Takeaways From the Illumina-Grail Merger Challenge Saga

Episode Summary

Illumina announced in December that it would divest GRAIL, the result of a merger challenge with many twists and turns both in the United States and in Europe.

In this episode of the “Fierce Competition” podcast, Skadden attorneys Julia York (partner, Washington, D.C.), Ingrid Vandenborre (partner, Brussels) and Michael Sheerin (counsel, New York) talk about the three-year Illumina/GRAIL saga. In particular, they focus on three key areas of the Fifth Circuit's ruling that appear most likely to impact future merger enforcement efforts in the United States.

Tune in to hear about Illumina’s divestment of GRAIL, how it got there and what we can learn from this winding legal battle.

Key Points

• Overview of Illumina and GRAIL: Illumina is one of the world's largest DNA sequencing companies. It develops, manufactures and markets integrated systems for genetic analysis. GRAIL is a biotechnology company that uses DNA sequencing to develop multi-cancer early detection tests (MCEDs). GRAIL was founded by Illumina in 2015.
• The EU and EC's Assessment of Illumina/GRAIL: The European Commission has prohibited, under the EU Merger Regulation, the implemented acquisition of GRAIL by Illumina. Illumina did not offer remedies sufficient to address competition concerns.
• Legacy of Illumina/GRAIL: Illumina’s decision to sell follows a Fifth Circuit ruling that vacated a 2023 FTC decision requiring the divestiture but that endorsed certain aspects of the FTC’s decision. The case offers some guidance for companies considering a merger, particularly a vertical merger, in the United States.

Voiceover (00:00):
Welcome to Fierce Competition, a podcast from Skadden’s Global Antitrust and Competition group that explores antitrust policy and enforcement around the world. Join our colleagues from across the continent as we discuss the latest developments and what they mean to you in an increasingly complex legal and regulatory landscape.

Julia York (00:21):
Hello, everyone and welcome to our February 2024 edition of Fierce Competition. I’m Julia York. I’m a partner in the Antitrust and Competition Group at Skadden here in the Washington, DC office. Joining me today are Ingrid Vandenborre, a partner in our Brussels office, also in the Antitrust and Competition Group, as well as Mike Sheerin, counsel in our New York office, and we’re excited to be here today to talk about the three-year saga that was Illumina-Grail.

(00:48):
I think it’s fair to say that it’s a merger challenge unlike any other I’ve seen in my career with lots of twists and turns both in the United States and in Europe. The spoiler alert, as many of you probably already know, is that Illumina announced in December that it would divest Grail, but we’ll talk today about how it got there and what we can take away from the transaction. So just to start with a bit of an overview, Illumina is one of the world’s largest DNA sequencing companies.

(01:15):
It develops, manufactures, and markets integrated systems for genetic analysis in particular next-generation sequencing platforms, and those are called NGS platforms. Grail is a biotechnology company that uses the DNA sequencing to develop multicancer early detection tests, or MCEDs. Grail had actually been founded by Illumina in 2015, and Illumina maintained a controlling stake until 2017 when it brought in outside investors to raise capital needed to bring that Grail MCED test from concept to clinical studies.

(01:49):
The spinoff left Illumina with a 12% equity stake. And by September 2020, Grail had raised $1.9 billion from venture capital and strategic partners. On September 8th, 2020, Illumina entered into an agreement to reacquire Grail for $8 billion with the goal of bringing Grail’s now developed MCED test to market, and the merger attracted close scrutiny in both the United States and Europe.

(02:15):
And so just to give a short overview of the various steps that were taken by the regulatory authorities both in the United States and in Europe, just to run through it to give you a bit of more background. In the United States, the parties made their HSR filing in October 2020 and got a second request in November 2020. In Europe, the deal wasn’t notifiable because it fell below the notification thresholds for the EU and for the national member states.

(02:42):
But in February 2021, the EU proactively invited the National Competition Authorities, the EU member states to make referrals to the EC, despite Grail having no presence in Europe and no revenue in the EU. And then France in early March 2021 requested that the EC examine the deal under the little-used Article 221 of the EU merger regulation and had support from a couple of other EU countries. And Illumina challenged the French referral request before national courts, but failed, and also challenged one from the Dutch government.

(03:18):
So back in the United States, the FTC sued to block the merger. At the end of March 2021, the Federal Trade Commission issued a so-called part three administrative complaint, so the litigation would proceed in its in-house administrative court, but at the same time filed in federal district court for a preliminary injunction seeking to temporarily block the transaction. The FTC alleged that as the dominant provider of NGS, Illumina had the ability to foreclose Grail’s MCED test rivals.

(03:48):
And that after the acquisition, Illumina would have the incentive to foreclose firms that threatened Grail. And the result, according to the FTC, was that the proposed acquisition would diminish innovation in the United States market for MCED tests. So just a reminder that the Federal Trade Commission can’t temporarily pause the deal on its own. It has to go to federal court to seek that injunction, which is another important piece of the story.

(04:14):
So a few weeks after that, the EC accepted jurisdiction in a context of a new policy focus on so-called killer acquisitions and the general court of the EU confirmed the EC’s jurisdiction. Following those developments in Europe, in late May 2021, the FTC withdrew its federal complaint for a preliminary injunction citing the ongoing or European review as a basis for mootness and to conserve judicial resources. Then a few months after that, the EU opened an in-depth phase two investigation into the transaction on a similar foreclosure theory.

(04:48):
In the US, the litigation proceeded in the FTCs administrative court in what’s known as part three litigation. But then in August 2021, Illumina publicly announced completion of the transaction, so it actually closed and acquired Grail. The EC opened a gun jumping investigation in October 2021 and adopted interim measures to restore and maintain the conditions of effective competition while the merger review was ongoing and required that Illumina and Grail be kept separate.

(05:16):
The FTC’s part three litigation concluded on September 1st, 2022 with a decision from the administrative law judge ruling in the merging party’s favor. So that was then appealed by complaint counsel to the full commission. And a few days later in the EC, the EC prohibited the transaction in phase two. Back in the US, in April 2023, the full commission, which was hearing the appeal from the administrative law judge, issued an opinion and order reversing the ALJ’s dismissal of the proceeding and required Illumina to divest Grail.

(05:47):
Illumina a few months later petitioned the Fifth Circuit Court of Appeals to review the commission’s order and opinion. And then in July 2023, the EC fined Illumina 432 million euros for intentionally breaching its standstill obligations. And that decision is also still pending. The EC then ordered Illumina to unwind the completed acquisition of Grail that has also been challenged and is still ongoing.

(06:13):
And then finally in mid 2023, the Fifth Circuit issued its decision determining that substantial evidence did support the Federal Trade Commission’s conclusions that the relevant market was the market for the research development and commercialization of MCED tests in the United States. That the complaint counsel had carried its initial burden of showing that the Illumina-Grail merger was likely substantially to lessen competition in that market, and that Illumina had not identified recognizable efficiencies to rebut the anti-competitive effects of the merger.

(06:43):
However, the court vacated the commission’s order and remanded for further proceedings based on the incorrect standard that the commission had applied in reviewing Illumina’s rebuttal evidence. So a few days after that decision came out, Illumina announced it would divest Grail, and that process is ongoing despite the still pending appeals in the EC. So with that background in mind, I’m going to hand it over to Mike to give a little bit of insight and analysis of the opinions in the United States.

Michael Sheerin (07:14):
Thanks, Julia. So there’s certainly a lot to unpack from the winding legal battle that occurred in the United States, including three legal decisions, so one from the administrative law judge, one from the commission itself, and then most recently the Fifth Circuit opinion. But today we really want to focus on what we view as the three key areas of the Fifth Circuit’s ruling that appear most likely to impact future merger enforcement efforts here in the United States.

(07:39):
As Julia mentioned, the FTC has claimed ultimate victory because the parties did walk away from the transaction after the Fifth Circuit ruling. But the reality is the Fifth Circuit actually vacated the commission’s decision ordering the Grail divestiture finding that the commission had not appropriately evaluated the impact of Illumina’s so-called open offer.

(07:58):
So for background, on the same day that the FTC first sued to enjoin the merger in federal court in the United States, the parties announced that they had developed a standardized contract that would make Illumina’s NGS platform available to any US customer who wanted it. And so the terms of the offer was basically an open contract that was made publicly available. It was irrevocable.

(08:21):
|It allowed any customer who wanted access to sign up through August 2027, and it committed Illumina to provide its NGS platform to anyone who wanted it through the end of August 2033 at the same price and with the same access to services and products that Illumina provided to Grail during the same time period. So the purpose of the offer was clear. The FTC was worried Illumina would foreclose Grail’s competitors, but the open offer in the party’s minds at least would make that impossible.

(08:50):
And from a strategy perspective, the open offer, even if not accepted by the FTC, set the parties up to what we call litigate the fix. So go to court and say that you’ve offered this remedy that really addresses all of the competitive concerns with the hope that you can convince a judge that the FTC’s case is meritless and any alleged harm has already been remedied. Not surprisingly, the FTC was not persuaded by the open offer and persisted with their case.

(09:16):
However, the administrative law judge was persuaded, that the open offer went a long way towards mitigating the FTC’s foreclosure concerns, finding that it “effectively constrains Illumina from harming Grail’s alleged rivals and rebuts the inference that future harm to competition is likely.” On appeal to the commission, the same commission that voted out the complaint and had originally not found the open offer compelling, not surprisingly, disagreed with the ALJ’s findings and found that the open offer did not sufficiently address their competitive concerns.

(09:48):
Interestingly though, while the commission decision itself was unanimous, there was significant disagreement between the commissioners as to the legal standard that should apply to remedies. The parties had argued that the remedy had to be considered as part of the FTC’s prima facie case, which really meant that the FTC had the burden of proving that the merger taking into account the open offer still violated Section 7 of the Clayton Act.

(10:13):
Complaint counsel and the majority of commissioners found that that was not the appropriate standard and thought that the existence of the open offer did not need to be included or considered as part of the prima facie case or at the liability stage at all. But that instead, the commission only needed to determine whether the original transaction without regard to the open offer violated Section 7 of the Clayton Act.

(10:36):
Under this view, the remedy would only become relevant after liability had been determined and then the burden would be solely on the parties to prove that the open offer fully restored any competition lost from the merger, which indeed is a high hurdle. Commissioner Wilson proposed a different approach where a remedy needs to be evaluated, in this case, the open offer needs to be evaluated as part of the prima facie case, but ultimately the burden rests on the parties to show that it should offset the competitive harm alleged by the commission.

(11:07):
While the commission had said that the remedy had to restore all of the competition loss from the merger and “preserve exactly the same level of competition that existed before the merger,” the Fifth Circuit held that that went too far, that a remedy merely must “sufficiently mitigate the merger’s effect” such that it would no longer be likely to “substantially lessen competition.” So you can have a remedy that may not fully restore competition loss from the merger, but so long as it goes so far to mitigate the harm such that it’s no longer a substantial lessening of competition, that can be enough.

(11:40):
So why does this matter? I’ll talk a little bit about this in the takeaways, but it makes it materially easier for parties going forward to litigate the fix. So the commission has long held this view that the burden parties face to establish a remedy is sufficient to address competitive concerns is extraordinarily high. Fifth Circuit disagreed. They said that a remedy, especially of the type offered here, needs to be taken into account in evaluating at the outset whether a merger is actually likely to substantially lessen competition.

(12:09):
And what it does more broadly would combine with some other cases, which I’ll mention, is it creates some very unhelpful precedent that the FTC is going to have to overcome in future merger challenges. The other perhaps less impactful, but relevant item I wanted to touch on was the approach the commission and then the Fifth Circuit took to assessing competitive effects of the merger. So vertical merger, announced as a vertical merger case, where the analysis really focused on the impact of the deal on competitors at either level of the supply chain.

(12:38):
So here the focus was on whether Illumina would withhold its DNA sequencing technology from would be competitors to Grail’s cancer tests. As alleged by the FTC, Illumina’s refusal to provide its technology to these third parties would stifle competition in cancer screening and ultimately harm consumers downstream.

(12:57):
Over the past several decades, the standards used to assess the potential for anti-competitive effects in a vertical merger has always been what we call the ability and incentive test, with the merge firm have both the ability to foreclose competitors, as well as the incentive to do so. Most of the action in vertical cases has always been on the second prong, which requires a fairly detailed data and economic intensive exercise to analyze whether the merge firm would make more money from withholding the product or service than it would from continuing to supply it to third parties.

(13:29):
So here Lumina would be foregoing the sales of its NGS platform to competing cancer screening test producers. So you have to take into account what’s the money Illumina would stand to lose. And on the other side of the ledger is what would the expected gain be from that foreclosure? So how much would Illumina expect to recoup by selling more Grail tests downstream? So that’s been the standard that has been used probably for the last 40 years in the United States. But in the Illumina-Grail decision, the commission also introduced an alternative test.

(14:01):
So they looked at the ability incentive test, but they also reintroduce what we call the Brown Shoe test, which comes from a 1962 Supreme Court vertical merger case, which for lack of a better description, uses some squishier standards for determining if a vertical merger could raise issues. And as articulated by the commission and its decision, the Brown Shoe test allows the FTC to prove a merger is anti-competitive if at least three of any of the following factors would support an inference of illegality.

(14:31):
So those factors, let’s list them quickly, are the nature and economic purpose of the transaction, is the purpose is intended to gain access to an important input, the likelihood and size of any market foreclosure, the extent of concentration of the various industries, barriers to entry, the market share need to buy a buyer to achieve a profitable level of production, trends towards consolidation at either level of supply chain, and then the degree of market power possessed by the merging parties.

(14:58):
So like I said, if this all sounds a little subjective, a little squishy, it’s because it is. Now importantly, the commission didn’t just look at the Brown Shoe standard. They said if you look at ability incentive or you look at Brown Shoe, the results come out the same way. Commissioner Wilson in her concurrence, again, took issue with this though. She said that the only standard that applies in US merger analysis is the ability incentive test.

(15:20):
She agreed with the outcome that there was the ability and incentive for Illumina to foreclose, but she disagreed with the application of Brown Shoe, noting that it’s outdated, overly simplistic, and ignores the economic realities that you have to take into account in more of the hard economic focused incentive tests that we talked about earlier.

(15:40):
The Fifth Circuit noted the disagreement, but declined to address it, declined to resolve the issue, and instead looked at the FTC’s approach under both standards finding, as Julia mentioned, that there was ample evidence to support a finding of likely foreclosure under either Brown Shoe or the ability and incentive test. So why does this matter? Well, as much as the Fifth Circuit didn’t give a definitive determination as to which standard applies, the FTC has been very ready to accept the Fifth Circuit decision as an endorsement of the Brown Shoe standard.

(16:10):
And because Brown Shoe arguably creates a more flexible and subjective standard for the FTC to apply, one could argue, and I assure the FTC would argue, that it makes it easier for them to pursue vertical merger enforcement efforts. So as a result, the FTC no doubt views this as a big win for future vertical merger enforcement efforts. They’ve been saying that publicly.

(16:30):
And so it’s something that we as practitioners and merging parties need to keep in mind that the traditional approach we’ve seen over the last 40 years to how to analyze a vertical merger may be changing. So I’ll pass it back to Julia to talk about innovation markets and nascent competition.

Julia York (16:45):
Sure. Thanks, Mike. Yeah, so one thing that really jumped out at me in the Fifth Circuit opinion relates to market definition. As Mike indicated, the FTC has embraced this decision as a big win for them, but there are some considerations on the Fifth Circuit opinion that I think actually really go contrary to some of the positions the FTC has taken and the DOJ as well in identifying and describing nascent competitors. So as we all know, market definition can make or break a merger case.

(17:16):
Here it was a major battleground. The ALJ in his initial decision concluded that there was no foreclosure because Grail had no current competitors in the market that could be foreclosed. The commission disagreed with that saying that the ALJ had improperly focused on foreclosure harm to MCED tests that were on the market as opposed to tests that were in development.

(17:38):
On appeal, Illumina made a number of arguments about market definition that, according to the Fifth Circuit, assumed that the commission should have defined the market based on products that currently exist, not those that are simply anticipated or expected. So the Fifth Circuit disagreed with that. (17:53):

The Fifth Circuit first addressed Illumina’s arguments as to the lack of cross elasticity and interchangeability, saying that the commission wasn’t required mathematically to demonstrate cross elasticity of demand because imposing that kind of a requirement in an innovation market would basically prevent research and development markets from ever being recognized for antitrust purposes. And then the second argument that Illumina had made was that the MCED tests in development by competitors of Grail were not the same.

(18:24):
They were not functionally interchangeable, substitutable products. And the court said, “Well, perfect substitutability is not required.” But what I found very interesting is the court’s further discussion around the meats and the bounds of the relevant antitrust market, especially here in this innovation market. The court said, this is the Fifth Circuit speaking, said that just because it’s an innovation market, complaint counsel can’t just get away with simply labeling it a research and development market.

(18:54):
Instead, complaint counsel has to be put to its proof and carry its burden of delineating the bounds of that relevant product market. And the court gave a couple of concrete guideposts for when a competitor can be considered to be in the relevant market, even though it’s still perhaps only nascent. First of all, the court recognized that in some cases there really might not be any competition, right? So of course, there might not be tests that are sufficiently far along for them to be considered to be competitors in the marketplace.

(19:24):
But critically, I think, the court recognized that mere speculation about potential competition is insufficient. This is quoting from the opinion that the Fifth Circuit said, “The mere fact that some companies someday may innovate a competing product in a given market would be too speculative to support a Section 7 claim, lest every acquisition be presumptively unlawful.”

(19:45):
So in this case, the Fifth Circuit said the FTC’s market definition had sufficient support in the evidence because competing tests had been clinically validated and other developers had concrete plans to begin the trials necessary for FDA approval. And then separately, the Fifth Circuit also pointed to internal Grail documents that showed that the company viewed itself as being in competition with those other MCED test developers.

(20:11):
So I think the takeaway from this discussion, even though it’s buried in a paragraph in the middle of the opinion, is that the Fifth Circuit really does seem to have put some stretch around what it means for a competitor to be a nascent competitor in Section 7 cases. And that’s particularly relevant in the current climate where killer acquisitions have really been a flavor du jour of the agency’s enforcement efforts for a couple of years.

(20:37):
The requirement of concrete steps taken towards entry, so the idea that companies need to be well on their way towards bringing a product to market, really provides more specificity than the broad language that the merger guidelines that were issued last December offer in terms of the nascent competitor. And just to give you a little bit of a contrast, the new merger guidelines describe a nascent competitive threat as “a firm that could grow into a significant rival, facilitate other rivals growth, or otherwise lead to reduction in its power, or one that has the potential to grow into a more significant rival in the future.”

(21:13):
And that’s pretty wishy-washy if you ask me. The merger guidelines do embrace the Illumina-Grail decision in terms of market definition and asserting that the agencies can define relevant markets around products that would result from innovation if successful, even if those products don’t yet exist. So I think that the merger guidelines are trying to preserve a broader conception of nascent competition, of a nascent competitor, than what the Fifth Circuit had in mind.

(21:45):
So while there’s room to quibble about where exactly the meats and bounds of a nascent competitor market will be drawn, I think the Fifth Circuit opinion requires some pretty concrete steps before you can draw the lines to include a nascent competitor in the marketplace. And just to compare and contrast with some investigations I have seen firsthand, I’ve seen cases where the government has tried to characterize a killer acquisition where the supposedly nascent competitor, a handful of brainstorming documents that were really aspirational or conceptual, but probably very unrealistic.

(22:23):
And so I’d say that the Illumina decision really does raise the bar when looking at a supposed nascent competitor through that lens. So it remains to be seen whether the Fifth Circuit’s nascent competitor analysis will be applied more broadly and whether merging parties will be successful in pushing back on killer acquisition theories. And with that, I’ll hand it over to Ingrid to talk about the EU.

Ingrid Vandenborre (22:48):
It’s kind of hopeful to hear that there’s a limit to the nascent competition criteria.

Julia York (22:54):
I was very excited about that.

Ingrid Vandenborre (22:56):
Because obviously the European Commission is not limited by a court, and so we’re going to have a bit more of a struggle to get a framework for the EU. But that brings us to the EU and the European Commission’s assessment of Illumina-Grail. The Illumina-Grail decision reflects first on two fronts for the EC. On the one hand, it’s a jurisdictional first because jurisdiction is created where the thresholds were not met. And then there’s a substantive first as well, because it’s the first purely vertical foreclosure case that leads to prohibition.

(23:29):
And there was a remedy, but it was not accepted. So even on the European front, even though it accepts behavioral remedies, they did not accept that. So maybe we start with the jurisdictional aspect first. So there are several jurisdictions that already have tests that allow for review of transactions before or absent meeting of a revenue-based or asset-based thresholds. At the EC level, just for background, the merger regulation grants the European Commission exclusive jurisdiction to review concentrations within EU dimension as defined by the merger control regulation.

(24:04):
The merger regulation does provide for referral mechanism. Until 2020, the European Commission have pretty much discouraged referral requests from member states. It’s in March 2021 that the EC revisited this approach on the application of Article 22, and this is already after the start of this case. The commission confirmed that Article 22 is applicable to all concentrations, not only those that meet the respective thresholds under the national criteria of the member states’ merger control laws. (24:37):

And that was a major, major policy reversal for the commission because they had always discouraged the referral of transactions from national authorities where deals did not meet the national merger control rules. In the case of Illumina-Grail, the commission stated that they thought a referral was appropriate because “Grail’s competitive significance is not reflected in its turnover as evidenced in the transaction value,” which was $7.1 billion.

(25:04):
So they looked at transaction value as a significant aspect, and they’ve otherwise stated that the deal met all of the other criteria that the commission views as valid under an Article 22 referral. So I’ll quote for a bit from their findings. So the commission considered that the concentration threatened to affect competition and markets more likely to be wider than national. Coordination of investigative efforts was desirable in this context. The target did not generate any revenue yet, but one of its products in development is expected to capture a significant share of an addressable market.

(25:41):
The target has raised significant amount in equity financing, and the value of the deal is particularly high. The concentration had not been implemented and not notified to any member state. And so those were the criteria they raised and identified as this legitimizing review under Article 22. The parties took the commission to court.

(26:05):
The general court decided recently that irrespective of the scope of national merger control thresholds, a referral can be justified, which had been the key argument from Illumina and Grail to say, well, the thresholds are not met under national laws. How can this all of a sudden create review? The general court has confirmed that jurisdiction, so future deals are reconfirmed as well.

(26:26):
This was an important aspect for the European Commission to say, “We can continue to bring deals under our review as long as we have at least three member states under Article 22 that are asking us to review. And this is whether or not they get jurisdiction of the deal under national laws. And we already know that there are certain member states that will always refer once they get a nudge or an encouragement from the European Commission.” So countries like France, Belgium, Austria, some of the Scandinavian countries will typically always refer.

(26:58):
We know some member states are much more reluctant. Germany’s reluctant. Italy is kind of on the fence. Those typically are member states that have their very own precedent, their own jurisprudence on merger cases and are not really necessarily that happy to always automatically refer once the EC expresses an interest. And if there’s one limiting factor, it is that the European Commission does not want parallel review. They do not want to create something that’s going to harm the one-stop shop approach.

(27:28):
So if it is established that a member state has review, already has established jurisdiction for review and will keep that review, the EC is less likely to try and get a referral on Article 22. I think that’s the only practical limitation that we’ve seen in practice and also how to strategically consider limiting the scope for an Article 22. I had mentioned there are two firsts. So I think it was first on jurisdiction.

(27:53):
It’s also first on substance first prohibition based on a vertical foreclosure theory that was very much novel and new because typically vertical cases were addressed by remedies. There have been vertical cases in phase twos, but they were addressed by remedies. These were not considered acceptable here.

(28:12):
And just to go back to the innovation markets and nascent competitor note, because it permeates this assessment of this case throughout the jurisdictions, the commission, although its decision is not yet public, the press release indicated that and acknowledged and admitted that while there is still uncertainty about the exact results of the innovation raise that Grail is participating in and the future of the market for early cancer detection tests, protecting the current innovation competition is critical to ensure that early cancer detection tests with different features and price points will come to the market. (28:51):

And so it is far forward-looking into the future to markets that are highly dynamic, are admitted as being highly dynamic. And that is something that is increasingly novel as well. There is not yet jurisprudence that will limit that far forward-looking. I think here we’re looking at markets expected to develop in 2035, so we’re looking at 10 years from now. That far forward-looking approach is confirmed in the market definition.

(29:19):
Notice that came out two weeks ago where basically the commission had said that it can examine short term and medium term, I guess you call 2035 medium term, changes in market structure when there is “sufficient probability that new types of products are about to emerge.” So maybe the element of these products being new was one of the aspects that led the commission to say, “Now we can look forward much more vastly into the future because there will actually be new products that will come to market.”

(29:50):
And maybe I’ll stop there. I think that will take us to takeaways. So I think I’m going to hand back to Mike to kick us off on takeaways from this. Michael Sheerin (29:59):

One of the issues I wanted to cover and alluded to it before is for companies considering a merger, particularly a vertical merger, but even a horizontal merger, is what’s the legacy of the Illumina-Grail case for remedies in the United States? And the agencies are loathed to admit it, but it’s been a rough few years for them in terms of how courts evaluate and give credit to remedies in merger cases. So the idea of offering remedies to fix competitive concerns goes back decades, right? It’s been established practice for a long time, but this administration has taken a very skeptical view of remedies.

(30:33):
So they’ve been much less willing to accept divestitures where those would fix the issue and certainly have been very hostile to behavioral remedies. So the idea of litigating the fix, which has happened several times before this administration, has become a much more reoccurring phenomenon over the last couple of years where parties will offer to fix the issue upfront either with a divestiture or is here a behavioral commitment.

(30:57):
The agencies reject that, and then the parties take that into court with them to say, “Listen, judge, we’ve gone a long way to address these issues. We think this is a good remedy,” and ask the court to take that remedy into account when assessing whether there actually is a Section 7 violation.

(31:11):
And so several of the merger cases brought over the last 18 months have involved litigating the fix strategies, and in those cases, including Illumina-Grail, United-Change, which was a case that DOJ brought, and then the FTC brought a case against Microsoft-Activision last year, all involved cases where the parties had offered remedies. There was another case the DOJ brought involving locks, so locks that you’d have on your door, where the parties that offered a remedy as well that they found quite compelling.

(31:39):
And the DOJ actually settled that case on the eve of trial, actually in the midst of trial, in large part because the sense everyone was getting was that the judge was very open to accepting the remedy. And so what that means is the agencies can be very dismissive of remedies, but what you’ve seen is an acceptance, a willingness by courts to think about the impact the remedies could have on the Section 7 analysis.

(32:02):
And you now have several judges in the last two years that have been persuaded that fixes offered by the parties and rejected by the agencies still address the competitive concerns. And so what this does is it starts to create more of a roadmap of options for parties that are considering a merger that may raise potential antitrust complexities. So what it does is by offering a remedy upfront early in the process, in particular before the case goes to trial, it places additional burden on the agencies at trial.

(32:33):
So as we saw in the Fifth Circuit decision, Fifth Circuit says you can’t put all of the burden proving the remedy and the remedy’s effectiveness on the parties, but in fact, it needs to be taken into account as part of the government’s prima facie case. So the parties certainly bear the burden of production to show that they’ve offered a remedy and what the likely effects will be, but that ultimately the burden of persuasion that the merger violates Section 7 in light of the remedy offered still rests with the FTC or DOJ.

(33:01):
So that puts more of the burden than the agencies have ever wanted for dealing with the remedies on them. So offering a remedy upfront, particularly a very compelling remedy, can really be a helpful strategy before you get to court. The other piece of the Fifth Circuit decision was they corrected the standard that the commission applied. So the commission said that to have a sufficient remedy, that remedy has to address all of the potential harm that arose from the merger, has to restore all of the competition that was lost.

(33:27):
Fifth Circuit said that’s not true. All the remedy has to do is go far enough to prevent it from being a substantial lessening of competition. Now, that’s a very gray area and it’s hard to define, but it does, again, walks back the standard that the regulators have always thought applies to remedies and made it more favorable to merging parties. And so the big takeaway for this is think about what are your possible options? What are the menu of fixes that you could potentially offer and when you should offer them?

(33:55):
In particular, behavioral fixes, which have long been disfavor of the United States, not just by this administration, are having a bit of a moment. So the idea is in vertical cases, you can make contractual commitments that may address the competitive concern that didn’t work in Illumina-Grail. But in other cases, courts have been willing to entertain that. And so what it does is create another tool that for much in the last 20 years we didn’t think existed in US merger enforcement, but behavioral fixes now warrant a really close look.

(34:22):
Can you make contractual commitments in a vertical case that may go a long way to addressing the government’s concerns, and maybe they’ll stand up in court or even persuade the FTC or DOJ to settle or walk away rather than risk litigating? So then I’ll turn it to Julia to talk about the implications of the part three process.

Julia York (34:40): So this is a little bit more of a procedural takeaway. This was a case where the part three proceeding went through to its conclusion within the FTC before the administrative law judge. I think it really brought to the fore how lengthy and I think probably fair to say unsatisfying the part three process is for the litigants that are litigating there. In terms of timing, this case took about two and a half years from when the FTC filed its complaint in part three in March 2021 until the Fifth Circuit issued its decision.

(35:12):
And by the way, the Fifth Circuit decision was a remand. So had the parties not abandoned or rather agreed to divest, it likely would’ve gone back to the commission to reevaluate under the Fifth Circuit directed the FTC to consider. I think another obvious point is part three for respondents, it’s quite frustrating that it’s the commission that initially votes out the complaint and then again, eventually the commission that decides the appeal from the administrative law judge.

(35:41):
And while the respondents can basically appeal the FTC’s decision to any circuit court of its choosing, we saw the Fifth Circuit applies a fairly deferential standard of review for the FTC. So what I take away from this is that we may see more of the part three process moving forward. In the past, the FTC typically didn’t continue part three litigation after losing a preliminary injunction in federal district court. But in this case, they withdrew that case. And then in another case that we are familiar with, the case was put back into part three and after the preliminary injunction was lost.

(36:20):
So the fact that the FTC was handed what they view as a pretty significant victory means that we might see more of the part three process going forward. And again, this just adds to the uncertainty that merging parties face in the US transactional environment at the moment. But again, it remains to be seen what the FTC does with this decision. So I’ll hand it to Ingrid for some final thoughts on the EU.

Ingrid Vandenborre (36:46):
Yeah, and greater uncertainty on the EU side as well. Mainly jurisdictionally, right? So this means that for merger filings analysis, we would look at the thresholds before and say, “Oh, does this deal meet thresholds in certain jurisdictions? Do we have to file this?” This puts the substantive analysis out front ahead along with a filings jurisdictional analysis, because whether or not an authority will take jurisdiction depends on the substance at this point, because the EC can take jurisdiction if it wants to.

(37:18):
It will depend on how it views the deal, its implications. Does it involve dynamic markets? Does it involve high value targets? Does it involve a potential for a killer acquisition rationale? Those substantive elements will become a key part of the jurisdictional assessment as to whether or not the EC would take jurisdiction over a deal. And so it complicates the filings analysis. It complicates the jurisdictional assessment. It also complicates what you need to put in your purchase agreement in terms of the condition’s precedent.

(37:50):
That is all a little bit less predictable. And so we’ve developed and attuned to that since Illumina-Grail. And so there’s been a bit of a practice building, but it has changed materially how the merger filings analysis is done. And then I would say one takeaway on the substantive front, vertical deals are harder than they were five years ago. This only confirms that there may be some remedies that will work, but not all remedies will work. And I think authorities are less reluctant to prohibit a vertical deal.

(38:20):
I think there’s always been a view of if it’s a vertical deal, we’ll find a way to make it go through because there was this implicit assumption that the vertical deal carries efficiencies with it that no longer exists, I think. And there’s much less hesitation on saying we think this raises issues, particularly when it involves nascent dynamic markets and, as I mentioned, new products where agencies will start looking far out in the future and say, “Hey, I’m not sure how this market will develop.

(38:49):
There may be new products. I think there’s a potential for foreclosure that may be more likely than it used to be to lead to a potential prohibition.” And so with that, I think we’re closing off on the takeaways for today. Thanks, everyone.

Julia York (39:03):
Thanks, everyone.

Voiceover (39:04):
Thank you for joining us for today’s episode of Fierce Competition. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Additional information about Skadden can be found at skadden.com.