Articles Posted in Mergers & Acquisitions

Mergers & Acquisitions, AI and Antitrust: The New Creative Ways for Big Tech to Enter the AI Market and Avoid HSR Rules

July 21, 2024 | Bona Law PC

Two of the main pillars from the Biden Administration Antitrust Policy in 2023 have been an aggressive merger enforcement agenda and its crusade against Big Tech and vertical integration.

On the merger side, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have published new Merger Guidelines (see also here) and proposed new changes to Hart-Scott-Rodino Act (HSR) notification requirements (see also here.) In addition, both antitrust agencies have challenged more mergers in 2022 and 2023 than ever before. In a letter from November 2023 responding to questions from Rep. Tom Tiffany, R-Wis., FTC Chair Lina Khan stressed the fact that:

“a complete assessment of the FTC’s success in stopping harmful mergers reveals that of the 38 mergers challenged during my tenure as Chair, 19 were abandoned, another 14 were settled with divestitures, and two are pending a final outcome.”

This includes key acquisitions such as the Nvidia/Arm Ltd or Meta/Within, among many others. And the FTC is showing no signs of slowing down this aggressive approach. Another recent example of a merger challenge by the DOJ is the Live Nation/Ticketmaster’s complaint.

But despite the FTC’s Chair confidence and the recent new challenge by the DOJ, this hasn’t been an easy path for the antitrust enforcers. Courts in the US have pushed back several of the agencies’ extreme challenges and new theories, such as in the Microsoft/Activision, (see also here, here, and here.)

On the Big Tech front things do not look much better. Both agencies have filed major illegal monopolization cases, sometimes together with State AGs, against Apple (Smartphones), Google (Google Search and Google Ad Technology), Amazon (Online Retail), and Meta (Instagram/WhatsApp––see also here––, and Within acquisitions.)

In other words, if you work in Big Tech, forget about acquiring an AI startup, unless you want to go through a long and hostile review process. This is having a serious impact on the most disruptive and growing industry we’ve seen in years.

The “Magnificent Seven” Tech Companies

The ascendency of Apple, Microsoft, Nvidia, Tesla, Meta, Alphabet and Amazon, the so-called “Magnificent Seven” tech stocks––is indicative of “a fundamental shift”, primarily propelled by advancements in AI. Currently, the top seven tech stocks have not only accounted for about half of the gains in the entire S&P 500, but also contributed to over a quarter of the index’s total market capitalization. These companies are not merely riding the wave of current technologies but actively shaping the future of AI. They collectively gather most of the market cap in the industry.

But until we see a shift on the current enforcers’ antitrust policy against acquisitions involving Big Tech, it doesn’t matter how well these companies perform. Why? Because as a startup in the tech industry (and really in any industry), your main goal is to either try to eventually go public through an IPO––if you become big enough––, or rather look for one of the Big Tech companies to acquire you. But with the antitrust agencies’ current appetite to block such transactions, Venture Capital companies and investors in the AI industry are thinking twice before risking their money on a startup, unless they specifically know that company is going public. Otherwise, the risk that VCs and investors see to get the deal blocked by either the FTC or DOJ is just too high, regardless of the potential these startups might have. And let’s be honest, the number of companies that make it to that level is already extremely low.

First, this is clear evidence of how such an aggressive and disproportionate approach to acquisitions involving Big Tech is currently hindering innovation in the most relevant and disruptive industry we’ve seen in years. But this is a topic for another article.

Second, what I want to discuss in this article is how because of such an extreme approach from the Biden Administration, Big Tech are starting to develop new and creative strategies to get involved in the AI industry, without having to acquire any startups and face the antitrust agencies. At least not until now, because this has already raised some eyebrows at both the DOJ and FTC.

Microsoft/Inflection

The first of these deals involves Microsoft and Inflection.

Backed by Microsoft, Nvidia and billionaires Reid Hoffman, Bill Gates and Eric Schmidt; ex-DeepMind leader Mustafa Suleyman––now Google’s main AI lab, and Reid Hoffman, who co-founded LinkedIn, started Inflection in 2022, claiming to have the world’s best AI hardware setup.

Inflection thesis was based on AI systems that can engage in open-ended dialogue, answer questions and assist with a variety of tasks. Named Pi for “personal intelligence,” Inflection’s first release helped users talk through questions or problems over back-and-forth dialog it then remembers, seemingly getting to know its user over time. While it can give fact-based answers, it’s more personal and “human” than any other chatbot.

In March of this year, Microsoft announced the payment of $650 million to inflection. $620 million for non-exclusive licensing fees for the technology (meaning Inflection is free to license it elsewhere) and $30 million for Inflection to agree not to sue over Microsoft’s poaching, which includes co-founders Mustafa Suleyman and Karén Simonyan. Suleyman will run Microsoft’s newly formed consumer AI unit, called Microsoft AI–– a new division at Microsoft that will bring together their consumer AI efforts, as well as Copilot, Bing and Edge––, whereas Simonyan is joining the company as a chief scientist in the same new group. Inflection will host Inflection-2.5 on Microsoft Azure. It will be also pivoting away from building the personalized AI chatbot Pi to become an AI studio helping other companies work with large language model AI.

So here is where it gets interesting. Microsoft didn’t formally need to make an offer to acquire Inflection. In other words, technically Inflection remains an independent company. But the antitrust agencies seem to disagree and have started asking themselves the following questions.

First, if the key people, money and technology have all left the company to go to Microsoft, what’s really left in Inflection to still be considered as a competitor in the market?

Second, could this qualify as a change in control according to 16 C.F.R. §801.1(b)? What about a file-able acquisition of just “assets”––a term currently undefined by the HSR statute and regulations?

And third, does this move create a “reverse acqui-hire” transaction, a practice which is becoming very popular in the AI industry? The so-called “acqui-hires,” are transactions in which one company acquires another with the main purpose to absorb key talent. But what’s going on in the AI industry is not quite the same. Big Tech are acquiring key employees––such as Suleyman and Simonyan with their core teams in this case––, while licensing technology, leaving the targeted company still functioning independently––so no HSR filing requirement is apparently triggered. This is not the first time we’ve seen this scenario in the AI industry. Last month, Amazon poached Adept’s CEO and key employees, while getting a license to Adept’s AI systems and datasets.

But the antitrust enforcers have started to ask themselves whether Inflection and Adept are still real competitors in the AI market. The FTC has already sent subpoenas to both parties in the Microsoft/Inflection transaction, asking for information about a potential gun-jumping scenario: whether the $650 million deal may qualify as an informal acquisition requiring previous government approval. In the case of Amazon/Adept, the FTC has also decided to start an investigation and asked for more information.

OpenAI, Nvidia and Microsoft

The FTC and DOJ are finalizing an agreement to split duties to investigate potential antitrust violations of Microsoft, OpenAI, and Nvidia.

According to Politico, the DOJ will lead the Nvidia investigation, and its leading position in supplying the high-end semiconductors underpinning AI computing, while the FTC is set to probe whether Microsoft, and its partner OpenAI, have unfair advantages with the rapidly evolving technology, particularly around the technology used for large language models. At issue is the so-called AI stack, which includes high-performance semiconductors, massive cloud computing resources, data for training large language models, the software needed to integrate those components and consumer-facing applications like ChatGPT.

Continue reading →

Best Practices for Merger Reviews before the Federal Agencies and the California Attorney General’s Office

February 5, 2024 | Bona Law PC

Author: Paul Moore²

Introduction

Over the past several decades State Attorneys General have become increasingly involved in merger reviews in tandem with the Federal Trade Commission and/or the U.S. Department of Justice’s Antitrust Division (the Regulatory Agencies). This increase in state merger reviews has been in parallel with states raising their merger and non-merger profile and general antitrust enforcement efforts statewide and nationally. This trend has occurred, in part, as Attorneys General expanded their staffs and have become increasingly experienced in antitrust enforcement efforts and merger analysis. While many states, including California, do not have statutes mandating proposed merger registration, Attorneys General have statutory authority to investigate conduct to ensure no laws have been violated³. This means that an Attorney General can decide to review a proposed merger whenever they think it may violate a state’s antitrust laws. Therefore, it makes sense to notify an Attorney General when a proposed merger may have a competitive impact in a specific state and is likely to trigger an in-depth analysis at the federal level. Some examples might be a merger between two competitors who have substantial overlapping retailing assets, service routes, or service areas in one state. Such a notification to a state allows parties to avoid duplicative and possibly successive investigations. Best practices have emerged around how to conduct a merger investigation with a Regulatory Agency and tandem with the California Attorney General’s office.

Best Practices When Cooperating with Staff

Contacting the federal agency likely to review a transaction before submitting an HSR filing is increasingly becoming part of merger review practice. Since there is no statutory requirement to seek regulatory authority to merge at the state level in California a best practice is to invite the Attorney General to participate in the review process to avoid subsequent investigations that could have been run in parallel with other agencies and possibly avoid efforts by the staff ex-post to unwind a transaction⁴. Contacting the California Attorney General (Cal-AG) before an HSR is filed is generally well-received by staff and is typically considered a smart strategy because it allows the staff assigned to the transaction the ability to begin reviewing the transaction before the 30-day statutory clock has started. This extra time allows staff more time to conduct a review before any enforcement decisions need to be made and in some cases provides the time necessary to avoid one altogether. In addition, a pre-filing notification to both staffs permits the two agencies to interact freely since there is no HSR confidence to maintain.

We are in an era where many meetings are conducted over video. Generally, saving time and client resources is a good thing; however, visiting a State Attorney General’s staff in their office at the beginning of a merger can pay significant dividends. An in-person visit can establish the foundation for a positive working relationship, allow for clear communications⁵ and most importantly, communicate to the staff and Attorney General that you are aware of the importance of their involvement and welcome their participation. The in-person visit makes a significant first-step in ensuring that things start off on the right foot.

Once the HSR is submitted, the Cal-AG is able to file her Form 712 and to continue the interagency dialogue with the benefit of the documents and filings the parties have made. The Cal-AG’s staff can also begin to reach out to third parties and seek waivers that permit the FTC/DOJ to share what is produced with the states. This is more efficient for the producing parties as well, as they can make what amounts to a single production to satisfy both reviewing agencies⁶. Securing these waivers early in the process also allows the staffs to communicate freely, to share economic analyses based on produced information, and for the CAL-AG staff to join party meetings with the FTC/DOJ⁷. This level of cooperation benefits all involved as it prevents parties from making the same presentation twice and it allows both regulatory agencies to hear the same information simultaneously.

Continue reading →

Did You Receive an FTC or DOJ Subpoena? Be Sure To Preserve Everything Ephemeral

February 2, 2024 | Bona Law PC

Authors: Steven Cernak & Molly Donovan

The Federal Trade Commission and the Department of Justice are reminding companies that, in responding to grand jury subpoenas and second requests, there is an obligation to preserve data and communications created using “new methods of collaboration and information sharing tools, even including tools that allow for messages to disappear via ephemeral messaging capabilities.” The government has specifically called out Slack, Microsoft Teams and Signal as being some of the applications of concern “designed to hide evidence.”

The government says that while there has always been an obligation to produce information from ephemeral messaging applications in investigations and litigations, the purpose of the reminder is to ensure that counsel and clients do not “feign ignorance” when choosing to use ephemeral messaging to do business. Thus, the FTC and DOJ will include new, explicit language in subpoenas and other requests specifically stating that data from ephemeral messaging applications must be preserved. A failure to meet that obligation could result in obstruction of justice charges.

More generally, once a company has been served with a subpoena, a document hold should be prepared and circulated right away. A document hold is a written notification to relevant employees not to delete, destroy or alter any electronic or paper materials potentially relevant to the subpoena. The notice must unpack what that language means in plain English and should be conservative in describing what “potentially relevant” means—(remember that just because something is being preserved does not necessarily mean it will have to be produced.)

The document hold should apply to all types of messaging (text, IM, DMs, ephemeral) to ensure that all existing and going-forward materials will not be deleted. The relevant persons with IT expertise should certify internally that preservation is occurring effectively, that all auto-delete functions have been turned off, and that back-up tapes are not being purged automatically.

It’s also a good idea to instruct employees not to talk to each other about the subpoena or the underlying subject matter. When employees talk to each other, it can create the appearance of collusion—i.e., employees are coordinating with each other about what to say or not say to the lawyers or to the government. This can raise obstruction suspicions that may only grow if the discussions occur over ephemeral messaging applications that employees think will not leave a paper trail behind.

If employees believe that they or others have violated, or behaved inconsistently with, company policies or relevant laws, employees should discuss that only with in-house or outside counsel—not with each other.

Continue reading →

Antitrust Agency Publishes Revised HSR Notification Thresholds and Filing Fees For 2024

January 23, 2024 | Bona Law PC

Authors: Steven Cernak and Luis Blanquez

On January 22, 2024, the Federal Trade Commission (FTC) issued its usual annual announcement to increase the Hart-Scott-Rodino (HSR) Act thresholds. The 2024 thresholds will take effect 30 days after publication in the Federal Register, which is expected soon, so the thresholds likely will be effective in late February.

HSR requires the parties to submit certain information and documents and then wait for approval before closing a transaction. The FTC and DOJ then have 30 days to determine if they will allow the merger to proceed or seek much more detail through a “second request” for information. The parties may also ask for “Early Termination” to shorten the 30-day waiting period, although for nearly two-years this option has been––and continues to be––suspended.

Continue reading →

FTC Sues IQVIA To Block Healthcare Programmatic Advertising Acquisition

January 3, 2024 | Bona Law PC

Authors: Molly Donovan & Steven Cernak

Update: The FTC has won a preliminary injunction to stop IQVIA from acquiring Propel Media. The judge (Judge Ramos in the Southern District of New York) ruled the injunction is in the public’s interest and the FTC has shown a reasonable probability of a substantial impairment in competition should the deal proceed. A written opinion is not available as of this post (January 3, 2024).

***

The Federal Trade Commission has sued to block IQVIA’s proposed acquisition of Propel Media—a deal the FTC says would combine two of the top three providers of programmatic advertising that target U.S. healthcare providers on a one-to-one basis. The FTC says IQVIA and Propel both operate demand-side platforms or “DSPs” (called Lasso and DeepIntent, respectively) in an already-concentrated “healthcare provider programmatic advertising market” (a “subset of the total healthcare digital advertising industry”). And the FTC argues the deal would result in further concentration in that market and would significantly decrease advertising competition, which would contribute to higher prescription drug costs for U.S. consumers.

The FTC has filed an administrative complaint and has asked the Southern District of New York to block the acquisition until the administrative trial is completed—projected for December 2023. The FTC requested that the injunction issue in the next few days on or before July 21.

According to the FTC, programmatic advertising matches buyers and sellers of advertising space in virtual auctions that occur in seconds or less. Programmatic advertising automates the more traditional negotiations between advertiser and publisher of print or digital ads. DSPs like Lasso and DeepIntent provide programmatic advertising to healthcare advertisers specifically (i.e., pharmaceutical companies and their advertising agencies).

According to the FTC, IQVIA and Propel are the leading DSPs providing programmatic advertising that targets healthcare providers on a one-to-one basis. This means IQVIA and Propel have the scope and quality of healthcare data to identify individual doctors—and their digital devices—who are relevant to a particular ad campaign. DSPs target healthcare providers because they make the “prescribing decisions” and shape consumers’ perceptions of drugs and drug brands.

Although the FTC admits that there are many “generalist” programmatic advertisers, the FTC urges that healthcare DSPs operate in a distinct relevant market specific to healthcare advertising with clients who have unique advertising demands.

The FTC calls the proposed acquisition presumptively unlawful under the Horizontal Merger Guidelines and caselaw. The FTC’s major concerns are twofold: the combination would eliminate “head-to-head” competition between 2 of only 3 competitors in the relevant market and would enhance IQVIA’s ability to reduce or eliminate potential competition by refusing to sell its healthcare data to would-be competitors or by selling it at anticompetitive prices. The FTC charges that IQVIA is the world leader in terms of the scale and quality of its healthcare data. And while IQVIA currently sells that data to DSPs and others, the FTC says IQVIA would be positioned to increase price and/or reduce access to data critical to one-to-one healthcare DSPs should the deal go through.

Continue reading →

Five Key Takeaways from Fifth Circuit’s Illumina Merger Review Opinion

December 26, 2023 | Bona Law PC

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.

Continue reading →

Antitrust for Kids: Back to School with Tough New Rules—The Draft Merger Guidelines

September 5, 2023 | Bona Law PC

Author: Molly Donovan

You may remember Gordon—in many ways, he was dominant in the 5^th grade, and though his behavior was questionable at times, he was very popular.

I’m writing this story because Gordon is starting a new school year and has ascended to MIDDLE SCHOOL. Very cool, but very intimidating—even for Gordon. For one thing, there is an entirely new set of rules about how students are supposed to behave.

In elementary school, there are rules, of course, but they’re intuitive (no pushing, no yelling, please share) and all kids are encouraged to form friendships with all other kids. You can walk to lunch with any other kid you choose to. You can play at recess with any group of kids you want to. This made things easy for Gordon who was a natural at buddying-up with classmates and forming new relationships with ease.

In middle school, things aren’t the same—there’s actually a rule against the buddy system that feels contrary to everything Gordon previously knew. Basically, the rule is: you cannot run around in friendship packs—or duos even—unless they are teacher approved. Why? The principal says the school is trying to eliminate friend groups that are probably going to cause trouble—by, for example, ganging up against the weaker kids who aren’t popular and don’t like gym, or getting too powerful on the playground and pestering the younger kids. The rule is not against combinations that will cause trouble, only that probably will.

You’re likely wondering how it will be determined whether a particular friend group meets that standard. Good question. Apparently, the test is not whether the parents and students —experts on who’s who in the ever-changing social dynamics of middle schools—believe a certain combination spells trouble. The principal and teachers will decide based on dusty old textbooks with opinions written years and years ago (we’re talking 1970s) about tween society.

Query whether that’s the best way. But that’s the way the teachers want to do things.

Did it work out? The school year just started, so it’s too soon to tell and the rules are in purgatory—they’re being publicly tested but are not official yet.

Continue reading →

Lessons from the FTC’s Settlement of the Amgen/Horizon Merger Challenge

September 5, 2023 | Bona Law PC

Authors: Steven Cernak and Luis Blanquez

In case you missed it on the eve of a holiday weekend, the FTC and several states settled their challenge of Amgen’s acquisition of Horizon last Friday. The case might have seemed like an odd one to antitrust and merger practitioners looking only at the last few decades of merger review; however, both the challenge and the settlement offer some lessons for future merging parties — and perhaps even the FTC itself.

Parties, Transaction, Challenge, Settlement

Both Amgen and Horizon are large pharmaceutical companies. According to the original complaint, each company produces drugs for which there are few if any competitors. Even according to that complaint, Amgen and Horizon do not compete with, supply to, or buy from each other.

The parties described the transaction as allowing Amgen to use its broader distributional reach to bring Horizon’s products to more consumers. The FTC, and later several states, alleged that Amgen was proficient at wringing profit out of its monopolized drugs in various ways, especially with pharmacy benefit managers (PBMs). The enforcers feared that Amgen would do the same with Horizon’s drugs, especially by bundling Amgen and Horizon drugs. The parties disputed that they had the ability or incentive to engage in such behavior but still offered to enter an order promising not to take such actions.

The FTC challenged the transaction in its internal tribunal and sought a preliminary injunction in federal court in the Northern District of Illinois to prevent the closing of the transaction. The states later joined that challenge. The parties countered with both antitrust arguments and constitutional challenges to the FTC’s structure and procedures, much as other parties like Illumina have.

Last Friday, the parties and enforcers settled all the challenges. The parties agreed to not bundle any Amgen product with Horizon’s two key products––Tepezza or Krystexxa––its medications used to treat thyroid eye disease (TED) and chronic refractory gout (CRG) or offer certain rebates to exclude or disadvantage any product that would compete with Tepezza or Krystexxa. Amgen agreed to seek FTC approval for any acquisition of pharmaceuticals competitive with Horizon’s. Finally, Amgen will submit to a compliance monitor and make annual reports for the fifteen-year duration of the order. Further details and analysis of the proposed order are here.

Analysis of the Challenge

The FTC’s challenge of the transaction might have looked different to merger review practitioners familiar only with challenges of proposed mergers of current competitors; however, the theory behind the challenge has some history. Unfortunately for the FTC, the last several decades worth of that history did not support the challenge.

When Congress passed and amended Clayton Act Section 7, it did not prohibit all mergers; instead, it prohibited only those whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” This standard does not require the FTC to show that the merger will have the proscribed competitive effect with certainty, but it must establish that the competitive effect is more than a mere possibility.

Both Congress and the courts have emphasized that something more than a mere possibility is necessary for a successful Clayton Act Section 7 challenge. The Congressional report described the necessary finding as follows: “The use of these words means that [the amended Clayton Act] would not apply to the mere possibility but only to the reasonable probability of the prescribed effect.” (emphasis added).

The Supreme Court in Brown Shoe clearly drew the “certainties/probabilities/possibilities” distinction:

Congress used the words ‘may be substantially to lessen competition’ (emphasis supplied), to indicate that its concern was with probabilities, not certainties. Statutes existed for dealing with clear-cut menaces to competition; no statute was sought for dealing with ephemeral possibilities. Mergers with a probable anticompetitive effect were to be proscribed by this Act.

Courts recognize only a few ways that the FTC or any challenger can successfully show a probability of a lessening of competition or tendency to create a monopoly.

First, challengers like the FTC can allege that the parties to the proposed transaction currently compete. Such a “horizontal” merger can lessen competition or create a monopoly by allowing the merged parties to unilaterally raise prices or otherwise harm consumers or implicitly coordinate with the remaining competitors on similar actions. Here, the FTC did not allege that any of Amgen’s or Horizon’s products currently compete.

Second, challengers can allege that one of the parties is a “potential competitor” of the other party. Such “potential competition” mergers can lessen competition or create a monopoly by eliminating the current threat or actual entry into a new market by one of the parties to the transaction. Here, the FTC did not allege that Amgen or Horizon is a potential entrant into any of the markets in which the other party competes.

Third, challengers can allege that the parties have or could have a supplier-customer relationship. In certain circumstances, such “vertical” mergers can lessen competition or create a monopoly in a few ways, principally by foreclosing access to rival firms to inputs, customers, or something else they need to effectively compete with the merged parties. Here, the FTC did not allege that Amgen and Horizon are in or could be in a supplier-customer relationship.

Instead, the FTC appeared to rely on the “entrenchment” variant of the “conglomerate” competition theory, claiming that “Post-Acquisition, Amgen will possess the ability and incentive to sustain and entrench its dominant positions in the markets for [Horizon’s products].”

Under this theory, the FTC alleged that after the acquisition, Amgen would have both the ability and incentive to more effectively exploit the alleged monopoly power already possessed by Horizon. Unfortunately for the FTC, this theory has been abandoned as discredited since the 1970s. According to the latest version of the ABA Antitrust Law Developments, “[After Procter & Gamble in 1967], courts and the FTC applied the entrenchment theory very cautiously and liability has not been found in any case on this theory since the 1970s . . . and its subsequent antitrust decisions suggest it is unlikely that the Court will again apply [the theory].” Even the FTC itself just three years ago told an international body that “[c]onglomerate mergers that raise neither vertical nor horizontal concerns are unlikely to be problematic under U.S. merger law.”

And there is good reason for courts to have grown skeptical of the theory — it cannot support an allegation that the probable effect of a proposed merger “may be substantially to lessen competition, or to tend to create a monopoly.”

Certainly, the theory cannot support an allegation that the proposed merger probably will tend to create a monopoly. After all, under the theory, the seller’s products already enjoy monopoly power. The proposed merger would not have created any monopoly power. Here, the FTC alleged that Horizon already enjoys a monopoly with its two key products.

The theory also could not support an allegation that the proposed merger probably will substantially lessen competition. Because the theory required so many possible actions by both the parties to the transaction and third parties, the potential anticompetitive harm is nothing more than the “ephemeral possibility” that the Supreme Court has correctly said is not covered by the Clayton Act.

Here, as detailed by the parties in their brief, the following actions had to occur before the ephemeral possible harm alleged by the FTC would occur: The handful of products identified in the FTC’s Amended Complaint had to overcome significant clinical development and regulatory hurdles; AND at that hypothetical and uncertain time, those other products, though differentiated from Horizon’s products, must threaten them competitively; AND at that same uncertain future time, the alleged competitive position of Amgen’s products must not have changed such that Amgen will have the ability and incentive to bundle them with Horizon’s products in ways that will harm competition.

But even if the parties were wrong and the actions did happen, the FTC could have acted at that time by bringing a monopolization challenge. Now, if those ephermeral possibilities do occur, the FTC will have an easier time alleging a violation of the consent order.

Lessons for Parties and the FTC

For future merging parties in the pharmaceutical industry, this FTC action (and Chairwoman Khan’s statement accompanying the settlement) make clear that the agency will flyspeck every proposed transaction and challenge many more than in the past. These include the Pfizer/Seagen or Biogen/Reata pending transactions, for instance. As Henry Liu, Director of the FTC’s Bureau of Competition highlighted in the press release: “Today’s proposed resolution sends a clear signal that the FTC and its state partners will scrutinize pharmaceutical mergers that enable such practices, and defend patients and competition in this vital marketplace.” The FTC’s ongoing investigation of PBMs means that FTC actions in this area might not be confined to merger challenges.

Continue reading →

Still More “Suddenly Classic” Antitrust Cases from the New Merger Guidelines: General Dynamics, Marine Bancorporation and Procter & Gamble

August 7, 2023 | Bona Law PC

Authors: Steven Cernak and Luis Blanquez

As we explained in a prior post, the new draft merger Guidelines issued recently by the FTC and DOJ cite to several older court opinions that may be unfamiliar to antitrust practitioners who have been focused for decades exclusively on earlier versions of the Guidelines. In the last post, we covered two such cases, Philadelphia National Bank and Pabst. Below, we cover three more of such newly “classic cases:” General Dynamics, Marine Bancorporation and Protect & Gamble.

General Dynamics

It is not surprising that the New Guidelines cite General Dynamics seven times; after all, the case has been cited in hundreds of opinions and even more law review articles and treatises. Nor are some of the citations surprising. For example, one citation (FN 93) quotes the case for the proposition that “other pertinent factors” besides market share might mandate a conclusion that competition would not be lessened by a merger. Similarly, citations about market definition make sense because the definitions of both the product and geographic markets were contentious points in the opinion. But for reasons we explain below, the citations to the case for parts of the New Guidelines that would challenge mergers on the basis of just an increase in concentration, while accurate, seem out of step with the opinion as a whole.

General Dynamics is a 1974 opinion with the 5-4 majority opinion written by Justice Stewart. Eight years before, Justice Stewart had written the dissent in Von’s Grocery. In that dissent, Justice Stewart penned one of his most famous quotes (no, not that one): “The sole consistency that I can find is that, in litigation under § 7, the Government always wins.” More substantively, Justice Stewart took issue with the majority’s market definition analysis. Instead of simply assuming a “Los Angeles grocery” market as the majority did, Justice Stewart would have applied a “housewife driving test” that, despite the antiquated name, was similar to the hypothetical monopolist test of later Guidelines. Also, instead of assuming anticompetitive effects from “high” market shares and increasing competition, as did the majority, Justice Stewart would have considered other pertinent factors, like low barriers to entry, turnover of firms, and changes to the Los Angeles population.

Eight years later, Justice Stewart applied similar concepts in General Dynamics, but this time for the majority. In this case, one Midwest coal supplier gradually purchased the voting securities of another Midwest coal producer. The DOJ produced evidence of high and increasing concentration in coal markets. Depending on the geographic market, the share represented by the top four firms went from 43-55% to 63-75% as the shares were being acquired. The lower court, however, found that there was cross-elasticity of demand among coal and other energy sources, like oil, natural gas, nuclear, and geothermal energy, so the proper product market was a broader “energy market.” Justice Stewart spoke approvingly of such a market analysis but, because of the analysis we describe below, found it unnecessary to opine on market definition. Significantly, the dissent agreed with the lower court that reviewing evidence of cross-elasticity of demand was appropriate; however, it thought that evidence supported a finding of a submarket for coal for certain customers, especially electric utilities. (The majority and dissent had similar disagreements about the geographic market definition.)

More important to the lower court and Justice Stewart were “other pertinent factors” that made shares of past production unhelpful in predicting future competitive effects of the merger. Here, the selling company’s reserves of coal were much smaller than its past or current production. For example, it controlled less than 1% of the coal reserves in Illinois, Indiana, and western Kentucky. As a result, its future competitive strength was much worse than a review of any current market shares would indicate. Again, the dissent did not dispute that such “other pertinent factors” were relevant to the analysis; however, it thought the facts did not support finding the seller to be so weak going forward and that much of that evidence came from post-acquisition transactions.

Given the overall facts and tone of both opinions in General Dynamics, it is odd that the New Guidelines cite it for support for challenging mergers that further a trend toward concentration. The New Guidelines accurately quote Justice Stewart’s opinion:

[The Court’s] approach to a determination of a “substantial” lessening of competition is to allow the Government to rest its case on a showing of even small increases of market share or market concentration in those industries or markets where concentration is already great or has been recently increasing…

But in the opinion, that sentence is followed by these three sentences:

…the question before us is whether the District Court was justified in finding that other pertinent factors affecting the coal industry and the business of the appellees mandated a conclusion that no substantial lessening of competition occurred or was threatened by the acquisition of United Electric. We are satisfied that the court’s ultimate finding was not in error. In Brown Shoe v. United States we cautioned that statistics concerning market share and concentration, while of great significance, were not conclusive indicators of anticompetitive effects … (cleaned up)

The New Guidelines citation to General Dynamics in its footnote 93 for the proposition that “other pertinent factors” besides concentration trends should be considered in merger analysis probably better reflects the overall tenor of the case’s opinions.

Marine Bancorporation

The Guidelines mention Marine Bancorporation seven times to highlight that when a merger eliminates a potential entrant into a concentrated market, it may substantially lessen competition or tend to create a monopoly. Marine Bancorp., 418 U.S. 602, 630 (1974).

The Guidelines explain that to determine whether one of the merging parties is a potential entrant, the Agencies examine:

whether one or both of the merging firms had a reasonable probability of entering the relevant market other than through an anticompetitive merger. The Agencies’ starting point for assessment of a reasonable probability of entry is objective evidence. For instance whether the firm has sufficient size and resources to enter; evidence of any advantages that would make the firm well-situated to enter; evidence that the firm has successfully expanded into other markets in the past or already participates in adjacent or related markets; evidence that the firm has an incentive to enter; or evidence that industry participants recognize the company as a potential entrant Marine Bancorp., 418 U.S. 636–37 (1974); and,
whether such entry offered “a substantial likelihood of ultimately producing deconcentration of [the] market or other significant procompetitive effects.” If the merging firm had a reasonable probability of entering the concentrated relevant market, the Agencies will usually presume that the resulting deconcentration and other benefits that would have resulted from its entry would be competitively significant, unless there is substantial direct evidence that the competitive effect would be de minimis.

This is known as actual potential competition. The Guidelines also describe that under perceived potential competition, the acquisition of a firm that is perceived by market participants as a potential entrant can substantially lessen competition by eliminating or relieving competitive pressure. And in FN 42 the draft includes that this elimination of present competitive pressure is sometimes known as an anticompetitive “edge effect” or a loss of “perceived potential competition.” E.g., Marine Bancorp., 418 U.S. at 639.

Procter & Gamble

The Guidelines mention Procter & Gamble six times to explain how the Agencies examine (i) whether one of the merging firms already has a dominant position that the merger may reinforce, and (ii) whether the merger may extend or entrench that dominant position to substantially lessen competition or tend to create a monopoly in another market.

The Guidelines highlight that to identify whether one of the merging firms already has a dominant position, the agencies look to whether (i) there is direct evidence that one or both merging firms has the power to raise price, reduce quality, or otherwise impose or obtain terms that they could not obtain but- for that dominance, or (ii) one of the merging firms possesses at least 30 percent market share. Procter & Gamble Co., 386 U.S. 568, 575 (1967).

If this inquiry reveals that at least one of the merging firms already has a dominant position, the Agencies then examine whether the merger would either entrench that position or extend it into additional markets. As a mechanism of whether a merger may entrench a dominant position, the Guidelines include, among others, entry barriers. A merger “may substantially reduce the competitive structure of the industry by raising entry barriers and by dissuading the smaller firms from aggressively competing.” Procter & Gamble Co., 386 U.S. 568, 578 (1967).

As in the case of General Dynamics, it is puzzling to see how the Guidelines cherry pick with the citations of Marine Bancorp and Protect & Gamble. Indeed, both cases discuss potential entry in concentrated markets and whether one of the merging firms already has a dominant position that the merger may extend to substantially lessen competition. But they also criticize––at length––the PNB 30% structural presumption and lack of economic analysis, something the Agencies completely ignore in this draft.

Continue reading →

More “Suddenly Classic” Antitrust Cases from the New Merger Guidelines: Philadelphia National Bank and Pabst

August 1, 2023 | Bona Law PC

Authors: Steven Cernak and Luis Blanquez

As we explained in a prior post, the new draft merger Guidelines issued recently by the FTC and DOJ cite to several older court opinions that might not be familiar to antitrust practitioners who have been focused for decades exclusively on earlier versions of the Guidelines. Below, we cover two more of such newly “classic cases:” Philadelphia National Bank and its presumptions about market shares and competition and Pabst, which the new Guidelines cite for its language on trends in concentration.

Philadelphia National Bank (PNB)

The New Guidelines mention PNB seven times to basically highlight the Supreme Court’s position that possible economies from a merger cannot be used as a defense to illegality. And they do so by including a footnote with the well-known cite from the same case: “Congress was aware that some mergers which lessen competition may also result in economies, but it struck the balance in favor of protecting competition.”

The Guidelines fully develop this argument in Guideline 1. This Guideline first explains that concentration refers to the number and relative size of rivals competing to offer a product or service to a group of customers. It further states that when a merger between competitors significantly increases concentration and results in a highly concentrated market, the Agencies presume that a merger may substantially lessen competition based on market structure alone.

The entire text of the Guideline is grounded on the PNB case and what Assistant Attorney General Jonathan Kanter mentioned in June 2023 during his speech at the Brookings Institution’s Center on Regulation and Markets Event “Promoting Competition in Banking”

In that case, in 1961 the DOJ challenged the merger of the second and third largest commercial banks in metropolitan Philadelphia. The district court allowed the merger that would have created a bank with 30 percent of the relevant market, raising the two-firm concentration ratio from 44 percent to 59 percent. The Supreme court reversed the case and established the precedent that certain mergers are so clearly likely to lessen competition that they must be prohibited in the absence of clear evidence to the contrary:

[A] merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects. 374 U.S. at 363

In other words, without attempting to specify the smallest market share that would still be considered to threaten undue concentration, the Supreme Court confirmed that a post-merger market share of 30 percent or higher unquestionably gave rise to the presumption of illegality. Later on, in General Dynamics––a case we will discuss in our next article––the Court approved a merger with market shares above 30% because “other pertinent factors” indicated the merger would not substantially lessen competition. (The New Guidelines do not discuss that aspect of General Dynancs, despite mentioning the case in the same footnote.)

That’s why for the last 40 years the Government has been making its prima facie case by simply showing 30 percent of the market is involved in the merger, abandoned that 30 percent presumption, focusing instead on competitive effects and other relevant factors that might affect them, such as the structure of the market and potential entry.

As former Commissioner Joshua D Wright and Judge Douglas Ginsburg wrote in Philadelphia National Bank: Bad Economics, Bad Law, Good Riddance:

The problem for today’s courts in applying this semicentenary standard is that the field of industrial organization has long since moved beyond the structural presumption upon which the standard is based. The point is not that 30 percent is an outdated threshold above which to presume adverse effects upon competition; rather, it is that market structure is an inappropriate starting point for the analysis of likely competitive effects. Market structure and competitive effects are not systematically correlated. Nor does the rebuttable nature of the 30 percent presumption reduce it to a mere annoyance, an exercise the clutters up litigation but is soon enough dispatched by the defendant’s showing; the practical effect of beginning the analysis of a merger with an essentially irrelevant presumption is to shift the burden of proof from the plaintiff, where it rightfully resides, to the defendant, as though the law prohibited all mergers except those that could be proved acceptable by their proponents.

The article describes all the flaws about this outdated structural presumption. Despite those flaws, PNB has never been officially overruled and these New Guidelines might just give it new life, at least until the courts get involved.

Pabst

The new Guidelines cite U.S. v. Pabst three times, all in connection with the new Guideline that the effect of a merger “may be substantially to lessen competition” if it “contributes to a trend toward concentration.” The 1966 case reversed a lower court and found that evidence of the probable anticompetitive effect of the merger of Pabst and its brewery competitor Blatz in 1958 was sufficient to find a Section 7 violation.

The key issue was whether the DOJ had done enough to show one or more of these geographic markets: the entire United States; the three-state area of Wisconsin, Illinois, and Michigan; or just Wisconsin. Writing for the Court, Justice Black found that the evidence of “the steady trend toward concentration in the beer industry” was sufficient for a violation, no matter how the geographic market was defined.

Continue reading →