Illumina v. FTC
Unpublished (cited as 00517004299) (2023)
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Rule of Law:
When evaluating a merger under Section 7 of the Clayton Act, a merging party's rebuttal evidence (such as a behavioral commitment like an 'Open Offer') must be assessed at the liability stage to determine if it sufficiently mitigates the merger's likely anticompetitive effects such that competition is no longer substantially lessened, not if it entirely eliminates those effects.
Facts:
- Illumina, Inc., a manufacturer of next-generation sequencing (NGS) platforms, founded Grail, Inc. in 2015 to develop multi-cancer early detection (MCED) tests.
- In February 2017, Illumina spun off Grail to raise capital, reducing its equity stake to 12%.
- By September 2020, Grail's MCED test (Galleri) had received a breakthrough device designation from the FDA, and other MCED tests (like CancerSEEK and PanSeer) were in development, all relying exclusively on Illumina’s NGS platforms.
- On September 20, 2020, Illumina entered into an agreement to re-acquire Grail for $8 billion, intending to bring Galleri to market.
- On March 30, 2021, Illumina released a standardized supply contract, known as the “Open Offer,” to all for-profit U.S. oncology customers, guaranteeing NGS platforms at the same price and terms provided to Grail.
- Grail began offering Galleri for commercial sale as a laboratory-developed test in April 2021, becoming the only NGS-based MCED test commercially available at that time, though others were expected to enter the market soon.
- Illumina consummated the merger with Grail on August 18, 2021, but held Grail as a separate company due to ongoing European Commission regulatory review.
Procedural Posture:
- On March 30, 2021, the Federal Trade Commission's Complaint Counsel issued a complaint alleging that the Illumina-Grail merger agreement, if consummated, would violate Section 7 of the Clayton Act.
- The FTC’s Chief Administrative Law Judge (ALJ) convened an evidentiary hearing on August 24, 2021.
- On September 1, 2022, the ALJ issued an initial decision finding that Complaint Counsel failed to prove the merger was likely to cause a substantial lessening of competition and concluded that Illumina’s Open Offer rebutted the inference of future harm.
- Complaint Counsel appealed the ALJ’s decision to the Federal Trade Commission.
- The Federal Trade Commission, upon its de novo review, reversed the ALJ’s decision, concluding that the merger was likely to substantially lessen competition, found that the Open Offer failed to rebut the prima facie case because it would not 'eliminate the effects' of the merger, and ordered Illumina to divest Grail.
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Issue:
Does the Federal Trade Commission apply an erroneous legal standard under Section 7 of the Clayton Act when it requires a merging party, at the rebuttal stage, to show that a proposed behavioral remedy would entirely eliminate, rather than merely sufficiently mitigate, the merger's likely anticompetitive effects?
Opinions:
Majority - Edith Brown Clement
Yes, the Federal Trade Commission applied an erroneous legal standard at the rebuttal stage of its analysis. The court found that the Commission's conclusions regarding the relevant market definition (research, development, and commercialization of MCED tests in the U.S.) and the establishment of a prima facie case for substantially lessening competition were supported by substantial evidence under both the 'ability-and-incentive' and 'Brown Shoe' standards for vertical mergers. Illumina's constitutional challenges were rejected as foreclosed by Supreme Court precedent. However, the court determined that the FTC legally erred by requiring Illumina to show that its 'Open Offer' would 'eliminate the effects' of the merger to rebut the prima facie case. The court clarified that such agreements, made before any liability finding to address competitive concerns, should be considered at the liability stage, not just the remedy stage. Citing decisions like United States v. UnitedHealth Grp. Inc. and FTC v. Microsoft Corp., the Fifth Circuit held that the language of Section 7 of the Clayton Act, which prohibits mergers that 'substantially' lessen competition, requires merging parties to show only that their rebuttal evidence sufficiently mitigates the merger's effects such that it is no longer likely to 'substantially' lessen competition, not that it negates anticompetitive effects entirely. The court also found substantial evidence to support the Commission's finding that Illumina failed to substantiate its claimed efficiencies as cognizable rebuttal evidence.
Analysis:
This case is significant for clarifying the legal standard for evaluating a merging party's proposed behavioral commitments (like supply agreements) at the rebuttal stage in Section 7 Clayton Act vertical merger challenges. It reiterates that such agreements should be treated as part of the liability analysis, not merely as post-liability remedies, aligning with recent district court decisions. By requiring evidence to only 'sufficiently mitigate' rather than 'entirely eliminate' anticompetitive effects, the ruling lowers the evidentiary bar for merging parties, potentially making it easier to defend mergers with proactive behavioral remedies and influencing future antitrust enforcement strategies.
