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Fifth Circuit Largely Upholds Prior Illumina/Grail Finding But Vacates And Remands Decision Due To FTC’s Treatment Of Parties’ Rebuttal Evidence
01/23/2024On December 15, 2023, a panel of the United States Circuit Court for the Fifth Circuit vacated and remanded the U.S. Federal Trade Commission’s (the “Commission,” when referred to as a judicial body, and “Complaint Counsel” when referred to as a complainant) April 3, 2023 Opinion and Order, which required Illumina, Inc. (the “Company”) to divest Grail, Inc. (the “Acquiree”). Although the Fifth Circuit substantially agreed with the Commission’s initial Clayton Act Section 7 analysis reversing an Administrative Law Judge’s (“ALJ”) September 2022 dismissal of the complaint, it held that the Commission made a “legal error” when it analyzed the Company’s pre-closing standardized consumer supply contract as a remedy, instead of as rebuttal evidence to the Complaint Counsel’s prima facie case.
The Company provides DNA sequencing services, including next-generation sequencing (“NGS”) platforms. The Acquiree 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 the specific performance characteristics to detect relevant biomarkers. Both the ALJ and the Commission found that the Company’s NGS platform is 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 firms like the Acquiree that develop and make MCED tests. [1]
On March 30, 2021, Commission staff issued a complaint, which alleged that the Company’s acquisition of the Acquiree may substantially lessen competition in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act, 15 U.S.C. §§ 18, 45, on the basis that the Company would have the ability and incentive to foreclose and disadvantage the Acquiree’s rivals in the development and sale of MCED tests. On the same day, the Company attempted to “allay any concerns relating to the [proposed acquisition], including that [the Company] would disadvantage the Acquiree’s potential competitors” by publicly offering a 12-year supply agreement to its for-profit U.S. oncology customers (the “Open Offer”). 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, holding that the Commission had failed to prove its prima facie case that the acquisition would likely result in a substantial lessening of competition in contravention of Clayton Act Section 7. On April 3, 2023, reviewing the decision de novo, the Commission reversed the ALJ’s decision, holding that “(1) the relevant market is the market for the research, development, and commercialization of MCED tests in the United States; (2) Complaint Counsel carried its initial burden of showing that the [Parties] merger is likely to substantially lessen competition in that market under either the ability-and-incentive test or looking to the Brown Shoe factors; and (3) [the Company] had not identified cognizable efficiencies to rebut the anti-competitive effects of the merger.” In its opinion, the Commission analyzed the Open Offer as a remedy meant to ensure access of supplies to consumers of the Company’s NGS Platform, so that competition would not be harmed at all in the downstream MCED test market.
On appeal, the Fifth Circuit substantially agreed with the Commission’s reasoning, holding that “substantial evidence supported” most of the “Commission’s conclusions.” In particular, the Fifth Circuit explicitly supported the FTC’s use of Brown Shoe factors, rather than the hypothetical monopolist test of the now-abandoned Merger Guidelines, for market definition. Nevertheless, the Court reversed and vacated the Commission’s order, and remanded it for reconsideration by the Commission, because it found that analyzing the Open Offer under a remedy standard—i.e., that the Open Offer needed to restore the pre-merger level of competition—was “incompatible with [what is required by] the plain language of the Clayton Act.”
In analyzing the Open Offer, the Fifth Circuit panel considered (1) “where in the Section 7 analysis the Open Offer should be evaluated” and (2) “how it should be evaluated.” The panel identified three options of where the Open Offer could be analyzed: (i) as part of Complaint Counsel’s prima facie case at the liability stage; (ii) at the remedy stage, following a finding of liability; or (iii) as part of the Company’s rebuttal to the prima facie case, as argued by Commissioner Wilson in her concurrence.
The Fifth Circuit panel concluded that the Open Offer should be analyzed at the liability stage, determining that it was neither a pure “market reality,” as the Company argued, nor a remedy as the Commission had held. The panel reasoned that the Open Offer in question was not a simple market reality because it was “not just a normal commercial supply agreement but instead a direct response to anticompetitive concerns.” However, it could not be considered a “remedy” either, because a “remedy” can be imposed “only on the basis of a violation of the law … after the finding of liability.” Instead, the panel held that the Open Offer “is somewhere in between a fact and a remedy — a post-signing, pre-closing adjustment to the status quo implemented by the merging parties to stave off concerns about potential anticompetitive conduct” and distinguishing it from court-ordered or party-offered remedies contingent on liability.
After establishing that the Open Offer should be considered at the liability stage, the panel then held that the Open Offer should be considered as part of the Company’s rebuttal case, not the government’s prima facie case, because it is most compatible with the “flexible framework” of Section 7. In particular, the Commission erred by holding that the Company was required to “show that the Open Offer would restore the pre-[merger] level of competition, i.e., eliminate [the Company’s] ability to favor [the Acquiree] and harm [the Acquiree’s] rivals.” The effect of this standard was that the Company could only rebut the Complaint Counsel’s showing of a likelihood of a substantial reduction in competition with a showing that, due to the Open Offer, the merger would not lessen competition at all. The panel noted that both the District of Columbia and Northern District of California had recently rejected applying this remedy-stage standard in the liability-stage, because the remedy-stage standard would “effectively erase the word ‘substantially’ from Section 7.” How the Commission would have applied this analysis on remand, however, will never be known because, despite the remand order, the Company announced it would nevertheless unwind the transaction and divest Grail.
This is the third important decision analyzing the effect of a unilateral commitment to make an essential input available to competitors in a Clayton Act challenge to a vertical merger, see United States v. AT&T, Inc., 310 F. Supp. 3d 161 (D.D.C. 2018), aff’d, 916 F.3d 1029 (D.C. Cir. 2019), and FTC v. Microsoft Corp., No. 23-cv-02880-JSC, 2023 WL 4443412, at *15 (N.D. Cal. July 10, 2023), and is important in establishing that the acquiror’s unilateral offer need not restore the precise competitive situation before the merger, so long as the effect of the transaction is not to “substantially” reduce competition. The Fifth Circuit’s analysis of the proper structure for analyzing Open Offer should also provide useful guidance on how other types of pre-merger “fixes” to assuage competitive concerns will be evaluated by courts.
[1] For additional background to the factual and procedural history, please see our earlier article from April 18, 2023. (FTC Orders Biotechnology Company To Divest Cancer Detection Test Maker (shearman.com)).
Antitrust Litigation