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Freshfields Transactions

| 5 minutes read
Reposted from A Fresh Take

Illumina/Grail: A Tale of Transatlantic Entropy

This isn’t the first time we’ve written about this US-focused transaction in the innovative markets for next generation gene sequencing and cancer screening tests – we covered its surprising developments in terms of EU merger control in July, following the EU General Court’s rejection of Illumina’s challenge to the European Commission’s (EC) decision to review its acquisition of Grail (see here). Now, less than two months later, the EC has issued a blocking decision on 6 September 2022, and an Administrative Law Judge (ALJ) in the United States has issued an opposite ruling a few days earlier, rejecting the criticism of the Federal Trade Commission (FTC) against the vertical combination of Illumina and Grail. Are we beginning to see the opening of a new chapter of procedural transatlantic bifurcation – despite substantive alignment across competition agencies – in competition law enforcement?

While the substantive analysis between the EC and the FTC does not differ substantially (no clash between the agencies), the procedural treatment of the business combination in the two jurisdictions could not be more different.

Precarious Position for Illumina: US-Focused Transaction Blocked by the EC

Last year, the EC decided to accept a referral of the transaction by the French competition authority (supported by other fellow agencies in Europe) under Article 22 of the EU Merger Regulation (EUMR), even though the transaction did not meet the thresholds of the EUMR – nor of any national merger regime in the EU – as there was no horizontal overlap between the parties, and more importantly, Grail did not generate revenue anywhere in the world in the relevant year of reference. A trifle polemically, one could say that the matter was shuttled between a multitude of interested agencies, who under their regular rules would have been acting out of scope when taking up scrutiny of the transaction on a stand-alone basis. The new Article 22 process somewhat resembles the practice of the UK competition authority (CMA) when it “calls in” transactions for review, albeit those transactions must still trigger the CMA’s own jurisdictional thresholds (even if the CMA takes a somewhat expansive view of those thresholds). While jurisdiction over non-reportable transactions is well understood in the United States, in the EU it is clearly a première, at least in a case where the transaction is not reportable under any relevant national merger regime in the first place. Yet, on 13 July 2022, the EU General Court dismissed Illumina’s challenge of the EC’s decision to review the acquisition, suggesting that the EU legislator would have contemplated the authority of the EC to investigate transactions of a foreign-to-foreign nature even where the target company has not yet started selling products on the market.

In the EC’s press release of 6 September 2022, Executive Vice-President, Margrethe Vestager, explained the EC’s decision to block the transaction: “In a race with other companies, GRAIL is developing a blood-based early cancer detection test. If successful, these tests will revolutionise our fight against cancer and help to save millions of lives. Illumina is currently the only credible supplier of a technology allowing to develop and process these tests. With this transaction, Illumina would have an incentive to cut off GRAIL's rivals from accessing its technology, or otherwise disadvantage them.” The EC continues to explain that remedies proposed by Illumina would not have solved these concerns, which are essentially of a vertical foreclosure character.  

The FTC advanced a nearly identical theory of harm when it challenged the transaction:  “Illumina is the only provider of DNA sequencing that is a viable option for these multi-cancer early detection, or MCED, tests in the United States. . . .  As the only viable supplier of a critical input, Illumina can raise prices charged to Grail competitors for [next-generation sequencing] instruments and consumables; impede Grail competitors’ research and development efforts; or refuse or delay executing license agreements that all MCED test developers need to distribute their tests to third-party laboratories.”

With its decision to block the transaction, the EC is now contemplating a possible unwinding of the transaction, while Illumina has said that it will challenge any order from the EC to dispose of Grail. Separately, Illumina is also appealing the July 2022 decision from the General Court that confirmed the EC’s jurisdiction to review the transaction.

An Opposite Position in the US: A Loss for the FTC

Despite broad substantive alignment between the FTC and the EC, following an administrative trial on the merits, FTC ALJ Chappell ruled in favor of Illumina, rejecting the FTC’s alleged vertical theory of harm and permitting Illumina’s acquisition of Grail. Chappell’s opinion held that FTC complaint counsel failed to prove that Illumina’s acquisition of Grail is likely to substantially lessen competition in the relevant market for research, development, and commercialization of MCED tests.  In particular, he found that: (i) FTC complaint counsel evidence failed to prove that Grail’s MCED competitors are likely to enter imminently or close substitutes for Grail’s MCED test; and (ii) Illumina’s “Open Offer” that provides next-generation DNA sequencing customers supply and price protections for a period of 12 years “effectively constraints Illumina’s alleged ability and incentive to harm Grail’s purported rivals or to advantage Grail.”

Differences in FTC and EC process – in particular, the requirement that the FTC ultimately prove its case before an independent ALJ – have left Illumina in the exact opposite position vis-à-vis the FTC as compared with the EC: while Illumina has indicated it will appeal any EC order to dispose of Grail, FTC complaint counsel is now appealing ALJ Chappell’s decision to the full Commission. 

On appeal, the 5-Commissioner FTC panel will review the transaction de novo – without any deference to ALJ Chappell’s analysis. The FTC slate of Commissioners consists of three Democrats – who have stated publicly that they plan to prioritize vigorous enforcement of the antitrust laws and their policy positions – and two Republicans, and an overturning of ALJ Chappell’s opinion would not be surprising: three of the current Commissioners (including both Republicans) already voted for the FTC’s challenge to the transaction in March 2021 – leaving the review to be conducted by Commissioners who had already expressed concern with the transaction and proposed remedies.

A Long Way to Go

In both the US and EU, a final decision could still be many months, if not years, away: in the US, if the FTC overturns the ALJ’s ruling, the parties may appeal the decision to a federal court of appeals to rule on the merits of the transaction.  In the EU, Illumina has indicated it intends to appeal the EC’s ruling, a process which could span years.  With the long road ahead, the Illumina/Grail saga will remain a space to watch –regarding Illumina’s procedural position as well as the substantive assessment of the transaction – on both sides of the Atlantic.  

Illumina/Grail is a reminder that US-focused acquisitions, including acquisitions that do not trigger ex-US filing requirements, can nonetheless prompt close scrutiny, face significant delay, and ultimately be challenged by competition authorities abroad.  Antitrust risk assessments, contractual terms in merger agreements, and defense strategies should account for this risk – particularly during the present era of heightened antitrust scrutiny and cross-border cooperation between competition authorities.


antitrust and competition, merger control, regulatory, europe, united states