Key Holdings in FTC Order Vacating ALJ Decision and Dismissing Case Challenging Altria/JUUL Merger | Practical Law

Key Holdings in FTC Order Vacating ALJ Decision and Dismissing Case Challenging Altria/JUUL Merger | Practical Law

On June 30, 2023, the Federal Trade Commission (FTC) issued an order vacating Administrative Law Judge (ALJ) Michael Chappell's initial decision and dismissing the FTC's complaint challenging an allegedly unlawful agreement between Altria and competing e-cigarette company JUUL. In addition, the FTC clarified points of law in the ALJ's initial decision.

Key Holdings in FTC Order Vacating ALJ Decision and Dismissing Case Challenging Altria/JUUL Merger

by Practical Law Antitrust
Law stated as of 11 Jul 2023USA (National/Federal)
On June 30, 2023, the Federal Trade Commission (FTC) issued an order vacating Administrative Law Judge (ALJ) Michael Chappell's initial decision and dismissing the FTC's complaint challenging an allegedly unlawful agreement between Altria and competing e-cigarette company JUUL. In addition, the FTC clarified points of law in the ALJ's initial decision.
On June 30, 2023, the Federal Trade Commission (FTC or the Commission) issued an order vacating Administrative Law Judge (ALJ) Michael Chappell's initial decision in the FTC's challenge to an allegedly unlawful agreement between Altria Group, Inc. and JUUL Labs, Inc. The Commission's order dismisses the FTC's complaint as no longer in the public interest and clarifies points of law in the ALJ's decision.

Background

The FTC's complaint alleged that in December 2018, Altria acquired a 35% stake in JUUL in exchange for a $12.8 billion investment. The FTC's complaint alleged that Altria's receipt of a substantial ownership stake in JUUL was in exchange for its agreement to withdraw its existing closed system e-cigarettes from the market. The alleged agreement:
In its initial decision dismissing the FTC's complaint, the ALJ found that the FTC failed to prove:
  • The Section 1 and Section 5 claims because there was not sufficient evidence to establish:
    • the existence of an unwritten agreement that Altria would exit the e-cigarette market in exchange for ownership interest in JUUL; and
    • that the transaction would unreasonably restrain future competition in the relevant market.
  • The Section 7 claim due to insufficient evidence that the non-compete provision would likely harm competition in the e-cigarette market.
FTC Complaint Counsel appealed the ALJ's initial decision to the Commission. Following the appeal, the defendants moved to dismiss the proceeding as moot and no longer in the public interest because of the following market developments after the appeal had been filed:
  • Altria relinquished its investment in JUUL, unwinding the 2018 investment.
  • Altria and JUUL terminated certain relationship and service agreements related to Altria's investment.
FTC Complaint Counsel opposed the defendants' motion to dismiss, arguing that:
  • The voluntary cessation of unlawful conduct does not make an enforcement proceeding moot.
  • Meaningful relief had not been granted.
Other market developments took place while the appeal was pending, including that Altria terminated the written non-compete with JUUL and the FDA had denied marketing authorization for all JUUL products sold in the US.
For an overview of the FTC administrative trial process, see Practice Note, FTC Act Section 5: Overview.

The Commission's Order

The Commission issued an order:
  • Dismissing the FTC's complaint, stating that proceeding was no longer in the public interest because:
    • the agreements that triggered the filing of the complaint were no longer in place; and
    • the competitive landscape of the e-cigarette market is uncertain and JUUL's ability to continue marketing its products in the US is in question due to the FDA's denial of market authorization.
  • Vacating the ALJ's initial decision to dismiss the FTC's complaint because it had been appealed but was not yet final, and had no precedential effect.
  • Clarifying certain points of law.
In dismissing the complaint, the Commission rejected the respondents' claim that the case was moot, finding that additional relief could remedy an illegal transaction even where it has been unwound. However, the Commission found dismissal appropriate given the developments during the pendency of the appeal and limited Commission resources.

Points of Law Clarified

The Commission also clarified certain points of law. First, that the FTC could have properly plead that the per se rule applied to the alleged unwritten agreement, stating that the agreement:
  • Seemed to be a naked elimination of competition.
  • Was not reasonably related to integration of economic activity or reasonably necessary to achieve procompetitive benefits.
The Commission then clarified points of law related to issues raised by the initial decision, including:
  • How to evaluate certain aspects of conspiracy evidence under Section 1 of the Sherman Act.
  • In a Clayton Act merger challenge, that competitive effects should be measured by comparing the actual world and the but-for world in the absence of the transaction.
  • That the ALJ erred in:
    • declining to find that the transaction was presumptively illegal through Herfindahl-Hirschman Index (HHI) data;
    • treating Altria as a potential competitor instead of an actual competitor; and
    • failing to consider innovation losses.

Conspiracy Claim

The FTC's complaint included a conspiracy claim that Altria agreed to withdraw its e-cigarette products and halt their innovation efforts in exchange for a financial interest in JUUL. The ALJ found that Complaint Counsel failed to prove the existence of an unwritten agreement between the parties to stop competing regarding e-cigarette products.
The Commission clarified that where a Sherman Act Section 1 conspiracy is alleged, the Commission will evaluate:
  • Direct and circumstantial evidence of an agreement, including plus factors, meaning economic actions and outcomes beyond parallel conduct that are generally inconsistent with unilateral conduct but instead with explicitly coordinated action.
  • Antitrust conspiracy evidence as a whole, in light of reasonable inferences, to determine if the proof of coordinated conduct makes the conspiracy more likely than not.

Anticompetitive Effects

The ALJ evaluated the FTC's Section 7 challenge by comparing the pre- and post-transaction worlds. The ALJ considered commercial developments in the relevant market post-transaction when analyzing the transaction's competitive effects, finding that because the market had become more competitive post-transaction, the transaction did not have an anticompetitive effect.
Complaint Counsel argued that a before and after comparison of the pre- and post-transaction worlds is not appropriate in an antitrust case. Instead, the proper comparison is between a world with the transaction (the actual world) and one without, known as a but-for world comparison.
The Commission agreed with Complaint Counsel, stating that the proper analysis of the transaction's competitive effects involves comparing the actual world and the world but-for the merger.

HHI Presumption

Complaint Counsel provided HHI evidence before the ALJ showing that the market was highly concentrated pre-transaction and would be increased post-transaction to above 2,500, creating a presumption that the transaction was illegal. The ALJ did not apply this evidence to establish a presumption that the transaction may substantially lessen competition, reasoning instead that the decline of Altria's market share pre-transaction lessened the predictive value of the HHI.
The Commission disagreed with the ALJ and noted that:
  • The ALJ should have applied the presumption and found that the HHI evidence established a prima facie case.
  • Factors claimed to lessen the predictive value of an HHI analysis are properly considered on rebuttal.

Actual Competitor

The Commission held that the ALJ erred when it treated Altria as a potential competitor and applied the actual potential competition doctrine. The actual potential competition doctrine looks at the harm from eliminating a firm that may have entered the relevant market through alternate means but for the acquisition.
The Commission reasoned that Altria was an actual, current competitor as of the date of the transaction because:
  • Altria withdrew their cig-a-like products days before finalizing the transaction.
  • The transaction halted Altria's significant efforts to develop and launch new products.
The Commission clarified that the proper standard to evaluate potential entry under the actual potential competition doctrine is a reasonable probability of entry (and not clear proof that independent entry would have occurred), which must be proven by a preponderance of the evidence.

Innovation Efforts

According to the Commission, the ALJ failed to give weight to the competitive harms resulting from reduced innovation caused by the transaction. As part of the transaction, Altria:
  • Disbanded its Growth Teams that had been engaged in an intensive, multi-million dollar R&D effort to develop and launch new products.
  • Agreed to cease ongoing large-scale e-cigarette R&D efforts with research partner Philip Morris International under an agreement valued at between $30 to $100 million per Growth Team.
The Commission argued that the impact of merger-related reductions in spending on R&D and harm to innovation must be considered in evaluating the competitive impact of mergers.
For more on how courts analyze the effects of a merger generally, see Practice Note, How Antitrust Agencies Analyze M&A.