On April 3, 2023, the United States Federal Trade Commission (the “Commission”) voted unanimously to issue an Opinion and Order requiring Illumina, Inc. (the “Company”), to divest GRAIL, Inc. (together the “Parties”). The Opinion reversed the Administrative Law Judge’s (the “ALJ”) Initial Decision of September 1, 2022, which had dismissed the complaint brought by Commission staff alleging that the acquisition would reduce innovation and would likely harm competition.
The Company provides DNA sequencing services, including next-generation sequencing (“NGS”) platforms. NGS technology is used for a broad range of applications, such as genetic disease testing, non-invasive prenatal testing, and oncology therapy selection. GRAIL develops and makes tests for the early detection of multiple cancer types through biomarkers (called multi-cancer early detection (“MCED”) tests). MCED tests depend on NGS technology with very specific performance characteristics to detect relevant biomarkers. In addition to GRAIL, there are several other MCED test developers, and while there are other NGS platform providers in addition to the Company, a significant factual finding (in the complaint, the ALJ’s Initial Decision, and the Commission’s Opinion) was that the Company’s NGS platform is in practice the only product that has the performance characteristics required by MCED test providers to develop clinically effective and commercially viable MCED tests. According to the Commission, this means that the Company’s NGS platform is an essential input for GRAIL and its rivals.
On March 30, 2021, Commission staff issued a complaint, which alleged that the Company’s acquisition of GRAIL may substantially lessen competition in violation of Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act, 15 U.S.C. §§ 18, 45, on the basis that the Company would have the ability and incentive to foreclose and disadvantage GRAIL’s rivals. On the same day, the Company publicly made available a 12-year supply agreement to its for-profit U.S. oncology customers (the “Open Offer”) to “allay any concerns relating to the [proposed acquisition], including that [the Company] would disadvantage GRAIL’s potential competitors”. On August 18, 2021 (just before the evidentiary hearing before the ALJ began), the Parties closed the transaction.
On September 1, 2022, the ALJ issued an Initial Decision, which held that the Commission had failed to prove its
prima facie case that the acquisition would likely result in a substantial lessening of competition. Amongst other points, the ALJ noted that, prior to the acquisition, the Company was already the only viable supplier of NGS platforms which are appropriate for MCED tests, and therefore, the ability to raise prices, withhold supply, or decrease quality was present before the acquisition took place. Further, the ALJ found that the Company’s Open Offer would constrain the Company from using tools that would raise rivals’ costs or otherwise foreclose rivals as the Open Offer provides various protections for the Company’s customers in relation to access to products, pricing, quality, and rights to develop products on the Company’s systems.
The Commission’s Opinion reversed the ALJ’s decision. In relation to anticompetitive effects, the Commission assessed the acquisition based on two different standards that are used to evaluate vertical mergers.
Brown Shoe and the cases following it examine the “share of the market foreclosed” and analyze “various economic and historical factors”. More recent cases, such as
AT&T, assess whether a transaction is likely to increase the ability and/or incentive of the merged firm to foreclose rivals.
Under the
Brown Shoe standard, the Commission found that four factors (likely foreclosure, the nature and purpose of the transaction, the degree of market power that the merged firm would possess, and entry barriers) were present and established a Section 7 violation. According to the Commission, the fact that the Company is, and will be for the foreseeable future, the only viable supplier of a critical input for MCED tests means that the Company has many mechanisms for foreclosing GRAIL’s rivals (including, for example, price discrimination; withholding or degrading access to supply or service; and withholding, delaying, or limiting access to new and improved products). The Commission posited that the Company’s internal documents included references, which suggested that the acquisition would likely cause harm. The Commission also found that the Company has significant upstream market power as it is in practice the only NGS platform provider for MCED test makers. Further, barriers to developing and marketing an MCED test are already significant, and the Commission held that GRAIL’s competitors’ risks of doing business with the Company would increase as a result of the acquisition, which would increase barriers to entry.
The Commission also found that, under the ability and incentive framework, there was a
prima facie case that the acquisition would result in likely harm to competition on the basis that the Company would have the ability to impede R&D and commercialization efforts by GRAIL’s rivals. Specifically, the Commission found that the Company would have the ability to identify GRAIL’s rivals based on the information it is able to obtain about its customers’ use of its NGS platform and that the Company would be able to use that information to benefit GRAIL. Further, the Commission found that the merged entity would have an increased incentive to restrict GRAIL’s rivals as the merged entity would profit financially from the success of GRAIL’s MCED tests over its rivals’ tests.
The Parties argued that the Company’s Open Offer should have been taken into account to rebut the Commission’s
prima facie case. The Commission held that the Open Offer was a proposed remedy that was meant to address antitrust concerns and not an “economic reality” that was a pre-existing market condition, and therefore, it was not appropriate to consider it at the
prima facie stage, but rather any remedy should be considered only after a
prima facie showing of anticompetitive harm. The Commission also emphasized that the parties to a transaction bear the burden of proving that any proposed remedy would negate any likely anticompetitive effects of the transaction. The Commission found that the Open Offer was inadequate to eliminate the likely anticompetitive effects of the acquisition and to fully replace the lost competitive intensity. Significantly, the Commission said that the Open Offer would have needed to foresee and foreclose all possible ways that the Company could harm GRAIL’s competitors, which it failed to do.
Commissioner Christine S. Wilson issued a concurring opinion, which highlighted two aspects of the Commission’s Opinion with which she disagreed. First, Commissioner Wilson disagreed that
Brown Shoe expressed any standard for assessing vertical harm. Rather, in her view, the ability and incentive framework are the only viable standard to assess harm in vertical transactions. Second, she disagreed with the Commission’s decision to assess the Open Offer as a remedy, since in her view, the Open Offer was part of the relevant commercial realities and should have been assessed as rebuttal evidence and not at the remedy stage.
The Commission’s Opinion continues the 100% success rate for the Commission in its in-house process. Notably, the Opinion is evidence of the agencies’ increased willingness to assess vertical mergers and to prevent those that they find may be likely to harm competition. Further, the Opinion spotlights the extremely strict standards that the agencies now apply to remedies, and in particular, behavioral remedies; the Opinion emphasizes that “both the Commission and courts have preferred structural remedies” and that “behavioral remedies provide only temporary protection, allowing the threat inherent in the merger to persist”. These are issues that the agencies are likely to address in the forthcoming new Merger
Guidelines.
