A ntitrust authorities on both sides of the Atlantic reached opposing conclusions about the legality of an acquisition of the developer of a cancer-detection test by a DNA-sequencing supplier. These decisions grapple with several hotly debated issues in antitrust law. The transaction does not involve the horizontal combination of competitors, but rather a vertical acquisition of a customer in an emerging and innovative market, raising concerns that, if the acquisition were not blocked, other current or potential customers—developers of cancer-detection tests—might be foreclosed from access to critical technology. Decision-makers also had to confront the buyer's commitment to solve the concerns by promising not to discriminate against these other customers. Adding further complexity, these merger challenges arose in an unusual procedural posture— especially in Europe, where the transaction did not meet the relevant thresholds for pre-merger notification— because the parties consummated the deal while investigations on both sides of the Atlantic were ongoing.
Illumina, Inc. supplies DNAsequencing technology used for genetic and genomic analysis. Grail, Inc., is a developer of a multi-cancer early detection test that, along with similar tests still in development, is understood to be groundbreaking in the early detection and treatment of cancer. Illumina formed Grail in 2016 and then spun it off shortly afterwards, while maintaining a minority stake. Illumina agreed to reacquire Grail in September 2020, and the deal was consummated in August 2021.
FTC Administrative Decision A Federal Trade Commission (FTC) administrative law judge (ALJ) decided that the merger would not substantially lessen competition in violation of antitrust law. The ALJ rejected arguments from FTC staff that the transaction would harm potential Grail competitors that use Illumina's DNA sequencing technology—also known as “next-generation sequencing” systems—to develop similar cancer tests. Initial Decision (Sept. 9, 2022). The FTC staff argued that Illumina would have the incentive and ability to hinder Grail's rivals from access to this technology, which could impede their ability to innovate, bring cancer-detection tests to market, and save lives. Illumina countered that lives will be saved by the reunited company because it will make the test more widely available, at an affordable cost.
The ALJ found that the transaction would not change Illumina's incentives to lessen competition by harming downstream customers, in part because Illumina already possessed monopoly power in the upstream sequencing-technology market and had an economic interest in Grail. In addition, the lack of close substitutes for Grail's test would make foreclosure unprofitable without plausible opportunities to divert sales from other customers to Grail.
In anticipation of claims that the transaction would create incentives to foreclose Grail's rivals, Illumina announced its “Open Offer,” a unilateral commitment designed to solve competitive concerns by offering all customers a long-term intellectual property license and supply agreement, touted as providing equal access and low prices. The FTC staff maintained that the Open Offer was insufficient, but the ALJ concluded that, even if Illumina had the incentive to foreclose, it would be constrained by the Open Offer from harming Grail's potential rivals.
The FTC staff appealed the ALJ's decision to the full Federal Trade Commission, which can make independent findings of fact and legal conclusions. The Commission's decision can then be reviewed by a federal court of appeals.
European Decision
In the same week that the FTC ALJ handed down his ruling that the combination of Illumina and Grail did not violate antitrust law, the European Commission (EC) announced a contrasting decision prohibiting the transaction. (Sept. 6, 2022) The EC found that Illumina would have the ability and incentive to foreclose access to Grail's rivals who rely on Illumina's sequencing technology to develop their cancer-detection tests.
The EC found that only Illumina's sequencing systems meet the requirements of Grail and its rivals, with no credible alternatives to Illumina's technology in the short- to medium- term. Illumina had the ability, according to the EC, to foreclose access to, raise prices for, and degrade the quality or delay provision of its technology to Grail's potential competitors.
The EC determined that Illumina would have the incentive over time to foreclose Grail's rivals. Although currently the sale of DNAsequencing technology to Grail's potential competitors comprises a small fraction of Illumina's revenues, the EC concluded that these sales would increase dramatically—to over €40 billion a year by 2033—and become highly lucrative, as early cancer detection tests become more prevalent.
The EC found that Illumina and Grail's proposed remedies under the Open Offer were insufficient to address the competitive issues with the transaction, following a market test that considered input from customers. In addition to the Open Offer to customers who could be Grail's rivals, Illumina proposed to enable the development of rival sequencingtechnology providers by licensing intellectual property rights and stopping patent litigation. The EC concluded that the patent-related commitments covered only a limited set of patents that were set to expire in the short term, while Illumina had many other patents that competitors would need to develop an alternative sequencing system. The EC determined that the Open Offer to Grail's rivals would not be effective in practice because it did not address all possible foreclosure strategies, Illumina would be able to circumvent provisions to favor Grail, and the commitments would have been difficult to monitor due their complexity.
Following its September 2022 decision to prohibit the consummated acquisition, earlier this month, the EC sent a Statement of Objections (or formal charge) to Illumina and Grail informing them of the restorative measures it intends to adopt under the European Merger Regulation.
EC Review of Non-reportable Deals
The Illumina/Grail transaction raised novel procedural questions in Europe, as the transaction did not meet the EC's or any member state's jurisdictional pre-merger notification thresholds. Still, the European General Court found that the EC had jurisdiction to review the Illumina/ Grail transaction because of the referral from six member states. The General Court stated that Article 22 of Regulation (EC) No. 139/2004 allows the EC to review a transaction referred by a member state that “affects trade between member states and threatens significantly to affect competition in the territory of the member state concerned” even when the transaction does not have a “European dimension.”
Having invited member states to refer the Illumina/Grail transaction in February 2021, the EC opened an investigation in April 2021 after receiving requests from France and several other member states. Illumina, with the support of Grail, challenged the EC's jurisdiction, arguing that Article 22 was intended to allow member states without merger control legislation to refer transactions to the EC. Absent that situation, Illumina contended, a member state can only refer a transaction to the EC if its jurisdictional thresholds are met. In a decision likely to be reviewed by the European Court of Justice, the General Court rejected these arguments and concluded that the regulations provide the EC with the flexibility to review transactions that “are likely to significantly impede effective competition in the internal market which, because the turnover thresholds have not been exceeded, would otherwise escape control under the merger control systems of both the European Union and the member states.” Case T227/21, Illumina, Inc. v. Comm'n (General Court July 13, 2022)
The novel exercise of jurisdiction is arguably intertwined with the parties' decision to close their transaction—prematurely according to the EC. The Commission opened a parallel investigation into whether the parties “gunjumped” EU merger control law by completing the transaction during the pendency of an investigation and issued a separate Statement of Objections to Illumina and Grail in July 2022 that may lead to fines if the EC finds that the parties breached EU merger regulations. Also in response to the parties closing the transaction, the EC implemented interim measures in October 2021 requiring Illumina and Grail to operate as separate companies. And, in October 2022, the EC extended these interim measures until the Commission issues an order unwinding the transaction and added that the parties must “actively work to prepare for a potential order to unwind the transaction.”
It is hard to think of another recent merger that has raised more knotty antitrust issues than the Illumina-Grail transaction. While appellate review may clarify some issues, it is perhaps not surprising that the vertical acquisition of a customer in a nascent and innovative space would engender a multitude of disagreements and opposing views. Vertical mergers (and practices) require a more nuanced assessment of competing incentives and cognizable efficiencies compared to horizontal mergers, which are often amenable to structural analysis. And promising, new technology markets are difficult to predict, let alone model.
Assessing the buyer's proposed remedies or commitments designed to fix competitive concerns adds complexity to the mix. The burden of proof remains unsettled in U.S. courts: Enforcers argue that the merging parties should have to demonstrate that the fix resolves the competitive concerns while merging parties contend that enforcers should have to prove that the modified merger (including commitments or divestitures) would lessen competition. And the methods for evaluating such commitments differ across the ocean, where the EC engages in a formal market test. Hostility (expressed by some enforcers) to behavioral remedies—solutions that do not involve divestitures but rather limitations on business practices—adds uncertainty and diminishes the likelihood of settlements, especially in vertical mergers and innovation markets.
Finally, the EC's assertion of expanded jurisdiction over otherwise non-reportable transactions adds a new dimension to planning, assessing, and resolving antitrust reviews of mergers.
Originally Published by New York Law Journal
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