Agencies' Aggressive Merger Approach Was Tested In 2023

In this article for Law360, partner Peter McCormack was quoted regarding notable antitrust merger developments from 2023. 

A bold approach to merger enforcement by U.S. agencies led to some high-profile setbacks in 2023, including in cases targeting deals by Meta and Microsoft, but enforcers also blocked a major airline collaboration and saw success against a deal by DNA sequencing giant Illumina.

Despite a mixed record in court, leadership of the Federal Trade Commission and U.S. Department of Justice's Antitrust Division have credited their aggressive approach to merger enforcement with helping deter problematic deals before they even materialize.

Experts told Law360 that the aggressive tact has also made the agencies less willing to accept fixes from merging parties to address potential concerns, leading to litigation that has tested the conclusions enforcers are reaching about the deals and the remedies being offered.

During 2023, courts rejected the FTC's challenge of Microsoft's $68.7 billion deal for Activision Blizzard but blocked a partnership between JetBlue and American Airlines that the DOJ said amounted to an illegal merger. Illumina also decided to undo its $8 billion reacquisition of cancer-testing company Grail following a Fifth Circuit ruling in December after the company appealed an FTC order.

The agencies, meanwhile, settled several challenges after filing them in court, crediting adjusted remedy offers.

Debbie Feinstein, global antitrust head at Arnold & Porter Kaye Scholer LLP and a former FTC competition bureau chief, said companies have been thinking hard about whether their deals are going to run into trouble but said they also feel confident in their analysis of the competition issues at play.

"They're preparing themselves for longer reviews, but companies are still doing deals when they think they are beneficial and where they think they have a good story as to why it won't harm competition," Feinstein told Law360. "The fact that companies are willing to litigate, is showing that they're not going to just back down."

Here, Law360 looks at the major merger review developments from 2023.

Activision Case Imperiled

One of the most closely watched merger cases of the year was the FTC's challenge of Microsoft's purchase of video game developer Activision Blizzard, a deal that enforcers for Europe, the U.K. and elsewhere signed off on after a series of commitments from the tech giant.

The FTC first moved to block the deal in late 2022, contending in an administrative complaint that the merger would give Microsoft the ability to make titles produced by Activision, especially its popular Call of Duty franchise, exclusive to its Xbox game console and its streaming and subscription services.

The move came despite offers from Microsoft to enter into binding agreements that would guarantee access to Activision's games, an offer Nintendo accepted but Sony refused at first. Europe's antitrust authority also cleared the transaction in May based on commitments from Microsoft to freely license current and future Activision games to cloud streaming providers for 10 years.

The FTC then asked a California federal court to pause the deal for its in-house challenge in June, but U.S. District Judge Jacqueline Scott Corley rejected the bid following a five-day evidentiary hearing.

Barbara T. Sicalides, a partner with Troutman Pepper, told Law360 that the ruling is part of a recent trend that has shown courts are willing to consider the fixes offered by merging parties to address competition concerns, even if the agencies find them deficient.

"If a buyer is willing to find a solution ... certainly the trend appears to be that courts won't just ignore those efforts," Sicalides said. "The impact of those efforts on the analysis is important."

The U.K.'s Competition and Markets Authority had also moved to block the transaction but returned to the negotiating table following the FTC's loss in district court. Sony also accepted Microsoft's offer to keep Call of Duty on its PlayStation console following the ruling.

The companies then closed the deal in October after U.K. enforcers approved the deal based on further commitments. The FTC, however, is appealing the district court ruling. The Ninth Circuit heard oral arguments in December on the agency's case and a separate challenge to the deal being brought in a private suit from video game players.

"I think what's notable is that the government has not had success challenging vertical transactions," Feinstein said. "The district court made pretty clear its view that this was not a problem, and it'll be interesting to see if the Ninth Circuit has a different view."

Late Vertical Win

The FTC scored a major victory in mid-December when Illumina said that it plans to divest the cancer testing company Grail, which it founded and later spun off before reacquiring in 2021, after a Fifth Circuit ruling on the agency's merger challenge.

Enforcers in the U.S. and Europe contend the move would hurt competition for new tests that screen for multiple types of cancer at early stages using DNA-sequencing technology. Illumina provides the sequencing services used for the tests and enforcers argued it could hinder Grail's potential rivals that are developing similar tests using Illumina's sequencing services.

Illumina has consistently defended the deal as necessary to accelerate adoption of Grail's tests and has offered customers of its DNA sequencing services long-term contracts to alleviate worry they will lose access. The company has also contended that European enforcers lack jurisdiction to review the deal in the first place and is fighting a fine for closing the deal without approval there.

The FTC's administrative law judge initially rejected the commission challenge after finding a lack of evidence showing that Grail has any actual or potential rivals that are close behind. But the commission overruled the decision with an April order, finding that the move needed to be blocked to encourage innovation.

The Fifth Circuit heard oral arguments for Illumina's appeal of the FTC decision in September and issued its ruling on Dec. 15, finding the combination is "likely to substantially lessen competition" while also faulting the FTC's analysis.

The court said the commission used the wrong legal standard when looking at the fix offered by Illumina and would have sent the case back to the agency for another look, but the ruling prompted Illumina to announce the deal's unwinding.

Feinstein told Law360 the Fifth Circuit's ruling shows that in some cases a vertical transaction can violate the merger laws but said the court also took care to explain that Illumina was only required to show that the offer it made to its DNA-sequencing customers mitigated the merger's effect, "such that it was no longer likely to substantially lessen competition."

"That will have an impact on future cases in which there is some sort of 'litigate the fix' effort," Feinstein said. "Despite general questions about the role of efficiencies in merger law, the Fifth Circuit went through each proffered efficiency and assessed them in great detail before finding them insufficient."

Viewed alongside the court's decision in the Microsoft-Activision case, along with a D.C. federal court's rejection last year of the DOJ's bid to block UnitedHealth's $13.8 billion acquisition of Change Healthcare, Sicalides said the Illumina case shows the courts are considering the "market realities" of contractual fixes companies are offering to ease merger concerns.

"Parties will need to consider carefully their strategy, scope and timing with respect to proposed 'fixes' to significant concerns the agencies might identify," she said.

Litigation Loses

The FTC suffered a major defeat with a February ruling in California federal court that rejected the agency's challenge of Meta Platforms Inc.'s acquisition of virtual reality fitness app developer Within Unlimited.

The commission had asked the court for a preliminary injunction to pause the move for an administrative case challenging the merger but the judge found the agency could not show Meta was likely to enter the VR fitness app market on its own had it not cut the deal.

The challenge was seen as aggressive because Meta and Within do not currently compete directly. Meta sells the Quest virtual reality headset, making the deal a vertical transaction between companies at different points in the supply chain. But enforcers alleged Meta could have decided to start developing a competing fitness app sometime in the future.

Feinstein said a theory about "potential competition" is not novel and said the commission settled several such cases while she was at the agency. But she also said the cases are hard for the government to win in court.

"There had to be more than an idea that maybe somebody might want to do something," Feinstein said. "There had to be a concrete likelihood of entry that was going to have an impact."

Peter McCormack, a partner with Kirkland & Ellis, told Law360 that the case has raised awareness about potential competition issues, even though the commission was ultimately unsuccessful.

"While potential competition is not a novel theory, after that case, potential competition theories have become front of mind for practitioners; now you see those theories being asked about more often," he said.

The DOJ suffered a loss in July when the Third Circuit refused to revive its challenge of U.S. Sugar Corp.'s $315 million acquisition of Imperial Sugar from Louis Dreyfus Co. after a Delaware district court rejected allegations that the deal would reduce competition for the sale of refined sugar in the southeast part of the country.

The case was a traditional challenge of direct competitors in the same industry, but the appeals court said the government failed to properly consider the roles of wholesalers and distributors and should have looked at the market for "sales" of refined sugar rather than a market that only included producers.

Jonathan Gleklen, chair of the U.S. antitrust practice at Arnold & Porter, said the issue of whether distributors are an independent competitive force comes up a lot in merger reviews. If a distributor is just reselling what they buy from one of the merging parties, they probably aren't impacting competition, he said.

The sugar companies argued that distributors in their industry do more than just buy sugar from U.S. refineries, they also store inventory and import sugar from other regions or countries.

"Here, the parties had a much better story that they actually compete with the distributors," Gleklen said.

DOJ Takes on Airline Deals

A Massachusetts federal judge handed the DOJ a much-needed win in May, after a string of losses on merger cases, agreeing to nix a partnership between JetBlue and American Airlines after finding the agreements stifled competition by allowing the carriers to essentially combine their operations in the regions around Boston and New York City.

U.S. District Judge Leo T. Sorokin presided over a bench trial where the government argued the accord could cost travelers more than $700 million per year, while the airlines countered that the so-called Northeast Alliance helps them better compete against the other large carriers.

The judge sided with enforcers, writing that whatever the benefits of American and JetBlue becoming more powerful, "such benefits arise from a naked agreement not to compete with one another." American is appealing the ruling to the First Circuit, but the airlines have already scrapped the deal anyway.

Sicalides said the case is important because it implicates the ability of companies to collaborate and that the judge employed a "very aggressive read of the law" by not fully crediting what the airlines argued were clear benefits of the deal for consumers.

"It is difficult to tell how much effect you could have only because the judge's opinion is so unequivocal," she said. "It's hard to tell whether other judges with different facts would readily rely on it."

The DOJ also wrapped a bench trial in December in front of a different judge in Massachusetts federal court for a case seeking to block JetBlue's planned $3.8 billion merger with Spirit Airlines Inc. There, the agency alleges the tie-up will hurt passengers who rely on ultra-low-cost carriers like Spirit.

Enforcers lodged the challenge despite JetBlue's promise when signing the deal to divest most of the overlapping routes flown by the airlines and continued pursuing the case as JetBlue cut a series of moves to make good on its promise.

U.S. District Judge William G. Young peppered both sides with questions during closing arguments about what an outcome might look like that allows the deal to go forward — but with additional divestitures that might help buoy the market for bargain-hunting fliers.

Sicalides said the case and JetBlue's promises raise an issue that was a common theme throughout the year, with companies bringing their merger fixes to court after being unable to secure a settlement from one of the agencies, and said the judge's comments suggest the court is receptive.

"The judge in the Spirit merger case clearly thinks that the court should take into consideration the potential remedies that have been proposed," she said. "Certainly, the trend appears to be that courts are not just going to ignore those efforts."

Midcase Settlements

The antitrust agencies settled several merger challenges after they were lodged this year, accepting modified versions of fixes that the companies had appeared to be offering during the merger review.

The DOJ reached a deal on May 5 to end its challenge of Assa Abloy's $4.3 billion purchase of a hardware and home improvement business from Spectrum Brands. The settlement came after 6 days of trial in D.C. federal court on claims the merger would hurt competition for residential smart locks and premium mechanical door locks.

The deal to end the challenge added additional assets to an offer Assa Abloy had put forward previously to sell its U.S. and Canadian residential locks businesses to Fortune Brands Home & Security in an $800 million transaction.

The FTC agreed in August to drop its challenge to Intercontinental Exchange Inc.'s $11.7 billion acquisition of Black Knight that was brought over concerns about the supply of loan origination systems and other software used by banks to help generate mortgages.

The companies said in July that they'd agreed to offload extra assets, adding the sale of Black Knight's Optimal Blue business, which provides data to price mortgages, to a subsidiary of Canada's Constellation for $700 million, after previously saying in March they'd be selling the Empower loan origination system to Constellation.

The agencies have been vocal about an increased hesitancy to accept settlements in merger cases and McCormack from Kirkland & Ellis said that both the ICE and Assa Abloy cases were watched closely by the antitrust bar. The government's decision to pursue litigation, only to subsequently settle, he said, "diverged in some respects from the current administration's approach to antitrust enforcement."

Feinstein said the midcase settlements could be an effect of the approach being taken by the agencies.

"The government isn't as quick to accept a settlement and so some of the matters are going into litigation and then settling," she said.

In September, the FTC and several states also settled their pending challenge of Amgen's planned $27.8 billion purchase of Horizon Therapeutics. Enforcers alleged the deal would allow Amgen to leverage its portfolio of blockbuster drugs to protect the monopoly positions of Horizon's thyroid eye treatment Tepezza and its chronic refractory gout treatment Krystexxa by bundling rebates offered to insurance companies and pharmacy benefits managers.

The settlement bars Amgen from bundling its products with either Tepezza or Krystexxa and from conditioning rebates or other contract terms on one of the drugs.

McCormack said the theory of the Amgen case was based on "conglomerate effects" and that such cases can be difficult to prove in court. That's because the merging parties are neither direct competitors nor customers or suppliers of each other, he said, and the potential for harm is based on speculation about the impact of bundling complimentary products.

"Even though the parties publicly stated the settlement was on favorable terms, the fact that the FTC was willing to pursue a challenge on a conglomerate theory is something that the antitrust bar is acutely aware of in terms of evaluating future transactions," McCormack said.