Articles Posted in FTC

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

February 14, 2023 | 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.

Continue reading →

Antitrust for Kids: Lemonade Redux: Alternatives to Non-Competes In the Face of the FTC’s Proposed Ban

January 24, 2023 | Bona Law PC

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.

Continue reading →

FTC’s Proposed Noncompete Ban Has Already Succeeded

January 19, 2023 | Bona Law PC

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.

Continue reading →

FTC Antitrust Challenge of Altria/JUUL Gets Curiouser and Curiouser

November 14, 2022 | 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.

Continue reading →

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

October 7, 2022 | 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.

Continue reading →

Fair to Say Robinson-Patman No Longer “Forgotten”?

October 4, 2022 | Bona Law PC

Author: Steven Cernak

Recently, FTC Commissioner Bedoya made one of his first speeches and called for a “return to fairness” when enforcing the antitrust laws. In particular, he called for renewed enforcement of the Robinson-Patman Act. This speech is just the latest reason why businesses need to prepare for a new antitrust landscape. But Commissioner Bedoya and anyone else calling for drastic basic changes in antitrust enforcement need to be prepared to patiently work for such change with a skeptical judiciary.

In the speech, Bedoya argued that all the antitrust statutes were passed with the intention of improving the “fairness” of markets, not necessarily their “efficiency,” as the laws have come to be interpreted. Therefore, he wants the FTC to focus the interpretation of all the antitrust statutes on fairness, not efficiency, which he claims to be unambiguous: “People may not know what is efficient — but they know what’s fair.” Specifically, Bedoya called for a rejuvenated enforcement of the Robinson-Patman Act and its prohibitions on various types of discriminations, usually against smaller competitors.

On Bedoya’s Robinson-Patman point in particular, please allow me a short “I told you so.” In a prior post, I explained that Robinson-Patman was forgotten but not gone, still affecting negotiations and leading to a few private suits each year. I have insisted on teaching my Antitrust students about the basics of the law, warning them that it is still alive and was unlikely to ever be repealed. If the FTC were to begin actively enforcing the statute after a couple decades, all that knowledge will come in handy once again for many more lawyers.

More generally, it is not clear that interpretation of antitrust law would need to jettison “efficiency” or consumer welfare and move to “fairness” to reach a different result in some of the anecdotes covered in Bedoya’s speech. At least some of the matters might have come out differently with a longer-term view of competition and consumer welfare. In my view — a view that I know Comm. Bedoya does not share — such a standard would be less ambiguous than trying to figure out what “fairness” requires in any situation.

Continue reading →

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

September 11, 2022 | 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.

Continue reading →

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

January 25, 2022 | 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.

Continue reading →

Observations on the Court’s Rejection of Facebook’s Motion to Dismiss the FTC’s Amended Antitrust Complaint

January 24, 2022 | Bona Law PC

Author: Jarod Bona

The FTC filed an antitrust lawsuit against Facebook (now Meta Platforms Inc.). Judge James E. Boasberg dismissed it. The FTC then filed an amended complaint. And the same judge just denied Facebook’s motion to dismiss that complaint.

The FTC alleges that Facebook has a longstanding monopoly in the market for personal social networking (PSN) services and that it unlawfully maintained that monopoly through (1) acquiring competitors and potential competitors; and (2) preventing apps that Facebook viewed as potential competitive threats from working with Facebook’s platform.

The FTC’s first claim asserts that Facebook monopolized the market through (1), above—acquiring companies (especially Instagram and WhatsApp) instead of competing. The FTC’s second claim includes both (1) and (2), the interoperability allegations, and invokes Section 13(b) of the FTC Act, which allows the agency to seek an injunction against an entity that “is violating” or “is about to violate” the antitrust laws.

The Court permitted the FTC to go forward with both claims, but also concluded that the facts from the interoperability allegations happened too long ago to fit into Section 13(b)’s “is violating” or “is about to violate” temporal requirement.

You can read the play-by-play of the opinion elsewhere or, even better, read the actual decision. My purpose with this article is instead to offer some observations about the opinion and broader antitrust litigation issues.

Direct and Indirect Evidence of Monopoly Power

The FTC argues that it has alleged both indirect and direct evidence of Facebook’s monopoly power. But because the Court concluded that the FTC had adequately alleged indirect evidence of Facebook’s monopoly power, it didn’t need to analyze the direct evidence of monopoly power.

The only reason I am bringing this up is because most monopolization cases focus on indirect evidence of monopoly power—i.e. relevant market definitions, market share, barriers to entry, etc.— so many people don’t consider that a plaintiff can also satisfy this element through direct evidence of monopoly power. For example, if a plaintiff can prove that a defendant is engaged in supracompetitive pricing, it is showing direct evidence of monopoly power. And in an antitrust claim against a government entity, the plaintiff may be able to show directly that the public entity is a monopolist as a result of government coercion.

Notably, the Court dismissed the last FTC Complaint against Facebook for failure to allege monopoly power. Here, the Court concludes that “the Amended Complaint alleges far more detailed facts to support its claim that Facebook” has a dominant share of the relevant market for US personal social networking services.

In reaching this conclusion, the Court agreed with the FTC that Facebook’s dominance is durable because of entry barriers, particularly network effects and high switching costs.

Anticompetitive Conduct

The alleged anticompetitive conduct consists of a series of mergers and acquisitions. Within antitrust and competition law, you typically hear about antitrust M&A in the context of Hart-Scott-Rodino filings and direct merger challenges by the FTC or DOJ.

Courts will sometimes conclude that mergers and acquisitions are a means of exclusionary conduct by a monopolist. As in the present case, that can come up when a company that dominates a market confronts a potential competitor and must decide how to respond. Sometimes the monopolist will compete better—reduce prices, improve quality, etc. That’s the way competition works. But in other situations, the monopolist might solve its problem by dipping into its cash or stock and remove the threat to its monopoly profits by buying the nascent competitive threat.

You could also imagine a scenario in which a monopolist engages in exclusionary conduct by going vertical and purchasing either a supplier or customer in a context in which such doing so makes it difficult for the monopolist’s competitors to achieve economies of scale. This can be similar in effect to an exclusive-dealing arrangement.

Harm to Competition

The FTC, of course, must allege harm to competition. The standard harm to competition is an increase in prices or a decrease in quality—which are two sides of the same coin. But these aren’t the only harms to competition that a plaintiff can allege.

Here, of course, the FTC is asserting an antitrust claim centered on purchase of Instagram and WhatsApp, which were free before and after the acquisitions. And the Facebook social network site is, of course, also free.

But the Court concluded that the FTC did, in fact, allege harm to competition. The FTC alleged “a decrease in service quality, lack of innovation, decreased privacy and data protection, excessive advertisements and decreased choice and control with regard ads, and a general lack of consumer choice in the market for such services.” And the FTC emphasized the lower levels of service quality on privacy and data protection resulting from lack of meaningful competition.

The Court accepted these allegations as sufficient harm to competition: “In short, the FTC alleges that even though Facebook’s acquisitions of Instagram and WhatsApp did not lead to higher prices, they did lead to poorer services and less choice for consumers.”

The question of whether less choice is sufficient harm-to-competition to support an antitrust claim has been controversial over the years, but Courts are increasingly permitting it.

Previously Cleared Transactions

Facebook understandably grumbles that the FTC previously cleared through the HSR process the two transactions that it now complains about. But the Court rejects this argument because it says the “HSR Act does not require the FTC to reach a formal determination as to whether the acquisition under review violates the antitrust laws.” And, in fact, an HSR approval expressly reserves the antitrust enforcers the right to take further action. It doesn’t seem fair, but that’s the way it is.

Continue reading →

FTC Continues to Unilaterally Repeal the HSR Merger Review Process

October 28, 2021 | Bona Law PC

Author: Steven J. Cernak

The Federal Trade Commission continues to take subtle steps that, in total, will end up significantly changing the merger review process under the Hart-Scott-Rodino Act. We have already covered some of the earlier actions: withdrawal of the 2020 Vertical Merger Guidelines, withdrawal of one long-standing HSR rule interpretation and threats to the rest, and the routine issuance of threatening letters to parties closing after the end of HSR’s waiting period. This week, the FTC took another such step when it announced that it would now “routinely” require many parties involved in mergers to obtain prior approval from the FTC for many future transactions.

Before 1995, the FTC had often included a “prior approval” provision in any order settling its review of a merger that it had found to be anticompetitive. That provision required the parties to seek FTC approval for any future merger, usually for the next ten years though usually limited to the markets involved in the original merger. In 1995, the FTC issued a Policy Statement explaining that it would no longer routinely require such prior approval provisions and, instead, would simply rely on HSR’s requirement for most large mergers to be reported to the antitrust agencies prior to consummation. Earlier this year, the FTC rescinded that 1995 Policy Statement. This week, the FTC announced its replacement.

To understand the import of the new policy, you must understand how the HSR merger review process has worked in practice. The parties to most mergers and similar transactions above the threshold set by Congress (and automatically updated each year) must file certain forms and documents with both the FTC and the Department of Justice Antitrust Division before closing. The reviewing agency, say, the FTC, then has thirty days to investigate and determine if it will allow the transaction to proceed or seek more information through a “second request.”

If the FTC goes the latter route, the parties then spend months providing the additional documents and information. After the parties certify full compliance with the second request, the FTC must choose to allow the transaction to proceed or sue to enjoin it. By that point months into the investigation, the parties and the FTC often agree to modifications to the transaction — typically, divestiture of certain assets to a buyer — that the FTC thinks will solve any competition concerns.

The details of that agreement are then memorialized. After this week’s statement, that document now will routinely provide that the parties, for future transactions, must seek prior approval from the FTC under terms and timelines set by the FTC, not HSR. Such prior approval requirements certainly will cover future transactions in the markets affected by the original transaction; however, the FTC might also seek broader prior approval provisions in certain cases. Also, the FTC might seek such prior approval requirements even if the parties choose to abandon the proposed transaction, whether prior to or after the FTC sues to enjoin it. Finally, the FTC likely will insist on prior approval before any buyer of divested assets can resell them.

Benefits Expected by the FTC

The FTC sees three main benefits from this new policy. First, it thinks that parties to “facially anticompetitive” transactions will not pursue them in the first place because of fear of imposition of these prior approval requirements for all future transactions. Second, the FTC will be able to preserve its resources by having fewer mergers to review and challenge and, for those subject to prior approval provisions, reviewing them under timelines and rules more FTC-friendly than HSR. Finally, the FTC will be able to review before consummation any deals that would be too small to trigger HSR filing requirements.

Other Likely Effects

The FTC’s assessment of potential effects seems both one-sided and simplistic. Certainly, the new policy will raise the costs to the parties of making HSR submissions on “facially anticompetitive” mergers and so should reduce their number; however, the costs of the risk of prior approval provisions also will fall on other mergers challenged by the FTC, at least some of which reasonable antitrust minds might have found to be not “facially anticompetitive.” Because parties will not be sure that their “good” merger will be mistakenly challenged as a “bad” one, they might hesitate to pursue mergers beneficial to consumers. So, the new policy could reduce both “bad” and “good” mergers. The FTC’s new policy implicitly assumes that the benefit to the FTC from not needing to challenge the bad ones outweighs the costs to consumers from losing the benefits of the good ones never pursued.

Continue reading →