Articles Posted in FTC

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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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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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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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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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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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Authors: Steven Cernak and Luis Blanquez

Earlier in February 2023, the Court for the Northern District of California denied the FTC’s preliminary injunction motion to prevent the closing of Meta Platforms Inc.’s acquisition of Within Unlimited, Inc.––a virtual reality (VR) App developer. The FTC has declined to appeal the loss and has paused its administrative in-house challenge. Meta has now closed the transaction. Below we summarize the key points from the opinion and what we think are the two key takeaways for merger practitioners.

Opinion Summary

As with many contested mergers, a key legal battle in this case was market definition. The FTC proposed a relevant product market consisting of VR dedicated fitness apps, meaning VR apps “designed so users can exercise through a structured physical workout in a virtual setting.” The merging parties, on the other hand, alleged that the FTC’s proposed market definition was too narrow, excluding “scores of products, services, and apps” that are “reasonably interchangeable” with VR dedicated fitness apps, including VR apps categorized as “fitness” apps on Meta’s VR platform, fitness apps on gaming consoles and other VR platforms, and non-VR connected fitness products and services”. Extensively quoting Brown Show and that venerable opinion’s “practical indicia” of a market, the Court held that the FTC made a sufficient evidentiary showing of a well-defined submarket, consisting of VR dedicated fitness apps.

Having won that battle, the FTC argued that the proposed acquisition would violate Section 7 of the Clayton Act by substantially lessening competition in the market for VR dedicated fitness apps. According to the agency, even though Meta was not currently a competitor in the VR dedicated fitness app market, it was both (i) an actual potential competitor, and (ii) a perceived potential competitor in the relevant market. In the first theory, the FTC argued that the transaction harmed competition because Meta would have entered the market on its own. In the second theory, the FTC argued that Meta’s mere presence on the wings of the market before the transaction kept current participants from acting anticompetitively.

The court denied the FTC’s motion for preliminary injunction, finding that the facts did not support either potential competition theory. The court, however, did find that both theories remained good law and, therefore, are available for the FTC and DOJ to support violations of Section 7 of the Clayton Act in the future. Merger practitioners will need to learn, or remember, the necessary elements of these theories, including sufficient market concentration and the acquiring party having the necessary characteristics, capabilities, and economic incentive to enter the market.

Key Takeaway: Old Precedent Comes Back

Most merger practitioners have become used to working with the DOJ/FTC Horizontal Merger Guidelines (HMG) and the opinions that follow their reasoning, especially those from this century. For some practitioners with little to no grey hair, those precedents might be all they have ever known.  For example, the district court opinion in AT&T/TimeWarner in 2018 has multiple cites to H.J. Heinz from 2001, Arch Coal from 2004, and Baker Hughes from 1990.  Last year’s UnitedHealth/Change opinion cited all those same cases plus Anthem from 2017 and Sysco from 2015.  Sure, some older precedent always makes it into opinions and briefs — defendants often cite General Dynamics from 1974 and the government loves 1963’s Philadelphia National Bank — but those exceptions are few.

As the FTC has moved away from the 2010 HMGs but not yet replaced them, practitioners have questioned where to find guidance. If the briefs and opinion in this case are any clue, the answer might be court opinions from forty or more years ago.

For example, look at the cases cited in the potential competition sections of the opinion. Now, it is true that the Supreme Court cases that extensively discuss the theories, such as Marine Bancorp., date from the 1970’s. The district and appellate court cases relied on by the court in the section discussing the continued validity of the actual potential competition theory date from 1984, 1981, 1980, and 1974. The only more recent court opinion mentioned is the FTC’s loss in 2015’s Steris. The Court’s 1973 opinions in Falstaff Brewing gets extensive discussion in ten separate mentions. According to Lexis, that case involving Dizzy Dean’s favorite beer has only been cited twenty times since 2010.

Even when defining the product market, the court spends ten pages going through various indicia found in 1962’s Brown Shoe and only two pages on the hypothetical monopolist test found in the HMGs — and then only “[i]n the interests of thoroughness.” The cases cited in the Court’s legal analysis of product market definition include several from this century but also older ones like Twin City Sports Service (1982), Times Picayune (1953), and Continental Can (1964). So at least until any new Guidelines are issued, merger practitioners might need to spend more time honing arguments based on older cases and less time arguing the intricacies of the HMGs.

Key Takeaway: Competitive Pressure from Apple?

In discussing competition in the VR hardware and various software or app “markets,” the Court describes many different current competitors. While it is difficult to know for certain because of the extensive redactions, it appears that Apple applied extensive competitive pressure on Meta, either as another potential suitor for Within or a current or potential competitor in some VR-related market—or both.  Specifically, the judge says in his opinion that Meta was concerned that Apple might “lock in” fitness content (perhaps Within?) that would be exclusive to Apple’s expected VR hardware.

If so, these two Big Tech behemoths pressuring each other, especially in markets neither one dominates, is further support for some of the ideas expressed at least in Nicolas Petit’s Moligopoly Scenario.  Paraphrasing one of Petit’s points, these powerful companies might seem like monopolists, but they act more like oligopolists fearful of competitive pressure from other giants and others. In short, none of them wants to miss the next big thing and become the next Blockbuster to some future Netflix. This opinion seems to put considerable weight on contemporaneous documents from Meta and others that describe those types of strategic considerations driving Meta’s behavior. If future cases follow suit, merger practitioners might be able to focus more on well-supported boardroom considerations and less on hypothetical analyses from outside economic experts.

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Author: Molly Donovan

You might recall that Max and Margie are next-door neighbors on Lemon Lane.

In a strange turn of events, after Max was found liable for an illegal hub-and-spoke conspiracy against Margie, she let bygones be bygones and hired Max to procure materials for her lemonade stand and to develop new flavors of soft drinks for kids. In that role, Margie and Max agreed that, should Max ever leave Margie’s employ, he wouldn’t compete with Margie by working to sell any kids’ beverages within the city limits for a period of 2 years.

That was all fine until the FTC announced a proposed ban on non-competes, defining “non-compete clause” as a “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Substance is more important than form—so that if any agreement functions as a “non-compete,” under the FTC’s definition, it would be banned, too, regardless of its label.

Now Margie’s in a bind—does she undo her noncompete with Max? Does she try to language around the proposed ban? Does she wait to see if the ban comes to fruition? Certainly, due to their history, she doesn’t fully trust Max who she has trained at length (including in antitrust compliance), is privy to top-secret recipes, and has developed key relationships with Margie’s lemon suppliers, all in the course of his employment with Margie. Given all that, can’t he be stopped from competing against her in the event he works for another beverage company someday?

Here’s what Margie should know: the FTC has recognized two carve-outs to the potential ban—one for non-solicitation agreements and one for non-disclosures. Such agreements aren’t subject to the proposed ban because they don’t “prevent” workers from competing with their former employers. Instead, a non-solicitation would prevent workers only from soliciting clients or customers with whom the former employer has a business relationship. And non-disclosures would prevent workers only from using proprietary information learned during the course of employment in a new job.

If used as an alternative to a non-compete, these types of clauses should continue to be tailored to particular customers, products and geographic areas that are relevant to the employee at issue and the pertinent procompetitive justifications. An overly broad non-solicitation or non-disclosure could be said to function the same as a non-compete and therefore, become subject to the proposed ban.

Margie could consider other options as well. Perhaps a unilateral policy that deferred compensation or other incentive payments will be clawed back should a worker choose to compete, disclose confidential information in a new position, or disparage Margie in some way. Such a policy is not a contractual agreement because it’s unilateral, and it doesn’t prevent Max from competing—it merely discourages him. (Of course, Margie should be sure a clawback is legit under other laws like ERISA).

Further, if Margie is considering a stick, she might also consider a carrot: a unilateral incentive program for workers that don’t compete within a specified time period or a specific geographic region, etc.

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Author: Steven Cernak

Recently, the Federal Trade Commission proposed a nearly complete ban on noncompete provisions in employment agreements. Because it faces the usual lengthy rulemaking process and several expected legal challenges, the proposed rule might not become effective for months, if ever. Through the proposal and attendant publicity, however, the FTC already has drastically changed how such provisions will be used.

Noncompete Basics and the Law Today

Noncompetes prevent workers from leaving an employer to work for other employers, typically competitors. The clauses usually are limited in time and geography. So, for example, a worker is prohibited from working for specific other employers — say, competitors — in a particular geographic area — say, Michigan — for a limited period of time — say, six months after leaving the first employer. Through these clauses, employers hope to better protect their secrets and avoid training a worker for a competitor. For example, a nondisclosure agreement might not adequately prevent use of the first employer’s competitive details that are embedded in the worker’s brain.

Today, such provisions are usually evaluated under state common or statutory law. A handful of states ban them. A few statutorily limit their use to high salary workers. Most try to balance the interests of the employer with those of the worker trying to earn a living in a chosen field. Such provisions are more likely to be upheld if the interests of the employer are legitimate and the restrictions on the worker’s mobility are limited.

FTC Proposed Rule

On January 5, 2023, the FTC proposed a rule that would upend that status quo developed over hundreds of years, declaring nearly all noncompetes as an “unfair method of competition” under the FTC Act, and outlawing nearly all of them. The proposal would allow some noncompetes in the sale of a business and sought comment on partially exempting noncompetes for high salary workers. The proposal would prohibit parties from entering new noncompete provisions and employers from enforcing existing ones. Also, all state laws that were not as restrictive would be pre-empted. The FTC is seeking comment on the proposal through March 10.

Reaction was quick. The proposal at regulations.gov generated thousands of official comments, mostly positive, in the first couple weeks. Negative commentary in the media took several angles. First, some renewed arguments that the FTC does not have the authority to issue rules under its “unfair methods of competition authority.” Others questioned whether the FTC has the authority under recent Supreme Court precedent to answer, without explicit Congressional direction, such a “major question” that has generated thousands of opinions and state laws over hundreds of years.

Finally, even granting that the FTC has the authority for such a rule, some argued that the FTC’s 200+ page notice did not adequately support the wisdom of departing from the typical case-by-case evaluation because other analyses found the overall effect of such noncompetes to be mixed. The FTC will need to consider all the official comments and decide if any tweaks to the proposed rule are appropriates. Unless the rule drastically changes, legal challenges seem certain. Therefore, a ban on nearly all noncompete provisions might not be effective for many months, if ever.

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Author: Steven J. Cernak

The FTC’s challenge of Altria’s investment into its e-cigarette competitor JUUL Labs, Inc. (JLI) already raised interesting antitrust and administrative law issues: Did the parties’ discussions of FTC compliance during merger negotiations create an unreasonable agreement? Are the structure and procedures of the FTC constitutional?

Recently, the case took another unusual turn. In early November 2022 — after the Commission voted out the complaint; FTC Complaint Counsel tried the case; the in-house administrative law judge issued a decision favoring the parties; and the Commissioners heard oral argument on an appeal — the Commissioners sought additional briefing on the possibility of applying different theories that would make it easier for the FTC to win. The Commissioners’ request seems to be allowable under the FTC’s procedures but might not help it in responding to potential constitutional challenges to those procedures, whether in this case or another one before the Supreme Court.

Facts and Prior History

We covered the case’s facts and procedural history in detail for this Washington Legal Foundation Legal Backgrounder. Here is a short recap.

Altria was the largest and one of the oldest cigarette companies in the country but struggled mightily with e-cigarettes. JLI was a new, smaller company successfully focusing on e-cigarettes. In early 2018, the two parties began nearly year-long negotiations towards a large Altria investment in JLI. Throughout the rocky negotiations, the parties and their respective antitrust counsel discussed and exchanged documents about the likely need to take some action regarding Altria’s competitive e-cigarette assets during the expected FTC antitrust review.

After some FDA communications and during a break in the negotiations, Altria announced that it would pull some of its e-cigarette products. Negotiations resumed and shortly before reaching an agreement with JLI (which included a formal non-compete agreement), Altria announced that it would cease all e-cigarette sales.

The FTC investigated and the then-Commissioners, including current Commissioners Slaughter and Wilson, issued a complaint challenging the entire transaction. The complaint, inter alia, alleged an unreasonable agreement by which Altria agreed not to compete with JLI in the e-cigarette market “now or in the future” in exchange for an ownership interest in JLI. Specifically, that agreement took the form of the non-compete provisions of the written agreement as well as an implicit agreement to exit the market reached during negotiations as a “condition for any deal.”

Per the FTC’s procedures, the challenge was heard by the FTC’s internal administrative law judge. After extensive pre- and post-trial briefing, 20 witnesses, 2400 exhibits, and 13 days of hearing, in February 2022 the ALJ issued a 250-page opinion finding that the FTC’s Complaint Counsel did not prove that the parties reached an agreement for Altria to exit the e-cigarette market and that the non-compete provision of the investment agreement was not unreasonable. FTC Complaint Counsel immediately appealed to the Commissioners.

Throughout the challenge, the parties challenged the constitutionality of the FTC and its procedure on separation of powers and due process grounds. The parties’ briefing made much of the FTC’s enviable 25-year winning streak of the Commissioners never ruling against a challenge that they voted out. A different company whose actions are being challenged by the FTC, Axon Enterprise, recently argued to the Supreme Court that it should be allowed to raise similar constitutional issues before going through the same FTC’s procedures as Altria/JLI did.

Latest Request from Commissioners

In the WLF piece just before the oral arguments to the Commissioners, I suggested that the most interesting antitrust issue would be whether discussions among parties about actions they might take to address expected FTC antitrust concerns could ever add up to an agreement. I also wondered whether the Commissioners might, for the first time in 25 years, rule against a complaint they had issued to avoid any constitutional challenges in this case and, perhaps, to assist in any constitutional challenge in the Axon case.

I expected that by early November, the four remaining Commissioners would be well on their way to deciding the case and issuing an opinion; instead, on November 3, the Commissioners issued an Order requiring the parties and Complaint Counsel to brief two new issues. Specifically, assuming they overturn the ALJ’s opinion that the parties did not reach an unwritten agreement for Altria to exit the e-cigarette market, the Commissioners sought briefing on whether such an agreement should be analyzed as either per se illegal or inherently suspect. The Commissioners also ask if the history of this matter poses any impediments to considering these different standards and, if so, what steps would be necessary to overcome those impediments.

Applying the per se standard would make automatically illegal any such agreement that the Commissioners find the parties to have reached. Applying the inherently suspect standard would drastically lower the standard that the FTC must clear to find unreasonable any unwritten agreement reached by the parties. The inherently suspect standard, and an appellate court’s criticism of it the last time it was used in a high-profile case, are summarized in this recent post.

Conclusion

The briefing by the parties and Complaint Counsel will end just before Christmas. A ruling by the Commission would then be required by around the end of March, unless the Commission again further delays its responsibilities unilaterally. Here are three take-aways.

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Authors: Steven Cernak and Luis Blanquez

Hard times for the Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”). In the last few weeks, the Biden Administration has suffered three significant antitrust loses. This is the result of the Government’s determination to try to block mergers that, despite their size, were found by courts to not hinder competition.

Below is a short summary of the three merger cases with some final remarks on what to expect from the Government moving forward.

Illumina/Grail

In March 2021 the FTC filed an administrative complaint to block Illumina’s $7.1 billion proposed acquisition of Grail. Grail is a maker of a non-invasive early detection (MCED) test to screen multiple types of cancer using DNA sequencing, known as next generation sequencing or NGS.

In its complaint, the FTC alleged that the proposed transaction would substantially lessen competition in the U.S. MCED test market by reducing innovation and potentially increasing prices and diminishing the choice and quality of MCED tests. According to the FTC, Illumina, as the dominant provider of NGS––an essential input for the development and commercialization of MCED tests in the United States––would have the ability to foreclose or disadvantage Grail’s rivals while having at the same time the incentive to also disadvantage or foreclose firms that pose a significant competitive threat.

In September 2022, Chief Administrative Law Judge D. Michael Chappell dismissed the complaint in an unexpected decision ruling for the first time against the FTC in a merger case. In a nutshell, Judge Chappell 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.” On September 2, the FTC Complaint Counsel filed a Notice of Appeal.

Of interest is the fact that shortly after Judge’s Chappell ruling, in parallel the European Commission decided to block the acquisition under the EU Merger Regulation using similar antitrust arguments as the FTC. And that was despite the fact that the transaction did not initially trigger EU merger control thresholds and that the parties closed the acquisition during the investigation. The stakes are also high on that side of the Atlantic.

UnitedHealth/Change Highlights

In February 2022, the DOJ, together with Attorneys General in Minnesota and New York, filed a complaint to stop UnitedHealth Group Incorporated (UHG) from acquiring Change Healthcare Inc. According to the complaint the proposed $13 billion transaction would harm competition in commercial health insurance markets, as well as in the market for a vital technology used by health insurers to process health insurance claims and reduce health care costs.

In the complaint the Government argued that the proposed acquisition was (i) an illegal horizontal merger because it would create a monopoly in the sale of first-pass claims editing solutions in the U.S., (ii) an illegal vertical merger because UHG’s control over a key input—Change’s EDI clearinghouse—would give it the ability and incentive to use rivals’ CSI for its own benefit, which in turn would lessen competition in the markets for national accounts and large group commercial health insurance; and (iii) an illegal vertical merger because United’s control over Change’s EDI clearinghouse would give it the ability and incentive to withhold innovations and raise rivals’ costs to compete in those same markets for national accounts and large group plans.

In its press release, the DOJ also stated that the proposed transaction would give United access to a vast amount of its rival health insurers’ competitively sensitive information. Post-acquisition, United would be able to use its rivals’ information to gain an unfair advantage and harm competition in health insurance markets. The proposed transaction also would eliminate United’s only major rival for first-pass claims editing technology — a critical product used to efficiently process health insurance claims and save health insurers billions of dollars each year — and give United a monopoly share in the market. It further claimed that the proposed acquisition would eliminate an independent and innovative firm, Change, that today supports a variety of participants in the health care ecosystem, including United’s major health insurance competitors, with vital software and services.

To tackle DOJ’s three theories of harm, UHG agreed to divest Change’s claims editing business, ClaimsXten, to TPG upon consummation of the proposed acquisition. The divestiture package included all four of Change’s current claims-editing products. In May 2022, UHG also issued its “UnitedHealth Group Firewall Policy for Optum Insight and Change Healthcare,” addressing the sharing of customers’ competitively sensitive information (CSI) following the transaction.

In September 2022, U.S. District Judge Carl J. Nichols, after a two-week trial concluded that the Government was not able to meet its burden of proving that the transaction would substantially lessen competition in the relevant markets, which allowed the deal to move forward.

First, on the horizontal theory of harm, Judge Nichols determined that UnitedHealth’s proposal to divest ClaimsXten to TPG, allowed TPG to adequately preserve the level of competition that existed previously in the market for claims-editing software. In other words, the DOJ failed to show that the proposed merger was likely to substantially lessen competition in the market for first-pass claims-editing solutions in the U.S. Thus, the Court required UHG to divest ClaimsXten to TPG as proposed.

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