CURRENT MONTH (August 2023)
Antitrust Agencies Continue to Ramp Up Interlocking Director Enforcement
The Federal Trade Commission’s recent challenge to EQT Corporation’s acquisition of the Quantum Energy Partners private equity group “marks the FTC’s first case in 40 years that enforces Section 8 of the Clayton Act” and preempts a proposed board of directors interlock. On the same date, the Department of Justice announced the resignation of two Pinterest directors from the board of Nextdoor in response to the DOJ’s ongoing enforcement initiative to put an end to interlocking directorates.
Almost one year ago, EQT and Quantum entered into a purchase agreement whereby EQT would acquire two Quantum entities in exchange for cash and up to 55 million shares of EQT and EQT agreed to take all necessary action to include in a slate of director nominees an individual chosen by Quantum. In 2020, Quantum and EQT also formed a joint venture, The Mineral Company (“TMC”).
Section 8 of the Clayton Act is a strict liability statute. It bars an individual from serving on the boards of two corporations if each corporation has “capital, surplus, and undivided profits of more than $45,257,000,” is engaged in commerce, and the two corporations are “by virtue of their business and location of operation, competitors. . . .” The principal exceptions to Section 8’s prohibition apply if the competitive sales of either corporation are less than $4,525,700; less than 2 percent of either corporation’s total sales; or the competitive sales of each corporation are less than 4 percent of that corporation’s total sales. When competition between the boards at issue arises after the overlapping board member has been seated, the corporations must remedy the interlock within twelve months.
Although the acquisition of the two Quantum entities has been allowed to proceed, because Quantum will continue in the market, the FTC’s consent decree seeks to cut off opportunities for access to competitively sensitive information or strategic influence. The FTC objected to two agreements, specifically: (1) the purchase agreement’s provisions that EQT would “take all necessary action to facilitate” the appointment of a Quantum-selected director and that Quantum receive consideration in the form of EQT shares; and (2) the preexisting TMC joint venture.
The consent decree requires Quantum to forgo its right to an EQT board seat and prohibits EQT representatives from serving in management of any Quantum-related entity. Quantum must sell its shares of EQT. Quantum and EQT will also be required to unwind their joint venture, TMC.
The agencies’ recently proposed changes to Hart-Scott-Rodino filings will enhance their ability to identify problematic interlocking directors and unrelated preexisting arrangements by requiring parties to:
- identify the existing and prospective officers, directors, and board observers of the acquired company and all companies controlled by the buyer for the prior two years, and for each individual, identify any other companies for which those individuals would serve or have served during the prior two years as officers, directors, or board observers;
- provide all agreements between any entity within the acquiring person and any entity within the acquired person in effect at filing or within the year prior, including licensing, supply, non-competition or non-solicitation, purchase, distribution, or franchise agreements; and
- describe non-compete or non-solicitation agreements applicable to employees or businesses related to overlapping products or services.
At a minimum, operating companies should remain vigilant in their board selection, and parties to reportable transactions should cover the items above and other topics added in the proposed HSR filing changes as part of due diligence. The parties will need to be prepared to address or remedy potentially problematic issues and for any delays to the transaction that might arise as a result.
The FTC and DOJ Publish Revamped Draft Merger Guidelines
The Federal Trade Commission’s (FTC) and Department of Justice’s (DOJ) jointly issued Draft Merger Guidelines provide business and practitioners a window into how the agencies analyze mergers. There are significant changes from the previous guidelines that are consistent with the Biden Administration agencies’ public statements and enforcement actions over the last two years.
Broadly, the draft confirms the agencies’ interest in increased enforcement, particularly in tech and labor markets; fewer mergers; skepticism regarding efficiencies; concern for nascent competitors; distrust of “big”; and preference for organic growth. We highlight some of the most significant changes below.
Guideline 1 lowers the threshold for a “highly concentrated market” to the level published in the 1980s and 1990s. The Herfindahl-Hirschman Index (“HHI”) used to calculate market concentration sums the squares of the market share of each competitor in the market. In draft Guideline 1, the agencies not only reduce the standard for a “highly concentrated” HHI to 1,800 from 2,500, but they also reduce the level of the post-transaction delta from 200 to 100. Accordingly, mergers in markets with HHIs greater than 1,800 and an increase of greater than 100 “cause undue concentration and trigger a structural presumption that the merger[s] may substantially lessen competition or tend to create a monopoly.”
Guideline 7 seeks to discourage any transaction that makes it harder for remaining competitors to compete. The guideline suggests a firm could be treated as “dominant” with a market share as low as 30 percent and indicates that transactions that might increase switching costs, interfere with use of competitive alternatives, deprive rivals of economies of scale, eliminate a nascent competitive threat, or “in any other way” entrench the combined firm’s position could be challenged. The agencies will intensely scrutinize any merger involving a dominant firm.
Guideline 8 declares that the agencies will scrutinize mergers in markets that have been trending toward concentrated. The guideline sets forth two factors to establish this trend: (1) if a market has shown a history of consolidation, such as a market with an HHI exceeding 1,000 and approaching 1,800, or (2) if the merger would increase the rate of concentration, such as increases in HHI greater than 200.
Guideline 9 targets mergers or private equity roll-ups that might, in the past, have evaded agency scrutiny: challenging a pending transaction based on past lawfully consummated mergers and company documents reflecting a strategy of growth through acquisition. If either party has a pattern or strategy of consolidation, the agencies will examine the impact of the cumulative strategy to determine if it may substantially lessen competition or tend to create a monopoly. If the agencies consider the strategy suspect, they may combine multiple acquisitions for the purposes of their analysis.
Focusing on the tech industry, Guideline 10 notes that anticompetitive effects even on a single platform may make a merger illegal. The agencies view such platforms as markets themselves and platform operators as having conflicts of interest to the extent they sell products on the platform. Thus, a merger between a platform operator and a seller of goods on the platform will attract the attention of the agencies even if the merger would be innocuous if viewed only in the market of the products sold by the acquired seller.
Guideline 11 confirms that the agencies will consider labor markets as they would other supply markets, where employers are competing buyers for labor. When assessing the degree to which the merging firms compete for labor, the agencies will consider whether the merger may result in lower wages or slowed wage growth or any other degradation of workplace quality.
Two other noteworthy changes include the draft’s treatment of relevant market definition and synergies. Regarding market definition, the agencies will consider bundled products a single relevant market, even if pricing of such products would not violate Section 2’s prohibition on monopolization and attempted monopolization. The draft guidelines also state that merger-related efficiencies cannot be used as a defense. This contrasts with the 2010 guidelines, which explained how efficiencies could enhance the merged firm’s ability and incentive to compete and lower prices.
Parties interested in submitting public comments may do so until September 18, 2023.
The FTC & DOJ Predict Artificial Intelligence’s Antitrust Risks
The US antitrust enforcement agencies have identified generative artificial intelligence as potentially creating significant antitrust risk and risk for U.S. commerce if not policed or regulated effectively. In addition to warning that “AI could be used to turbocharge fraud and scams,” the FTC is keeping watch to ensure that large companies with an advantage in the AI market do not use it to “squash competition.” Most recently, FTC Chair Lina Khan stated:
As artificial intelligence tools become more widely adopted, we again hear from some that the time has come to embrace consolidation over competition. Especially as other nations directly prop up national champions, it can be tempting to adopt the view that we’re entering a new global arms race where success requires protecting and promoting domestic monopolies.
Chair Khan identified examples of conduct that, if allowed to go unchecked, the FTC believes could lead to unhealthy market concentration, specifically, bundling of technology or products, tying, and refusal to license valuable intellectual property.
The Antitrust Division has recently explained that the current model of AI “is inherently dependent on scale,” which may create “a greater risk of having deep moats or barriers to entry.” Organizations that control the large data sets, specialized engineering and research talent, or computational resources necessary for generative AI may attempt to use unfair methods of competition to maintain their market power. The recently issued draft merger guidelines reflect the additional concern that AI could be used to track or predict competitor prices or actions, making markets more susceptible to coordination.
None of us can predict exactly how the government will regulate AI, but whether or not new legislation or regulation will directly address the antitrust risk of AI, the FTC and DOJ intend to use the existing antitrust laws to prevent increased market concentration and harm to AI companies’ competitors. The antitrust risks thus far identified by the enforcement agencies include:
- Company relationships leading to entanglements that could reduce competition
- Minority owners with a strategic interest in operations
- Board members and officers tied to particular AI engines or technology
- AI collaboration, licensing, development, revenue-sharing, or cost-sharing “partners”
- Consultation services with competitors leading to access to competitively sensitive information
- Use of algorithms to coordinate pricing and/or production decisions
- Establishment or control of large pools of data used to block competition
- Algorithmic revenue management without agreement, leading to stabilized or higher prices
- Broad non-compete and non-solicitation provisions locking in engineering talent
- Blocking access to computational resources, such as cloud computing, by restrictive agreements bundled offerings, or otherwise
- Blocking or unfairly limiting access to any important input through restrictive licenses, exclusivity, or other exclusionary practices
- Misuse of open-source ecosystems, including by using open source to gain business and then closing off the ecosystem to lock in customers
- Acquisitions of entities with Al or large data sources
Organizations developing generative AI models or building businesses that will use AI tools should carefully consider how to manage their relationships to avoid potential antitrust risks and the exclusionary practices that might be used to entrench related market power.
Federal Reserve Board Provides More Information on Novel Activities Program
By Rachael L. Aspery, McGlinchey Stafford, PLLC
On August 8, 2023, the Federal Reserve Board (“Board”) published additional information on its program to supervise novel activities in the banks it oversees. The Novel Activities Program (“Program”) will focus on complex, technology-driven partnerships with non-banks to provide banking services to customers, and also activities that involve crypto-assets and distributed ledger technology (“DLT”). The information published by the Board is an extension of the Board’s prior policy statement from January 27, 2023. The January policy statement, pursuant to the Board’s discretionary authority under Section 9(13) of the Federal Reserve Act, provides clarity on the Board’s goal of promoting a level playing field for all banks with the federal supervisor when it comes to novel banking activities, such as crypto-asset-related activities; provides that all banks regardless of deposit insurance status would be subject to the limitations on certain activities imposed by national banks overseen by the Office of the Comptroller of the Currency; and further provides that banks must ensure activities are in compliance with the law and that business is conducted in a safe and sound manner.
In a world of changing technology and financial innovation, there are questions about whether certain novel activities are permissible or otherwise addressed in existing supervisory guidance or opinions. The Program will provide oversight of novel activities conducted by supervised banking organizations and, through regulation and supervision, aid in safeguarding the banking system, customers, and overall financial stability. Specifically, the Program will be focused on the enhanced supervision of the novel activities conducted by supervised banking organizations, including:
- complex, technology-driven partnerships with non-banks to provide banking services;
- crypto-asset-related activities;
- projects that use DLT with the potential for significant impact on the financial system; and
- concentration of provision of banking services to crypto-asset-related entities and FinTechs.
The Program will be integrated into the Federal Reserve’s existing supervisory structure, with a diverse group of advisors to ensure that best practices and risk-management strategies are relevant. Further, the Program will incorporate insights from external industry experts and utilize real-time data in order to enhance its technical expertise and to better understand novel activities and manifestations of risks of such activities so appropriate controls to manage such risks can be developed.
The goal of the Program is to foster the benefits of financial innovation in a diverse, data-driven environment, while recognizing and appropriately addressing the risks created by such innovation to ensure the safety and soundness of the banking system.
Consumer Finance Law
CFPB’s Section 1071 Rule Implementation Delayed for Many Banks Pending Outcome of Supreme Court Case
On July 31, 2023, a federal court in the Southern District of Texas granted a motion by two trade groups, the American Bankers Association and the Texas Bankers Association, as well as Rio Bank, for a preliminary injunction to block the Consumer Financial Protection Bureau’s final rule implementing section 1071 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 from taking effect until after the Supreme Court decides the constitutionality of the Bureau’s funding mechanism in CFPB v. Community Financial Services of America. Oral arguments in that case, an appeal from the Fifth Circuit’s decision holding that the Bureau’s funding structure violated the Appropriations Clause of the Constitution, are scheduled to be heard on October 3, 2023, the first day of the Supreme Court’s 2023 term, with a decision expected by the end of June 2024.
The district court enjoined the Bureau’s section 1071 rule, which amends the Equal Credit Opportunity Act’s Regulation B to implement Dodd-Frank’s directive that the Bureau collect certain lending data relating to small businesses, holding that the plaintiffs in the case demonstrated a substantial likelihood of success on the merits of their claim that the rule was “promulgated through the Bureau’s unconstitutional funding scheme,” a required element of the preliminary injunction standard that the Bureau did not dispute. The court further held that the costs for banks subject to the rule to bring their systems into compliance by the rule’s three-tiered effective date were unrecoverable and therefore constituted irreparable injury. Finally, the court held that the balance of equities and public interest favored an injunction, holding that it could not “conclude that a stay would harm more than benefit the public interest.”
The court, somewhat curiously, did not grant plaintiffs’ request for a nationwide injunction. It declined to credit plaintiffs’ argument that “‘limiting the relief to certain jurisdictions or parties would create patchwork rulings that would undermine the injunction and create unequal enforcement of an Agency rule that is invalid.’” Instead, the court’s order limits entry of the injunction as to members of the plaintiff trade associations. Already, trade groups representing community banks and credit unions have sought leave to intervene in the lawsuit to obtain similar relief from compliance with the section 1071 rule. A different set of trade groups have sued to block the rule in the Eastern District of Kentucky.
With the Bureau’s anticipated and controversial credit card late fee rule expected this fall, we can expect to see a similar litigation strategy deployed in a federal court within the jurisdiction of the United States Court of Appeals for the Fifth Circuit to delay its effective date to, at minimum, after the Supreme Court decides CFSA.
Director Chopra Forecasts FCRA Rulemaking for Data Brokers
On August 15, 2023, Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra delivered remarks before a White House Roundtable on Protecting Americans from Harmful Data Broker Practices. During his remarks, Director Chopra decried the risks posed by “‘artificial intelligence’ and other predictive decision-making,” which he claimed “increasingly rel[y] on ingesting massive amounts of data about our daily lives,” making it “critical that there’s some accountability when it comes to misuse or abuse of our private information and activities.”
During his remarks, Director Chopra signaled that the CFPB plans to move forward with a rulemaking that would clarify the application of the Fair Credit Reporting Act (“FCRA”) to data brokers. The announcement comes on the heels of a March 2023 Bureau Request for Information regarding the business practices of data brokers, the comment window for which closed in July. Director Chopra clarified that the “rules under consideration will define a data broker that sells certain types of consumer data as a ‘consumer reporting agency’” under the FCRA, which would impose substantial legal obligations on these entities and restrictions on the data under their control. Director Chopra also indicated that the Bureau’s rulemaking would address the status of “credit header” information (i.e., basic identification information such as a consumer’s name, phone number, address, and Social Security number) under the FCRA. Judicial precedent and longstanding FTC guidance have exempted credit header information from the status of “consumer report” information under the FCRA. A contrary Bureau rule could constrain the use and sale of such data.
According to Director Chopra, the Bureau will publish in September 2023 an outline of proposals and alternatives under consideration, and a proposed rule sometime in 2024.
CFPB Files Reply Brief in CFPB v. CFSA
The CFPB has filed its reply brief in CFPB v. CFSA. In the brief, the government largely echoes the arguments that appeared in its opposition to the CFSA’s initial appeal. The Bureau’s position is that the CFPB’s funding structure does not violate the Constitution’s Appropriations Clause because, among other things:
- The Appropriations Clause does not require Congress to specify the precise amount to be spent.
- Congress satisfied any dollar-amount requirement by specifying a cap on the CFPB’s funding.
- The Appropriations Clause does not require time-limited funding.
- All of the foregoing applies to appropriations to agencies with law enforcement powers.
As in its earlier briefs, the Bureau argues that its funding mechanism is similar to that of the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation. In making these arguments, the CFPB repeatedly relies on the Second Circuit’s recent decision in CFPB v. Law Offices of Crystal Moroney, P.C. upholding the agency’s funding structure as constitutional.
Finally, the Bureau reiterates its view that even if the Court were to find that some or all of the Bureau’s funding mechanism was unconstitutional, the proper remedy would be to sever the offending provisions, and that any other substantive relief should be prospective only. The brief argues that such prospective relief would be consistent with precedent and prevent the “deeply destabilizing” effects of invalidating past CFPB actions.
Oral argument is set for October 3, 2023.
Financing a Designer Puppy in Illinois? Better Act Fast!
By Tiyanna D. Lords, McGlinchey Stafford, PLLC
Effective January 1, 2024, Illinois HB 3236 (the “Act”) prohibits sales finance agencies from purchasing or making loans secured by either of the following contracts relative to the sale of a canine or feline: (a) a retail installment contract; (b) a retail charge agreement; or (c) the outstanding balance under a retail installment contract or a retail charge agreement. Any sales finance agency that violates the Act has no right to collect, receive, or retain any principal, interest, or charges related to the contract, agreement, or loan, and any such loan will be null and void. Notably, however, these changes only apply to any secured loan or retail installment transaction entered into after the effective date. Therefore, consumers wishing to finance a designer pet in Illinois must do so with haste!
DOE Adjusts Student Loan Repayment Plans In Anticipation of October Loan Repayment Restart
By Taylor Bennington, McGlinchey Stafford, PLLC
With the end of the COVID-19 pandemic–era student loan repayment pause, regulators and lenders alike are preparing for repayment to begin again in the fall of 2024. Federal government backed student loans will start accruing interest again on September 1, and payments will be due starting in October 2023. With repayment looming, the U.S. Department of Education (DOE) has promulgated rules to help provide relief and new avenues of repayment for certain borrowers.
Effective on July 1, 2024, the U.S. Department of Education finalized a rule (“Rule”) in the Federal Register (88 FR 43820) governing income-contingent repayment plans and income-based repayment plans under several federal student loan programs (34 C.F.R. Part 682 & 34 C.F.R. Part 685). The Rule, also known as the Saving on a Valuable Education Plan or “SAVE,” has been categorized as the “most affordable repayment plan ever” according to a statement released by the DOE.
The Rule categorizes existing repayment plans into three types: (1) fixed payment repayment plans, which establish monthly payment amounts based on the scheduled repayment period, loan debt, and interest rate; (2) income-driven repayment plans, which establish monthly payment amounts based in whole or in part on the borrower’s income and family size; and (3) the alternative repayment plan on a case-by-case basis when a borrower has exceptional circumstances or has failed to recertify the information needed to calculate an income-driven repayment payment.
Additionally, the Rule will adjust the treatment of spousal income in the Revised Pay-As-You-Earn (REPAYE) plan for married borrowers who file separately. The Rule also will increase the amount of income exempted from the calculation of the borrower’s payment amount from 150% of the Federal poverty guideline or level (FPL) to 225% of FPL for borrowers on the REPAYE program.
The Rule provides an early implementation date of July 30, 2023, for some specific changes. However, the Rule will be fully implemented by July 1, 2024.
Intellectual Property Law
The U.S. Government’s Innovative Strategy to Secure and Advance Critical and Emerging Technology
By Margaret M. Cassidy, Cassidy Law, PLLC
In a bid to respond to “strategic competitors” seeking to influence standards for Critical and Emerging Technologies (CETs) to advance their military and industrial plans as well as to advance their “autocratic objectives” by, among other things, blocking access to information and limiting innovation, the U.S. government has recently issued a National Standards Strategy for Critical and Emerging Technology.
The goal of the Strategy is to secure and safeguard CET that U.S. consumers and residents regularly use and to position the U.S. as a leader in securing CETs while remaining competitive across global markets. The U.S government will work with private industry, to include standard-setting organizations such as the American National Standards Institute (ANSI) and the National Institute of Standards and Technology (NIST), on CET standards.
The strategy has four key objectives:
- Investing in research and development aimed at ensuring that U.S. CET remains secure and cutting-edge.
- Government, private sector, and academia collaborating to develop CET standards that will best secure CET.
- Educating and training the U.S. workforce to support individuals and organizations in understanding and developing CET standards.
- U.S., allies, and partners collaborating on global, fair, and inclusive CET standards.
The CET standards will likely have implications for businesses that work with the U.S. government:
- Regulations will be updated to require compliance with new CET standards.
- Investment in recruiting, hiring, educating, and training a workforce capable of implementing the new CET standards.
- Demand for R&D and innovative solutions designed to protect CET.
- Partnerships between the U.S. government, industry, academia, and U.S. allies and partners to develop and implement CET standards .
- Increased costs to comply with new CET standards regulations.
- Requirements to self-audit compliance with CET standards and to report findings to the government.
For more information: U.S. Government National Standards Strategy for Critical and Emerging Technologies, May 2023.