The Biden administration is conducting investigations into potential antitrust violations to which the life sciences industry may be particularly vulnerable because having board members sit on more than one company is relatively common. Benjamin Nagin and Kristina Gliklad explain.
In recent months, the U.S. Department of Justice (DOJ) has made statements and launched investigations that highlight the current administration’s focus on identifying and prohibiting companies from having representatives on the boards of two competing companies, a practice known as ‘interlocking directorates’. Invoking Section 8 of the Clayton Act (Section 8) – a statute typically enforced only in the context of merger reviews – the DOJ believes that cracking down on interlocking directorates will deter potentially collusive or anticompetitive behavior.
Both the DOJ Antitrust Division and the Federal Trade Commission have signaled increased scrutiny of interlocking boards in the private equity space and their role in the health care market. And a recent study conducted in part by a Stanford Law School professor reveals that life sciences companies may be the DOJ’s next target. According to the study, interlocking directorates in the life sciences industry may occur at rates as high as 10-20%, and are particularly prevalent in oncology, neurology, immunology, and respiratory disease. Pharma companies have reason to be particularly concerned about potential exposure to scrutiny.
The law in question, Section 8, is the primary antitrust enforcement mechanism that limits the service of corporate representatives. It prohibits an individual from serving as a director or officer of two or more corporations if the corporations are ‘by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.’
Section 8 investigations are inherently fact-specific and require consideration of the nature and degree of overlap in the businesses. The Biden administration’s antitrust enforcers, however, are almost certain to take hardline positions on Section 8’s interpretation, and have communicated their intention to undertake a more proactive search for potential violations. In April 2022, Assistant Attorney General Jonathan Kanter announced that enforcement of Section 8 was ‘a priority for the Antitrust Division’. Where the DOJ had generally limited its Section 8 investigations to its standard merger review process, Kanter promised the DOJ would ‘ramp up efforts to identify violations across the broader economy’.
In June 2022, whilst remarking on the intersection between antitrust, health care, and private equity, the DOJ’s Antitrust Division signaled its commitment to taking ‘aggressive action’ over ‘board interlocks’. And in September 2022, the DOJ followed through on that commitment by requesting information about potential interlocking directorates from a number of companies outside the merger process. Most recently, on October 19, 2022, the DOJ announced that seven directors had resigned from corporate board positions in response to concerns raised by the Antitrust Division that their roles violated Section 8.
It appears that the DOJ may be basing its investigations into potential interlocks on information which has long been publicly available in U.S. Securities and Exchange Commission filings. Some investigations into potential interlocks have apparently relied on public information such as lists of directors on company websites or in Form 10-Ks.
As the antitrust agencies continue to commit resources towards identifying potential interlocks, it makes sense for all companies – especially those in the life sciences industry – to review their existing board memberships and appointment policies, and to consider whether any safe harbors or other limited exceptions may apply.