The Federal Trade Commission's (FTC's) in-house administrative law judge (ALJ) has handed the FTC a loss in its suit to reverse the completed acquisition of GRAIL, Inc. by Illumina, Inc. This is the FTC's second high-profile loss in an in-house administrative trial this year, following a similar setback in the Altria/JUUL matter.1 The FTC has appealed the ALJ's ruling to the full Commission.2
This was a difficult case for the FTC, which had the job of convincing the ALJ that the deal would cause vertical foreclosure in a nascent market.3 Forcing a court to speculate about the state of a high technology market years down the road is never easy. The difficulty was compounded in this case by the parties' decision to unilaterally implement measures addressing any purported competitive harms. The ALJ held both that the alleged harm was overly speculative and that the fix eliminated any possibility it would come to pass.
Companies facing challenging merger reviews, particularly with vertical mergers, should consider working proactively with customers to avoid complaints and implement similar fix-it-first measures, a tactic that has also found success in a recent DOJ litigated merger challenge.4
The ALJ's opinion is notable as the first opinion in a litigated vertical merger since the FTC withdrew its support for the Vertical Merger Guidelines last year. The Commission majority's statement at the time questioned the consensus that vertical mergers are typically less harmful than horizontal mergers and that vertical mergers often create efficiencies. This statement had no apparent influence on the ALJ, who instead quoted language from United States v. AT&T, 310 F. Supp. 3d 161 (D.D.C. 2018), affirming that vertical mergers often create efficiencies and generally do not pose the same risks as horizontal mergers.
Background
Illumina is a leading producer of DNA sequencing instruments, devices that read the sequences of nucleotides in DNA strands and that have a variety of uses for research, medical, pharmaceutical, and biotechnical applications. GRAIL, a former wholly-owned subsidiary of Illumina, is the first company to commercially release a "multicancer early detection test" (MCED test), a tool that promises to save lives by detecting cancers in patients long before they exhibit any symptoms. GRAIL reports that its MCED offering, Galleri, is capable of using DNA sequencing to screen for 50 types of cancer with a single blood draw. Illumina founded GRAIL in 2015, but spun it off not long after, while maintaining a 12 percent investment in the company. In September 2020, Illumina proposed to fully reacquire GRAIL, leading to a challenge from the FTC. The FTC filed an administrative complaint in its internal court and separately moved a federal district court to prevent the merger from closing while the administrative case was ongoing. The FTC withdrew its district court complaint after the European Commission opened an investigation, removing any impediment to closing in the U.S.5 Although merger litigation was looming, the deal closed in August 2021.6
In its complaint challenging the deal,7 the FTC's Complaint Counsel alleged the acquisition would give Illumina the incentive and ability to prevent other companies from developing MCED tests. Complaint Counsel alleged that GRAIL is in an "innovation race" with several rivals to research, develop, and commercialize MCED tests and that another oncology company could conceivably develop a test that could "leapfrog" GRAIL's Galleri test. According to Complaint Counsel, Illumina's DNA sequencing instruments are an "essential input into all MCED tests," so Illumina would have the ability to ensure GRAIL wins the innovation race by withholding DNA sequencing instruments from GRAIL's rivals or supplying them only on unfavorable terms. Complaint Counsel argued Illumina would have the incentive to do this because expected profits in the MCED market are far greater than expected profits in the DNA sequencing instrument market.
In its defense, Illumina argued the transaction created efficiencies that would speed up the approval and adoption of Galleri, saving lives, and that the FTC's suit was delaying realization of these efficiencies. Illumina criticized Complaint Counsel's market definition as "impermissibly speculative." According to Illumina, all the other tests the FTC claimed were rivals to Galleri were in very early stages and it was impossible to say whether any would eventually become a substitute for GRAIL's test. For the same reason, Illumina argued Complaint Counsel could not show Illumina has the incentive to harm rivals post-acquisition: Illumina would be giving up actual sales of sequencing instruments to harm companies that may or may not someday compete with GRAIL.
Illumina also argued that its Open Offer to continue supplying oncology test developers after the acquisition eliminated any possible harm. In the Open Offer, Illumina bound itself to supply the other oncology test developers on equal terms to GRAIL for a period of 12 years.8 The Open Offer included firewall protections, most-favored-nation and price-increase protections, and regular compliance audits by a Big 4 firm of accountants. By the time of trial, several companies had already signed the Open Offer.
Complaint Counsel disagreed with Illumina's arguments about efficiencies and the Open Offer. Echoing the FTC majority's Statement on the Withdrawal of the Vertical Merger Guidelines, Complaint Counsel argued that efficiencies such as accelerated R&D or the elimination of double marginalization (which is output-enhancing) cannot excuse an otherwise anticompetitive merger. Regarding the Open Offer, Complaint Counsel argued Illumina had the incentive to circumvent it and that any anti-circumvention protections were inadequate.
Decision
The ALJ, Judge Michael Chappell, sided with Illumina in an opinion released September 9, 2022.9 In setting out the legal standards, the ALJ noted that vertical mergers are often pro-competitive and Complaint Counsel had the burden to show harm to competition that was "sufficiently probable and imminent" to justify unwinding the merger. The ALJ held that Complaint Counsel failed to do so for two independent reasons.
First, the ALJ held that Complaint Counsel failed to show that the acquisition gave Illumina an incentive to harm GRAIL's rivals in the "innovation race." Although the ALJ accepted Complaint Counsel's argument that other companies were competing to develop another MCED test, he found that "no company is close" to developing a rival to Galleri. The evidence showed that GRAIL's rivals were "many years" out from releasing a test that could screen for more than one cancer. Compounding this issue, even if it were assumed competitors would launch tests in the next three to seven years, there was no indication the tests would be a reasonable substitute for Galleri along such dimensions as price, accuracy, or number of cancers detected. Given this uncertainty, the ALJ reasoned that Illumina had little incentive to give up sequencing instrument revenues by harming its oncology customers. In his view, Complaint Counsel's argument required "unwarranted leaps of logic."
The ALJ's second reason for siding with Illumina was the Open Offer. The ALJ found that, absent the Open Offer, Illumina would have the ability to harm oncology test developers through various mechanisms such as withholding sequencing instruments, raising prices, decreasing quality of service and support, or misusing confidential information. He also found, however, that the Open Offer effectively tied Illumina's hands, preventing it from employing any of these strategies. The ALJ was convinced by the monitoring and enforcement provisions included in the Open Offer and unpersuaded by Complaint Counsel's arguments about the risks of circumvention.
Conclusion
Shortly after the ALJ's judgment was announced (and before his opinion was released), the European Commission announced that it had reached the opposite conclusion and had issued a decision prohibiting the transaction under the EU Merger Regulation. The European Commission's opinion is forthcoming. Both decisions are being appealed. It remains to be seen whether the FTC or European Commission will be successful in reversing the transaction.
For more information about this or other issues related to antitrust review of technology industry mergers, please contact Michelle Yost Hale, Beau Buffier, or another member of the firm's antitrust and competition practice.
[1] “FTC Loses First Round of the Altria/JUUL Merger Litigation,” Wilson Sonsini Alert (Mar. 1, 2022), https://www.wsgr.com/en/insights/ftc-loses-the-first-round-of-the-altriajuul-merger-litigation.html.
[2] https://www.ftc.gov/system/files/ftc_gov/pdf/D09401CCNoticeofAppeal.pdf.
[3] For more information about nascent competition, see “Antitrust Hits the Metaverse: FTC Sues to Block Meta Platforms, Inc. from Acquiring a VR Fitness App,” Wilson Sonsini Alert (Aug. 1, 2022), https://www.wsgr.com/en/insights/antitrust-hits-the-metaverse-ftc-sues-to-block-meta-platforms-inc-from-acquiring-a-vr-fitness-app.html.
[4] United States v. UnitedHealth Grp., 2022 U.S. Dist. LEXIS 170934 (D.D.C. Sept. 21, 2022) (holding a proposed divestiture resolved competition concerns about the merger).
[5] FTC, Statement of FTC Acting Bureau of Competition Director Maribeth Petrizzi on Bureau’s Motion to Dismiss Request for Preliminary Relief in Illumina/GRAIL Case (May 20, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/05/statement-ftc-acting-bureau-competition-director-maribeth-petrizzi-bureaus-motion-dismiss-request.
[6] The European Commission has issued a Statement of Objections alleging that by closing the transaction during the pendency of its review, the parties engaged in illegal gun-jumping. https://ec.europa.eu/commission/presscorner/detail/en/IP_22_4604.
[7] https://www.ftc.gov/legal-library/browse/cases-proceedings/201-0144-illumina-inc-grail-inc-matter.
[8] https://www.illumina.com/areas-of-interest/cancer/test-terms.html.
[9] https://www.ftc.gov/system/files/ftc_gov/pdf/D09401InitialDecisionPublic.pdf.
