The U.S. Department of Justice Antitrust Division (DOJ) recently announced that two top executives of a talent and media agency resigned their positions on the board of directors for a competing business. They did so after the DOJ expressed concerns that their positions violated the Clayton Act’s prohibition on interlocking directorates. According to Acting Assistant Attorney General Richard Powers, the resignations will ensure the companies “continue to compete independently” in the entertainment markets. While government challenges to interlocking directorates are relatively rare (e.g., the DOJ has taken action in only two such additional matters since 1994), this latest action by the DOJ serves as a reminder of the importance of implementing an effective antitrust compliance program that considers the potential competitive implications of competitors having overlapping directors or officers. Moreover, in light of the Biden administration’s recent executive order directing a “whole-of-government” effort to enforce the antitrust laws, ensuring compliance with interlocking directorates law could help businesses minimize costly investigation risks, particularly in the context of a merger investigation.
What Are Interlocking Directorates?
Interlocking directorates occur when an individual simultaneously serves as a director or officer of two companies that are “by virtue of their business and location of operation, competitors.” The chief concern with such overlaps is that they will lead to improper exchanges of competitively sensitive information between competitors, or, in the worst-case scenario, unlawful coordination or conspiracies. While there is no global prohibition on interlocking directorates, Section 8 of the Clayton Act, 15 U.S.C. § 19, is a prospective-looking statute that makes such arrangements per se unlawful (meaning the interlock is unlawful regardless of any potential procompetitive justifications) when the following jurisdictional thresholds are met:
- The combined “capital, surplus, and undivided profits” of each of the corporations exceed $37,382,000 (for 2021, adjusted annually); and
- Each corporation participates in interstate commerce; and
- The corporations compete “by virtue of their business and location of operation . . . such that elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.”
Section 8, however, targets only the largest competitors whose activities create the greatest risk of anticompetitive harm. To that end, Section 8 exempts interlocks where the following safe harbors apply:
- The competitive sales of either corporation are less than $3,738,200 (for 2021, adjusted annually);
- The competitive sales of either corporation are less than 2% of that corporation’s total sales; or
- The competitive sales of each corporation are less than 4% of that corporation’s total sales.
Individuals and corporations both may violate Section 8, and actions may be brought privately, by the DOJ or by the Federal Trade Commission (FTC). As a practical matter, the primary remedy for Section 8 violations has been to enjoin the interlock and require the offending officer to resign one of their positions (typically their appointment to the board of directors of a company that competes with their primary employer). In addition, prospective injunctions on future interlocks may be granted, but only if there is a “cognizable danger of a reoccurring violation.” And while Section 8 only mentions “corporations,” in 2019, former assistant attorney general and head of the DOJ’s Antitrust Division, Makan Delrahim, noted that “[i]t is not clear from our review of the legislative history that Congress intended to limit the application of Section 8 solely to corporations,” given that “the harm [associated with interlocks] is the same regardless” of the corporate structure.
While not all interlocks are subject to Section 8, companies and individuals still can be liable for anticompetitive conduct that results from interlocks, such as information exchanges and horizontal competitor agreements that violate Section 1 of the Sherman Act. See United States v. eBay, Inc., 968 F. Supp. 1030, 1035 (N.D. Calif. 2013) (finding that an interlock that falls short of Section 8’s per se prohibition is not thereafter immunized from Section 1 violations that may have arisen from the interlock). In addition, the FTC occasionally has used its authority under Section 5 of the FTC Act to prosecute “unfair or deceptive acts or practices” that violate the “spirit and policy” of Section 8. See FTC v. Skybiz.com, Inc., 2001 WL 1673649, *5 (N.D. Okla. Aug. 2, 2001) (where the FTC relied upon the existence of an alleged, although later unsubstantiated, interlocking directorate to bolster its deceptive practices action).
Avoiding an Interlocking Directorates Problem
Businesses seeking to avoid unlawful interlocks should require interlocking directorate training as part of their broader antitrust compliance efforts. In addition, businesses and their in-house legal departments should consider implementing the following recommendations:
- Businesses generally should be aware whether they are subject to Section 8 scrutiny for potential interlocks. For 2021, Section 8 likely applies if the “capital, surplus, and undivided profits” of each of the corporations in question exceed $37,382,000. The threshold is adjusted annually in response to changes in gross national product (GNP).
- For businesses that exceed this basic jurisdictional threshold, it is prudent to keep internal records regarding their defined business segments, along with the revenues associated with each segment. For example, many businesses keep a list of their business segments and revenues using the North American Industry Classification System (NAICS) codes. While neither the antitrust enforcers nor private plaintiffs are required to accept these codes as the boundaries for economic market definition under Section 8, they provide a helpful tool for businesses to use in their compliance efforts.
- Before announcing or on-boarding a new board member, a business should confirm that the board member does not come from a competing business, such that their service would violate Section 8. To do this, the business will need to use its internal records and other resources to confirm what, if any, of its business segments compete with those of the business sending its officer to serve on the board, and whether one or more of the exemptions from Section 8 apply.
- Regardless of potential Section 8 issues, boards of directors should receive training regarding the antitrust risks associated with competitor communications, information exchanges and agreements. In some instances, it may be prudent for antitrust counsel to attend board and committee meetings to ensure that inappropriate topics are not discussed and to counsel in real time on antitrust issues that arise during discussions. In situations where Section 8 does not apply because the businesses are not large enough to meet the jurisdictional threshold, it may still be necessary to erect firewalls for certain board members if they come from businesses that compete against the board’s business.
- Similarly, a business that is allowing its officers to serve on the boards of other companies should confirm that the officer’s service will not create an unlawful interlock. The sending business also should provide its officer with guidance concerning appropriate board conduct.
- And finally, markets are constantly evolving. Businesses should update their internal records regarding their business segments regularly to take account of any changes. This is particularly important when mergers, acquisitions or other transactions alter a business’s competitive makeup. It is possible for an unlawful interlock to develop during a director’s term of service, at which point a director may need to resign their directorship mid-term.
The law surrounding interlocking directorates is nuanced and complex and involves a fact-intensive inquiry into the size and scope of the potentially competing business segments of the relevant parties. Businesses with questions or concerns relating to the antitrust implications of directors’ board service should consult with antitrust counsel.
The authors wish to thank summer associate Cassidy Segura Clouse for her contributions to this article.