DOJ Launches Enforcement Initiative Against “Interlocking Directorates”

Wilson Sonsini Goodrich & Rosati

In what appears to be a significant expansion of its antitrust enforcement efforts, the U.S. Department of Justice (DOJ) issued letters to multiple public companies, investors, and individuals this week, stating it may bring lawsuits against them for maintaining “interlocking directorates” in violation of Section 8 of the Clayton Antitrust Act (15 U.S.C. § 19).

An “interlocking directorate” occurs when the same individual or entity sits on the board of two competitors. The interlock can be direct, such as when the same individual sits on the board of two competing companies. The interlock can also be indirect, such as when the same private equity firm appoints different representatives to sit on the boards of competing companies.

Historically, the Section 8 prohibition on interlocking directorates has been enforced primarily in the context of merger reviews under the Hart-Scott-Rodino Antitrust Act of 1976, as amended (15 U.S.C. §18a) (the HSR Act). Under the HSR Act, parties must formally notify the DOJ and Federal Trade Commission (FTC) of certain mergers and acquisitions prior to closing, giving the agencies the opportunity to review information about the notifying parties.

What is most striking about the letters sent out this week is that the DOJ has begun to proactively search for potential Section 8 violations outside of a merger review, following through on statements it made earlier this year.1 The threatened claims are based on information that the DOJ culled from public sources such as U.S. Securities and Exchange Commission filings and earnings calls. The DOJ’s initiative represents a significant expansion of its efforts to identify and take action against potential violations of Section 8. Any individual or entity that sits on the board of competing corporations (including private equity or other investors who have different individual representatives serving as directors of competing corporations), or any corporation that has a board member or officer who is also a director or officer of a competitor, should immediately seek antitrust advice on how to remedy a potential violation before it is targeted by the DOJ.

Background. The U.S. Congress passed the prohibition on interlocking directorates as part of the Clayton Antitrust Act of 1914. The purpose of Section 8 is to protect competition by making sure that companies do not coordinate their competitive activities through a common director or officer. The DOJ and the FTC each have the ability to enforce Section 8 but have done so only sporadically since the Clayton Act was first implemented. There is little caselaw interpreting Section 8 due in part to a lack of enforcement and in part because companies usually remedy violations once they are identified.2

The Statute. Under Section 8, an interlocking directorate exists when a “person” serves as an officer or a director of two “corporations” that are “competitors.” 

  • Person. The term “person” is broadly defined to include individuals, corporations, and unincorporated entities such as limited partnerships or limited liability companies. The DOJ takes the position that a limited partnership, such as a private equity firm, can violate the statute if it appoints different representatives to serve on the boards of competitors. Take for example a private equity group that invests in multiple portfolio companies in a single industry. If the private equity group designates Employee A to serve on the board of Portfolio Company and Employee B to serve on the board of Portfolio Company’s competitor, then the DOJ could view this arrangement as an illegal interlock unless an exception applies.
  • Corporation. The term “corporation” includes both public and private companies. The term also includes foreign corporations that have U.S. operations. However, Section 8 does not apply to banks, banking associations, or trust companies.
  • Competitors. The term “competitors” looks to the nature of the business and geographic location of operation of the two corporations. The statute states that two corporations are competitors if the “elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.”3

Safe Harbors. Parties are strictly liable for a violation of Section 8. This means that there does not have to be actual competitive harm that results from an interlocking directorate. However, there are several “safe harbor” exemptions that if applicable can protect parties from liability.

  1. Section 8 does not apply to any corporation that has less than $41,034,000 in total capital, surplus, and undivided profits.4
  2. Section 8 also does not apply if:
    1. the competitive sales of either corporation are less than $4,103,400;
    2. the competitive sales of either corporation are less than two percent of the corporation’s total sales; or
    3. the competitive sales of each corporation are less than four percent of the corporation’s total sales.5

Remedy for a Violation. Parties are strictly liable if the Section 8 jurisdictional thresholds are met, and no exception applies. The remedy for a Section 8 violation is injunctive relief. Parties can remedy a violation by eliminating the interlock—that is, they can give up one or more board seats that create the interlock. The DOJ and the FTC are not able to seek civil penalties for a violation. Private plaintiffs, however, may attempt to obtain monetary damages for Section 8 violations.

Lessons from This Week. The DOJ is now actively searching through publicly available information to identify potential Section 8 violations. We recommend the following to minimize the risk of a Section 8 violation:

  • Include antitrust in your corporate compliance policy and send reminders to your officers and directors at least once a year.
  • Periodically ask your board members to list any other companies where they sit as a director or where their employer has other representatives sitting on the board.
  • Keep in mind that circumstances may change so that an entity that was not previously a competitor could become one—for instance, if your company expands into a new line of business or acquires another company.
  • Consult antitrust counsel before appointing representatives to multiple boards in the same industry.

[1] Jonathan Kanter, Assistant Attorney General, Dept. of Justice, Opening Remarks at 2022 Spring Enforcers Summit (Apr. 4, 2022) (“For too long, our Section 8 enforcement has essentially been limited to our merger review process. 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.”); see also Richard A. Powers, Deputy Assistant Attorney General, Dept. of Justice, Speech: Effective Antitrust Enforcement: The Future Is Now (June 3, 2022) (“Section 8, which prohibits interlocking directorates, helps prevent antitrust crimes before they occur. That’s because interlocking directorates can facilitate the exchange of competitively sensitive information and coordination between competing companies.”).

[2] Debbie Feinstein, Have a plan to comply with the bar on horizontal interlocks, FTC (Jan. 23, 2017), (“The Commission has generally relied on self-policing to prevent Section 8 violations, and as a result, litigated Section 8 cases are rare (with none construing the 1990 amendments)”).

[3] One court to address the issue set out three relevant considerations: “(1) the extent to which the industry and its customers recognize the products as separate or competing; (2) the extent to which production techniques for the products are similar; and (3) the extent to which the products can be said to have distinctive customers.” TRW, Inc. v. FTC, 647 F.2d 942, 946 (9th Cir. 1981).

[4] The monetary thresholds under the Clayton Act are adjusted by the FTC in January of each year based on changes in gross national product. The monetary thresholds included in this alert are for calendar year 2022.

[5] The term “competitive sales” means the gross revenues for all products and services sold by one corporation in competition with the other, determined on the basis of annual gross revenues for such products and services in that corporation’s last completed fiscal year.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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