Case: 23-60167 Document: 00517004299 Page: 1 Date Filed: 12/15/2023
United States Court of Appeals United States Court of Appeals
for the Fifth Circuit Fifth Circuit
FILED
____________ December 15, 2023
No. 23-60167 Lyle W. Cayce
Clerk
____________
Illumina, Incorporated; GRAIL, Incorporated, now known
as GRAIL, L.L.C.,
Petitioners,
versus
Federal Trade Commission,
Respondent.
______________________________
Appeal from the Federal Trade Commission
Agency No. 9401
______________________________
Before Clement, Graves, and Higginson, Circuit Judges.
Edith Brown Clement, Circuit Judge:
The Federal Trade Commission determined that Illumina, Inc.’s
acquisition of Grail, Inc. violated Section 7 of the Clayton Act, and therefore
ordered that the merger be unwound. Because the Commission applied an
erroneous legal standard at the rebuttal stage of its analysis, we VACATE
the Commission’s order and REMAND for further proceedings.
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I.
A.
Founded in 1998, Illumina is a publicly traded, for-profit corporation
that specializes in the manufacture and sale of next-generation sequencing
(“NGS”) platforms. NGS is a method of DNA sequencing that is used in a
variety of medical applications. In September 2015, Illumina founded a
wholly-owned subsidiary, Grail, which was so-named because its goal was to
reach the “Holy Grail” of cancer research—the creation of a multi-cancer
early detection (“MCED”) test that could identify the presence of multiple
types of cancer from a single blood sample.
Grail was incorporated as a separate entity in January 2016. Illumina
maintained a controlling stake in the company until February 2017 when, to
raise the capital needed to move Grail’s MCED test from concept to clinical
trials, Illumina decided to bring in outside investors. This spin-off reduced
Illumina’s equity stake in Grail to 12%. By September 2020, Grail had raised
$1.9 billion through a combination of venture capital and strategic partners.
Then, on September 20, 2020, Illumina entered into an agreement to re-acquire Grail for $8 billion, with the goal of bringing Grail’s now-developed
MCED test to market.
The MCED-test industry had changed dramatically between
February 2017—when Illumina spun Grail off—and September 2020—when
Illumina agreed to re-acquire Grail. Grail’s MCED test—which it named
Galleri—had acquired a breakthrough device designation from the U.S. Food
and Drug Administration (“FDA”), and Grail had published promising
results from a clinical study concerning the initial version of Galleri and was
undergoing additional clinical studies to validate its updated version.
Meanwhile, Thrive Earlier Detection Corporation had announced that the
initial version of its own MCED test—CancerSEEK—had also been
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clinically validated. And other MCED tests—including Singlera Genomics,
Inc.’s PanSeer—were in development. All of the MCED tests in
development—including Galleri, CancerSEEK, and PanSeer—relied on
Illumina’s NGS platforms for sequencing, and there were no available
alternatives.
Given their reliance on Illumina’s NGS platforms, Illumina’s
customers—both within and without the MCED-test industry—expressed
concern about whether they would be able to continue to purchase Illumina’s
NGS products post-merger on the same terms and conditions as pre-merger.
So, Illumina developed a standardized supply contract (the “Open Offer”)
that it made available to all for-profit U.S. oncology customers on March 30,
2021. The Open Offer is irrevocable, may be accepted by a customer at any
time until August 18, 2027, became effective as of the merger’s closing, and
will remain effective until August 18, 2033. Among other terms, the Open
Offer requires Illumina to provide its NGS platforms at the same price and
with the same access to services and products that is provided to Grail.
Grail first offered Galleri for commercial sale in April 2021 as a
laboratory-developed test.1 While Galleri is the only NGS-based MCED test
currently available on the market, others expect to go to market soon and to
directly compete with Galleri. Illumina’s NGS platforms are still the only
means of sequencing MCED tests and will remain so for the foreseeable
future.
_____________________
1
The FDA does not review or validate safety or efficacy data of tests sold as
laboratory-developed tests. Rather, independent labs self-certify the quality of their own
product under the regulatory framework set forth under the Clinical Laboratory
Improvement Amendments. For this reason, laboratory-developed tests have lower
adoption rates than FDA-approved tests.
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B.
On March 30, 2021—the same day Illumina released its Open Offer—
the FTC’s Complaint Counsel issued a complaint alleging that the Illumina-Grail merger agreement, if consummated, would violate Section 7 of the
Clayton Act.2 The merger was, in fact, consummated on August 18, 2021,
but, due to ongoing regulatory review by the European Commission, Illumina
held—and continues to hold—Grail as a separate company.
The FTC’s Chief Administrative Law Judge (“ALJ”) convened an
evidentiary hearing on August 24, 2021. In the coming months, the parties
developed an extensive evidentiary record consisting of over 4,500 exhibits
and the live or deposition testimony of fifty-six fact witnesses and ten experts.
Based on this record, the ALJ issued his initial decision on September 1,
2022. The ALJ found that Complaint Counsel failed to prove that the merger
was likely to cause a substantial lessening of competition in the market for the
research, development, and commercialization of MCED tests. Specifically,
the ALJ concluded that Complaint Counsel had not shown a likelihood that
Illumina would foreclose against Grail’s rivals because Grail has no current
competitors in the market to be foreclosed, the MCED tests in development
would not be a good substitute for Grail’s test, and any foreclosing activities
would cause harm to Illumina’s NGS-sales business. In any event, the ALJ
determined, the Open Offer “effectively constrains Illumina from harming
Grail’s alleged rivals and rebuts the inference that future harm to Grail’s
alleged rivals, and thus future harm to competition, is likely.”
_____________________
2
For clarity, we use “FTC” when discussing the Federal Trade Commission
generally, “Complaint Counsel” when describing the FTC’s actions as a party to these
adversary proceedings, and “Commission” when referring to the FTC’s actions as an
adjudicatory body.
4
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Complaint Counsel appealed the ALJ’s decision to the Commission,
and, after oral argument, the Commission reversed. Upon its de novo review,
the Commission concluded that the merger was likely to substantially lessen
competition in the market for the research, development, and
commercialization of MCED tests. The Commission found that the ALJ had
factually erred in discussing the capabilities of Grail and other MCED tests
in development, improperly focused on foreclosure harm to MCED tests on
the market today as opposed to tests in development, and failed to recognize
that any losses to Illumina’s NGS sales would be more than offset by
Illumina’s expected gains in clinical testing. The Commission also held that
the Open Offer was a remedy that should not be factored into the liability
analysis. But the Commission evaluated the Open Offer as rebuttal evidence
anyway, finding that the Open Offer failed to rebut Complaint Counsel’s
prima facie case because it would not “eliminate the effects” of the merger.
Finally, the Commission rejected Illumina’s constitutional defenses. The
Commission therefore ordered Illumina to divest Grail. Illumina now
appeals.
II.
We review the Commission’s decision, not that of the ALJ. Impax
Laboratories, Inc. v. FTC, 994 F.3d 484, 491 (5th Cir. 2021). All legal
questions pertaining to the Commission’s order are reviewed de novo while
the Commission’s factual findings are reviewed for “substantial evidence.”
Chicago Bridge & Iron Co. N.V. v. FTC,
534 F.3d 410, 422 (5th Cir. 2008).
Under this standard, we are bound by the Commission’s factual
determinations so long as they are supported by “such relevant evidence as
a reasonable mind might accept as adequate.” FTC v. Ind. Fed’n of Dentists,
476 U.S. 447, 454 (1986) (citation omitted). This is so “even if suggested
alternative conclusions may be equally or even more reasonable and
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persuasive.” N. Tex. Specialty Physicians v. FTC, 528 F.3d 346, 354 (5th Cir.
2008) (internal quotation marks and citation omitted).
III.
Because, as explained below, resolution of Illumina’s statutory claims
does not “obviate the need to consider” the constitutional issues raised,
United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988), we begin with
Illumina’s four constitutional challenges. Each is foreclosed by Supreme
Court authority.
A.
First, Illumina contends that the Commission proceedings were the
result of an unconstitutional delegation of legislative power in violation of
Article I. Specifically, Illumina claims that Congress delegated to the FTC
the power to decide whether to bring antitrust enforcement actions in an
administrative proceeding, pursuant to Section 5(b) of the FTC Act, 15
U.S.C. § 45(b), or to bring this same enforcement action in an Article III
court pursuant to Section 13(b) of the FTC Act,
15 U.S.C. § 53(b), without
providing “any guidance for purposes of deciding between administrative
proceedings and federal court.”
But as the Supreme Court recently clarified, federal-court actions
under Section 13(b) are not the same as administrative proceedings under
Section 5(b). Rather, when the FTC goes to federal court under Section
13(b), it is limited to pursuing injunctive relief; to obtain other forms of relief,
such as monetary damages, the FTC must resort to administrative
proceedings under Section 5(b). AMG Cap. Mgmt., LLC v. FTC, 141 S. Ct.
1341, 1348–49 (2021).
Moreover, to the extent that Illumina argues that Congress’s directive
for the FTC to commence an enforcement action when such a proceeding
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would be “in the interest of the public” does not provide an “intelligible
principle,” we disagree. To the contrary, the Supreme Court has repeatedly
“found an ‘intelligible principle’ in various statutes authorizing regulation in
the ‘public interest.’” Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 474
(2001) (collecting cases).
B.
Second, Illumina claims that the FTC unconstitutionally exercised
executive powers while insulated from presidential removal in violation of
Article II. But Humphrey’s Executor v. United States held that the FTC’s
enabling act did not run afoul of Article II because, essentially, the FTC was
vested with quasi-legislative/quasi-judicial authority rather than purely
executive authority. 295 U.S. 602, 626–32 (1935). While the Supreme Court
has cabined the reach of Humphrey’s Executor in recent years, it has expressly
declined to overrule it. See Seila Law LLC v. CFPB,
140 S. Ct. 2183, 2206
(2020); accord Collins v. Yellin,
141 S. Ct. 1761, 1783 (2021). Thus, although
the FTC’s powers may have changed since Humphrey’s Executor was
decided, the question of whether the FTC’s authority has changed so
fundamentally as to render Humphrey’s Executor no longer binding is for the
Supreme Court, not us, to answer. Lefebure v. D’Aquilla,
15 F.4th 650, 660
(5th Cir. 2021) (“[T]he only court that can overturn a Supreme Court
precedent is the Supreme Court itself.”).
C.
Third, Illumina argues that the FTC violated Illumina’s due process
rights by serving as both prosecutor and judge. But the Supreme Court has
held that administrative agencies can, and often do, investigate, prosecute,
and adjudicate rights without violating due process. Withrow v. Larkin, 421
U.S. 35, 47, 56 (1975). Of course, if there is evidence that a decisionmaker has
“actual bias” against a party, that raises due process concerns.
Id. at 47. But
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courts cannot “presume bias” merely from the institutional structure of an
agency. United States v. Benitez-Villafuerte, 186 F.3d 651, 660 (5th Cir. 1999).
Moreover, this court has already rejected the argument that the FTC’s
structure, which combines prosecutorial and adjudicative functions, deprives
parties of due process. Gibson v. FTC,
682 F.2d 554, 559–60 (5th Cir. 1982).
Illumina points to no evidence of actual bias and instead takes issue with the
FTC’s structural design. Whatever merit this argument may have, it is barred
by precedent.
D.
Fourth, Illumina claims an equal-protection violation because there is
no rational basis for allocating certain antitrust enforcement actions to the
FTC and others to the Department of Justice. But rational-basis review is a
low bar that is satisfied so long as “there is any reasonably conceivable state
of facts that could provide a rational basis for the classification.” FCC v.
Beach Commc’ns, Inc., 508 U.S. 307, 313 (1993). Here, the FTC and the DOJ
have an “interagency clearance process” which allocates antitrust
investigations to one agency or the other based primarily on which agency has
“expertise in [the] particular industry or market” of the transaction under
review. U.S. Gov’t Accountability Off., GAO-23-105790, DOJ
and FTC Jurisdictions Overlap, but Conflicts are
Infrequent (2023). This is undoubtedly a rational basis for giving one
agency the lead over the other.
IV.
We turn now to Illumina’s Clayton Act challenge. Section 7 of the
Clayton Act prohibits mergers and acquisitions “where in any line of
commerce or in any activity affecting commerce in any section of the country,
the effect of such acquisition may be substantially to lessen competition.” 15
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U.S.C. § 18.3 To evaluate Section 7 claims, courts apply a burden-shifting
framework. See, e.g., Chicago Bridge,
534 F.3d at 423; United States v. AT&T
Inc.,
916 F.3d 1029, 1032 (D.C. Cir. 2019) (applying burden-shifting
framework to Section 7 claim concerning vertical merger).4 Complaint
Counsel bears the initial burden to “establish a prima facie case that the
merger is likely to substantially lessen competition in the relevant market.”
AT&T,
916 F.3d at 1032. If a prima facie case is made, “the burden shifts to
the defendant to present evidence that the prima facie case inaccurately
predicts the relevant transaction’s probable effect on future competition or
to sufficiently discredit the evidence underlying the prima facie case.”
Id.
(internal quotation marks and citations omitted). If such a rebuttal is
provided, “the burden of producing additional evidence of anticompetitive
effects shifts to the government, and merges with the ultimate burden of
persuasion, which remains with the government at all times.”
Id. (citation
omitted). This framework is applied flexibly—“in practice, evidence is often
considered all at once and the burdens are often analyzed together.” Chicago
Bridge,
534 F.3d at 424.
A.
We start by reviewing Complaint Counsel’s prima facie case. The
Commission concluded that Complaint Counsel had carried its burden of (1)
identifying the relevant product and geographic market as the market for the
_____________________
3
The statute also prohibits mergers that would “tend to create a monopoly,” 15
U.S.C. § 18, but that provision is not at issue here.
4
We note, as did the D.C. Circuit, that “[t]here is a dearth of modern judicial
precedent on vertical mergers and a multiplicity of contemporary viewpoints about how
they might optimally be adjudicated and enforced.” AT&T, 916 F.3d at 1037. Indeed, until
AT&T in 2018, the government had not litigated a vertical merger case since the 1980s.
Jonathan M. Jacobson, Vertical Mergers: Is it Time to Move the Ball?, 33 ANTITRUST 6, 6
(2019).
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research, development, and commercialization of MCED tests in the United
States, and (2) showing that the Illumina-Grail merger was likely to
substantially lessen competition in this market. We find that these
conclusions are supported by substantial evidence.
1.
The first step of the prima facie case requires defining the relevant
market—that is, the “line of commerce” and the “section of the country”
where the relevant competition occurs. 15 U.S.C. § 18; see also United States
v. Marine Bancorporation, Inc.,
418 U.S. 602, 618 (1974) (“Determination of
the relevant product and geographic markets is a necessary predicate to
deciding whether a merger contravenes the Clayton Act.” (internal quotation
marks and citation omitted)). The parties agree with the Commission’s
finding that the relevant geographic market is the United States but disagree
as to its determination that the relevant product market is “the research,
development, and commercialization of MCED tests.”5
In antitrust law, the relevant product market is “the area of effective
competition,” which is typically the “arena within which significant
substitution in consumption or production occurs.” Ohio v. Am. Express Co.,
138 S. Ct. 2274, 2285 (2018) (internal quotation marks and citation omitted).
However, the relevant product market must “correspond to the commercial
realities of the industry.” Brown Shoe Co. v. United States,
370 U.S. 294, 336
(1962) (internal quotation marks and citation omitted). So, “courts should
combine different products or services into a single market” when necessary
to reflect these realities. Ohio,
138 S. Ct. at 2285 (alteration adopted) (internal
quotation marks and citation omitted).
_____________________
5
The ALJ defined the relevant product market the same way.
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To determine the boundaries of the relevant product market, the
Commission relied on what is known as the “Brown Shoe” methodology,
which looks to certain “practical indicia” of market demarcation, such as
“industry or public recognition of the [market] as a separate economic entity,
the product’s peculiar characteristics and uses, unique production facilities,
distinct customers, distinct prices, sensitivity to price changes, and
specialized vendors.” Brown Shoe, 370 U.S. at 325.
First, the Commission found that MCED tests have “peculiar
characteristics and uses” as compared to other current standard-of-care
cancer-screening tests. As the Commission explained, cancer is traditionally
detected through more invasive procedures, like a tissue biopsy,
colonoscopy, or mammography, which often screen for only one type of
cancer and only at a later stage of cancer development.6
Second, the Commission found that MCED tests are designed for
distinct customers—asymptomatic patients as opposed to those with
symptoms or a history of cancer. And, as the Commission noted, MCED test
developers expect to market their tests to primary care physicians and, in
Illumina’s case, directly to patients, as opposed to marketing plans for other
oncology tests, which focus on sales to oncologists and other cancer
specialists.
Third, the Commission found that MCED tests, which will be
targeted toward a more general population than traditional cancer-screening
tests, will likely have their own distinct pricing strategy. Specifically, MCED
tests will need to have particularly low out-of-pocket costs to patients in order
to achieve wide acceptance. Other MCED-test developers testified that they
_____________________
6
As the ALJ noted, “[t]he conclusion that MCED tests are a distinct product from
other oncology tests borders on the obvious.”
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anticipated competing with Grail on price, and evidence in the record showed
that Grail understood that lower-priced MCED tests would pose a
competitive threat. Finally, the Commission found that “MCED developers,
including Grail, see themselves as competing in a distinct market and view
each other as key competitors.”
Critically, because the Commission viewed the relevant product
market as one for the research, development, and commercialization of
MCED tests—not the existing commercial market for MCED tests—it based
its market definition on what MCED-test developers reasonably sought to
achieve, not what they currently had to offer. Each of Illumina’s proposed
bases for why the Commission’s market definition fails springs from the
presumption that the Commission should have defined the market based on
the products that currently exist, not those that are anticipated or expected.
We disagree.7
First, Illumina argues that there is no evidence of reasonable
interchangeability of use or cross-elasticity of demand between Galleri and
other MCED tests in development because the other tests either will not
match Galleri’s “performance characteristics” or “are years from coming to
market.” But as the Commission noted, record evidence suggested
otherwise—CancerSEEK has been shown to detect eight types of cancer in
an asymptomatic screening population while Galleri has only been shown to
detect seven. And even if Illumina was correct in its claim that the other
_____________________
7
In any event, the leading antitrust commentators have noted that “the difference
between actual and potential competition” for purposes of antitrust enforcement is often
“exaggerate[d]”: “[P]otential competition is competition ‘for’ the market, while ‘actual’
competition is said to be competition ‘in’ the market. But insofar as antitrust policy is
concerned, both kinds of competition can be equally ‘actual.’” 4 Phillip E. Areeda &
Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust
Principles and Their Application ¶ 907 (4th ed. 2016).
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MCED tests in development would only be able to detect a subset of the fifty
cancer types that Galleri can detect, two products need not be identical to be
in the same market; rather, the question is merely whether they are “similar
in character or use.” United States v. Anthem, Inc., 236 F. Supp. 3d 171, 194
(D.D.C.) (quoting FTC v. Staples, Inc.,
970 F. Supp. 1066, 1074 (D.D.C.
1997)), aff’d,
855 F.3d 345 (D.C. Cir. 2017). And the Commission correctly
noted that these other tests could still take sales from Galleri (i.e., be
substitutes, albeit not perfect substitutes) if they were priced lower.
Nor was the Commission required to mathematically demonstrate
cross-elasticity of demand. Indeed, requiring such hard metrics to prove the
bounds of a market where only one product has been commercialized but
there is indisputably ongoing competition to bring additional products to
market would, in effect, prevent research-and-development markets from
ever being recognized for antitrust purposes. This, in turn, would directly
contravene the purpose of Section 7—“to arrest anticompetitive tendencies
in their incipiency.” United States v. Phila. Nat’l Bank, 374 U.S. 321, 362
(1963) (internal quotation marks and citation omitted).8
To be sure, simply labeling a market as one for “research and
development” does not relieve Complaint Counsel of its burden to delineate
the bounds of a relevant product market. In some circumstances, there may
be no firms which can fairly be said to be “competing” in a space. And the
mere fact that some company, someday may innovate a competing product
in a given market would be too speculative to support a Section 7 claim, lest
_____________________
8
For similar reasons, the Commission was not required to use the hypothetical
monopolist test to define the relevant product market. In a research-and-development
market where most products have yet to reach the consumer marketplace, there are no
prices from which to build a data set, and thus no way to run a hypothetical monopolist test
analysis.
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every acquisition be presumptively unlawful. Cf. FTC v. Elders Grain, Inc.,
868 F.2d 901, 906 (7th Cir. 1989) (“Section 7 forbids mergers and other
acquisitions the effect of which ‘may’ be to lessen competition substantially.
. . . Of course the word ‘may’ should not be taken literally, for if it were, every
acquisition would be unlawful.”). But that is not the case here. While Grail
may have the most advanced MCED test, competing tests—particularly
CancerSEEK—have been clinically validated, and other developers have
concrete plans to begin the trials necessary for FDA approval. Indeed, Grail’s
own internal documents show that the company viewed itself as being in
active competition with these other MCED-test developers.
For similar reasons, Illumina’s other arguments—that the
Commission misapplied the Brown Shoe factors and “baseless[ly]” defined
the market to include products in development—also fail. Specifically,
Illumina contends that the Commission assessed the Brown Shoe “practical
indicia” too broadly, examining whether MCED tests were different from
other oncology tests rather than whether Galleri was different from other
MCED tests in development. But Illumina’s proposed approach assesses the
indicia far too narrowly. Indeed, under the narrower application urged by
Illumina, the relevant market would consist of only one product—Galleri.
Antitrust law does not countenance such a cramped view of competition,
particularly in a research-and-development market.9
_____________________
9
Because the relevant “line of commerce” is the research and development of
MCED tests, Illumina’s reliance on Mercantile Texas Corp. v. Board of Governors of Federal
Reserve System, 638 F.2d 1255, 1272 (5th Cir. Unit A 1981) for the proposition that market
entry needs to occur within two to three years is misplaced. Although other MCED test
developers have not yet entered the consumer market, they have entered the research-anddevelopment market.
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2.
With the relevant market established, we next turn to whether
Complaint Counsel carried its initial burden of showing that “the proposed
merger is likely to substantially lessen competition.” AT&T, 916 F.3d at 1032
(emphasis omitted). As the Commission recognized, courts have used “two
different but overlapping standards for evaluating the likely effect of a vertical
transaction”: (1) the Brown Shoe standard, which requires courts to look
(again) at the factors first enunciated in Brown Shoe and carried on through
its progeny, including Fruehauf Corp. v. FTC,
603 F.2d 345, 353 (2d Cir.
1979); and (2) the “ability-and-incentive” standard, which asks whether the
merged firm will have both the ability and the incentive to foreclose its rivals,
either from sources of supply or from distribution outlets. Commissioner
Wilson, concurring in the Commission’s decision, argued that there is no
Brown Shoe standard—only the “ability-and-incentive” test—for vertical
mergers in modern antitrust analysis. But we need not resolve this issue
because we find that, under either standard, Complaint Counsel established
a prima facie case supported by substantial evidence.
a.
We begin by addressing the test upon which all Commissioners
agreed—the ability-and-incentive test. Under this framework, courts
consider whether the merged firm will have the ability and incentive to
foreclose rivals from sources of supply or distribution to determine whether
the merger is likely to substantially lessen competition in the relevant market.
Illumina concedes that it would have the ability to foreclose Grail’s
rivals post-merger. But, in its reply brief, Illumina claims that merely having
the ability to foreclose is not enough; rather, the merger must have “increased
Illumina’s ability to foreclose.” But we do not consider arguments raised for
the first time on reply. MDK Sociedad De Responsabilidad Limitada v. Proplant
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Inc., 25 F.4th 360, 367 (5th Cir. 2022). And, in any event, we disagree with
Illumina’s assertion. As the Commission astutely observed, Illumina was
already established as the monopoly supplier of a key input—NGS
platforms—to MCED-test developers pre-merger. So, it would have been
impossible for Complaint Counsel to show that the merger would increase
Illumina’s ability to foreclose. Thus, as the Commission explained, requiring
such a showing would effectively “per se exempt from the Clayton Act’s
purview any transaction that involves the acquisition of a monopoly provider
of inputs to adjacent markets.” We decline to adopt a rule that would have
such perverse results.10
That leaves incentive to foreclose as the determining factor in
evaluating the Illumina-Grail merger under the ability-and-incentive test. As
the Commission explained, the degree to which Illumina has an incentive to
foreclose Grail’s rivals depends upon the balance of two competing interests:
Illumina’s interest in maximizing its profits in the downstream market for
MCED tests vis-à-vis its ownership interest in Grail versus Illumina’s
interest in maximizing its profits in the upstream market for NGS platforms
vis-à-vis its sales to all MCED-test developers. Foreclosing Grail’s rivals
would increase the former (by diverting MCED-test sales from competitors
to Grail) but decrease the latter (by reducing the total number of MCED tests
in the marketplace). So, the Commission reasoned, the greater Illumina’s
ownership stake in Grail, the more its interest in maximizing downstream
_____________________
10
Contrary to Illumina’s assertion, we do not read the Northern District of
California’s Microsoft decision as reaching a different conclusion. Indeed, that court’s
ultimate formulation of the ability-and-incentive test stated that Complaint Counsel was
required to show that “the combined firm (1) has the ability to” and “(2) has the incentive
to” foreclose. FTC v. Microsoft Corp., No. 23-cv-02880, 2023 WL 4443412, at *13 (N.D.
Cal. July 10, 2023) (emphases added). The decision does not require a showing that the
merger “provides” the combined firm with both, as Illumina wrongly claims.
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profits will outweigh its interest in preserving upstream profits, and thus the
more incentive it will have to foreclose. And since the merger would increase
Illumina’s ownership stake in Grail from 12% to 100%, Illumina would “now
earn much more from the sale of a [Grail] test than from the sale of a rival’s
test” and would therefore “have a significantly greater incentive to foreclose
[Grail’s] rivals rather than to keep them on a level playing field.”
Illumina challenges this conclusion on two bases. First, Illumina
argues that, even if the merger would result in Illumina earning larger profits
from the sale of a Grail test than the sale of a rival MCED test, that profit
differential means nothing without proof of diversion, i.e., Grail’s capture of
sales lost by rival MCED-test developers. Illumina is correct that diversion is
necessary for a vertical merger to give rise to foreclosure incentives. If
Illumina forecloses Grail’s rivals, preventing them from entering the MCED-test market or lowering their sales, Illumina’s NGS-sales revenue generated
from those rivals will suffer. Therefore, a foreclosure strategy is only
economically rational if Grail can pick up enough of its competitors’ lost
MCED-test sales to offset the losses to Illumina’s NGS-sales revenue. But,
Illumina argues, “[b]ecause Galleri is the only test on the market today, there
are no sales to divert,” so foreclosing Grail’s rivals would only harm
Illumina’s NGS revenue without any concomitant benefit to Grail’s MCED-test-sales revenue.
This contention suffers from the same fatal flaw as Illumina’s
arguments concerning the Commission’s market definition—it insists that
the Commission must consider only the MCED tests on the market right now,
not those likely to be on the market in the future. But the relevant market is
not “MCED tests commercialized today,” it is the “research, development,
and commercialization of MCED tests.” And as explained earlier, there is
substantial evidence in the record showing that other MCED-test developers
are, right now, working on creating tests that will rival Grail’s capabilities and
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that are expected to make it to the market in the near future. And when they
do, they would divert sales from Grail—or vice versa, should a foreclosure
strategy be pursued.
Illumina’s second argument—that harm to Illumina’s NGS business
from foreclosure of Grail’s rivals would outweigh any benefit to Grail’s
MCED-testing business—is more compelling. Pre-merger, the vast majority
of Illumina’s revenue—nearly 90% in 2020—was earned through its core
business of selling NGS products. And Illumina is right that pursuing a
foreclosure strategy threatens material harm to this business in two ways:
first, by loss of NGS sales to the foreclosed MCED-test developers, and
second, by loss of NGS business in areas outside of cancer detection as a
result of reputational damage. But, as the Commission identified, there are
two reasons why the risk of such harm is not as great as Illumina claims. First,
there are myriad ways in which Illumina could engage in foreclosing behavior
without triggering suspicion in other customers, such as by making late
deliveries or subtly reducing the level of support services. And second, and
more importantly, Illumina’s monopoly power in the NGS-platform market
means that, even if other customers did learn about Illumina’s foreclosing
behavior and therefore wanted to take their business elsewhere, they would
have nowhere else to turn.
In any event, there is a more fundamental reason why any harm to
Illumina’s NGS business may not disincentivize Illumina from pursuing a
foreclosure strategy against Grail’s rivals—the Illumina-Grail merger was
the cornerstone of a foundational change in Illumina’s business model
through which Illumina planned to “transform [itself] into a clinical testing
and data driven healthcare company” as opposed to its current iteration as a
“life sciences tools & diagnostics company focused on genomics.” In other
words, Illumina was willing to suffer losses to its NGS-platform sales in order
to accelerate the growth of its MCED-test sales because it now viewed the
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latter, not the former, as its primary (and far more profitable) business.
Illumina’s own internal projections bear this out, predicting that, although
Illumina would lose money in the short term as a result of the merger, by 2035,
its “net margin profit pool” for clinical testing services would be nearly eight
times the projected profit pool for its NGS-related sales.
In light of the foregoing, the Commission had substantial evidence to
support its conclusion that Complaint Counsel made a prima facie showing
that, post-merger, Illumina had a significantly increased incentive to crowd
out Grail’s competitors from the market. MCED testing is a nascent field in
which, although only one firm—Grail—has begun to commercialize its
product, numerous firms are researching and developing their own products
with the end goal of commercialization. And all of the players expect the field
to one day generate tens of billions of dollars in yearly revenue. To create and
eventually sell this product, each developer will need access to one critical
input—NGS platforms. Now, the sole supplier of that input—Illumina—has
purchased the first mover in this nascent industry. Given Illumina’s
monopoly power and shifting business priorities, it was reasonable for the
Commission to conclude that Illumina would likely foreclose against Grail’s
competitors—even at the expense of some short-term profits—to pursue its
long-term goal of establishing itself (via Grail) as the market leader in clinical
testing.11
_____________________
11
We give the evidence about Illumina’s past behavior little weight in this analysis.
The MCED-test market today, in which multiple firms are racing to develop their own tests
and earn a share of what is predicted to be a significant market, is very different from the
market that existed when Illumina last owned Grail, when the use of liquid biopsies for
cancer screening was highly experimental and not sure to succeed. It is therefore
speculative at best to draw conclusions about Illumina’s future actions from its past
behavior as the owner of Grail. Nor can we draw many insights concerning Illumina’s
potential post-vertical-merger actions in the MCED-test market by looking at its post-vertical-merger actions in the noninvasive-prenatal-tests market, which already had
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b.
The Commission also applied the factors first identified in Brown
Shoe, and later reiterated in Fruehauf, to determine whether the Illumina-Grail merger was likely to substantially lessen competition. These factors
include:
[T]he nature and economic purpose of the [transaction], the
likelihood and size of any market foreclosure, the extent of
concentration of sellers and buyers in the industry, the capital
cost required to enter the market, the market share needed by
a buyer or seller to achieve a profitable level of production
(sometimes referred to as “scale economy”), the existence of
a trend toward vertical concentration or oligopoly in the
industry, and whether the merger will eliminate potential
competition by one of the merging parties. To these factors
may be added the degree of market power that would be
possessed by the merged enterprise and the number and
strength of competing suppliers and purchasers, which might
indicate whether the merger would increase the risk that prices
or terms would cease to be competitive.
Fruehauf, 603 F.2d at 353. The Commission found that at least four of the
factors—likely foreclosure, the nature and purpose of the transaction, the
degree of market power possessed by the merged firm, and entry barriers—
supported a finding of a probable Section 7 violation. We conclude that the
Commission’s Brown Shoe determination was supported by substantial
evidence.
The first factor the Commission relied upon—likelihood of
foreclosure—weighs in favor of Complaint Counsel for the reasons set forth
_____________________
multiple competing products on the market at the time of Illumina’s acquisition and where
the company Illumina acquired was not the first mover in the market.
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in our ability-and-incentive analysis. The second factor—nature and purpose
of the transaction—also overlaps significantly with our prior discussion and
supports Complaint Counsel: The “nature” of the transaction is the
acquisition of a downstream customer by a sole-source supplier, and the
“purpose” is to fundamentally transform Illumina’s business model such
that it would be competing most intensely in the downstream market, i.e., the
same market in which it has the ability to foreclose.
As for the third factor—degree of market power—the parties’
arguments reflect a broader debate about how to view the potential
anticompetitive impact of the merger, which we have now already addressed
twice: whether the Commission was required to look at the immediate effect
of the merger (in which case, Illumina would be correct to say that the
acquisition does not change Grail’s share of the MCED-test market because
its Galleri test is the only product on the market) or could consider the
merger’s long-term impact. And as we have already explained, the
Commission properly considered the longer-term impact of the merger and
found that the merger was likely to lead to a concentration of market power
in the merged firm. This factor thus favors Complaint Counsel as well.
Finally, the Commission found that the merger would increase
barriers to entry in the relevant market. Specifically, based on testimony from
other MCED-test developers and Complaint Counsel’s expert witness, the
Commission found that rival firms would be disincentivized from investing
in MCED-test development post-merger. Illumina suggests that the
Commission gave too much weight to this self-interested testimony and too
little weight to other record evidence. But even if we would have found a
different conclusion to be “more reasonable and persuasive” had we weighed
the evidence ourselves, that would not be enough to set aside the
Commission’s finding on this factor under our deferential “substantial
evidence” review. See Impax, 994 F.3d at 491–92.
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Nor did the Commission commit legal error by omitting three of the
Brown Shoe factors from its analysis. There is “no precise formula[]” when
it comes to applying these factors. Fruehauf, 603 F.2d at 353. Indeed, the
Supreme Court has found a vertical merger unlawful by examining only three
of the Brown Shoe factors. Ford Motor Co. v. United States,
405 U.S. 562, 566
(1972) (considering the nature and purpose of the transaction, increased
barriers to entry, and increased concentration).
At bottom, the record supports the Commission’s findings that the
merger will result in the potential foreclosure of a key input by the sole
supplier, that it was intended to transform Illumina’s business model by
shifting its focus from NGS products to clinical testing, and that investment
by other MCED-test developers may be chilled, especially given the
deferential nature of our review. This was sufficient to support a
determination that Complaint Counsel had made a prima facie showing that
the merger was likely to substantially lessen competition under the Brown
Shoe test.
B.
Next, we address the Open Offer—the long-term supply agreement
that Illumina offered to rival MCED-test developers. First, we consider where
in the Section 7 analysis the Open Offer should be evaluated, and second, we
turn to how it should be evaluated.
1.
Based on the record, the parties’ arguments, and applicable case law,
we see three different options for the point in the Section 7 analysis at which
the Open Offer could come into play. The first option—pressed by
Illumina—is to require Complaint Counsel to account for the Open Offer as
part of its prima facie case. The second option—adhered to by the
Commission’s majority opinion—is to only consider the Open Offer at the
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remedy stage following a finding of liability. The third option—suggested by
Commissioner Wilson in her concurring opinion—is to place the burden of
showing the Open Offer’s competitive effects on Illumina as part of its
rebuttal to the prima facie case. As explained below, we agree with
Commissioner Wilson.
a.
The parties’ divergent views on this issue appear to stem from a
disagreement over whether the Open Offer should be treated as a “market
reality”—as Illumina contends—or a remedy—as the Commission found.
But we do not think that the Open Offer fits neatly into either bucket, and we
decline to force it into one.
On the one hand, it is evident that the Open Offer is not just a normal
commercial supply agreement but instead a direct response to
anticompetitive concerns over the Illumina-Grail merger. The opening
sentence of the Open Offer makes this plain; it explains that the Open Offer
was made “[i]n connection with Illumina’s proposed acquisition of Grail . . .
to allay any concerns relating to the [merger], including that Illumina would
disadvantage Grail’s potential competitors.” So, to treat the Open Offer as
just another fact of the marketplace seems to miss the forest for the trees.
But, on the other hand, the Open Offer is different in kind from a
Commission- or court-ordered “remedy,” which, as the Commission itself
noted, can be imposed “only on the basis of a violation of the law,” i.e., after
a finding of liability. See Gen. Bldg. Contractors Ass’n, Inc. v. Pennsylvania, 458
U.S. 375, 399 (1982). Indeed, the Open Offer became effective before the
evidentiary hearing in this case had even begun and nineteen months before
the Commission’s liability determination. Thus, the Commission majority’s
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reliance on cases like Ford Motor Co.12 and du Pont13—which concerned court-ordered divestitures after a finding of Section 7 liability—to support its
position that the Open Offer is a remedy is misplaced. So too is its reliance
on United States v. Aetna Inc., 240 F. Supp. 3d 1 (D.D.C. 2017), and FTC v.
Sysco Corp.,
113 F. Supp. 3d 1 (D.D.C. 2015). To be sure, both Aetna and
Sysco—like this case—involved proposals by the parties, not decrees by the
Commission or court. But in both cases, the proposed divestitures were
conditional upon the court’s liability determination, coming into effect in
Aetna only if the court found such divestiture “necessary to counteract the
merger’s anticompetitive effects,”
240 F. Supp. 3d at 17, and in Sysco “if the
merger received regulatory approval,”
113 F. Supp. 3d at 15. No such
conditions accompanied the Open Offer.
In this sense, the Open Offer is somewhere in between a fact and a
remedy—a post-signing, pre-closing adjustment to the status quo
implemented by the merging parties to stave off concerns about potential
anticompetitive conduct. Take, for example, the arbitration agreement at
issue in United States v. AT&T, Inc., 310 F. Supp. 3d 161 (D.D.C. 2018), aff’d,
916 F.3d 1029 (D.C. Cir. 2019). That case concerned a Section 7 challenge to
the vertical merger between AT&T (which distributes television content via
its cable platform DirecTV) and Time Warner (which packages television
content via its networks such as TNT, TBS, CNN, and HBO and licenses
such networks to distributors). Id. at 167. Shortly after the government filed
suit, and in an effort to assuage concerns that it would price-discriminate
against distributors other than AT&T post-merger, Time Warner made an
irrevocable offer to distributors to engage in “baseball style” arbitration
_____________________
12
405 U.S. at 571.
13
United States v. E. I. du Pont de Nemours & Co., 366 U.S. 316, 334 (1961).
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when it came time to renew their licensing agreements. Id. at 184.14 The
government argued that the arbitration agreements should be “ignored”
until the remedy stage, but the court disagreed, holding that the agreements
would have “real-world effect[s]” that should be considered prior to any
liability determination. Id. at 217 n.30.
The Northern District of California reached a similar determination
in FTC v. Microsoft Corp., where the court considered a “binding offer” by
Microsoft (the details of which are redacted from the opinion) designed to
assuage the government’s concerns that Microsoft (the manufacturer of the
popular Xbox gaming console) would pull certain videogames from
competing consoles following its vertical merger with videogame publisher
Activision. No. 23-cv-02880-JSC, 2023 WL 4443412, at *15 (N.D. Cal. July
10, 2023). The court rejected the government’s argument that, under du
Pont, Microsoft’s offer was merely a “proposed remedy” to be considered
after a finding of liability and explained that “offered and executed
agreements made before any liability trial, let alone liability finding,” should
be considered at the liability phase.
Id.
The Open Offer is akin to the remedial agreements at issue in AT&T
and Microsoft. And we agree with those courts that such agreements should
be addressed at the liability—not remedy—stage of the Section 7
proceedings.
b.
Having determined that the Open Offer should be considered at the
liability stage, the question remains: where does it fit within the burden-
_____________________
14
In “baseball style” arbitration, “each party puts forward a final offer before
knowing about its counterparty’s offer, and the arbitrator chooses between those two.”
AT&T, 310 F. Supp. 3d at 217.
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shifting framework for determining liability? Illumina urges that Complaint
Counsel was required to incorporate the Open Offer into its prima facie case.
Commissioner Wilson says that the Open Offer only comes into play as part
of Illumina’s rebuttal to Complaint Counsel’s prima facie case. We find the
latter approach most compatible with the “flexible framework” at play. See
Chicago Bridge, 534 F.3d at 424.
As we and our sister circuits have recognized, the burden-shifting
framework is “somewhat artificial.” FTC v. Butterworth Health Corp., No.
96-2440, 1997 WL 420543, at *1 (6th Cir. July 8, 1997); accord Chicago Bridge,
534 F.3d at 424–25. “Conceptually, this shifting of the burdens of
production, with the ultimate burden of persuasion remaining always with
the government, conjures up images of a tennis match, where the
government serves up its prima facie case, the defendant returns with
evidence undermining the government’s case, and then the government
must respond to win the point.” FTC v. Univ. Health, Inc.,
938 F.2d 1206,
1219 n.25 (11th Cir. 1991). “In practice, however, the government usually
introduces all of its evidence at one time, and the defendant responds in
kind.” Id. Thus, the “evidence is often considered all at once and the burdens
are often analyzed together.” Chicago Bridge,
534 F.3d at 425. This is
particularly true in vertical merger cases. In horizontal merger cases, the
government can “use a short cut to establish [its prima facie case] through
statistics about the change in market concentration.” AT&T,
916 F.3d at
1032. No such “short cut” exists in vertical merger cases, and the
government “must make a ‘fact-specific’ showing” even at the prima facie
stage.
Id.
That is precisely what happened in this case. As the government’s
brief explains, “[h]ere, Complaint Counsel produced evidence in its case-inchief that the Open Offer was ineffective, and Illumina attempted to produce
contrary evidence in the defense case.” The Commission then siloed all of
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this Open-Offer-related evidence into the rebuttal stage of its analysis.15 Had
the Commission applied the correct standard at the rebuttal stage, there
would have been no error in this approach. Indeed, we approved such a
methodology in Chicago Bridge.
As we explained there, in many Section 7 cases, the “[g]overnment’s
prima facie case anticipates and addresses the respondent’s rebuttal
evidence.” Chicago Bridge, 534 F.3d at 426. In such a situation, the
Commission need only “assess[] the rebuttal evidence in light of the prima
facie case” rather than switch the burden of production back-and-forth.
Id. at
424.
2.
At the rebuttal stage of the Section 7 analysis, Illumina bore the
burden “to present evidence that the prima facie case inaccurately predicts
the relevant transaction’s probable effect on future competition.” AT&T,
916 F.3d at 1032 (internal quotation marks and citation omitted). Because
Complaint Counsel preemptively addressed the Open Offer as part of its
case-in-chief, Illumina’s burden on rebuttal was “heightened.” Chicago
Bridge,
534 F.3d at 426. To be sure, Illumina’s burden was only one of
production, not persuasion; the burden of persuasion remained with
Complaint Counsel at all times. AT&T,
916 F.3d at 1032. But to satisfy its
burden of production, Illumina was required to do more than simply put
forward the terms of the Open Offer; it needed to “affirmatively show[]” why
_____________________
15
As explained above, the Commission majority erroneously viewed the Open
Offer as a remedy to be properly considered only “at the remedy stage, following a finding
of liability.” Nonetheless, it examined the Open Offer “at the rebuttal stage” because it
found that doing so made no difference to “the ultimate analysis or outcome.” But the
Commission applied the wrong rebuttal-stage standard. We express no view on whether
the application of the proper standard will change “the ultimate analysis or outcome” in
this instance.
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the Open Offer undermined Complaint Counsel’s prima facie showing to
such an extent that there was no longer a probability that the Illumina-Grail
merger would “substantially lessen competition.” See United States v. Baker
Hughes Inc., 908 F.2d 981, 991 (D.C. Cir. 1990) (emphasis added).
This is where the Commission erred. The Commission held Illumina
to a rebuttal standard that was incompatible with the plain language of
Section 7 of the Clayton Act, which only prohibits transactions that will
“substantially” lessen competition. 15 U.S.C. § 18. And this error pervaded
the Commission’s analysis of the Open Offer, as the Commission invoked
the wrong standard in five separate instances. Specifically, the Commission
held that Illumina was required to “show that the Open Offer would restore
the pre-[merger] level of competition,” i.e., “eliminate Illumina’s ability to
favor Grail and harm Grail’s rivals.” In effect, Illumina could only rebut
Complaint Counsel’s showing of a likelihood of a substantial reduction in
competition with a showing that, due to the Open Offer, the merger would
not lessen competition at all. This was legal error.
The Commission’s standard stems from its mistaken belief that the
Open Offer is a remedy. Indeed, the source of this total-negation standard is
the Supreme Court’s holding in Ford Motor Co. that “[t]he relief in an
antitrust case must be ‘effective to redress the violations’ and ‘to restore
competition.’” 405 U.S. at 573 (quoting du Pont,
366 U.S. at 326). The
District of Columbia applied this remedy-stage standard in its liability-stage
analysis in a string of cases, beginning with Sysco,
113 F. Supp. 3d at 72,
continuing in Aetna,
240 F. Supp. 3d at 60, and then again in FTC v. RAGStiftung,
436 F. Supp. 3d 278, 304 (D.D.C. 2020).16 But in its most recent
_____________________
16
We express no view as to whether a total-negation standard is appropriate at the
remedy stage of the Section 7 analysis.
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case, the District of Columbia reversed course, recognizing that the total-negation standard “contradicts the text of Section 7.” United States v.
UnitedHealth Grp. Inc., 630 F. Supp. 3d 118, 132 (D.D.C. 2022). As that court
explained, “the text of Section 7 is concerned only with mergers that
‘substantially . . . lessen competition,’” and by requiring on rebuttal a
showing that the merger will “preserve exactly the same level of competition
that existed before the merger, the Government’s proposed standard would
effectively erase the word ‘substantially’ from Section 7.”
Id. at 133 (quoting
15 U.S.C. § 18).
The Northern District of California agreed with this assessment. See
Microsoft, 2023 WL 4443412, at *13 (“It is not enough that a merger might
lessen competition—the FTC must show the merger will probably
substantially lessen competition.” (citing UnitedHealth, 630 F. Supp. 3d at
133)). And so do we. To rebut Complaint Counsel’s prima facie case,
Illumina was only required to show that the Open Offer sufficiently mitigated
the merger’s effect such that it was no longer likely to substantially lessen
competition. Illumina was not required to show that the Open Offer would
negate the anticompetitive effects of the merger entirely.
C.
Finally, we turn to Illumina’s other proffered rebuttal evidence—
efficiencies. As it did before the Commission, Illumina contends on appeal
that the Illumina-Grail merger would have “result[ed] in significant
efficiencies” which would have “easily offset[] the supposed
17
[anticompetitive] harm.” To be cognizable as rebuttal evidence, an
_____________________
17
The Commission stated that, to rebut the prima facie case, any substantiated
efficiencies needed “to offset and reverse the likely anticompetitive effects” of the merger.
This standard gives us pause for the same reasons discussed with respect to the standard
used to evaluate the Open Offer. But we need not decide whether such a standard is
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efficiency must be (1) merger specific, (2) verifiable in its existence and
magnitude, and (3) likely to be passed through, at least in part, to consumers.
See FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327, 348–49, 351 (3d Cir.
2016); Anthem,
855 F.3d at 362. The Commission determined that none of
Illumina’s proposed efficiencies were cognizable. We find that this
conclusion was supported by substantial evidence.
First, Illumina claimed that the merger would reduce (if not eliminate
entirely) Grail’s obligation to pay Illumina a royalty, which would have
generated a significant consumer surplus. The Commission found that this
claimed efficiency was neither merger specific nor likely to be passed through
to consumers. We find that the former determination was not supported by
substantial evidence, but the latter was. The Commission’s finding that the
royalty reduction was not merger specific was based on evidence
demonstrating that Grail had considered other ways to reduce or eliminate
the royalty without merging with Illumina, such as a buyout or longer-term
supply agreement. But the Commission did not fairly consider evidence that
Grail—in coordination with its bankers at Morgan Stanley—had determined
that it lacked the leverage necessary to bring Illumina to the table on these
alternative proposals, leaving merger as the only realistic option. We
_____________________
appropriate for evaluating efficiencies because the Commission did not rely on it. Instead,
the Commission found that Illumina had failed to substantiate its claimed efficiencies in the
first place.
We also note that our court has never addressed the threshold question of whether
it is proper for a court to take account of a merger’s efficiencies as a defense in a Section 7
case. But see Anthem, 855 F.3d at 355 (holding that proof of post-merger efficiencies can
rebut a Section 7 prima facie case); FTC v. Tenet Health Care Corp.,
186 F.3d 1045, 1054
(8th Cir. 1999) (same); Univ. Health, 938 F.2d at 1222 (same). We do not reach that
question here, either. Instead, we assume arguendo that such a defense can be properly
considered. Cf. FTC v. Penn State Hershey Med. Ctr.,
838 F.3d 327, 348 (3d Cir. 2016)
(assuming, without deciding, that efficiencies defense was valid); Saint Alphonsus Med.
Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd.,
778 F.3d 775, 790 (9th Cir. 2015) (same).
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therefore cannot conclude that substantial evidence supported this finding.
See Universal Camera Corp. v. NLRB, 340 U.S. 474, 488 (1951) (“The
substantiality of evidence must take into account whatever in the record fairly
detracts from its weight.”).
With respect to pass-through, however, there was substantial
evidence to support the Commission’s finding that, while Grail could
decrease the price of Galleri (i.e., pass some of the benefit through to
consumers) following reduction of the royalty, Illumina had not shown a
likelihood that Grail would do so. Indeed, as explained earlier, substantial
evidence supported the Commission’s finding that the merger would
increase Illumina’s incentive to foreclose against Grail’s rivals such that
competing MCED tests either never make it to market or the costs of
bringing such tests to market increase. In other words, Grail had no reason to
pass its royalty-reduction savings through to Galleri’s customers because, if
any of Grail’s competitors actually made it to market, Grail could force those
competitors to pass through extra costs to their customers.
Second, Illumina argued that the merger would eliminate double
marginalization—i.e., Illumina would no longer charge Grail a margin, as it
did before the merger—leading to additional consumer surplus. But Illumina
never put forward a proposed model for calculating this benefit, only an
“illustrative” one. Illumina does not contest this fact. Rather, Illumina
contends that it was Complaint Counsel’s burden to model these benefits.
But when it comes to efficiencies, “much of the information relating to
efficiencies is uniquely in the possession of the merging firms.” 4A Areeda
& Hovenkamp, Antitrust Law ¶ 970f (citation omitted). It is
therefore Illumina—not Complaint Counsel—that “must demonstrate that
the intended acquisition would result in significant economies.” Univ.
Health, 938 F.2d at 1223; see also Steven C. Salop, Invigorating Vertical Merger
Enforcement, 127 Yale L.J. 1962, 1981 (2018) (“Because the merging
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parties have better access to the relevant information, they also bear the
burden of producing evidence of efficiency benefits . . . .”). And because
Illumina failed to demonstrate that this proposed efficiency was verifiable,
the Commission had substantial evidence in support of its decision not to
recognize it.
Third, Illumina contended that the merger would lead to “significant
supply chain and operational efficiencies” of approximately $140 million
over a ten-year period. But, again, it presented no model by which it
calculated this number. And without an underlying model, including the
assumptions upon which it was based, the Commission had a sound basis to
conclude that Illumina had failed to carry its burden of showing this efficiency
was verifiable. See United States v. H & R Block, Inc., 833 F. Supp. 2d 36, 91
(D.D.C. 2011) (“[T]he lack of a verifiable method of factual analysis resulting
in the cost estimates renders [the proposed efficiency] not cognizable by the
Court.”). Plus, record evidence showed that Grail was in the process of
improving its operations pre-merger, and Illumina had not shown any
method of quantifying the incremental value, if any, the merger would
provide with respect to these operational efficiencies. Thus, there was not
only a verification issue, but a merger-specificity issue as well.
Fourth, Illumina claimed that the merger would result in significant
research-and-development efficiencies. But Illumina made no attempt to
quantify these claimed efficiencies, instead relying on testimony of its
executives that such efficiencies would be achieved. But “[w]hile reliance on
the estimation and judgment of experienced executives about costs [or
innovation] may be perfectly sensible as a business matter, the lack of a
verifiable method of factual analysis . . . renders [the efficiency] not
cognizable.” H & R Block, 833 F. Supp. 2d at 91.
32
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No. 23-60167
Fifth, Illumina argued that due to its “regulatory and market-access
expertise,” the merger would “accelerate” FDA approval and payer
coverage for Galleri. But the Commission, again supported by substantial
evidence, found that Illumina had not established that such acceleration
would actually occur, much less shown how it would be achieved. For
instance, Illumina’s own financial modeling of the merger did not assume
that Galleri’s widespread commercialization would be accelerated. Nor did
it account for the costs that would be associated with achieving any such
acceleration, such as diverting Illumina personnel to work on Grail projects.
And in any event, Illumina had failed to demonstrate that its claimed
“regulatory expertise” was superior to that which Grail already possessed.
Indeed, Grail had already obtained breakthrough device designation for
Galleri on its own. Illumina, on the other hand, had only ever obtained premarket approval for one Class III NGS-based diagnostic test, and in that
instance, a third party sponsored the clinical study upon which approval was
granted.
Sixth, Illumina pointed to “international efficiencies,” i.e., that the
merger would “accelerate the international expansion of Galleri.” But as the
Commission explained, Illumina “offered no concrete plans regarding
countries in which international expansion would occur, how much more
quickly the international expansion would occur, how much additional data
the international expansion would generate, how much the international
efforts would cost, or why such international expansion could only be
achieved through a merger.”18
_____________________
18
Because we find that substantial evidence supported the Commission’s
conclusion that Illumina had failed to substantiate its claimed international efficiencies, we
do not address the question of whether it is proper to consider efficiencies outside of the
relevant geographic market. But see Phila. Nat’l Bank, 374 U.S. at 370 (rejecting contention
33
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No. 23-60167
At bottom, an efficiency defense is very difficult to establish. See 4A
Areeda & Hovenkamp, Antitrust Law ¶ 970a (“[W]hile
efficiencies are commonly asserted as a defense, they are rarely found
sufficient to undermine a prima facie case against a merger.”) And
substantial evidence supported the Commission’s determination that
Illumina failed to establish cognizable efficiencies here.
V.
To sum up, Illumina’s constitutional challenges to the FTC’s
authority are foreclosed by binding Supreme Court precedent, and
substantial evidence supported the Commission’s conclusions that (1) the
relevant market is the market for the research, development, and
commercialization of MCED tests in the United States; (2) Complaint
Counsel carried its initial burden of showing that the Illumina-Grail merger
is likely to substantially lessen competition in that market under either the
ability-and-incentive test or looking to the Brown Shoe factors; and (3)
Illumina had not identified cognizable efficiencies to rebut the
anticompetitive effects of the merger. However, in considering the Open
Offer, the Commission used a standard that was incompatible with the plain
language of the Clayton Act. We therefore VACATE the Commission’s
order and REMAND the case for reconsideration of the effect of the Open
Offer under the proper standard.
_____________________
that “anticompetitive effects in one market could be justified by procompetitive
consequences in another”).
34
