Introduction
The Federal Trade Commission (FTC) has lost the first round of its challenge to Altria Group, Inc.’s (Altria) $12.8 billion acquisition of a 35 percent stake in JUUL Labs, Inc. (JLI). On February 17, 2022, an agency administrative law judge (ALJ) dismissed the agency’s complaint. In an opinion made public on February 24,1 the ALJ found the FTC staff had failed to prove that i) Altria had entered into an unlawful agreement with JLI not to compete as a condition of their transaction and ii) Altria’s acquisition of a minority stake in JLI substantially harmed competition.2 FTC staff has filed a notice to appeal the decision to the full Commission.
The ALJ decision is notable for four reasons:
- It broadens the potential application of the so-called “flailing firm” defense to two areas, non-competes and potential competition, where it has not been used historically. Specifically, the court deemed the merger and associated non-compete lawful in large part because i) Altria had been so unsuccessful that it had decided to exit the market for reasons apparently independent of the transaction, and ii) Altria could not be viewed as a viable potential competitor in light of its past failings.
- The decision emphasizes the importance of post-consummation evidence, which in this case suggested that competition increased after the transaction. The FTC was therefore forced into the difficult position of having to prove that prices, which declined in the roughly two-and-a-half years between signing and trial, would have declined even faster absent the transaction.
- Because the ALJ found that the FTC had failed to even establish its prima facie case, the decision may amplify progressive calls to reduce the burden the government faces in merger challenge, including by expanding or reworking the so-called structural presumption.
- The case, which will have been appealed to the full Commission and thence to a U.S. Court of Appeals if the Commission overturns the ALJ’s decision, may arrive in federal court shortly after the U.S. Supreme Court decides Axon v. FTC, in which the Court is likely to address constitutional challenges to the agency’s administrative litigation process. Altria/JLI also asserted, as an affirmative defense, that the FTC’s proceedings violate the United States Constitution.3
Arguments in Litigation
On April 1, 2020, the FTC filed an administrative complaint alleging that a series of agreements—which made the Marlboro cigarettes maker, Altria, the largest investor in the e-cigarette manufacturer, JLI—eliminated competition in the U.S. market for close-system electronic cigarettes and therefore violated Section 5 of the FTC Act, Section 1 of the Sherman Act, and Section 7 of the Clayton Act.4 The FTC alleged that the parties competed head-to-head between 2015 and 2018 but, following negotiations between the parties in the summer of 2018, Altria decided to stop competing with JLI and began pulling its MarkTen line of e-cigarettes from the market.5 The FTC alleged that Altria’s decision was the direct result of the parties’ negotiations because Altria agreed to exit from the e-cigarette market as part of the deal between the parties.6 In connection with its investment in JLI, the FTC also alleged that Altria agreed not to compete with JLI by developing or acquiring a competing e-vapor product while it maintained its investment in JLI.7 The FTC therefore alleged the parties had agreed i) to an unlawful agreement restraining trade in the U.S. market for e-cigarettes and ii) to an unlawful acquisition that substantially lessened competition in the same market.8 The FTC sought an order voiding all agreements related to the transaction and mandating Altria to divest its equity stake in JLI.9
According to the respondents, the purpose of Altria’s minority investment in JLI was to combine the strengths of both manufacturers: JLI’s popular design and satisfying e-vapor product and Altria’s regulatory expertise, mature distribution system, and know-how, all to help JLI, a Silicon Valley start-up, develop a competitive e-vapor product.10 Altria argued its decision to unwind its MarkTen business (controlled by its subsidiary Nu Mark) had been unrelated to the transaction and in part the result of Altria’s independent determination that it could not meet required U.S. Food and Drug Administration (FDA) approvals for its own pod-based product, MarketTen Elite.11 The parties also argued Altria’s exit did not substantially lessen competition because “cig-a-like” products like Altria’s MarkTen had failed to gain traction among consumers and were ineffective in converting traditional smokers to vapor products,12 and therefore MarkTen was not a competitive constraint on JLI.13 The parties also pointed to evidence that, after MarkTen’s exit, JLI continued to face fierce competition and actually lost share, and that prices declined in the marketplace.14 Finally, the parties argued that the parties’ additional agreements, including Altria’s agreement not to compete with JLI, were reasonably ancillary to the pro-competitive benefits of the transaction: “without [the non-compete], JLI could not have agreed to allow Altria access to JLI’s development plans and gained the full benefits of Altria’s regulatory expertise.”15
The ALJ's Initial Decision
Following a three-week trial, FTC ALJ Chappell ruled in favor of JLI and Altria.16
The ALJ ruled the FTC staff (also known in these proceedings as Complaint Counsel) had failed to show that the parties had entered an unlawful agreement as a condition of the transaction.17 In reaching its decision, the ALJ examined extensive evidence related to the parties’ course of dealing as well as evidence presented by Altria suggesting Altria had lawful alternative reasons for exiting the market.18 Viewed in its totality, the ALJ found insufficient evidence that Altria’s decision to exit the market was contrary to its own economic interest or suggestive of a conspiracy.19 Rather, the evidence suggested two non-pretextual reasons for Altria’s exit: MarkTen was losing money and had failed to assuage FDA concerns.20 The ALJ also credited evidence that Altria’s executives had begun to consider whether the companies should consider discontinuing certain products in response to an FDA warning.21
The ALJ also ruled the FTC staff had failed to show the parties’ agreement substantially lessened competition.22 Specifically, the ALJ could not find the transaction presumptively unlawful because FTC staff had failed to present strong economic evidence, including Herfindahl-Hirschman Index (HHI) calculations, demonstrating it would likely lead to undue concentration in the relevant market.23 The FTC’s own expert also acknowledged the absence of actual anticompetitive effects, as “overall prices are lower, overall output is higher, and market concentration is lower” than before the transaction.24 The ALJ also found that Altria/JLI faced strong competition from e-cigarette companies such as NJOY, LLC, Reynolds American, Inc., and Japan Tobacco Inc., which had managed to gain considerable market share only one year after the transaction.25
Finally, the ALJ found scant evidence the transaction and associated non-compete had eliminated future competition in the relevant market.26 The evidence showed that the process for obtaining FDA approvals for new e-vapor products was lengthy, costly, and strenuous.27 As the ALJ put it: “Under these circumstances, to conclude future products would likely obtain FDA approval and reach the market would require unacceptable and unfair speculation.”28 Even if Altria had been able to overcome these obstacles, the evidence suggested that Altria was years away from commercialization of a competitive e-vapor product.29 Because the evidence failed to establish any substantial anticompetitive effects of the non-compete, as required under the rule of reason, the ALJ also concluded it did not violate Section 1 of the Sherman Act.30
Conclusion
The FTC’s loss before the ALJ is likely to reverberate in other matters. Most significantly, the case suggests i) the agencies may face flailing firm defenses in a wider range of cases and ii) progressives may amplify calls to reduce the burden the government faces in merger cases. As Complaint Counsel has appealed the case to the full Commission, if the Commission were to overturn the ALJ’s decision, as seems possible given the Commission’s recent record of finding liability in nearly every case—which a recent Ninth Circuit judge indicated “[e]ven the [undefeated] 1972 Miami Dolphins would envy”31—there would be a further appeal to a U.S. Court of Appeals. The case therefore may arrive in federal court shortly after the U.S. Supreme Court decides Axon Enterprises v. FTC, which will be argued this fall.
[1] Press Release, Fed. Trade Comm’n, Administrative Law Judge Dismisses FTC Antitrust Complaint against Altria Group and JUUL Labs, Inc. (Feb. 24, 2022), https://www.ftc.gov/news-events/press-releases/2022/02/administrative-law-judge-dismisses-ftc-antitrust-complaint.
[2] See Altria Group, Inc., No. 9393 at 2 (F.T.C. Initial Decision Feb 23, 2022), https://www.ftc.gov/system/files/documents/cases/d09393altriainitialdecisionpublic.pdf.
[3] Altria’s Answer at 22, Altria Group, Inc., No. 9393 (F.T.C. filed July 27, 2020), https://www.ftc.gov/system/files/documents/cases/d09393_r_altria_answer_and_defenses_public599010.pdf.
[4] Complaint ¶¶ 1-13, 79, 82, Altria Group, Inc., No. 9393 (F.T.C. filed April 1, 2020), https://www.ftc.gov/system/files/documents/cases/d09393_administrative_part_iii_complaint-public_version.pdf.
[5] Id. ¶¶ 4-5, 55-56.
[6] Id. ¶¶ 4-5, 46-56.
[7] Id. ¶¶ 6-8, 22, 78.
[8] Id. ¶¶ 77-82.
[9] Id. at 16.
[10] Altria’s Answer, supra note 5, at 5-6, ¶¶ 4-5, 55-56.
[11] Id. at 1-3, ¶¶ 4-5, 46-56.
[12] Id. at 2-3, ¶¶ 6-8, 22, 78.
[13] Id. at 5-6; see also JUUL’s Answer at 3, Altria Group, Inc., No. 9393 (F.T.C. filed July 27, 2020), https://www.ftc.gov/system/files/documents/cases/d09393_r_jli_answer_and_defenses_public599011.pdf.
[14] Id. at 1-2.
[15] Altria’s Answer, supra note 5, at 5.
[16] J. Edward Moreno, Altria Says FTC Judge Tossed Challenge to $12.8B Juul Deal, Law360.com (Feb. 15, 2022), https://www.law360.com/articles/1465576/altria-says-ftc-judge-tossed-challenge-to-12-8b-juul-deal.
[17] Id. at 85.
[18] Initial Decision, supra note 2, at 61-74.
[19] Id. at 76-78.
[20] Id.
[21] Id. at 78-85.
[22] Initial Decision, supra note 2, at 104.
[23] Id. at 92.
[24] Id. at 257.
[25] Id. at 100-101.
[26] Id. at 105.
[27] Id. at 105-109.
[28] Id. at 108.
[29] Id. at 109-111.
[30] Id. at 112-113.
[31] Axon Enters., Inc. v. FTC, 986 F.3d 1173, 1187 (9th Cir. 2021).
