This morning the European Commission (EC) moved to unwind and block Illumina’s $7.1 billion acquisition of Grail. Illumina announced that it intends to appeal the decision. This development comes on the heels of Illumina’s victory late last week against the Federal Trade Commission (FTC or the Commission).
On September 1, an administrative law judge (ALJ) for the FTC rejected the Commission’s attempt to unwind Illumina’s $7.1 billion acquisition of Grail. In launching its administrative challenge to the then-unconsummated deal last year, the FTC argued that the tie-up would harm competition in a putative market for certain types of early detection cancer tests, a space in which Grail has emerged as a leader. Although the judge’s decision counts as a win for Illumina, the internal team handling the case for the FTC immediately launched an appeal. Under the FTC’s administrative procedures this appeal will be heard by the full Commission—the same body that 18 months ago voted unanimously to initiate the enforcement action. Taken together with the EC’s decision, Illumina’s victory may be fleeting.
Background
Grail was formed by Illumina to facilitate the eventual spinoff of the new standalone company, which happened in 2016. In September 2020, Illumina announced its proposed reacquisition of Grail, prompting the FTC’s investigation. In March 2021, the FTC filed its administrative complaint to block the transaction, while simultaneously filing suit in federal court seeking a temporary injunction preventing the parties from closing their deal pending the outcome of the administrative process.
The EC did not begin its investigation until the next month, seven months after the deal had been announced, controversially asserting jurisdiction over the parties and the deal even though the transaction did not meet established jurisdictional thresholds, owing largely to Grail’s lack of presence or revenues in Europe. The EC’s assertion arose from an aggressive policy shift by which the EC indicated it will accept case referrals from member state competition authorities even in circumstances where neither the EC nor the referring member states have any statutory authority to review the deal. On April 29, 2021 Illumina challenged the new policy before the General Court of the European Union, seeking an annulment of the EC’s assertion of jurisdiction over the matter. However, in July 2022 the General Court ruled against the company, upholding the EC’s assertion of jurisdiction over deals that have “significant effects on the structure of competition in the European Union” as being consistent with its statutory mandate. In addition to appealing today’s decision by the EC, Illumina is also separately appealing the July 2022 decision by the General Court regarding the EC’s assertion of jurisdiction.
With an EC investigation underway, in May of 2021 the FTC acted to withdraw its federal suit for temporary relief, citing the EC’s bar on the deal closing as obviating the need for judicial intervention to allow time for its administrative proceeding. Then, on August 18, 2021—while the European jurisdictional challenge was still pending—Illumina completed its acquisition of Grail, citing an imminent deadline-based termination of the parties’ merger agreement and the absence of any recognized legal impediment, such as the injunction the FTC had declined to pursue. As such, although Illumina has indicated that it will hold Grail as a separate and independent business pending the outcome of the FTC and EC processes, if successful the enforcement agencies will both unwind the deal and block it from happening again. The parties have continued to cooperate with the FTC and foreign competition authorities in their investigations.
The Enforcers’ Case Against the Deal
Both the FTC and the EC’s cases focus on a market for multi-cancer early detection (MCED) tests, which are designed to screen simultaneously for evidence of a number of different types of cancer, even in asymptomatic patients, thus enabling earlier and more effective treatments. This is accomplished by applying next generation genetic sequencing (NGS) technology to a blood sample to detect genetic material that may be biomarkers for one or more of the screened cancers.
Neither agency alleges any loss of competition as between Illumina and Grail themselves, as the companies do not operate in the same markets. Instead, these actions are relatively rare attempts to prevent a vertical acquisition transaction involving non-competitors who operate at different levels of the same supply chain.
Both agencies assert a vertical foreclosure theory of harm. In its complaint, the FTC alleges that “Illumina’s NGS platforms are an essential input for the development and commercialization of MCED tests,” and that “[w]ith respect to the application relevant to this case— MCED tests—Grail’s rivals have no substitutes for Illumina’s NGS platforms.” This position, the FTC says, allows Illumina to closely monitor sensitive aspects of all MCED developers’ businesses. According to the complaint, Illumina also already has the ability to severely disadvantage any MCED developer by, among other things, raising prices, refusing or interrupting supply, or withholding technical or regulatory support. Although Illumina currently benefits from not abusing its customers and in selling to all MCED developers, the FTC alleges the potential profits from the sale of Grail’s products would alter those incentives: “Allowing Illumina to purchase Grail and act on the incentives created by the Acquisition would cause substantial harm to U.S. consumers, who would experience reduced innovation, as well as potentially higher costs and reduced choice and quality for these life-saving products.”
For its part, Illumina has argued that the deal is driven by the belief that Grail’s MCED tests should be made available to as many people as quickly as possible, and that reuniting the companies is the fastest way to make the test widely available and affordable, thus saving lives.
Administrative Quagmire
The FTC Act allows the Commission to enforce the antitrust laws either through the federal courts, or in certain circumstances, through its own internal administrative adjudication process. No similar alternative to the courts exists for the Department of Justice, the other U.S. antitrust enforcement agency. The administrative process can be particularly advantageous to the FTC in terms of both its structure and the amount of time it might take to reach a final outcome. In Part 3 adjudicative proceedings (named after the relevant part of the FTC’s rules of practice) the FTC serves as prosecutor, judge, and jury. If after an initial investigation into a transaction the Commission finds “reason to believe” that a violation exists, it may vote to authorize a firewalled team of FTC staff to file a complaint and litigate before an independent ALJ, who will conduct a trial on the merits. The decision of the ALJ can be appealed, but that appeal is heard by the same Commission (albeit not always the same Commissioners) that authorized the complaint.
For Illumina, it has taken almost two years to get to this point, which is not uncommon in this notoriously slow process. Once the appeal is made, the Commission then reviews the case de novo, meaning it starts over and is not bound by the ALJ’s original decision on either the law or on its finding of facts. Although Commissioners nonetheless customarily defer to the ALJ’s factual findings, it is not clear if current FTC leadership will continue this practice. In any event, after this additional lengthy process the Commission issues its decision, which can in turn then be appealed to a federal circuit court. Unsurprisingly, many parties to transactions facing prolonged administrative challenges abandon their transactions rather than choosing to litigate.
Key Takeaways
- This matter has firmly established the EC’s ability to reach and review transactions that have no current impact within the European Community’s borders, if national competition authorities believe that it could affect their markets in the future. This creates a sizeable uncertainty, particularly for tech industry deals that may involve acquisitions of new or “nascent” competitors by larger established incumbents.
- Illumina is far from being done with the FTC. When it authorized the complaint in March 2021, the Commission was split 2-2 between Democratic and Republican appointees. The fact that the decision to bring a case was unanimous suggests a broad agreement on the basic facts and theories of the case. This suggests significant difficulty for the deal’s prospects, particularly given that the Commission now has a 3-2 progressive Democratic majority with an aggressive enforcement agenda.
- While the Commission can and does overturn adverse decisions on appeal, the ALJ decision is a reminder that antitrust law may not always provide support for the current FTC’s more vigorous and expansive enforcement posture. As discussed previously, the agency remains constrained by existing law and traditional antitrust merits analysis before the courts (even their own administrative court).
- The FTC has been making greater use of its administrative proceedings process in recent years. Parties to mergers and acquisitions transactions should remain wary, and take steps to understand the potential risks, particularly with respect to deal timing.
- The current action against a vertical deal reflects efforts by the FTC and other antitrust authorities in the United States and Europe to step up vertical enforcement efforts. Should the FTC or the EC succeed in unwinding and blocking the deal, which appears more likely than not, parties to M&A transactions can expect such efforts to become much more routine.
