After a year and half, the Federal Trade Commission’s (FTC’s) administrative challenge to Illumina’s vertical merger with Grail, its former subsidiary, was rejected by FTC Chief Administrative Law Judge D Michael Chappell. While the FTC’s challenge was unusual on its own, (for further details, see “Expect more of the same: FTC’s novel challenge to Illumina’s acquisition of Grail“) more dramatic events have followed, including the parties’ decision to merge despite a then-pending review of the transaction by the European Commission (EC) that the FTC relied upon in dismissing its suit for a preliminary injunction and more recently an EC decision prohibiting the merger (issued less than a week after Judge Chappell held that the merger could proceed under US law). While the rejection of the FTC’s challenge may not truly matter because of the ongoing legal battle in Europe, it demonstrates the key problems with the government’s case against Illumina and Grail, which may inform the government’s approach to future vertical merger challenges.

Key lessons

Judge Chappell’s decision about the merger and the FTC’s administrative action presents several key lessons:

• Illumina’s influence over and minority ownership interest in Grail meant it already had both the ability and incentive to foreclose competition prior to the merger, according to Judge Chappell. The FTC’s failure to account for Illumina’s preexisting stake in Grail when attempting to demonstrate Illumina’s incentives, as well as Illumina’s preexisting ability to harm makers of multi-cancer early detection (MCED) tests, meant that the FTC failed to demonstrate that Illumina’s ability and incentive to foreclose competition were causally tied to the merger. Going forward, the FTC may be more cautious in its approach to vertical mergers where the acquirer has a preexisting ownership interest in the acquired company or already had the ability to harm the acquired firm’s rivals, knowing that it may be harder to prove that the merger itself could substantially lessen competition.
• The absence of any actual competitors to Grail in the MCED test space, a factor to which the FTC gave little consideration in its complaint, was significant to Judge Chappell. He observed that the FTC could not prove that a high number of sales would likely be diverted from MCED test rivals because the evidence failed to demonstrate that Grail had any current rivals with sales to divert or that substitute MCED tests were likely to be sold by a rival in the near future. These findings may discourage future vertical merger challenges where the existence of future rivals to be foreclosed is only speculative.
• Illumina’s proposed contractual remedy, the “open offer”, was a standard long-term supply agreement that Illumina was making available to all current or new customers of its next-generation gene sequencing platforms. Judge Chappell placed tremendous weight on the open offer, holding that it effectively constrained Illumina’s ability to foreclose Grail’s rivals contrary to the concerns of the FTC. This signals to other companies contemplating vertical mergers that offering a robust contractual fix may be sufficient to overcome a merger challenge.

Speculating about future versus current market realities

The decision rebuffing the FTC’s challenge demonstrates a key tension faced by the FTC and Department of Justice in some merger challenges – the tension between halting mergers that could foreclose nascent competitors (which involves some degree of speculation in predicting the future) and establishing nonspeculative harm to competition tied to the realities of the marketplace. The FTC in particular has been subject to criticism that, in the last decade, it failed to challenge transactions that it should have predicted would foreclose competition down the road, such as Facebook’s acquisitions of Instagram and WhatsApp (for further details, see “FTC v Facebook – where are they now?“). Following this criticism, it is unsurprising that the FTC would not be dissuaded from challenging the Illumina/Grail merger by the fact that neither Grail nor any potential competitors had reached the point of selling MCED tests at the time the administrative complaint was filed.

However, Judge Chappell’s decision represents a warning that the FTC must not swing too far in the direction of trying to predict the future. His emphasis on the lack of actual evidence of MCED tests that could be substitutes for Grail’s tests and would be entering the market at any particular time showed that merger challenges may need to wait until there is at least concrete evidence of where the market may be headed – even if it has not yet arrived there.

These findings show that it may be difficult for the FTC to walk the tightrope of challenging mergers that might impact nascent competitors while avoiding losses caused by predictions of marketplace developments that are too speculative to show a violation of the antitrust laws.

In a similar vein, the judge’s treatment of the Illumina’s “open offer” emphasized the need for the FTC to focus on the realities of the marketplace rather than speculative possibilities. The open offer, which included confidentiality provisions and which Illumina volunteered to have turned into a consent decree monitored by the FTC, amounted to contractual commitments that, in the judge’s view, had the real-world consequences of constraining Illumina’s ability to foreclose Grail’s competitors. The open offer’s commitments were not speculative, as multiple companies had already either agreed to its terms or signaled a clear intent to do so. Based on that, the open offer’s contractual limitations on foreclosure were credited by the judge, while the FTC’s speculation about Illumina’s incentives to avoid its commitments or otherwise disadvantage Grail’s competitors was not.

When considering these issues with the judge’s admonition that the FTC failed to consider the impact of Illumina’s pre-existing stake in Grail, the message is clear: the primary flaws in the FTC’s challenge stemmed from its failure to accept the realities of the current market. These realities included Illumina’s ownership interest in Grail, the lack of evidence of probable or imminent entry of products competing with Grail’s product, and Illumina’s offered long-term contractual constraint on its ability to foreclose Grail’s competitors. Notably, these flaws were apparent from the beginning, as the FTC’s failure to provide weight to these factors was apparent even in its complaint.

Comment

While the FTC has announced that it will appeal Judge Chappell’s ruling, the holes in the FTC’s complaint were apparent from the start. It is interesting that the FTC chose such a novel challenge, with the difficulties presented by the known realities of the market, for its first litigated challenge to a vertical merger since the 1970s. The FTC’s loss seems unlikely to dissuade it from challenging vertical mergers altogether for another 45 years, though it may be less likely to challenge vertical mergers with as many complicating factors as were presented here. And despite being one of the issues presented by this merger that led to the FTC’s loss, the political pressure on the FTC likely means it will not be cowed from challenging mergers where the acquired entity is a nascent competitor or has only nascent competitors; though, going forward, it may do more to ensure it can at least develop an evidentiary record supporting the probable entry of competitors in the near future.

For companies considering vertical mergers, the most important takeaway from the FTC’s loss may be that judges are likely to credit genuine contractual commitments that will constrain foreclosure for the foreseeable future. The judge’s insistence that Illumina’s open offer was a market reality that the FTC could not undermine by questioning whether Illumina would honor its commitments shows that companies facing a merger challenge may be able to develop creative solutions to avoid the merger being blocked. And going forward, the FTC may be more likely to credit those proposed solutions before taking the drastic step of filing a complaint.

This content was originally published on October 27, 2022, via the International Law Office (ILO) newsletter. It can be found here: Novel challenge to Illumina-Grail merger has unhappy ending for FTC (for now)

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