The Fifth Circuit Court of Appeals recently issued a ruling on the important case of Illumina-Grail v. Federal Trade Commission. A unanimous 3-0 panel upheld the Federal Trade Commission (FTC)’s anti-merger intervention into genetics and biotech company Illumina’s attempted acquisition of cancer-screening start-up Grail. The decision cements the FTC’s latest anti-merger assault against public corporations, the consequences of which will undermine the rate of innovation in biotech development.
Despite the Fifth Circuit’s ruling, the decision was not a total win for the FTC. The legal basis for the FTC’s intervention was challenged by the judges, who remanded the case back to the Commission. Unfortunately, a day after the ruling, Illumina announced that it would divest from Grail, essentially closing the door on the matter.
When considering how the case was managed, there are several important issues to consider. First, the Fifth Circuit highlighted the FTC’s erroneous legal justification for rejecting Illumina’s vertical merger with Grail. The FTC Commissioners’ rebuttal failed to justify the basis for intervening in Illumina’s attempted acquisition, given the company’s open market pledge.
Secondly, the Fifth Circuit may have erred by treating the FTC differently than the Securities and Exchange Commission (SEC) in terms of their similar administrative law court (ALC) systems. In the Illumina case, the Court appeared to have ignored or applied a different legal reasoning from its prior ruling in Jarkesy v. SEC regarding the constitutionality of the FTC’s ALC.
Lastly, the forced divesture of Grail is further evidence of the FTC’s heavy-handed anti-merger crusade and unfairness of its ALC system. The Commission sacrificed the potentially life-saving, medical benefits that would have been gained from the Illumina-Grail merger just for the opportunity to break up a potential deal.
The dispute concerned a private biotech firm, Illumina, seeking to acquire its former subsidiary, Grail LLC, after the latter discovered a ground-breaking technology capable of early cancer detection. Specifically, Grail’s detection software proved capable of pinpointing more than 50 forms of cancer from a simple blood sample. Illumina had originally separated from Grail for the purpose of raising enough private capital needed to officially launch Grail’s revolutionary multi-cancer early detection (MCED) to market. Once it possessed enough venture capital, Illumina moved to vertically merge with Grail.
Vertical mergers are those that combine two compatible companies within the same industry with the goal to enhance the production of commercial goods. Such mergers bring together two companies involved at different phases of a supply chain. The idea is to generate synergy by combining the best of both companies.
Illumina’s attempted acquisition of Grail fits this model well. Had the deal been completed, Grail would have produced the product—MCEDs—for use by cancer patients. Illumina would have provided a specialized manufacturing system to rapidly produce MCEDs with their next generation sequencing (NGS). Illumina’s capital and sophisticated gene sequencing technology taken together with Grail’s pathbreaking cancer detection software would have set the combined company up to provide valuable medical technology to millions of Americans.
An Illumina-Grail merger may well have benefited countless patients at risk of developing cancer. For cancer treatment, time is of the essence, with the estimated US. cancer diagnoses amounting to 1.9 million in 2022. Early screening and subsequent treatment can help prevent a fatal outcome.
Rather than support this rare opportunity to save lives, the FTC sought to undermine Grail’s innovative breakthrough by invoking the Clayton Act. Illumina stood as the only company capable of drawing out the full market potential of Grail’s MCEDs. Forcing their divesture may result in the denial of lifesaving cancer screening for millions of at-risk patients who most likely do not have a clue about their sickness.
Another major issue with the FTC’s unwarranted Illumina-Grail intervention is how both the Fifth Circuit and the FTC’s own chief administrative law judge (ALJ) disapproved of it. While the Fifth Circuit’s ruling suggested the merger may “substantially lessen competition in this market,” they did not agree with the FTC’s crude means for intervening.
The judges detected a crucial flaw in the FTC’s anti-merger intervention with Illumina. Contrary to the FTC’s presumption of anti-competitive conduct, Illumina issued an “Open Offer” supply contract that made Grail’s MCED test widely available to all for-profit US oncology customers.
The FTC Commissioners jumped the gun by not properly considering Illumina’s pledge to avoid monopoly concerns by continuing to sell its DNA sequencing services to other firms without raising its prices. Additionally, Illumina offered to sign off on Grail’s contracts with rival cancer-screening developers.
“The Commission held Illumina to a rebuttal standard that was incompatible with the plain language of Section 7 of the Clayton Act, which only prohibits transactions that will ‘substantially’ lessen competition,” the Fifth Circuit ruling reads. “And this error pervaded the Commission’s analysis of the Open Offer, as the Commission invoked the wrong standard in five separate instances.”
The FTC Commissioners’ misapplied the Clayton Act by artificially raising the burden of proof for Illumina to overcome. The agency wrongfully believed that Illumina was required to prove that its Open Offer would nullify the anticompetitive effects of the Grail merger entirely. In actuality, Illumina needed only to show that the Open Offer satisfactorily allayed the proposed merger’s market effect to a degree that likely would not substantially lessen competition. This error likely resulted in the case being remanded to the FTC for reconsideration.
A final issue with the Illumina-Grail case stems from the disparate treatment of the FTC’s ALC from the SEC’s court. It seems very suspicious that the Fifth Circuit’s Illumina ruling upheld the notion of the FTC’s ALC possessing non-delegated legislative authority. This ignores the 2022 ruling that the SEC’s ALC wrongfully possessed that same unconstitutionally delegated authority in Jarkesy.
The Fifth Circuit denied the SEC’s nondelegated right to select the venue for pursuing its enforcement actions in court, while permitting the FTC this discretion for its highly similar antitrust enforcement actions.
The Fifth Circuit appeared at times to skirt around the subject of ALC review entirely, stating that it would “review the Commission’s decision, not that of the ALJ.” Yet, federal appeals courts are expected to consider details about every stage of an administrative law case, including decisions by the chief ALJ.
The Fifth Circuit also selectively invoked Humphrey’s Executor v. United States (1935) as binding precedent for how ALJs are insulated in Illumina. The judges mistakenly overlooked their prior acknowledgement of how Humprey’s Executor was constrained by the Supreme Court’s Myers v. United States(1926) case, having made this clear in its recent Jarkesy opinion.
When assessing the Illumina-Grail decision, we see some matters handled properly, while other key facts were gravely overlooked. The Fifth Circuit did well to highlight the FTC’s severe legal error, providing evidence of its flawed anti-merger approach. However, the court failed to acknowledge its prior decision against the SEC in Jarkesy with very similar standards to the FTC’s court.
This aversion resulted in the Fifth Circuit’s misapplication of the law to the FTC’s benefit. We also see that the FTC’s obsession with breaking up potential mergers outweighs consideration for the broader public good, even when it comes to breakthroughs in cancer detection. The Illumina Grail matter should be viewed as an unfortunate casualty of the FTC’s unprecedented market intervention.