Courthouse Steps Oral Argument: Illumina v. FTC
October 17, 2023 at 1:00 PM ET
In September, a panel of judges on the Fifth Circuit Court of Appeals heard oral argument in Illumina v. Federal Trade Commission. Earlier this year, the Federal Trade Commission (FTC) ordered biotechnology company Illumina to unwind its $8 billion acquisition of Grail, a cancer-screening startup. This case began with a 2021 administrative complaint challenging the transaction. In September 2022, the FTC’s administrative law judge (FTC) concluded that the FTC “failed to prove its asserted prima facie case that Illumina’s post-Acquisition ability and incentive to advantage Grail to the disadvantage of Grail’s alleged rivals is likely to result in a substantial lessening of competition in the relevant market.” The FTC complaint counsel appealed the decision of the ALJ to the commissioners, who then voted to overturn the ALJ’s decision, ordering Illumina to divest the acquisition. The case is now pending before the Fifth Circuit.
Please join us as we break down oral argument and discuss the broader implications of Illumina v. FTC.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
[Music and Narration]
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
Steven Schaefer: Good afternoon. Welcome to this Regulatory Transparency Project webinar. My name is Steven Schaefer, and I am the director of RTP at The Federalist Society.
Today, October 17, 2023, we are pleased to host a “Courthouse Steps” discussion on Illumina v. FTC, which is now pending before the Fifth Circuit.
Please note that, as always, all expressions of opinion on today’s program are those of the speakers. After the discussion, our panel will take audience questions, so please submit those into the Q&A function at the bottom of your Zoom window.
Before we go to discussion, I will briefly introduce our panelists.
Today we are joined by Ashley Baker, Director of Public Policy at the Committee for Justice. Her focus areas include the Supreme Court, regulatory policy, antitrust, and judicial nominations.
We are also joined by John B. Kirkwood, law professor at Seattle University. Professor Kirkwood is also a member of the American Law Institute, has been quoted by the Supreme Court, and four of his articles have won national awards for path-breaking antitrust scholarship.
Our moderator for today’s discussion is Adam Mossoff, law professor at George Mason’s Scalia Law School. His academic research has been cited by the Supreme Court, by the Court of Appeals for the Federal Circuit, and by federal agencies.
If you’re interested in learning more about our speakers, you can read their full and impressive bios at regproject.org.
Thank you all for joining us, and I will hand it on over to Adam.
Prof. Adam Mossoff: Thank you, Steve. And I’m really delighted to be moderating this fantastic discussion about an incredibly important case that implicates the biotech sector generally, biotech and biopharmaceutical innovation, and continuing legal and policy debates about antitrust.
And so, for those who are joining us, I’m going to kick off our discussion by just giving a very quick overview of the case, some of the procedural history, and where we are. Then I’ll turn it over to our two distinguished panelists, Jack and Ashley—we’re going to go by first names here since we’re all friends—and we will — who will give brief opening remarks.
We’ll have a bit of a moderating Q&A back and forth with me and with them. And then we’ll turn it over to the audience for some questions towards the end.
So if you think you have some questions or you already have something in mind that you would like to ask the panelists, you can enter it now into the Q&A or just be ready to go at around halfway through the webinar.
So, as I mentioned, I’m going to kick off our discussion with a brief overview of what’s happening. So this will set the framework for both Jack and Ashley to talk about what happened in the oral argument last month and where they think the case may be going from here.
So, as I mentioned, this is an incredibly important case implicating many aspects of the U.S. innovation economy, biotech innovation, and the continuing deployment of antitrust, and the concerns about stifling of competition by companies in the innovation economy.
So, for those who don’t know, Illumina is a very prominent biotech company, and it has developed some path-breaking genetic tests for detecting cancer in blood, so incredibly important diagnostic tests that represent the classic example of the miracles that have been wrought by the biotech revolution of the past 20 or 30 years.
Illumina, in continuing to develop these genetic tests, spun out a small subsidiary that was called GRAIL to further develop some of these genetic tests. GRAIL successfully developed these tests, and then Illumina sought to reacquire GRAIL and to further develop and exploit the fact that it’s a capital-intensive large, but established biotech company. It’s established manufacturing supply chain and distribution chain for quickly distributing this test into the market.
The FTC then stepped in and said, “No. You should not be merging”; that this would have ill effects for competition and the economy. So, in March of 2021, the FTC commissioners voted to bring a complaint to block the merger, seeking to block the merger of Illumina and GRAIL under the Clayton Act and the FTC Act on the grounds that the merged companies would ultimately stifle competition and harm consumers ultimately by raising prices.
Originally, they filed a complaint in the Ninth Circuit in district court in a northern district of California. But in May of 2021, just a couple months later, they withdrew that complaint and proceeded in-house at the FTC through their own administrative hearing process.
Meanwhile, concurrently, the European Union then brought its own complaint and has been proceeding in parallel with the FTC. And, in fact, there have been some recent developments in that that I’ll mention towards the end of my opening remarks.
As a result of the internal administrative hearing in September of 2022, the administrative law judge of the FTC actually ruled in favor of Illumina and GRAIL and said there was not sufficient evidence, as required by the Clayton Act, that the merged companies would forestall competition and raise prices to the harm of both competition and consumers. The FTC complaint counsel then appealed to the commissioners, and the commissioners then unfold de novo review, reverse the ALJ, and actually ordered the merger to be blocked.
It was at that point, then, that Illumina proceeded to file its appeal with the Fifth Circuit. And before the Fifth Circuit, Illumina has now actually raised two arguments. One is, is that, of course, the classic antitrust argument that “our merger will not forestall competition or raise prices.” But then, they’ve also added an additional argument—now that they’re in Article III court, actually—that the FTC is unconstitutional and that this case represents some of the due process concerns and separation of powers concerns that highlight why administrative agencies are unconstitutional.
And that’s the case which we have — which oral argument was heard just this past month of which Jack and Ashley will be talking about.
As I mentioned, a proceeding in the EU has been occurring parallel with the U.S. proceedings. The EU has actually ordered Illumina and GRAIL not to merge. They did proceed to merge. Illumina did proceed with the merger. And, in fact, just recently, the EU competition law authorities have actually ordered Illumina to now unwind that merger. And they’ve also fined them for proceeding against the earlier order not to merge. And so, that’s the state of play with respect to what has happened in terms of the proceedings at the FTC, then the appeal with the Fifth Circuit, and the proceedings in the EU.
So, without much further ado, I’m going to turn it over to our panelists now, who are going to talk about the issues in much more in-depth, and we’re going to kick off first with Ashley.
Ashley Baker: Hi. Thank you, Adam. Thank you for the introduction. Thank you for joining us. And thank you to Professor Kirkwood as well.
There’s obviously — there’s a lot going on here in this argument, and the case itself is a little bit all over the place. It combines a lot of issues. There’s a lot of background here.
So I think what I’m going to do is first talk a little bit about the Clayton Act and the vertical versus horizontal mergers and then talk about the constitutional issues a bit and give some appropriate background here. I’m going to keep that brief so we can go over it in a more Q&A because I know people on this call probably have various levels of antitrust or administrative law expertise. And like I said, this one is a bit — it involves a lot — a lot of things.
So, essentially — so back things up to the oral argument itself since we are here to talk about oral argument but also the broader implications of the case. Arguments did focus very much on the nature of the transaction itself, what law should apply to that, and what standards this does meet.
But in respect to showing a violation under the Clayton Act, it’s necessary to show harm with three main factors. So the harm has to be — it has to be probable; it has to be imminent; and it has to be substantial. It has to substantially lessen competition, as the Clayton Act says.
So Illumina is arguing — in oral argument, they argued that it doesn’t necessarily violate any of those things; that vertical transactions, or specifically this vertical transaction — I should caveat all of that with saying not all vertical transactions, but here, this being vertical transactions, don’t necessarily directly eliminate competitors.
So I’m going to take that a step back, I guess, to a more 30,000-foot level, though, and discussing what a horizontal versus vertical merger is in 15 seconds. And so, there are two misguided premises here that the FTC is complaining. One is that the same scrutiny should apply to both vertical and horizontal mergers. And —
I’m sorry. That was my dog barking in the background.
But a horizontal merger basically combines two firms that compete in the same product market. So you’re taking away a competitor that would compete head-to-head. So that can lessen competition in a very more direct way. And the reduction in competition raises prices. It can reduce innovation. There are a lot of negative potential consequences there in cases in which there is actually a legitimate case against the company.
A vertical merger, though, it combines firms with an upstream/downstream relationship. So, as the Department of Justice merger and FTC merger guidelines in 2020—which is what this deal goes by—it causes firms or assets at different stages of the supply chain, so they get this at two different stages of the supply chain.
And Illumina’s argument here is very much that it would not do that. They swallowed up the company. And they kept around 12 percent interest in the company, so it was theirs to begin with. But also because of GRAIL being a smaller biotech startup and Illumina having the equipment that can run the sequencing that can conduct these tests, and they’re actually not being a competitor, so going back to what I said about the Clayton Act, about theories of harm and whether or not that harm is imminent, whether that’s substantial, and there’s really not necessarily much of a competitor on the market yet. Or, at least, there wasn’t at the time of the initial complaint.
But now that we’re in an Article III court, the main things to really discuss in general, as far as that goes—I know we filed an amicus brief in Illumina. I know, Professor Kirkwood, I think you also were — you got your filed brief or coordinated a brief on behalf of academics—but it is about kind of the structure of the FTC itself and whether or not it represents what it does under Humphrey’s Executor, which is something that is very ripe for a Supreme Court review.
I actually have a forthcoming law review article about this in the Journal of Corporation Law that’s coming out in January about structural concerns at the FTC.
But essentially, Humphrey’s Executor ruled that the Court—sorry—that the commission was constitutional because the powers it exercised were quasi-judicial, quasi-legislative. And my argument here would be that they are very much exercising executive enforcement powers, or as it was quintessentially executive powers, as described under the Supreme Court precedent in Seila Law and more recently, and doing various things, such as representing the Federal Trade Commission in court in the following four preliminary injunctions.
Seeking injunctive relief is one thing that very explicitly is described by the Supreme Court as an executive power. And there are a number of other recent actions here that I would argue that makes the Court—sorry—makes the commission more executive and not an independent agency.
Of course, the big lingering question then is what next? You don’t burn down the entire FTC necessarily. How do we restructure here? Is it — are we talking more about the appointment calls issue related to the commissioners? Are we talking more about the structure of the agency itself because I would argue that even applying Humphrey’s Executor — it runs afoul of Humphrey’s itself. And we’re in the Fifth Circuit here. We’re not in the Supreme Court.
In the Fifth Circuit, although sometimes they, in other circuits, would like to say, “This is the law of the land,” and be able to overturn precedents, we can’t — we’re a couple steps removed from that. And we — well, we’ll get back to whenever — Adam, earlier you were saying that we’ll make some predictions here, so I’m going to save that part for last. But there’s a lot to look at here in administrative law. And this is a very exciting time to work on both the nexus of antitrust and administrative law at the moment.
Prof. Adam Mossoff: Awesome. Thank you. Thank you, Ashley. All right.
Is—I’m sorry—John or Jack? I’m sorry.
Prof. John Kirkwood: Jack. Jack.
Prof. Adam Mossoff: Jack. Okay. Thank you. All right. It’s okay.
All right. Jack, you’re up. Batter up.
Prof. John Kirkwood: Okay. Thanks a lot, Adam.
Ashley commented on the constitutional issues as well as the antitrust issues. My expertise is in antitrust, so I’ll confine my initial remarks to the antitrust issues and would be happy to talk about the others later.
This is a challenge, as both Adam and Ashley said, to a vertical merger. Vertical mergers are different from horizontal mergers. Horizontal mergers involve combinations of competitors. And as Ashley pointed out, they immediately eliminate a competitor. A vertical merger involves an acquisition, as in this case, of a supplier by a downstream firm or the reverse. Here it’s a supplier buying a downstream firm.
Vertical mergers can be efficient and aren’t often challenged, so that’s an argument in Illumina’s favor. But vertical mergers also have an inherent tendency to reduce competition because, once the supplier buys a downstream firm, that creates a financial incentive to divert sales from competitors of the downstream firm to your own downstream firm. When you sell to a competitor, you only make the upstream profit. When you sell to your own firm, you make both the upstream profit and the downstream profit. So there’s an inherent incentive in a vertical merger to foreclose your downstream competitors and shift sales to your own firm.
Usually in a vertical merger, however, the effects are tiny — or tiny’s too strong. They’re small. In the justice department’s last challenge to a vertical merger, AT&T’s acquisition of Time Warner, the government’s expert, well-regarded economist at Berkeley, Carl Shapiro, calculated that the adverse effect of the merger would be a raise subscription prices for video streaming by 50 cents a month. That’s small.
GRAIL is different. So Adam was right to emphasize how important the case is. GRAIL named itself GRAIL because it was in search of the Holy Grail, a cancer detection test that you could take as part of your annual physical that would tell you whether you had cancer before you had any symptoms. If such a test were developed so that it detected a wide range of cancers, was approved by the FDA, was covered by virtually all payors, was affordable, it would revolutionize cancer detection.
As a result, the game to being the first one to have such a test will be large, maybe even enormous, as the commission said. That expands, that emphasizes, that enlarges Illumina’s incentive to favor GRAIL over its rivals. So that’s what makes this case both particularly important and more appealing as an antitrust enforcement matter. The game to the winner is so much larger than in the typical vertical merger case.
And let me just close my initial remarks by pointing out that in the oral argument where at the very end the lawyer representing Illumina from the crack firm of Cravath, Swaine & Moore said, “When we initially owned all of GRAIL, we favored it, and of course, we favored it because we want to be the winner in the race to develop this cancer test.” That’s the problem with the merger. That’s the reason the FTC was concerned that this powerful incentive would cause Illumina to favor GRAIL and disfavor GRAIL’s rivals.
Prof. Adam Mossoff: Sorry. I had to unmute myself there for a moment.
So, all right. Thank you, Jack.
And so, I suppose we should kick off our discussion between the two of you—and feel free to jump in and respond to each other as well—with kind of — we haven’t really mentioned or talked much about Illumina—now Illumina-GRAIL’s—open offer saying that “We are going to” — “We will actually license. And we are committing to license.” Nor have we really — nor have we talked about Illumina’s proposed remedy itself, its behavior remedy.
So let me kick off first with Ashley to maybe comment on that. Does that address what Jack has raised about the concerns about unduly favoring to now its internal supplier to the detriment of external suppliers and external producers of the test?
Ashley Baker: Well, so certainly, I think it does a lot. I think there are two separate questions here—are there not—that alleviates them [inaudible 00:20:57] Clayton Act versus whether or not this should be necessarily litigated, whether under previous administrations they were more accepting of remedies, both at the DOJ and at the FTC. And a lot of these remedies, by the way, would allow both agencies to take care of the problem at hand and move on to other cases with that background.
So the open offer, so to speak, is — so Illumina’s offered behavioral-type remedies; that includes a commitment to enter a 12-year supply contract for sequencing product to the support services, which guarantees that it will not discontinue any of the sequencing products supplied under the current offer as long as the customer continues to buy the product. So as long as the product is viable and at market, then that is how long that will go on, and a guarantee also of no price increases for the sequencing product covered.
So, of course, they will initially favor the only player that they have on the market. And of course, they favor the firm that they spun out. This is a typical model within the biopharmaceutical industry is that you have this smaller research and development unit that — it doesn’t make any sense from a management standpoint to keep under Illumina, which runs the sequencing, does a lot of larger things. And then, if that product is viable, they reacquire them. So I would say, of course, they would favor them to that extent. But it makes sense to which they are competitors, they did offer to go into a 12-year contract.
And I’d also point out in Amgen v. FTC recently a somewhat similar — I would say similar because the facts of the case are different, but similar in terms of they offered a behavioral remedy that was ultimately accepted by the FTC recently. And they withdrew the case from the northern district of Illinois, in which they were seeking a preliminary injunction. So that’s acceptable there. I don’t see why it couldn’t have been acceptable here earlier on.
Prof. Adam Mossoff: Jack?
Prof. John Kirkwood: Yeah. So two things: the remedy in Horizon Amgen was very different. Horizon Amgen was an even bolder—much bolder—much more frontier-stretching case because it wasn’t a vertical merger. It wasn’t a horizontal merger. They were in two different markets, but the FTC was concerned that they would bundle their drugs together and be able to raise prices by charging a bundled price for them. And they agreed not to bundle. So that solved the FTC’s problem.
Here, the concern is that, as Ashley has now agreed, that Illumina would favor GRAIL and disfavor rivals. And the potential injury to consumers is that the best cancer tests, the most effective or the most cost-effective test won’t reach the market first.
And, yes, Illumina has offered, through its open offer, to level the playing field. But there are many practical problems with the open offer. It wouldn’t prevent, for example, Illumina from giving additional services to GRAIL, to giving GRAIL advanced notice of changes in the way its sequencing device worked, in being able surreptitiously to transfer competitors’ confidential information to GRAIL. So there are a bunch of practical problems with the open offer, not that in broad details it’s not the right approach. But practically, there are so many problems. The FTC rejected it, and it was never brought up in oral argument. Illumina’s counsel didn’t point to the open offer, and none of the judges on the Fifth Circuit wanted to explore it.
Ashley Baker: So I can follow up with that and, in part, agreeing and part disagreeing.
Start with Amgen. By the way, I do agree Amgen was a bit of a stretch what they were arguing there. They are very different. And the bundling theory was something that, for practical matters, not had ever happened. I think it’s actually the most egregious case the FTC has brought during this administration by a long stretch.
But I would point out, with the open offer, though, it still addresses the concerns of the FTC at the time. And in addition to the open offer itself, which was not probably — verbal associative reasons in which just being this how far stretched this case is across various constitutional and market issues during oral argument only so many things have time to really come up in their relevance considering also the FTC’s really completely seriously consider it.
But also, there are reputational and transactional harms that would result from refusing to deal with firms within the industry, and to cite some of Jack’s concerns here. And also, there are litigation and regulatory risks with attempting foreclosure. And there are still — the FTC still has plenty of tools at its disposal under the FTC Act, under the Clayton Act, should the — should this happen in the future. So it is still kind of based on this hypothetical theory of harm that really hasn’t happened yet.
And, from my perspective, I think being able to show that sort of harm in any sort of litigation is really key. But I think that wasn’t really played out that well during oral argument regarding what the risks are if Illumina in the future decides not to go through with this offer.
Prof. John Kirkwood: The problem with waiting until after the merger occurs is that any foreclosure, any favoritism that’s occurred is hard to remedy. Once the FTC’s only remedy would be to allege a monopolization case as a practical matter. And so, that would have to be — that would have to prove that the favoritism was sufficiently severe that it would give GRAIL monopoly power here. Possible, but the whole point of the Clayton Act was to stop mergers that would present these risks before they actually occurred, and the risks would actually become concrete.
And the favoritism, the foreclosure that’s of concern, would be subtle, sure, if, after the merger, Illumina refused to serve any of GRAIL’s competitors. Yes, that would create reputational harms and might also provoke regulatory action. But we’re talking about — the concern is subtle favoritism that actually tips the scales to where GRAIL wins when a rival should have.
Ashley Baker: But you can’t unscramble the egg, as they like to say in antitrust law. And that is—sorry, I thought I — sorry, I thought I put myself on mute there. I did not—as they like to say. So that’s a fair enough point. However, showing that it is a substantial lessening in competition here or that it’s imminent, that’s where the rubber meets the road, as far as I’m concerned.
Prof. Adam Mossoff: Yeah. In a certain sense, this is — it’s difficult because we’re arguing over a hypothetical, as Ashley has mentioned and as Jack has described. This is brought under the Clayton Act, so it’s an action to stop a merger on the grounds that we predict or expect that it will lead to a foreclosure of competition, not that it, in fact, has.
I became somewhat interested in this case, too, because the FTC doesn’t just rest on the premises of favoring your company that — your supplier that you’re merging with now. But, also, it — it also argues that, because Illumina and now the combined Illumina GRAIL have all of the key patents on this core genetic testing for cancers in blood, that the patents will give it the ability to monopolize the market by excluding competitors from producing the same diagnostic testing kit.
And, of course, I became interested in that because that sounded to me very much like the old, now defunct argument that patents confer automatically a monopoly power in the market—which was an old antitrust rule but has since been rejected by the Supreme Court—that patents provide a legal monopoly, certainly. A property right, I prefer to characterize it as. But that you still have to show with the appropriate rule of reason type analysis that, actually, a patent owner is exercising in improperly a legal power in the marketplace as a result of the patent.
I don’t know if any of you had picked up on that as well or have any thoughts on that.
Prof. John Kirkwood: Your statement of the law seems exactly right. Your statement of antitrust law will say, “Yes. The acquisition of a patent—a legitimate patent—is not an antitrust violation.” It depends on additional conduct that would reinforce, maintain, or enlarge monopoly power. You’re absolutely right.
Ashley Baker: Yeah. And maybe this is a webinar for another day on patent rights being property rights and how that is thought an antitrust violation that you have. Yeah. That’s my own commentary. So I think we’re more or less on the same page.
I think that this — I don’t want to go too off track here. I do think perhaps recently, with the revised merger guidelines with behavior that will further entrench monopolies, could a firm that has multiple patents — there we’re talking about legitimate patents. Well, that’s a whole other conversation you have about patentability.
But whether or not they’re trying to crack down on that, I don’t know. But that’s not really relevant to this case yet, especially considering it was going by the previous merger guidelines and not the proposed merger guidelines.
Prof. Adam Mossoff: Okay.
So I’ll remind the audience that we’ll be coming up very shortly on time for taking questions from the audience. So if you have a question, please put it into the Q&A feature on Zoom, and I will read it out to the panelists and to the audience at large.
And while you’re formulating your questions, I guess I’ll throw out another question to both Jack and Ashley, which is that, Jack, you mentioned and described, I think, really nicely how vertical mergers are very different from horizontal mergers. We see more often enforcement actions against horizontal mergers than we do vertical mergers. I think I recall someone saying once you can count on one hand the total number of vertical merger enforcement actions brought in the past several decades, which is in stark contrast to the number of horizontal merger enforcement actions that have been brought by the antitrust authorities.
And you mentioned the concerns with a vertical merger, but can you maybe—Jack, we’ll start with you—describe a little bit more some of these differences and perhaps why we normally don’t see vertical mergers and some of the concerns that have led to why vertical merger enforcement actions haven’t been brought as often.
Prof. John Kirkwood: Sure. Let me just add a brief comment that you’re absolutely right. The number of vertical merger cases that are actually litigated are very small compared to the number of horizontal merger cases that are litigated. But the agencies have managed to get settlements in vertical merger cases that have stopped a number. So the numbers are a little closer if you include settlements.
The reason that vertical merger cases are more difficult to challenge and are challenged more rarely is that they’re probably more likely than horizontal mergers to create efficiencies. So for the most obvious, the one that the defense bar will often bring up is that if you combine an upstream supplier with a downstream distributor, you can eliminate the upstream supplier’s profit margin and reduce prices downstream because you don’t have what’s called the double marginalization: two profit margins, upstream and downstream. So that’s an obvious efficiency, and you may have coordination efficiencies as well. So the possibility of efficiencies is maybe greater in vertical mergers.
And then the ability to demonstrate substantial anti-competitive effects is more difficult because—as I was trying to say—as I was saying earlier—there’s an inherent incentive to divert sales from a competitor to your downstream firm, but the size of that incentive depends on the various profit margins. And so, these cases—cases other than GRAIL—often turn on what’s called vertical arithmetic, where the economists on both sides are trying to figure out whether there’s a net financial incentive to favor your downstream firm. That’s less grabby than you’ve taken a competitor out of the market.
Ashley Baker: So I would add to all of that, though, or maybe caveat or modify that with saying Supreme Court precedent is on the side with regards to not taking as many vertical merger cases. So over time, the Supreme Court has eliminated per se condemnation for vertical restraints.
So, starting 1977, the Supreme Court rejected per se illegality for vertical non-price restraints, which overruled a case from about ten years before that. And then it later confirmed that a vertical restraint is not legal per se unless it includes some agreement on price or price levels. And then, eventually, the Supreme Court repudiated the last vertical per se prohibition which was on, basically, vertical minimum price constraints.
And throughout these decisions, the Supreme Court emphasized that any departure from evidence-specific rule of reason, as they said, must be based on demonstrable economic effect rather than remissible line drawing.
So they’ve set the bar pretty high here on this. And this, in general, the Supreme Court precedent is very much on our side, and they have recognized the efficiencies of vertical mergers in Baker Hughes and elsewhere.
Prof. John Kirkwood: Yeah. That’s true. There are vertical efficiencies. And the Supreme Court’s moved away from per se illegality on the vertical side. But this case is a rule of reason challenge put in that terms, and the efficiencies and the anti-competitive effects are different from those in a vertical restraints case. So it’s not exactly the same, but you’re right, Ashley, the course of Supreme Court precedent has favored vertical restraints relative to horizontal. That’s a good point.
Ashley Baker: In general, yeah. I was just responding to Adam’s point about not bringing as many cases.
Prof. Adam Mossoff: All right. So, Ashley, Jack described, I think, very nicely the concerns with this merger that the FTC has identified in terms of the favoritism internally and to the exclusion of competition and other suppliers.
Can you describe a bit more a point that you made in your own pre-remarks about what Illumina did with GRAIL and what is occurring here with this merger where GRAIL is a small company, and it’s merging with a larger company represents a business model within the biotech sector more generally? And what, then, is the concern more broadly with the enforcement action in this case? Why is this such a big case from the perspective of the biotech sector?
Ashley Baker: So I should first start with saying I don’t — I’ve never worked in the biotech sector, specifically, and I don’t represent any clients here. And their concerns are basically what Illumina has articulated. I agree with their threats — their business model.
That being said, it makes a lot of sense to not — from just a purely management perspective to not manage GRAIL versus your entire company. And I feel a lot of those concerns are more like a corporate dominance issue, I guess.
And another thing, I guess, we haven’t really discussed here, though, is this lends a huge management upheaval at Illumina—which they ousted their president—so I will admit I have mixed feelings about that board vote because, on one hand, Carl Icahn saw an opportunity there, and he said, “Well, most investors here don’t tolerate the level of risk that Illumina’s board does in terms of going against the regulators.”
And I think that’s true for the average investor. But for the company itself, I think it makes complete sense, especially when you have that big of a return on investment in a small company or—I’m sorry—in a small group that you’ve spun out that does your R&D, that you’re not — isn’t directly part of your overhead cost in bringing them back in. And you’re allowed to have a controlling share of that board. They had 12 percent. They had enough to bring it back in. That was, essentially, their property. Then I think legally they’re in the clear. But, at the time, the corporate issues here are how to run exactly a business like this or a bit more here.
Prof. Adam Mossoff: Jack, I don’t know if you have any responses to that. I don’t mean to call you out, so —
Prof. John Kirkwood: No. Not at all. Ashley’s characterized it correctly.
My understanding is that Carl Icahn’s major argument was that the acquisition was a bad idea. It would be stopped eventually, eventually unwound, and that it was a waste of Illumina’s resources to pursue it. So Icahn was making a pro-antitrust argument for his corporate takeover.
And, so far, he’s gotten vindicated in the European Union. The European Commission has consistently opposed it and has now ordered divestiture—as you said earlier, Adam—and fined Illumina. So validating Carl’s concern, fined Illumina 432 million euros for acquiring GRAIL when the European Commission said, “You can’t.” So there’s already been a big hit to Illumina from its acquisition plans.
Ashley Baker: I feel that Carl Icahn’s making a pro-antitrust argument. And I consider it more like guerilla capitalism. Carl Icahn saw — he saw an opportunity to get three members on the board of a company worth many billions of dollars.
And his assessment that the average investor might not be able to tolerate the regulatory risk is pretty correct because, even if the FTC’s case is totally wrong, it doesn’t matter. Dragging them through — dragging them through the process to make — Jack was alluding to GRAIL and the Holy Grail. It’s his excuse to make a Monty Python reference. Or at least, I think this is a Holy Grail reference: is the violence inherent in the system. Constitutional peasants; they first dragged them through the Part 3 proceedings. They’re prosecutor, judge, and jury. And then they take them out into federal court.
And this is going to be a costly process. And most companies don’t make it to the end of the FTC’s processes. Whether or not that’s for better or for worse is also a point for debate, but I do think his motives there were more banking on the fact that this is a very costly process.
Prof. John Kirkwood: Agree.
Prof. Adam Mossoff: Well, as we see, there’s lots been occurring in this — as a result of this case, both internally at Illumina and more broadly in the international space in the EU.
We do have one question that’s been posted to the panelists, which is: How will the outcome of this case impact biotech innovation? So, I guess, more precisely, will it impact biotech innovation? And, if so, how?
I guess I’ll start with Ashley first with this one.
Ashley Baker: All right. I think it’s a bit soon to tell. I do think that, actually, the corporate problem that we were just discussing and that upheaval and that being a result of this case, that sort of thing has more of an impact on potential innovation or what moves companies make in terms of their R&D because they’ve seen more what’s at stake in terms of what could happen to them internally and how long this process is. So I think really —
Prof. Adam Mossoff: No, I think the question —
Ashley Baker: — the result [CROSSTALK 00:44:13] versus the process.
Prof. Adam Mossoff: But, Ashley, I think the question is more like game out at the legal outcome. So let’s say the FTC wins. Will there be an impact on biotech innovation as a result, do you think?
Ashley Baker: Well, in terms of this product, the product’s already out there. The product’s available. They can’t bring it to market at scale at the extent that they would like to. It’s still very expensive and very limited. It might have been taken off market. It’s not available in all markets. But the technology has been developed. So in terms of this specific case, I’m not really sure.
More broadly, though, I do think that a lot of companies will be pretty wary.
Prof. Adam Mossoff: Okay. Can you maybe describe that a little bit more? I guess that’s what makes this a blockbuster case is that it has implications beyond the specifics of this case. What might be those implications be?
Ashley Baker: Well, I think the FTC’s actions, in general, have implications beyond this case. And that would include Amgen. And although Amgen they initially, eventually went through the settlement, and that was, by the way, basically what Amgen had proposed in the first place. They didn’t have to go through that litigation. Just these threats of it is really what’s impactful.
And I think a lot of more things that at the Federal Trade Commission right now. For example, the new HSR filing rules, what exactly you have to turn over in terms of information, which includes patents and IP-related enforcements, includes a lot of other issues. It kind of — the FTC’s been pretty blatantly honest about this. It’s like, “We would like to stop more deals in the boardroom,” which, for me, is a lot of overreach.
Prof. Adam Mossoff: Jack?
Prof. John Kirkwood: Sure. Well, let’s start with the impact on innovation and then talk about FTC overreach. The impact on innovation depends on who’s right about the case.
The argument from Illumina throughout is that this acquisition will propel the innovation forward more quickly. The FTC found that that efficiency claim had not been substantiated. And Illumina’s lawyer didn’t actually back it up in the oral argument. He just referred the Court to the record, but he didn’t tell a convincing story of why the acquisition would accelerate innovation.
The impact of the case would be on future instances where you have a dominant upstream supplier acquiring one of the downstream firms in an innovation contest. So it would be fairly limited, but where that’s the case, if the FTC’s right, then stopping a vertical acquisition would increase innovation. If the FTC’s wrong, it’s going to suppress innovation. It’s going to make it more difficult for a dominant supplier to seed if you will, to fertilize innovation.
Ashley Baker: I would add to my remarks one thing that will impact innovation as far — in terms of outcome. This was the case, as we haven’t had that much time to go into burden-shifting frameworks.
And, by the way, I guess I should announce I have a burden-shifting framework podcast around, I think, 2020. That was a FedSoc RTP production, so if anyone wants an explainer of how burden-shifting at the agencies works, you should take a look at that.
But, essentially, it’s very hard to prove these pro-efficiency defenses. And my view is that you have to prove harm. The burden is on the government to prove harm, and it’s not on the defendant to prove that their transaction is efficient. And whenever you shift that burden over to the defendant, that makes it virtually impossible. So if that’s the case, then in future cases, that certainly impacts a lot of things.
Prof. Adam Mossoff: Yeah. Before we come up to the close of our time, Jack mentioned a little bit more detail on the action in the EU. And I was wondering if you guys could comment on this a bit more. I know that there was some controversy about the European Union becoming involved in this case on both the jurisdictional grounds. And even the U.S. Chamber did a FOIA request, I believe, of the FTC on emails and things of this sort.
I was wondering if we could maybe have some further discussion of this as well, because this is part and parcel of how this case has become such a significant case that has become a bellwether, not just for antitrust more generally, but also the biotech space and international development of competition law or antitrust laws as it comes to be known.
So, Jack, you first mentioned the U.K., so I don’t — maybe you can — I could start with you. Or we could start with — or we could kick this off part with Ashley.
Prof. John Kirkwood: Yeah. I’m not familiar with the exact jurisdictional argument for why Illumina contended that the EU didn’t have jurisdiction. One would think that, if this cancer test is as revolutionary as so many people have described it, that it would affect patients, consumers in Europe, and so that there would be a legitimate interest on the part of the European Commission to stop an acquisition that would reduce competition in this area. But, again, I don’t know.
The other issue is whether the FTC colluded with the European Union to get them to intervene. Again, I don’t know the details. From my years of experience at the FTC, we would always cooperate with another enforcement agency. If they called us up and wanted to know what we were finding, we’d tell them. But I don’t know if the FTC went beyond that if they did something pernicious beyond that.
Ashley Baker: So to address those two concerns to the extent I can, in the European Union, basically, the laws — it seems that they did not have a product market there. But there’s — and this is—since we’re running out of time, I’m giving a very brief, shallow summary of it.
But European Union countries petition the European Commission if they don’t have basically—let’s call it their equivalent, that country’s equivalent—to DOJ antitrust. So they don’t have their own antitrust oversight authority to the European Commission and say, “You should bring this case.” And that’s the point at which — that’s the vehicle which European Commission became involved. And they very rarely use that.
Whether or not that was legitimate use is another question. I think that’s very much a lingering question, though. And that will play out in the EU under EU law.
And regarding — sorry. What was the second part of your —
Prof. Adam Mossoff: Well, it was —
Ashley Baker: — your question?
Prof. Adam Mossoff: Were there some —
Ashley Baker: Occlusion. Yeah.
Prof. Adam Mossoff: There’s some — yeah. There was some allegations of some improper interactions between —
Prof. John Kirkwood: That’s it.
Ashley Baker: There have been. And Jack was pointing out that, cooperatively, those communications are not necessarily out of the normal. I do think one thing that they’re looking at closely, though, is the timeline.
So you have the — you have two spheres of things going on. So you have — in the U.S., you have — they bring the suit in federal court in front of an Article III judge. They withdraw the suits. They withdraw the preliminary injunction. They go back to their Part 3 proceedings in-house administrative court. But during that timeline, too, it’s because the EU is able to bring their suit. So merger challenges globally are viewed more or less sequentially.
So if it weren’t for the fact that the EU brought the suit when they did, then they—or the European Commission brought the suit when they did—it wouldn’t make any sense for them to withdraw that suit that they brought into federal court and then put it back in their administrative proceedings.
So that level of cooperation is more than sharing information about markets, about global impacts. It’s more litigation strategy, and I think that’s what they’re trying to get at with the FOIA request.
Prof. John Kirkwood: Right. But there wouldn’t be anything improper about that. If the EU issues an order blocking the acquisition, then the FTC not only has no more reason to be in federal court, but the relevant statute, 13(b) of the FTC Act, requires an imminent violation. And if the EU has blocked the acquisition, the FTC wouldn’t have that anymore, so it would be natural to them to withdraw.
Ashley Baker: But, if that being clear would make a difference in terms of what federal judges would think in terms of blocking the acquisition, if they withdrew their preliminary injunction and went back to administrative proceedings, in which it wasn’t until the past two years that they’ve lost two in a row in front of their administrative law judges in 25 years, then that would probably impact what federal judges are thinking at the very least. And also, it allows them to drag out the timeline, too, because that has to be cleared in the EU. So it’s a clearance issue. Yeah.
Prof. Adam Mossoff: All right. Well, so based on the oral argument —
Ashley Baker: Oh, you’re —
Prof. Adam Mossoff: Based on — sorry about that. I was on mute.
Based on the oral argument last month before the Fifth Circuit — we really didn’t get to the constitutional arguments, but that’s okay because we’re primarily dealing with some — or we have antitrust scholars here, so we should be talking about the antitrust issues. We can do a separate one on constitutional issues.
But based on your reading of the tea leaves, so to speak, or looking into your magic 8 ball, what do you think might happen in this case? So, of course, with all the appropriate caveats that who knows what’s going to come out in the case based on oral argument? But what do you think will come out?
So, Jack, how about we’ll start with you?
Prof. John Kirkwood: Unfortunately, the oral argument was mixed. The arguments started off with the one active judge. There was only one active judge. The third judge, I don’t believe we heard anything from. The second judge just asked if Clayton 7 challenge was based on probabilities. And everybody agreed it was.
So it was one activist judge who started off pounding Illumina on the ground that indeed there was competition with GRAIL. And so, there was a concern here. But he ended the oral argument pounding the FTC because there had been no instance in which Illumina had actually cut off one of GRAIL’s competitors or raised prices to GRAIL’s competitors. There wasn’t active aggression against GRAIL’s competitors. And so, that seemed to bother the judge. And that’s particularly significant because the federal district court judge in Microsoft/Activision had also noted that Microsoft had never actually cut off any of the other game distribution platforms.
And so, to the extent that a vertical merger challenge will only be successful if the government chose not only an — a billion incentive to foreclose but also past instances of active foreclosure, then it’s going to make these cases even harder to win.
So I’m not sure how it’s going to come out. Illumina did favor GRAIL when it was a — when it owned it completely but didn’t engage in aggressive refusals to deal.
Ashley Baker: So I would say it’s always hard to predict these things. And I do think that the outcome is very mixed, and if you look at what the media had to say about oral argument, it was that they favored the FTC. But really, I would agree that it was very much mixed. And by the end of it, they never really got their answer as to whether — what the impact of this is and whether or not it’s hypothetical—which I would certainly say it is—and whether or not it’s what the broader impact is.
I think this is a larger — we can see this going en banc depending on what the judges have to say. But I think one interesting issue, though, and one issue to watch for generally—particularly post-Axon v. FTC and the Supreme Court’s decision there in April—is whether or not this is kind of tees up sums constitutional challenge or whether it can to what extent the judges decide to really grapple with those constitutional issues that the FTC—sorry— that Illumina filed in response to the FTC’s challenge in the Fifth Circuit because I think a lot of those are ripe. And the Supreme Court is certainly not, then, hesitant to express some buyers’ remorse over Humphrey’s Executor and a lot of other administrative law issues.
And we have Jarkesy pending, so it’s a whole interesting nexus right now.
Prof. John Kirkwood: Yeah. That’s all right. Interestingly, in the oral argument, the judges didn’t ask one question about the constitutional issues.
Ashley Baker: I think they should have.
Prof. John Kirkwood: Okay. Fair enough. But they didn’t.
Prof. Adam Mossoff: Which is even more interesting given that Illumina dedicated about half of its brief to the constitutional issues.
Prof. John Kirkwood: That’s right. That’s right.
Prof. Adam Mossoff: Sorry. They had a two-prong attack, as I mentioned in our opening remarks. It was unconstitutional, and even under the antitrust laws, it’s still valid.
Well, thank you to both Jack and Ashley for a fantastic exchange and discussion. Really interesting. Really important case. We’re going to continue to see this develop. It potentially has legs. May even go to the U.S. Supreme Court on either the antitrust grounds, constitutional grounds, or both. So, certainly, this is not over yet. And we will certainly hold more teleforums and more webinars as the case develops.
So, with that, I will turn it back to Steve to close us out.
Steven Schaefer: Well, I just want to thank all of our experts for sharing your time and expertise with us today and to the audience for tuning in.
You can find more content like this at regproject.org. And you can follow us on any major social media platform @fedsocrtp to stay up to date with what’s going on in the regulatory space.
Until next time, we are adjourned. Thank you.
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