Back in April 2022, Assistant Attorney General (AAG) Jonathan Kanter hinted very strongly that the Antitrust Division of the Department of Justice (DOJ) would be looking at Section 8 violations of the Clayton Act. That Section prohibits a person from serving on boards of companies that are competitors – also known as "interlocking directorates". 15 U.S.C. § 19. DOJ recently made good on this promise, announcing that seven directors resigned from board positions in response to DOJ Section 8 investigations. A little over a week later, it has been reported that DOJ sent civil investigative demands (CIDs) to large private equity firms related to potential Section 8 violations. Additionally, DOJ has issued multiple letters to public companies, individuals, and investors stating it may bring lawsuits this year, alleging violations of Section 8.
These steps plainly signal that DOJ is aggressively pursuing actions to enforce federal antitrust prohibitions against overlapping membership on the boards of competing companies. According to AAG Kanter, DOJ's "Antitrust Division is undertaking an extensive review of interlocking directorates across the entire economy…." In response to DOJ's recent focus on "interlocking directorates," public companies and private equity firms should proactively review and assess the board memberships of directors, officers, or other representatives to identify and address potential Section 8 violations before becoming subject to a DOJ investigation.
What Is Section 8 and DOJ's Historical Approach to Interlocking Directorships
Section 8 seeks to prevent competing companies from coordinating competitive activities for mutual benefit through a shared director or officer. Section 8 applies to both "direct" and "indirect" interlocking directorships. "Direct" interlocking directorships occur when a person serves on the board of two competitors simultaneously, while "indirect" interlocking directorships occur when representatives of an entity serve on competing boards.
Section 8 does, however, include safe harbors. For example, serving on the board of competing companies can be lawful if: (1) the companies are horizontal competitors; and (2) the companies have "capital, surplus, and undivided profits" of more than $41,034,000 in the aggregate as of 2022. Exceptions apply also when: (1) the "competitive sales of either corporation" are less than $4,103,400; (2) the "competitive sales of either corporation" are less than 2% of that company's total sales; or (3) the "competitive sales of each corporation" are less than 4% of that company's total sales.
Further, DOJ's remedies to Section 8 violations are limited to injunctive relief. Unlike Section 1 violations of the Sherman Act, DOJ's only remedy is to force a director to step down from a board in order to resolve the interlocking directorate issue. United States v. W.T. Grant Co., 345 U.S. 629, 632–33, 97 L. Ed. 1303, 73 S. Ct. 894 (1953). DOJ cannot seek money damages or penalties. That said, private plaintiffs could seek monetary damages for Section 8 violations, although such actions are extremely rare. ABA Section of Antitrust Law, Interlocking Directorates: Handbook on Section 8 of the Clayton Act 36 (2011).
Historically, DOJ principally investigated and enforced prohibitions against interlocking directorates in the merger review context. However, DOJ's recent actions indicate that DOJ is independently investigating Section 8 violations outside of the merger review process.
DOJ's Shift to Active Investigation of Interlocking Directorships
DOJ's recent actions signal a change in its policy. It is now actively reviewing and pursuing potential Section 8 violations outside of the merger review context. AAG Kanter said that DOJ would "ramp[] up efforts to identify [Section 8] violations across the broader economy and [would] not hesitate to bring Section 8 cases to break up interlocking directors." On June 22, Deputy AAG Andrew Forman stated at the American Bar Association's Antitrust in Healthcare Conference that the Antitrust Division was "committed to taking aggressive action" to identify where "PE investments in competitors leads to board interlocks in violation of Section 8…." Further, both DOJ and the FTC have added Request for Additional Information and Documentary Material provisions, also known as Second Requests, to allow the agencies to gather follow-up information on potential board interlocks in the merger review context.
Steps to Take Before a DOJ Section 8 Investigation
To prepare for and prevent a DOJ investigation, companies should:
- Examine current company holdings within sectors to identify stakes in potential competitors;
- Update antitrust requirements in corporate policies;
- Routinely remind officers and directors of antitrust requirements in corporate policies;
- Periodically ask directors and officers about updates to board memberships and check that listed companies have not become competitors under Section 8. Just because a company is not a competitor at a specific time does not mean that it will never become one; and
- Be ready to respond to requests for information related to potential interlocking directorships.
DOJ is making good on its intent to pursue interlocking directorships. Its increased focus on potential antitrust violations is likely to continue, especially in heavily regulated industries such as the healthcare and tech industries. If you have questions on how to identify or resolve Section 8 violations, please reach out to Geoffrey Garinther or Kan Nawaday.
* The authors would like to thank Eva-Maria Ghelardi, a Law Clerk in Venable's New York office, for her assistance in writing this alert.