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.
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.
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.
Likewise, Judge Nichols was very critical of DOJ’s two vertical theories of harm. Judge Nichols concluded that evidence related to the government’s vertical claims rested on mere speculation. At most, DOJ just presented evidence that UHG would have some incentive and ability to exploit competitors’ competitively sensitive data for its own economic benefit. For the proposed acquisition to substantially lessen competition, Judge Nichols said that UHG would have to uproot its entire business strategy and corporate culture; intentionally violate or repeal longstanding firewall policies; flout existing contractual commitments; and sacrifice significant financial and reputational interests.
Moreover, Judge Nichols further held that the Government also failed to meet its burden under its foreclosure theory of vertical harm. The acquisition would neither result in less innovation by rival payers, nor would UHG have the ability and incentive to raise rival payers’ costs by withholding or delaying the sale of EDI-related innovations—specifically, integrated platforms.
In November 2021, the Antitrust Division filed a merger challenge to stop United States Sugar Corporation from acquiring its rival, Imperial Sugar Company in Georgia and Kentucky.
The complaint alleged that the transaction would leave an overwhelming majority of refined sugar sales across the Southeast in the hands of only two producers and would eliminate aggressive competition in the supply of refined sugar, which had led to lower prices, better quality, and more reliable service. As a result, the deal would substantially lessen competition at a time when global supply chain challenges already threaten steady access to important commodities and goods.
Now, almost a year later, U.S. District Judge Maryellen Noreika ruled in favor of the merging parties and rejected the DOJ’s challenge. In a recent statement, Assistant Attorney General Jonathan Kanter expressed his disappointment on the court’s decision and mentioned how further consolidation in the market for this important kitchen staple will have real-world consequences for millions of Americans.
More recently, the DOJ filed a notice of appeal to the US Court of Appeals for the Third Circuit and an emergency motion for injunction pending appeal, or in the alternative, a 14-day injunction to pursue an expedited motion pursuant to Federal Rule of Appellate Procedure 8. But that hasn’t worked either. As of this writing, U.S. District Judge Maryellen Noreika denied the motion, indicating the that US Sugar acquisition would not result in irreparable harm.
The cases above show the FTC’s and DOJ’s commitment to keep an aggressive approach on any merger enforcement action under the Biden Administration. This is also in line with a recent statement from AAG Kanter “Oversight of Federal Enforcement of The Antitrust Laws” and FTC’s Chair Lina Khan, both before the U.S. Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights.
But vigorous enforcement of the antitrust laws to protect competition and consumers must be always supported by the law and the facts, as also expressed by Commissioners Noah Joshua Phillips and Christine S. Wilson in its dissenting statement before the same Subcommittee.
The FTC is skeptical about vertical mergers, particularly expressing concern about their negative impact on innovation, especially in nascent markets.
We expect both antitrust enforcement agencies to continue their aggressive approach to merger review during the Biden administration’s pendency. We also expect continued skepticism from judges steeped in different antitrust principles. With some tweaks to their approach, DOJ and FTC could eventually win some of these merger challenges. In the meantime, their aggressive posture alone will cause some parties to back away from some potential mergers, which fits the goals of the Biden Administration.