Case: 23-60167 Document: 124 Page: 1 Date Filed: 06/12/2023
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`
`
`
`
`No. 23-60167
`
`IN THE
`United States Court of Appeals
`for the Fifth Circuit
`
`ILLUMINA, INC. AND GRAIL, INC.,
`Petitioners,
`
`v.
`FEDERAL TRADE COMMISSION,
`Respondent.
`
`
`
`
`Petition for Review of an Order of the Federal Trade Commission
`
`
`BRIEF FOR AMICI CURIAE INTERNATIONAL CENTER OF
`LAW AND ECONOMICS AND LAW AND ECONOMICS
`SCHOLARS ON BEHALF OF PETITIONERS
`
`Gene C. Schaerr
`
`
`Donald M. Falk
`SCHAERR | JAFFE LLP
`
`SCHAERR | JAFFE LLP
`1717 K Street NW, Suite 900 Four Embarcadero Center,
`Washington, DC 20006
`
` Suite 1400
`(202) 787-1060
`
`
`San Francisco, CA 94111
`gschaerr@schaerr-jaffe.com
`(415) 562-4942
`dfalk@schaerr-jaffe.com
`
`Counsel for Amici Curiae
`
`JUNE 12, 2023
`
`
`
`
`
`
`
`

`

`Case: 23-60167 Document: 124 Page: 2 Date Filed: 06/12/2023
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`
`
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`SUPPLEMENTAL STATEMENT OF INTERESTED PERSONS
`No. 23-60167
`Illumina, Inc. and Grail, Inc. v. Federal Trade Commission.
`
`Pursuant to 5th Cir. R. 29.2, the undersigned counsel of record
`
`hereby certifies that, in addition to the persons and entities listed in the
`
`Petitioners’ Certificate of Interested Persons, the following listed persons
`
`and entities as described in the fourth sentence of Rule 28.2.1 have an
`
`interest in the outcome of this case. These representations are made in
`
`order that the judges of this court may evaluate possible disqualification
`
`or recusal.
`
`Amici Curiae:
`
`International Center for Law and Economics
`
`Alden F. Abbott
`
`Brian Albrecht
`
`Thomas C. Arthur
`
`Dirk Auer
`
`Stephen N. Dnes
`
`Kenneth G. Elzinga
`
`Luke M. Froeb
`
`Harold Furchtgott-Roth
`
`
`
`
`
`

`

`Case: 23-60167 Document: 124 Page: 3 Date Filed: 06/12/2023
`
`Daniel J. Gilman
`
`Janice A. Hauge
`
`Justin (Gus) Hurwitz
`
`Keith N. Hylton
`
`William J. Kolasky
`
`Thomas A. Lambert
`
`Stan J. Liebowitz
`
`Abbott B. Lipsky, Jr.
`
`John E. Lopatka
`
`Daniel A. Lyons
`
`Geoffrey A. Manne
`
`Scott E. Masten
`
`Alan J. Meese
`
`Daniel P. O’Brien
`
`Jeffrey T. Prince
`
`Paul H. Rubin
`
`Vernon L. Smith
`
`Michael E. Sykuta
`
`Liad Wagman
`
`ii
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`

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`Case: 23-60167 Document: 124 Page: 4 Date Filed: 06/12/2023
`
`Jonathan W. Williams
`
`John M. Yun
`
`Counsel for Amici Curiae:
`
`Donald M. Falk
`
`Gene C. Schaerr
`
`Schaerr | Jaffe LLP
`
`
`
`
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`
`
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`iii
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`

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`Case: 23-60167 Document: 124 Page: 5 Date Filed: 06/12/2023
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`In accordance with Federal Rule of Appellate Procedure 26.1,
`
`amicus curiae International Center for Law and Economics states that it
`
`is not publicly traded and has no parent corporations. No publicly traded
`
`corporation owns 10% or more of amicus. The legal name of amicus
`
`International Center for Law and Economics is International Policy
`
`Network US d/b/a International Center for Law & Economics.
`
`
`
`
`
`
`
`
`
`/s/ Donald M. Falk
`Donald M. Falk
`
`Counsel of Record for Amicus Curiae
`International Center for Law
`and Economics
`
`
`
`iv
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`Case: 23-60167 Document: 124 Page: 6 Date Filed: 06/12/2023
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`TABLE OF CONTENTS
`
`IDENTITY AND INTEREST OF AMICUS CURIAE AND
`
`SUPPLEMENTAL STATEMENT OF INTERESTED PERSONS ............ i
`TABLE OF AUTHORITIES ..................................................................... vii
`SOURCE OF AUTHORITY TO FILE BRIEF ...................................... 1
`RULE 29(a)(4)(e) STATEMENT ................................................................ 2
`INTRODUCTION AND SUMMARY OF ARGUMENT ............................ 3
`ARGUMENT ............................................................................................... 7
`I.
`Differently. .................................................................................... 7
`A.
`Vertical Merger Cases. ........................................................ 7
`B.
`Incentives Given the Merger’s Efficiencies. ..................... 10
`1.
`Mergers ..................................................................... 13
`2.
`Consideration to Evident Benefits .......................... 15
`3.
`Actual Harm ............................................................. 17
`4.
`Analysis .................................................................... 20
`
`The FTC Did Not Undertake the Necessary Fact-
`Specific Examination of the Merged Firm’s
`
`Vertical and Horizontal Mergers Should Be Scrutinized
`
`Prima Facie Standards and the Government’s
`“Ultimate Burden” Differ
`in Horizontal and
`
`Presumptions Suitable to Horizontal Mergers
`Are Not Fit for the Analysis of Vertical
`
`The Commission Failed
`
`to Give Due
`
`The Commission’s Speculative Prima Facie
`Case Fails to Account for the Likely Risk of
`
`Evidence of Likely Procompetitive Effects
`Should Not Be Ignored at Any Stage of
`
`v
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`Case: 23-60167 Document: 124 Page: 7 Date Filed: 06/12/2023
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`Differential Treatment of Vertical and Horizontal
`
`In Theory, The Competitive Implications of
`
`II. The Open Offer Undercuts the Commission’s Prima Face
`Case and Its Disregard of Potential Remedies. ......................... 21
`III. The Economics of Vertical Integration Support the
`Mergers. ...................................................................................... 24
`A.
`Vertical Mergers Are Ambiguous. .................................... 25
`B. Empirical Research Establishes that Vertical
`Mergers Tend to Be Procompetitive In Practice. ............. 28
`C. New Research Does Not Undermine the Prevailing
`View of Vertical Mergers. .................................................. 31
`CONCLUSION ......................................................................................... 37
`APPENDIX A ............................................................................................ 38
`CERTIFICATE OF SERVICE .................................................................. 43
`CERTIFICATE OF COMPLIANCE ........................................................ 44
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`
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`
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`vi
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`Case: 23-60167 Document: 124 Page: 8 Date Filed: 06/12/2023
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`TABLE OF AUTHORITIES
`
`Page(s)
`
`Cases
`
`Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988) ................... 9
`Chicago Bridge & Iron Co. v. FTC, 534 F.3d 410 (5th Cir. 2008) ............ 8
`Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977) ....................... 9
`Dr. Miles Med. Co. v. John D. Park & Sons Co.,
`220 U.S. 373 (1911) ................................................................................. 9
`FTC v Penn State Hershey Medical Center,
`838 F.3d 327 (3d Cir. 2016) ................................................................... 15
`FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001) ...................... 14, 15
`FTC v. Wilh. Wilhelmsen Holding ASA,
`341 F. Supp. 3d 27 (D.D.C. 2018) ......................................................... 15
`Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,
`551 U.S. 877 (2007) ........................................................................... 9, 25
`New York v. Deutsche Telekom AG,
`439 F. Supp. 3d 179 (S.D.N.Y. 2020) .................................................... 21
`Otto Bock HealthCare N. Am., Inc., 168 F.T.C. 324 (2019) .................... 15
`Republic Tobacco v. North Atlantic Trading Co.,
`381 F. 3d 717 (7th Cir. 2004) .................................................................. 7
`United States v. AT&T Inc., 310 F. Supp. 3d 161 (D.D.C. 2018),
`aff’d, 916 F.3d 1029 (D.C. Cir. 2019) .............................................. 10, 20
`United States v. AT&T, Inc.,
`916 F.3d 1029 (D.C. Cir. 2019) .............................. 7-8, 10, 14, 15, 20, 21
`United States v. Baker Hughes,
`908 F.2d 981 (D.C. Cir. 1990) ..................................................... 8, 15, 24
`United States v. General Dynamics Corp., 415 U.S. 486 (1974) ............. 23
`
`vii
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`Case: 23-60167 Document: 124 Page: 9 Date Filed: 06/12/2023
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`United States v. H&R Block, Inc., 833 F. Supp. 2d 36
`(D.D.C. 2011) ............................................................................. 13, 14, 15
`United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967) ................. 9
`Statutes and Rules
`
`15 U.S.C. § 18, Clayton Act § 7, ......................................................... 13, 17
`Fed. R. App. P. 29(a)(2) .............................................................................. 1
`Fed. R. App. P. 29(a)(4)(e) .......................................................................... 2
`
`Other Authorities
`
`Phillip Areeda & Herbert Hovenkamp, Antitrust Law
`(4th ed. 2017). .......................................................................................... 5
`Henry Ogden Armour & David J. Teece, Vertical Integration
`and Technological Integration, 62 Rev. Econ. & Stat. 470
`(1980) .................................................................................................. 4, 25
`Dennis W. Carlton, Transaction Costs and Competition Policy,
`73 Int’l J. Indus. Org. 1 (2019) .......................................................... 4, 25
`Malcom B. Coate & Andrew N. Kleit, Exclusion, Collusion, and
`Confusion: The Limits of Raising Rivals’ Costs, FTC Bureau of
`Economics Working Paper No. 179 (1990) ...................................... 27-28
`James C. Cooper, et al., Vertical Antitrust Policy as a Problem of
`Inference, 23 Int’l. J. Indus. Org. 639 (2005) ............................. 28, 29-30
`Gregory S. Crawford, et al., The Welfare Effects of Vertical
`Integration in Multichannel Television Markets, 86
`Econometrica 891 (2018) ................................................................. 16, 35
`Dep’t of Justice, Antitrust Division and FTC,
`2020 Vertical Merger Guidelines (2020) ........................... 3-4, 11, 15, 27
`Dep’t of Justice, Antitrust Division & FTC, Horizontal Merger
`Guidelines (Aug. 19, 2010) .................................................................... 11
`
`viii
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`

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`Case: 23-60167 Document: 124 Page: 10 Date Filed: 06/12/2023
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`FTC, Competition and Consumer Protection in the 21st Century:
`FTC Hearing #3: Multi-Sided Platforms, Labor Markets, and
`Potential Competition (Oct. 17, 2018) (transcript), available at
`https://www.ftc.gov/system/files/documents/public_events/141
`3712/ftc_hearings_session_3_transcript_day_3_10-17-
`18_0.pdf. ............................................................................................ 35-36
`FTC, Competition and Consumer Protection in the 21st Century;
`FTC Hearing #5: Vertical Merger Analysis and the Role of the
`Consumer Welfare Standard in U.S. Antitrust Law, (Nov. 1,
`2018) (transcript), available at
`https://www.ftc.gov/system/files/documents/public_events/141
`5284/ftc_hearings_session_5_transcript_11-1-18.pdf. ................... 33, 35
`Justine Hastings, Vertical Relationships and Competition in
`Retail Gasoline Markets: Empirical Evidence from Contract
`Changes in Southern California: Reply, 100 Am. Econ. Rev.
`1227 (2010) ............................................................................................. 34
`Justine S. Hastings & Richard J. Gilbert, Market Power,
`Vertical Integration, and the Wholesale Price of Gasoline,
`33 J. Indus. Econ. 469 (2005) ........................................................... 33-34
`Francine Lafontaine, Vertical Mergers, in FTC, Competition
`and Consumer Protection in the 21st Century; FTC Hearing #5:
`Vertical Merger Analysis and the Role of the Consumer Welfare
`Standard in U.S. Antitrust Law, (Nov. 1, 2018) (presentation
`slides), available at
`https://www.ftc.gov/system/files/documents/public_events/141
`5284/ftc_hearings_5_georgetown_slides.pdf. .................................. 30-31
`Francine Lafontaine & Margaret E. Slade, Presumptions in
`Vertical Mergers: The Role of Evidence, 59 Rev. Indus. Org.
`255 (2021) ............................................................................................... 31
`Francine Lafontaine & Margaret Slade, Vertical Integration and
`Firm Boundaries: The Evidence, 45 J. Econ. Lit. 629, 677
`(2007) ...................................................................................................... 28
`
`ix
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`Case: 23-60167 Document: 124 Page: 11 Date Filed: 06/12/2023
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`Fernando Luco & Guillermo Marshall, The Competitive Impact
`of Vertical Integration by Multiproduct Firms, 110 Am. Econ.
`Rev. 2041 (2020) ............................................................................... 32-33
`Geoffrey A. Manne, Kristian Stout & Eric Fruits, The Fatal
`Economic Flaws of the Contemporary Campaign Against
`Vertical Integration, 69 Kansas L. Rev. 923 (2020) ............................. 32
`Daniel O’Brien, The Antitrust Treatment of Vertical Restraint:
`Beyond the Possibility Theorems, in Konkurrensverket,
`Swedish Competition Authority, Report: The Pros and Cons of
`Vertical Restraints 22, 36 (2008) ..................................................... 26-27
`Janusz A. Ordover, Garth Saloner & Steven C. Salop,
`Equilibrium Vertical Foreclosure, 80 Am. Econ. Rev. 127
`(1990) ...................................................................................................... 27
`David Reiffen & Michael Vita, Comment: Is there New Thinking
`on Vertical Mergers? 63 Antitrust L.J. 917 (1995) ..................... 4, 25, 26
`Patrick Rey & Jean Tirole, A Primer on Foreclosure, in 3
`Handbook of Industrial Organization 2145 (Mark Armstrong
`& Robert H. Porter, eds.) (2007) ........................................................... 22
`Michael A. Salinger, Vertical Mergers and Market Foreclosure,
`103 Q.J. Econ. 345 (1988) ...................................................................... 26
`Steven C. Salop, Revising the Vertical Merger Guidelines, in
`FTC, Competition and Consumer Protection in the 21st
`Century; FTC Hearing #5: Vertical Merger Analysis and the
`Role of the Consumer Welfare Standard in U.S. Antitrust Law,
`(Nov. 1, 2018) (presentation slides), available at
`https://www.ftc.gov/system/files/documents/public_events/141
`5284/ftc_hearings_5_georgetown_slides.pdf. ....................................... 32
`Steven C. Salop & David T. Scheffman, Cost-Raising Strategies,
`36 J. Indus. Econ. 19 (1985) .................................................................. 27
`
`x
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`

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`Case: 23-60167 Document: 124 Page: 12 Date Filed: 06/12/2023
`
`Christopher T. Taylor, et al., Vertical Relationships and
`Competition in Retail Gasoline Markets: Empirical Evidence
`from Contract Changes in Southern California: Comment,
`100 Am. Econ. Rev. 1269 (2010) ........................................................... 34
`Oliver Williamson, The Economic Institutions of Capitalism
`(1985) ........................................................................................................ 4
`Joshua D. Wright & Jan M. Rybnicek, US v. AT&T Time
`Warner: A Triumph of Economic Analysis, 6 J. Antitrust
`Enforcement 3 (2018) ............................................................................ 11
`Chenyu Yang, Vertical Structure and Innovation: A Study of the
`SoC and Smartphone Industries, 51 Rand J. Econ. 739 (2020) .......... 16
`John M. Yun, Vertical Mergers and Integration in Digital
`Markets, in The GAI Report on the Digital Economy (Joshua
`D. Wright & Douglas H. Ginsburg, eds., 2020) at 245 ........................ 30
`
`
`xi
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`

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`Case: 23-60167 Document: 124 Page: 13 Date Filed: 06/12/2023
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`
`
`
`IDENTITY AND INTEREST OF AMICUS CURIAE AND
`SOURCE OF AUTHORITY TO FILE BRIEF
`The International Center for Law & Economics (“ICLE”) is a
`
`nonprofit, nonpartisan, global research and policy center aimed at
`
`building the intellectual foundations for sensible, economically grounded
`
`policy. ICLE promotes the use of law and economics methodologies, and
`
`economic findings, to inform public policy, and has longstanding
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`expertise in antitrust law. 
`
`Amici also include 29 scholars of antitrust, law, and economics at
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`leading universities and research institutions across the United States.
`
`Their names, titles, and academic affiliations are listed in Appendix A.
`
`All amici have extensive expertise in antitrust law and economics, and
`
`several served in senior positions at the Federal Trade Commission or
`
`the Antitrust Division of the Department of Justice.
`
`Amici have an interest in ensuring that courts and agencies
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`correctly apply the standards for evaluating horizontal and vertical
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`mergers, and take into account the benefits commonly associated with
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`vertical mergers.
`
`
`
`Amici are authorized to file this brief by Fed. R. App. P. 29(a)(2)
`
`because all parties have consented to its filing.
`
`
`
`
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`

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`Case: 23-60167 Document: 124 Page: 14 Date Filed: 06/12/2023
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`RULE 29(a)(4)(e) STATEMENT
`Amici hereby state that no party’s counsel authored this brief in
`
`whole or in part; that no party or party’s counsel contributed money that
`
`was intended to fund the preparation or submission of the brief; and that
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`no person other than amicus or its counsel contributed money that was
`
`intended to fund the preparation or submission of the brief.
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`
`
`
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`2
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`Case: 23-60167 Document: 124 Page: 15 Date Filed: 06/12/2023
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`INTRODUCTION AND SUMMARY OF ARGUMENT
`The FTC’s decision to require Illumina to divest Grail rests on at
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`least two misguided premises. The first is that the same scrutiny applies
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`to both horizontal and vertical mergers. The second is that benefits
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`typically associated with vertical mergers do not apply here.
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`A horizontal merger combines firms that compete in the same
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`relevant market, which necessarily reduces the number of firms engaged
`
`in head-to-head competition and may eliminate substitutes. That
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`reduction inherently tends to increase prices, but the price effect may be
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`trivial. In addition, market responses (competitive repositioning or new
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`entry) or other benefits of the merger (savings in transaction and other
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`costs, enhanced investment incentives) may neutralize or offset the
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`impetus to higher prices. But because those benefits are not automatic
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`(and the reduction of direct competition is), they must be proven rather
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`than assumed if the merger otherwise poses a significant risk of
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`anticompetitive effects.
`
`A vertical merger, in contrast, combines firms with an upstream-
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`downstream (e.g., seller-buyer) relationship—that is, “firms or assets at
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`different stages of the same supply chain.” Dep’t of Justice, Antitrust
`
`3
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`

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`Case: 23-60167 Document: 124 Page: 16 Date Filed: 06/12/2023
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`Division and FTC, Vertical Merger Guidelines 1 (2020). Examples
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`include a manufacturer’s acquiring a distributor or a firm providing a
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`manufacturing input.
`
`The economic consequences of combining complements rather than
`
`substitutes are fundamentally different. Whereas the first-order effect of
`
`a horizontal merger is upward pricing pressure, the first-order effect of a
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`vertical merger is downward pricing pressure. Vertical mergers typically
`
`entail the elimination of double marginalization (“EDM”), which is akin
`
`to downward pricing pressure
`
`(and often considered alongside
`
`efficiencies). David Reiffen & Michael Vita, Comment: Is There New
`
`Thinking on Vertical Mergers? 63 Antitrust L.J. 917, 920 (1995). Vertical
`
`integration also typically internalizes externalities in research and
`
`development, resulting in greater investment. Henry Ogden Armour &
`
`David J. Teece, Vertical Integration and Technological Innovation, 62
`
`Rev. Econ. & Stat. 470 (1980). Like horizontal mergers, vertical mergers
`
`often confer other benefits such as operational and transactional
`
`efficiencies. Dennis W. Carlton, Transaction Costs and Competition
`
`Policy, 73 Int’l J. Indus. Org. 1 (2019); Oliver Williamson, The Economic
`
`Institutions of Capitalism 86 (1985).
`
`4
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`Case: 23-60167 Document: 124 Page: 17 Date Filed: 06/12/2023
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`Thus, while both types of mergers can create benefits from cost
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`savings, their intrinsic effects move in opposite directions: higher prices
`
`and less investment with horizontal mergers, and lower prices and more
`
`investment with vertical mergers.
`
`1.
`
`The FTC’s conclusion that the same scrutiny applies to
`
`horizontal and vertical mergers, Opinion 75, conflicts with precedent
`
`(and long-standing economic research). Courts and economists alike
`
`recognize that vertical integration typically is procompetitive, and it is
`
`widely accepted that vertical mergers and horizontal mergers should be
`
`evaluated under different presumptions. As the leading antitrust treatise
`
`puts it, “[i]n the great majority of cases no anticompetitive consequences
`
`can be attached to [vertical integration], and injury to competition should
`
`never be inferred from the mere fact of vertical integration.” 3B Phillip
`
`Areeda & Herbert Hovenkamp, Antitrust Law ¶ 755a (4th ed. 2017). That
`
`vertical mergers can be anticompetitive—under specific facts and
`
`circumstances—does not establish that vertical integration is likely to be
`
`anticompetitive (it is not) or that there is no useful antitrust distinction
`
`between vertical and horizontal mergers (there is).
`
`5
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`Case: 23-60167 Document: 124 Page: 18 Date Filed: 06/12/2023
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`The Commission did not simply presume that this vertical merger
`
`would be anticompetitive, however. It also discounted both the likelihood
`
`of efficiencies in vertical mergers and specific evidence of efficiencies
`
`associated with the already-consummated merger. As a result, the
`
`Commission did not properly assess the likely competitive effects of the
`
`merger.
`
`2.
`
`The Commission also disregarded evidence of a current and
`
`operative constraint on any potential anticompetitive effects of the
`
`merger. Illumina’s Open Offer appears to be contractually binding, and
`
`addresses the risk of foreclosure that is the primary competitive concern
`
`here. Proper consideration of the Open Offer should have shifted the
`
`Commission
`
`further away
`
`from presuming harm. Instead, the
`
`Commission gave it no weight.
`
`3. The existing standards for vertical merger scrutiny are
`
`informed by, and consistent with, economic research regarding vertical
`
`mergers and other forms of vertical integration. That research shows that
`
`the Commission was wrong to hold that vertical and horizontal mergers
`
`should be analyzed identically, and wrong to disregard the well-
`
`established benefits of vertical integration. While economic theory
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`6
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`Case: 23-60167 Document: 124 Page: 19 Date Filed: 06/12/2023
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`indicates that vertical mergers can be anticompetitive, the weight of the
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`empirical evidence overwhelmingly indicates that they tend to be
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`procompetitive or competitively neutral. Indeed, the large majority of
`
`vertical mergers that have been studied have been found to be
`
`procompetitive or benign. That suggests that case-specific evidence is
`
`paramount in assessing both potential anticompetitive effects and
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`countervailing pro-consumer efficiencies.
`
`ARGUMENT
`I. Vertical and Horizontal Mergers Should Be Scrutinized
`Differently.
`A. Prima Facie Standards and the Government’s
`“Ultimate Burden” Differ in Horizontal and Vertical
`Merger Cases.
`
`Courts have long recognized that horizontal and vertical mergers
`
`are categorically different. “As horizontal agreements are generally more
`
`suspect than vertical agreements,” courts are “cautious about importing
`
`relaxed standards of proof into vertical agreement cases.” Republic
`
`Tobacco v. North Atlantic Trading Co., 381 F. 3d 717, 737 (7th Cir. 2004).
`
`Thus, for vertical mergers, “unlike horizontal mergers, the government
`
`cannot use a shortcut to establish a presumption of anticompetitive
`
`effect.…” United States v. AT&T, Inc., 916 F.3d 1029, 1032 (D.C. Cir.
`
`7
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`Case: 23-60167 Document: 124 Page: 20 Date Filed: 06/12/2023
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`2019) (“AT&T II”). In a vertical merger case, “the government must make
`
`a fact-specific showing that the proposed merger is likely to be
`
`anticompetitive,” and the “ultimate burden of persuasion… remains with
`
`the government at all times.” Id. (emphasis added; cleaned up).
`
`As the ALJ’s Initial Decision (ID) recognized (at 132), the burden-
`
`shifting approach is not bound by any specific, sequential form. Then-
`
`Judge Thomas stressed in United States v. Baker Hughes, 908 F.2d 981,
`
`984 (D.C. Cir. 1990), that “[t]he Supreme Court has adopted a totality-of-
`
`the-circumstances approach…, weighing a variety of factors to determine
`
`the effects of particular transactions on competition.” As the ALJ aptly
`
`put it, the Baker Hughes “‘burden-shifting language’” provides “‘a flexible
`
`framework rather than an air-tight rule’”; “in practice, evidence is often
`
`considered all at once and the burdens are often analyzed together.” ID
`
`132 (quoting Chicago Bridge & Iron Co. v. FTC, 534 F.3d 410, 424-24 (5th
`
`Cir. 2008)).
`
`The differential treatment of vertical and horizontal mergers
`
`parallels the Supreme Court’s vertical restraints jurisprudence. The
`
`potential anticompetitive effects of vertical restraints are similar to those
`
`8
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`Case: 23-60167 Document: 124 Page: 21 Date Filed: 06/12/2023
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`posed by vertical mergers, as both obtain between firms at different levels
`
`of the supply chain.
`
`Over time, the Supreme Court has eliminated per se condemnation
`
`for vertical restraints. In 1977, the Court rejected per se illegality for
`
`vertical non-price restraints, Cont’l T.V., Inc. v. GTE Sylvania Inc., 433
`
`U.S. 36, 49, 52 n.19, 58 (1977) (overruling United States v. Arnold,
`
`Schwinn & Co., 388 U.S. 365 (1967)), later confirming that “a vertical
`
`restraint is not illegal per se unless it includes some agreement on price
`
`or price levels.” Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 735-
`
`36 (1988). Eventually, the Court repudiated the last vertical per se
`
`prohibition—of vertical minimum price restraints. Leegin Creative
`
`Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (overruling Dr.
`
`Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911)). In these
`
`decisions, the Court emphasized that any departure from the evidence-
`
`specific rule of reason “must be based on demonstrable economic effect,
`
`rather than . . . upon formalistic line drawing.” Bus. Elecs., 485 U.S. at
`
`724.
`
`These decisions reflect a nearly categorical repudiation of
`
`presumptions of illegality in dealings involving entities at different levels
`
`9
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`Case: 23-60167 Document: 124 Page: 22 Date Filed: 06/12/2023
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`of the supply chain. Here, however, the Commission took the opposite
`
`approach, presuming anticompetitive effect while rejecting the
`
`significance of rigorously established benefits in a way that approaches a
`
`per se standard. This Court should reject that departure from sound law
`
`and economics.
`
`B. The FTC Did Not Undertake the Necessary Fact-
`Specific Examination of
`the Merged Firm’s
`Incentives Given the Merger’s Efficiencies.
`The FTC had to show that Illumina has a greater incentive to
`
`foreclose rivals following—and because of—the merger. Instead, the
`
`Commission adopted a standard of review that elides the requirement
`
`that, in a vertical merger case where there is “no presumption of harm in
`
`play,” “the government must make a fact-specific showing that the
`
`proposed merger is likely to be anticompetitive” both at the prima facie
`
`stage and in the final analysis. United States v. AT&T Inc., 310 F. Supp.
`
`3d 161, 192 (D.D.C. 2018) (“AT&T I”), aff’d, 916 F.3d 1029 (D.C. Cir.
`
`2019); see AT&T II, 916 F.3d at 1032.
`
`To be sure, there is little recent case law regarding the standard of
`
`review for vertical mergers because the federal antitrust agencies have
`
`rarely challenged,
`
`let alone
`
`litigated, vertical acquisitions. The
`
`10
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`

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`Case: 23-60167 Document: 124 Page: 23 Date Filed: 06/12/2023
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`Department of Justice challenge to the AT&T/Time Warner merger
`
`marked “the first time in 40 years that a court has heard a fully-litigated
`
`challenge to a vertical merger.” Joshua D. Wright & Jan M. Rybnicek,
`
`US v. AT&T Time Warner: A Triumph of Economic Analysis, 6 J.
`
`Antitrust Enforcement 3 (2018).
`
`Nevertheless, up to now, the agencies have considered likely
`
`structural benefits, transactional efficiencies, and potential remedies,
`
`along with potential harms, in toto and on net, in assessing a merger’s
`
`likely competitive impact. Hence, the Vertical Merger Guidelines—
`
`jointly adopted by the FTC and the Antitrust Division of the Department
`
`of Justice in June 2020 (although withdrawn by the FTC while this case
`
`was pending)—state that “[t]he Agencies do not challenge a merger if
`
`cognizable efficiencies are of a character and magnitude such that the
`
`merger is unlikely to be anticompetitive in any relevant market.” Vertical
`
`Merger Guidelines at 11. Even under the Horizontal Merger Guidelines,
`
`“[t]he Agency will not challenge a merger if cognizable efficiencies are of
`
`a character and magnitude such that the merger is not likely to be
`
`anticompetitive.” Dep’t of Justice, Antitrust Division & FTC, Horizontal
`
`Merger Guidelines § 10 (Aug. 19, 2010).
`
`11
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`Case: 23-60167 Document: 124 Page: 24 Date Filed: 06/12/2023
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`But here the Commission did not seriously account for likely
`
`efficiencies or other benefits that may be derived from practices
`
`inconsistent with foreclosure. Put simply, Illumina’s ability to profit from
`
`the merger without foreclosing rivals reduces its incentive to foreclose.
`
`Although the foreclosure incentive may remain on some margins, the
`
`question of the greater incentive cannot be resolved without assessing
`
`the incentives against foreclosure as well as those for it.
`
`Illumina’s post-merger incentive to foreclose rivals may be
`
`constrained by:
`
`● its interest in revenue realized from a broader array of
`
`sequencing clients than the relatively few engaged in multi-
`
`cancer early detection (MCED) research;
`
`● the procompetitive—and pro-consumer—cost advantages it is
`
`likely to realize from integration with Grail;
`
`● the relatively low risk of entry by close substitutes for Galleri in
`
`the near, or even foreseeable, future;
`
`● the Open Offer;
`
`● reputational or transactional harms that may result from
`
`refusing to deal with firms in its industry; and
`
`12
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`Case: 23-60167 Document: 124 Page: 25 Date Filed: 06/12/2023
`
`● the
`
`litigation and regulatory risks attending attempted
`
`foreclosure.
`
`But the FTC presumed away these and other factors that could mitigate
`
`the risk of harm.
`
`1. Presumptions Suitable to Horizontal Mergers Are
`Not Fit for the Analysis of Vertical Mergers
`The Commission maintains that the same scrutiny applies to
`
`efficiencies claims in vertical and horizontal transactions. To justify this
`
`conclusion, the Commission declined to “simply take managers’ word for
`
`efficiencies without independent verification, because then the efficiency
`
`defense ‘might well swallow the whole of Section 7,’ as managers could
`
`present large unsubstantiated efficiencies claims and courts would be
`
`hard pressed to find otherwise.” Opinion 75-76 (quoting United States v.
`
`H&R Block, Inc., 833 F. Supp. 2d 36, 91 (D.D.C. 2011). But this is a non
`
`sequitur, and wrong for three reasons.
`
`First, the Commission need not (and the ID did not) “simply take
`
`managers’ word for efficiencies.” As the Initial Decision noted, courts and
`
`academic authorities both recognize procompetitive effects, including
`
`efficiencies, generally observed with vertical integration. ID 133-35, 196.
`
`13
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`

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`Case: 23-60167 Document: 124 Page: 26 Date Filed: 06/12/2023
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`See also ID 135 (noting case-specific evidence regarding research and
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`development efficiencies, EDM, and the acceleration of access).
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`Second, to support its rejection of competitive benefits, the FTC
`
`continued to conflate the legal standards for horizontal and vertical
`
`mergers, relying only on serial string citations to horizontal merger
`
`cases. Opinion 75-76. Because a vertical merger puts direct, downward
`
`pressure on prices and upward pressure on complementary
`
`investments—the inverse of horizontal merger effects—the reliance on
`
`horizontal cases highlights the Commission’s failure to recognize the
`
`fundamental difference between horizontal and vertical integration. See
`
`AT&T II, 916 F.3d at 1032.
`
`Third, ignoring that distinction, and the resulting need for a “fact-
`
`specific showing” of the likely anticompetitive effects of a vertical merger,