Articles Posted in Mergers & Acquisitions

April 5, 2023

Latest Step on Twisty Illumina/Grail Antitrust Merger Challenge Road

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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February 14, 2023

Meta/Within Merger Antitrust Opinion: Cutting Edge Tech, Vintage Precedent

by Bona Law PC

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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November 14, 2022

FTC Antitrust Challenge of Altria/JUUL Gets Curiouser and Curiouser

by Bona Law PC

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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October 7, 2022

Three Strikes But Not Out: Antitrust Enforcers Swing and Miss in Recent Merger Challenges: Illumina/Grail; UnitedHealth/Change Highlights; and U.S. Sugar Corp/Imperial Sugar

by Bona Law PC

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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September 11, 2022

Altria Group/JUUL Labs: An Antitrust Violation for Antitrust Clearance Strategy and Transaction Non-Competes?

by Bona Law PC

Authors: Steven Cernak and Luis Blanquez

The FTC’s challenge of Altria Group’s proposed minority investment in JUUL Labs, Inc. (JLI) in April 2020 generated attention in both the mainstream media and the competition law press. Press coverage since that time has hit the latest developments but often missed the important issues this challenge raises: When can parties reach an anticompetitive agreement before they sign their official merger documents? Non-compete agreements have been pilloried lately, but are they anticompetitive even in a partial merger situation like this one?

This summary should help you prepare for the September 12 oral arguments in front of the Commissioners. You can read Steve Cernak’s more detailed article on these issues for the Washington Legal Foundation here.

The Parties and the Transaction

Altria, together with its subsidiaries, is the largest and one of the oldest cigarette companies in the U.S. In addition to its other products, it also sold e-cigarettes during the relevant period. JLI, is a smaller, newer company focused only on e-cigarettes.

As with most antitrust matters, especially merger investigations, market definition was contentious. Generally, e-cigarettes are electronic devices that aerosolize nicotine-containing liquid using heat generated by a battery as the user puffs. Open system e-cigarettes contain a reservoir that a consumer can refill with their choice of a nicotine-containing liquid. Closed system e-cigarettes have a container that already contains that liquid. Closed systems include cig-a-likes, which mimic the shape and look of a traditional cigarette, as well as pod products that have various shapes, including a shape like a USB thumb drive.

The e-cigarette category began growing rapidly about ten years ago. A few companies offered different options. Altria offered cig-a-like products and then pod products, but JLI offered only pod products. At the time of the challenged transaction, pods were the dominant choice of consumers, with JLI’s product the market leader.

While sales of pods, especially JLI’s pods, grew strongly at the end of 2017, Altria was only selling cig-a-likes and their sales fell. For regulatory reasons, Altria sought to purchase an existing pod product because it couldn’t develop its own product in a reasonable timeframe. In late 2017, it licensed the rights to a Chinese pod product and rushed it to market in early 2018.

Altria then approached JLI in early 2018 about an acquisition. By the end of July, the up-and-down negotiations centered around a multi-billion-dollar investment by Altria in exchange for a minority interest in JLI, possibly a non-voting interest convertible to voting after antitrust clearance. (An acquisition of non-voting securities does not require Hart-Scott-Rodino approval; conversion of such securities does.) At this point, the parties were far from reaching a deal, but began to discuss two other items that would lead to the FTC’s challenge of the eventual transaction.

The ironic first issue was how the parties could obtain antitrust clearance for the entire transaction. The parties’ term sheet described cooperation with the FTC and agreement to any “concessionary requirements of the FTC” related to Altria’s e-cigarette business. That is, the parties agreed that Altria would “divest (or if divestiture is not reasonably practicable, contribute at no cost to [JLI] and if such contribution is not reasonably practicable, then cease to operate” Altria’s e-cigarette business. JLI did not want to compete with Altria because Altria, as a major JLI shareholder, would have access to important JLI information. JLI’s executives later testified that they expected the FTC to oversee this process.

Second, in exchange for regulatory aid, Altria would agree to not compete with JLI’s e-cigarette products. Again, JLI didn’t want Altria’s to access sensitive JLI information when performing these services would allow Altria to improve its current e-cigarette products (before divestiture) or develop better new ones.

While negotiating over financial considerations and Altria’s voting rights, the parties continued to refine these two items. In later term sheets, the requirement that Altria “cease to operate” its e-cigarette assets disappeared while the requirement that Altria either contribute those assets to JLI or divest them remained.

Negotiations broke down in early September, but improved in October as Altria came around to terms much closer to JLI’s proposals. In early December, Altria announced that it was pulling its remaining e-cigarette products from the market, allegedly to conserve costs for product development or to invest in JLI. The parties finally reached an agreement later in December. Altria then ceased its other e-cigarette development efforts.

The Challenge and Initial Decision

On April 20, 2020, the FTC issued a two-count administrative complaint against the parties. Count I 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 the ownership interest in JLI. Specifically, that agreement took the form of the non-compete provisions of the written agreement as well as an agreement to exit the market reached during negotiations as a “condition for any deal.” Count II alleged that the transaction, including the agreed upon market exit by Altria and the written non-compete provisions, violated Clayton Act Section 7’s prohibition of mergers that “substantially lessen competition” in the relevant market.

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July 26, 2022

China Makes Major Changes to its Antitrust Law

by Bona Law PC

Author: Yang Yang.

Ms. Yang is an Antitrust Partner at Fairsky Law Firm, which has a New York office. She is also a lecturer and researcher at China University of Political Science and Law. She authored a treatise on China Merger Control and is a member of the expert advisory team for Amendments to China Anti-Monopoly Law (with a total number of 8 members). Indeed, she leads the drafting of an expert report on suggested amendments to China Merger Control regime, Chapter 4 of Chinese Anti-Monopoly Law. She is also a frequent contributor to the Antitrust Report of LexisNexis and Competition Policy International (Asia Column and Asia Chronicle).

On June 24, 2022, the Chinese Standing Committee of the National People’s Congress passed amendments to the Chinese Anti-Monopoly Law, which will come into force on August 1, 2022. These amendments have been the first ones since the first adoption of Chinese Anti-Monopoly Law in 2008.

They cover the following topics: (i) antitrust investigations by the Chinese Antirust Bureau under the SAMR, (ii) merger control review by the Chinese Antitrust Bureau under the SAMR, and (iii) civil litigation or private actions seeking damages or claiming invalidations of contractual provisions based on a violation of Chinese Anti-Monopoly Law. These amendments mark significant changes to China’s antitrust regime.

You might also enjoy the following articles that I’ve authored on The Antitrust Attorney Blog:

Antitrust Merger Control in China: Notifiable Transactions under the People’s Republic of China Anti-Monopoly Law

Draft Amendment to Chinese Antitrust Law Calls for Further Clarifications

Administrative Enforcement by Chinese Antitrust Bureau

With regard to antitrust investigations by Chinese Antirust Bureau under the SAMR, the changes primarily relate to (a) vertical agreements––i.e., RPM; (b) hub-and-spoke agreements, and (c) to the abuse of dominance by internet/technology companies.

Vertical Agreements

These amendments introduce a new “safe harbor” rule for vertical agreements based on the market share of investigated parties in their relevant markets. They now supply more detailed guidance on relevant-market definition, including specific precedents for certain industries. This guidance reduces uncertainty for the investigated parties.

Hub-and-Spoke Agreements

Hub-and-spoke agreements involve manufactures and distributors not entering directly into Resale Price Maintenance provisions (RPM), but rather holding meetings to facilitate horizontal agreements. These fall within the scope of prohibited horizontal agreements in Chinese Anti-Monopoly Law.

For any investigation relating to horizontal or vertical agreements, there is also a new issue of whether any party to such agreements has hosted meetings, organized exchanges of information, or provided substantial facilitation. This also calls for more future guidance from the regulators.

Abusive Conduct by Technology Companies

For internet companies, the provision on prohibiting abusive conduct by algorithms or platform policies is not new. Algorithms and platform policies are commonly used by internet companies. But this new provision may indicate a potential priority from law enforcement. This seems to be consistent with merger control rules and the Chinese Antitrust Bureau’s priority relating to markets impacting the national economy and people’s daily lives, which includes areas of public facilities, pharmaceutical manufacturers and internet platforms.

Merger Control

In the merger control realm, there are three main changes: (i) notification of voluntary transactions, (ii) the introduction of a “Stop the Clock” mechanism, and (iii) a new merger review process by categories and levels. These changes can cause the following uncertainties in practice and may require more detailed guidance.

Notification of Voluntary Transactions

Under this new provision the Chinese Antitrust Bureau has the power to require parties to notify transactions before they are implemented if there is evidence of potential anticompetitive effects. There is no mandatory obligation, however, to notify transactions that do not trigger the relevant merger thresholds before their implementation.

But, despite the new law, current rules do encourage voluntary transactions involving, for example, active pharmaceutical ingredients. These changes create uncertainty on whether the authority has any power to reverse such transactions or impose remedies after their implementation.

In addition, under the new law, the authority must first require the parties to notify the transaction. If the parties do not comply with the notification request, the authority will initiate an official investigation. This process allows the parties to provide evidence and prove that the transaction does not have anticompetitive effects. The authority then has the power to approve (with or without remedies), or prohibit the transaction.

“Stop the Clock” Provision

The new “Stop the Clock” provision grants the authority more time to review the transaction if the notifying parties fail to provide documents on time. At the same time, the notifying parties will now have more time to respond to the authority and to other parties’ concerns. But under the current law and rules, the authority usually requires the parties to withdraw and refile a notification if the review process has reached the 180-day deadline. Therefore, the new law may restrain the Chinese Antitrust Bureau from extending an investigation longer than 180 days. We will have to see what happens.

New Merger Review Process by Categories and Levels

Finally, the new merger review process by categories and levels calls for more detailed rules on implementation and policies and creates uncertainty as to whether some industries will have higher scrutiny than others.

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June 6, 2022

Is it Time for Antitrust Lawyers to Pay Attention to Interlocking Directorates and Section 8 of the Clayton Act?

by Bona Law PC

Authors: Steven Cernak and Luis Blanquez

Section 8 of the Clayton Act prohibits certain interlocking directorates between competing corporations. But while the prohibition has been around since 1914, most antitrust lawyers pay little attention to it, partly because companies can quickly resolve any issues voluntarily. Recent comments by the new AAG Jonathan Kanter, however, hint that litigation might play a larger role in future Section 8 issues.

Clayton Act, Section 8 Basics

The prohibitions of Section 8, in its most recent form, can be simply stated: No person can simultaneously serve as an officer or director of competing corporations, subject to certain jurisdictional thresholds and de minimis exceptions. Truly understanding the prohibition, however, requires understanding all those italicized terms.

First, Section 8’s prohibition applies only if each corporation has “capital, surplus, and undivided profits,” or net worth, of $10M or more, as adjusted. The FTC is responsible for annually adjusting that threshold for inflation and usually announces the change early in the calendar year along with changes to the Hart-Scott-Rodino thresholds. Currently, the threshold is just over $41M.

Section 8 provides an exception where the competitive sales of either or each of the corporations is de minimis. Specifically, no interlocks are prohibited if the competitive sales of 1) either corporation are less than $1M, as adjusted (currently about $4.1M); 2) either corporation are less than 2% of that corporation’s total sales; or 3) each corporation are less than 4% of that corporation’s total sales.

Originally, Section 8 applied only to directors of corporations; however, the 1990 amendments extended the coverage to officers, defined as those elected or chosen by the corporation’s Board. Despite the clear wording of the statute limiting it to officers and directors, courts have considered the possibility that Section 8 might apply when a corporation’s non-officer employee was to be appointed a director of a competitor corporation.

The language of Section 8 clearly applies to interlocks between competing corporations. An interlock between a corporation and a competing LLC would not be covered by the statutory language or the legislative history of the original statute or amendment. The FTC and DOJ have not explicitly weighed in on application to non-corporations, although the FTC’s implementing regulations for Hart-Scott-Rodino cover LLC explicitly as “non-corporate interests” different from corporations. Still, the spirit of Section 8 would seem to cover any such non-corporate interlock. Also, any corporate director who also serves a similar role for a competing LLC would face an increased risk of violating Sherman Act Section 1.

Section 8 clearly applies if the same natural person sits on the boards of the competing corporations. It might also apply if the same legal entity has the right to appoint a natural person to both Boards, even if that entity appoints two different natural persons to the two Boards. That interpretation is consistent with the Clayton Act’s broad definition of “person” and has been supported by both the FTC and DOJ and the one lower court to consider the question.

As with other parts of the antitrust laws, the question of competition between the two corporations requires some analysis. The few courts to look at the question have found that corporations that could be found to violate Sherman Act Section 1 through an agreement would be considered competitors. On the other hand, these same courts did not define competitors more narrowly to be those corporations that would not be allowed to merge under the more extensive analysis of Clayton Act Section 7.

Kanter’s Speech

On April 4, 2022, at the ABA Antitrust Spring Meeting, Jonathan Kanter, the assistant attorney general in charge of the Antitrust Division at the DOJ, made during his speech some significant remarks about Section 8. First, he highlighted the fact that the Division is committed to litigating cases using the whole legislative toolbox that Congress has given them to promote competition, including Section 8 of the Clayton Act. Second, he reminded everyone that Section 8 helps prevent collusion before it can occur by imposing a bright-line rule against interlocking directorates. Third, that for too long, Section 8 enforcement has essentially been limited to their merger review process. And last but not least, that the Division will start ramping up efforts to identify violations across the broader economy and will not hesitate to bring Section 8 cases to break up interlocking directorates. The former head from the FTC made a similar statement back in 2019, indicating how Section 8 of the Clayton Act protects against potential information sharing and coordination by prohibiting an individual from serving as an officer or director of two competing companies.

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February 4, 2022

Merger Control in Russia

by Bona Law PC

Authors: German Zakharov and Dmitry Domnin

German Zakharov is a Partner of the Competition/Antitrust and Foreign Direct Investments Practices at ALRUD Law Firm. German supports clients on a wide range of antitrust issues: coordination of merger control transactions with Federal Antimonopoly Service of the Russian Federation (FAS Russia), cartel investigations, advising on distributorship agreements, and analyzing compliance of commercial agreements with antitrust requirements. German represents companies during dawn raids performed by FAS Russia and its territorial subdivisions as well as in court.

Dmitry Domnin is a Senior Attorney of the Competition/Antitrust and Foreign Direct Investments Practices at ALRUD Law Firm. Dmitry advises on a wide range of antimonopoly issues. His experience includes merger control clearance of global M&A/JV transactions. In addition, Dmitry represents clients during the national security clearance of transactions related to the foreign investments in Russia, including investments in strategic industries. Dmitry has experience in assisting clients during antimonopoly cases, in particular cases on abuse of dominance. Dmitry also has experience in preparation and running mock dawn raids. Dmitry advises clients on the various issues related to the antimonopoly risks of vertical agreements, including risks under the legislation of the Eurasian Economic Union.

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January 25, 2022

Antitrust Merger Thresholds Increased and Merger Guidelines Being Updated; More Changes Coming Soon?

by Bona Law PC

Authors: Steven J. Cernak and Luis Blanquez

As we have discussed in several recent posts, the FTC has made several changes to the merger antitrust review process. This month, the FTC made two more changes, one completely expected and one hinted at in other recent announcements.

HSR Thresholds Updated

As expected — in fact, required by statute — the FTC announced the annual update to various HSR thresholds based on growth in the economy in the last year. The minimum threshold for filings was increased to $101M. Any transactions properly valued at that level or less do NOT trigger any HSR filing requirement. The upper threshold was also increased, this time to $403.9M. Any transaction valued in excess of that level will trigger a filing requirement unless one of several exemptions apply. Transactions valued in between those two amounts will trigger a filing requirement only if the size of the person thresholds are crossed. In short, those thresholds require one of the parties to have annual net sales or total assets exceeding $202M while the other party’s figures exceed $20.2M.

While the FTC announced these new threshold levels this month, they will only become effective thirty days after the official announcement is published in the Federal Register — so, late in February. The FTC has said that it is exploring other, more substantive, changes to the HSR process but none have been announced. As we have discussed previously, HSR’s valuation and exemption rules can be complicated so be sure to reach out to your Bona Law contact for further advice on HSR filing requirements and strategy.

Merger Guidelines to Change?

Earlier in the month, the FTC also announced that it was joining with the DOJ Antitrust Division to consider a complete rewrite of both the Horizontal and Vertical Merger Guidelines. In a virtual conference and a long statement, the agencies announced both the dozens of questions they hope to consider in the coming months and the process for the exercise. Comments and suggestions from the public are welcome until the end of March. The agencies expect to have a draft of new Guidelines shortly thereafter before opening another comment period. They hope to complete the process by the end of 2022.

The Guidelines have been issued by the agencies for decades. They are meant to describe the analysis that the agencies use to evaluate whether any merger or similar transaction violates the antitrust laws. Making the Guidelines public helps merging parties have some idea if their transaction will be challenged by the agencies. While not officially law, they have proven to be highly influential with courts considering such challenges.

The exact changes the agencies will propose are not yet known; however, based on their statements during the announcement and the questions posed to the public for comment, here are some key questions that the agencies will consider and that could lead to drastic changes in merger review:

Should new Guidelines further de-emphasize market definition in favor of an approach that tries to directly predict competitive effects?
Should presumptions based on market shares or similar measures be strengthened?
Should effects on parties other than consumers, like labor and local communities, receive greater emphasis?
Should effects on elements other than price, such as product quality and wages, receive greater emphasis?
Should some efficiencies, such as lower input prices from suppliers, be seen as reasons to challenge the merger?
Should distinctions between horizontal and vertical transactions reflected in the guidelines should be revisited considering trends in the modern economy?

The agencies also seek input on potential updates to the guidelines’ discussion of potential and nascent competitors, which may be key sources of innovation and competition, as well as how to account for key areas of the modern economy like digital markets in the guidelines, which often have characteristics like zero-price products, multi-sided markets, and data aggregation that the current guidelines do not address in detail.

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December 3, 2021

Meanwhile, the DOJ Antitrust Division Launches Merger Challenges in the Airline, Publishing, and Sugar Industries

by Bona Law PC

Authors: Steven Cernak and Luis Blanquez

As we have reported numerous times (most recently here), the Federal Trade Commission has been making headlines with some controversial changes to U.S. merger review procedures, disputes over its voting rules, and personnel changes. But while the FTC was making headlines, the other federal antitrust enforcer, the Department of Justice Antitrust Division, was launching the three antitrust enforcement actions we summarize below. Now that Jonathan Kanter has been confirmed as the Assistant Attorney General in charge of the Division, we expect the pace of actions to only pick up.

American/JetBlue

In July 2020, American Airlines and JetBlue Airways announced the formation of the “Northeast Alliance.” The Alliance is a series of agreements between the two competitors relating to their respective operations at Boston’s and New York City’s four major airports. The agreements commit the two airlines to pool revenues and coordinate on “all aspects” of network planning except pricing at the four airports. The companies sought and, after making a few minor tweaks, received approval from the Trump Administration Department of Transportation in January 2021. Shortly thereafter, the Alliance began operation.

In September 2021, the Biden Administration, joined by several states, sued the two companies alleging that the Alliance was a civil violation of Sherman Act Section 1 under the rule of reason. The complaint describes the Alliance as effectively a merger of the two companies’ operations in Boston and New York that will reduce choice for consumers. Because the Alliance is effectively a partial merger, the complaint uses Clayton Act Section 7 analysis, including HHI calculations for various city-pairs that will be affected by the Alliance, to predict the negative effects on consumers.

In November 2021, the parties moved to dismiss the case. Their main argument is that in a Section 1 case, the complaint must allege anticompetitive effects that have already occurred. Predictions of potential anticompetitive effects, while sufficient for a Section 7 merger challenge, are insufficient here. The complaint does not allege any negative competitive effects, such as reduced flights, since the Alliance’s inception. In fact, as the motion and the companies’ monthly press releases since the lawsuit make clear, the capacity of the two airlines in the four airports has only increased. As of this writing, the Division and their state partners have not yet responded to the motion.

Penguin Random House/Simon & Schuster

In November 2021, the Department of Justice Antitrust Division filed a civil antitrust lawsuit to block Penguin Random House’s proposed acquisition of its close competitor, Simon & Schuster. As alleged in the complaint, this acquisition would enable Penguin Random House, which is already the largest book publisher in the world, to exert outsized influence over which books are published in the United States and how much authors are paid for their work.

As described in the complaint, the publishing industry is already highly concentrated. Publishers compete to acquire manuscripts, which they edit, package, market, distribute and sell as books. Publishers pay authors advances for the rights to publish their books. In most cases, the advance represents an author’s total compensation for their work. Just five publishers, known as the “Big Five,” are regularly able to offer high advances and extensive marketing and editorial support, making them the best option for authors who want to publish a top-selling book.

While smaller publishers occasionally win the publishing rights to anticipated top-selling books, they lack the financial resources to regularly pay the high advances required and absorb the financial losses if a book does not meet sales expectations. The complaint alleges that Penguin Random House, the world’s largest publisher, and Simon & Schuster, the fourth largest in the United States, compete head-to-head to acquire manuscripts by offering higher advances, better services and more favorable contract terms to authors.

This is a good example of how the Antitrust Division analyzes the existence of monopsony power and the way it sometimes harms competition in input markets. In this case, the proposed merger would result in lower advances for authors and ultimately fewer books and less variety for consumers. It would also put Penguin Random House in control of close to half the market for acquiring publishing rights to anticipated top-selling books, leaving hundreds of individual authors with fewer options and less leverage.

U.S. Sugar/Imperial Sugar

During the same month of November, the new chief of the Antitrust Division––Jonathan Kanter–– filed his first merger challenge to stop United States Sugar Corporation from acquiring its rival, Imperial Sugar Company. The complaint alleges that the transaction would leave an overwhelming majority of refined sugar sales across the Southeast in the hands of only two producers. As a result, American businesses and consumers would pay more for refined sugar, a significant input for many foods and beverages.

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