DOJ

Companies, Board Members and Officers Take Note: U.S. Antitrust Agencies Are Focused on Interlocking Directorates

The FTC and the DOJ Antitrust Division have again warned companies, along with their board members and officers, of the legal prohibition on interlocking directorates: when an individual, or an organization’s agent(s), simultaneously serves as an officer or director of two competing companies. In a recent FTC blog, and prior post, the agency flagged the importance of monitoring for interlock issues during standard antitrust compliance. The DOJ Antitrust Division likewise recently made clear in remarks by Assistant Attorney General Makan Delrahim and Principal Deputy Assistant Attorney General Andrew Finch, that it, too, is closely monitoring interlocks, particularly during transaction reviews. In-house counsel, board members and executive officers must routinely monitor interlock issues, or risk an independent government investigation or side investigation to an M&A review.

The Law

Section 8 of the Clayton Act, 15 U.S.C. § 19, prohibits “interlocking directorates.” The concern is that officer or director interlocks between competitors could result in inappropriate coordination or the sharing of competitively sensitive information, in violation of antitrust laws. The purpose of Section 8 is therefore to “nip in the bud incipient violations of the antitrust laws by removing the opportunity or temptation to such violations through interlocking directorates.” U.S. v. Sears, Roebuck & Co., 111 F. Supp. 614, 616 (S.D.N.Y. 1953).

Q: Which positions are covered?

A: “Director” means a member of the board of directors, and “officer” means a position elected or chosen by the board. The prohibition applies not only to the same individual serving as an officer and/or director of two competing companies but also to entities (like private equity firms) that have their agent(s) or representative(s) serving in these roles.

Q: Which entities are covered?

A: While the statute specifically refers to interlocks among “corporations,” DOJ Antitrust Division AAG Delrahim recently signaled a willingness to enforce Section 8 against unincorporated entities such as LLCs, as the potential harm is “the same regardless of the forms of the entities.” The FTC has taken similar positions in, for example, investigating interlocks involving banks, which Section 8 exempts, and competing non-bank corporations.

Q: What are “competitive sales”?

A: “Competitive sales” are “the gross revenues for all products and services” sold by one company in competition with the other, “determined on the basis of annual gross revenues for such products and services in [the company’s] last completed fiscal year.” Companies are “competitors” if an agreement between them would violate antitrust laws. 15 U.S.C. § 19(a)(1)(B), (a)(2). The FTC has advised companies to look at their ordinary course business documents and to speak to knowledgeable employees in determining if two companies compete.

Q: Is there a grace period for compliance?

A: If an interlock did not violate Section 8 at the time it was established but, later, changed circumstances cause a prohibited interlock (such as two companies that previously did not compete becoming competitors), the companies or individuals will have one year to cure. During that time frame, parties must remember that other antitrust laws still apply.

When an interlock violates Section 8 from the time it was established, there is no grace period to cure.

The Risks

Section 8 violations are inherently illegal and do not require proof that the interlock resulted in harm to competition. The government’s remedy for a Section 8 violation is injunctive relief—elimination of the offending interlock, typically with an officer or director’s resignation. But any interlock — in violation of Section 8 or not—could give rise to claims under other antitrust laws. Section 1 of the Sherman Act prohibits combinations and conspiracies in restraint of trade, and Section 5 of the FTC Act prohibits unfair or deceptive acts in restraint of commerce. The FTC has stated it may use Section 5 to reach interlocks that may not “technically meet” the ban in Section 8 of the Clayton Act but which the agency determines may “violate the policy against horizontal interlocks expressed in Section 8.” Private plaintiffs also could bring a Sherman Act claim for treble damages.

Out of Sync? : DOJ’s Policy Reversal Towards SEPs Lacks Legal Support

Jay Jurata and Emily Luken co-authored an article for Global Competition Review about the troubling policy shift by the DOJ’s Antitrust Division regarding the application of competition law to the assertion of standard-essential patents.

Please click here to read the full article.

DOJ Attorney Outlines Considerations in Evaluating Vertical Mergers

DOJ Attorney Outlines Considerations in Evaluating Vertical Mergers Wordcloud Illustration of Merger Acquisition

On November 17, 2016, Jon Sallet, DOJ’s Deputy Assistant Attorney General for litigation, presented a speech at the American Bar Association Antitrust Section’s Fall Forum in which he outlined his views regarding the DOJ’s approach to vertical mergers and other transactions that raise the potential for vertical restraints on competition.  After recapping some of the history regarding the DOJ’s treatment of vertical restraints, Mr. Sallet commented on issues such as merger-related efficiencies, competitive effects, input foreclosure and raising rivals costs, innovation effects, the exchange of competitively sensitive information that could harm interbrand competition, and potential anticompetitive effects in transactions that do not involve a combination of vertically related assets.  Finally, he noted that if the DOJ has concerns regarding anticompetitive effects, it might feel that conduct remedies are insufficient and may require structural remedies or even try to block the transaction.  Any company considering a vertical merger or a transaction that may raise the potential for vertical restraints on competition will benefit from reviewing Mr. Sallet’s speech.  The speech is available here.

 

FTC and DOJ Antitrust Division Request Comments on Proposed Revisions to Antitrust Guidelines for Licensing IP

After several turbulent years of litigation and policy wrangling, many have asked whether the federal antitrust agencies should rewrite their two-decade old Antitrust Guidelines for the Licensing of Intellectual Property (“Guidelines”).  Should they provide clearer guidance regarding thorny questions about licensing standard essential patents (SEPs), patent assertion entities (PAEs), reverse payment settlements, or other matters that have prompted new guidelines from other enforcers around the world?  On August 12, the Federal Trade Commission and US Department of Justice’s Antitrust Division responded with modest updates to the Guidelines, likely setting themselves up for considerable commentary in the weeks to come.

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ValueAct Settlement Marks Record Penalty in Heightened Agency Efforts Against HSR Act Violations

Where is the line drawn between acquisitions of securities made “solely for the purpose of investment” on one hand, and influencing control, thereby requiring regulatory approval, on the other hand? That is the central cautionary question that was reinforced by the July 12, 2016, Department of Justice (“DOJ”) settlement with ValueAct Capital.  The well-known activist investment firm agreed to pay $11 million to settle a suit alleging that it violated the premerger reporting and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”).  ValueAct purchased more than $2.5 billion of shares in two oil companies, Baker Hughes Inc. and Halliburton Co., after they announced they would merge.  The DOJ alleged that ValueAct used its ownership position to influence the proposed merger and other aspects of Baker Hughes and Halliburton, and thus could not rely on the exemption.

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DOJ Heightens Focus on Hospital Systems and Market Allocation

On April 14, 2016, the U.S. Department of Justice and two West Virginia hospitals entered into a consent decree requiring the hospitals to cease allocating territories for marketing their healthcare services.  The complaint and consent decree can be viewed here and here.  This consent decree follows a similar consent decree that the DOJ entered into with three Michigan hospitals in June 2015, perhaps signaling the DOJ’s increased focused in policing allegedly anticompetitive agreements among hospitals and medical centers.

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