FTC gearing up for aggressive oversight of antitrust, M&A

March was a telling month as to how high a priority antitrust will be for the agency and the Biden administration, generally. In a key move, Acting Chair Rebecca Kelly Slaughter on March 25 announced the creation of a new rulemaking group within the Office of the General Counsel, which will “allow the FTC to take a strategic and harmonized approach to rulemaking across its different authorities and mission areas.”

The FTC referred to its current rulemaking process as decentralized, “with individual bureaus and divisions responsible for certain rules,” whereas this new group will better position the agency “to strengthen existing rules and to undertake new rulemakings to prohibit unfair or deceptive practices and unfair methods of competition.”

The significance of this restructuring is that it has the potential to fundamentally change the way the FTC has been executing its mission historically—through its investigatory and enforcement powers more often than rulemaking. Slaughter indicated major changes are in the works, stating it is “time for the Commission to activate its ‘unfair methods of competition’ rulemaking authority in our increasingly concentrated economy.”

One possibility is “more stand-alone Section 5 enforcement in competition cases,” Slaughter said at a March 18 hearing before the House Subcommittee on Antitrust, Commercial, and Administrative Law. This would be a noteworthy development due to the expansive scope of the FTC’s powers to investigate under Section 5, which is far broader than the antitrust investigatory powers of the Department of Justice.

For more than 100 years, Section 5 of the Federal Trade Act has been the primary source of the FTC’s competition enforcement authority. Section 5 empowers the FTC to investigate anticompetitive conduct that might not constitute a violation under other antitrust laws (principally, the Sherman Act and the Clayton Act) but nevertheless could be deemed illegal by the agency.

“[Section 5] could be used in any industry for any type of practice the FTC deems unfair, and all you need is a majority of FTC approving it and going forward with it and for the court to grant injunction,” says Carl Hittinger, national team leader for BakerHostetler’s Antitrust and Competition practice. “So, I think that corporations should be looking out for that kind investigation coming their way.”

Vertical mergers could also start to see more enforcement activity. “To date, vertical mergers analysis has been too reliant on assumed pro-competitive benefits,” Slaughter said at the subcommittee hearing. “Furthermore, even where competitive concerns are identified, they have nearly always been remedied by behavioral consent decrees. I do not believe this approach to vertical enforcement is adequately capturing the competitive consequences of these transactions.”

As a clear sign of its intent, the FTC on March 30 filed its first lawsuit in decades challenging a vertical merger. The Commission voted 4-0 to issue an administrative complaint and to authorize a federal court lawsuit to block Illumina’s $7.1 billion proposed acquisition of Grail, a maker of an early detection liquid biopsy test that can screen for multiple types of cancer in asymptomatic patients at very early stages using DNA sequencing.

According to the FTC, Illumina is the only provider of DNA sequencing that is a viable option for multi-cancer early detection (MCED) tests in the United States. The FTC complaint, filed in the U.S. District Court for the District of Columbia, alleges the proposed acquisition will diminish innovation in the U.S. market for MCED tests. Trial is set to begin Aug. 24; notably, it would mark the first vertical merger litigation under new guidelines issued in June 2020.

Broader merger reviews

The FTC further has its sights on the pharmaceutical industry, though that appears to just be a starting point. On March 16, the agency announced plans to launch an international multilateral working group, with an aim “to identify concrete and actionable steps to review and update the analysis of pharmaceutical mergers.”

“Given the high volume of pharmaceutical mergers in recent years, amid skyrocketing drug prices and ongoing concerns about anticompetitive conduct in the industry, it is imperative that we rethink our approach toward pharmaceutical merger review,” Slaughter said in a press release. “Working hand in hand with international and domestic enforcement partners, we intend to take an aggressive approach to tackling anti-competitive pharmaceutical mergers.”

Initially, this working group will include competition enforcement partners in Europe, Canada, and the United Kingdom, as well as the U.S. Department of Justice’s Antitrust Division and offices of state attorneys general. This is, however, not intended to be an exhaustive or exclusive list, Slaughter said on a March 16 call with reporters.

Compliance and legal professionals should think carefully about the specific criteria the working group will consider in rethinking its analysis of pharmaceutical mergers, including:

• How current theories of harm can be expanded and refreshed;
• What full range of effects a pharmaceutical merger has on innovation;
• How to consider regulatory abuses, like price-fixing and reverse payments, in pharmaceutical conduct;
• What evidence may be needed to challenge a transaction based on new or expanded theories of harm;
• What remedies would work in cases where those theories are applied; and
• Lessons learned about the scope of assets and characteristics of firms that make successful divestiture buyers.

“If this model works well, it would be great to apply it to other areas,” Slaughter said. The Justice Department’s participation is particularly important here for the insight it can offer outside of pharmaceutical mergers, she said.

Historically, the FTC and Antitrust Division have divided up which industries to investigate for merger review purposes. “What we are seeing now is a blurring of the lines a little bit in terms of both agencies looking at things together,” Hittinger says.

Congressional action

Anticompetitive mergers are a key focus on the congressional front as well. In early February, Sen. Amy Klobuchar (D-Minn.) introduced a sweeping antitrust reform bill, the “Competition and Antitrust Law Enforcement Reform Act,” which specifically focuses on the following merger categories:

• Mergers that significantly increase market concentration;
• Acquisitions of competitors or nascent competitors by a dominant firm (those with 50 percent market share or possession of significant market power); and
• Mega-mergers (valued at more than $5 billion).

For legal and compliance officers, the most important provision in the legislation proposes to shift the burden of proof from the government to the merging parties, which would have to prove their mergers do not create any anticompetitive concerns. It would also create a new provision under the Clayton Act (which governs mergers) to prohibit so-called “exclusionary” conduct that presents an “appreciable risk of harming competition” and would seek related civil penalties.

Other provisions in the legislation propose to establish an independent Office of the Competition Advocate within the FTC to conduct market analyses to inform enforcement; require merged companies to update agencies on the outcomes of their deals; and extend whistleblower incentives to those who report potential civil violations.

Compliance message

“Be careful about what is documented and in what way. Be very careful about your motives for the merger and how you write it up in any prospectus or internal e-mails or other communications.”

Donald Pepperman, Partner, Waymaker

The potential practical implications for companies evaluating or pursuing any of the mergers discussed above may face lengthier and more extensive reviews, broader discovery, and associated closing delays, antitrust experts say. There are, however, proactive steps legal and compliance professionals can, and should, take to make the transaction process smoother and to help mitigate an antitrust investigation.

“Be careful about what is documented and in what way,” says Donald Pepperman, a partner at law firm Waymaker. “Be very careful about your motives for the merger and how you write it up in any prospectus or internal e-mails or other communications.”

Avoid pointing to anticompetitive reasons for the merger or using language describing how the transaction will disadvantage competitors in any way, which antitrust enforcement authorities will not look favorably upon during a review. Rather, if you are going to do an acquisition, Pepperman recommends developing compelling procompetitive reasons for the transaction—for example, the merger will create new and innovative products, enable expansion into new markets, or revive a distressed business.

Also, analysis should be done pre-signing, because if it is done in response to an antitrust investigation, it will look disingenuous. “This is stuff that general counsel and compliance officers have to think about,” Pepperman says. He also recommends turning to external or in-house antitrust counsel who can offer their expertise on what to do or not to do in the merger process.