FTC Dismisses Complaint Against Altria and JLI and Sets Forth Views on Several Legal Issues
In 2018, Altria Group Inc. (Altria) acquired a 35% stake in Juul Labs Inc. (JLI), an e-vapor company. Altria agreed to provide services to JLI in addition to its investment of cash, and the agreement between the parties contained a provision that, after the investment, Altria would not compete against JLI with respect to e-vapor products. The Federal Trade Commission (FTC or the Commission) brought suit in an administrative proceeding in April 2020 alleging both that the acquisition was unlawful and that Altria had removed its own e-vapor products from the market prior to its investment in JLI as part of an unlawful unwritten agreement not to compete.1 After trial, the FTC’s Administrative Law Judge rejected the FTC’s claims against Altria and JLI, holding there was no unlawful agreement and that the transaction had no adverse impact on competition. After complaint counsel appealed that decision and after the Commission heard oral argument, the Commission dismissed the complaint.2 It noted that there have been significant market developments since complaint counsel filed their appeal — namely that Altria no longer has an interest in JLI, the services agreement is no longer in effect, Altria exercised its option to terminate the written non-compete agreement, and the FDA has not granted marketing authorization for JLI products.
While the Commission vacated the ALJ’s initial decision on the grounds that the dismissal deprives complaint counsel of the ability to obtain review of the decision, the Commission nevertheless clarified its view of several matters of law that arose in the context of that initial decision.
1. The Non-Compete Could Have Been Pled as Per Se Illegal
The Commission’s complaint alleged that, in addition to a non-compete that was set forth in the parties’ written agreement, there was an “alleged unwritten agreement that Altria would cease competing with JLI in e-cigarettes” in order for JLI to agree to the Altria investment. A unanimous Commission voted out the complaint under the rule of reason and complaint counsel litigated the case under that standard. Respondents vigorously denied that there was such an unwritten agreement, and the ALJ found no evidence of such an unwritten agreement and that — even if one existed — there were no anticompetitive effects from the transaction. Nevertheless, the Commission noted that naked agreements by horizontal competitors to divide markets, customers, or territories have long been held per se unlawful.3
While courts apply the rule of reason to agreements not to compete that are ancillary to a broader procompetitive collaboration, and notwithstanding that the written non-compete was part of a larger agreement, the Commission stated that the alleged unwritten non-compete did “not appear to be reasonably related to any integration of economic activity nor reasonably necessary to achieve an integration’s procompetitive benefits.” The Commission did not explain why a non-compete related to a services agreement that would involve the exchange of confidential information would not be “reasonably related to any integration of economic activity” or address respondents’ arguments that the written non-compete was ancillary to a legitimate transaction that had procompetitive benefits.
2. Conspiracy: Finding Agreement
The Commission noted that proof of the unwritten agreement turned on circumstantial evidence, that “it is bedrock principle that ‘[n]o formal written agreement is necessary to constitute an unlawful conspiracy,’” and factfinders look at “plus factors” in evaluating the evidence. The Commission noted that the ALJ was uncertain whether to consider plus factors because there were no allegations of parallel conduct by those involved in the alleged conspiracy (i.e., because only Altria allegedly stopped competing, not JLI), but that he nevertheless applied them. The Commission made a number of interesting statements in this regard:
- “In order to dispel any ambiguity in future cases, we now clarify that factfinders must consider plus factors, meaning behaviors or outcomes inconsistent with independent action, when evaluating the inferences to be drawn from ambiguous circumstantial evidence.”
- “In evaluating post hoc explanations of executives for conduct consistent with agreement, the factfinder should consider the presence or absence of corroboration along with traditional elements of credibility.”
- “[T]he proponent of an inference of conspiracy need not exclude all possibility of independent action to prevail.”
- “Ultimately, the proponent must present evidence sufficient to allow the fact-finder to infer that the conspiratorial explanation is more likely than not.”
3. Competitive Effects: “But For” Analysis
The ALJ examined the competitive state of the market before and after the transaction — a comparison that showed competition had increased rather than declined. The Commission said that was an improper comparison. “[T]he proper comparison is between the actual world and the but-for-world in the absence of the transaction at issue.” The Commission gave no guidance as to how to make those predictions, especially in a marketplace undergoing significant change. The fact that the market was more competitive post-transaction was not persuasive to the Commission, which noted “here, the ALJ found competitive harm unproven because the closed system e-cigarette market ‘has become more competitive’ after the Transaction … but the pertinent question is whether it would have become still more so in the absence of the Transaction.”
4. Herfindahl–Hirschman Index (HHI) Presumption
The Commission noted that complaint counsel’s expert calculated HHIs that exceeded the thresholds in the 2010 Merger Guidelines4 for applying a presumption that the transaction would substantially lessen competition. The ALJ found that — even if Altria had stayed in the market — its market share declines would have persisted and thus historical shares were not a good predictor of Altria’s future competitive significance.
The Commission disagreed. “Having accepted Complaint Counsel’s market share analysis, the ALJ should have applied the presumption and found that Complaint Counsel established a prima facie case.” The Commission explained that “[f]actors that are claimed to undermine the predictive value of the HHI analysis are properly considered on rebuttal.”
5. Altria’s Role as an Actual Competitor
Altria had no e-vapor products on the market at the time of the transaction. Accordingly, the ALJ’s analysis at times treated Altria as a potential, not an actual competitor. The Commission indicated that the ALJ should have treated Altria as a current competitor because Altria had removed one of its products only days before the transaction and because it was engaged in an “intensive, multi-million dollar R&D effort to develop and launch new products, an effort that the Transaction halted.” Pointing to its own decision in Illumina,5 the Commission said Altria’s development efforts “offered present competitive benefits, and their loss harmed competition.” The Commission made this determination despite the ALJ’s finding that “Altria’s capabilities to develop a competitive product to bring to market in the near future” were “questionable at best” and that Altria’s product development “Growth Teams” were five to six years away from having a product.
The Commission also made clear that it considers the appropriate standard for actual potential competition is “reasonable probability,” not “clear proof.” It noted that reasonable probability can be demonstrated by a preponderance of the evidence.
6. Competitive Effects: Importance of Innovation Efforts
The Commission also claimed the ALJ’s initial decision “failed to grapple with the loss of competition that occurred when Atria disbanded its Growth Teams.” Although the ALJ did consider the Growth Teams as noted above, the Commission found the ALJ’s analysis insufficient. It said that “[w]e believe that to effectively protect and promote fair competition in the Nation’s economy, which is characterized by constant technological change, Clayton Act jurisprudence must acknowledge and weigh merger-related losses to R&D and the resultant harms to innovation.”
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The Commission’s statements, while made in the context of one case and part of a dismissal of a case, not an opinion, make clear their views on these issues. We can expect continued enforcement against alleged anticompetitive agreements — and fights over whether the correct standard is rule of reason or per se. The Commission will continue to rely heavily on the HHI presumption of illegality — a presumption that, with the forthcoming new guidelines, could be triggered at lower concentration levels. And they will continue to address perceived losses of competition from the elimination of potential competition even in situations where the success prospects and timeline for such innovation is speculative.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
The Commission did so after extending the time for a Commission decision, denying respondents’ motion to dismiss the complaint as moot (because it determined there is additional relief that could be granted to remedy an illegal transaction) and then withdrawing the matter from adjudication to discuss settlement. The Commission docket for this matter can be found here.
The Commission had previously requested briefing on whether they should apply the per se standard. Both complaint counsel and respondents noted that the case had been litigated under the rule of reason standard and it would be inappropriate for the Commission to apply a new standard on appeal.
Department of Justice and the Federal Trade Commission, Horizontal Merger Guidelines (Aug. 19, 2010), available here.