DOJ and FTC Step Up Scrutiny of Interlocking Directorates

On November 10, 2022, the Federal Trade Commission signaled it plans to invoke its authority to regulate unfair methods of competition under Section 5 of the FTC Act to bring enforcement actions against interlocking directorates that fall outside other antitrust laws.[1]

The FTC's announcement dovetails with reinvigorated enforcement action by the U.S. Department of Justice, which enforces the ban on interlocking directorates in Section 8 of the Clayton Act (15 U.S.C. § 19).

The Interlocking Directorate Ban

Section 8(a)(1) of the Clayton Act prohibits a person or entity from simultaneously serving as a director or board-appointed officer at two competing corporations, subject to certain exceptions and conditions. The ban only applies if the two corporations are engaged in actual (not potential) competition in interstate commerce and meet certain financial thresholds. Each corporation must have capital, surplus, and undivided profits worth more than $41,034,000.00.[2]

Whereas most antitrust statutes require regulators to prove anticompetitive injury, Section 8 imposes strict liability—meaning that the existence of an interlock alone violates federal law.

Three safe harbors limit the statute's reach. Section 8:

• Provides a one-year grace period where the rise in competition to meet the threshold arose gradually;[3]
• Only applies to horizontal interlocks; and
• Does not apply where the competition between the two corporations is de minimis.[4]

Recent DOJ Enforcement Actions

Until this year, the Department of Justice rarely investigated and enforced the federal ban on interlocking directorates outside of the pre-merger review procedures in the Hart-Scott Rodino Act.

In April 2022, Assistant Attorney General Jonathan Kanter's opening remarks at the Spring Enforcers Summit pledged that the Antitrust Division was "ramping up efforts to identify violations across the broader economy" and would "not hesitate to bring Section 8 cases to break up interlocking directorates."[5]

On October 19, 2022, the DOJ announced that seven directors had resigned from the boards of five companies in response to interlocking directorate concerns raised by the Antitrust Division investigation of potential Section 8 violations.[6] The announcement was part of the DOJ's ongoing "extensive review" of potential Section 8 violations across the U.S. economy and advised that Section 8 enforcement "will continue to be a priority for the Antitrust Division." The five impacted firms represent diverse sectors of the economy and include software providers, online education service providers, and manufacturers. Each of the removed directors was permitted to remain on the board of one of the competitors.

Notably, three of the directors forced to resign from competing boards represented private equity firms, suggesting that DOJ investigators will cast a particularly critical eye on board positions held by investment firms with common ownership of competing corporations.

The FTC's New Policy Statement and Section 5 of the FTC Act

The FTC has broad authority under Section 5 of the FTC Act to regulate "unfair methods of competition."[7] The agency's November 10, 2022, Section 5 Policy Statement identified interlocking directorates that fall outside the "literal language" of the Clayton Act as ripe for Section 5 enforcement. It notes the two criteria the FTC will consider when evaluating potential Section 5 violations: (1) indicia of unfairness, where "conduct may be coercive, exploitative, collusive, abusive, deceptive, predatory, or may involve the use of economic power of a similar nature;" and (2) "conduct that tends to negatively affect competitive conditions."

While the FTC Policy Statement signals the agency's enforcement priorities, it is not binding on federal courts, which must decide the limit of the FTC's Section 5 power.

Recommendations for Risk Mitigation

Corporations seeking to mitigate the risk of exposure to Section 8 investigations and penalties should evaluate their corporate governance compliance programs, especially after changes in board composition, and consider:

• Requiring members to report any new board positions they accept;
• Updating board appointment policies;
• Implementing regular compliance reviews for existing board members; and
• Evaluating whether interlocks that fall within Section 8's safe harbor provisions might create exposure to FTC unfair competition inquiries.