In a yet another setback for the U.S. Department of Justice’s (DOJ) ongoing effort to prosecute labor-side violations of the Sherman Act, District of Connecticut Judge Victor A. Bolden granted a motion for a judgment of acquittal on April 28, 2023 in United States v. Patel. The order, which was entered before the jury was given an opportunity to deliberate, is not appealable and therefore brings an end to DOJ’s efforts to prosecute an alleged “no-poach” market allocation agreement. But more significantly, the order sets a high bar for proving a per se unlawful market allocation agreement in criminal no-poach cases, which could hinder DOJ’s ability to use the criminal justice system to police such cases.

The Alleged Conspiracy

The indictment alleged that the defendants — a manager at Raytheon subsidiary Pratt & Whitney, and executives at each of five outsourced engineering service providers used by Pratt & Whitney — typically “competed against one another to recruit and hire engineers and other skilled workers,” but participated, between 2011 and 2019, in an agreement “to suppress competition by allocating employees in the aerospace industry working on projects for” Pratt & Whitney.1 Specifically, as alleged, the agreement was a no-poach agreement that prohibited the defendants from contacting, interviewing, recruiting, or hiring each other’s employees.2

The defendants filed an unsuccessful motion to dismiss the indictment last year. We examined the district court’s opinion in a December 19, 2022 blog post. In short, the court held that (1) the no-poach agreement alleged by the indictment would, if proven at trial, amount to market allocation, which is an existing category warranting per se treatment under the Sherman Act,3 and (2) the no-poach agreement was not “ancillary to a legitimate business collaboration” and therefore did not qualify under the “ancillary restraints” exception to the per se rule.4 The case then moved to trial, with jury selection beginning in April 2023.

The Grant of Defendants’ Motion for Judgment of Acquittal

After the government presented its case-in-chief, the defendants jointly moved for a judgment of acquittal under Federal Rule of Criminal Procedure 29.5 Nearly a week later, the court granted the motion on the grounds that, as a matter of law, the conduct proven by the government at trial did not amount to a per se violation of the Sherman Act.6

In arriving at this conclusion, the court first reiterated its view that a horizontal market-allocation agreement, including an agreement “allocating or dividing an employment market,” is “traditionally subject to per se treatment” under the Sherman Act.7 But it then ruled that, as a matter of law, the instant case did not involve per se market allocation, largely based on its analysis of a Second Circuit case, Bogan v. Nw. Mut. Life Ins. Co.8 That case, which was civil rather than criminal, involved an agreement among “general agents” of Northwestern Mutual Life Insurance Company, who were responsible for hiring district and sales agents to sell Northwestern Mutual life insurance, not to compete for services of existing district and sales agents by restricting their transfer.9 The Second Circuit affirmed the district court’s grant of the Bogan defendants’ motion for summary judgment, holding that the per se rule was not applicable.10 The court reasoned that the agreement had too many exceptions to constitute an allocation; it “permitted transfers, and experienced NML agents do not comprise the entire set of supplies for their services” because the general agents were free to compete for new Northwestern Mutual agents. Therefore, while the agreement “may constrain General Agents to some degree, it does not allocate the market for agents to any meaningful extent.”11

Focusing on the evidence presented by the government at trial, the Patel court held that this case was on all fours with Bogan.12 Even assuming the government had adequately proven that there was an agreement between defendants to restrict hiring of engineers or other skilled labor employees among the five contractors working on projects for Pratt & Whitney, there were simply too many holes in the bucket — i.e., too many exceptions to the agreement — for it to hold water as a per se market allocation agreement. The court noted that “hiring among the relevant companies was commonplace, throughout the alleged agreement,” even citing numerous examples of poaching set forth in pages of string cites to the trial transcript and relevant exhibits that showed that even those who had sent emails that appeared to refer to a bright-line rule against poaching engaged in the practice.13 “Under these circumstances,” the court concluded, “the alleged agreement itself had so many exceptions that it could not be said to meaningfully allocate the labor market of engineers from the supplier companies working on Pratt and Whitney projects.”14 Like the agreement in Bogan, the agreement here “constrained” the workers “to some degree” but did not allocate the market “to any meaningful extent.”15

The court was careful to note that its holding was based on a careful analysis of the extent of enforcement of the agreement; the outcome would not have been the same had the proof allowed only for the “theoretical possibility” of switching employers, or that transfers “occurred in a few exceptional cases.”16

The Court’s Opinion Increases DOJ’s Burden in No-Poach Cases

The court’s ruling ends DOJ’s case against Patel and his co-defendants; the Double Jeopardy Clause of the Fifth Amendment does not allow the government to appeal the grant of a Rule 29 motion for judgment of acquittal where, as here, the jury has not already delivered a guilty verdict and a successful appeal would therefore require a retrial.17 

Although DOJ has established that “no-poach” agreements can be treated as per se violations of Section 1 of the Sherman Act that may be criminally prosecuted, DOJ has yet to secure a conviction. And the Patel court’s opinion could make it more difficult for DOJ to continue to bring criminal no-poach cases as market allocation agreements.18 Under the Patel court’s ruling, in cases involving no-poach agreements, the court must “assess whether the agreement meaningfully allocates the market such that this no hire agreement is one that operates as a market allocation agreement and justifies per se treatment.”19 In other words, even with evidence of an agreement among defendants to restrict hiring, the court must find that the agreement has the effect of “meaningfully” allocating the market in order to prove a per se unlawful market allocation agreement.

DOJ’s failure to prove that the Patel defendants actually allocated the market may portend questions about future criminal enforcement of alleged “no-poach” agreements. Proving the existence of naked “no-poach” agreements in court has been more challenging than DOJ likely anticipated.

Currently, DOJ has another criminal no-poach case, United States v. Surgical Care Affiliates, LLC and SCAI Holdings, LLC,20 heading toward trial. If nothing else, that case, which concerns an alleged agreement not to solicit senior-level employees in the outpatient medical facilities business, will be an opportunity for DOJ to prove an unlawful agreement and finally secure a victory.

Endnotes

1 Indictment ¶¶ 4, 10-16, 19, United States v. Patel, 3:21-cr-00220 (D. Conn. Dec. 15, 2021), ECF No. 20.

2 Id. ¶¶ 20-21.

3 United States v. Patel, No. 3:21-CR-220, 2022 WL 17404509, at *7 (D. Conn. Dec. 2, 2022).

4 Id. at *11.

5 Order Granting Motion for Acquittal at 3, United States v. Patel, 3:21-cr-00220 (D. Conn. Apr. 28, 2023), ECF No. 599.

6 Id. at 11.

7 Id. at 9.

8 166 F.3d 509 (2d Cir. 1999)

9 Id. at 511–12.

10 Id. at 513–16.

11 Id. at 515–16. The court also noted that, consistent with Bogan, the jury instructions in United States v. DaVita Inc. stated that “a horizontal market allocation requires cessation of ‘meaningful competition’ in the allocated market.” No. 1:21-cr-00229-RBJ, 2022 WL 1288585, at *3 (D. Colo. Mar. 25, 2022).

12 Order Granting Motion for Acquittal at 12, United States v. Patel, 3:21-cr-00220 (D. Conn. Apr. 28, 2023), ECF No. 599.

13 Id. at 18.

14 Id. at 17.

15 Id. (citing Bogan, 166 F.3d at 515). In his December 2022 motion to dismiss ruling, Judge Bolden distinguished Bogan from the facts alleged in the Patel indictment on the grounds that (1) the Northwestern Mutual agents were all paid on a uniform rate schedule, so a no-poach agreement could not negatively affect their wages and (2) the agreement in Bogan did not “allocate the market . . . to any meaningful extent,” and “permitted transfers.” Patel, 2022 WL 17404509, at *10 & n.2.

16 Id. at 18.

17 See United States v. Martin Linen Supply Co., 430 U.S. 564 (1977).

18 See US Dep’t of Justice, Justice Manual at 7-2.200 (April 2022), available at https://www.justice.gov/jm/jm-7-2000-prior-approvals#7-2.200 (“While a violation of the Sherman Act may be prosecuted as a felony, in general, the Department reserves criminal prosecution under Section 1 for ‘per se‘ unlawful restraints of trade among competitors, e.g., price fixing, bid rigging, and market allocation agreements.”).

19 Order Granting Motion for Acquittal at 12-13 n.3, United States v. Patel, 3:21-cr-00220 (D. Conn. Apr. 28, 2023), ECF No. 599 (emphasis added).

20 No. 3:21-cr-00011 (N.D. Tex.).

On January 23, 2023, a federal district court approved a pretrial diversion agreement between the Department of Justice (DOJ) and Ryan Hee, a former regional manager for a healthcare staffing company. The deal, which will likely result in Hee walking away without a conviction, is yet another lackluster result for DOJ’s thus-far largely unsuccessful effort to criminally prosecute alleged anticompetitive conduct in the labor markets.

Indeed, despite a spate of victories at the motion to dismiss stage (covered in our previous posts here, here, and here), DOJ has yet to secure a labor-side Sherman Act conviction at trial. Years after its initiation, DOJ’s effort has yielded only two convictions.[1] The pretrial diversion agreement with Hee does little to change this.

Continue Reading With Pretrial Diversion Agreement, DOJ’s Antitrust Division Achieves Another “Meh” Victory In Its Continued Effort to Police Labor Markets

In this blog post, we provide an overview of the updates to the Criminal Division’s Corporate Enforcement Policy (CEP) and discuss the impact of these changes on the corporate enforcement policies for criminal violations of sanctions and export controls, criminal violations of antitrust laws, and civil violations of the False Claim Act.

On January 17, 2023, Assistant Attorney General Kenneth A. Polite, Jr. announced changes to the Department of Justice’s (“DOJ”) Corporate Enforcement Policy (“CEP”), including applying the most recent FCPA Corporate Enforcement Policy to all corporate criminal cases handled by the DOJ’s Criminal Division. The FCPA Corporate Enforcement Policy, codified in § 9-47.120 of the Justice Manual, provides that if a company voluntarily self-discloses, fully cooperates, and timely and appropriately remediates, there is a presumption of declination absent certain “aggravating circumstances involving the seriousness of the offense or the nature of the offender.” The clear goal of this and other recent pronouncements from senior DOJ leadership is to tip the scales in favor of early disclosure by setting forth concrete incentives for corporations that discover potential criminal violations. 

Importantly, the CEP now explicitly states that a company presenting “aggravating circumstances,”[1] while not eligible for a presumption of declination, may still obtain a declination if (1) the company had an effective compliance program and system of internal accounting controls at the time of the alleged misconduct, (2) the voluntary self-disclosure was made “immediately” upon the company becoming aware of the allegation of misconduct, and (3) the company provided “extraordinary cooperation” to DOJ investigators. For companies that do not receive a declination but do receive credit, the CEP also increases the available discounts from fines under the U.S. Sentencing Guidelines (“USSG”), both for companies that voluntarily self-disclose and those that do not.

Although the updated CEP heavily emphasizes the benefits of voluntary self-disclosure and cooperation, its implications for companies will largely depend upon the Criminal Division’s application of the policy, including through DOJ prosecutors’ interpretation of important, undefined terms such as “immediate” disclosure and “extraordinary” cooperation.

Moreover, although the CEP applies to the entire Criminal Division, it could potentially have ripple effects on the corporate enforcement policies in place in other DOJ components. For example, the CEP does not revoke or alter the DOJ National Security Division’s (“NSD”) Export Control and Sanctions Enforcement Policy for Business Organizations (the “Export Control and Sanctions Enforcement Policy”). That NSD policy is generally consistent with the CEP, but it does not spell out affirmatively, as the new Criminal Division policy does, the circumstances that a company must demonstrate to be considered for a non-prosecution agreement (“NPA”) rather than a criminal resolution in the face of aggravating factors. Similarly, the Antitrust Division and Civil Division have their own corporate enforcement policies in place, each of which has aspects uniquely tailored to those respective regimes. It therefore remains to be seen whether these other Divisions within DOJ will adjust their corporate enforcement policies to align more precisely with the CEP.  

Declinations when Aggravating Circumstances are Present

Under the prior version of the CEP, companies could qualify for a presumption of declination if there was an absence of aggravating factors and if they: voluntarily disclosed; provided full cooperation; and timely and appropriately remediated. The revised CEP clarifies that companies may still qualify for a declination even where aggravating circumstances are present, but only under very specific and stringent requirements to qualify for such a result. Those requirements are: 

  • The voluntary self-disclosure was made immediately upon the company becoming aware of the allegation of misconduct;
  • At the time of the misconduct and disclosure, the company had an effective compliance program and system of internal accounting controls, which enabled the identification of the misconduct and led to the company’s voluntary self-disclosure; and
  • The company provided extraordinary cooperation with the Department’s investigation and undertook extraordinary remediation that exceeds the respective factors listed in the CEP.

The impact of the updated policy will largely depend upon how prosecutors apply these standards in practice. 

First, it will be important to evaluate how DOJ prosecutors in practice apply the standard of voluntary self-disclosure “made immediately upon the company becoming aware of the allegation of misconduct.” As currently articulated, the standard of immediate self-disclosure of a mere allegation is arguably unrealistic and does not appear to afford companies the opportunity to meaningfully investigate potential misconduct to determine whether there is even any potential misconduct (as opposed to a mere allegation) to disclose. 

Second, the requirement to demonstrate an effective compliance program goes beyond the FCPA Corporate Enforcement Policy’s prior requirement of demonstrating effective remediation. Although the definition of an “effective compliance program” at the time of misconduct likely comports with the Evaluation of Corporate Compliance Programs guidance, the new requirement and the way that it is articulated will mean that companies will have to affirmatively demonstrate the effectiveness of the compliance program both previously and at the time of the disclosure. This will mean that companies will have to devote even more money and resources (i.e., internal as well as external counsel) to making that case to the Department of Justice.

Third, while the concept of “extraordinary cooperation” has been referenced in a number of corporate settlements in recent years, that standard remains ill-defined, and DOJ enjoys substantial discretion in applying it. Assistant Attorney General Kenneth Polite emphasized that providing information that DOJ might not otherwise be able to obtain is part of the assessment, but that ultimately “we know ‘extraordinary cooperation’ when we see it, and the differences between ‘full’ and ‘extraordinary’ cooperation are perhaps more in degree than kind.” This leaves companies and their counsel with significant uncertainty as to what will be considered sufficient in any given matter.

USSG Discounts

The discounts available for companies that do not receive a declination but do receive credit are now greater, both for those that voluntarily disclose and those that do not. While the FCPA Corporate Enforcement Policy (and its later extension to the Criminal Division more broadly) provided for a maximum “50% reduction off of the low end” of the USSG fine range for non-recidivist companies that voluntarily self-disclose, fully cooperate, and appropriately remediate, the updated CEP provides for “at least 50% and up to 75% reduction off of the low end” of the USSG fine range for companies that meet those standards, except in the case of recidivists. Under the CEP, the Criminal Division will recommend up to a 50% reduction off of the low end of the USSG fine range for companies that do not voluntarily disclose but still fully cooperate and appropriately and timely remediate.

Furthermore, while this was always the case, it is notable that the revised policy expressly stresses the discretion that prosecutors have to recommend the specific percentage reduction and starting point in the fine range based on the particular facts and circumstances. It will be important to watch how prosecutors utilize this discretion in practice, and companies and their counsel will want to analogize (or distinguish) their cases from resolutions reached under the revised CEP going forward.

The CEP’s Potential Impacts on Corporate Enforcement Policies in Specific Areas

Export Control and Sanctions Violations

By comparison, as described above, when a company voluntarily self-discloses potentially willful violations of US export controls and sanctions laws to the NSD’s Counterintelligence and Export Control Section (“CES”), fully cooperates, and timely and appropriately remediates, there is a presumption of an NPA and no fine, absent aggravating circumstances. While the Export Control and Sanctions Enforcement Policy’s standards for receiving credit for voluntary self-disclosure, full cooperation, and timely and appropriate remediation are identical to those set forth in the prior FCPA Corporate Enforcement Policy, the NSD’s guidelines set forth specific aggravating factors that apply to criminal violations of US sanctions and export control laws by companies.[2]

If, due to aggravating factors, a different criminal resolution – i.e., a deferred prosecution agreement or guilty plea – is warranted for a company that has voluntarily self-disclosed, fully cooperated, and timely and appropriately remediated its export control or sanctions violations, the DOJ will accord, or recommend to a sentencing court, a fine that is, at least, 50% less than the amount that otherwise would be available. Unlike violations of the FCPA, criminal violations of sanctions and export control laws, which are typically charged as violations of the International Emergency Economic Powers Act (“IEEPA”), do not rely on the USSG in determining criminal fines. Rather, prosecutors charging IEEPA violations rely upon the alternative fine provision in 18 USC § 3571(d) and on forfeiture authority. Under 18 USC § 3571(d), the fine would ordinarily be capped at an amount equal to twice the gross gain or gross loss. Per NSD’s policy, however, when a company voluntarily self-discloses, fully cooperates, and timely and appropriately remediates, DOJ will cap the recommended fine at an amount equal only to the gross gain or gross loss (i.e., 50 percent of the statutory maximum), and the company would also be required to pay all disgorgement, forfeiture, and/or restitution resulting from the misconduct at issue. 

Importantly, the Export Control and Sanctions Enforcement Policy’s guidelines do not apply to administrative fines, penalties, and forfeitures commonly imposed by the State Department’s Directorate of Defense Trade Controls (“DDTC”), the Department of Commerce’s Bureau of Industry and Security (“BIS”), and the Treasury Department’s Office of Foreign Assets Control (“OFAC”) for export control and sanctions violations, all of which have their own guidelines. However, per § 1-12.100 of the Justice Manual, attorneys prosecuting these cases are expected to coordinate with other enforcement authorities and consider the total amount of fines, penalties, and forfeiture paid to DDTC, BIS, and/or OFAC in determining the criminal penalty.

Criminal Antitrust

Unlike other areas of corporate criminal enforcement under the DOJ umbrella, the Antitrust Division has had its own long-standing Leniency Program in place that provides broad protections to companies who participate in the Program. Under the Leniency Program, codified in § 7-3.000 of the Justice Manual, corporations who are the first in a conspiracy to report their cartel activity to the Antitrust Division and cooperate in the investigation can completely avoid criminal conviction, fines, and prison sentences.

Although broader DOJ enforcement policy changes typically try to avoid – and often expressly carve out – any interference with the Antitrust Division’s Leniency Program, the Antitrust Division often follows significant enforcement policy changes with its own issuance of enforcement guidance that is more precisely tailored to the contours of the Leniency Program. In this case, however, the Antitrust Division acted first (albeit after Deputy Attorney General Lisa Monaco’s issuance of her eponymous memo in October 2021). Last April, with the professed goal of making the program more straightforward and accessible, the Antitrust Division implemented updates to the Leniency Program, and these changes, as well as some of the prior aspects of the Leniency Program, emphasize the same requirements put forth in the CEP. Namely, these revisions require, as a condition of non-prosecution, that a company promptly reports potential misconduct, has an effective compliance program in place, addresses any compliance shortcomings that contributed to the misconduct, provides significant cooperation to the DOJ’s investigation, and undertakes remediation efforts that will address the root causes of the conduct.  

While the Antitrust Division’s prompt reporting requirement for complete non-prosecution has some of the same ambiguity as the CEP’s similar requirement, the Antitrust Division’s Guidance allows for companies seeking non-prosecution to conduct a timely, preliminary internal investigation to confirm the violation occurred before reporting the violation to the Antitrust Division. This appears to be significantly different from the CEP’s prerequisite to declination, where aggravating circumstances are present, of “immediate” reporting of a mere “allegation.” Moreover, the Leniency Program, unlike the CEP, does not create stricter requirements for those “first in” companies seeking declination that present aggravating circumstances, except that the Antitrust Division will carefully review the culpability of a company that served as the ringleader of the conspiracy before granting the company leniency.  

Overall, and likely based on the number of years the Antitrust Division’s program has been in place, the Antitrust Division has a more robust set of guidance to assist companies going through this process than the CEP provides. Last year, the Antitrust Division released 35 pages of FAQs covering all aspects of the program. While much of the implementation of the Leniency Program will depend on the facts and circumstances of the case as well as the viewpoints of the prosecutors involved, these FAQs will resolve some of the ambiguity that will arise from the CEP’s more limited guidance, but also, at times, may put more onerous burdens on companies. In addition, the Antitrust Division has numerous examples of successful and unsuccessful leniency applications over decades of implementation to use as further guidance. While we expect the Antitrust Division to review its program in comparison to the CEP, including whether to follow CEP’s suit in quantifying the amount of credit given under certain cooperation/aggravating factor scenarios, we also expect that prosecutors may look towards the voluminous guidance from the Antitrust Division as they implement the CEP.

False Claims Act

DOJ’s Civil Division most recently issued corporate enforcement guidance applicable to civil violations of the False Claims Act in May 2019, now codified in § 4-4.112 of the Justice Manual. That guidance follows the typical framework for cooperation credit set forth in the CEP – timely voluntary disclosure, prompt cooperation, and appropriate remediation – but lacks the more precise quantifications of cooperation credit available that the CEP now puts in place for corporate criminal resolutions. Although it is likely that the Civil Division will revisit this guidance in light of the issuance of the CEP, the nature of civil FCA violations may not lend itself to perfect or even near-perfect alignment with the CEP. For example, there is no applicable sentencing fine range to use as a baseline for granting civil FCA defendants cooperation credit in the form of percentage discounts, and the amount covered by corporate resolutions is driven largely by the loss to the government, which will almost certainly not be the subject of any cooperation credit-driven discount. However, given the CEP’s clear goal of providing transparency as to the extent of cooperation credit available, and the benefits of doing so in the civil FCA context, we may see a revision to this guidance that provides precision on what multiplier might apply to the amount of damages under certain cooperation/aggravating factor scenarios (the FCA provides for the imposition of up to treble the amount of damages to the government), and/or what per-claim civil penalty within the statutory range might apply (in addition to treble damages, the imposition of civil penalties ranging from $12,537 to $25,076 per claim can also be imposed).  

Conclusion

While the CEP acknowledges that voluntary self-disclosure is just that – voluntary, not mandatory, except where required by specific regulatory regimes – the overall tenor is a heavy emphasis on voluntary self-disclosure in corporate matters handled by the Criminal Division. As companies wait to see how the Criminal Division enforces the CEP, and whether the NSD, the Antitrust Division, or the Civil Division updates their respective enforcement policies to align with the CEP, it is prudent for companies to proactively invest in risk-based compliance programs and carefully weigh the potential costs and benefits of voluntary self-disclosure.  For further information, please contact a member of Steptoe’s Investigations & White Collar Defense or Export Controls and Sanctions Practice

[1] Aggravating circumstances include the involvement of executive management of the company in the misconduct; a significant profit to the company from the misconduct; egregiousness or pervasiveness of the misconduct within the company; or criminal recidivism.

[2] Aggravating factors include exports of items controlled for nuclear nonproliferation or missile technology reasons to a proliferator country; exports of items known to be used in the construction of weapons of mass destruction; exports to a Foreign Terrorist Organization or Specially Designated Global Terrorist; exports of military items to a hostile foreign power; repeated violations, including similar administrative or criminal violations in the past; and knowing involvement of upper management in the criminal conduct.

The FTC has taken its strongest actions yet to limit private contract terms limiting employees’ ability to work for competitors, both issuing a proposed rule barring most noncompete agreements and filing complaints and consent decrees with three companies prohibiting their specific noncompete provisions. Prudent employers should evaluate their own employment contracts to assess the risk of current enforcement actions and plan for future compliance if the proposed rule comes into effect.

Read more here.

On January 23, 2023, the Federal Trade Commission (“FTC”) announced updated size-of-transaction thresholds for premerger notification (Hart-Scott-Rodino or “HSR”) filings, as well as new HSR filing fees and new de minimis thresholds for interlocking officer and director prohibitions under Section 8 of the Clayton Act.

The HSR filing thresholds, which are revised annually based on the change in gross national product, trigger a premerger notification filing requirement with both the FTC and the Department of Justice’s (“DOJ”) Antitrust Division.  For proposed mergers and acquisitions, the 2023 threshold will increase from $101 million to $111.4 million. 

Separately, pursuant to the 2023 Consolidated Appropriations Act, the FTC announced the new filing fees for premerger notification filings.  Before this announcement, parties to a transaction paid the following filing fees based on the size of the transaction:

Old 2022 Thresholds and Filing Fees

Transaction ValueFiling Fee
Greater than $101 million but less than $202 million$45,000
Greater than or equal to $202 million but less than $1,009.8 million$125,000
$1,009.8 million or greater$280,000

Under the new act, however, the new filing fee structure has six categories and increases the fees substantially for the largest transactions:

New 2023 Thresholds and Filing Fees

Transaction ValueFiling Fee
Greater than $111.4 million but less than $161.5 million$30,000
Not less than $161.5 million but less than $500 million$100,000
Not less than $500 million but less than $1 billion$250,000
Not less than $1 billion but less than $2 billion$400,000
Not less than $2 billion but less than $5 billion$800,000
$5 billion or more$2.25 million

Congress increased the fees to help the DOJ and the FTC staff more closely review transactions after the unprecedented number of prenotification filings in the past two years.  Of note, Congress decreased fees for smaller transactions subject to the HSR Act.     

The new de minimis thresholds for triggering Section 8’s bar on interlocking officers and directors are $45,257,000 for the minimum size of capital, surplus, and undivided profits for purposes of Section 8(a)(1) and $4,525,700 for the minimum amount of competitive sales for purposes of Section 8(a)(2)(A).  The triggers for application of Section 8 of the Clayton Act are particularly important in light of the Department of Justice’s recent focus and enforcement actions on this issue, as discussed previously.

The size-of-transaction threshold for transactions under Section 7A and the new filing fees will take effect 30 days after publication in the Federal Register.  The thresholds for Section 8 became effective on January 20, 2023.    

January 25, 2023 Update:  The 7A thresholds and new filing fees will become effective on February 27, 2023.

On 31st December 2022, the current R&D Block Exemption 1217/2010 (‘R&D BE’) is due to expire and to be replaced by a new safe harbor regulation which will be supported by guidelines contained within new Horizontal Guidelines to be issued by the European Commission, which are still in draft.  The Commission is seeking to extend the life of the existing R&D BE by six months to the end of June 2023.

We provided a summary of the proposals for the new R&D BE, when the draft was first released in March 2022 and our comments are here.  This remains the latest version of the draft.  Key proposals readers should be aware of are:

  1. There will be new market share thresholds.  Where the parties to the R&D agreement are competitors at the time of the agreement, the combined market share cap is 25% of the relevant product or technology markets.  Similarly, where the R&D agreement is with respect to paid-for R&D, then the market share limit is also 25% of the aggregated shares of the financing party and all the parties funded by the financing party which are engaged in R&D for the same contract products or contract technologies.
  2. R&D agreements will be excluded from the benefit of the R&D BE where there are less than three competing R&D efforts in addition to and comparable with those of the parties to the R&D agreement.
  3. If the R&D agreement provides for joint exploitation, then the exemption will last for 7 years from launch of the products resulting from the R&D.  Thereafter, the exemption continues to apply as long as the 25% market share threshold is not exceeded and, if it is, it still benefits from a further two years exemption.
  4. The exclusion of the benefit of the exemption where the agreement contains hardcore restrictions (Article 8), is as expected.  It includes: banning R&D in unrelated fields; certain output limitations; certain price fixing arrangements; territorial and active sales restrictions.
  5. The Definitions section has been expanded and clarified and there is now a specific section covering withdrawal of the benefit of the exemption by the Commission.
  6. Guidance on the R&DBE is provided in Chapter 2 of the new Horizontal Guidelines.  There will also be guidance in the Market Definition Notice which is being updated too by the Commission.
  7. The new R&D BE, once adopted,  will last for 12 years

Please do not hesitate to contact our team if you have any questions on the existing or new R&D BE.

On October 31, 2022, Judge Florence Pan, now on the D.C. Circuit but sitting by designation in the District Court of the District of Columbia, delivered a “treat” to the Department of Justice (DOJ) and a “trick” to Penguin Random House by blocking its $2.18 billion purchase of rival publisher Simon & Schuster.  The opinion, which was released on November 7, 2022, represents a comprehensive endorsement of the DOJ’s monopsony theory of the case and a complete rejection of the defendants’ counterarguments.  After a string of defeats, the case marks the first win for the DOJ under the Biden administration in a litigated merger challenge.

Continue Reading DOJ Blocks the Penguin/Simon & Schuster Deal:  A Signature Antitrust Win for the Biden Administration

Last month, the U.S. Department of Justice’s (DOJ) Antitrust Division announced that seven directors from the boards of five companies resigned in response to concerns that the directors’ roles violated the prohibition against interlocking directorates under Section 8 of the Clayton Act.1  These resignations follow previous statements by the DOJ that it intended to “reinvigorate” Section 8 enforcement, including a speech delivered earlier this year by Assistant Attorney General (AAG) Jonathan Kanter, who made clear that the Antitrust Division would be closely scrutinizing interlocking directorates.2  This development highlights the need for companies to maintain an effective antitrust compliance program that carefully monitors board memberships and appointment policies to mitigate Section 8 risks.

Legal Background: Clayton Act Section 8

Subject to certain de minimis exemptions, Section 8 of the Clayton Act prohibits “interlocking directors,” which occur when a “person” simultaneously serves as a director or officer of two or more competing corporations. Section 8 is—in effect—a prophylactic statute designed to eliminate the possibility of anticompetitive effects that could arise from competitors coordinating their business decisions or exchanging competitively sensitive information. As such, the prohibition applies only to interlocks involving corporations that are competitors “by virtue of their business and location of operation…such that elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.”3 Unless an exemption applies, an interlock that violates Section 8 is unlawful per se (i.e., there is no consideration of whether the interlock results in anticompetitive effects). 

To remedy a Section 8 violation, the antitrust agencies or private plaintiffs can seek injunctive relief to require the removal of the overlapping director to eliminate the interlock. Private plaintiffs may also seek damages, although we are not aware of any court that has awarded damages for a Section 8 claim.

Exemptions and Exclusions

Because certain interlocks are deemed to pose minimal risk of competitive harm, Section 8 does not apply where:  

  • The combined total capital, surplus, and undivided profits of either corporation is less than $41,034,000 (indexed annually); or
  • The competitive sales of:
    • either corporation are less than $4,103,400 (indexed annually);
    • either corporation are less than 2% of the corporation’s total sales; or
    • each corporation are less than 4% of the corporation’s total sales.4

Further, Section 8 provides for a one-year grace period following an intervening event that creates an interlocking directorate violation.5 The grace period applies where the officer or director was eligible to serve in that position at the time of appointment (i.e., the appointment did not violate Section 8), but becomes ineligible for that position due to an intervening event that makes continued participation unlawful under Section 8 (e.g., their competitive sales grow above the de minimis thresholds). The officer or director has a one-year grace period from the date of the intervening event to resign from that position. 

Application to Other Entities, Definition of Person, and Indirect Interlocks

While the language of Section 8 refers only to “corporations,” the term is undefined in the Clayton Act. Nonetheless, the DOJ has taken the position in commentary (but not in litigation) that it can use its broader antitrust authority to enforce Section 8 against non-corporate entities because “the harm from interlocking directorates is the same regardless” of the corporate structure.6 

The DOJ and the Federal Trade Commission (FTC) also take the position that under Section 8, entities are “persons” and may violate the statute if their representatives serve as directors or officers of two competing entities, even though the representatives are not the same individuals. At least one district court has adopted this “representative” or “deputization” theory to hold that Section 8 prohibits a parent corporation from designating different agents to serve on the boards of two competing partially owned subsidiaries where the agents’ service on the boards was “not in their individual capacities,” but rather as deputies or agents of the corporation.7 

The DOJ and FTC also take the view that indirect interlocks,  (e.g., where subsidiaries of two companies compete or one company competes with the subsidiary of the other company) can violate Section 8. While there is no definitive test under Section 8, courts have generally looked at the extent of control or influence that a parent company has with respect to directing the activities and competitive policies of the subsidiary to determine whether Section 8 applies. For example, competition with a subsidiary can be attributed to the parent company “where the parent closely controls or dictates the policies of the subsidiary.”8 Although courts have not elaborated on a specific list of factors relevant to this inquiry, the DOJ and FTC have challenged indirect interlocks under Section 8.9

Recent Resignations Highlight Increased Section 8 Risk

Despite some activity in recent years,10 it has been nearly four decades since the DOJ or FTC have filed a lawsuit to enforce Section 8. But with the latest round of announced resignations, the DOJ has made good on its promise to “reinvigorate” Section 8 enforcement.

These resignations eliminated the alleged interlocks on the boards of ten technology/software companies. All of the affected entities were publicly traded corporations, and three of the five individuals who resigned represented investment firms with significant stakes in competing corporations.11 Notably, the DOJ neither required the corporations to enter into consent decrees nor imposed any other settlement conditions. In its press release announcing the resignations, however, the DOJ made it  known that “companies, officers, and board members should expect that enforcement of Section 8 will continue to be a priority for the Antitrust Division” and invited the public to provide information as to any interlocking directorates of which they are aware.12

The resignations follow several pronouncements by the antitrust agencies portending increased Section 8 enforcement. In April, AAG Kanter noted that the DOJ was “ramping up efforts to identify violations across the broader economy” and “will not hesitate to bring Section 8 cases to break up interlocking directorates,” including outside the context of the “merger review process.”13 Then, in June, Deputy Assistant Attorney General Andrew Forman signaled that private equity was of particular focus: “to the extent that private equity investments in competitors leads to board interlocks in violation of Section 8, the division is committed to taking an aggressive action.”14

Implications and Key Takeaways

The DOJ’s proactive approach to Section 8 enforcement marks a departure from prior agency practice, where Section 8 issues primarily arose in the context of transactions reviewed under the Hart-Scott-Rodino Antitrust Act (HSR). It also deviates from the FTC’s 2017 statement that it “relies on self-policing to prevent Section 8 violations.”15 

We believe the announced resignations are likely a harbinger of things to come and expect the antitrust agencies’ proactive approach to Section 8 enforcement to continue. While Section 8 refers only to “corporations,” government enforcers have stated their belief that Section 8 applies more broadly to non-corporate legal entities. With that in mind, companies are well advised to take the following steps to mitigate potential Section 8 concerns.

  • Companies should review their existing board membership and ask each director and officer to list the companies for which they serve a similar role to ensure there are no interlocks between competing companies.
  • Companies should review existing board appointment policies to ensure they comply with Section 8. In particular, when onboarding a new officer or director who serves a similar role for another company in a related industry, companies should be mindful of compliance with Section 8.
  • When evaluating potential mergers, acquisitions, or joint ventures, companies should carefully consider if any transaction provisions would give one company the right to appoint an officer or director to a competing company.
  • Private equity firms should carefully review their investment portfolios to ensure there are no interlocks between competing companies.
  • Companies should further consider conducting annual reviews of board memberships to avoid any new Section 8 concerns that may have arisen due to changed circumstances. For example, previously benign interlocks among companies could trigger Section 8, if the companies begin to compete against each other more directly.16 Therefore, Section 8 compliance should be reassessed annually to assess the companies’ growth, new products, repositioning, or acquisitions. This should include an annual assessment of the applicability of the de minimis thresholds triggered by the extent of “competitive sales.”
  • Finally, even if an exemption applies under Section 8, interlocking officers or directors between competing companies may raise antitrust risk under Section 1 of the Sherman Act, which prohibits agreements in restraint of trade. In such a case, companies should consider implementing antitrust guidelines—such as firewalls between interlocked officers or directors and procedures for safeguarding competitively sensitive information—to mitigate potential Section 1 risk.

Endnotes

1 Press Release, U.S. Dep’t of Justice, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates (Oct. 19, 2022), https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially.

2 Johnathan Kanter, AAG, Antitrust Div., U.S. Dep’t of Justice, Opening Remarks at 2022 Spring Enforcers Summit (Apr. 4, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers. 

3 15 U.S.C. § 19(a)(1).

4 15 U.S.C. § 19(a)(2).

5 15 U.S.C. § 19(b). 

6 Makan Delrahim, AAG., Antitrust Div., U.S. Dep’t of Justice, Remarks at Fordham University School of Law (May 1, 2019), https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-fordham-university-school-law.

7 Reading International, Inc. v. Oaktree Capital Management LLC, 317 F. Supp. 2d 301, 331 (S.D.N.Y. 2003).  The DOJ supported this position in an amicus brief.  See Brief for the United States as Amicus Curiae, Reading Int’l v. Oaktree Capital Mgmt., 03-cv-1895 (S.D.N.Y. Oct. 1, 2003), available at https://www.justice.gov/atr/case-document/brief-united-states-amicus-curiae-13.

8 Square D Co. v. Schneider S.A., 760 F. Supp. 362, 367 (S.D.N.Y. 1991).

9 See In re: Borg-Warner Corp., 101 F.T.C. 863, 910–13 (1983); United States v. Crocker Nat. Corp., 656 F.2d 428, 450 (9th Cir. 1981).

10 In 2016, the DOJ challenged a transaction in which an electronic trading platform, Tullet Prebon, would have acquired a subsidiary of a competitor, ICAP, with ICAP obtaining the right to nominate one member of Tullet’s board.  After the DOJ raised concerns under Section 8, the parties restructured the deal to remove the offending provisions.  See Press Release, U.S. Dep’t of Justice, Tullet Prebon and ICAP Restructure Transaction after Justice Department Expresses Concerns about Interlocking Directorates (July 14, 2016), https://www.justice.gov/opa/pr/tullett-prebon-and-icap-restructure-transaction-after-justice-department-expresses-concerns.

Likewise, the FTC issued blog posts in 2017 and 2019 reminding corporations to be mindful of compliance with Section 8.  See Michael E. Blaisdell, Bureau of Competition, Fed. Trade Comm’n, Interlocking Mindfulness (June 26, 2019), available at: https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness; Debbie Feinstein, Bureau of Competition, Fed. Trade Comm’n, Have a plan to comply with the bar on horizontal interlocks (Jan. 23, 2017), available at: https://www.ftc.gov/enforcement/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks. 

Furthermore, in June 2021, two executives of Endeavor Group Holdings Inc. resigned their positions from the board of Live Nation Entertainment Inc. after the DOJ “expressed concerns that their positions on the Live Nation Board created an illegal interlocking directorate.”  Press Release, U.S. Dep’t of Justice, Endeavor Executives Resign from Live Nation Board of Directors after Justice Department Expresses Antitrust Concerns (June 21, 2021), https://www.justice.gov/opa/pr/endeavor-executives-resign-live-nation-board-directors-after-justice-department-expresses.

11 Press Release, U.S. Dep’t of Justice, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates (Oct. 19, 2022), https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially.

12 Id.

13 Johnathan Kanter, AAG, Antitrust Div., U.S. Dep’t of Justice, Opening Remarks at 2022 Spring Enforcers Summit (Apr. 4, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.

14 Andrew Forman, Deputy AAG, Antitrust Div., U.S. Dep’t of Justice, Keynote at the ABA’s Antitrust in Healthcare Conference (June 3, 2022), https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-andrew-forman-delivers-keynote-abas-antitrust.

15 Debbie Feinstein, Bureau of Competition, Fed. Trade Comm’n, Have a plan to comply with the bar on horizontal interlocks (Jan. 23, 2017), available at: https://www.ftc.gov/enforcement/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks.

16 For example, in 2009, the FTC began investigating interlocking directors between Apple and Google.  Google’s entry into the smartphone market—with the introduction of its Android platform—put Google in direct competition with Apple, raising potential Section 8 concerns. The companies ultimately resolved the investigation by requiring the two overlapping directors to each resign from one of their respective board positions.  See Statement of Fed. Trade Comm’n Chairman Jon Leibowitz Regarding the Announcement that Arthur D. Levinson Has Resigned from Google’s Board (Oct. 12, 2009), available at http://www.ftc.gov/opa/2009/10/ google.htm.

Similarly, in 2016, David Drummond, a longtime Alphabet executive and director at Uber, proactively resigned from Uber’s board after Alphabet’s increasing investments in autonomous vehicles put it in direct competition with Uber’s similar endeavors.  See Mike Isaac, Uber and Alphabet’s Rivalry Heats Up as Director Chooses Sides, N.Y. Times (Aug. 29, 2016), available at https://www.nytimes.com/2016/08/30/technology/uber-and-alphabets-rivalry-heats-up-as-director-chooses-sides.html.

As discussed previously, the FTC under Chair Khan has adopted an aggressive posture toward antitrust enforcement.  Although the current FTC agenda draws on some powerful enforcement weapons, the leadership of the FTC believes that additional ammunition is required to reach the full extent of potential anticompetitive behavior and the harms associated with it.  To challenge other forms of anticompetitive behavior, the FTC is considering bringing back two long disused arrows in its quiver:  Section 5 of the FTC Act and the Robinson-Patman Act.

Two recent speeches by Chair Khan and Commissioner Bedoya outline the potential for the revival of these provisions.  Both speeches share a theme:  the belief that the purpose of the antitrust laws is to prevent unfair methods of competition, not just to promote efficient ones.  Chair Khan and Commissioner Bedoya are arguing that both the courts and the agency have gone down the wrong track for antitrust enforcement since the 1980s.  Accordingly, the FTC appears to be returning to older schools of thought about antitrust enforcement and using statutory provisions that have been relatively dormant in recent decades; the implications of that return will be seen soon.

Section 5.  Section 5 of the FTC Act prohibits “unfair methods of competition” and “unfair or deceptive acts or practices” in or affecting commerce.  Enacted in 1914, Section 5 was intended to cover gaps in the Sherman Act by reaching other conduct that threatens open and competitive markets but is not captured by the language of the Sherman Act.  In an earlier era, the FTC had frequently used Section 5 to bring standalone actions against conduct including invitations to collude, price discrimination, de facto bundling, and tying and exclusive dealing.  But starting in the 1980s the FTC began to use Section 5 more sparingly.  In 2015, this reached its apotheosis when the FTC issued a policy statement that an act or practice in question would be challenged on a standalone basis under Section 5 only if it caused or was likely to cause “harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.”  In the five years after the 2015 statement, the FTC brought only one standalone Section 5 complaint.  Even in that action, a complaint against Qualcomm for its alleged “no license-no chips” practice, the FTC still relied primarily on Sherman Act theories of harm, rather than focusing on any notion of “unfairness.” Chair Khan, though, now plans to reverse that trend, as one of her first actions after taking office was to withdraw the 2015 policy statement.

In a recent speech, Chair Khan made clear her view that Section 5 should be used by the FTC more expansively.  To that end, she promised that the FTC would soon issue a policy statement that “reflects the statutory text, our institutional structure, the history of the statute, and the case law.”  Given that Chair Khan believes Section 5 gives the FTC considerable power to address unfair practices, the policy statement may foreshadow another major expansion of the FTC’s enforcement efforts.

Robinson-Patman Act.  The Robinson-Patman Act arose out of a similar concern to Section 5: there were behaviors that harmed competition but were not captured by the Sherman Act’s prohibitions.  Originally enacted in 1936 to protect small retailers from the growing strength of chain stores, the Robinson-Patman Act prohibits “discriminat[ing] in price between different purchasers of commodities of like grade and quality” when the effect would be to harm competition.  The prohibition applies to competing purchasers who intend to resell the commodity, meaning that it does not apply to direct sales to consumers.  Although it has a broad reach, the need to demonstrate injury to competition, as well as to overcome the defenses to such discrimination, such as cost justification and meeting competition, have made Robinson-Patman cases notoriously difficult for plaintiffs to prove.

Despite the lofty goals of the Robinson-Patman Act, the FTC has not brought an action under the statute in more than 20 years.  The statute’s concern for small retailers found itself out of step with the emphasis on efficiency and consumer welfare prompted by the free market turn antitrust enforcement took in the 1980s.  Recently, though, Commissioner Bedoya has called for the FTC to embrace the historical purpose of antitrust enforcement – to protect small businesses from unfairness.  In this regard, Commissioner Bedoya suggests that Robinson-Patman enforcement has not been shown to be correlated with higher prices, and he points out that the FTC is charged with stopping unfair methods of competition, not inefficient ones. His speech echoes a similar statement by Commissioner Slaughter that the FTC should revive its use of the Robinson-Patman Act.  And Chair Khan advocated for the use of the Robinson-Patman Act in writing prior to her appointment.  All three believe that the FTC should focus on protecting small competitors and the “competitive process,” an emphasis that may be interpreted to include keeping small competitors on a level playing field with larger retailers.

Implications.  The immediate effect of the revival of these tools may be limited.  For Section 5, Chair Khan admits that the agency’s last aggressive enforcement actions in the 1980s, such as Boise Cascade in the Ninth Circuit or Ethyl in the Second Circuit, foundered, although she blames their problems on evidentiary issues, not in the legal theories.  Of course, the FTC would also face a judiciary that may be more conservative overall, and generally more receptive to economic and efficiency arguments than arguments about unfairness.

Similarly, as mentioned above, for Robinson-Patman, the FTC will need to overcome sophisticated defenses based on cost-justifications and other arguments.  Courts valuing efficiency and cost-savings may continue to find such arguments persuasive to the extent consumers benefit from large retailers passing their lower prices along to customers.

It seems clear the FTC’s revival of these old tools demonstrates a desire to return to the initial purposes of the antitrust laws and to push the boundaries of recent antitrust enforcement.  Even if it only brings a few cases or does not have much success, the threat of new enforcement may discipline businesses and require a re-examination of current business practices.

Further to our blog piece at the beginning of this year, there have been additional developments at the EU and national levels in respect to gun-jumping in merger cases. In general, a breach of EU or national rules could occur when the merging parties (i) fail to notify their merger when the relevant thresholds have been met; and/or (ii) the parties implement the transaction before receiving the approval(s) (i.e., fail to observe standstill obligations during the review period). The merger parties should not underestimate their obligations as failure to do so could result in substantial fines.

EU General Court confirmed a € 28 million fine for a failure to comply with EU merger control rules

On May 18, 2022, the General Court confirmed a fine of € 28 million  imposed by the European Commission on a Japanese multinational company specialising in the manufacture of optical and image processing products for its failure to observe the standstill and notification obligations in the acquisition of a Japanese medical equipment company.

The transaction was carried out in two steps through the acquisition of different types of shares. During the first step, the interim acquirer acquired different voting and non-voting shares (95% control of the target), and the ultimate acquirer acquired 5% of the shares of the target. As the second step, the acquirer exercised its share options, acquiring 100% of the shares of the target. While the transaction was notified to the Commission as a whole (i.e., the acquisition of 100% of all shares of the target) and the Commission cleared the transaction, the Commission also found that during the first step of the transaction, due to the partial implementation of the transaction, the acquirer failed to notify a concentration in breach of Article 4(1) of Regulation (EC) No 139/2004 and for implementing a concentration in breach of Article 7(1) of that regulation. The reason is that the first step was carried out before the notification of the transaction to the Commission.

The Court confirmed that the implementation of a transaction can take place as soon as the parties to the transaction implement operations contributing to a lasting change of control of the target. In other words, the implementation of the transaction can take place before the actual acquisition of control over the target.

French Competition Authority imposed a €7 million fine for a failure to comply with French merger control rules

The French Competition Authority imposed a fine of € 7 million  on a company active in the market for alcoholic beverages (especially production and distribution of spirits) for implementing its acquisition of another company active in the same market. Even though the merger was cleared on February 28, 2019, the acquirer was then subjected to dawn raids just a week after its’ clearance. The Authority found that the acquirer implemented the acquisition without submitting a notification to the Authority and failed to observe the standstill obligation under the French Commercial Code.

The Authority found that the acquirer exercised decisive influence over the target prior to the notification by:

  • Acquiring the majority stake in the target – resulting in 3 of 11 directors in the target being from the acquirer, which allowed them to obtain competitively sensitive information and monitor the activities of the target;
  • Intensifying commercial and financial relations between the parties, for example, by increasing supplies and opening credit lines; and
  • Being involved in the strategic and operational decisions of the target (e.g., through the involvement of appointing the managing director of the target).

The above cases highlight that even if an acquisition is ultimately cleared by a competent authority, the parties can still face substantial fines if they fail to notify the transaction before the implementation and/or implement the transaction before the authority has finalised the review. The parties should carefully assess each step of the proposed transaction to ensure merger control compliance at the EU and national level.

Steptoe’s antitrust team would be happy to support you in any merger control-related assessment.