In March 2023, the Federal Trade Commission (FTC) proposed tightened requirements of the Negative Option Rule. This is an effort to combat unfair or deceptive practices, such as charging customers for recurring products or services that they don’t want and can’t cancel easily. Negative options refer to features like automatic renewals, prenotification plans, free-to-pay and fee-to-pay conversions, and continuity programs.
The FTC seeks to increase the requirements for negative options to prevent marketers from deceiving or making it difficult for consumers to cancel or opt out of subscriptions, notifications or similar programs. The proposed regulations aim to avoid any hindrance or deception to consumers who want to opt out or cancel.
The American Bar Association’s Antitrust Law Section held its annual Spring Meeting in Washington, DC, on March 29–31, 2023. The Spring Meeting sessions featured updates from federal, state, and international antitrust enforcers and thought-invoking discussions on leading antitrust issues facing the business community today. Following Part 1, this post summarizes key takeaways from the second portion of the Spring Meeting, including updates regarding premerger notification filings, labor markets, state antitrust enforcement, compliance programs, national security, consumer protection, interlocking directorates, and remedies.
FTC Zeros in on Missing Material in HSR Filings
Federal Trade Commission (FTC) Bureau of Competition Director Holly Vedova underscored the consequences of failing to submit Item 4 material in HSR filings. She noted the FTC will bounce filings found to have missing Item 4 documents. If the waiting period has not expired and newly surfaced documents change the scope of the request, the FTC may issue a Second Request. If the waiting period has expired when consequential missing material is realized, the FTC will require a corrective filing for the original transaction and may impose “significant” civil penalties.
Vedova also reminded practitioners that changes in a merger agreement can require an additional HSR filing. If material changes are made before the waiting period expires, parties should proactively reach out to the FTC to inquire as to whether further action is needed. Parties may need to amend their original filing or submit a new one entirely.
Labor Markets Remain High Priority
The antitrust enforcement agencies have promised continued, fervent action in labor markets. In keeping with this promise, this January, the FTC issued a proposed rule that would make it illegal to enter into or maintain noncompete agreements with employees or independent contractors.
FTC Chair Lina Khan emphasized that noncompetes impede business dynamism, innovation, and entry, and eliminating noncompetes is estimated to return $300 billion back into the pockets of American workers.
FTC Commissioner Rebecca Kelly Slaughter pointed to California as an innovator in labor market enforcement, citing its prohibition on noncompetes. FTC enforcers encouraged the continued submission of public comments on the proposed rule. The comment period is set to close on April 19, 2023.
Wisconsin Assistant Attorney General Gwendolyn Cooley also noted that enforcing noncompetes has been a hallmark of state enforcement, especially in New York and Washington, and additional states are considering legislation that would ban noncompetes.
The Department of Justice (DOJ) Antitrust Division’s Acting Director of Criminal Enforcement Emma Burnham and the Chief of DOJ’s Criminal II Section James Fredericks noted practitioners should expect an uptick in criminal cases in the labor and employment space. DOJ Antitrust Division’s Deputy Assistant Attorney General Jonathan Kanter stressed that antitrust crimes focused on workers are just as important as those focused on consumers.
New York’s antitrust chief, Elinor Hoffman, indicated that New York is focused on labor issues, including no-poach agreements and noncompete clauses that may arise during merger reviews. [...]
The American Bar Association’s Antitrust Law Section recently held its annual Spring Meeting in Washington, DC, featuring updates from federal, state, and international antitrust enforcers and in-depth commentary on leading antitrust issues facing the business community today. This post recaps key takeaways from the first portion of the Spring Meeting.
CIVIL ENFORCEMENT AND MERGER REVIEW: US DEPARTMENT OF JUSTICE (DOJ) PRIORITIES
Aggressive Enforcement by Any Other Name: DOJ Antitrust Division Deputy Assistant Attorney General Hetal Doshi characterized DOJ’s enforcement posture as “not aggressive enforcement, just enforcement,” but nevertheless opined that the Department’s past practice of erring on the side of under-enforcement has “ill-served” the public.
Whole-of-Government Means Whole-of-Government: The Division’s Deputy Assistant Attorneys General Maggie Goodlander and Michael Kades highlighted that various federal statutes other than the antitrust laws confer the power to act to preserve competition. They emphasized DOJ’s intent to pursue sweeping enforcement priorities to execute President Biden’s recent executive order calling for a whole-of-government approach to protecting competition, including by working in conjunction with other federal agencies like the Departments of Defense, Transportation, and Agriculture.
Enforcement Priorities Include Technical Violations of HSR Act, Spoliation, Gun-Jumping: Deputy Assistant Attorney General Goodlander emphasized DOJ’s intent to pursue vigorously violations of the HSR Act, including failures to make required premerger notification filings, failures to provide all Item 4 documents, and “gun-jumping” caused by concerted action prior to the satisfaction of the HSR Act’s waiting period. Goodlander also commented on DOJ’s intent to scrutinize merging parties’ conduct during the due diligence phase to investigate whether parties are using due diligence to conceal and accomplish anticompetitive conduct. Other DOJ officials further emphasized that DOJ and the Federal Trade Commission (FTC) are working to ensure that the agencies’ investigations are not harmed by the use of third-party ephemeral communication platforms and to penalize spoliation of evidence contained in such messaging applications.
Hostility Toward Freely Granted Divestitures in Merger Investigations: Deputy Assistant Attorneys General Doshi and Andrew Forman conveyed the high bar merging parties face when they offer structural or behavioral remedies, including divestitures, to resolve or head off a DOJ challenge to a merger or acquisition. Doshi and Forman pointed to instances where divestitures and/or carveouts offered in merger transactions have failed and “the American people bear the risk” of anticompetitive harms and asserted that “the idea that a divestiture can cure the feared antitrust issues can’t rest on our hopes of what might happen in the future after the deal and divestiture closes.”
Consent Decrees Face Much Stricter Scrutiny: Deputy Assistant Attorneys General Forman, Goodlander, and Kades emphasized the “exacting standard” that must be applied when DOJ is considering entering into a consent decree to resolve a merger challenge. According to the Department officials, the antitrust laws prohibit mergers that may substantially lessen competition, which means that for a consent decree to resolve antitrust concerns, it must eliminate the possibility that a merger could cause harm—an “extremely high bar.”
Updated Merger Guidelines to Focus on Relevant [...]
Does your company sell to consumers or businesses that can leave reviews or rate your products? Whether your customers can leave reviews on your website or another public-facing review platform, companies should be aware of new developments in the consumer review enforcement space that may impact how you publicize and conduct your product rating and review system. If you are not aware of the expanding consumer review regulations, it could cost your company millions or even land you in jail.
CUSTOMER REVIEWS AND PROPOSED REVISIONS
Section 5 of the Federal Trade Commission (FTC) Act (the Act) prohibits unfair and deceptive acts and practices. Specifically, as the Act relates to customer reviews: negative customer reviews and ratings cannot be suppressed or hidden; any incentives for reviews must be disclosed; material connections between a reviewer and the reviewed product must be disclosed; and review gating is prohibited. The FTC has heightened its focus on consumer reviews as of late and proposed revisions to the Endorsement Guides for advertisers that would tighten enforcement against posting false positive reviews or manipulating consumer perception by suppressing negative reviews, among other things. The proposed guideline revisions would state that “in procuring, suppressing, boosting, organizing, or editing consumer reviews of their products, advertisers should not take actions that have the effect of distorting or otherwise misrepresenting what consumers think of their products.” See Federal Register, Guides Concerning the Use of Endorsements and Testimonials in Advertising, Section IV (C) (July 26, 2022), https://www.federalregister.gov/documents/2022/07/26/2022-12327/guides-concerning-the-use-of-endorsements-and-testimonials-in-advertising. In addition to broadening its Endorsement Guides, the FTC has already demonstrated a significant increase in consumer review enforcement—including pursuing increased penalties and new priorities like review hijacking.
CONSULTANT RECEIVES PRISON SENTENCE FOR BRIBED REMOVAL OF NEGATIVE REVIEWS
In February 2023, Hadis Nuhanovic, a merchant consultant, was sentenced to 20 months in prison for taking part in a global scheme in which he bribed employees of a technology platform to remove negative online reviews on his clients’ products and reinstate suspended accounts, among other illegal activities such as stealing sensitive company information related to product-review rankings and targeting his clients’ competitors on the platform. Nuhanovic, together with a co-defendant, reached out to platform employees in India and bribed them to obtain unfair advantages for his own business’ gain. For example, Nuhanovic admitted that he paid a platform employee to remove negative reviews and further admitted that he operated multiple sham accounts—created using false information—to purchase products from merchants and submit negative reviews about them, with the intention of deceiving consumers and harming the targeted accounts. Additionally, Nuhanovic used his sham accounts to leave positive reviews for his preferred accounts, further deceiving consumers and improving the placement of certain favored products in searches.
In addition to the review bribes, Nuhanovic was investigated for other related crimes to which he ultimately pled guilty. He was sentenced to three years of supervised release on top of the 20 months in prison and forced to forfeit $100,000 and pay $160,000 in unreported taxes.
On February 3, 2023, the US Department of Justice’s (DOJ) Antitrust Division announced the withdrawal of three policy statements related to antitrust enforcement in healthcare. Although the withdrawn statements focus on healthcare, DOJ’s decision to withdraw these statements will have broad impacts across industries.
The three policy statements, issued in 1993, 1996, and 2011, relate to competitor collaboration and information sharing, and established “safety zones” of activities shielded from antitrust scrutiny. The 1996 Statements of Antitrust Enforcement in Health Care (1996 Statements) were revised and expanded upon the 1993 Statements. Though ostensibly related to healthcare, the guidance has been relied upon by all industries and understood to cover all manner of competitively sensitive information. Two of the safety zones most often relied on by companies relate to competitor exchanges of price and cost information, and competitor joint purchasing arrangements.
Information Exchanges
The safety zone on information exchanges (Statement 6 of the 1996 Statements) stated that, in general, the agencies would not challenge an exchange of price or cost information (e.g., employee compensation) if the following three conditions were met:
The exchange is managed by a third party (e.g., a trade association or consultant).
The information is more than three months old.
The exchange has five or more participants contributing data, and no individual participant’s data represents more than 25% of any statistic; and no individual participant’s data can be identified.
Companies have relied on this safety zone in conducting surveys and benchmarking related to pricing, supply costs, and salaries. These surveys have served as critical compliance tools. Organizations exempt from federal income tax often use surveys to demonstrate fair market value compensation to safeguard against claims of private inurement and private benefit. Similarly, healthcare companies routinely use benchmarking studies to demonstrate fair market value compensation for compliance with fraud and abuse laws.
Group Purchasing Organizations
The safety zone on joint purchasing arrangements (Statement 7 of the 1996 Statements) stated that, in general, the agencies would not challenge joint purchasing arrangements (e.g., group purchasing organizations (GPOs)) if the following two conditions were met:
The purchases account for less than 35% of the total sales of the purchased product or service.
The cost of the products or services purchased jointly accounts for less than 20% of the participants’ revenues.
DOJ cited changes in the healthcare landscape as the rationale for withdrawing these policy statements, specifically indicating that the statements were “overly permissive” on information sharing. In a speech the day before DOJ’s announcement, Principal Deputy Assistant Attorney General (DAAG) Doha Mekki stated that the safety zone factors “do not consider the realities of a transformed industry” and “understate the antitrust risks of competitors sharing competitively sensitive information.” DAAG Mekki explained that:
Information exchanges managed by third parties can have the same anticompetitive effects—and the use of a third party enhances anticompetitive effects.
New algorithms and AI learning increase the competitive value of historical information (more [...]
On November 10, 2022, the Federal Trade Commission (FTC) voted to approve a new policy statement interpreting the FTC’s authority under Section 5 of the Federal Trade Commission Act, which prohibits “unfair methods of competition in or affecting commerce.” The newly adopted policy statement provides a significantly more expansive interpretation of the FTC’s authority and replaces all prior FTC guidance on the scope and meaning of unfair methods of competition under Section 5. The policy statement asserts that the FTC was set up to be an expert body charged with determining what constitutes unfair methods of competition and, accordingly, the FTC is entitled to great weight in its findings.
The US Department of Justice’s and the Federal Trade Commission’s losses in three merger challenges in September and a fourth in October demonstrate that merging parties can close difficult transactions if willing to fight the agencies in court. In this Law360 article, McDermott’s Jon B. Dubrow, Joel R. Grosberg and Matt Evola discuss these four cases and what they mean for merging parties.
Seven directors resigned from corporate boards following promises of enforcement of Clayton Act Section 8 (15 U.S.C. § 19) by the US Department of Justice (DOJ), Antitrust Division (the Division), the Division announced Wednesday.
The directors served on the boards of corporations that the DOJ asserted competed in a variety of sectors, including information technology, software, and manufacturing.
WHAT’S THE LEGAL CONCERN
Section 8 prohibits “interlocking directorates” (per se violation), which occur when the same individual serves simultaneously as an officer or director of two competing companies (direct interlocks) or when different individuals on boards of competing companies act on behalf of and at the direction of a single firm (indirect interlocks through deputization). In its press release, the DOJ noted that some of the interlocks arose because a private equity firm appointed different personnel to the boards of competing companies.
The goal of Section 8 and the DOJ action is to decrease potential opportunities for the exchange of sensitive information between competitors and the risk of anticompetitive conduct more generally.
Exemptions might apply. There are de minimis exemptions if a) the competing sales are less than $4.1 million (threshold updated annually); b) the competing sales of either corporation represent less than 2% of its total sales; or c) the competing sales of each corporation are less than 4% of its total sales. A careful analysis (similar to that done in merger analysis) is necessary to determine whether an exemption might apply.
Not just corporations? While the plain language of Section 8 refers to interlocks involving “corporations,” the DOJ has stated its view that Section 8 also covers interlocks between non-corporate entities, such as LLCs (this is an open area of law).
Not just the same person? While the plain language of Section 8 states that it applies when the same “person” sits on the board or acts as an officer of two competitors, the DOJ interprets Section 8 broadly to mean that two different individuals appointed by a common entity cannot serve on boards of competitors because the entity is a “person” and is serving on the boards through its designees.
WHAT ARE THE RISKS
Interlocks can create significant antitrust risk. While the DOJ’s concerns with interlocks seem to be assuaged with the quick removal of the Corporate Director identified, interlocks have served as the factual underpinning for antitrust conspiracy claims. Therefore, companies should be proactive in eliminating problematic interlocks, as the interlock combined with parallel action by competitors in an industry could serve as the factual basis for long and costly conspiracy investigations or litigation and could support complaint allegations to defeat a Twombly-based motion to dismiss.
ANTICIPATE CONTINUED ENFORCEMENT
While the resignations are not novel, they represent a major amplification of corporate responses to what Assistant Attorney General Jonathan Kanter has described as “an extensive review of interlocking directorates across the entire economy” and [...]
In the United States, parties continue to be cautious in litigating challenged transactions. Since January 2021, the US Federal Trade Commission (FTC) and Department of Justice (DOJ) filed lawsuits (or threatened to sue) to block 16 transactions. Of those transactions, 12 were abandoned and six are in various stages of litigation. The data suggest that the FTC’s and DOJ’s aggressive merger enforcement policy is raising the stakes for parties to potential mergers and acquisitions, including an increased willingness by the agencies to litigate potentially problematic transactions.
Between May 6 and June 3, 2022, the European Commission (Commission) held a public consultation to seek views on the draft revised Merger Implementing Regulation (Implementing Regulation) and the Notice on Simplified Procedure. This consultation was launched in the context of the Commission’s review process of the procedural and jurisdictional aspects of EU merger control.
On April 20, 2022, the UK government proposed new measures to boost consumer protection rights and competition rules. In particular, the UK government’s reforms aim to strengthen the Competition & Markets Authority’s (CMA) powers and alleviate burdens on smaller companies.
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