Section 2 Cases Involving Acquisitions of Nascent Threats
The agencies brought three cases under the first Trump administration using Section 2 to challenge an alleged monopolist’s acquisition of a nascent competitive threat: Illumina/PacBio, Visa/Plaid, and Facebook/Instagram & WhatsApp. This strategy has been successful for the government. Parties have largely declined to litigate these challenges, and in Facebook the FTC obtained a summary judgment ruling that solidified Section 2 as a merger enforcement tool.
Illumina/PacBio
In 2019, the FTC initiated an administrative proceeding seeking to block Illumina Inc.’s proposed acquisition of Pacific Biosciences of California, Inc. Per the complaint, Illumina possessed a greater than 90% share of next-generation DNA sequencing (NGS) systems, while PacBio was one of only a few other firms to have gained a foothold, with a 2-3% share. NGS systems were highly differentiated. Illumina’s short-read technology had advantages on cost, number of reads, and throughput, whereas PacBio’s long-read technology far surpassed Illumina’s on the length of DNA it could cover. Accordingly, “certain applications are best served by short-read systems, other applications are adequately served only by long-read systems, and some applications may be served either by short-read or long-read technology depending on the objectives, budget, and time for a particular use case or project.” The complaint alleged the acquisition would violate Section 2 and Section 7.
For the Section 7 count, the complaint set forth market concentration figures showing a pre-merger Herfindahl-Hirschman Index (HHI) of 8,290 increasing to 8,733. Such numbers would render the transaction presumptively unlawful, but the HHI calculations were dependent on finding that Illumina’s and PacBio’s NGS systems competed in the same relevant product market. In some merger cases it is uncontested that the parties’ respective products are reasonably interchangeable substitutes, and the main dispute is whether third-party products compete in the same relevant market. But in cases where the products are complex, specialized, and differ significantly on price and other metrics, the parties may argue that their products do not belong in the same market. Courts often follow the narrowest market principle, which dictates beginning with the smallest grouping of products and testing outward. In merger cases, that means starting with only one merging firm’s product and determining whether other products—including those of the other merging firm—exhibit sufficient cross elasticity of demand to be included in the same market.
The FTC did not allege significant cross elasticity of demand between Illumina and PacBio sequencers. To the contrary, it alleged that “[w]hen Illumina has implemented price increases, those increases have been profitable and have not driven sales toward other DNA sequencing systems.” It is therefore not clear whether or how the FTC would have carried its burden of proving that these products compete in the same relevant market. This problem had frustrated the FTC in the past, as a court had previously found that the only two drugs approved for a rare indication were not in the same relevant market because doctors ignored the drugs’ prices when prescribing them and, therefore, “an increase in the price of [one] would not drive a hospital to purchase [the other].” Here, it is possible that the Commission (and potentially a reviewing appellate court) would have relaxed the cross elasticity of demand requirement if otherwise no competing product would fall within the same relevant market as Illumina sequencers. Presented with alleged “internal documents demonstrating intensifying head-to-head competition,” the Commission may have expanded the market definition to capture whatever competition did exist between Illumina and other platforms, even if that competition did not exhibit high cross elasticity of demand.
The Section 2 count did not rise or fall on whether the market encompassed both Illumina and PacBio sequencers. In United States v. Microsoft Corp., the D.C. Circuit ruled that Section 2 bars a firm with monopoly power from engaging in conduct that has the effect of excluding a nascent threat to the monopoly. The court further held that a product or firm outside the monopolist’s relevant market can constitute a nascent threat if it “showed potential” to disrupt the monopoly. Relying on language from Microsoft, the FTC’s Illumina/PacBio complaint alleged that “[t]he Acquisition, if consummated, would eliminate the nascent competitive threat that an independently owned PacBio poses to Illumina’s monopoly power. . . . The Acquisition is anticompetitive conduct reasonably capable of contributing significantly to Illumina’s maintenance of monopoly power.”
Aside from possible legal uncertainty as to whether the Commission or an appellate court would apply Microsoft to the acquisition (as opposed to the exclusion) of a nascent threat, Section 2 translated into an advantage for the FTC’s case on balance. Section 2’s downside would be satisfying the significant burden of proving monopoly power, which is not required under Section 7. However, under Section 2, the FTC would not need to prove that PacBio competed with Illumina in the same relevant market.
As to whether PacBio showed potential as a threat to Illumina’s alleged NGS monopoly, while a number of allegations in the complaint are redacted, the FTC did allege that PacBio’s systems were converging with Illumina’s, creating “a closer substitute . . . for some customers in some projects,” and that “as PacBio’s cost per genome decreases, customers expect to sequence more samples on PacBio and fewer samples on Illumina.” Moreover, “PacBio has continually improved its system with the goal of converting ever more sequencing volume from short-read systems to its long-read technology.”
Following the FTC’s complaint, Illumina and PacBio abandoned the merger. PacBio has since continued to iterate on its long-read sequencing instruments and chemistry. The product page for its current flagship Revio sequencer offers a head-to-head comparison against Illumina.
Visa/Plaid
In 2020, the DOJ filed suit in federal court in California seeking to halt Visa Inc.’s proposed acquisition of Plaid Inc. Per the complaint, Visa was a monopolist in online debit transactions, with a durable market share of approximately 70%. In an online debit transaction, requests sent over a debit network coordinate a transfer of funds from a consumer’s bank account into an online merchant’s account. Plaid enables consumers to connect their bank accounts to financial services apps such as Venmo. Plaid had already built connections to 11,000 financial institutions and more than 200 million U.S. consumer bank accounts.
Plaid’s existing technology did not compete directly with Visa’s online debit services, but Plaid allegedly was planning to leverage its technology and relationships with banks and consumers to enable users to pay for goods and services online with money debited from their bank accounts. Per the complaint, this “pay-by-bank” service would be a form of online debit that uses a consumer’s online banking username and password (rather than associated debit card credentials) to access bank account information and facilitate the transfer of funds using Automated Clearing House (rather than a debit network), at a lower cost.
The DOJ characterized Plaid as a “nascent but significant competitive threat” that was “uniquely positioned to offer a pay-by-bank debit service that would compete with Visa’s online debit services.” The complaint alleged that “Plaid plans to build on the success of its current services by creating an end-to-end payments network that enables instantly-guaranteed money movement in a system similar to Visa and Mastercard, but focused on bank-linked payments” and “has seen strong interest from the field.” The DOJ’s complaint also quoted Visa’s CEO stating “clearly, on their own or owned by a competitor [Plaid is] going to create some threat to our important U.S. debit business” and calling the acquisition “[an] insurance policy to protect our debit biz in the U.S.” In internal documents, senior Visa leadership allegedly estimated a “potential downside risk of $300-500M in our US debit business” by 2024 should Plaid fall into the hands of a rival.
Visa, in contrast, asserted:
Plaintiff would have this Court believe that Plaid is in the near future poised to create a compelling two sided payment network capable of competing with Visa despite Plaid’s pipeline products having no consumer awareness or merchant adoption, Plaid having no experience in the payments space, being nowhere close to having the requisite feature set to operate a network (such as chargeback rules, dispute management, and consumer purchase protection), and having no reasonable path to developing all of these necessary features or relationships.
Visa further characterized Plaid’s steps to date as “research and development products” and “ideas [that] could be construed as a first attempt at basic money movement . . . by a data aggregation company with no prior payments experience, but in no universe could they be seen as a potential rival to the established, sophisticated debit networks trusted by consumers and merchants alike.” Visa claimed the DOJ’s narrative “is nothing more than a patchwork of excerpted party documents and testimony taken out of context[.]”
Plaid denied that it planned to create an end-to-end payments network that would compete with Visa’s online debit services:
This entire case is premised on the government’s speculation that, if not acquired by Visa, Plaid would develop and successfully launch an online debit service that would facilitate transactions between consumers and merchants in competition with Visa. But Plaid, a data aggregation company with no prior payments experience, does not have any online debit service nor any plans to develop one.
The complaint alleged that the acquisition would violate both Section 2 and Section 7. For the Section 2 count, the DOJ quoted Microsoft’s rule that “monopolists cannot have ‘free reign to squash nascent, albeit unproven, competitors at will,’” teeing up the question of whether Plaid was a nascent, albeit unproven, competitor.
The DOJ’s legal framing of the Section 7 count was atypical. The complaint did not organize the allegations around the elements of the actual potential competition doctrine, which bars a firm in a concentrated relevant market from acquiring one of only a few firms likely to enter the market and produce a deconcentrating effect. Instead, the agency quoted Brown Shoe to argue that an acquisition can violate Section 7 when “the relative size of the acquiring corporation ha[s] increased to such a point that its advantage over its competitors threaten[s] to be ‘decisive.’” The DOJ explained that Visa “already has a decisive market position through its online debit monopoly, and would unlawfully extend that advantage by acquiring Plaid.” The DOJ may have chosen this uncommon legal framing because the traditional actual potential competition has not condemned many transactions.
Visa opposed the government’s legal framing:
“Potential competition” theories like this one have for decades been evaluated under Section 7 of the Clayton Act—the federal antitrust statute specifically designed to address mergers—and have found almost no traction in the courts. Likely aware that potential competition cases are extremely difficult to win, Plaintiff has tacked on a Section 2 Sherman Act claim in the apparent hope of avoiding unfavorable Section 7 precedent. That choice is puzzling because Section 2, which prohibits monopolization, imposes equally—if not more—stringent evidentiary requirements on Plaintiff than does Section 7. In any event, regardless of which statute is ultimately applied, Plaintiff’s misconceived “potential competition” theory of harm fails on the facts.
These legal and factual fights were not resolved. After answering the complaint, Visa and Plaid abandoned the transaction. Today, Plaid offers a pay-by-bank solution in the United States, which it expects will continue to grow. Plaid’s CEO recently called the failure of its merger with Visa a “blessing in disguise.”
Facebook/Instagram & WhatsApp
In 2020, the FTC filed suit in federal court in the District of Columbia alleging Facebook protected a monopoly in personal social networking via a course of anticompetitive conduct comprising its 2012 acquisition of Instagram, its 2014 acquisition of WhatsApp, and its platform policies restricting software developers from overlapping Facebook core functions. Facebook’s personal social networking service is a zero-price offering that users access free of charge. Facebook allegedly held monopoly power in that market, evidenced by its dominant market share and entry barriers that include network effects and high switching costs. Per the complaint, “Facebook’s acquisition and control of Instagram represents the neutralization of a significant threat to [Facebook’s] personal social networking monopoly, and the unlawful maintenance of that monopoly by means other than merits competition.” The complaint’s sole count alleged that Facebook’s course of conduct violated Section 2.
The FTC pressed the case forward under the Biden administration. After amending the complaint in response to Facebook’s successful motion to dismiss, the FTC survived a second motion to dismiss save for the allegations regarding Facebook’s platform policies, which the court found were no longer in effect and therefore did not support an injunction under Section 13(b) of the FTC Act. Discovery proceeded regarding the Instagram and WhatsApp acquisitions.
In 2024, Facebook (now Meta) moved for summary judgment. According to Meta, Microsoft requires showing actual harm to consumers, so it is the FTC’s legal burden under Section 2 to “prove that consumers would have been better off if Meta had not acquired Instagram and WhatsApp.” The District Court agreed that “Microsoft is the key case” but rejected Meta’s interpretation of it and denied its motion:
Meta conflates the need to demonstrate “anticompetitive effects” with the need to demonstrate an impact on consumer welfare via measurable (and, in this case, counterfactual) price or output changes. . . . But price- or output-related evidence of competitive harm is downstream from the anticompetitive effect itself. . . . [The Microsoft] court repeatedly (and unanimously) focused on whether the actions foreclosed competition on the merits, not whether they led to price or output changes. . . . Critically, Microsoft’s anticompetitive conduct was aimed at what the court called “nascent threats”—middleware products that did not yet compete with Microsoft in the operating-system market but posed the threat of doing so. . . . [T]he court had no doubt that such conduct was proscribed. . . . This Court sees no reason why a monopolist’s acquisition of its competitors should be any different. . . . To hold otherwise would imply that, had Microsoft simply acquired Netscape Navigator rather than sought to exclude it from the market, Section 2 would have remained dormant.”
The court’s opinion is the strongest legal precedent to date supporting the use of Section 2 to challenge a monopolist’s acquisition of a nascent threat. The case is now in the hands of the second Trump administration. Trial commenced in April.
Section 7 Cases Involving Increased Future Competition
The agencies under the first Trump administration argued in three Section 7 cases that a merger would eliminate a firm poised to become a stronger competitor in the future. They offered this argument to bolster a structural presumption. It is the converse fact pattern to United States v. General Dynamics Corp., in which current market shares suggested the merger would cause undue concentration, but one merging firm’s prospects were unpromising: “United’s relative position of strength in [coal] reserves was considerably weaker than its past and current ability to produce.” As a result, the Court upheld the district court’s finding that the merger did not violate Section 7. In these cases, in contrast, the agencies took the position that market shares understated one merging firm’s competitive significance.
Otto Bock/Freedom
In 2017, the FTC initiated an administrative proceeding seeking to unwind Otto Bock HealthCare North America, Inc.’s acquisition of FIH Group Holdings, LLC (“Freedom Innovations” or “Freedom”). Per the complaint, Otto Bock was the dominant supplier of microprocessor prosthetic knees (including its best-selling C-Leg 4) in the United States, and Freedom was its “most significant and disruptive competitor.” In addition, the complaint alleged that competition between the firms “was poised to increase in the near future” because both companies planned to develop a next-generation microprocessor prosthetic knee. Following an administrative trial, the Administrative Law Judge upheld the FTC’s complaint.
On review before the Commission, Otto Bock argued that a presumption based on market shares should be entitled to no weight in this case involving differentiated products, unless the plaintiff establishes a correlation between market share and market power. The Commission rejected that argument and found that the merger was presumptively unlawful based on pre- and post-merger HHIs. The Commission also found that presumption was bolstered by, inter alia, evidence showing competition was set to intensify further with Freedom’s impending introduction of its Quattro, dubbed the “C-Leg killer.” “[W]e need not conclude that, without question, the Quattro would have cut into the C-Leg’s sales or induced Otto Bock to improve the C-Leg. . . . The fact that, at the time Otto Bock acquired Freedom, Freedom was preparing to introduce a new MPK that it expected to take significant share away from Otto Bock and that Otto Bock itself described as a ‘serious threat’ provides further proof of the likely anticompetitive effects of the Acquisition.” The Commission ordered the merger unwound.
CDK/Auto/Mate
In 2018, the FTC initiated an administrative proceeding seeking to block CDK Global, Inc.’s acquisition of Auto/Mate, Inc. Both companies provided systems used by automotive dealerships in nearly every aspect of their business. Per the complaint, CDK was one of the two largest providers in the market, and Auto/Mate was an “innovative, disruptive challenger.” CDK allegedly determined that by purchasing Auto/Mate “it could eliminate a strong current competitor, which was threatening to become an even more disruptive rival.” The FTC sought a market concentration presumption but also alleged that “the HHIs based on current market shares materially understate Auto/Mate’s competitive significance in the Relevant Market because they do not take into consideration Auto/Mate’s likely growth trajectory.” For example, the complaint quoted Auto/Mate’s Chairman explaining, “[w]e expect that as we continue to take larger groups from CDK/R&R, that we will eventually wake the sleeping giants.” The FTC alleged that “CDK recognized that if Auto/Mate fell into the hands of a well-financed buyer willing to invest additional resources, Auto/Mate would become an even more aggressive and effective competitor.” Upon the FTC’s challenge, the parties abandoned the merger.
Sabre/Farelogix. In 2019, the DOJ filed suit in federal court in Delaware to enjoin Sabre Corp.’s acquisition of Farelogix Inc. Sabre’s global distribution system (GDS) transaction platform connects airlines to travel agents. Farelogix’s Open Connect (FLX OC) service enables airlines to distribute content directly to customers or indirectly through travel agents. The DOJ alleged that Farelogix was a growing threat to Sabre’s dominance, that the transaction was presumptively unlawful and would eliminate existing head-to-head competition, and that Farelogix’s market share understated its competitive significance going forward because Farelogix was poised to grow significantly.
Following a bench trial, the district court found that the government did not carry its burden to prove the transaction would harm competition in a relevant market. According to the court, under Ohio v. American Express Co., as a matter of law, “Sabre, which is a two-sided platform facilitating transactions between airlines and travel agencies, does not compete with Farelogix, which indisputably only interacts with airlines and is not a two-sided platform.” Moreover, the court found that, even assuming Farelogix could compete in a relevant market with Sabre without being a two-sided platform, the DOJ did not prove a relevant product market and made errors in attributing market shares for its HHI calculation. The court did not squarely reach the issue of Farelogix’s future competitive significance but was persuaded that Sabre saw FLX OC as a competitive threat and a real alternative to GDS, and that “some at Sabre viewed the acquisition of Farelogix as a way to neutralize this perceived threat.” The DOJ noticed an appeal, but when the U.K. Competition & Markets Authority subsequently issued a decision holding that the acquisition violated UK competition statutes, the parties abandoned the transaction. The Third Circuit then granted a motion from the DOJ to vacate the district court’s decision but noted it may potentially serve as persuasive authority.
Section 7 Actual Potential Competition Cases?
The first Trump administration did not bring any Section 7 case under the actual potential competition doctrine. Other recent administrations have been thwarted in their attempts to utilize the doctrine. Proof in these cases is more difficult than in cases concerning current competition. When evaluating a merger ex ante involving a pipeline competitor, there are no current sales from which to infer future effects; the government must use other evidence to elucidate a hypothetical future world. Consummated merger challenges involving pipeline acquisitions similarly require reconstructing a past but-for world absent the merger. In both postures, the government must prove the probability of a counterfactual scenario. The Section 7 actual potential competition doctrine sets a high bar on that front by requiring the plaintiff to show a “reasonable probability” that the target firm would enter the market but for the merger, which many courts have interpreted to mean a greater than 50% chance. Therefore, according to the doctrine, there is no substantial lessening of competition even if a buyer with considerable market power acquires a target that has a 49% chance of successful entry.
The 2023 Merger Guidelines provide a path to update the actual potential competition doctrine by applying a sliding scale between two elements of the test. Guideline 4 explains the agencies’ view that, “for mergers involving one or more potential entrants, the higher the market concentration, the lower the probability of entry that gives rise to concern.” This more flexible approach could close a gap in the law between Section 7 and Section 2. For example, it may capture transactions where the acquirer’s market share is relatively high but short of the level required to show monopoly power under Section 2, and the target’s probability of entry is significant enough to warrant protection but is not greater than 50%. The second Trump administration has affirmed that it will continue to utilize the 2023 guidelines. On the right set of facts, perhaps one of the agencies will advocate that a court apply the sliding scale test, or perhaps the FTC will apply it in a Commission opinion.
Looking Ahead
The government presumably will continue employing Section 2 to challenge monopolist acquisitions of nascent threats given its track record (five challenges ended with abandonment or divesture, another is now on trial). The outcome of the FTC’s trial against Meta regarding Instagram and WhatsApp will be an important additional data point on that front, but the court’s ruling on summary judgment already solidified the legal standard the government has been pressing for in these cases. Section 7 challenges in which the government points to one firm’s increased future competitive significance as a way to bolster a structural presumption will also likely continue, as courts have generally been receptive to this argument. However, the current Trump administration may be unlikely to pursue a Section 7 actual potential competition case without also advocating to update the doctrine to make the standard for reasonable probability more flexible.
