Featured Expert Contributor, Antitrust & Competition Policy – Federal Trade Commission
Gerald A. Stein, a former attorney at the Federal Trade Commission, currently is a partner at Norton Rose Fulbright US LLC, and is a member of the firm’s Litigation and Disputes Group Antitrust and Competition Group. The opinions expressed herein are his own. The author thanks Sholom Licht, a summer associate at the firm, for his substantial assistance and contributions.
In a rare defeat before its own administrative law judge (ALJ), the Federal Trade Commission’s (FTC) two count administrative complaint against Altria Group, Inc. (Altria) and JUUL Labs, Inc. (JLI) seeking to (1) declare illegal and void a purported non-compete agreement; and (2) declare illegal and to unwind Altria’s consummated purchase of a 35% ownership interest in JLI, was fully dismissed. The ALJ rejected the FTC assertions that (1) that in preparation for the acquisition (and prior to closing), Altria entered into an agreement with Juul that it would not compete in certain e-cigarette markets in violation of Section 1 of the Sherman Act; and (2) that the transaction through which Altria obtained its 35% interest in JLI violated Section 7 of the Clayton Act because it would substantially lessen competition.
The ALJ’s 263-page decision is significant not only because it marks a rare loss for the FTC in its own home court, but also because it serves as an important reminder for merging entities to carefully maintain competition prior to closing a transaction and to refrain from agreements or communications that can be construed as anticompetitive. While in this case the ALJ found that there was no agreement, a final decision has yet to be rendered, and the risks that such communications pose should not be underestimated.
The FTC’s complaint counsel has appealed this decision to the full Commission, which is not required to defer to the ALJ’s factual or legal determinations; it reviews the proceedings de novo. The Commission rarely issues a decision against itself—so in the likely event that the parties lose, we expect this case ultimately to be reviewed by a circuit court.
Altria’s operating subsidiaries primarily are engaged in the manufacture and sale of tobacco products in the United States. From 2012-2018, Altria had an active operating company called Nu Mark LLC (Nu Mark), through which Altria developed and sold in the United States what are referred to as “innovative tobacco products,” including electronic cigarettes (e-cigarettes). JLI manufactures and sells an e-cigarette known as JUUL (Juul).
At issue in the Section 7 claim is a transaction executed on December 20, 2018, by Altria and JLI (the Transaction) pursuant to which Altria invested $12.8 billion in JLI in exchange for a 35% economic interest in JLI. In summary, in exchange for the monetary investment, the Transaction provided Altria with the right to obtain voting shares and appoint one-third of JLI’s directors upon antitrust clearance of the Transaction; imposed some restrictions on JLI’s sale rights; and imposed some restrictions preventing Altria from acquiring control of JLI.
A material part of the FTC’s claim as to the anticompetitive effects of the Transaction is a non-compete provision through which Altria agreed “not to, directly or indirectly, . . . own, manage, operate, control, engage in or assist others in engaging in, the e-Vapor Business” for a period of six-years from the closing date, unless extended, to be concurrent with the expiration of the term of the related Services Agreement, under which Altria agreed to provide JLI with regulatory assistance, among other services. The FTC contended that the non-compete provision resulted in anticompetitive effects by eliminating future competition from Altria.
The FTC further alleged that the non-compete provision also was an illegal agreement in violation of Sherman Act Section 1, and that the parties had entered into an additional “side” agreement for Altria to cease competing with its then-existing products against Juul prior to the closing of the Transaction. Thus, the FTC argued that these agreements provided for Altria to exit the e-vapor market and constituted further anticompetitive effects of the Transaction.
The ALJ defined the Relevant Geographic Market as the United States, and the Relevant Product Market as “a closed system e-cigarettes market that includes both cig-a-likes and pod-based products.” (Generally, there are two types of e-cigarettes: open-tank and closed system—the differences pertain to differences in size, shape and operating systems.) Although the ALJ found some differences in the demographic of customers for the different types of closed system e-cigarettes, the “greater weight of the evidence” favored finding a single closed system e-cigarette product market.
The ALJ found no dispute with respect to whether the parties agreed to the non-compete agreement, but whether the parties entered into a “side” agreement that Altria would exit its then-existing e-vapor business was hotly contested. The crucial question for the ALJ to determine was whether Altria’s decision to exit the market was an independent business decision or the result of an agreement with JLI.
The ALJ reviewed the voluminous record the FTC submitted on the parties’ negotiations, including term sheets, draft talking points, and communications between the parties, held a three-week trial featuring live testimony by 20 witnesses, and extensive post-trial briefing.
The ALJ ultimately found that Altria’s exit from the market was unrelated to any agreement with JLI, and dismissed the claim that it was in violation of the Sherman Act Section 1.
In rejecting the FTC’s argument that the evidence demonstrated an agreement between the parties, the ALJ stated: “Complaint Counsel does not directly assert or clearly explain how an agreement to submit a transaction for antitrust review and approval, whereby competitive products of one party would be disposed of to the extent required or allowed by antitrust authorities, could be deemed an antitrust violation.” Thus, the ALJ concluded that “the evidence fails to prove the alleged agreement between Altria and JLI for Altria to stop competing with its existing products.”
The FTC appealed the ruling, contending that the ALJ ignored well-settled precedent governing the review of evidence in conspiracy cases, and that the ALJ wrongly favored what the FTC considered self-serving testimony of Altria’s executives over more reliable evidence to the contrary.
The FTC points to case law establishing that conspiracy may be proven by inferences drawn from relevant and competent circumstantial evidence alone, and that agreement need not be demonstrated in the form of a formal contract. The FTC argues in its appeal that considering that JLI made repeated demands that Altria exit the market as part of any transaction, that Altria said that it would do so, and that after doing so the transaction was concluded almost simultaneously, there exists a “totality of the evidence” indicating that Altria and JLI had a “conscious commitment” to the scheme of Altria’s exit from the market.
The FTC argues that the ALJ decision that the “evidence fails to prove the alleged agreement” sets an evidentiary burden that is too high for the proving of conspiracy, contradicting settled precedent. Furthermore, the FTC questions the reliance of the ALJ on the testimony of executives, which the FTC argues contained contradictions, errors, biases, and generally lacks credibility.
In its response, Altria argues that the ALJ decision was rightly based on numerous documents and credible witnesses that demonstrate conclusively that Altria’s decisions to exit the e-vapor business was an independent business decision taken by Altria, and not a conspiracy. Altria emphasizes that a Sherman Act § 1 violation occurs when there is an “agreement,” and that the FTC’s burden at trial is to prove “agreement” and “to exclude the possibility of independent action.” In this case, argues Altria, there is insufficient evidence that points to an “agreement,” and the FTC has not met its burden of proof.
In fact, Altria argues, “the totality of the evidence” points to a different reality. It shows that the JLI only insisted on the disposition of Altria’s e-vapor products as part of the antitrust review process, and intended for those products to remain on the market until that point. Further, JLI was not worried about Altria’s existing e-vapor products since they were regarded as uncompetitive, and JLI was actually “shocked” when Altria withdrew from the market. Altria’s exit, it argues, was for independent business reasons, and was actually made without notice to JLI.
In its reply, the FTC reiterates its skepticism of the executives’ testimony, and questions the business sense of the decision to withdraw, further arguing that there is a clear inference of an agreement between Altria and JLI to exit the e-vapor market, and thus a violation of Section 1 of the Sherman Act.
In this entangled case, documents, conversations, meetings, and agreements will continue to be scrutinized by the Commission, and likely in the future by a circuit court, to determine what the actual catalyst and motivation of Altria’s exit was, and whether there is sufficient evidence to point to a “side agreement” that violated antitrust laws. Whatever the ultimate finding, this case highlights the need for merging enterprises to carefully monitor their pre-merger conversations and communications to ensure that they do not include any agreements or actions that can be construed as anti-competitive.
Oral argument of the appeal to the full Commission presently is scheduled for September 12, 2022.