The US Federal Trade Commission (FTC) and the US Department of Justice Antitrust Division (DOJ) (together “Agencies“) each have recently taken enforcement actions that demonstrate renewed attention on interlocking directorates (in which individuals simultaneously serve as directors on the boards of competing companies). Interlocking directorates are prohibited under Section 8 of the Clayton Act unless one of its de minimis exceptions applies. Those exceptions are dependent upon the volume of revenues derived from products sold by the operative companies in competition with one another.
On August 16, 2023, the DOJ announced that two Pinterest directors had resigned from their positions on the Nextdoor Board of Directors in response to DOJ action.1 On the same day, the FTC announced that it had reached a consent decree related to a merger in the natural gas space (Quantum/EQT). The consent decree included a provision prohibiting an interlocking directorate.2
These actions suggest that the Agencies are increasing investigations into interlocking directorates—both as standalone investigations and as part of merger reviews. They also signal that the Agencies are willing to take an expansive view on the scope of Section 8 while simultaneously taking a restrictive view on Section 8’s de minimis exceptions. Accordingly, companies should seek counsel on any potential interlocking directorates and think carefully about whether they may continue to rely on the exceptions.
- Antitrust investigations into interlocking directorates are priorities. Both the FTC and DOJ have recently undertaken actions confirming that interlocking directorates are antitrust enforcement priorities. These actions have arisen in standalone conduct investigations by the DOJ and in a merger review by the FTC.3
- The Agencies will potentially apply a broad understanding of “competitive sales” when evaluating whether a de minimis exception applies. While an interlock may avoid challenge if the companies do not exceed certain de minimis “competitive sales” thresholds, the DOJ’s enforcement action against Pinterest suggests that the agency may take a broader view when analyzing whether companies sufficiently compete for purposes of Section 8 than it may take in other enforcement contexts. This follows from prior FTC guidance indicating that what constitutes “competitive sales” under Section 8 is a loosely defined term.
- The Agencies may view Section 8 as applying to non-corporate entities. While the text of the Clayton Act Section 8 only references “corporations (other than banks, banking associations, and trust companies),” the FTC recently took the position that Section 8 applies to interlocks involving non-corporate entities in connection with the Quantum/EQT consent decree. While not a litigated result, this decree demonstrates that the FTC believes Section 8’s application is not limited to corporations.
Section 8 legal framework
Section 8 is a civil statute that prohibits individuals from simultaneously serving as a director or officer in any two competing corporations if they are above a certain size and if none of the de minimis exceptions apply.4 Section 8 is a per se statute — accordingly, a plaintiff only needs to demonstrate that an interlock exists to establish a violation.5
The text of Section 8 indicates that it applies to “corporations (other than banks, banking associations, and trust companies).” Federal courts have not directly addressed whether Section 8 may be applied to non-corporate entities (such as LLCs and partnerships).
For 2023, an interlocking directorate is exempt from Section 8 when:6
- Either corporation has less than USD 45,257,000 in total capital, surplus, and undivided profits.
- The competitive sales of:
- Either corporation are less than USD 4,525,700
- Either corporation are less than 2% of the company’s total sales
- Each corporation are less than 4% of the company’s total sales
The typical remedy sought and obtained in Section 8 cases brought by the federal government is injunctive relief (i.e., removing the individual from one of their positions to eliminate the interlock). While private parties are also able to pursue Section 8 claims, there has been very limited private enforcement and we are not aware of any instance where a plaintiff has successfully obtained damages for a Section 8 violation.
There has been a noticeable increase in Section 8 enforcement in recent years. These actions have included:
- In June 2021, the DOJ announced that two executives of Endeavor Group Holdings had resigned from their positions on the Live Nation Board of Directors “after the Department expressed concerns that their positions on the Live Nation Board created an illegal interlocking directorate.” The DOJ noted that the two companies “compete closely in many sports and entertainment markets”.
- In October 2022, the DOJ announced that seven directors had resigned from corporate board positions “in response to concerns by the Antitrust Division that their roles violated the Clayton Act’s prohibition on interlocking directorates”.7
- On August 16, 2023, the DOJ announced that two Pinterest directors had resigned from their positions on the Nextdoor Board of Directors “in response to Justice Department’s ongoing enforcement efforts against interlocking directorates.” While few details were publicly released regarding this action, the DOJ characterized both companies as social networks. Notably, the DOJ did not disclose whether it considered or evaluated the potential applicability of any de minimis exceptions.
- On August 16, 2023, the FTC announced that it had approved a consent order referencing Section 8 in a transaction between Quantum Energy Partners (“Quantum“) and EQT Corporation (“EQT“).9 The FTC said that the acquisition would make Quantum one of EQT’s largest shareholders and give Quantum a seat on EQT’s Board of Directors. The FTC described the two as “direct competitors” in the production and sale of natural gas in the Appalachian Basin, but released no details regarding its consideration or evaluation of any de minimis exceptions. In addition, FTC Chair Lina Khan, joined by the two other sitting commissioners, issued a statement that this enforcement action “makes clear that Section 8 applies to businesses even if they are structured as limited partnerships or limited liability corporations.” Whether federal courts will agree with the FTC’s position remains to be seen.
These actions are consistent with statements from leadership expressing the need to prioritize Section 8 enforcement, including as part of standalone investigations.10 In April 2022, DOJ Assistant Attorney General Jonathan Kanter remarked: “For too long, our Section 8 enforcement has essentially been limited to our merger review process. We are ramping up efforts to identify violations across the broader economy, and we will not hesitate to bring Section 8 cases to break up interlocking directorates.”11 The FTC articulated a similar position in its November 2022 policy statement on Section 5 of the FTC Act, in which the FTC argued it had the power to address “interlocking directors and officers of competing firms not covered by the literal language of the Clayton Act”.12
The FTC’s Section 8 enforcement against Quantum/EQT reinforces this message. Upon announcing the action, FTC Chair Lina Khan said: “Over the past year, our colleagues at the Antitrust Division have sought to reactivate Section 8 and effectively put market participants back on notice. Today’s complaint and consent order build on that effort, marking the Commission’s first formal Section 8 enforcement in nearly 40 years.” The action, which applied Section 8 to non-corporate entities and indicated that interlocking directorates may violate Section 5 of the FTC Act, demonstrates that the FTC is seeking to expand its Section 8 enforcement.
These developments highlight that the Agencies are taking a more aggressive approach to Section 8 enforcement and are looking for opportunities to evaluate situations giving rise to potential interlocks. In light of this, companies should consider taking steps to avoid Section 8 liability, such as:
- Conduct annual analyses of directors’ and officers’ board memberships to detect any emerging Section 8 interlocks. This is especially important in industries involving organic expansion, such as technology and healthcare, where new competition may emerge quickly.
- Expand compliance reviews to assess non-corporate entities. In light of the FTC’s recent action and the explicit statement from its Chair that Section 8 can apply to partnerships or limited liability corporations (consistent with similar public statements by DOJ leadership), broad compliance assessments should be made across business units. Assessments should include managers that serve a non-corporate entity in a capacity that could be viewed as analogous to a corporate Board of Director role.
- Think carefully about the scope of products and geographies when assessing “competitive sales”. For example, a 2017 FTC blog post indicated that the Agencies may take a “broad view” of competitive sales and may not require “the same market definition analysis found in other antitrust cases”.14 It is therefore important to regularly review (and potentially reevaluate) how product and service revenues are categorized and measured as part of any Section 8 compliance audit.
- Develop strong organizational safeguards, such as firewalls between potentially interlocked executives and procedures for directors handling competitively sensitive information. These steps are important for compliance. An actual or potential interlocking directorate—regardless of whether it violates Section 8—may facilitate, or be perceived to facilitate, a separate antitrust violation under Section 1 of the Sherman Act or Section 5 of the Federal Trade Commission Act. These safeguards should be developed and implemented even if a Section 8 exemption appears to be applicable.
1 DOJ, Two Pinterest Directors Resign from Nextdoor Board of Directors in Response to Justice Department’s Ongoing Enforcement Efforts Against Interlocking Directorates (Aug. 16, 2023).
2 FTC, FTC Acts to Prevent Interlocking Directorate Arrangement, Anticompetitive Information Exchange in EQT, Quantum Energy Deal (Aug. 16, 2023).
3 In their proposed revisions to the HSR form, it is notable that the Agencies included a requirement that parties provide details to facilitate potential Section 8 reviews. If this requirement is part of the final amendments to the HSR form, it could—and likely would—trigger more Section 8 investigations and enforcement actions.
4 15 U.S.C. § 19.
5 U.S. v. Sears, Roebuck & Co., 111 F. Supp. 614, 616 (S.D.N.Y. 1953).
6 FTC, Revised Jurisdictional Thresholds for Section 8 of the Clayton Act (Jan. 23, 2023).
7 DOJ, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates (Oct. 19, 2022).
8 See supra note 1.
9 See supra note 2.
10 See supra note 3.
11 DOJ, Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit (Apr. 4, 2022).
12 FTC, Policy Statement Regarding Section 5 Enforcement (Nov. 10, 2022).
13 Lina Khan, FTC, Statement of Chair Lina M. Khan, Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya, In the Matter of EQT Corporation. Commission File No. 221-0212 (Aug. 16, 2023).
14 Debbie Feinstein, FTC, Have a Plan to Comply with the Bar on Horizontal Interlocks (Jan. 23, 2017).