Wachtell Lipton Discusses U.S. M&A Antitrust Enforcement for  2023 and the Year Ahead

In 2023, leadership of the Federal Trade Commission and the Antitrust Division of the Department of Justice maintained an aggressive approach to merger enforcement, investigating and challenging transactions on the basis of a broad range of theories of harm articulated in the agencies’ newly issued 2023 Merger Guidelines.  Although some transaction parties abandoned their deals at the prospect of a lengthy investigation or litigation, others defended their transactions in court, where the agencies met with mixed success.  The FTC and DOJ also continued to disfavor merger settlements, entering into only three such consent decrees in 2023.

In the upcoming year, transaction parties should continue to plan for longer deal timelines—accounting for the possibility of a lengthier filing process, merger challenges that attempt to substantiate theories articulated in the 2023 Merger Guidelines, and continued reluctance by the agencies to entertain pre-complaint settlements—and, in some cases, prepare to implement remedies proactively and defend them in litigation.  While 2024 promises to be another year of robust merger enforcement, well-prepared transaction parties can navigate that enforcement and successfully execute deals consistent with the antitrust laws.

2023 Merger Guidelines

Many of the merger challenges initiated in 2023, and those anticipated in the upcoming year, reflect theories of harm and approaches to antitrust analysis memorialized in the 2023 Merger Guidelines, a set of guidelines that describe the agencies’ approach to reviewing transactions and views as to the scope of the antitrust laws.  The final version of the guidelines, issued in December 2023, incorporates the agencies’ consideration of comments to the July 2023 draft guidelines.

As we previously discussed, the new Merger Guidelines demonstrate an increased focus on vertical and conglomerate transactions, competition for labor, potential competition, transactions involving private equity and technology companies, and market trends toward concentration.  Other notable changes include:

  • Structural Presumptions. The Merger Guidelines significantly lowered existing market concentration thresholds at which the agencies will presume a transaction violates the antitrust laws and introduce a new share-based threshold:  transactions resulting in a combined share of greater than 30 percent or a Herfindahl-Hirschman Index (a traditional measure of market concentration) of over 1,800 points, in each case, where there is a change in HHI of 100 points or more, will be presumed unlawful.  These presumptions can be rebutted or disproved, but the more the concentration or share metrics exceed these thresholds, the stronger the evidence needed to rebut or disprove them.
  • Market Observability. The Merger Guidelines note that analytical or surveillance tools used to track or predict competitor prices or actions, such as pricing algorithms, may increase market observability and, in turn, make a market more susceptible to coordination.
  • Ecosystem Competition. The Merger Guidelines acknowledge the concept of “ecosystem competition,” whereby a dominant firm offering a variety of products or services may be partially constrained by a firm offering niche or partially overlapping products or customer bases.  This is particularly true during what the agencies describe as technological transitions.

The agencies’ recent investigations and enforcement records already reflect these new guidelines.  Importantly, however, the Merger Guidelines merely express the current FTC’s and DOJ’s enforcement priorities—they are not law.  We anticipate the agencies will attempt to enshrine some of these guiding principles in federal antitrust case law through more litigation proceedings this year.

Merger Challenges and Notable Abandonments

The antitrust agencies’ recent merger investigations and challenges demonstrate a willingness to explore and test in federal court more expansive theories of harm.

A number of FTC cases initiated in prior years carried over into 2023.  Two were ultimately withdrawn from adjudication following decisions adverse to the FTC.  First, in Meta/Within, the district court denied the FTC’s motion for a preliminary injunction due to insufficient evidence that the FTC would likely be successful on its claims under the actual or perceived potential competition theories of harm.  In Axon/Safariland, the Supreme Court concluded that Axon could pursue its constitutional challenges to the FTC’s administrative structure in district court, rather than through the FTC’s administrative process.  The Commission subsequently dismissed its complaint, finding that further federal court litigation would take years to resolve, precluding a timely resolution on the antitrust merits.

Two other matters involved appeals of adverse decisions issued by the FTC’s Administrative Law Judge (“ALJ”).  In Altria/JUUL, the FTC appealed the ALJ’s conclusion that the FTC failed to prove anticompetitive harm resulting from Altria’s minority investment in JUUL.  Prior to the Commission’s decision on the appeal, Altria terminated its non-compete with JUUL and unwound its JUUL investment.  Declining to dismiss the litigation as moot, the Commission instead dismissed the proceeding as no longer in the public interest, vacated the ALJ’s initial decision so as to eliminate its precedential effect, and articulated the Commission’s position on certain issues of law addressed in the initial decision, most notably that an alleged unwritten agreement for Altria to exit the relevant market could have been challenged as per se illegal, rather than under a rule of reason standard.  In Illumina/Grail, the Fifth Circuit reviewed the Commission’s reversal of the ALJ’s dismissal of the complaint.  Although the Fifth Circuit found there was substantial evidence to support the Section 7 claim for a relevant market of products not yet in existence—a conclusion now cited in the new Merger Guidelines—the Fifth Circuit also concluded that the Commission should have evaluated whether Illumina’s proposed remedy sufficiently mitigated the alleged harm such that the transaction was no longer likely to substantially lessen competition.  Following the Fifth Circuit’s decision, Illumina announced its decision to divest Grail.

In Microsoft/Activision, the FTC has appealed to the Ninth Circuit the denial of the FTC’s motion to preliminary enjoin the proposed merger.  The FTC’s appeal seeks to, among other things, clarify the appropriate standard for securing a preliminary injunction under Section 13(b) of the FTC Act.  The Ninth Circuit’s decision is pending.

The DOJ began 2023 with three pending cases:  (1) the appeal of the denial of its motion to enjoin U.S. Sugar’s acquisition of Imperial Sugar, which was affirmed by the Third Circuit; (2) a challenge to the alliance between American Airlines and JetBlue, which resulted in the DOJ securing an injunction against the continuance of the alliance; and (3) a challenge to Assa Abloy’s acquisition of Spectrum Brands which, as discussed below, was settled.

In 2023, the FTC challenged nine transactions as compared to the DOJ, which initiated a single, successful merger enforcement challenge—JetBlue/Spirit Airlines.  Although enforcement actions spanned a range of industries, including software, energy, gas stations, and industrial products, healthcare was in focus with several challenges involving healthcare providers, pharmaceuticals, and healthcare technology.

Many of these cases have important implications for near-term merger reviews and enforcement actions including Sanofi/Maze Therapeutics (abandoned), a challenge to the license of a phase 2-ready pharmaceutical, traditionally viewed as likely too nascent to present a competitive issue; Amgen/Horizon Therapeutics (consent decree), a challenge focused on the parties’ ability to entrench the existing monopoly position of a non-overlap product; and Anesthesia Partners (ongoing), as described here and here, a challenge to a private equity firm’s serial acquisition strategy, which reflect theories of harm consistent with the 2023 Merger Guidelines.  In Louisiana Children’s Medical Center/HCA Healthcare, Inc. (summary judgment in favor of parties), the district court found that a state statute governing certain hospital mergers constituted state action that exempted the merger from federal antitrust review.  In Seven & i Holdings Co., Ltd. and 7-Eleven, Inc. (ongoing), the FTC is seeking a large monetary penalty for failure to provide prior notice of the acquisition of a single gas station as required by an existing consent order.  In a notable victory for the DOJ, a District Court enjoined JetBlue’s long-delayed purchase of Spirit, finding that the deal would harm a narrow category of fliers—those relying on Spirit for ultra-low fares.  The District Court, however, limited its injunction to the transaction as agreed by the parties in July 2022, declining to opine on any future renegotiated transaction between the two companies as DOJ had requested.

Agency Settlements

Current DOJ and FTC leadership have expressed a deep aversion to merger settlements, and in 2023 the agencies formally settled just three matters, in each circumstance only after filing a federal complaint challenging the transaction.  First, with the assistance of a mediator, DOJ entered into a settlement in Assa Abloy/Spectrum Brands.  The settlement required a divestiture that is broader than the scope of the divestiture previously proposed by the transaction parties and, among other things, provides for the appointment of a monitoring trustee to assess, for up to five years following entry of the final judgment, whether the divestiture buyer has replicated the competitive intensity lost as a result of the transaction, and gives DOJ leave to seek additional divestitures of intellectual property if the monitoring trustee determines that a failure to replicate the competitive intensity is a result of limits on the use of certain brand names or trademarks.

The FTC entered into two settlements resolving challenges against Amgen/Horizon Therapeutics and Intercontinental Exchange/Black Knight.  The Amgen/Horizon Therapeutics settlement, addressing FTC’s novel concern that the transaction would allow Amgen to leverage its portfolio of blockbuster drugs to entrench the monopoly positions of certain Horizon medications, imposed a behavioral rather than structural remedy as traditionally favored by the agencies.  The FTC concluded that the behavioral remedy was acceptable because the transaction did not give rise to foreclosure or information exchange concerns, and any future anticompetitive conduct could be readily discovered and reported.  As we previously discussed, the FTC also settled the Intercontinental Exchange/Black Knight matter following the parties’ entry into two divestiture agreements to address FTC’s competition concerns.

Section 8 Enforcement

Both the DOJ and FTC continue to aggressively pursue enforcement of Section 8 of the Clayton Act, which generally prohibits a person from serving as an officer or director of two competing corporations.  In March 2023, the DOJ reported on the results of some of its enforcement efforts, including notably investigations into indirect interlocks and investigations resulting in board members resigning or declining to serve on both boards.  The FTC initiated its first Section 8 enforcement in nearly 40 years in EQT/Quantum Energy Partners.  In that matter, the FTC entered into a consent order that prevents the creation of a director interlock and, in parallel, Chair Khan and Commissioners Slaughter and Bedoya clarified their view that, despite Section 8’s specific prohibition on interlocks among competitor “corporations,” Section 8 should apply to limited partnerships and limited liability corporations.  Notably, the consent order provides for Quantum Energy Partners’ stipulation that the structure of its business associations satisfy the “corporation” and “board of directors” elements of Section 8.

The Year Ahead

In 2024, transaction parties should anticipate close scrutiny of transactions with inquiries into topics such as labor, research and development, post-transaction governance, and the competitive dynamics surrounding the parties’ “ecosystem.”  If the agencies continue to decline to engage with parties on pre-complaint settlements, parties should also prepare to identify and implement remedies and to defend in court the sufficiency of these self-imposed remedies.

The FTC may also finalize a rulemaking effecting significant, proposed changes to the HSR notification form—the most far-reaching of such changes since 1978.  If the FTC’s draft rules are any indication of the scale and scope of the final rules, all transaction parties should anticipate significantly longer lead times to prepare and file their respective HSR forms.

From a policy perspective, the antitrust agencies are likely to continue implementing the mandates of President Biden’s 2021 executive order on competition.  Regardless of the outcome of the upcoming presidential election, some of the policy changes embraced by the FTC and DOJ may have a long-lasting effect on merger and conduct antitrust enforcement due, in part, to President Biden’s “whole-of-government” approach to competition policy that has facilitated the review of proposed transactions and business conduct by a number of other agencies and departments, including the Department of Labor and the Department of Defense.

For most of the last year, the FTC has been led by only three Commissioners, all of whom are Democrats.  In 2024, the FTC may be joined by two Republican Commissioners, Virginia Solicitor Andrew Ferguson and Utah Solicitor Melissa Holyoak, who were nominated in July 2023, but whose confirmations remain pending before the U.S. Senate.  Although additional Commissioners may not change some policy and enforcement outcomes, they could provide a much-needed critical and tempering voice.

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Antitrust merger enforcement activity will likely continue to be robust in the upcoming year.  With proper evaluation of potential transactions and a firm commitment to closing, however, transaction parties will position themselves well for the successful execution of deals.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “U.S. M&A Antitrust Enforcement:  2023 and the Year Ahead,” dated January 17, 2024.