The 19 October 2022 announcement by the US Department of Justice (DOJ) that seven directors had resigned from corporate board positions in light of DOJ concerns that their respective board appointments to competing companies at the same time violated section 8 of the Clayton Act has generated a tremendous amount of attention. That attention is both warranted and not. It is warranted because it is somewhat surprising that a statute which has been around for more than a century was apparently ignored by so many people and companies. It is unwarranted for the same reason – section 8 has been around for a long time and the vast majority of companies and investors are well aware of its strictures.

Section 8 was part of the original passage of the Clayton Act in 1914 and was designed to “nip in the bud incipient violations of the antitrust laws”.(1) By this, the statute attempts to prevent improper coordination between competitors that may give rise to a violation of section 1 of the Sherman Act (prohibiting agreements that unreasonably restrain trade).

The concept of section 8 is reasonably simple: officers and directors may not serve simultaneously on the boards of direct competitors. The statute does not require any proof of actual or potential competitive effects, and it only applies to corporations, not partnerships or limited liability companies. These matters are somewhat more complicated when it comes to an officer or director who serves on the board of two corporations that do not compete directly, but have competing subsidiaries, or so-called “indirect interlocks”.

Placed into broader perspective, the statute attempts to address one way in which competitors could coordinate behaviour in a way that lessens competition. However, it is not the only way in which competition may be lessened without clear evidence of an agreement between competitors, and it is not the only tool that the government has to address such concerns. The DOJ’s announcement is therefore important because it reflects an additional attempt by the Biden administration antitrust enforcers to use all tools that they have available to address what they perceive as decades of underenforcement of US antitrust law. The DOJ has made clear that it will be “ramping up efforts to identify violations across the broader economy, and [it] will not hesitate to bring Section 8 cases to break up interlocking directorates”.

Statute

With certain exceptions, section 8 prohibits a person from serving as an officer or director at two companies that are competitors “by virtue of their business and location of operation”:

• In determining whether two companies are competitors, the courts will examine whether the companies offer any overlapping products or services, such that they would be considered horizontal competitors.(2) The courts also look to “commercial realities” and whether companies or customers see two products as competing with one another.(3) These are highly fact-specific inquiries, and there is a great deal of uncertainty over the precise parameters of this determination. Some case law suggests that this is not the same as the exercise traditionally performed when analysing mergers, with Judge Easterbrook more recently suggesting that a merger analysis should be performed. It is unclear how much this potential – but subtle – distinction factored into the DOJ’s announcement, or whether the DOJ was also examining competition with regard to purchases or labour markets (something that very likely was not considered in 1914).
• Importantly, the statute does not prohibit simultaneous service by officers or directors in companies that stand in a vertical (supplier/customer) relationship even though such a position could result in competitive harm (eg, where a customer gets board positions on the supplier and uses that position to try to influence the supplier’s treatment of the customer’s competitors).
• The statute is unclear as to indirect interlocks, but there is case law indicating that the matter becomes a question of control over the subsidiary. For example, the Ninth Circuit has held that:

whether for the purposes of Section 8 the business of a subsidiary is to be attributed to a parent in determining if the parent competes with another corporation with which it is interlocked, turns upon the extent of the control exercised by the parent over the subsidiary’s business.(4)

Again, this probably was not considered at the time of the statute’s enactment and the precise parameters of its application are uncertain.

• The statute may apply even if the same person is not serving on the competing boards – if the same entity appoints the director or officer in the competing companies and the persons are serving as an agent of the appointing party, the government takes the position that there is an illegal interlock. It appears that this was the case in several of the recent resignations, as the DOJ expressed concerns that competitors had representatives from the same investment firms on their boards.

There are de minimis exceptions that permit a person to serve as a director or officer in competing corporations where:

• the competitive sales of either corporation are less than $1,000,000 (adjusted annually according to increases (or decreases) in the gross national product);
• the competitive sales of either corporation are less than 2% of that corporation’s total sales; or
• the competitive sales of each corporation are less than 4% of that corporation’s total sales.

The statute defines “competitive sales” as:

the gross revenues for all products and services sold by one corporation in competition with the other, determined on the basis of annual gross revenues for such products and services in that corporation’s last completed fiscal year.

“Total sales” are further defined as “the gross revenues for all products and services sold by one corporation over that corporation’s last completed fiscal year.”

Section 8 violations impose no penalties or fines; however, the statute requires that the interlock be eliminated when a violation is deemed to have occurred. How much this lack of penalties factored into the board members’ analysis in accepting their original interlocking appointments is not clear since, unless there is an independent antitrust violation, a section 8 violation would be unlikely to create cognisable damages.

Section 8 enforcement actions are relatively infrequent but do happen periodically. The last time that the DOJ announced section 8-related resignations was 21 June 2021. In October 2009, the Federal Trade Commission “commended” Google and Apple for the resignation of an overlapping board member “without the need for litigation”.

Comment

The DOJ’s announcement should not be a surprise except to the extent it found eight companies in non-compliance at the same time. Anyone serving on multiple boards or any investor that has the opportunity to appoint board members should remain vigilant about the strictures of section 8, particularly in light of the annual de minimis threshold changes. At the same time, even if the statute does not apply – because, for example, the companies at issue are LLCs or the sales of the companies fall within an exception – these same entities should be mindful that any effort to coordinate the competitive behaviour of competitors continues to create antitrust risk.

For further information on this topic please contact W Todd Miller or Amber L McDonald at Baker & Miller PLLC by telephone 1- 202-663-7820 or email (tmiller@bakerandmiller.com or amcdonald@bakerandmiller.com). The Baker & Miller PLLC website can be accessed at bakerandmiller.com.

Endnotes

(1) United States v Sears. Roebuck & Co, 111 F Supp 614, 616 (SDNY 1953).

(2) FTC v Sysco Corp, 113 F Supp 3d 1, 25 (DDC 2015) (internal citations omitted).

(3) Id.

(4) United States v Crocker Nat’l Corp, 656 F2d 428, 450 (9th Cir. 1981), rev’d on other grounds, Bankamerica Corp v United States, 462 US 122, 76 L Ed 2d 456, 103 S Ct 2266 (1983).

This content was originally published on December 22, 2022, via the International Law Office (ILO) newsletter. It can be found here: Interlocking directorates: why do we care?

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