April 20, 2020

Antitrust: FTC Files Post-Deal Challenge to Minority Investment

Earlier this month, the FTC unanimously voted to challenge Altria Group’s acquisition of a 35% stake in e-cigarette vendor JUUL Labs.  This Jenner & Block memo says that the FTC’s action appears to be the first time that the agency has filed an administrative complaint seeking to unwind a minority investment in a competitor without also announcing a simultaneous settlement.  That means this may end up being the FTC’s first litigated case involving a minority stake. This except from the memo lays out the FTC’s allegations:

The FTC challenges the parties’ $12.8 billion equity deal and non-compete agreement. The Commission specifically alleges that the agreements constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Act and Section 5 of the FTC Act, and substantially lessened competition in violation of Section 7 of the Clayton Act.[

Altria is a leading producer and marketer of traditional tobacco products, such as Marlboro cigarettes. JUUL Labs, a startup company, popularized new e-cigarette products. By July 2018, JUUL had attained a reported value of $15 billion. According to the complaint, it was around that time that Altria sought to invest in JUUL. Prior to the deal, Altria and JUUL allegedly monitored each other’s prices and competed vigorously in the national market for e-cigarette sales. According to the FTC complaint, in late 2018 JUUL surpassed Altria and its ‘traditional tobacco’ competitors to claim the top market share.

In December 2018, Altria acquired a 35% stake in JUUL in exchange for approximately $12.8 billion, raising JUUL’s valuation to $38 billion. The deal contains a six-year non-compete provision, which JUUL allegedly sought to prevent Altria from competing with its own e-cigarettes. Weeks prior to the deal’s announcement, Altria discontinued its “MarkTen” e-cigarette product—a move the company claims to have made due to concerns about children vaping, but the FTC alleges was a result of the transaction.

The memo says that this action highlights the potential antitrust issues associated with minority investments in competitors – even those that don’t confer effective control. It cautions that in the current regulatory environment, businesses are “well-advised to consider the antitrust deal risk arising from such acquisitions, which may become the subject of an FTC administrative action if they tend to ‘substantially lessen competition’ under the Horizontal Merger Guidelines.”

John Jenkins