Last month, the U.S. Department of Justice's (DOJ) Antitrust Division announced that seven directors from the boards of five companies resigned in response to concerns that the directors' roles violated the prohibition against interlocking directorates under Section 8 of the Clayton Act.1 These resignations follow previous statements by the DOJ that it intended to "reinvigorate" Section 8 enforcement, including a speech delivered earlier this year by Assistant Attorney General (AAG) Jonathan Kanter, who made clear that the Antitrust Division would be closely scrutinizing interlocking directorates.2 This development highlights the need for companies to maintain an effective antitrust compliance program that carefully monitors board memberships and appointment policies to mitigate Section 8 risks.
Legal Background: Clayton Act Section 8
Subject to certain de minimis exemptions, Section 8 of the Clayton Act prohibits "interlocking directors," which occur when a "person" simultaneously serves as a director or officer of two or more competing corporations. Section 8 is—in effect—a prophylactic statute designed to eliminate the possibility of anticompetitive effects that could arise from competitors coordinating their business decisions or exchanging competitively sensitive information. As such, the prohibition applies only to interlocks involving corporations that are competitors "by virtue of their business and location of operation...such that elimination of competition by agreement between them would constitute a violation of any of the antitrust laws."3 Unless an exemption applies, an interlock that violates Section 8 is unlawful per se (i.e., there is no consideration of whether the interlock results in anticompetitive effects).
To remedy a Section 8 violation, the antitrust agencies or private plaintiffs can seek injunctive relief to require the removal of the overlapping director to eliminate the interlock. Private plaintiffs may also seek damages, although we are not aware of any court that has awarded damages for a Section 8 claim.
Exemptions and Exclusions
Because certain interlocks are deemed to pose minimal risk of competitive harm, Section 8 does not apply where:
- The combined total capital, surplus, and undivided profits of either corporation is less than $41,034,000 (indexed annually); or
- The competitive sales of:
- either corporation are less than $4,103,400 (indexed annually);
- either corporation are less than 2% of the corporation's total sales; or
- each corporation are less than 4% of the corporation's total sales.4
Further, Section 8 provides for a one-year grace period following an intervening event that creates an interlocking directorate violation.5 The grace period applies where the officer or director was eligible to serve in that position at the time of appointment (i.e., the appointment did not violate Section 8), but becomes ineligible for that position due to an intervening event that makes continued participation unlawful under Section 8 (e.g., their competitive sales grow above the de minimis thresholds). The officer or director has a one-year grace period from the date of the intervening event to resign from that position.
Application to Other Entities, Definition of Person, and Indirect Interlocks
While the language of Section 8 refers only to "corporations," the term is undefined in the Clayton Act. Nonetheless, the DOJ has taken the position in commentary (but not in litigation) that it can use its broader antitrust authority to enforce Section 8 against non-corporate entities because "the harm from interlocking directorates is the same regardless" of the corporate structure.6
The DOJ and the Federal Trade Commission (FTC) also take the position that under Section 8, entities are "persons" and may violate the statute if their representatives serve as directors or officers of two competing entities, even though the representatives are not the same individuals. At least one district court has adopted this "representative" or "deputization" theory to hold that Section 8 prohibits a parent corporation from designating different agents to serve on the boards of two competing partially owned subsidiaries where the agents' service on the boards was "not in their individual capacities," but rather as deputies or agents of the corporation.7
The DOJ and FTC also take the view that indirect interlocks, (e.g., where subsidiaries of two companies compete or one company competes with the subsidiary of the other company) can violate Section 8. While there is no definitive test under Section 8, courts have generally looked at the extent of control or influence that a parent company has with respect to directing the activities and competitive policies of the subsidiary to determine whether Section 8 applies. For example, competition with a subsidiary can be attributed to the parent company "where the parent closely controls or dictates the policies of the subsidiary."8 Although courts have not elaborated on a specific list of factors relevant to this inquiry, the DOJ and FTC have challenged indirect interlocks under Section 8.9
Recent Resignations Highlight Increased Section 8 Risk
Despite some activity in recent years,10 it has been nearly four decades since the DOJ or FTC have filed a lawsuit to enforce Section 8. But with the latest round of announced resignations, the DOJ has made good on its promise to "reinvigorate" Section 8 enforcement.
These resignations eliminated the alleged interlocks on the boards of ten technology/software companies. All of the affected entities were publicly traded corporations, and three of the five individuals who resigned represented investment firms with significant stakes in competing corporations.11 Notably, the DOJ neither required the corporations to enter into consent decrees nor imposed any other settlement conditions. In its press release announcing the resignations, however, the DOJ made it known that "companies, officers, and board members should expect that enforcement of Section 8 will continue to be a priority for the Antitrust Division" and invited the public to provide information as to any interlocking directorates of which they are aware.12
The resignations follow several pronouncements by the antitrust agencies portending increased Section 8 enforcement. In April, AAG Kanter noted that the DOJ was "ramping up efforts to identify violations across the broader economy" and "will not hesitate to bring Section 8 cases to break up interlocking directorates," including outside the context of the "merger review process."13 Then, in June, Deputy Assistant Attorney General Andrew Forman signaled that private equity was of particular focus: "to the extent that private equity investments in competitors leads to board interlocks in violation of Section 8, the division is committed to taking an aggressive action."14
Implications and Key Takeaways
The DOJ's proactive approach to Section 8 enforcement marks a departure from prior agency practice, where Section 8 issues primarily arose in the context of transactions reviewed under the Hart-Scott-Rodino Antitrust Act (HSR). It also deviates from the FTC's 2017 statement that it "relies on self-policing to prevent Section 8 violations."15
We believe the announced resignations are likely a harbinger of things to come and expect the antitrust agencies' proactive approach to Section 8 enforcement to continue. While Section 8 refers only to "corporations," government enforcers have stated their belief that Section 8 applies more broadly to non-corporate legal entities. With that in mind, companies are well advised to take the following steps to mitigate potential Section 8 concerns.
- Companies should review their existing board membership and ask each director and officer to list the companies for which they serve a similar role to ensure there are no interlocks between competing companies.
- Companies should review existing board appointment policies to ensure they comply with Section 8. In particular, when onboarding a new officer or director who serves a similar role for another company in a related industry, companies should be mindful of compliance with Section 8.
- When evaluating potential mergers, acquisitions, or joint ventures, companies should carefully consider if any transaction provisions would give one company the right to appoint an officer or director to a competing company.
- Private equity firms should carefully review their investment portfolios to ensure there are no interlocks between competing companies.
- Companies should further consider conducting annual reviews of board memberships to avoid any new Section 8 concerns that may have arisen due to changed circumstances. For example, previously benign interlocks among companies could trigger Section 8, if the companies begin to compete against each other more directly.16 Therefore, Section 8 compliance should be reassessed annually to assess the companies' growth, new products, repositioning, or acquisitions. This should include an annual assessment of the applicability of the de minimis thresholds triggered by the extent of "competitive sales."
- Finally, even if an exemption applies under Section 8, interlocking officers or directors between competing companies may raise antitrust risk under Section 1 of the Sherman Act, which prohibits agreements in restraint of trade. In such a case, companies should consider implementing antitrust guidelines—such as firewalls between interlocked officers or directors and procedures for safeguarding competitively sensitive information—to mitigate potential Section 1 risk.
1. Press Release, U.S. Dep't of Justice, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates (Oct. 19, 2022), https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially.
2. Johnathan Kanter, AAG, Antitrust Div., U.S. Dep't of Justice, Opening Remarks at 2022 Spring Enforcers Summit (Apr. 4, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.
3. 15 U.S.C. § 19(a)(1).
4. 15 U.S.C. § 19(a)(2).
5. 15 U.S.C. § 19(b).
6. Makan Delrahim, AAG., Antitrust Div., U.S. Dep't of Justice, Remarks at Fordham University School of Law (May 1, 2019), https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-fordham-university-school-law.
7.> Reading International, Inc. v. Oaktree Capital Management LLC, 317 F. Supp. 2d 301, 331 (S.D.N.Y. 2003). The DOJ supported this position in an amicus brief. See Brief for the United States as Amicus Curiae, Reading Int'l v. Oaktree Capital Mgmt., 03-cv-1895 (S.D.N.Y. Oct. 1, 2003), available at https://www.justice.gov/atr/case-document/brief-united-states-amicus-curiae-13.
8. Square D Co. v. Schneider S.A., 760 F. Supp. 362, 367 (S.D.N.Y. 1991).
9. See In re: Borg-Warner Corp., 101 F.T.C. 863, 910–13 (1983); United States v. Crocker Nat. Corp., 656 F.2d 428, 450 (9th Cir. 1981).
10. In 2016, the DOJ challenged a transaction in which an electronic trading platform, Tullet Prebon, would have acquired a subsidiary of a competitor, ICAP, with ICAP obtaining the right to nominate one member of Tullet's board. After the DOJ raised concerns under Section 8, the parties restructured the deal to remove the offending provisions. See Press Release, U.S. Dep't of Justice, Tullet Prebon and ICAP Restructure Transaction after Justice Department Expresses Concerns about Interlocking Directorates (July 14, 2016), https://www.justice.gov/opa/pr/tullett-prebon-and-icap-restructure-transaction-after-justice-department-expresses-concerns.
Likewise, the FTC issued blog posts in 2017 and 2019 reminding corporations to be mindful of compliance with Section 8. See Michael E. Blaisdell, Bureau of Competition, Fed. Trade Comm'n, Interlocking Mindfulness (June 26, 2019), available at: https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness; Debbie Feinstein, Bureau of Competition, Fed. Trade Comm'n, Have a plan to comply with the bar on horizontal interlocks (Jan. 23, 2017), available at: https://www.ftc.gov/enforcement/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks.
Furthermore, in June 2021, two executives of Endeavor Group Holdings Inc. resigned their positions from the board of Live Nation Entertainment Inc. after the DOJ "expressed concerns that their positions on the Live Nation Board created an illegal interlocking directorate." Press Release, U.S. Dep't of Justice, Endeavor Executives Resign from Live Nation Board of Directors after Justice Department Expresses Antitrust Concerns (June 21, 2021), https://www.justice.gov/opa/pr/endeavor-executives-resign-live-nation-board-directors-after-justice-department-expresses.
11. Press Release, U.S. Dep't of Justice, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates (Oct. 19, 2022), https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially.
13. Johnathan Kanter, AAG, Antitrust Div., U.S. Dep't of Justice, Opening Remarks at 2022 Spring Enforcers Summit (Apr. 4, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.
14. Andrew Forman, Deputy AAG, Antitrust Div., U.S. Dep't of Justice, Keynote at the ABA's Antitrust in Healthcare Conference (June 3, 2022), https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-andrew-forman-delivers-keynote-abas-antitrust.
15. Debbie Feinstein, Bureau of Competition, Fed. Trade Comm'n, Have a plan to comply with the bar on horizontal interlocks (Jan. 23, 2017), available at: https://www.ftc.gov/enforcement/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks.
16. For example, in 2009, the FTC began investigating interlocking directors between Apple and Google. Google's entry into the smartphone market—with the introduction of its Android platform—put Google in direct competition with Apple, raising potential Section 8 concerns. The companies ultimately resolved the investigation by requiring the two overlapping directors to each resign from one of their respective board positions. See Statement of Fed. Trade Comm'n Chairman Jon Leibowitz Regarding the Announcement that Arthur D. Levinson Has Resigned from Google's Board (Oct. 12, 2009), available at http://www.ftc.gov/opa/2009/10/ google.htm.
Similarly, in 2016, David Drummond, a longtime Alphabet executive and director at Uber, proactively resigned from Uber's board after Alphabet's increasing investments in autonomous vehicles put it in direct competition with Uber's similar endeavors. See Mike Isaac, Uber and Alphabet's Rivalry Heats Up as Director Chooses Sides, N.Y. Times (Aug. 29, 2016), available at https://www.nytimes.com/2016/08/30/technology/uber-and-alphabets-rivalry-heats-up-as-director-chooses-sides.html.
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