Section 8 of the Clayton Act1, which prohibits certain director and officer interlocks, often goes unnoticed. But, a recently reported Federal Trade Commission inquiry into overlaps on the boards of prominent technology companies Google Inc. and Apple Inc. has drawn attention to this rarely-litigated provision of the antitrust laws. The investigation serves as a reminder for companies to screen officers and directors for potential interlocks and to monitor changes in their business, which could lead to new interlocks.
Overview of Section 8
Section 8 prohibits any “person” from simultaneously serving as a director or board-appointed or elected officer of two competitor corporations. US antitrust enforcers have also taken the position that an entity may violate Section 8 if its deputies serve as officers or directors of competing corporations, even if the deputies are different individuals.2 Violations of Section 8 are illegal per se, which means it is not necessary to prove actual anticompetitive harm resulting from the interlock in order to establish a violation of this section. To be subject to Section 8’s provisions, however, both corporations must have capital, surplus and undivided profits of more than US$26,161,000.3
Section 8 exempts interlocks having a de minimis effect on competition:
1) where the competitive sales4 of either corporation are less than US$2,616,100;5
2) where the competitive sales of either corporation are less than two percent of that corporation’s total revenues; or
3) where the competitive sales of each corporation are less than four percent of that corporation’s total revenues.6
Additionally, if a director or officer is eligible to serve when elected or selected but later becomes ineligible under Section 8 as a result of a change in the operations of a corporation or a change in the company’s capital, the statute provides for a grace period of one year for the director or officer to resign.
Separate rules govern interlocks involving banks, bank associations and trusts.
Both the Antitrust Division of the US Department of Justice and the FTC can bring actions for injunctive relief against the allegedly interlocked corporations or the relevant officer or director. They may seek an order requiring the officer or director to resign from one or both companies. The agencies may also require the corporation to implement an internal monitoring system to guard against illegal interlocks.
A private right of action is also available, but private plaintiffs can recover damages for an interlock only if they are able to show competitive injury.
Apple and Google
The recently reported scrutiny of Apple and Google arises because two individuals—Google chief executive Eric Schmidt and Arthur Levinson, the former chief executive of Genentech Inc.—sit on the boards of both companies. Apple and Google have long participated in separate sectors and often have been allies and collaborators. Recently, however, the extent to which the two companies operate in similar segments has increased—for example, Google now offers the Android operating system for mobile phones that compete with the iPhone.
Section 8 of the Clayton Act is typically monitored by counsel to corporations and there has been little litigation, as companies often choose to resolve issues internally rather than face the expense of litigation. Mr. Schmidt, however, has indicated that he will not resign from Apple’s board in spite of the FTC’s inquiry, because he does not consider Apple a “primary competitor.”7 He also noted that he recuses himself from Apple board meetings when the board discusses the iPhone. Other reports indicate that Apple and Google may be able to take advantage of one or more of the de minimis thresholds, because the amount of commerce in competition is such a small part of their overall businesses.8
It is unclear what prompted the FTC’s Section 8 investigation, but interlocking directorate investigations are often the by product of competitor complaints or other investigations by the antitrust agencies (for example, an investigation into other business practices).
Practice Points and Reminders:
- Screen all new officer or director candidates for any interlocking directorate issues;
- Stay current on other board positions held by the company’s officers and directors;
- Monitor Section 8 compliance as the company’s business changes, as this may create interlocks down the road;
- Foreign corporations should also be aware of the interlock prohibition if they have sales in or into the United States;
- Be aware of situations that can give rise to Section 8 issues, such as in the context of mergers9 or investments by private equity firms in multiple businesses in the same industry; and
- Where companies compete but are not subject to Section 8 restrictions because of the de minimis provisions, consider Sherman Act Section 1 risks. Even if the amount of competition is small, the interlock might lead to sharing competitively sensitive information, potentially resulting in a serious and costly Section 1 government investigation or private lawsuit (e.g. price fixing).