MoFo Competition: Antitrust Shifts You Need to Know
MoFo Perspectives Podcast
MoFo Competition: Antitrust Shifts You Need to Know
MoFo Perspectives Podcast
“If adopted and implemented by the agencies, the measures [in Biden’s executive order] would amount to the toughest antitrust enforcement that we’ve seen in the U.S. in decades.”
The award-winning women partners of Morrison & Foerster’s Global Antitrust Law Practice Group Lisa Phelan, Megan Gerking, Bonnie Lau, and Penny Preovolos share their 2022 predictions on what to expect in antitrust enforcement under the Biden administration.
Topics discussed include insights on:
Speaker: Welcome to MoFo Perspectives, a podcast by Morrison & Foerster, where we share the perspectives of our clients, colleagues, subject matter experts, and lawyers.
Megan Gerking: Hello, and welcome to MoFo Competition, a podcast series where MoFo’s antitrust and competition partners will discuss current trends in antitrust and give tips on how to navigate today’s shifting competition law landscape. I am Megan Gerking, your host for our first episode. I am joined by Global Antitrust group Co-Chair Lisa Phelan, along with Partners Bonnie Lau and Penny Preovolos. We will identify critical developments, forecast key trends you can expect to see in 2022, and offer timely tips on how best to prepare. Welcome, everyone.
Lisa Phelan: Thanks, Megan for kicking us off! Happy to join you all to discuss some important trends we are seeing in antitrust law developments, enforcement priorities in the Biden administration, and the intense focus that this new administration is putting on competition in all aspects of government oversight. Megan, why don’t you kick us off and tell us a little bit about the Biden administration’s focus on antitrust enforcement.
Megan Gerking: Sure, Lisa. The Biden administration appears to be making true on their campaign promise to make antitrust enforcement a top priority. During this podcast, we will all be talking about several related developments, but I wanted to kick things off by talking about the sweeping executive order that the president issued in July for the stated purpose of strengthening antitrust regulation and expanding anti enforcement. The promoting competition in the American economy executive order takes a whole-of-government approach to promoting competition and includes 72 initiatives aimed at delivering concrete benefits to Americans consumers, workers, farmers, and small businesses. The order directs more than 12 federal agencies to work with the FTC and the DOJ to vigorously enforce the antitrust laws. If adopted and implemented by the agencies, the measures would amount to the toughest antitrust enforcement that we’ve seen in the U.S. in decades. Notably among other things, the order encourages the DOJ and the FTC to revisit mergers that were previously unchallenged by prior administrations and apply more scrutiny to future merger review.
Megan Gerking: It also directs the FTC and the DOJ to consider revising the horizontal and vertical merger guidelines and to reassess prior guidance, preventing employers from agreeing to suppress wages and to not poach each other’s employees. Finally encourages the chair of the FTC to exercise the FTC’s rule making authority, to address several issues, including the use of unfair non-compete clauses, data collection, competition in major internet marketplaces, and occupational licensing restrictions. The order really sets the stage for deliberate effort by the administration to change both the substance and policy of the federal government to U.S. competition enforcement, but the immediate and long-term effect of the order is less clear. This is for a few reasons. First, the order does not enact any new law or regulation, rather it instructs and guides the actions of federal agencies. Second, the FTC and DOJ are quite limited in the rules that they can develop and implement.
Megan Gerking: And any newly adopted rules are likely to be challenged in court. Any move will likely be met with significant opposition by business industry groups and political opponents. Opponents will likely lodge challenges in court through lobbying efforts and could also try to undermine efforts through strategic communications in media. And of course any future administration could reverse course, but the bottom line is that the order is the first major step toward a significant change in competition enforcement policy. Bonnie, I think the order really demonstrates the significance of White House personnel appointments and the individuals leading the FTC and DOJ. Could you talk a little bit about these people who are leading the administration priority? What is your take on the significance of these appointments?
Bonnie Lau: Thanks, Megan. Yeah, there are three individuals I’d like to highlight today. The first is Tim Wu, the key architect of the executive order that you just described. He’s an academic at Columbia Law, and now an official at the Biden White House with responsibility for technology and competition policy. Tim Wu is a well-known vocal advocate for significantly expanded antitrust enforcement, supporting small businesses and wanting to protect against what he calls the Curse of Bigness, and for all the reasons that you just outlined, Megan, we can see from the executive order that the Biden White House is really trying to implement a very expansive interpretation of harm and using traditionally antitrust‑focused tools in new areas, like data and labor, which we’ll talk about later. The second individual is Lina Khan. So Lina Khan is now the chair of the FTC. She was sworn in June 2021 and unexpectedly elevated to the chair role that same day. Lina Khan gained notoriety as a law student after writing the 2017 Yale Law Journal article…
Bonnie Lau: Amazon’s Antitrust Paradox, where she argued that the consumer welfare standard was inadequate to assess digital giants like Amazon. Frankly, it’s really hard to understate the shakeup that she’s caused in just the few months that she’s led the FTC. And, Megan, I know you’re going to share in greater detail later, but a couple things we’re starting to see out of the FTC: more requests for additional information on deals; expansive questions to the parties on a broad set of areas of concern, including labor markets, data use, and collection; and ESG. The third person I’d like to highlight is Jonathan Kanter. He was recently confirmed by the Senate on November 16th to lead the DOJ Antitrust Division. Kanter is a former corporate lawyer, but a vocal critic of big tech. He’s historically fought Google and other large tech companies, but from the perspective of a lawyer representing corporate rivals, such as Microsoft, Uber, and Yelp.
Bonnie Lau: So the general expectation is that he is going to be somewhat more moderate than his counterpart at the FTC, but still represent a significant shift towards aggressive antitrust enforcement. Confirming that shift, this week on December 6th, Cantor stated that the DOJ is on the same page as the FTC and will work closely together on enforcement priorities, including promoting competition in labor markets. Together, all three of these appointments underscore the Biden administration’s focus on antitrust. And it’s one of the few areas where we see bipartisan support for reform. So we’re already starting to see significant developments in this space. Lisa, speaking of the DOJ, you spent many years there enforcing the antitrust laws. What are some of the key trends you are seeing on the enforcement side, especially in the criminal antitrust space, which I know is your specialty as Chief of National Criminal Enforcement.
Lisa Phelan: Thanks, Bonnie. Actually, there is a key enforcement trend that’s really taking companies and in-house counsel by surprise. And that is the aggressive enforcement of the Sherman Act in the context of labor markets. Historically, this was not a space where DOJ really ever intervened and especially not criminally, but about a decade ago, DOJ brought a civil antitrust case. There they alleged that there was a violation of the Sherman Antitrust Act by some major tech companies, because they had formed an agreement not to poach one another’s software engineers. Things were kind of quiet on the labor market front for a while, but then in the waning days of the Obama-Biden administration in late 2016, the DOJ and the FTC jointly announced that going forward, they would consider this type of conduct, these standalone agreements between companies not to hire or solicit each other’s employees, they would consider this conduct to be criminal conduct.
Lisa Phelan: Likewise, the enforcement agencies announced that any kind of agreement between companies on any component of wages or compensation would be seen by DOJ as a criminal conspiracy. Now in just this last year, the DOJ has filed criminal indictments against four different companies. And in some cases also against their executives charging that they had engaged in this type of no-poach agreement. And at least two of the cases also had a wage-fixing component. Now companies facing felony convictions under the Sherman Antitrust Act, which is what is happening here now in this space, can be fined up to a hundred million dollars depending on the effect of these agreements. And executives can face up to 10 years in prison. In these four cases I just mentioned, the defendants, of course, are challenging the DOJ’s aggressive interpretation of the application of the Sherman Act, but to date, no court has ruled.
Lisa Phelan: And this criminal litigation by DOJ is proceeding. And as I think we’ve kind of all noted here, the Biden administration can only be anticipated to continue this kind of aggressive stance, which they would see as protecting workers and ensuring competition for talent, which can sometimes lead to higher wages. So given all of this current focus, companies would be wise to revisit their existing antitrust policies and update them to make sure they are covering this type of no-poach and wage‑coordination conduct. They also want to update any antitrust training materials that they give to their employees to make sure that not just sales and marketing executive types are being trained, but any employee that is involved in hiring and compensation makes sure they’re being made aware of these new risks. And just a quick note there, competitors for talent are not necessarily your competitors for your products or services that you sell. Almost any kind of business could be a competitor for the same talent. So it really is a change. And one that is creating tremendous risk for a broad swath of companies, but it’s not just this type of action by the government and agreement between companies that’s being focused on. Penny, isn’t it also the case that agreements between employers and employees are becoming a focus? What are the evolving concerns there?
Penny Preovolos: Yes, Lisa, that’s absolutely right. Consistent with the focus on labor markets you described, we’re seeing really for the first time a federal antitrust focus on employer-employee non‑compete provisions. Historically, non-competes were regulated by the states. The theory underlying the new federal focus in this area is that non-competes impair competition in the labor market for employee services, potentially reducing employee job mobility, compensation, and other benefits. The July executive order that you’ve been hearing about encourages the FTC to use its rule making authority to broadly curtail or ban “unfair non-competes.” Now that’s something of an ambiguous message because the term “unfair” could mean two different things. One, it could leave non-competes being regulated the way they historically have been under the rule of reason, which would leave open the possibility of a fair or quote reasonable that is permissible non-compete. Although I think it’s fairly clear that the executive order intends, at a minimum, a heavier thumb on the side of finding non-competes unfair or not permissible, but the interpretation that non-competes will continue to be regulated under the rule of reason makes historical sense.
Penny Preovolos: And it’s certainly the interpretation that business will press for. On the other hand, the concern is that unfair could simply be a rhetorical device, meaning that these arrangements will always be unfair. We know that FTC Chair Khan for example, who you’ve just heard about, as well as Commissioner Chopra were aggressive advocates of FTC rule making regarding non-competes in order to address this issue at the national level before the executive order was ever issued. So while rule making does not happen overnight, the FTC is going to have to figure out priorities for all the different things it wants to do. We can anticipate that commissioners Khan and Chopra, and likely any other Biden appointees, are going to be very strong advocates for FTC regulation that either squarely prohibits or very broadly restricts non-compete provisions imposed by employers on their employees. Employers also need to be mindful of state enforcement, which in many states has been quite strict.
Penny Preovolos: My home residence, California, along with other states makes the imposition of non‑competes by an employer unlawful per se. That is as a matter of law, they are never permissible in those three states, but we’ve also seen AGs in other states becoming increasingly aggressive in attacking employer-employee non-competes. So, for example, in the last couple years, we’ve seen the New York, Illinois, and Washington attorney generals conduct extensive investigations concerning non-competes. And those investigations were, as is virtually always the case, followed by a pile-on of private damages class actions. We’ve also seen 20 other states toughen their non-compete regulation in the past five years. And finally, really staging the current executive order, a large group of state AGs in 2019 sent a joint letter to the FTC, urging it to end abusive non-competes. Going forward, I’d advise employers who use non-compete agreements to consider three things.
Penny Preovolos: First, is the non-compete provision, as opposed to a narrower provision like a non‑disclosure agreement, truly necessary? Second, if it is, the employer should work with counsel to draft the non-compete provision as narrowly as possible. Third, the employer and its counsel should clearly document the reasons why the non-compete is necessary and, crucially, document the reasons why a more narrow provision would not suffice. And, of course, employers and their counsel should closely monitor, going forward, the federal and state developments we’ve been talking about. Bonnie, I know you focus a lot of your time on civil litigation. Are there other trends you see in private antitrust litigation that companies might want to be aware of?
Bonnie Lau: Thanks, Penny. Yeah, there are a couple different trends we’ve been seeing. First, as we all know, the civil plaintiffs bar closely follows federal and state enforcement trends. So we’re seeing a significant uptick in civil follow-on no-poach litigation following the no-poach and non-compete enforcement trends that Lisa and Penny just described. And in the civil context, the big battle is to see if courts will agree with enforcers and civil plaintiffs that no-poach agreements should be per se or automatically illegal violations rather than evaluated under the rule of reason. We’re also seeing a shift in the focus of civil antitrust class action in MDL litigations. They’re no longer primarily focused on cartel and price-fixing conduct. Instead, increasingly, claims are also being brought regarding monopolization and abusive conduct by dominant firms. And another interesting development is that we’re seeing novel and evolving theories of harm, typically around issues like big data, killer acquisitions, digital platform self-referencing and more. An additional trend that we’re seeing is that antitrust damages litigation is increasingly important all over the globe. Before companies might anticipate that they would only be sued in litigation in the United States.
Bonnie Lau: But what we’re seeing is damages claims are rising significantly over recent years, particularly in Europe. So we’re seeing cases in the UK, Germany, and the Netherlands, likely fueled by the EU damages directive, as well as in other jurisdictions that aren’t traditionally known for these types of claims. So one thing that companies should keep in mind: because of the increased collaboration among international enforcers and because of this trend towards litigation, not just in the U.S., but in a variety of different jurisdictions, companies who are interested in settling should think strategically about mechanisms to achieve what I’ll call global peace across all potential claims and enforcers. So defendants need to think carefully and globally across these multiple forums to achieve finality and try to limit their aggregate liability. Megan, let’s transition to another hot topic, which is merger enforcement. And I know you know the merger approval process well. What are some of the new trends that you’re seeing in this space?
Megan Gerking: Thanks, Bonnie. We do appear to be in a period of potentially significant change in approach to merger review. First, we are seeing reviews depart from traditional theories of harm. Merger review has really focused in past several decades on the consumer welfare standard or assessing the potential direct harm from a proposed merger on competition and consumers, namely by higher prices or reduced output or quality. And Chair Lina Khan initiated a shift in approach to substantive merger review upon her arrival of the FTC, and this position to consider a broader set of possible harms was really solidified in September with an announcement by FTC Bureau of Competition Director Holly Vedova. It seems to be bearing out. The FTC has reportedly been looking into more novel theories, including one example, the possibility that mergers create or enhance monopsony power in labor markets. They’ve also reportedly been looking into environmental and social governance issues, conglomerate effects, and how the involvement of investment firms may affect market incentives to compete.
Megan Gerking: But, it’s not clear how the FTC will assess whether a transaction is unlawful under these more novel theories and how it would bear out in court in litigation. Second, per the executive order, the FTC and the DOJ will be reconsidering merger review guidelines. Earlier this fall, the FTC, by a three‑to‑two vote, unilaterally withdrew the vertical merger guidelines, which had been issued jointly by the DOJ and the FTC in 2020. The majority in its statements supporting the withdrawal express concerns about the legitimacy of efficiency arguments, and while the DOJ indicated they would stay in place for the time being, it is likely with the arrival of Jonathan Kanter that this will be something that the DOJ looks at as well. In addition to the changes in the substantive approach, the FTC in particular seems to be taking steps that make it harder for parties to get deals done.
Megan Gerking: Just some examples: earlier this year, the FTC postponed early termination, and there’s no sign that it will resume in the near term. So expect deals to take longer to review. There have been an increasing number of requests by staff for poll and refiles including in transactions where the agency is likely to issue second requests rather than resolve concerns during the poll and refile period. The FTC has been issuing more second requests, and you can expect as a party that it will be harder to comply and it will take longer to comply. Our understanding is that timing agreements are being extended out further. In a deal that could present risks, the parties really can no longer go into the merger review process expecting to easily resolve concerns through settlement. Chair Lina Khan and others have been extremely vocal about dislike of behavioral remedies. And Chair Khan has also suggested that structural remedies may not be good enough.
Megan Gerking: And in the rare instance where a fix is sufficient, expect more burdens in the settlement. The FTC is now imposing prior approval clauses when it does settle mergers, such provisions give the FTC veto power over future deals for at least 10 years, essentially flipping the burden of proof on the parties in the future. There’s also been one settlement that required a monitor and compliance obligations that extended out several years. The FTC is also sending out letters at the end of the HSR waiting period, whether it be at the end of the first 30 days or at some point in the second request process warning companies that they’re closing at their own risk and that the agency’s investigation may continue post-closing. Given these developments at the FTC among others over the past several months, practitioners have been speculating that we could see a possible divergence in the approach to substantive merger review by the DOJ and FTC.
Megan Gerking: Jonathan Kanter has only been in place for a few weeks, so we will need to wait and see how things shake out at the DOJ. But, Kanter’s first public remarks suggest this might be a little less likely as we might have thought just a few months ago. Speaking at a joint FTC and DOJ workshop on competition and labor markets, Kanter emphasized the importance of collaboration between the DOJ and FTC and stressed that he will collaborate and cooperate more with the FTC in the future. Given the uncertain and challenging merger review environment, it is more important than ever to be prepared. Companies considering M&A should work closely with antitrust counsel for a number of reasons. First, to assess the antitrust risk early on and align on how the risks impact deals. Second, to ensure that your interests are adequately protected in the commercial agreement. Third, to develop a strategic plan that is tailored to the specific deal’s risk profile. And fourth, prepare for a longer review. Regardless of the deal profile, the agency will take at least 30 days to review the transaction. Now, Penny, more generally, federal enforcement is not the only concern as the states have been increasingly active on the antitrust front. How significant has this change been?
Penny Preovolos: Thanks, Megan. As you know, the state attorneys general have historically been quite active in antitrust enforcement. We have frequently seen large groups of state attorneys general joining together, often through their association, the National Association of Attorneys General or NAAG, to bring joint antitrust lawsuits. Notably, those lawsuits have sometimes taken positions that are quite a bit more aggressive than the positions taken by the DOJ or FTC. Given the refocus and broadening of antitrust thinking we are seeing on the federal level and abroad, we can also expect the state AGs to double down with increased antitrust enforcement activity. They’ve signaled that in a number of ways. For example, 30 state attorneys general sent a joint letter pressing for passage of the expansive new slate of pending federal antitrust legislation that you’ve been hearing about. And 21 state AGs sent an additional letter voicing strong support for what’s known as the State Antitrust Enforcement Venue Act. That act would prohibit transfer and coordination of state AG actions with private antitrust class actions in a single multidistrict litigation or MDL proceeding as they are now.
Penny Preovolos: Now that may sound procedural, technical, and dry as dust, but unfortunately, it’s not. When state AG actions are consolidated as part of an MDL, they pretty much just become part of a largish piece of litigation that the defendant has to address in any event. Letting the AGs proceed separately in their home states or collectively in a court a group of AGS select adds a considerable amount of power to state AG prosecutions and the pressure they can put on defendants. So this proposed act really is a significant new weapon for the AGs. Overall, I think we can expect very active state AG enforcement in a number of areas, including the areas we’ve been talking about, such as no‑poach agreements and employee non‑compete provisions imposed by employers. Lisa, we are hopefully coming out of this COVID era, and some major government spending bills have passed or seem likely to pass. Do you have any final thoughts on where the competition enforcers are likely to put their resources?
Lisa Phelan: Yeah, Penny, historically, crises and big government spending, which often go hand in hand, have created a confluence that sometimes leads to antitrust violations like bid rigging on government contracts. And in this era with billions, even trillions, being spent by the government on COVID relief and infrastructure, the DOJ and the FBI will have its agents primed and ready to look for collusion and coordination by companies who are understandably looking to acquire some of these lucrative government contracts. Around the time that COVID spending was first ramping up about a year, year and a half ago, the DOJ, led by the Antitrust Division of the DOJ, created something that they called the Procurement Collusion Task Force. And this is adjoining together of not only main justice prosecutors and investigators, but also U.S. attorney’s offices and some of the Inspector General’s offices at government agencies to focus on companies and executives that are taking actions that victimize government agencies or government programs by colluding and coordinating on the bidding process or by allocating government contracts in back room deals.
Lisa Phelan: So the task force is providing training on what collusion might look like to all of the government agencies, like for example, DOT, which will no doubt be getting lots of funding in connection with the infrastructure bill and DoD, so that those agencies are able to recognize what DOJ sometimes refers to as the red flags that a bid submission might be suspicious, or to be able to pick out a pattern among bidding entities that might suggest that there’s some sort of coordination going on among the bidders. So, companies that are understandably, as we say, looking to take advantage of these valuable and important opportunities for government contracts in infrastructure or healthcare in any kind of COVID-related spending, those companies would be wise to brush up their antitrust training to make sure that anyone who’s involved in the government bidding process in order to avoid falling under the scrutiny of these new taskforce agents. They need to have detailed antitrust training, how to handle the bidding process, and, most importantly, never to have any communication with any other bidders because these taskforce agents are going to be only too happy to make an example out of anyone or any company that they see as potentially taking advantage of these government programs, and, in their mind, taking taxpayer dollars in an unwarranted way. So I think that’s a space that we’re going to want to watch closely, and we’re going to want to work with companies to make sure they can get the benefits of these contracts without the risks.
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