As the Biden administration calls for tougher antitrust enforcement, the aerospace and defense (A&D) industry faces increased antitrust scrutiny. In this Law360 article, McDermott’s Jon Dubrow, Lisa Rumin and Anthony Ferrara explain how policy changes by the Federal Trade Commission, the Antitrust Division of the US Department of Justice and the US Department of Defense may affect A&D industry participants in various aspects of their businesses, including mergers and acquisitions, teaming agreements and labor practices. The authors also offer suggestions to help these companies mitigate antitrust risk arising from heightened antitrust scrutiny of the industry.
On February 9, 2022, the US Treasury Department (Treasury) released a report with recommendations for how the Tobacco Tax and Trade Bureau (TTB), Federal Trade Commission (FTC) and Department of Justice (DOJ) can help drive competition in the beer, wine and spirits markets by stepping up conduct enforcement, adopting creative and nuanced theories of harm in merger reviews and implementing new regulations to decrease the burden on smaller industry participants. Treasury’s report is based, in part, on hundreds of comments received from industry participants and paints a detailed picture of the current landscape for alcohol beverage distribution and sale across the United States.
In the United States, antitrust agencies have now filled senior leadership positions, although the Federal Trade Commission (FTC) awaits the appointment of a fifth commissioner. Challenges to mergers continue apace at both the FTC and the Department of Justice (DOJ). The agencies challenged two mergers in the fourth quarter and a third transaction was abandoned. Additionally, nine consent orders were approved. The FTC is also including prior approval provisions in consent orders across industries, requiring parties seeking to settle merger disputes to agree to provide the FTC with greater rights to reject potential future deals.
The European Commission (Commission) imposed interim measures for the first time in the context of the Commission’s determination that Illumina’s acquisition of GRAIL was premature. The Commission conditionally cleared, in Phase I, Veolia’s acquisition of Suez—a transaction involving two French incumbents in the water and waste sectors—following comprehensive commitments. IAG withdrew from its proposed acquisition of Air Europa following the Commission’s decision not to approve the transaction absent further concessions.
In the United Kingdom, the Competition & Markets Authority (CMA) imposed a record fine of £50.5 million on Facebook for breaching an initial enforcement order related to its acquisition of Giphy, and ultimately required Facebook to sell Giphy. The CMA also updated its merger guidance in parallel with the entry into force of the UK National Security and Investment Act, published a new template for initial enforcement orders and updated its guidance on interim measures.
The US Federal Trade Commission (FTC) has announced a series of new reviews scheduled for 2022 regarding key FTC guides and rules. Consumer-facing businesses should pay close attention to these reviews. While FTC reviews are periodic and can be routine, they can also result in fundamental changes to how the FTC approaches enforcement of key issues. Review periods can also provide an opportunity for impacted businesses to submit public comment and opinion to the FTC for consideration.
The FTC’s ongoing and upcoming reviews were highlighted in the Biden administration’s recently released Fall 2021 Unified Agenda of Regulatory and Deregulatory Actions; this publication highlights federal agencies’ regulatory action plans for the coming year. The FTC’s Statement on Regulatory Priorities announced that the agency will undertake a thorough review and examination of the guidance provided in, and the enforcement of, the following key guides and rules:
Guides Against Deceptive Pricing: These Guides address types of pricing representations, such as marketer representations that a price is a “sale” or “discount,” comparisons to others’ prices or manufacturers’ retail prices and representations about special prices based on the purchase of other goods or services (e.g., “buy-one-get-one” offers).
Guide Concerning Use of the Word ‘Free’ and Similar Representations: This Guide sets forth requirements when using the promotional device of offering “free” merchandise or services. When making such offers, the Guide requires all terms and conditions be set forth clearly and conspicuously at the outset of the offer to avoid any reasonable probability that the terms might be misunderstood.
Guides for the Use of Environmental Claims (Green Guides): The Green Guides provide the general principles applying to all environmental marketing claims; how consumers will likely interpret certain claims and how marketers can substantiate such claims; and how marketers can qualify such claims to prevent deception of consumers.
Business Opportunity Rule: This Rule requires business opportunity sellers to give prospective buyers particular information to aid in their evaluation of a business opportunity. The FTC intends to initiate review of this Rule by late 2021.
Amplifier Rule: This Rule creates uniform test standards and disclosures for consumers to make more meaningful comparisons of amplifier equipment performance attributes. The FTC plans to submit a recommendation for further Commission action on review of this Rule by February 2022.
In addition to those newly announced reviews, the report also discussed the following ongoing FTC reviews:
Children’s Online Privacy Protection Rule (COPPA): COPPA imposes requirements on operators of websites or online services directed to children under age 13 as well as on operators of websites or online services that have actual knowledge that they are collecting personal information online from a child under age 13. FTC staff is continuing to analyze and review the public comments; however, the period for comment on COPPA ended in late 2019.
Guides Concerning the Use of Endorsements and Testimonials in Advertising (Endorsement Guides): These guidelines are designed to help businesses and other advertisers of TV, print, radio, blogs, [...]
In the United States, the US Department of Justice’s (DOJ) challenge of American Airlines and JetBlue’s “Northeast Alliance” after the joint venture’s approval by the US Department of Transportation earlier this year demonstrates the Biden administration’s commitment to aggressive antitrust enforcement. US President Joe Biden issued an Executive Order calling for tougher antitrust enforcement, including “encouraging” the DOJ and Federal Trade Commission (FTC) to modify the horizontal and vertical merger guidelines to address increasing consolidation. At the same time, the FTC, under Chair Lina Khan, continues its rapid pace of change to the merger review process.
Under a new interpretation of Article 22 of the EU Merger Regulation (EUMR), the European Commission (Commission) asserted jurisdiction over Illumina’s acquisition of GRAIL and Facebook’s acquisition of Kustomer, even though the transactions did not meet the Commission or Member State filing thresholds. The EU General Court confirmed a significant gun-jumping fine imposed on Altice for breach of the EUMR notification and standstill obligations.
In the United Kingdom, the UK government published plans to update antitrust rules, including revising its jurisdictional thresholds and expanding the “share of supply” test to allow the CMA to more easily capture vertical and conglomerate mergers, as well as acquisitions of startups. And the Competition & Markets Authority’s (CMA) handling of the Veolia/Suez transaction demonstrates the CMA’s willingness to engage with parties to seek practical interim solutions while it is investigating a consummated transaction for potential antitrust concerns.
In the United States, aggressive antitrust enforcement is likely to continue with the appointment of Lina Khan as Federal Trade Commission (FTC) Chair and the nomination of Jonathan Kanter to lead the Department of Justice’s (DOJ) Antitrust Division. The premerger notification landscape continues to shift as filings reach another record high. Technology companies remain in the “hot seat” as legislators in the US House of Representatives introduced five antitrust reform bills that would change the enforcement landscape for digital platforms, including seeking to preclude large digital platform companies from acquiring smaller, nascent competitors. And the US Department of Justice is making good on President Biden’s pledge to regulate “Big Ag” by challenging Zen-Noh Grain Corporation’s proposed acquisition of 38 grain elevators from Bunge North America, Inc.
Meanwhile, in Q1 2021, the European Commission (Commission) published its Guidance on Article 22 of the EU Merger Regulation. The Guidance encourages the EU Member States to refer certain transactions to the Commission even if the transaction is not notifiable under the laws of the referring Member State(s). In Q2, not long after the issuance of the Guidance, the Commission received its first referral request to assess the proposed acquisition of GRAIL by Illumina. In light of the growing global debate on the need for more effective merger control, EU Competition Commissioner Margrethe Vestager confirmed that the Commission will not soften EU merger policy going forward. The Commission’s statement was made despite the fact no deals have been blocked by the Commission in about the last two years.
A newly announced change in Federal Trade Commission (FTC) policy could have dramatic implications for the ways manufacturers of everything from cell phones to cars draft warranties, design products, and distribute replacement parts. Specifically, the FTC has set its sights on repair restrictions.
On July 21, the Commission unanimously voted to approve a policy statement announcing increased antitrust and consumer protection enforcement against business practices that make it difficult for consumers to repair their own products, or use independent repair shops. Manufacturers should take note of this import change in enforcement policy, and promptly evaluate their exposure.
Notably, the FTC’s announcement comes on the heels of President Biden’s executive order “Promoting Competition in the American Economy,” which encouraged the FTC to address “anticompetitive restrictions on third-party repair or self-repair of items…” It also follows a recent report by the FTC to Congress addressing repair restrictions, and a July 2019 FTC workshop examining the issue.
One area of particular concern for the FTC is product warranties that require the use of specific service providers or parts. Section 102(c) of a 1975 federal law known as the Magnuson-Moss Warranty Act (MMWA) prohibits companies from conditioning warranty coverage, expressly or impliedly, on a consumer’s use of an article or service identified by brand, trade, or corporate name, unless the company provides that article or service without charge or the company has received a waiver from the FTC.
Recent reports, including empirical analyses cited by the FTC in its report to Congress, suggest that violations of Section 102(c) are widespread. Indeed, one recent analysis by a prominent public interest group alleged that 45 out of 50 companies whose warranties the group examined appeared to violate the provision. Accordingly, Section 102(c) enforcement is likely to play a prominent role in the FTC’s crackdown.
It also appears that the FTC intends to use its broad authority under Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices,” to challenge a wide range repair restrictions. In its report to Congress, the FTC highlighted the following practices in particular as “restricting independent repair or repair by consumers:”
“Physical restrictions” and “product designs that complicate or prevent repair”;
Purposely making parts, repair manuals, and diagnostic software and tools unavailable;
Designs that make independent repairs less safe, such as the use of glue to fasten lithium ion cells into mobile phones and other devices;
Steering consumers to preferred repair networks using telematics;
“Policies or statements that steer consumers to manufacturer repair networks”;
“Application of patent rights and enforcement of trademarks;
Disparagement of non-OEM parts and independent repair”;
“Software locks, Digital Rights Management and Technical Protection Measures”; and
“End User License Agreements.”
The diverse range of practices that the FTC has identified make this shift in enforcement an important issue for a wide range of companies. Still, there are clues to how the FTC may deploy its scarce resources in this area, at least initially.
First, its prior enforcement may provide an indication. In 2015, [...]
President Biden recently issued an executive order affirming his administration’s policy of enforcing the antitrust laws to “combat the excessive consolidation of industry” and cited healthcare markets as one of several priorities. The Federal Trade Commission (FTC) and US Department of Justice (DOJ) already have been actively enforcing the antitrust laws in provider consolidation matters. The FTC is currently challenging the proposed merger of two health systems in New Jersey, and in the past year unsuccessfully challenged the combination of Jefferson Health and Einstein Health in Philadelphia and successfully challenged the proposed combination of two health systems (Methodist Le Bonheur and Saint Francis) in Memphis.
The executive order follows a proposed bill to increase budgets for the FTC and DOJ, FTC resolutions on compulsory process in healthcare investigations, congressional calls to investigate the use of COVID-19 Provider Relief Fund payments for acquisitions, the FTC physician practice acquisition retrospective and other health antitrust developments.
The US Court of Appeals for the Second Circuit vacated a final order of the Federal Trade Commission (FTC), which had found that agreements to refrain from bidding on keyword search terms for internet advertisements violated Section 5 of the FTC Act. The Court made clear that although trademark agreements are not necessarily immune from antitrust scrutiny, they are entitled to significant deference. 1-800 Contacts, Inc. v. Federal Trade Commission, Case No. 18-3848 (2d Cir. June 11, 2021) (Per Curium). The Second Circuit held that the FTC applied an incorrect analytical framework and incorrectly concluded that the agreements were an unfair method of competition under the FTC Act.
1-800 Contacts and its competitors advertise online through search advertising. They bid on search engine keywords, which help display their websites in response to consumer searches. They also bid on negative keywords, which prevent their ads from being displayed when consumers search for specified terms.
Between 2004 and 2013, 1-800 Contacts entered into a series of settlement agreements to resolve trademark disputes with competitors, as well as one commercial agreement with a competitor, all of which included terms prohibiting the parties from using each other’s trademarks, URLs and similar terms as search advertising keywords. The agreements also required the parties to use negative keywords so that a search including one party’s trademarks would not trigger a display of the other party’s ads. 1-800 Contacts enforced these agreements when it believed them to be breached.
The FTC challenged the agreements, alleging that they “unreasonably restrain truthful, non-misleading advertising as well as price competition in search advertising auctions,” violating Section 5 of the FTC Act, 15 U.S.C. § 45. An administrative law judge (ALJ) subsequently found the agreements to violate Section 5. 1-800 Contacts appealed to the full Commission, which affirmed the ALJ’s decision. 1-800 Contacts appealed.
The Second Circuit vacated the FTC’s decision but noted that the FTC was correct to reject 1-800 Contacts’ argument that trademark settlement agreements are necessarily immune from antitrust scrutiny. Citing the Supreme Court decision in Actavis, the Second Circuit held, “the mere fact that an agreement implicates intellectual property rights does not immunize an agreement from antitrust attack.”
The Second Circuit disagreed with the FTC’s specific antitrust analysis, however. The Court held that the FTC erred by applying an “inherently suspect” analysis—also known as a “quick-look” analysis—rather than the rule of reason. The Court focused on the fact that “the restraints at issue here could plausibly be thought to have a net procompetitive effect because they are derived from trademark settlement agreements,” and the fact that the FTC acknowledged as much by finding that the company’s justifications were “cognizable and, at least, facially plausible.” The Second Circuit also noted that courts have limited experience with these types of agreements. The Court concluded that “[w]hen, as here, not only are there cognizable procompetitive justifications but also the type of restraint has not been widely condemned in our judicial experience . . . . [w]e are bound . . [...]
On June 6, 2021, the US Senate passed the Merger Filing Fee Modernization Act of 2021. The bill is co-sponsored by Senator Amy Klobuchar (D-MN), the Chairwoman of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights; and Senator Chuck Grassley (R-IA).
The bill amends the premerger notification provisions of 15 U.S.C. § 18a and substantially increases the Hart-Scott-Rodino Act (HSR) filing fees for large mergers, while also effectuating a slight decrease in HSR filing fees for smaller mergers. The text of the bill can be found here.
The adjusted HSR filing fees are as follows:
The proposed HSR filing fees are subject to annual increases based on the Consumer Price Index (CPI), unless the CPI increase is less than 1%. Any changes must be published by the Federal Trade Commission (FTC) each year (no later than January 31). The HSR filing fee thresholds themselves will remain correlated to Gross National Product (GNP).
The competition agencies also stand to directly gain from the passage of this bill. Section 3 of the bill authorizes the appropriation of increased funds for both the Department of Justice Antitrust Division (DOJ) and the FTC. The bill appropriates $252 million to the DOJ and $418 million to the FTC, substantially increasing the resources at the disposal of the regulatory agencies and even exceeding the FTC’s requested budget for FY 2022.
The bill is still subject to approval in the House of Representatives and by President Biden. But given the bipartisan support for this bill, its passage appears likely, and it raises the potential for additional bipartisan antitrust legislation in the future.
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