Even in defeat, FTC, DOJ advance important US case law in 2023

The US Federal Trade Commission and Department of Justice faced a series of setbacks with their merger challenges in 2023, with courts more often siding with the companies. However, in many cases the rulings involved important victories for the agencies’ goal of advancing their theories of harm and standards for merger review.

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27 December 2023
By Flavia Fortes, Ben Brody and Ilana Kowarski

The US Federal Trade Commission and Department of Justice faced a series of setbacks with their merger challenges in 2023, with courts more often siding with the companies.

However, in many cases the rulings involved important victories for the agencies’ goal of advancing their theories of harm and standards for merger review — and suggest that, in their second full years in their roles, DOJ antitrust chief Jonathan Kanter and FTC Chair Lina Khan are succeeding in at least some aspects of their fights to use all the tools available for the federal competition enforcement agencies.

The agencies convinced the courts to validate potential competition theories of harm and to accept that vertical deals can be challenged, and they persuaded companies to accept remedies in cases with novel theories of harm, such as the conglomerate-effects theory. They also pushed through additional and extensive commitments, like prior-approval provisions, which can, for example, position the agencies to block future transactions that seek to unlawfully maintain the merged companies’ monopolies.

In the Meta-Within transaction, a California district judge sided with the parties in denying the FTC’s request to stop the deal. What sank the FTC’s case was the lack of evidence that Meta was ever seriously considering building its own VR fitness app from scratch, or was perceived as a likely competitor by other companies in the space. But District Judge Edward Davila found that the rarely-used legal theory passed court muster, offering proof-of-concept for similar cases in future.

FTC officials say the case vindicates the theory of harm to “potential competition” — that mergers and acquisitions can harm horizontal competition even where the companies don’t already compete in the same market. Davila concluded that the doctrine is alive and well, if not very fresh, and rejected Meta's motion to dismiss the case.

In two deals where the commission sued but ultimately settled the cases with a consent decree, Intercontinental Exchange-Black Knight and Amgen-Horizon Therapeutics, the FTC secured a commitment of notification of any future deals proposed by the parties — a “prior approval” clause — for the next 10 years.

In ICE-Black Knight, the FTC said the original divestiture didn't fully resolve the potential anticompetitive impacts of the transaction, and it ultimately secured a number of additional commitments from the parties to resolve competition concerns.

In Amgen-Horizon, the FTC sought to apply a theory of harm that hasn’t been used in decades, and the agency obtained a consent decree prohibiting Amgen from engaging in any cross-product bundling or exclusionary rebate schemes involving Horizon’s monopoly drugs.

Under Khan, the FTC has been pressing companies to agree to seek approval for future deals if the firms sought to engage in transactions that resulted in a consent decree to resolve competitive concerns. Khan in September said the agreement that remedied the alleged issues in the Amgen-Horizon transaction included the prior-approval provision “because Amgen could try to neutralize Horizon’s rivals not just through excluding them but also through acquiring them”.

Even in the Assa Abloy-Spectrum challenge, where the judge said the DOJ rushed the decision to challenge the companies and didn’t give the parties an opportunity to fully explain the divestiture, the DOJ said the divestiture was better than previous, similar divestiture proposals it had rejected.

Assa Abloy, a Swedish manufacturing company, agreed to acquire the Hardware and Home Improvement division of Spectrum Brands in 2021. The DOJ filed a complaint to block the deal last September, arguing that the transaction would eliminate competition and lead to higher prices and lower quality for certain door lock mechanisms. Sarah Oxenham Allen, special counsel for state relations at the DOJ's antitrust division, said the agency could win more concessions from companies by taking them to court, even if it doesn’t manage to block a deal outright.

The final outcome was similar to the DOJ’s settlement in UnitedHealth-Change Healthcare in 2022, where the divestiture package that the parties litigated was much more robust than what they were offering the DOJ before they filed the complaint. Oxenham Allen said that “even though the DOJ lost that case, they got a better divestiture out of it by litigating.”

This year, the DOJ secured a clear victory when US District Judge Leo Sorokin issued a strongly worded decision in the agency’s favor when it challenged American Airlines’ Northeast Alliance partnership with JetBlue. The court opinion prompted JetBlue’s departure from its joint venture with American, though American has appealed the ruling against the alliance to the First Circuit.

Nevertheless, Sorokin subsequently rejected the DOJ’s request for a court order to forbid either JetBlue or American from participating in any future ventures that mirror their controversial alliance. He also refused to impose a prior-notice and waiting-period requirement for any joint venture between one of the merging parties and a rival airline that wasn’t involved in this case, contrary to the DOJ’s wishes, although he did institute such a condition for any subsequent business combination involving both JetBlue and American.

This month, the FTC scored a major win in the Court of Appeals for the Fifth Circuit, when the court found that the agency carried its burden to show that the merger between Illumina and Grail is likely to substantially lessen competition. The decision finds that vertical deals can be challenged, which was a defining moment for merger policy in the US.

Deterrence

The agencies are also being effective in their goal of deterrence, with Khan and Kanter arguing that abandonments of allegedly anticompetitive M&A and companies declining to even propose questionable transactions are as important to enforcement as court victories. Several transactions were abandoned when faced with the risk of a challenge by the FTC or the DOJ.

Drugmaker Sanofi’s pipeline drug-licensing deal with Maze and John Muir Health’s hospital buyout of San Ramon Regional Medical Center were withdrawn after both healthcare transactions elicited FTC complaints. Dealmakers in both transactions criticized the agency’s decision to sue and its legal rationale in official statements, wherein they also lamented the costs of litigation.

Sanofi retracted its proposed licensing arrangement with Maze for an early-stage medicine for a life-threatening and rare degenerative genetic disorder— Pompe Disease — in response to a government lawsuit alleging a nascent competition theory of harm.

The block was also the agency’s first challenge of an unconsummated merger involving a Phase 1 pipeline drug, and it has advanced the FTC’s goals for stronger enforcement of early-stage pharmaceutical deals.

John Muir backed away from its intended acquisition of the remaining interest in San Ramon Regional Medical Center a month after the FTC launched a suit that utilized some proven legal tactics but also experimented with less conventional litigation strategies.

The agency used some of the same methods it has successfully used in the past to block hospital deals in its complaint against John Muir.

For example, the FTC took a conventional approach to defining a healthcare-service product market, asserting that dealmakers had majority control of a relevant market, emphasizing price and quality concerns, and invoking a legal presumption of harm for a market where merging parties have high market share. However, the FTC drew a uniquely shaped geographic market which didn't fall neatly within jurisdictional lines but instead followed the path of a specific traffic corridor that runs parallel to California’s I-680 highway, and the market’s boundaries were outlined by natural landmarks such as waterways and land formations.

The agency also leaned on novel theories of harm which are cornerstones of the new federal M&A guidelines. Fundamental precepts of the new guidelines which were cited by the agency in this case include the cumulative negative impact that serial acquisitions can have even if one of the deals in a series appears to be okay; the possibility that mergers can entrench the market power of dominant players; and the potential for a transaction to accelerate trends toward consolidation. John Muir’s choice to walk away from its deal on the basis of a somewhat unconventional FTC hospital deal challenge may encourage the agency to introduce another lawsuit of a similar kind in the future.

Adobe and Figma also walked away from their proposed $20 billion deal in December after the European Union, UK and US DOJ all, broadly, zoomed in on markets for design software for websites and apps, essentially concerned that the deal would remove an innovator in the market. The DOJ had not formally taken any action on the deal beyond its second request in November 2022, while the EU and UK’s CMA had outlined preliminary concerns. Still, at a time of increasing international cooperation, the combined investigations of so many regulators likely made it difficult to push the deal through. South Korea, Japan and other regulators were looking at the acquisition, too, which had made designers nervous, and the EU’s charge sheet, issued in November, ultimately looked at Adobe’s core design tools as well the previous sunsetting of Adobe’s offerings that were similar to Figma.

Even Illumina, which had completed its acquisition of Grail, agreed to divest the business line despite the Fifth Circuit’s ruling sending the case back to the FTC with instructions to evaluate Illumina’s proposed fixes in a more defendant-friendly way.

Court losses

Nevertheless, there have been several significant court losses as well, such as Meta-Within.

Likely the most consequential for the FTC long-term was the Supreme Court’s unanimous decision in April that companies don’t have to wait for the end of the agency’s administrative process to challenge the constitutionality of its in-house forum in an federal appeals court. That decision, which grew out of taser-maker Axon’s acquisition of a camera subsidiary called VieVu, led this year to multiple merging parties attacking the constitutionality of the FTC’s structure and processes in what many agency-watchers have viewed as a larger “generational” threat to the administrative state.

Nonetheless, by year’s end, the FTC had resolved some of the resulting challenges (including Amgen-Horizon and ICE-Black Knight), won favorable precedent in at least two districts holding that the challenges shouldn’t be heard in preliminary injunction suits and managed to prevail on the constitutional issues in Illumina.

The DOJ also suffered losses in appeals courts. The antitrust division in March dropped its appeal to UnitedHealth’s acquisition of Change Healthcare, whose technology helps insurers process and edit claims. The government had sought to stop the merger, alleging it hurt competition by giving UnitedHealth’s Optum unit access to competitively sensitive information, but the antitrust division failed to get an injunction the prior year.

In July, the Third Circuit also upheld the DOJ’s defeat in its challenge to the combination of US Sugar and Imperial Sugar, affirming the district court’s finding that the product market should have included both producers and resellers, since sugar is a commodity.

In Microsoft’s acquisition of video game studio Activision Blizzard, meanwhile, the FTC sought a preliminary injunction in June, alleging the deal would allow the Xbox maker to foreclose popular video game titles from Sony’s high-end consoles and hurt competition in cloud gaming market and gaming subscriptions libraries. Ultimately, a federal district judge in California rejected the FTC’s theories as unproven and characterized Microsoft’s side deals to continue access to Activision content as pro-competitive.

Instead, it was the UK that got Microsoft to restructure some additional aspects of the deal to address concerns over the nascent cloud-gaming market. The FTC has appealed, and a Ninth Circuit panel heard oral arguments earlier this month over how much the district court should have relied on the side deals and resolved other evidence from Microsoft.

The decision could have far-reaching consequences for the operation of the FTC’s preliminary injunction powers, especially as the agency deals with more proposed fixes in litigation. It’s unclear when the circuit judges will rule, though in the meantime, the FTC has continued to get ready for its in-house administrative case against the consummated merger.

Clearances, pending transactions

Although Khan and Kanter have staked their records on increased enforcement and the advancement of newer theories, some deals did go through. Pfizer received all the necessary regulatory approvals to buy Seagen, suggesting that the FTC decided not to pursue the difficult-to-prove innovation theory of harm that Pfizer had said the government was looking into. The clearance of L3Harris-Aerojet Rocketdyne likewise may have signaled potential limits around conglomerate theories.

The agencies, in particular the FTC, are also going into 2024 with full plates. Kroger’s proposed purchase of Albertsons has been under heavy pressure from Khan allies. The companies had told a judge in private challenge to the deal earlier this month that they won’t close before Jan. 17 but are in talks with the FTC to extend that timing. The FTC is also still investigating Amazon-iRobot (despite having sued Amazon twice in 2023). It’s also issued second requests in other major transactions, including two major energy deals — Chevron-Hess and ExxonMobil-Pioneer.

The DOJ is waiting for a ruling on its bid to block the JetBlue-Spirit merger, and it has issued a second request for UnitedHealth’s acquisition of Amedisys, a home health and hospice provider.

The end of the year also saw a series of pharmaceutical dealmaking, with AbbVie buying Immunogen, Roche agreeing to acquire Carmot, AstraZeneca purchasing Icosavax and Gracell and Bristol Myers Squibb inking deals for Karuna Therapeutics and RayzeBio.

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