Antitrust enforcement has been heating up over the last few years in several areas – notably in healthcare and labor.[1] As the antitrust climate intensifies and spreads, private equity (PE) firms are starting to feel the heat, finding themselves the focus of increased antitrust scrutiny. Significantly, antitrust enforcement and litigation risks are moving from the portfolio companies to the PE firms themselves. Three areas of heightened risk stand out: interlocking directorates, roll-ups, and PE divestiture buyers.[2]
Interlocking Directorates
The first heightened risk area is interlocking directorates, which can happen when PE firms seek representation on the boards of their portfolio companies. When those portfolio companies are actual competitors (think competitors for products, services, or even labor) Section 8 of the Clayton Act prohibits them from appointing two different people from the firm to those boards.[3]
At last year’s Spring Enforcers Summit, the head of the Antitrust Division of the Department of Justice, Assistant Attorney General Jonathan Kanter, proclaimed that the Division “will not hesitate” to bring Clayton Act cases “to break up interlocking directorates.”[4] Since then, at least twelve directors have resigned from corporate boards in response to DOJ concerns.[5] Almost half of the directors whose resignation the DOJ touted in an October 2022 press release, represented PE firms.[6]
Both the DOJ and FTC may seek injunctive relief for interlocking directorate violations. In other words, they can force corporate board members in violation of the statute to resign and/or force a deal restructure to avoid the interlock. Private plaintiffs technically may seek damages under Clayton Act § 16, but to date, none have been awarded.[7]
Roll-Ups
A second antitrust private equity area of focus is “roll-up” strategies, i.e., when PE firms acquire multiple companies in the same industry and “roll them up” into one. In a May 2022 interview with the Financial Times, AAG Kanter cast aspersions on the motives of PE firms that engage in these strategies, describing the business model as “designed to hollow out or roll up an industry and essentially cash out.”[8] That method, he continued, “is very much at odds with the law and very much at odds with the competition we’re trying to protect.” The FTC has been equally hostile to these methods, for example, in June 2022 moving to force a PE firm to divest certain veterinary clinics and seek approval from the FTC to buy any more.[9]
PE Divestiture Buyers Beware
The third key area of increased antitrust scrutiny is when PE firms hope to become divestiture buyers, i.e., when PE firms purchase divested assets in the wake of an agency merger review. The DOJ, again through AAG Kanter, has signaled a concern that PE divestiture buyers can “fuel[] additional competitive problems,” by “reducing costs at a company, which will make it less competitive, or squeezing out value by concentrating [the] industry in a roll-up.”[10]
Recently in the DOJ’s merger challenge of Assa Abloy’s proposed purchase of Spectrum Brands, the DOJ initially prohibited the smart locks company from divesting assets to any PE buyer to satisfy antitrust concerns, but settled during trial allowing divestiture to a PE firm.[11] We have yet to see whether this is a case-specific issue or signals a broader (and new) Department policy, but it certainly is consistent with AAG Kanter’s pronouncements from last spring. We may be seeing the beginnings of the Department putting their aggressive posturing into action.
PE Investment in Competing Entities
PE firms investing in competing entities should be aware of the possibility that antitrust enforcers could look at PE firms as facilitating or participating in anticompetitive collusion between competitor companies, which could spur investigations or litigation of alleged Sherman Act, Section 1 collusion – especially price fixing, market allocation, or other anticompetitive agreements. Bid-Rigging, Price-Fixing and Market-Allocation conspiracies can be prosecuted criminally by DOJ.[12] There are two primary risks to PE firms that have concentrated investments in particular industries: (1) the immediate risk of a government civil or criminal investigation; and/or 2) a civil suit arising from those allegations.
By investing in competing entities, or even companies that could potentially compete (nascent competitors), a PE firm runs the risk of allegations that it was the hub in a classic hub-and-spoke conspiracy in violation of Section 1 of the Sherman Act. Applied to PE, in a hub-and-spoke conspiracy, the common investor (the hub) coordinates an anticompetitive agreement among the competitors (the spokes); for example, the competitors might agree to set a floor or ceiling price or to divide customers, markets, or employees. The DOJ Antitrust Division may investigate such suspected agreements criminally, focusing on meetings, emails, or text communications between competitors and the common PE investor who might be viewed as facilitating or participating in collusive, anticompetitive agreements. Civil government antitrust cases are possible. For example, in United States v. Apple Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013), a court found Apple liable for conspiring with five book publishing companies to raise and fix the price for e-books. Private civil suits are also possible and treble-damages can be awarded. In the civil context, such agreements can be inferred from the conduct of the parties or the exchanges between the common investor and the competitors.
Takeaways
- PE firms should expect antitrust scrutiny when investing in competitors or multiple companies in same industry;
- RollUps are likely to face antitrust scrutiny;
- PE firms and portfolio companies should develop compliance and assessment tools to detect and prevent potential interlocking directorates; and
- PE firms with portfolio companies that are competitors or potential competitors should be mindful of information flow to avoid accusation of facilitating or participating in collusive anticompetitive agreements.
For all these reasons, antitrust compliance is critical. PE firms and their portfolio companies should prioritize solidifying antitrust compliance programs and make sure to include tools to detect and prevent these high-scrutiny issues.
FOOTNOTES
[1] Ann O’Brien, Leo Caseria, and Joy Siu, “DOJ Loses Third Consecutive Antitrust Labor Trial,” Antitrust Law Blog, SheppardMullin (March 24, 2023) available at https://www.antitrustlawblog.com/2023/03/articles/criminal-doj/doj-loses-third-consecutive-antitrust-labor-trial/; Ann O’Brien and Lindsey Collins, “DOJ Antitrust Division Loses Two Bellweather Criminal Antitrust No-Poach and Wage-Fixing Trials, American Bar Association (June 27, 2022) available at https://www.americanbar.org/groups/health_law/publications/aba_health_esource/2021-2022/june-2022/doj-antitrust-division-loses-two-trials/; John Carroll and Rachel Guy, “U.S. Healthcare Industry Remains Antitrust Enforcement Priority,” Antitrust Law Blog, SheppardMullin (Sept. 30, 2022) available at https://www.antitrustlawblog.com/2022/09/articles/healthcare-antitrust/us-healthcare-industry-remains-antitrust-enforcement-priority/.
[2] On April 19, 2023, Sheppard Mullin hosted a webinar called “Beware: Private Equity Firms Facing Heightened False Claims Act and Antitrust Risks” addressing these risks. A recording of the webinar is available at https://www.sheppardmullin.com/multimedia-479.
[3] 15 U.S.C. § 19, available at https://www.law.cornell.edu/uscode/text/15/19. The statute has other requirements – namely a financial threshold the companies must meet (over approximately $41 million in profits) – and the interlock itself is a “per se” violation whether or not there has been any actual competitive injury.
[4] Jonathan Kanter, “Assistant Attorney General Jonathan Kanter Delivers 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.
[5] See Practical Law The Journal, “GC Agenda: May 2023,” available at https://www.reuters.com/practical-law-the-journal/transactional/gc-agenda-may-2023-2023-05-01/.
[6] Press Release, “Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates,” Department of Justice (Oct. 19, 2022), available at https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially; Jean M. Fundakowski, Allison Davis, Yonaton Rosenzweig, and Kaley Fendall, “DOJ and FTC Step Up Scrutiny of Interlocking Directorates,” Davis Wright Tremaine LLP, (Dec. 6, 2022) available at https://www.dwt.com/insights/2022/12/doj-ftc-antitrust-interlocking-directorates.
[7] Interlocking Directorates, Practical Law Practice Note w-002-9202.
[8] Stefania Palma, “Crackdown on buyout deals coming, warns top US antitrust enforcer,” Financial Times, (May 19, 2022) available at https://www.ft.com/content/7f4cc882-1444-4ea3-8a31-c382364aace1.
[9] Press Release, “FTC Acts to Protect Pet Owners from Private Equity Firm’s Anticompetitive Acquisition of Veterinary Services Clinics,” Federal Trade Commission, (June 13, 2022) available at https://www.ftc.gov/news-events/news/press-releases/2022/06/ftc-acts-protect-pet-owners-private-equity-firms-anticompetitive-acquisition-veterinary-services.
[10] Palma supra note 8.
[11] Bryan Koenig, “DOJ Told Assa Abloy: No Private Equity Buyers,” Law360.com (April 24, 2023) available at https://www.law360.com/articles/1600512. On May 6, 2023, Assa Abloy and the DOJ reached a settlement which permitted Assa Abloy to divest certain assets, including its Smart Residential business, to the PE firm Fortune Brands. See, Press Release. Assa Abloy, (May 6, 2023) available at https://www.assaabloy.com/group/en/news-media/press-releases/id.2c18a7926479fdff.
[12] For example, in 2019, the DOJ Antitrust Division prosecuted a price-fixing conspiracy in the U.S. canned tuna industry, which resulted in a $100 million criminal fine for one company and jail time for an executive. Press Release, “StarKist Ordered to Pay $100 Million Criminal Fine for Antitrust Violation,” DOJ (Sept. 11, 2019) available at https://www.justice.gov/opa/pr/starkist-ordered-pay-100-million-criminal-fine-antitrust-violation; Press Release, “Former Bumble Bee CEO Sentenced to Prison for Fixing Prices of Canned Tuna,” (June 16, 2020) available at https://www.justice.gov/opa/pr/former-bumble-bee-ceo-sentenced-prison-fixing-prices-canned-tuna. A PE firm that had purchased Bumble Bee in 2010 was sued in a follow-on civil antitrust class action and is still fighting its way out of the case. See Nadia Dreid, “PE Firms Look to Slip Tuna Price-Fixing Claims,” Law360.com (March 28, 2023) available at https://www.law360.com/articles/1590499/pe-firms-look-to-slip-tuna-price-fixing-claims.