Antitrust enforcers are echoing claims of recent books and
articles decrying private equity firms’ reshaping of American
business in ways allegedly antithetical to
competition.1
As antitrust enforcers remain keenly focused on health care,
technology and labor, PE firms investing in these sectors have also
faced increased antitrust scrutiny.2
Antitrust enforcement and litigation risks are moving from the
portfolio companies to the PE firms themselves. Areas of heightened
PE antitrust risk stand out: interlocking directorates, rollups,
divested asset purchases and investment in competing entities. This
article addresses these risks and offers takeaways for the current
climate.3
Interlocking Directorates
The first heightened risk area is interlocking directorates,
which can happen when PE firms seek representation on the boards of
their portfolio companies. When those portfolio companies are
actual competitors — think competitors for products, services
or even labor — Section 8 of the Clayton Act prohibits them
from appointing two different people from the firm to those
boards.4
At last year’s Spring Enforcers Summit, the head of the
Antitrust Division of the U.S. Department of Justice, Assistant
Attorney General Jonathan Kanter, proclaimed that the division
“will not hesitate” to bring Clayton Act cases “to
break up interlocking directorates.”5
Since then, at least 12 directors have resigned from corporate
boards in response to DOJ concerns.6 Almost half of the
directors whose resignation the DOJ touted in an October 2022 press
release, represented PE firms.7
Both the DOJ and the Federal Trade Commission may seek
injunctive relief for interlocking directorate violations. In other
words, they can force corporate board members in violation of the
statute to resign and/or force a deal restructure to avoid the
interlock.
Private plaintiffs technically may seek damages under Section 16
of the Clayton Act, but to date, none have been
awarded.8
Rollups
A second antitrust private equity area of focus is rollup
strategies — i.e., when PE firms acquire multiple companies
in the same industry and roll them up into one.
In a May 2022 interview with the Financial Times, Kanter
described this business model as “designed to hollow out or
roll up an industry and essentially cash out.”9
That method, he continued, “is very much at odds with the
law and very much at odds with the competition we’re trying to
protect.” The Federal Trade Commission has been equally
hostile to these methods.
For example, in the June 2022 decision in the Matter of JAB
Consumer Partners SCA SICAR, National Veterinary Associates Inc.
and SAGE Veterinary Partners LLC, the agency moved to force the
owner of a chain of veterinary clinics, JAB Consumer Partners, to
divest clinics in California and Texas as a condition of its
proposed $1.1 billion acquisition of competing clinic operator SAGE
Veterinary Partners LLC.10
PE Divestiture Buyers Beware
The third key area of increased antitrust scrutiny is when PE
firms hope to become divestiture buyers, i.e., when PE firms
purchase divested assets in the wake of an agency merger review.
The DOJ, again through Kanter, has signaled a concern that PE
divestiture buyers can “fuel additional competitive
problems,” by “reducing costs at a company, which will
make it less competitive, or squeezing out value by concentrating
[the] industry in a roll-up,” as Kanter said in the Financial
Times interview.11
Recently in the DOJ’s merger challenge of Assa Abloy
AB’s proposed purchase of Spectrum Brands, the DOJ initially
prohibited the smart locks company from divesting assets to any PE
buyer to satisfy antitrust concerns, but settled during trial
allowing divestiture to a PE firm.12
This surprising turn of events seemed to show the DOJ walking
back its stance on divesting assets to PE firms, but the chilling
effect of the anti-PE DOJ throwdown remains to be seen. Time will
tell whether this was a case-specific issue or signals a broader,
and new, anti-PE divestiture buyer stance, but it certainly is
consistent with Kanter’s pronouncements from last spring.
PE Investment in Competing Entities
PE firms investing in competing entities should be aware of the
possibility that antitrust enforcers could look at PE firms as
facilitating or participating in anti-competitive collusion between
competitor companies, which could spur investigations or litigation
of alleged Sherman Act, Section 1 collusion — especially
price-fixing, market allocation, or other anticompetitive
agreements. Bid-rigging, price-fixing and market-allocation
conspiracies can be prosecuted criminally by the DOJ.
There are two primary risks to PE firms that have concentrated
investments in particular industries: (1) the immediate risk of a
government civil or criminal investigation; or (2) a civil suit
arising from those allegations.
For example, in 2019, the DOJ Antitrust Division prosecuted a
price-fixing conspiracy in the U.S. canned tuna industry, which
resulted in a $100 million criminal fine and jail time for an
executive.13
A PE firm that had purchased Bumble Bee Foods LLC in 2010 was
also sued in a follow-on civil antitrust class action and is still
fighting its way out of the case.14
By investing in competing entities, or even companies that could
potentially compete (nascent competitors), a PE firm runs the risk
of allegations that it was the hub in a classic hub-and-spoke
conspiracy in violation of Section 1 of the Sherman Act.
Applied to PE, in a hub-and-spoke conspiracy, the common
investor, or the hub, coordinates an anti-competitive agreement
among the competitors, or the spokes.
For example, the competitors might agree to set a floor or
ceiling price or to divide customers, markets or employees. The DOJ
Antitrust Division may investigate such suspected agreements
criminally, focusing on meetings, emails or text communications
between competitors and the common PE investor who might be viewed
as facilitating or participating in collusive, anti-competitive
agreements.
Civil government antitrust cases are also possible. For example,
in the 2013 U.S. v. Apple Inc. decision, the U.S. District Court
for the Southern District of New York found Apple liable for
conspiring with five book publishing companies to raise and fix the
price for ebooks.
Private civil suits are also possible and treble damages can be
awarded. In the civil context, such agreements can be inferred from
the conduct of the parties or the exchanges between the common
investor and the competitors.
Takeaways
- PE firms and portfolio companies should develop compliance and
assessment tools to detect board seats in competitor companies and
prevent potential interlocking directorates. - Rollups are likely to face intense antitrust scrutiny.
- PE firm attempts to scoop up divested assets during government
merger reviews may be viewed unfavorably by antitrust
enforcers. - PE firms should expect antitrust scrutiny when investing in
competitors, or multiple companies in the same industry. - Investing in multiple competing companies can create the risk
of an appearance that PE firms are facilitating or participating in
industry collusion, leading to costly and stressful criminal and/or
civil investigations and litigation. - To reduce antitrust risk for PE firms, it should be clear that
portfolio companies make independent decisions about prices, wages,
what customers to sell to, or in what geographic areas to
operate. - PE firms with portfolio companies that are competitors or
potential competitors should also be mindful of information flow to
avoid accusation of facilitating or participating in collusive
anticompetitive agreements. - To mitigate these risks, PE firms and portfolio companies
should develop solid compliance and assessment tools to detect and
prevent antitrust violations, particularly in high-scrutiny areas
like health care, tech and labor.
Ann O’Brien is partner and Lindsey Collins is special counsel at
Sheppard Mullin Richter & Hampton LLP.
The opinions expressed are those of the author(s) and do not
necessarily reflect the views of their employer, its clients, or
Portfolio Media Inc., or any of its or their respective affiliates.
This article is for general information purposes and is not
intended to be and should not be taken as legal advice.
Footnotes
1. See, e.g., Ballou, Brendan (2023) Plunder: Private
Equity’s Plan to Pillage America. New York, NY: Public Affairs;
Brendan Ballou, “Private Equity is Gutting America – and
Getting Away With It,” New York Times, April 28, 2023,
available at https://www.nytimes.com/2023/04/28/opinion/private-equity.html.
2. Ann O’Brien, Leo Caseria, and Joy Siu, “DOJ
Loses Third Consecutive Antitrust Labor Trial,” Antitrust Law
Blog, SheppardMullin (March 24, 2023) available at https://www.antitrustlawblog.com/2023/03/articles/criminal-doj/doj-loses-third-consecutive-antitrust-labor-trial/;
Ann O’Brien and Lindsey Collins, “DOJ Antitrust Division
Loses Two Bellweather Criminal Antitrust No-Poach and Wage-Fixing
Trials, American Bar Association (June 27, 2022) available at https://www.americanbar.org/groups/health_law/publications/aba_health_esource/2021-
2022/june-2022/doj-antitrust-division-loses-two-trials/; John
Carroll and Rachel Guy, “U.S. Healthcare Industry Remains
Antitrust Enforcement Priority,” Antitrust Law Blog,
SheppardMullin (Sept. 30, 2022) available at https://www.antitrustlawblog.com/2022/09/articles/healthcare-antitrust/us-healthcare-industry-remains-antitrust-enforcement-priority/.
3. On April 19, 2023, Sheppard Mullin hosted a webinar
called “Beware: Private Equity Firms Facing Heightened False
Claims Act and Antitrust Risks” addressing these risks. A
recording of the webinar is available at https://www.sheppardmullin.com/multimedia-479.
4. 15 U.S.C. § 19, available at
https://www.law.cornell.edu/uscode/text/15/19. The statute has
other requirements – namely a financial threshold the
companies must meet (over approximately $41 million in profits)
– and the interlock itself is a “per se” violation
whether or not there has been any actual competitive
injury.
5. Jonathan Kanter, “Assistant Attorney General
Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers
Summit,” (April 4, 2022) available at https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.
6. See Practical Law The Journal, “GC Agenda: May
2023,” available at https://www.reuters.com/practical-law-the-journal/transactional/gc-agenda-may-2023-
2023-05-01/.
7. Press Release, “Directors Resign from the Boards
of Five Companies in Response to Justice Department Concerns about
Potentially Illegal Interlocking Directorates,” Department of
Justice (Oct. 19, 2022), available at https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially;
Jean M. Fundakowski, Allison Davis, Yonaton Rosenzweig, and Kaley
Fendall, “DOJ and FTC Step Up Scrutiny of Interlocking
Directorates,” Davis Wright Tremaine LLP, (Dec. 6, 2022)
available at https://www.dwt.com/insights/2022/12/doj-ftc-antitrust-interlocking-directorates.
8. Interlocking Directorates, Practical Law Practice Note
w-002-9202.
9. Stefania Palma, “Crackdown on buyout deals
coming, warns top US antitrust enforcer,” Financial Times,
(May 19, 2022) available at https://www.ft.com/content/7f4cc882-1444-
4ea3-8a31-c382364aace1.
10. Press Release, “FTC Acts to Protect Pet Owners
from Private Equity Firm’s Anticompetitive Acquisition of
Veterinary Services Clinics,” Federal Trade Commission, (June
13, 2022) available at https://www.ftc.gov/news-events/news/press-releases/2022/06/ftcacts-protect-pet-owners-private-equity-firms-anticompetitive-acquisition-veterinary-services.
11. Palma supra note 8.
12. Bryan Koenig, “DOJ Told Assa Abloy: No Private
Equity Buyers,” Law360.com (April 24, 2023) available at https://www.law360.com/articles/1600512. On May
6, 2023, Assa Abloy and the DOJ reached a settlement which
permitted Assa Abloy to divest certain assets, including its Smart
Residential business, to the PE firm Fortune Brands. See, Press
Release. Assa Abloy, (May 6, 2023) available at https://www.assaabloy.com/group/en/news-media/press-releases/id.2c18a7926479fdff.
13. See Press Release, “StarKist Ordered to Pay $100
Million Criminal Fine for Antitrust Violation,” DOJ (Sept. 11,
2019) available at https://www.justice.gov/opa/pr/starkist-ordered-pay-100-million-criminal-fine-antitrust-violation.
14. See Press Release, “Former Bumble Bee CEO
Sentenced to Prison for Fixing Prices of Canned Tuna,” (June
16, 2020) available at https://www.justice.gov/opa/pr/former-bumble-bee-ceo-sentenced-prison-fixing-prices-canned-tuna;
Nadia Dreid, “PE Firms Look to Slip Tuna Price-Fixing
Claims,” Law360.com (March 28, 2023) available at https://www.law360.com/articles/1590499/pe-firms-look-to-slip-tuna-price-fixing-claims.
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