The long and tortured regulatory-review path for Illumina, Inc.’s $7.1 billion acquisition of GRAIL, Inc. demonstrates the current climate of intense global antitrust scrutiny of transactions. The combination raises so-called “vertical” antitrust issues in that it combines firms at different levels of a supply chain. Illumina provides DNA sequencing tools used in the development and commercialization of multicancer early detection tests (“MCED” tests), while GRAIL is a downstream developer and provider of those MCED tests. Antitrust regulators in the United States and the European Union have been focusing on whether the deal would provide Illumina, the allegedly dominant supplier of a critical input in MCED test development, with the incentive and ability to disadvantage GRAIL’s MCED rivals.
The deal, first announced in September 2020, triggered in-depth reviews in both the United States and European Union. On August 18, 2021, nearly a year after announcement, the parties closed the transaction. They did so despite the EU and US regulatory reviews remaining open and active. With regard to the European Union, Illumina justified closing the deal by taking the position that it did not believe the European Commission nor its member states had jurisdiction over the transaction, given that GRAIL has no business in the European Union. The European Commission continued its inquiry and on September 6, 2022, issued a ruling prohibiting the acquisition. It also accused the parties of improperly closing the transaction while the investigation was pending, potentially subjecting them to the maximum fine that the European Commission can impose (10% of Illumina’s annual revenue) and informed the parties of its intention to use “restorative measures” to unwind the completed deal.
The review in the United States has been similarly fraught. Following a “second request” investigation, the Federal Trade Commission (“FTC”), in March 2021, filed a complaint challenging the deal in its administrative court. The FTC Administrative Law Judge (“ALJ”) conducted a trial, hearing testimony from 56 fact witnesses and 10 expert witnesses and receiving over 4,500 exhibits into evidence. On September 9, 2022, the ALJ issued a detailed opinion, finding, on the facts, that FTC counsel had failed to prove its case. However, under established procedure for matters under the FTC’s jurisdiction, the matter then went on appeal back to the full FTC—the same body that initially issued the complaint. On April 3, 2023, the FTC overturned the ALJ’s findings and concluded that the acquisition was anticompetitive. It further ordered the parties to unwind the transaction.
As of the time of this publication, Illumina is appealing the FTC’s decision to the US Court of Appeals for the Fifth Circuit. It also is appealing the European Commission’s assertion of jurisdiction over the transaction and its substantive objections to the deal. Rulings are expected in these proceedings by the end of 2023 or beginning of 2024.
While it may take over a year for these proceedings to conclude, several important lessons are evident:
Government Enforcers Are Suspicious of Remedies to Counter Alleged Anticompetitive Effects
Illumina and GRAIL attempted to mitigate the purported competitive harms by proposing a conduct remedy. In essence, Illumina agreed to provide a twelve-year long-term supply agreement to its for-profit US oncology customers that would provide protections on service, supply, pricing, intellectual property, and confidentiality. The ALJ concluded that this “Open Offer” effectively addressed the competitive harms caused by the transaction in that it would keep Illumina from raising costs to, or otherwise foreclosing, GRAIL’s rivals.
The FTC disagreed, however, both with how the ALJ addressed the remedy as a matter of process and with his substantive conclusion. The FTC concluded that enforcers must prove that a proposed transaction is anticompetitive—without consideration of any remedies offered after announcement—and parties must then prove that a remedy addresses the competitive harm. This puts the FTC in conflict with federal courts: in September 2022, in United States v. UnitedHealth Grp. Inc., the US District Court for the District of Columbia came to the opposite conclusion—that enforcers must prove that the proposed transaction, plus any remedies offered after announcement, are anticompetitive. In addition, in the case of Illumina/GRAIL, the FTC concluded that the remedy would not restore a pre-acquisition level of competition. This puts into action statements by AAG Jonathan Kanter and FTC Chair Lina Khan that remedies short of blocking deals, particularly behavioral remedies, are disfavored.
Antitrust Enforcers Around the World Are Coordinating, but Are They “Colluding?”
In early 2023, the U.S. Chamber of Commerce (the “Chamber”) published 332 records it obtained following protracted litigation of a 2022 FOIA request for communications between the FTC and enforcers outside the United States regarding the Illumina/GRAIL transaction. Shortly after publication of these records, Illumina requested that the ALJ reopen the record to admit additional documents, which Illumina argued raised due process concerns because the documents indicated that the FTC was potentially improperly coordinating with foreign antitrust authorities. The Chamber alleged that the competition enforcers were engaged in “forum shopping,” with the European Union taking action soon after the ALJ had approved the deal. A Chamber official was quoted as stating, “[I]t appears that what’s occurring here with the Federal Trade Commission isn’t international regulatory cooperation. Instead, it’s international regulatory collusion.”1
Illumina then made similar assertions in its briefing once the case arrived before the FTC on appeal. The FTC dismissed those due process concerns, finding “nothing improper” about the correspondence among FTC staff and other enforcers, which the FTC said was “specifically contemplated by international agreements and authorized by Congress.” Commissioner Wilson, who was not always in lockstep with the other commissioners and stepped down from her position on March 31, 2023, agreed and wrote in her concurrence that, in this case, the communication between international antitrust enforcers was “beneficial for consumers, merging parties, and the development of sound antitrust law.” Though, Commissioner Wilson’s concurrence did acknowledge that antitrust enforcers do not have blanket authority to engage in any type of communication, and that communications that “facilitate forum shopping on the part of the US government” could be deemed to be improper.
At the time of this publication, Illumina and GRAIL stated in their petition to the Fifth Circuit that they are appealing “all aspects” of the FTC’s decision, which presumably includes these due process concerns. We may not have heard the last of the debate on government coordination vs. collusion.
The FTC Has a Distinct Advantage on Appeal
This matter highlights an important procedural twist that differentiates FTC actions from those brought by the Antitrust Division of the Department of Justice (the “DOJ”). Both agencies have the ability to review transactions under the US antitrust laws, and the agencies themselves decide which one will handle each specific matter (so-called “clearance”). That decision can have significant procedural consequences.
The US federal courts play a central role in reviewing antitrust enforcement actions by both agencies. However, the DOJ is a law enforcement agency that has no adjudicative power on its own; thus, to block a proposed deal following the end of the pre-merger Hart-Scott-Rodino (“HSR”) waiting period, the DOJ must file an action in a federal district (trial) court. The DOJ has the burden of proof and the Article III judge is a neutral-fact finder. The court is the arbiter of whether the law has been violated and, if so, orders appropriate remedies, including permanently blocking the transaction from closing.
The process is somewhat different in matters the FTC handles. Unlike the DOJ, the FTC can refer a matter to its own administrative tribunal. In that process, an administrative law judge conducts a trial and issues findings. That order can then be appealed to the FTC, which can then issue an order. The FTC administrative process, however, takes substantial time to play out. The agency does not have the ability to preliminarily enjoin a merger; it must wait for the completion of the process. Accordingly, in most merger matters, the FTC seeks a preliminary injunction from a federal district court to block the deal from closing during the pendency of the FTC administrative review. Practically, if the FTC obtains such an injunction, then parties usually abandon the deal rather than hold it open for the length of the administrative review.
The twist in Illumina/GRAIL, however, was that the parties initially kept the deal open given the European Union review. So, the FTC proceeded with the administrative review without seeking a federal court injunction. Even after the parties closed the deal over the European Union review, the FTC continued with its own process and issued its order to unwind the deal.
But, unlike with DOJ proceedings, there is no final, neutral decision-maker. Even after a full trial before the ALJ, the FTC is not required to give deference to the ALJ’s factual determinations; it reviews both the legal and factual issues de novo.
The defendant can appeal the FTC’s decision to any federal circuit court in whose jurisdictional region the defendant does business. This is not, however, a “do-over” in federal court; instead, the FTC’s decision receives deference from the appellate court in that questions of law are reviewed de novo but factual determinations made by the FTC are not challenged provided that they are supported by substantial evidence. Given that antitrust matters often turn on the facts, this can be a critical—and often decisive—advantage for the FTC.
Even with this procedural benefit, circuit courts do not always find for the FTC. Indeed, circuit courts tend to take a more critical look when the FTC has overturned ALJ determinations. In a case involving the same ALJ that heard Illumina/GRAIL, the Eleventh Circuit, in reversing the FTC’s determination, explained that, although the substantial evidence standard still applied, the court may “examine the FTC’s findings more closely when they differ from those of the ALJ” and stressed that the review encapsulates the entire record, including the ALJ’s decision.2
We will see if Illumina is able to achieve a similar outcome.
Antitrust Issues Can Draw the Attention of Shareholder Activists
The Illumina/GRAIL transaction has caught the attention of more than just the antitrust regulators and courts. Carl Icahn has launched a proxy contest at Illumina. Icahn has published a series of open letters to Illumina shareholders over the course of March and April 2023, criticizing Illumina for pursuing the GRAIL acquisition despite regulatory opposition. As of the time of this publication, Icahn is calling for Illumina’s CEO to be ousted, for three Icahn-nominated candidates to be added to the Illumina board of directors, and for Illumina and GRAIL to be “separated immediately,” stating that the effort to overturn both the FTC and European Commission actions would be “an almost impossible battle” to win. Illumina has stated that Icahn’s letters do not reflect an understanding of the regulatory process, and that Illumina expects to “execute a divestiture based on the terms of the final order, expeditiously and in a manner that services the best interest of Illumina’s shareholders, unless Illumina wins the jurisdictional appeal in the meanwhile”.
llumina/GRAIL provides a case-study in the challenges facing mergers in the current climate of aggressive, global antitrust enforcement. In considering future deals, companies and their advisors should keep in mind and plan for:
- antitrust concerns that reach beyond combinations of direct competitors; as Illumina/GRAIL teaches, the enforcers are increasingly skeptical of “vertical” transactions and non-traditional theories of harm;
- global enforcers exercising jurisdiction over more and more matters and working together in ways that may increase the risk of a deal being blocked;
- enforcers taking a dim view of remedies, and
- ever-increasing length of regulatory reviews with all the risks associated with such delays, including potentially drawing attention and criticism from shareholder activists.
1Khushita Vasant, US Chamber Says FTC Engaged in 'International Regulatory Collusion' over Illumina-Grail Merger, MLex Market Insight (Feb. 25, 2023), https://mlexmarketinsight.com/news/insight/us-chamber-says-ftc-engaged-in-international-regulatory-collusion-over-illumina-grail-merger.2Schering-Plough Corp. v. F.T.C., 402 F.3d 1056, 1061-62 (11th Cir. 2005) (citing Universal Camera Corp. v. NLRB, 340 US 474, 487-88 (1951)). In Universal Camera, the Supreme Court stated: “[E]vidence supporting a conclusion may be less substantial when an impartial, experienced [ALJ] who has observed the witness and lived with the case has drawn conclusions different from the [Commission’s] than when he has reached the same conclusions.” 340 US at 496.