In September 2020, Illumina put forward a proposal to acquire Grail for USD 7.1 billion. This proposal sparked extensive reviews in the United States (US) and the European Union (EU). Despite these ongoing reviews, on August 18, 2021, nearly a year after the announcement, the transaction between the parties was finalized, even as the regulatory processes in the European Union and United States were still underway.
In the United States, after a “second request” investigation, the Federal Trade Commission (FTC) filed a complaint challenging the deal in its administrative court in March 2021. As per the complaint, Illumina holds a dominant position in the DNA sequencing technology sector, notably in the creation of NGS instruments crucial for analyzing blood samples to detect cancer-related mutations or biomarkers. Meanwhile, Grail provides the sole commercially available MCED test, utilizing Illumina’s NGS technology. Grail obtained FDA approval as a laboratory developed test in April 2021. The complaint alleges that the proposed vertical merger would negatively impact consumers within the US market for MCED test research, development, and commercialization. Allegedly, the merger would lead to higher prices, limited choices of products, and diminished product standards.
Following a trial presided over by the FTC Administrative Law Judge (ALJ), a detailed opinion was issued on September 9, 2022. The ALJ found that the FTC counsel had not substantiated its case based on the facts. However, the matter was appealed to the FTC’s Commissioners, who conducted a de novo review of the ALJ’s initial findings of fact and conclusions of law. On April 3, 2023, the FTC Commissioners overturned the ALJ’s findings, deeming the acquisition anticompetitive and mandating the parties to unwind the transaction.
In parallel with the outset of the administrative procedure, the FTC concurrently sued Illumina in federal court, seeking a preliminary injunction against the acquisition. This dual-track method, typical in FTC merger challenges, aims to prevent the parties from completing their transaction while administrative actions are ongoing. However, in May 2021, the federal court, at the FTC’s request, dismissed the complaint, enabling the FTC to focus solely on its administrative proceedings. The FTC cited the European Commission’s (EC) involvement (which will be elaborated on shortly) as grounds for not seeking a preliminary injunction, assuming the transaction could not proceed due to the EC’s actions. However, in August 2021, Illumina contested the EC’s jurisdiction, asserting that the EU merger thresholds were not met, and finalized the transaction.
The FTC’s Analysis of the Vertical Merger Between Illumina and Grail
The FTC Commissioners’ decision to reverse the ALJ decision is notable for its discussion of how the FTC analyzes vertical mergers. The Commissioners applied two overlapping standards to evaluate the potential effects of a vertical transaction: the framework established in the 1962 Brown Shoe case and a more recent approach of courts and enforcers which focuses on determining whether a transaction is likely to bolster the merged firm’s ability and/or incentive to foreclose rivals from supply sources or distribution outlets.
The Commissioners observed that despite the differing terminology, there is an overlap between the two standards due to the fact that the Brown Shoe factors offer valuable understanding into how a merged company could both possess the capability and motivation to adversely impact its competitors.
The Brown Shoe standard and its progeny examine the “share of the market foreclosed” and identify “various economic and historical factors” that a court should review in determining whether a vertical merger may substantially lessen competition. The FTC Commissioners identified that “at least four of the factors” indicated a violation.
Firstly, with regard to likely foreclosure, the Commissioners determined that a considerable possibility of market foreclosure exists, as “Illumina is currently, and for the reasonably near future will remain, the only viable supplier of a critical input: NGS platforms necessary for MCED tests.” Given the dependency of MCED developers on Illumina’s NGS platforms, they face heightened susceptibility to potential foreclosure. Furthermore, the Commissioners outlined various foreclosure strategies, such as price discrimination and withholding or degrading access to supply, services, or new technologies.
The Commissioners concluded that Illumina would possess a substantial financial motivation to favor Grail while limiting NGS platform access for competitors. Illumina stands to gain significantly more profit from the sales of Grail tests compared to selling NGS platforms to competitors.
Secondly, the Commissioners concluded that given the case involves a single supplier gaining complete ownership of a downstream customer, the nature and purposes of the acquisition would tend to support a likelihood of anticompetitive effects.
Thirdly, in evaluating market power, the Commissioners highlighted the absence of significant alternatives to Illumina for upstream NGS platforms. Acknowledging Grail as the sole current seller of MCED, the Commissioners asserted that this aspect supports the prima facie case under consideration. The Commissioners alleged that the merger heightens the potential for the relevant market to lose its competitive nature due to consolidation.
Fourthly, regarding entry barriers, the Commissioners emphasized substantial obstacles in developing and marketing MCED tests. These hurdles encompass high developmental costs, extensive time commitments for clinical trials, and considerable uncertainty. The decision underscored that these entry barriers are poised to increase as a result of the merger, given that Grail’s competitors currently rely on Illumina’s NGS platforms while simultaneously competing against Illumina.
Illumina’s ability and incentive to foreclose is the second overlapping standard that was analyzed by the Commissioners. As mentioned above, the Commissioners acknowledged that the Brown Shoe factors offer valuable insights for this standard. Thus, the Commissioners determined that the merger would amplify Illumina’s ability and incentive to detrimentally impact Grail’s competitors.
Regarding Illumina’s ability to foreclose, while the ALJ acknowledged Illumina’s capability to impede rivals, such as identifying MCED competitors and potentially limiting access to or increasing the costs of NGS platforms, the ALJ focused on the fact that these capabilities preexisted the merger and were not amplified by it. Disagreeing with this perspective, the Commissioners asserted that a merger only needs to enhance either the ability or the incentive, not necessarily both.
Regarding Illumina’s incentive to foreclose, the Commissioners determined that the merger notably increased Illumina’s incentive to foreclose competitors. Pre-merger, due to Illumina’s small ownership stake in Grail, any foreclosure actions would have adversely affected Illumina by reducing its revenue from NGS sales to Grail’s rivals. However, post-merger, the Commissioners observed a significant shift in Illumina’s economic interests as Illumina would now yield considerably higher profits from the sale of a Grail MCED test.
Constitutional Inquiries Embedded in the Merger
The merging parties raised several constitutional arguments, including arguing that the FTC’s dual role in investigating and adjudicating their case creates potential bias, violating due process. However, the FTC cited Supreme Court decisions, such as Withrow v. Larkin from 1975 that has previously ruled that the combination of investigative and adjudicative functions within agencies does not inherently create bias. Courts uphold the presumption of impartiality among agency adjudicators, even when involved in investigations and hearings.
Additionally, the merging parties questioned the fairness of how merger cases are split between the FTC and DOJ, arguing unequal treatment without a valid reason in legal standards, policies, process, evidentiary rules, etc. However, the Commissioners dismissed these claims, stating that both agencies share antitrust enforcement authority and have a system to divide their work. This allocation aims to conserve resources and expertise by avoiding duplication serving a legitimate governmental purpose.
The Merger Saga Also Holds an EU Angle
On April 2021, the EC, at France’s request, decided to review the Illumina Grail transaction under Article 22 of the EU Merger Regulation, as the USD 7.1 billion deal value allegedly indicates that Grail’s turnover does not reflect its competitive significance. This was despite the transaction not meeting the EU’s turnover-based thresholds for merger notification, and not being subject to any mandatory notification in any EU member state.
Notwithstanding the European Commission’s decision to review the merger, in August 2021, Illumina proceeded with the acquisition of Grail, citing the EC’s lack of jurisdiction. However, in September 2022, the EC blocked the acquisition. The rationale behind the block stemmed from vertical competitive concerns, with the EC expressing fears that the transaction could stifle innovation and restrict choices within the market for blood-based early cancer detection tests.
On October 2023, the EC ordered Illumina to unwind its already completed acquisition. This is the first time the EC ordered an unwind of an acquisition. In addition, in July 2023, the EC imposed its largest-ever gun-jumping fine, EUR 342 million, on Illumina. Illumina still maintains its position that the EC has no jurisdiction to review the acquisition at hand, and an appeal on this point is still pending the European Court of Justice (following a decision of the EU’s General Court that upheld the EC’s jurisdiction).
The Fifth Circuit Decision
On December 15, 2023, the United States Court of Appeals for the Fifth Circuit issued its decision. The Fifth Circuit determined that the FTC had met its burden of showing the transaction would harm competition and accepted the FTC’s articulation of the tests that can be used to make such a showing in vertical mergers. As mentioned above, the FTC considered two overlapping standards to prove harm to competition. The Fifth Circuit also analyzed the transaction under both standards, stating that as under both standards the FTC has met its burden, the court need not to decide on the question of the relevant standard. In addition, the Fifth Circuit rejected the constitutional arguments raised by Illumina.
That said, the Fifth Circuit’s opinion ultimately revolved around Illumina’s standardized supply contract (Open Offer) that it made available to all U.S. oncology customers and would remain effective until August 2033. In this offer, Illumina agreed to “provide its NGS platform at the same price and with the same access to services and products that is provided to Grail.” FTC's contended that the Open Offer was a “remedy” that offset a determination of liability and that the Open Offer failed to restore competition completely to the status quo level. The merging parties, however, argued that the Open Offer was a market reality that the FTC needed to consider in showing competition would be substantially lessened. The Fifth Circuit found that, in considering the Open Offer, the FTC used a wrong standard, vacating the Commission's order and remanding the case for reconsideration of the effect of the Open Offer under the proper standard.
Ultimately, two days following the Fifth Circuit decision, Illumina announced its decision to divest Grail stating that "following a review of the Court's opinion, Illumina has elected not to pursue further appeals of the Fifth Circuit decision." This announcement marked the culmination of a regulatory journey spanning over three years. It left the FTC with a seeming victory in a vertical merger challenge, and provided pivotal insights from the Court regarding the standard for evaluating such mergers, constitutional considerations, and “litigating the fix” issues.