Tech companies should check for any interlocking governance with other companies.
Life sciences companies are more likely to fit under many of the available exceptions.
Over the last several weeks, the Antitrust Division of the Department of Justice (“DOJ”) has sent letters to numerous companies, including several technology companies, alleging violations of Section 8 of the Clayton Act (“Section 8”). Citing publicly available information, the letters identify alleged violations based on private equity-affiliated representation on the boards of competing companies. 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.
What does Section 8 prohibit?
Section 8 prohibits individuals or entities from serving simultaneously as a director or officer of any two corporations that are competitors, a situation that is referred to as an “interlocking directorate.” Note that the DOJ takes the position that Section 8 prohibits a single entity (e.g., a private equity firm or venture capital fund) from appointing two people affiliated with the same PE firm or VC fund to sit as its representatives as officers or directors of competing companies.
Who is a Competitor?
For purposes of Section 8, corporations are competitors if an agreement between them to eliminate competition would violate the antitrust laws. Section 8 is a strict liability prohibition, meaning that a violation does not require any harm to competition. In technology verticals, the DOJ takes a broad view of competitive overlap between companies, and likely would consider “potential” competition as being sufficient.
By contrast, in life sciences, it is harder for the agencies to label companies as competitors—even in the same therapeutic area—if they are focused on different technologies, patient sub-populations, route of administration with divergent preclinical or clinical efficacy, and safety profiles because, in many cases, different products in the same therapeutic area are complements, not competitors.
What are the consequences of an investigation?
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. Historically, nearly all of the DOJ and FTC Section 8 enforcement actions have arisen in the context of merger investigations under the Hart-Scott-Rodino Act. The enforcement letters that the DOJ has sent recently, however, are based on publicly available information (e.g., Securities and Exchange Commissions filings) and unrelated to merger investigations. These letters therefore represent a significant expansion of the DOJ’s Section 8 enforcement.
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.
Exemptions Based on Revenue
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
- Each corporation’s competitive sales are less than 4% of its total sales
In other words, for pre-revenue innovative companies, the applicability of Section 8 might be far in the future, especially in life sciences where the pre-revenue phase often can be more than a decade. 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.
Although the DOJ’s enforcement effort appears targeted at private equity firms and the practice of nominating directors across potentially competitive companies, under Section 8 an issuer on which an interlocking board member sits is also implicated in the violation. As mentioned above, we are aware of a number of technology companies with private equity-nominated directors that have been contacted by the DOJ in connection with these investigations. To date, there are no examples of an investigation where the targets include a life sciences company.
In order to avoid being the target of similar enforcement efforts by the DOJ, companies should remain informed of board members’ and officers’ positions at other companies and routinely evaluate whether prohibited interlocks may exist. 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.