In recent days, the Antitrust Division of the U.S. Department of Justice (“DOJ”) has sent letters to numerous private equity firms and portfolio companies alleging violations of Section 8 of the Clayton Act (“Section 8”). Citing publicly available information, the letters identify alleged violations based on the target private equity firms’ representation on multiple portfolio companies that are competitors. The letters warn that the DOJ is considering filing a lawsuit and ask the recipients to contact the DOJ to explore the possibility of resolution prior to a lawsuit.
This broad Section 8 enforcement effort follows warnings by the antitrust agencies of increased scrutiny. Most recently, Assistant Attorney General Jonathan Kanter warned in a speech in April, “For too long, our Section 8 enforcement has essentially been limited to our merger review process. We are ramping up efforts to identify violations across the broader economy, and we will not hesitate to bring Section 8 cases to break up interlocking directorates.” The DOJ letters appear to be a result of those ramped up efforts.
Section 8 Prohibition and the Consequences of an Investigation
Section 8 prohibits individuals and corporations from serving simultaneously as a director or officer of any two corporations that are competitors engaging in U.S. interstate commerce or U.S. commerce into foreign countries, regardless of country of incorporation. For purposes of Section 8, corporations are competitors if an agreement between them to eliminate competition would violate the antitrust laws, e.g., do the two companies offer goods or services, in the same geographic area, that customers would find reasonable substitutes for one another. Section 8 is a strict liability prohibition, meaning that a violation does not require any harm to competition. Note that the DOJ takes the position that Section 8 prohibits one company from appointing two different people to sit as its agents as officers or directors of competing companies. Moreover, Section 8 interlock liability may arise regardless of whether competing portfolio investments are held by the same or different funds.
Section 8 is rarely enforced partly because the only remedy available to plaintiffs for a Section 8 violation is injunctive relief — if the DOJ or FTC were to bring and win a Section 8 lawsuit, the companies would be required to eliminate the interlocking directorate by having officers or directors resign from one or both of the companies at issue.
However, one of the key risks of a Section 8 investigation is that it could expand into an investigation under Section 1 of the Sherman Act, which is likely to have major legal and financial ramifications for a company. The purpose of Section 8 is to prevent coordination and the unlawful sharing of competitively sensitive information between competitors, and a Section 8 violation could thus lead DOJ to open an investigation into coordination and information sharing under Section 1 of the Sherman Act.
There are several de minimis exemptions to Section 8 to keep in mind. Section 8 does not apply if any of the following is true:
- Either corporation’s competitive sales are less than $4,103,400 (an annually adjusted figure);
- Either corporation’s competitive sales are less than 2% of that corporation’s total sales; or
- Each corporation’s competitive sales are less than 4% of its total sales.
There is also a one-year grace period, meaning interlocks are not a violation if less than one year has passed since the event that created the interlocking directorate.
In order to avoid being the target of similar enforcement efforts by the DOJ, private equity firms should evaluate their board and officer representation across their portfolio companies. Goodwin’s Antitrust & Competition group is available to advise on any Section 8 issues, including assessing potential violations, determining whether exemptions apply, and advising on proactively eliminating potentially problematic interlocks if identified.
 Assistant Attorney General Jonathan Kanter, Opening Remarks at 2022 Spring Enforcers Summit (April 4, 2022) (available at https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers).
 For the purpose of the exemptions, competitive sales are defined using the annual gross revenues for those products and services in the most recent fiscal year. 15 U.S.C. § 19(a)(2)
 15 U.S.C. § 19(a)(1), (2)