Home The Role of the State Antitrust and Competition How the Illumina/Grail Opinion Updates Case Law on Vertical Mergers and “Litigating...

How the Illumina/Grail Opinion Updates Case Law on Vertical Mergers and “Litigating the Fix”

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Steven C. Salop analyzes the Fifth Circuit Court’s opinion accepting the Federal Trade Commission’s suit to block Illumina’s acquisition of Grail. The ruling sheds light on how courts may approach vertical merger analysis and “litigating the fix” in the future, and what this may mean for the Merger Guidelines’ approach to vertical mergers.

Illumina is a biotech firm that manufactures and sells next-generation sequencing (“NGS”) platforms for DNA sequencing. In 2015, Illumina created a subsidiary called Grail with the goal of creating a multi-cancer early detection (“MCED”) test using Illumina’s NGS platform to identify, in a single blood sample, the possible presence of multiple forms of cancer. In 2017, it spun off Grail into a separate company to reduce its risk: Illumina brought in outside investors and diluted its own stake to 12% ownership. In 2020, it agreed to re-purchase a 100% stake in the spun-off company. Perhaps ironically, this re-acquisition required Illumina to file a merger application.

The Federal Trade Commission itself then investigated this vertical merger. The FTC filed an administrative complaint at the end of March 2021 that the re-acquisition was illegal. However, the FTC’s independent administrative law judge consummated the merger in August 2021 and rejected the complaint in September 2022. FTC staff appealed to the FTC’s commissioners, who issued their opinion in March 2023, concluding that the merger was likely to substantially lessen competition in the market for the research, development, and commercialization of MCED tests. Illumina appealed the Commission’s decision to the 5th Circuit Court. Meanwhile, Grail was still held separate from Illumina as a result of the review by the European Commission which also found that the acquisition was anticompetitive. 

The 5th Circuit court opinion, filed on December 15, 2023, accepted the FTC’s vertical merger analysis, concluding that the re-acquisition was illegal. By contrast, as discussed below, the court rejected the Commission’s approach to “litigating the fix” in favor of the approach proposed by former Commissioner Christine Wilson, who stepped down last March, in her concurring opinion on the matter. As a result, the court vacated the FTC decision and remanded the case back to the Commission for re-evaluation. However, it is noteworthy that based on the factual evidence discussed in the majority opinion, Wilson concluded that the transaction was likely to lessen competition substantially.

Based on that factual evidence showing the efficiency claims either did not require a merger, or were unverified or unquantified, it seemed likely that the Commission could reach the same conclusion on remand applying the court’s preferred standard. However, as a result of the court’s decision to allow the FTC to decide how to move forward, Illumina announced that it will not appeal but instead will divest its position in Grail.

Nevertheless, it is still useful to examine the court’s antitrust analysis because it will guide future courts and the antitrust enforcement agencies.

Ability and Incentive to Foreclose

The FTC analyzed the merger in two ways. The FTC’s decision first applied an “ability and incentive” analysis to the foreclosure concerns, an analysis that is also contained in the just-issued 2023 Merger Guidelines. While Illumina conceded that it had the ability to restrict or “foreclose” access to its NGS input technology to Grail’s competitors, it argued that the merger would not increase its ability to do so. Considering that Illumina was found to be a monopolist, the FTC treated Illumina’s argument as irrelevant. In fact, the court agreed, characterizing Illumina’s argument as “perverse.”

The court also accepted the FTC’s analysis of foreclosure incentives. It recognized that foreclosure would lead to lower upstream sales for Illumina, and it did not accept Illumina’s arguments that it lacked incentives to foreclose because the foregone profit of those lost sales would exceed Grail’s increased downstream profits in the future. As summarized by the court, “Given Illumina’s monopoly power and shifting business priorities, it was reasonable for the Commission to conclude that Illumina would likely foreclose against Grail’s competitors—even at the expense of some short-term profits—to pursue its long-term goal of establishing itself (via Grail) as the market leader in clinical testing.”

Illumina also argued that foreclosure would have been profitable absent the transaction, considering Illumina’s previous 12% financial interest in Grail, so that the acquisition would not have any incremental foreclosure effects. Not surprisingly, the FTC made the point that the incentive to foreclose would increase when Illumina’s interest rose to 100%. The court accepted the FTC’s analysis, again because Illumina’s foreclosure incentives would grow in the future. For the same reason, the court also dismissed Illumina’s argument that since Grail is a monopolist, there currently are no rivals’ sales to foreclose.

Brown Shoe Vertical Merger Analysis

The FTC also analyzed the merger based on the 1962 Supreme Court case Brown Shoe. This was a point of contention among the FTC commissioners. The court did not opine on the validity of applying Brown Shoe because the Commission reached the same conclusion as it did under either the ability-and-incentive analysis. Both approaches are contained in the 2023 Merger Guidelines. The Commission focused on four of the Brown Shoe factors— nature and purpose of the merger, likelihood of foreclosure, the merged firm’s market power, and entry barriers. The court concluded that the Commission’s findings here were supported by substantial evidence and that it was not necessary for the Commission to find the other Brown Shoe factors.

Elimination of Double Marginalization and Other Efficiencies

Whereas the 2020 Vertical Merger Guidelines treated the impact of a merger on eliminating the upstream price-cost margin charged by the upstream merging firm to its downstream partner (“elimination of double marginalization” (EDM)) as part of the agency’s prima facie case, the 2023 Merger Guidelines treat EDM as an efficiency rebuttal factor for which the merging parties have the burden of production. The court also took this latter approach. While the court did not simply assume that EDM was “merger-specific,” it did reject the FTC’s finding by concluding that Illumina provided sufficient evidence of that the merger was necessary to achieve the efficiency benefit (i.e., “merger-specificity”). However, the court affirmed the FTC’s conclusion that Illumina failed to provide sufficient evidence that the EDM would (rather than could) be passed through to customers as lower downstream prices. This is important because the EDM only provides competitive efficiency benefits if it is passed through. One reason why significant pass-through would be less likely to occur here is because the impact of the foreclosure on rivals’ costs would reduce the competitive need to do so. Moreover, Illumina’s economic expert did not quantify the likely EDM pass-through. He merely provided an “illustrative” model based on Illumina’s margin. This analysis was insufficient because the incentive to pass-through EDM can be reduced or even eliminated by an offsetting “opportunity cost” and other factors. This opportunity cost involves the reduction in profitable input sales to rivals resulting from the foreclosure. This is because the foreclosure leads to rivals’ losing sales to the downstream merging firm.

Illumina claimed several other efficiency benefits involving supply chain and operations, R&D, market access and regulatory expertise, and international expansion. The court affirmed the FTC’s rejections of these claims as unverified, including lack of quantification of certain claims.

Litigating the Fix

The court’s analysis of the evidentiary burdens in litigating-the-fix cases is interesting. The FTC took the position that Illumina’s Open Offer contract, which would have constrained the company’s ability to harm Grail’s competitors, was a remedy that was relevant only after liability was established, in which case Illumina would have the burden to prove that it would eliminate any lessening of competition. By contrast, Illumina’s position was that analysis of the Open Offer contract should be part of the Commission’s prima facie case, which would place the burden on the FTC.

The court instead adopted the approach in Wilson’s concurring opinion. Under this approach, the contract remedy would be treated as a rebuttal factor in the liability analysis, whereby Illumina would have the burden of production. In a forthcoming article on litigating the fix,  Jennifer Sturiale and I recommend a procedural approach that is similar to Wilson’s. That article also recommends placing a substantial evidentiary burden on the merging parties in light of the common shortcoming of merger remedies revealed by the FTC’s remedy study and other evidence.

Under the court’s approach, it is not necessary for Illumina to produce evidence that there would be insufficient likelihood of any lessening of competition. Instead, it is only necessary to produce evidence that there would be insufficient likelihood of substantially lessening of competition, taking into account the strength of the FTC’s prima facie case. As the court explained:

To rebut Complaint Counsel’s prima facie case, Illumina was only required to show that the Open Offer sufficiently mitigated the merger’s effect such that it was no longer likely to substantially lessen competition. Illumina was not required to show that the Open Offer would negate the anticompetitive effects of the merger entirely.

While the FTC majority preferred to analyze the Open Offer as a remedy following a finding of liability, it also analyzed the Open Offer as a rebuttal factor. However, even here the FTC’s analyzed whether the Open Offer would fully negate the competitive harm. Thus, its analysis falls short under the standard demanded by the court. As explained by the FTC:

We find that the Open Offer would not restore the pre-Acquisition level of competition. Even if the Open Offer limits Illumina’s use of some of the tools at its disposal, it does not eliminate Illumina’s ability to favor GRAIL and harm GRAIL’s rivals, and it does not fundamentally alter Illumina’s incentives to do so. The Open Offer does not replicate the cooperation Illumina would have been incentivized to provide to third-party MCED test developers absent the Acquisition, and it would not replace the competitive intensity that existed before the Acquisition. Therefore, even if considered at the rebuttal stage, Respondent’s proposed remedy fails to overcome Complaint Counsel’s prima facie showing of harm.

However, there is more. The FTC’s factual analysis of the gaps and shortcomings of the Open Offer strongly suggests that the evidence produced by Illumina of the mitigating effects of the Open Offer would not establish an insufficient likelihood of substantially lessening of competition. These flaws would seem to allow Illumina to continue to profitably foreclose Grail’s rivals.

Indeed, that was the conclusion of Wilson, whose concurrence treated the Open Offer as a rebuttal argument within the liability case. As she opined:

More important, the factual analysis of adequacy of the Open Offer, which is described in the Commission Opinion in Section VII.D.5.b (p. 69-77), demonstrates that the Open Offer does not prevent Illumina from advantaging GRAIL relative to GRAIL’s rivals. Instead, the evidence reveals that after treating the evidence of the Open Offer as part of the competitive effects analysis, the Open Offer does not eliminate the predicted anticompetitive effects of the transaction. Ultimately, as described in the Commission Opinion, even after considering the effects of the Open Offer, anticompetitive effects are likely and the transaction is likely to lessen competition substantially.

Despite Wilson’s concurring opinion, the court did not express a view on whether the Open Offer remedy would be found deficient on appeal. For this reason, the FTC might have required additional briefing and perhaps even a supplemental hearing. But these procedural steps were unlikely to change the result in light of the record. The court did not dispute the FTC’s factual analysis of Open Offer on which Wilson relied.

Based on this factual record, the Commission arguably could simply reevaluate the Open Offer as demanded by the court and applied by Commissioner Wilson. And applying this standard, the Commission similarly might reject Illumina’s evidence regarding the Open Offer remedy. It might reject Illumina’s evidence in the rebuttal step of the Baker Hughes framework. Or it might conclude in the final decision step that the merger is likely to substantially lessen competition notwithstanding Illumina’s Open Offer contract.  Of course, Illumina’s decision to sell Grail made this issue moot.


Until AT&T/Time Warner in 2019, there had been no litigated vertical merger decisions for almost 40 years. Now there are two. If one includes the central foreclosure allegations in the Steve’s & Sons private case attacking the Jeld-Wen/CMI merger, there are three. And the plaintiff has shown substantial anticompetitive effects in two of them. It appears that Bork’s vertical Kool-Aid may be getting drained out.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.

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Steven Salop is a Professor of Economics and Law at the Georgetown University Law Center in Washington, DC, where he teaches antitrust law and economics. His research and consulting focuses on antitrust, competition, and regulation. He has written numerous articles in various areas of antitrust and competition which take a modern “Post-Chicago” approach. These include a number of articles with various co-authors on the competitive effects of vertical mergers. Professor Salop has also written economics and law articles focused on various types of exclusionary conduct, monopolization, analysis of various aspects of horizontal mergers and joint ventures, facilitating practices, and role of decision theory in legal rulemaking. Professor Salop earned a BA degree at the University of Pennsylvania, Summa Cum Laude, and an M.Phil. and PhD in Economics from Yale University. Professor Salop has been honored with lifetime achievement awards from the AALS antitrust section and the American Antitrust Institute.

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