Based on recent announcements and remarks of U.S. Department of Justice Antitrust Division (DOJ) leadership, it is clear that Section 8 of the Clayton Act, prohibiting “interlocking directorates,” is an enforcement priority after several years of little to no action.
Understanding the focus of the renewed federal enforcement push and the scope of Section 8 should be a priority for any entity with individuals serving as officers or directors for companies that may be deemed to be competitors. In addition, adding Section 8 screening to existing antitrust compliance programs and taking Section 8 into account when structuring business arrangements are also important, particularly for private equity firms with individuals serving as officers or directors for multiple portfolio companies.
Understanding the Focus of the New Section 8 Enforcement Wave
On Oct. 19, 2022, DOJ announced that seven individuals (many with apparent ties to private equity and other investment entities) had resigned from the boards of five companies in response to DOJ’s concerns that their service potentially violated Section 8. DOJ called the announcement “the first in a broader review of potentially unlawful interlocking directorates,” across all industries, signaling that more companies have received or may receive warning letters and requests for information relating to interlocks. The announcement aligns with press reports that several private equity firms and their portfolio companies have also received inquiries from DOJ relating to interlocks.
Although it was enacted more than a century ago, neither DOJ nor the Federal Trade Commission (FTC), which also can bring actions under Section 8, have focused on the statute as an enforcement tool. In April 2022, however, Assistant Attorney General for Antitrust Jonathan Kanter signaled a change in DOJ’s approach to Section 8, saying that “[c]ompetitors sharing officers or directors further concentrates power and creates the opportunity to exchange competitively sensitive information and facilitate coordination — all to the detriment of the economy and the American public.” Given that both DOJ and the FTC recently signaled that they are targeting private equity for increased enforcement, and that it is not uncommon for private equity firms to place multiple representatives or a single individual on the boards or in the officer ranks of portfolio companies that may be deemed competitors of one another, it is not a surprise that private equity seems to be on the front line of this initial enforcement wave.
As part of its effort to revive Section 8 enforcement, DOJ also indicated its intention to affirmatively seek out information relating to interlocks (for example, in U.S. Securities and Exchange Commission filings and companies’ own public statements), instead of relying on information that comes in the door when parties file premerger notifications under the Hart-Scott-Rodino Act. “For too long, our Section 8 enforcement has essentially been limited to our merger review process,” Kanter said in the same April 2022 remarks. “We are ramping up efforts to identify violations across the broader economy, and we will not hesitate to bring Section 8 cases to break up interlocking directorates.”
Understanding the Scope of — and Exceptions to — Section 8
The purpose of Section 8 is to stop antitrust violations before they occur by eliminating the potential for competitors to coordinate business conduct through common officers and directors.
Section 8 provides that “[no] person shall, at the same time, serve as a director or officer in any two corporations” that are “competitors” by “virtue of their business and location of operation,” such that they could violate Section 1 of the Sherman Act if they agreed not to compete, either expressly through coordination of business conduct or tacitly via an exchange of competitively sensitive information, for example. The relief available to DOJ and the FTC in Section 8 cases is an injunction to eliminate the interlock.
Even if an arrangement appears to potentially violate Section 8 based on the basic elements of the statute, it is important to remember that there are well-defined exceptions to Section 8 liability.
- First, the statute does not apply to financial institutions, such as banks, banking associations and trust companies.
- Second, a director or officer may have up to one year from the “event causing ineligibility” to vacate a position that creates an interlock.
- Third, the statute does not apply in situations where the competition among the relevant entities is “de minimis.” Competition is deemed “de minimis” if it satisfies any of the following three tests:
- The competitive sales of either corporation are less than $4,103,400 (adjusted annually for inflation).
- The competitive sales of either corporation are less than 2% of that corporation’s total sales.
- The competitive sales of each corporation are less than 4% of that corporation’s total sales.
Although the Section 8 elements and exceptions seem relatively straightforward, an uptick in enforcement actions may yield some additional certainty around the more unsettled aspects of the statute, depending on the direction DOJ and the FTC wish to take and the willingness of courts to defer to the agencies’ interpretations.
- Single vs. Multiple Officers or Directors. In the past, the agencies have pursued actions where an interlock involves a single individual serving as an officer or director of multiple competitor corporations. (For example, all of the recent resignations highlighted by DOJ apparently involved situations in which a single individual occupied roles at multiple competitor corporations.) Whether DOJ or the FTC will seek to enforce Section 8 where a single entity appoints multiple employees or representatives to competitor corporations to serve as officers or directors remains to be seen, although DOJ has advanced this position in the past.
- Incorporated Entities vs. Other Entities. On its face, Section 8 covers interlocks among corporations, not partnerships, limited liability companies or other types of entities. Applying Section 8 to interlocks among non-incorporated entities is another way DOJ or the FTC could seek to expand the scope of Section 8.
- Definition of “Competitors” and “Competitive Sales.” Determining whether the relevant entities compete and whether competition among the relevant entities is de minimis based on “competitive sales” may involve complex questions focused on the corporate and commercial relationships among the relevant parties, and the nature of the industry. Whether DOJ or the FTC takes a conservative or novel approach to defining competitors and competition also may influence the reach of Section 8 enforcement.
Incorporating Section 8 Risk Into Business Strategy and Compliance Program Design
When structuring business arrangements in the current environment, it will be prudent for parties to consider Section 8, given that the form of the relevant entities, governance rights, and the present or potential competitive relationship among the parties will determine the level of potential enforcement risk. For instance, in drafting forward-looking agreements, agreeing on what will happen at the end of the one-year grace period if a problematic interlock arises will allow parties to proceed with greater certainty as opposed to responding to a situation with no clear plan.
With respect to arrangements already in place, collaborating with antitrust counsel to assess the specific risk associated with individual interlocks makes sense, taking into account the likely positions of DOJ and the FTC with respect to whether the parties are competitors and in connection with the calculation of competitive sales. In addition, it is important that companies supplement current antitrust compliance programs with Section 8 guidance in order to identify or prevent problematic interlocks, and, more generally, to sensitize individuals serving as officers or directors for competitor entities to antitrust risk arising from what may be perceived as improper coordination of business conduct and exchange of competitively sensitive information.
If you have questions or wish to discuss strategies for managing Section 8 enforcement risk, please reach out to our authors, or to our other antitrust team members: Amy Manning, Angelo Russo, Sarah Zielinski and Nick Giles.