Author: Steven Cernak
On December 15, 2023, the Fifth Circuit remanded to the FTC its order requiring Illumina to divest its re-acquired subsidiary, Grail. Despite the remand, the opinion is a big win for the FTC. Below, we offer five takeaways for future merging parties and their counsel.
[Disclosure: Bona Law filed an amicus brief for 34 Members of Congress arguing that the FTC’s action violated the “major questions” doctrine and misinterpreted Clayton Act Section 7 in several ways.]
Here is a quick summary of the twists and turns of this case from our earlier writings. Illumina is a dominant provider of a certain type of 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 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). Shortly thereafter, the European Commission announced that it too would investigate the transaction, even though the transaction did not meet its usual thresholds.
During these investigations, the parties closed the transaction. The European Commission decided to block the transaction and the parties appealed. 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 ALJ decision. The four Commissioners unanimously agreed to overturn it. Now, the Fifth Circuit has largely upheld that decision of the Commission, though with a remand for reconsideration of one aspect of the decision, as described below.
Takeaway 1: This Development is Largely an FTC Win
Some of the initial tweets and headlines, perhaps after reading only the opinion’s opening paragraph vacating the FTC’s order and remanding for further consideration, seemed to characterize the Fifth Circuit opinion as another loss for the FTC. But make no mistake, this development is a big win for the FTC for several reasons. First, the FTC challenged this transaction to block, then later, unwind, the acquisition of Grail. About a day after the opinion was filed, Illumina announced it would divest Grail. Mission accomplished.
Second, the court found “substantial evidence” for the Commission’s conclusions, despite arguments by the parties (and amici) to the contrary. As detailed below, the court did not question the Commission’s use of older cases and theories to review mergers.
Third, even the court’s rationale for the remand was not that strong a rebuke of the FTC. During the investigation, Illumina made an Open Offer to other customers of its sequencing, promising to treat them as well as Grail. The ALJ found this a useful additional fact in concluding that Illumina did not have the incentive to harm Grail competitors. The FTC majority opinion disagreed with the ALJ and only considered the Open Offer in the remedy phase of the merger review. Commissioner Wilson also disagreed with the ALJ but considered the Open Offer in Illumina’s rebuttal portion of the liability phase of the review. The parties argued that the Open Offer should be addressed by the FTC Complaint Counsel in its prima facie case for liability. The Fifth Circuit agreed with Commissioner Wilson. It seems certain that the other three Commissioners would have reached the same ultimate conclusion on remand when considering the Open Offer earlier in the process.
Takeaway 2: The Court Quickly Punted Constitutional Concerns
As with several other recent challenges to the FTC and other administrative agencies, the parties raised serious, difficult constitutional questions about the structure and processes of the FTC and its review of mergers. The court wrestled with none of them. Instead, the court took only two pages to explain that the four questions were answered by precedent, either from the Fifth Circuit or the Supreme Court, and saw no reason to explore whether any court should change. While this opinion is not the final word on these and similar issues, the FTC at least avoided a number of thorny issues for now.
Takeaway 3: Vertical Might be the New Horizontal
We hear sometimes that a proposed transaction should sail through the Hart-Scott-Rodino merger review process because “the parties don’t compete.” While that focus on current horizontal competition might have been a sufficient screen for antitrust issues a few years ago, it no longer is. Whether the Trump Administration’s challenge of the AT&T/TimeWarner transaction or the Biden Administration’s challenge of this transaction, Microsoft/Activision, or others, vertical (and potential competition) mergers have been ripe for challenge for a few years. Illumina’s abandonment of this vertical deal after this ruling will only encourage further challenges by federal and state antitrust enforcement agencies.
Takeaway 4: Courts Sometimes Agree with New/Renewed Antitrust Theories
As the Biden Administration DOJ and FTC have issued new merger guidelines or unilaterally taken other actions, one popular response from parts of the antitrust commentariat has been “but just wait until the courts consider them.” It is true that a long-lasting change in antitrust interpretation (like, say, the Chicago School) can only start with law review articles and enforcer speeches but eventually will require supportive court opinions; however, the “wait for the courts” sentiment seems built on two faulty premises.
One premise seems to be that courts invariably disagree with the FTC or DOJ’s actions. Here, however, the court not only largely affirmed the end result of the FTC’s opinion, it raised few issues with the analysis that generated the result. For example, the court explicitly supported the FTC’s use of Brown Shoe factors, not the hypothetical monopolist test of the now-abandoned merger guidelines, for market definition. Also, the FTC majority opinion emphasized Brown Shoe when determining the likelihood that Illumina would act anticompetitively towards Grail’s competitors. Com. Wilson’s concurrence argued that there was no applicable “Brown Shoe test” but only a more modern “ability and incentive” test (which the majority only secondarily used). The Fifth Circuit saw no need to choose and easily found the FTC’s evidence sufficient under either standard, thereby continuing to breathe new life into some old Brown Shoe language.
The second premise is that many merging parties have the patience and money to last through a court fight of any enforcer challenge that comes at the end of a year-long or more HSR second request process. Such a costly delay is asking a lot from a company’s workers, management, and shareholders. So, any merger strategy that counts on a court disagreeing with any enforcer challenge must explain the cost and length of such a strategy — and, now, that it might not be successful. Such explanations will convince some, maybe most, clients to forego fighting an enforcer challenge after months of second request compliance — and perhaps even proposing the merger in the first place. As we have discussed elsewhere, such in terrorem effects can be even more important than the number of court victories and might partially explain the significant decrease in HSR filings in the 2023 calendar year.
Takeaway 5: Some Helpful Advice on Fixes
As described above, the parties and the FTC disagreed on how and when to evaluate the Open Offer. The parties described it as a “market reality” that FTC Complaint Counsel had to deal with in its prima facie case. The FTC saw it as a remedy to be evaluated only after liability had been decided. The Fifth Circuit disagreed with both and described it as “somewhere in between a fact and a remedy.”
The court distinguished the Open Offer from court-ordered remedies or party-offered remedies that were contingent on a liability finding, such as in the Aetna or Sysco cases. Instead, the court found the Open Offer much more like the agreements in the recent AT&T or Microsoft/Activision cases, where the offers were “irrevocable” or “binding” and made before any liability trial, let alone liability finding. So future merging parties looking to make any such fixes as effective as possible should be prepared to implement them well before any fact finder forces them to do so. Such a move will not guarantee the deal will be approved but will make the enforcer and any court take it more seriously.
Obviously, the Fifth Circuit opinion here is just one opinion, not from the Supreme Court, and contingent on the case’s unusual facts. It also comes after the FTC has suffered some setbacks in other courts. Still, the positive outcome for the FTC should give future merging parties pause before taking on an agency challenge.