.

Supreme Court Case Law Obligates Merger Challenges to Address the Deal and Certain Proposed Fixes

The FTC desperately tried to also show that Microsoft’s binding offer was just a “proposed remedy” that may not be considered until the remedy phase, after a Section 7 liability finding.

As support, it relies on its own 2023 Illumina decision and E.I. du Pont, 366 U.S. But once again the Court disagrees with the FTC:

“E.I. du Pont does not support the Commission’s holding. It involved a remedy proposed after a finding of a Section 7 violation. The Court held: “once the Government has successfully borne the considerable burden of establishing a violation of law, all doubts as to the remedy are to be resolved in its favor.” E.I. du Pont, 366 U.S. at 334. E.I. du Pont says nothing about whether the merger-challenging plaintiff must address offered and executed agreements made before any liability trial, let alone liability finding; that is, whether the FTC must address the circumstances surrounding the merger as they actually exist.” This same point is key to the Illumina appeal currently pending in the Fifth Circuit.

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End of an Era: The FTC Proposes Significant Changes to the HSR Form

July 6, 2023 | Bona Law PC

Authors: Steven Cernak and Luis Blanquez

During the last week of June 2023, the Federal Trade Commission proposed making the most drastic changes to the Hart-Scott-Rodino form since the form was created in 1978. According to FTC Chair Lina M. Khan’s statement, joined by Commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya “This marks the first time in 45 years that the agencies have undertaken a top-to-bottom review of the form that businesses must fill out when pursuing an acquisition that must be notified in accordance with the HSR Act.”

As we have previously described, HSR is the program under which the parties to most large transactions must submit the form and certain documents to the US antitrust agencies prior to closing the deal. The HSR form has always been short but complicated, with decades of formal regulations and informal interpretations, even lore, behind each of its sections.

Much of that history will go by the wayside if the final changes are anything like this initial proposal. The form — along with the documents and data it requires — will more closely resemble the much more onerous premerger notification schemes in other jurisdictions and will significantly lengthen the time and increase the expense of future HSR Act filings. Unfortunately, the current proposal does not envision the higher thresholds or “short forms” for obviously benign transactions present in those other jurisdictions.

The FTC will be accepting comments on its current proposal until late August. It will consider those comments before issuing the final form and instructions, likely later this year. While the details of the new form might change in the coming months, most of the current proposals likely will survive. To begin to prepare for that new day, here are some of the highlights:

Provision of details about transaction rationale and details surrounding investment vehicles or corporate relationships. This might include diagrams of a transaction’s structure, the timeline for the acquisition, and all related agreements between the parties at the time of the filing, among others;
The disclosure of required foreign merger control filings becomes mandatory;
Provision of information describing horizontal overlaps, and non-horizontal business relationships such as supply or licensing agreements;

Provision of projected revenue streams, transactional analyses and internal documents describing market conditions, and structure of entities involved such as private equity investments. This means an expansion on the scope of 4(c) and (d) documents, including, for example, drafts (not just final versions) of responsive documents and other non-transaction related documents;
Provision of details regarding previous acquisitions undertaken within the ten years prior to the acquisition filed, including information about all officers and board members, significant creditors and holders of non-voting securities, or minority shareholders (including now minority investors from companies controlled by the ultimate parent company), among many others;
Disclosure of information that screens for labor market issues by classifying employees based on current Standard Occupational Classification system categories.
Disclosure of subsidies from foreign entities of concern that Congress believes can distort the competitive process or otherwise change the business strategies of a subsidized firm in ways that undermine competition following an acquisition. Under the Merger Filing Fee Modernization Act of 2022, the agencies are required to collect information on subsidies received from certain foreign governments or entities that are strategic or economic threats to the United States.

Implementation of anything like these changes will move the HSR system even further from what Congress envisioned when it passed HSR in 1976. Then, the bill’s sponsors predicted that only the 150 largest deals each year or so would require a filing — over the last twelve months, nearly 2100 filings were made. Congress envisioned that even the “second requests” would require only documents and data that had already been “assembled and analyzed by [the parties]” — now, second requests usually take nearly a year to complete. These changes to the initial form and submission promise to add weeks to every filing, not just the problematic ones, as the parties assemble documents and data that they saw no need to analyze. Odd that the FTC sees as necessary such drastic changes to a notification program that its Introductory Guide has described as a “success” since at least 2009.

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Antitrust for Kids: As Rivals Become Friends, The Government Gets Angry (The PGA Mini-Golf Tale Continued)

July 5, 2023 | Bona Law PC

Authors: Molly Donovan & Luke Hasskamp

You may recall Liv, age 8—the new kid. Last we heard, Liv was getting pushed around by Paul, Greg and Adam (“PGA” for short) because she dared to build a mini-golf course in an attempt to challenge PGA’s longstanding position as the best and only mini-golf in town.

PGA was not happy about the new competition and unilaterally announced that any kid who played with Liv would be banned from the PGA’s more reputable course.

As we ended things last time, the town kids spoke with an antitrust lawyer and ultimately forced PGA to end the boycott. We thought that would be this story’s end, but what happened next was a real shock.

Liv and PGA were unsatisfied with the resolution forced upon them by the players. They each lawyered up as Liv accused PGA of abusing its dominant position in the mini-golf world causing Liv tens of dollars in antitrust damages. Turns out, the lawyer fees started adding up fast, and PGA could not continue to the fight.

As Liv and PGA spoke privately about how to resolve their dispute, they came up with a surprising idea that (they believed) would end PGA’s legal fees and satisfy Liv’s desire for a meaningful seat at the mini-golf table that could end her “new kid” stigma: why not merge? Liv and PGA could join forces permanently, becoming a mini-golf behemoth that would end the rivalry and potentially increase profits for all.

Great solution! Everything is neatly wrapped up and most importantly, by all accounts, Liv and PGA are seemingly good friends.

Wrong! The town government hates the idea. Why should the only two competitors in the mini-golf market be allowed to team up? Liv and PGA—now referred to as PGA Plus*—couldn’t stop the lawyer-fee-bleed after all. They had to keep their antitrust lawyers on retainer to gear up for their next battle: this time, against the town.

But is it really plausible that Liv and PGA want to be BFFs, living hand-in-hand in perpetuity? Is some contingent secretly going behind closed doors encouraging the government to tank the deal?**

If the new alliance is legit, how will PGA Plus defend the merits of a merger that unquestionably eliminates all existing (and probably all possible) competition?

We’ll wait and see as events continue to unfold in this thrilling antitrust tale.

Moral of the Story: One antitrust problem can lead to another. A dominant company like PGA can raise the specter of antitrust scrutiny by engaging in unilateral anticompetitive conduct or by collaborating or combining with another horizontal firm.

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Axon, Altria, Illumina, and Administrative Law: What an Antitrust Lawyer Should Know Now

April 20, 2023 | Bona Law PC

Authors: Steven Cernak and Aaron Gott

Last week, the U.S. Supreme Court ruled against the Federal Trade Commission and allowed Axon Enterprise to raise certain constitutional objections to FTC processes in federal court before going through the FTC’s internal administrative proceedings. That decision teed up an “existential” threat to the FTC that seems likely to return to the Court in a few years. In the meantime, however, different cases raise similar questions and might reach the Court earlier.

Axon Background and Summary

In May 2018, Axon purchased one of its competitors in a transaction that did not require an HSR filing. The FTC investigated and decided in January 2020 to challenge the consummated transaction. As is always possible with such challenges, the FTC chose to bring it in front of its internal Administrative Law Judge rather than in a federal court. In that procedure, the ALJ makes an initial decision, which then can be appealed by the parties or FTC Complaint Counsel to the Commissioners. The parties can then appeal any negative decision by the Commissioners to a federal court of appeals of their choosing.

Immediately after the FTC issued the administrative complaint, Axon sued in federal court to raise constitutional challenges to FTC procedures. Both the district court and Ninth Circuit ruled that Axon must go through the FTC’s procedures before eventually raising the constitutional issues to a federal court. Procedurally, the Ninth Circuit did issue a stay on the FTC’s proceedings in October 2020 while Axon pursued the appeal of its constitutional challenges.

On April 14, 2023, the Court unanimously ruled that Axon could pursue its constitutional challenge to the FTC in court now and did not need to wait until going through the FTC’s administrative proceedings. (The Court’s opinion also applied to a companion case involving the Securities and Exchange Commission.) Writing for the Court, Justice Kagan applied the Court’s “Thunder Basin factors” and concluded that a federal district court had jurisdiction to hear such “fundamental, even existential” challenges to the FTC’s procedures even before those procedures had run their course. That is because such constitutional challenges implicate federal courts’ general subject-matter jurisdiction to consider questions of federal law, rather than implicate the exception to questions of federal law that Congress has determined should be heard in agencies instead of the courts in the first instance. Justice Gorsuch concurred in the judgment on different grounds. The case was remanded for a trial to consider the merits of those constitutional challenges.

The Constitutional Challenges to be Decided on Remand

And what were those “fundamental, even existential” constitutional challenges? Axon explicitly identified two in its original complaint. First, Axon claims that it violates the separation of powers to have an FTC ALJ removable only for good cause — and then only by a Board whose members are also only removable for good cause — and not freely by the President. Second, Axon claims that having the FTC investigate and initiate, adjudicate, and review the complaint unconstitutionally combines prosecutorial and adjudicative functions. Finally, Axon also at least implicitly raised due process concerns because of the “black box” clearance process to determine whether the Justice Department Antitrust Division or FTC will review any individual merger under their different standards and procedures. (Justice Kagan did not think Axon’s complaint explicitly raised the clearance issue and so did not address it.)

Justice Thomas concurred fully in the Court’s opinion but wrote separately to express “grave doubts about the constitutional propriety” of having agencies, not federal courts, adjudicating private rights, as compared to governmental privileges, and with only highly deferential judicial review at the end of the proceedings.

Any antitrust attorney who has ever dealt with the FTC will agree with the Court’s description of these challenges as “fundamental” to how the FTC operates. Since 1914, the FTC has been the agency developing its alleged expertise in policing unfair methods of competition by playing prosecutor, judge, and jury. Specifically regarding potentially anticompetitive mergers, the FTC and Antitrust Division have decided which agency will perform the review based on opaque, historical, difficult-to-explain precedent. (For example, traditionally the FTC has reviewed mergers involving light-duty vehicles while the Antitrust Division reviewed those involving medium and heavy-duty vehicles.) With the Court’s remand in Axon, the FTC will soon be forced to defend these practices in a district court and, presumably, eventually again in the Supreme Court.

Will JLI/Altria or Illumina/Grail Reach the Court Before Axon?

While Axon now will have its day in district court to raise these issues, two other FTC competition matters that have already gone through the administrative proceedings might raise similar constitutional issues in courts of appeals more quickly.

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Antitrust for Kids: If You Write A Bad Note, Live with It: Document Preservation in Antitrust Cases

April 11, 2023 | Bona Law PC

Author: Molly Donovan

Gordon was recognized as dominant in the 5th grade class. He had the greatest share of friends and ran the fastest. He was the smartest and won the most academic awards at the end of each school year. He was always chosen as the lead in every school play.

But one day, Gordon’s teacher accused him of cheating. Rather than playing fair, Gordon had excluded a new student, Samuel, from the playground races at school. Samuel showed real promise in track and field and Gordon hated to admit that he felt a bit threatened. Although he knew it was wrong, Gordon wrote a number of notes to classmates telling them to exclude Samuel from all playground races. His teacher, of course, found one of those notes.

That was bad enough, but Gordon went and made everything worse. For use during an upcoming parent-teacher conference, Gordon’s teacher instructed him to collect and keep all the notes he had written to friends demanding that they refuse to race against Samuel. Instead, Gordon shredded the notes and threw away the scraps! Then—and this is the real clincher—Gordon told his teacher, falsely, that he had preserved the notes as instructed.

Obviously, this all came out at the conference. There, the teacher argued that Gordon should be punished for throwing away the notes and lying about their being preserved. Gordon argued that punishment was not necessary—his conduct was not that bad since at least half the notes were to friends who had nothing to do with the boycott of Samuel anyway.

As you might expect, Gordon’s parents agreed with the teacher. The result: Gordon had to give back a significant portion of his monthly allowance and donate it to the school, and further punishment—publicly unknown—would wait until Gordon got home. Eeeek!

Could Gordon continue his dominance after all that? You’ll have to wait for a future Antitrust for Kids to find out.

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Latest Step on Twisty Illumina/Grail Antitrust Merger Challenge Road

April 5, 2023 | Bona Law PC

Author: Steven Cernak

The twists and turns of the various antitrust challenges to the proposed Illumina/Grail merger have provided antitrust practitioners numerous lessons the last two years. This week, the FTC commissioners unanimously voted to overturn their administrative law judge’s initial decision and order Illumina to divest the controlling stake in Grail that it had purchased. The FTC’s opinions provided some lessons on vertical-merger challenges and the constitutionality of FTC organization and processes. But because the parties plan to appeal, this week’s decision is just the latest turn in a long and winding road.

Facts and Prior Developments

Here is a summary of the facts and past developments from our earlier writings. Illumina is a provider of a certain type of DNA sequencing, including instruments, consumables, and reagents. According to the FTC’s complaint, it is the dominant provider of this DNA sequencing.

Grail is one of several companies developing a multi-cancer early detection (MCED) test. An MCED promises to be able to detect biomarkers associated with up to fifty types of cancer by extracting the DNA from a simple blood sample. To work, the MCED needs DNA sequencing supply. According to the FTC complaint, the type of DNA sequencing that works best — and with which Grail and all other MCED developers have been working — is the type supplied by Illumina.

The parties announced Illumina’s proposed acquisition of Grail in September 2020 and said that it would speed global adoption of Grail’s MCED and enhance patient access to the tool. In late March 2021, the FTC challenged this transaction by filing an administrative complaint before its own administrative law judge (ALJ). The FTC also sought a temporary restraining order and preliminary injunction from the U.S. District Court for the District of Columbia. The parties successfully removed the case to the Southern District of California.

Shortly thereafter, the European Commission announced that it too would investigate the transaction, even though the transaction did not meet its usual thresholds. The Commission made this decision at the request of several member states. The parties challenged the Commission’s jurisdiction and its usual requirement that the transaction not close until the Commission completed its investigation. As a result of the European action, the FTC decided that its federal court case to block closing was no longer necessary and so dismissed it.

So, in Europe, the investigation continued while in the U.S. the parties prepared for and held the trial in front of the FTC’s ALJ. During this time, the parties closed the transaction. Last Fall, the Commission decided to block the transaction. The parties are appealing that decision. Just before the European decision, the FTC ALJ dismissed the complaint in an unexpected decision ruling for the first time against the FTC in a merger case. In a nutshell, the ALJ concluded that the FTC failed to prove that Illumina’s post-acquisition ability and incentive to advantage Grail to the disadvantage of Grail’s alleged rivals would likely result in a substantial lessening of competition in the relevant market for the research, development, and commercialization of MCED tests. FTC Complaint Counsel appealed the FTC’s own ALJ decision. Earlier this week, the four Commissioners unanimously agreed to overturn it.

Review of Facts, Vertical Merger Standards, and FTC Constitutionality

In late 2021, the FTC voted to withdraw its vertical merger guidelines; therefore, this opinion is one of the first chances since then for practitioners to see how these particular Commissioners would approach vertical mergers. The Commission’s opinion asserted that “case law provides two different but overlapping standards for evaluating the likely effect of a vertical transaction:” Brown Shoe’s focus on share of the market foreclosed and other structural factors versus the more recent focus on the merged entity’s ability and incentive to foreclose rivals from necessary inputs or distribution channels.

In her concurring opinion (and one of her final actions before her resignation), Commissioner Wilson asserted that while Brown Shoe has not been overruled, its most recent application was in 1979, more recent FTC actions have focused on the ability/incentive framework, and some commentators have called Brown Shoe and its focus on market share, “largely repudiated.” Because the DOJ Antitrust Division has not abandoned the vertical merger guidelines and recent courts have focused more on the ability/incentive framework, the Commission opinion here introduces uncertainty for parties as to the standard they should follow for evaluating vertical mergers—the Court and DOJ standard or this new FTC standard?

While there was some disagreement on the legal standard, the four Commissioners agreed on the application to the facts: The transaction was anticompetitive and should be unwound. As per FTC procedure, the Commission reviewed the ALJ’s fact and legal findings de novo and disagreed with them in key areas. Below, we summarize three examples.

First, the ALJ had found that Illumina had the ability to foreclose Grail’s rivals in various ways; but the ALJ found these facts “less significant” in this case because that ability came from being the only practical supplier of the sequencing, regardless of the Grail transaction. The ALJ contrasted those facts with the recent DOJ AT&T vertical merger review, where the alleged ability would be created only by the challenged transaction. The Commission opinion found this analysis “flawed” and that Complaint Counsel must show only that the ability existed, not that it was created by the proposed merger.

Also, the ALJ rejected concerns about Illumina’s increased incentive to foreclose Grail rivals for several reasons, especially because successful commercial sale of the MCED tests of those competitors was so far in the future that a foreclosure strategy now made no sense. The Commission opinion disagreed, finding that foreclosure tactics now would destroy current and ongoing R&D competition and help cement Grail’s very profitable production future.

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Bona Law Helps Deliver Successful 2023 Spring Meeting for the ABA Antitrust Section

April 3, 2023 | Bona Law PC

Authors: Steve Cernak, Dylan Carson, Kristen Harris

Back in person again, the 71st edition of the American Bar Association Antitrust Law Section’s annual Spring Meeting did not disappoint and Bona Law was there for the formal and informal conversations that will help shape antitrust enforcement in the U.S. and abroad. With over 3700 registrants from over 60 countries and dozens of panels, events, and receptions — formal and informal — the 2023 Spring Meeting was the place to be for antitrust and consumer protection lawyers last week. Bona Law attorneys Steve Cernak, Dylan Carson, and Kristen Harris represented the firm and engaged with numerous public antitrust enforcers, private practitioners and in-house antitrust counsel from across the globe on a variety of hot topics. Next year’s event promises to continue this tradition when Cernak becomes Antitrust Section Chair-elect in August 2023 and Harris joins him in Section leadership.

Cernak moderated a panel of the Federal Trade Commission Bureau Directors. Our takeaway of their message is that they have no plans to slow down the aggressive antitrust and consumer protection enforcement, despite some court losses and other resistance. Some commentators had complained that this FTC was downplaying or completely ignoring economic learning. The new Director of the Bureau of Economics swatted away that claim, saying he and his economists are fully on board with the enforcement direction. Expect continued aggressive enforcement out of this FTC, with a focus on revitalizing vertical merger enforcement, the Commission’s Section 5 authority, and Robinson-Patman Act enforcement. On the DOJ side, the importance of corporate antitrust compliance programs and the future of criminal and civil monopolization cases were repeated themes on multiple panels.

The Spring Meeting attracts practitioners and enforcers with a wide range of views on antitrust enforcement priorities. An interesting vibe we picked up from panels on the Biden Administration as well as hallway conversations is the newer ideological splits. On one side are the Biden Administration enforcers and their many supporters who want to see new or revived enforcement theories or laws very different from those that have prevailed for over forty years. On the other side are the supporters of that economics-based status quo, including both Obama-era enforcers and big business types, who, while not always agreeing on specifics, have found a common opponent in the Biden Administration enforcers. The split is not the same “red v. blue” split seen elsewhere in U.S. politics and expect to see strange bedfellows for some time to come.

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Domestic Companies and Their Execs Plead Guilty to Criminal Price-Fixing

February 16, 2023 | Bona Law PC

Authors: Jon Cieslak & Molly Donovan

Two individuals and four of their corporate entities pleaded guilty to an antitrust conspiracy to fix the prices of DVDs and Blu-Rays sold on Amazon’s platform during the 2016-2019 time period.

According to the plea agreements, the defendants “engaged in discussions, transmitted across state lines both orally and electronically, with representatives of other sellers of DVDs and Blu-Ray Discs on the Amazon Marketplace. During these discussions, the defendant[s] reached agreements to suppress and eliminate competition for the sale of DVDs and Blue-Ray Discs . . . by fixing prices” paid by consumers throughout the United States. Further details about the operation of the conspiracy are not public.

The total affected commerce done by the six guilty-plea defendants is $2.875 million. The agreed-to fines imposed against the corporate defendants range from $68,000 to $234,000, some payable in installments. Sentencing for the individuals is forthcoming with the plea agreements specifying that the Department of Justice is free to argue for a period of incarceration to be served by each of the individuals at issue.

The action is pending in the District Court for the Eastern District of Tennessee. It serves as a reminder that the DOJ’s Antitrust Division will not excuse price-fixing by relatively small companies, even if the volume of affected commerce is also relatively small.

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2022 Developments in Antitrust and Distribution

February 6, 2023 | Bona Law PC

Author: Steven Cernak

In the antitrust world in 2022, stories about Big Tech, government enforcement, and merger challenges dominated the headlines. But in putting together the 2023 edition of Antitrust in Distribution and Franchising (available for purchase soon!), I found a number of less-famous opinions that US distributors and their counsel should know. Just like last year at this time, I thought it made sense to share some of the research highlights. Below, I summarize opinions on important topics like Robinson-Patman, vertical price agreements, and locked-in consumers.

Robinson-Patman

Robinson-Patman’s Depression-era prohibition of some price and promotion discrimination has not been enforced by the federal antitrust authorities for decades — although, as we discussed recently, that might change soon. Even as government enforcement disappeared, private enforcement continued — again, as we have discussed before. Courts dealing with those private suits have been stingy, sometimes even hostile, in their interpretations of the law — once again, as we have discussed very recently. Two 2022 opinions continued those trends.

In Dahl Automotive Onalaska Inc. v. Ford Motor Co. (588 F.Supp. 3d 929, W.D. Wisc.), the defendant paid its dealers a portion of the MSRP of every vehicle sold so long as the dealer was building, or had built, a dealership exclusive to defendant’s brand. Plaintiffs were several small dealers who claimed the payments were harmful price or promotional allowance discrimination because other, larger, dealers sold more cars and so could recoup the cost of the exclusive dealership construction more quickly.

The court granted defendant’s Robinson Patman Act summary judgement motion. The court found that even if the payments allowed larger dealers to recover their construction costs more quickly, “it doesn’t mean that the payments result in price discrimination” because the promised payments merely allowed the dealers to recoup their cost of construction already incurred. Therefore, plaintiffs’ Section 2(a) claim failed. The court also found that the payments were not for “promotional allowances” because the dealership building did not resemble “advertising-related perks.” The court agreed with prior courts that had “concluded that buildings where sales occurred were not promotional facilities.” Therefore, plaintiffs’ Section 2(d) claim failed.

In In re Bookends & Beginnings LLC (2022 U.S. Dist. LEXIS 152596, S.D.N.Y.), plaintiff independent booksellers claimed that major publishers and Amazon violated various laws, including Robinson-Patman Section 2(a), when the publishers granted Amazon a larger discount than it granted plaintiffs. The magistrate judge recommended granting defendants’ motion to dismiss this claim because the Morton Salt inference of competitive injury was inappropriate when the actual discount to Amazon was not known or alleged and there was no other factual support for the complaint’s “conclusory allegation” that the discount was “steep,” “huge,” or “substantial.

Vertical Price Agreements and Retailer Cartels

As we have discussed on the blog, the Leegin case changed the evaluation of vertical price agreements under federal antitrust law from per se illegality to a rule of reason analysis. But while the Court found that such agreements were not always anticompetitive, it did discuss some situations when they might be anticompetitive: For example, when “there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel.” The Court also expressed concern if the restraint were imposed by a manufacturer or retailer with market power.

In Davitashvilli, et. al. v. GrubHub Inc. (2022 U.S. Dist. LEXIS 58974 S.D. N.Y.), purported classes of restaurant customers survived a motion to dismiss their claims that defendants, three of the most popular online platforms for meal deliveries, harmed competition through vertical price agreements. The three defendants require the restaurants whose meals they deliver to charge the same price to customers using defendants’ services as those customers dining in and/or using a competitive delivery service. Plaintiffs likened defendants to the retailers and the restaurants to the manufacturers in Leegin, a comparison the court found “somewhat strained” but “plausible.” Because of the alleged market power of each or all of the defendants, plaintiffs plausibly claimed that the restaurants were forced to work through defendants and raise their prices to the purported classes of diners to recoup some of their additional costs.

Market Power Over Locked-In Customers

In the Supreme Court’s classic tying case, Kodak, the defendant required purchasers of replacement parts for its copiers to also purchase copier service from it. Because defendant often was the only seller of those parts, plaintiffs claimed that defendant had market power sufficient to force customers to accept this tie. Defendant, and the Court’s dissent, argued that defendant could not have power in the aftermarket for parts for its copiers because it had no power in the foremarket for copiers. The Court’s majority responded that defendant could have market power over that subset of its customers who were “locked in” to defendant’s copiers, perhaps because they purchased a copier before defendant adopted its tying policy and because switching to a different copier was costly. As a result, defendant’s summary judgment motion in Kodak was denied.

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