DOJ Threatens More Enforcement of the Ban on “Interlocks” Under Section 8 of the Clayton Act
The Department of Justice’s Antitrust Division (“DOJ”) has announced that it intends to bring more cases against “interlocking directorates” that violate Section 8 of the Clayton Act. Such “interlocks” occur when competing companies share (or effectively share) board members or officers. While penalties for Section 8 violations remain modest as a practical matter, a DOJ investigation can be expensive and disruptive, so companies should examine their slates of boards and officers for potential interlock violations.
DOJ’s Announcement About “interlocks” and Section 8
Assistant Attorney General Jonathan Kanter is the new head of the DOJ’s Antitrust Division. He was confirmed into that position in November 2021, following his nomination by President Biden. Kanter, in an April 2022 speech to a summit of antitrust enforcers, stated that he intends to increase enforcement of several antitrust statutes and specifically that he intends to bring more Section 8 cases against interlocks. “For too long,” said Kanter, “Section 8 enforcement has essentially been limited to our merger review process.” Now, DOJ is “ramping up efforts to identify violations across the broader economy” and “will not hesitate to bring Section 8 cases to break up interlocking directorates.”
Both DOJ and its sister agency the Federal Trade Commission (“FTC”) have reminded businesses about Section 8 before. For example, see the FTC’s blog post, “Have a plan to comply with the bar on horizontal interlocks” (2017), and the FTC in 2019 stated that “Private equity firms that acquire board seats across a diverse portfolio of companies may be particularly likely to encounter Section 8 issues via a merger or acquisition.” But Kanter’s April 2022 statement seems to go a step further, predicting that DOJ is ready to file suit, not just send reminders.
What the Law Prohibits (and Permits)
Section 8 of the Clayton Act, 15 U.S.C. § 19, states that “no person shall, at the same time, serve as a director or officer in any two corporations (other than banks, banking associations, and trust companies) that are [competitors],” if the two corporations are each above a size threshold and they cannot show that their competitive sales are below certain de minimis sales thresholds (explained below). Technically, Section 8 applies only to corporations, but DOJ and the FTC take the position that they can use their broader antitrust authority to enforce the same concept against non-corporate entities as well.1
Interlocking directorates that violate Section 8 are per se illegal or flatly prohibited, meaning that antitrust authorities do not need to establish anticompetitive effects for liability to attach. As such, a company cannot escape liability by putting up firewalls or otherwise arguing a lack of effects. Importantly, and particularly relevant for private equity investors, the requirement for an interlocking “person” in the statute should be read as “representative,” not an individual person. As noted in the horizontal interlocks blog post referenced above, the FTC and DOJ take the position that an interlock involving the same individual named person is not required for Section 8 liability to arise. In their view, an interlock can exist if different persons serve on the different boards or officer slates, but those different persons are answerable to the same corporation (e.g., both are employees of the same company).
The corporate size threshold for Section 8 is triggered when two competing corporations that share a director or officer have “capital, surplus, and undivided profits” (usually interpreted as total enterprise value) aggregating more than $41,034,000 (for 2022; annually adjusted).2 Even if the corporations in question meet the combined size threshold, however, the statute allows for certain exceptions in cases where they compete in only a minimal way. These de minimis competitive sales thresholds essentially act as affirmative defenses against what might otherwise be a Section 8 violation. The de minimis sales tests are:
- the competitive sales3 of either corporation are less than $4,103,400 (for 2022; annually adjusted);
- the competitive sales of either corporation are less than 2% of that corporation’s total sales;4 or
- the competitive sales of each corporation are less than 4% of that corporation’s total sales.
Even if a company determines the de minimis competition defense applies to its situation, it is a good idea to keep a paper trail showing that the common director or officer cannot act as a conduit to facilitate price fixing, bid rigging, or customer or geographical allocation, done in secret or by means of fraud on the customer. These types of antitrust violations — described by the U.S. Supreme Court as the “supreme evil” of antitrust5 — are not subject to de minimis defenses and can lead to significant and potentially criminal liability. Accordingly, it is a best practice for a common director or officer to recuse himself or herself from any matter where the companies in question are bidding against or otherwise directly competing against each other, head-to-head.
While Section 8’s liability standard is strict, it does not carry an automatic monetary penalty. The usual result of Section 8 liability is merely an order to cease one of the overlapping director or officer positions. That said, investigations can be expensive, and there is always a possibility that a Section 8 violation could determine that an interlock caused an actual reduction of competition — for which damages could be imposed under other antitrust statutes — or could expose other wrongdoing that the government would not ignore.
Fortunately, Section 8 provides for a one-year grace period for interlocks that were previously not problematic but later became so, if companies start to compete (or compete more than a de minimis level, as explained above) after the interlock already exists. Companies that find themselves in this “thrust-upon” infringement of Section 8 have twelve months, measured from when the violation begins, to end the interlock.
What This Means for You
It is a good idea to have a compliance plan in place that, on an annual basis, asks questions that would expose any problematic interlock. These questions can be integrated into existing conflict-of-interest screens for directors and officers. If a company discovers any interlocks involving competitors, it should undertake the analysis laid out above to determine whether the companies in question meet the combined size threshold and, if so, whether any of the competitive sales thresholds create a de minimis competition defense.
1 In the same “horizontal interlocks” blog post noted in the text, the FTC states, “Section 5 of the FTC Act may also reach interlocks that do not technically meet Section 8’s interlock requirements but violate the policy against horizontal interlocks expressed in Section 8. For example, Section 5 can reach interlocks involving banks, which are exempt from Section 8, and competing non-bank corporations.” DOJ shares a similar view (see, e.g., this 2019 speech) based on its authority under the most general of the antitrust laws, Sections 1 and 2 of the Sherman Antitrust Act.
2 The 2022 adjustment is published here.
3 The statute defines competitive sales as “the gross revenues for all products and services sold by one corporation in competition with the other, determined on the basis of annual gross revenues for such products and services in that corporation’s last completed fiscal year.”
4 The statute defines total sales as “gross revenues for all products and services sold by one corporation over that corporation’s last completed fiscal year.”
5 Verizon Communications v. Law Offices of Curtis V. Trinko, 540 U.S. 398, 408 (2004).
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.