Background on the Deal

Nvidia is an American technology company that primarily designs graphics processing units (“GPUs”) and semiconductor chips for the gaming and professional markets, as well as the mobile computing and automotive markets. Arm is a British semiconductor chip design provider that is owned by the SoftBank Group (“SoftBank”) and licenses designs for chips to other companies, such as Nvidia. According to the Complaint, Arm’s technology is considered an “industry-described neutral, open licensing approach” that does not favor any one semiconductor manufacturer. Thus, because Arm licenses technology to Nvidia, this a vertical acquisition of a supplier by a manufacturer. On September 13, 2020, it was announced that Nvidia would buy Arm from SoftBank for $40 Billion, with SoftBank acquiring a 10 percent share in Nvidia.

FTC’s Objections to the Proposed Deal

The Complaint alleges that the merger would substantially lessen competition in violation of Section 7 of the Clayton Act¹ and thus should be blocked. The FTC argues that because Arm’s technology is a “de facto industry standard,” it is a critical input that enables competition between Nvidia and it competitors. Therefore, the merger would give Nvidia “the ability and incentive to use its control of this technology to undermine its competitors.” Thus, in the FTC’s view, the merger would allegedly “reduc[e] competition and ultimately result[] in reduced product quality, reduced innovation, higher prices, and less choice.” The Complaint also alleged that the acquisition would give Nvidia “access to the competitively sensitive information of Arm’s licensees,” many of whom are Nvidia’s competitors, as well as eliminate “innovations that Arm would have pursued but for a conflict with Nvidia’s interests.” The FTC alleges three worldwide markets as relevant:

• “High-Level Advanced Driver Assistance Systems for passenger cars. These systems offer computer-assisted driving functions, such as automated lane changing, lane keeping, highway entrance and exit, and collision prevention;”
• “DPU SmartNICs, which are advanced networking products used to increase the security and efficiency of datacenter servers;” and
• “Arm-Based CPUs for Cloud Computing Service Providers. These new and emerging products leverage Arm’s technology to meet the performance, power efficiency, and customizability needs of modern datacenters that provide cloud computing services. ‘Cloud computing’ refers to the increasingly popular computing business model in which large datacenter operators provide computing services remotely and/or directly offer computing resources for rent, as well as provide other support services to customers who can then run applications, host websites, or perform other computing tasks on the remote servers—i.e., ‘the cloud.’”

Unanimous Challenge to Vertical Transaction

Importantly, the FTC voted 4-0 to issue the Complaint, and the unanimity of the FTC is worthy of note. While bipartisan votes have been common at the FTC historically, the new agenda of FTC Chair Lina Khan has been criticized by her Republican counterparts and experts from outside of the agency. Further, the FTC recently voted 3-2 along party lines to rescind the “Vertical Merger Guidelines and Commentary,” drawing heavy criticism from the Republican commissioners. When it withdrew those guidelines, the FTC said it did so “to prevent further industry or judicial reliance on certain flawed provisions.” This suggests that Chair Khan and the Democratic members intend to more vigorously challenge vertical mergers, which historically have not often been challenged. However, the fact that the challenge to this vertical transaction garnered bipartisan support indicates that concern about vertical mergers is not necessarily a divisive, partisan issue.

The Complaint stands as the second attempt by the FTC to block a vertical merger this year, as the administrative proceeding over Illumina’s proposed acquisition of Grail, a cancer screening test designer, is still ongoing. A vertical merger is one between firms at different levels in the chain of distribution such as a manufacturer and its parts supplier. Because the purchaser and supplier do not compete, vertical mergers often do not diminish competition and therefore are rarely challenged by antitrust enforcers. In some circumstances, however, a vertical combination could make it harder for companies to compete with the merged entity. Traditionally, the kinds of harms that the government identifies in a vertical merger case are input foreclosure² (where other manufacturers depend on inputs from the supplier being acquired) and facilitating collusion (where the supplier theoretically could facilitate collusion between the merged manufacturer and other manufacturers using the supplier’s inputs). However, proving these types of harms is no easy task because courts often expect antitrust enforcers to show that the foreclosure from the vertical merger would lead to higher prices. For example, two years ago, the U.S. Court of Appeals for the D.C. Circuit rejected the Department of Justice’s (“DOJ”) efforts to block the vertical merger between AT&T and Time Warner because the government had not sufficiently proven anticompetitive harm from rising prices.³ The FTC will face similar problems in prosecuting its case here and in the Illumina proceeding. Chair Khan and her counterpart at the DOJ Antitrust Division have criticized antitrust doctrine applied in recent years that focuses primarily on quantitative price effects to prove anticompetitive harm, and the FTC may use these cases to establish that qualitative measures of anticompetitive effects can prove its case.

FTC Sticks with Administrative Complaint For Now

Despite authorizing the Complaint, the FTC did not authorize staff to seek a preliminary injunction in federal court to stop the merger. Often the FTC files a lawsuit in federal court seeking a temporary restraining order and preliminary injunction against the merger while the administrative litigation plays out.⁴ Because merger agreements often have drop-dead deadlines to complete the deal, this practice is common and often results in the main battle being fought at the federal preliminary injunction stage. In fact, FTC administrative litigation procedures mandate that if a preliminary injunction is denied, the administrative litigation is suspended, and the FTC must reevaluate whether an administrative complaint is in the public interest and should go forward.⁵

In the Nvidia/Arm case, however, the FTC opted not to seek a preliminary injunction. Federal courts often apply demanding standards of proof on the FTC to demonstrate anticompetitive harms. By avoiding preliminary injunction litigation, the FTC will not have to convince an independent federal court that the merger would be anticompetitive, and instead can rely on its own administrative litigation to resolve the matter in a proceeding scheduled to begin August 9, 2022. By relying solely on the administrative process, this may give the FTC more freedom to try to persuade the administrative law judge that it should be permitted to prove anticompetitive effects beyond quantifiable price effects. In addition, the FTC sometimes chooses not to seek a preliminary injunction because it believes that the transaction will not consummate for other reasons, such as the announced pending investigation by the European Commission (the “EC”). The FTC indicated in its announcement that it “cooperated closely with staff of the competition agencies in the European Union, United Kingdom, Japan, and South Korea.” When the EC conducts an investigation, the parties are prohibited from consummating the transaction until the investigation closes, which will happen here by March 15, 2022. Earlier this year, the FTC even sought a motion to dismiss its own request for a preliminary injunction in the Illumina matter when the EC announced that it had opened an investigation into the merger. This tactic creates uncertainty for the merging parties, as it allows the FTC to get “two bites at the apple.” If it turns out that the FTC’s sister regulators across the globe decide to clear the merger in their countries, the FTC could then still decide to seek an injunction to block the merger because of alleged anticompetitive effects in the U.S.

Looking Forward

The new leadership of the FTC seems intent on challenging more vertical mergers and trying to establish more favorable standards for such challenges. This case, however, shows that vertical mergers are not just a concern of the new majority. Rather, in the right case where a vertical merger threatens to foreclose the ability of competitors to obtain essential inputs to compete, the full FTC may support challenging the merger. However, even though the FTC has insulated its challenge in the administrative process for now, its theories of harm must eventually face the crucible of federal courts and risk suffering the same fate as those in the AT&T/Time Warner case.

*Rami Abdallah Rashmawi is a law clerk in our Washington DC office.

¹ 15 U.S.C. § 18.

² See Brown Shoe Co. v. United States, 370 U.S. 294 (1962).

³ United States v. AT&T, Inc., 916 F.3d 1029, 1031 (D.C. Cir. 2019).

⁴ See 15 U.S.C. § 53(b) (allowing the commission to seek an injunction if it has “reason to believe” that any person is “violating, or about to violate, any provision of law enforced by the Federal Trade Commission, and . . . that the enjoining thereof pending the issuance of a complaint by the Commission . . . would be in the interest of the public”).

⁵ 16 C.F.R. § 3.26(c) (“Following denial of [preliminary injunctive] court relief as specified in paragraph (b) of this section, respondents may move that the adjudicative proceeding be withdrawn from adjudication in order to consider whether the public interest warrants further litigation.”).