Notice2023-18272
EQT and Quantum; Analysis of Agreement Containing Consent Order To Aid Public Comment
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 25, 2023
Issuing agencies
Federal Trade Commission
Abstract
The consent agreement in this matter settles alleged violations of Federal law prohibiting unfair methods of competition. The attached Analysis of Proposed Consent Orders to Aid Public Comment describes both the allegations in the complaint and the terms of the consent orders--embodied in the consent agreement--that would settle these allegations.
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<title>Federal Register, Volume 88 Issue 164 (Friday, August 25, 2023)</title>
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[Federal Register Volume 88, Number 164 (Friday, August 25, 2023)]
[Notices]
[Pages 58269-58275]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-18272]
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FEDERAL TRADE COMMISSION
[File No. 221 0212]
EQT and Quantum; Analysis of Agreement Containing Consent Order
To Aid Public Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed consent agreement; request for comment.
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SUMMARY: The consent agreement in this matter settles alleged
violations of Federal law prohibiting unfair methods of competition.
The attached Analysis of Proposed Consent Orders to Aid Public Comment
describes both the allegations in the complaint and the terms of the
consent orders--embodied in the consent agreement--that would settle
these allegations.
DATES: Comments must be received on or before September 25, 2023.
ADDRESSES: Interested parties may file comments online or on paper by
following the instructions in the Request for Comment part of the
SUPPLEMENTARY INFORMATION section below. Please write: ``EQT and
Quantum; File No. 221 0212'' on your comment and file your comment
online at <a href="https://www.regulations.gov">https://www.regulations.gov</a> by following the instructions on
the web-based form. If you prefer to file your comment on paper, please
mail your comment to the following address: Federal Trade Commission,
Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610
(Annex N), Washington, DC 20580.
FOR FURTHER INFORMATION CONTACT: Greta Burkholder (202-326-3225),
Bureau of Competition, Federal Trade Commission, 400 7th Street SW,
Washington, DC 20024.
SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal
Trade Commission Act, 15 U.S.C. 46(f), and FTC Rule Sec. 2.34, 16 CFR
2.34, notice is hereby given that the above-captioned consent agreement
containing a consent order to cease and desist, having been filed with
and accepted, subject to final approval, by the Commission, has been
placed on the public record for a period of 30 days. The following
Analysis of Agreement Containing Consent Order to Aid Public Comment
describes the terms of the consent agreement and the allegations in the
complaint. An electronic copy of the full text of the consent agreement
package can be obtained from the FTC website at this web address:
<a href="https://www.ftc.gov/news-events/commission-actions">https://www.ftc.gov/news-events/commission-actions</a>.
You can file a comment online or on paper. For the Commission to
consider your comment, we must receive it on or before September 25,
2023. Write ``EQT and Quantum; File No. 221 0212'' on your comment.
Your comment--including your name and your state--will be placed on the
public record of this proceeding, including, to the extent practicable,
on the <a href="https://www.regulations.gov">https://www.regulations.gov</a> website.
Because of the agency's heightened security screening, postal mail
addressed to the Commission will be delayed. We strongly encourage you
to submit your comments online through the <a href="https://www.regulations.gov">https://www.regulations.gov</a>
website. If you prefer to file your comment on paper, write ``EQT and
Quantum; File No. 221 0212'' on your comment and on the envelope, and
mail your comment to the following address: Federal Trade Commission,
Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610
(Annex N), Washington, DC 20580.
Because your comment will be placed on the publicly accessible
website at <a href="https://www.regulations.gov">https://www.regulations.gov</a>, you are solely responsible for
making sure your comment does not include any sensitive or confidential
information. In particular, your comment should not include sensitive
personal information, such as your or anyone else's Social Security
number; date of birth; driver's license number or other state
identification number, or foreign country equivalent; passport number;
financial account number; or credit or debit card number. You are also
solely responsible for making sure your comment does not include
sensitive health information, such as medical records or other
individually identifiable health information. In addition, your comment
should not include any ``trade secret or any commercial or financial
information which . . . is privileged or confidential''--as provided by
Section 6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule Sec.
4.10(a)(2), 16 CFR 4.10(a)(2)--including competitively sensitive
information such as costs, sales statistics, inventories, formulas,
patterns, devices, manufacturing processes, or customer names.
[[Page 58270]]
Comments containing material for which confidential treatment is
requested must be filed in paper form, must be clearly labeled
``Confidential,'' and must comply with FTC Rule Sec. 4.9(c). In
particular, the written request for confidential treatment that
accompanies the comment must include the factual and legal basis for
the request and must identify the specific portions of the comment to
be withheld from the public record. See FTC Rule Sec. 4.9(c). Your
comment will be kept confidential only if the General Counsel grants
your request in accordance with the law and the public interest. Once
your comment has been posted on <a href="https://www.regulations.gov">https://www.regulations.gov</a>--as legally
required by FTC Rule Sec. 4.9(b)--we cannot redact or remove your
comment from that website, unless you submit a confidentiality request
that meets the requirements for such treatment under FTC Rule Sec.
4.9(c), and the General Counsel grants that request.
Visit the FTC website at <a href="https://www.ftc.gov">https://www.ftc.gov</a> to read this document
and the news release describing this matter. The FTC Act and other laws
the Commission administers permit the collection of public comments to
consider and use in this proceeding, as appropriate. The Commission
will consider all timely and responsive public comments it receives on
or before September 25, 2023. For information on the Commission's
privacy policy, including routine uses permitted by the Privacy Act,
see <a href="https://www.ftc.gov/site-information/privacy-policy">https://www.ftc.gov/site-information/privacy-policy</a>.
Analysis of Agreement Containing Consent Order To Aid Public Comment
The Federal Trade Commission (``Commission'') has accepted for
public comment, subject to final approval, an Agreement Containing
Consent Order (``Consent Agreement'') from QEP Partners, LP, by itself
and through the entities under its control (including Quantum Energy
Partners VI, LP; Q-TH Appalachia (VI) Investment Partners, LLC)
(collectively, ``Quantum''), and EQT Corporation (``EQT,'' and together
with Quantum, ``Respondents''). EQT has proposed acquiring THQ
Appalachia I, LLC (``Tug Hill'') and THQ-XcL Holdings I, LLC (``XcL
Midstream'') from Quantum for approximately $5.2 billion: $2.6 billion
in cash and up to 55 million shares of EQT stock (``Proposed
Transaction''). In addition to this consideration, and in connection
with Quantum's anticipated status as one of EQT's largest shareholders,
EQT agreed to facilitate the appointment of Quantum's CEO, or another
Quantum-designated individual, to the EQT Board of Directors.
The Proposed Transaction raises several concerns. Specifically,
both Quantum's anticipated position as one of EQT's largest
shareholders and EQT's obligation to facilitate the appointment of a
Quantum designee to the EQT board raise concerns that Quantum or EQT
could have access to each other's competitively significant, non-public
information and could participate in, or have influence over,
competitive decision-making at each firm. Under Section 8 of the
Clayton Act, it is per se illegal for directors and officers to serve
simultaneously on the boards of competitors (subject to limited
exceptions), as would occur here absent the Consent Agreement with the
appointment of Quantum's designee to the board of its competitor, EQT.
In addition to these concerns, a pre-existing joint venture between EQT
and Quantum, The Mineral Company (``TMC''), raises concerns with
respect to the exchange of competitively sensitive business information
regarding the acquisition of mineral rights within the Appalachian
Basin.
The Consent Agreement is designed to remedy allegations in the
Commission's Complaint that: (1) Quantum's proposed acquisition of up
to 55 million shares of EQT stock, together with or separately from
assurances that a Quantum-designee will be nominated for a seat on the
EQT Board of Directors, would result in an illegal interlocking
directorate in violation of Section 8 of the Clayton Act, 15 U.S.C. 19,
and an unfair method of competition in violation of Section 5 of the
Federal Trade Commission Act, 15 U.S.C. 45 due to potential exchange of
confidential, competitively sensitive information, and that (2) TMC,
the pre-existing Quantum/EQT joint venture, is an unfair method of
competition in violation of section 5 of the FTC Act, 15 U.S.C. 45.
The proposed settlement presents significant relief for these
concerns. The Consent Agreement and proposed Decision and Order
(``D&O'') prohibit Quantum from occupying an EQT Board seat and require
Quantum to divest its EQT shares by a non-public date certain,
effectively imposing a structural fix to concerns about the influence
and information access that arise from Quantum's sizable EQT
shareholder position. The D&O contains provisions that incentivize
Quantum's rapid sale of the EQT shares, coupled with provisions
effectively rendering Quantum's ownership passive pending the sale of
its EQT shares. The D&O also reduces opportunities for exchanging
confidential and competitively significant information between the
firms beyond Quantum's EQT share ownership, notably by requiring EQT
and Quantum to unwind the TMC mineral rights acquisition joint venture.
The D&O contemplates the appointment of a monitor to ensure compliance
with the terms of the ten-year order.
The proposed D&O imposes effective and administrable relief, while
setting important Commission precedent on the application of Section 8
of the Clayton Act, Section 5 of the FTC Act, and the use of structural
remedies to address these theories of harm. By restricting future
opportunities for the parties to engage in conduct that would result in
Section 8 violations and other unfair methods of competition involving
natural gas activities in the Appalachian Basin, the proposed D&O
signals the antitrust risks of excessive influence and anticompetitive
information exchange.
The Commission has placed the Consent Agreement on the public
record for thirty days to solicit comments from interested persons.
Comments received during this period will become part of the public
record. After thirty days, the Commission will review the comments
received and decide whether it should withdraw, modify, or make the
proposed Order final.
I. The Respondents
Respondent QEP Partners, LP is a limited partnership organized,
existing, and doing business under, and by virtue of, the laws of the
State of Delaware, with its office and principal place of business
located in Houston, Texas. Respondent QEP Partners, LP controls
Respondents Quantum Energy Partners VI, LP and Q-TH Appalachia (VI)
Investment Partners, LLC. Through its private equity, investment, and
structured finance funds, Quantum owns, controls, or has influence over
entities producing natural gas in the Appalachian Basin and throughout
the country. Quantum-owned entities include Tug Hill, a natural gas
producer in the Appalachian Basin, and XcL Midstream, a natural gas
gatherer and processor in the Appalachian Basin, two entities sought
for purchase by Respondent EQT.
Respondent EQT is a corporation organized, existing, and doing
business under, and by virtue of, the laws of the Commonwealth of
Pennsylvania, with its office and principal place of business located
in Pittsburgh, Pennsylvania. EQT is the nation's largest producer of
natural gas. EQT acquires mineral rights and produces natural gas and
natural gas liquids primarily in the Appalachian
[[Page 58271]]
Basin, including areas close to Quantum's Tug Hill/XcL Midstream
operations. EQT markets natural gas within and outside the Appalachian
Basin.
II. The Agreements
On September 6, 2022, EQT and Quantum entered into a Purchase
Agreement, under which EQT sought to acquire Tug Hill and XcL Midstream
from Quantum for a total purchase price of approximately $5.2 billion.
Roughly half of the consideration to Quantum would take the form of up
to 55 million shares of EQT stock.\1\ The Proposed Transaction would
make Quantum one of EQT's largest shareholders. As additional
consideration, EQT agreed to ``take all necessary action to
facilitate'' the appointment of Quantum CEO Wil VanLoh, or another
Quantum designee, ``to be included in a slate of director nominees
recommended by the [EQT] Board'' for election as an EQT director.
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\1\ The number of shares ultimately due to Quantum is subject to
customary purchase price adjustments, including adjustments for
business proceeds and costs incurred during the interim period
between signing and closing of the Proposed Transaction.
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The Commission's Complaint alleges that the Proposed Transaction,
as structured, would violate Section 8 of the Clayton Act, 15 U.S.C.
19, as an illegal interlocking directorate, and that the Proposed
Transaction--the acquisition of up to 55 million EQT shares or EQT's
obligation to use best efforts to nominate a Quantum director--also
constitutes an unfair method of competition in violation of Section 5
of the Federal Trade Commission Act, 15 U.S.C. 45 due to risks of the
exchange of competitively sensitive, non-public information.
In October 2020, EQT and a Quantum affiliate entered an agreement
forming a joint venture, TMC. TMC served as a vehicle for EQT to
purchase mineral rights in the Appalachian Basin, with funding largely
supplied by Quantum. The TMC agreement requires EQT to offer a right of
first refusal to TMC before EQT can purchase mineral rights within a
specified geography. TMC receives forward-looking and competitively
sensitive, non-public information about EQT's mineral rights
acquisition plans, drilling plans, strategies, and operations.
Quantum's participation in TMC management provided it with access to
this information as well.
The Commission's Complaint alleges that the TMC joint venture is an
unfair method of competition in violation of Section 5 of the Federal
Trade Commission Act, 15 U.S.C. 45.
III. Line of Commerce
The production and sale of natural gas is a relevant line of
commerce. Natural gas is a critical fuel source with highly varied uses
in the United States and worldwide. Natural gas purchasers generally
cannot switch to alternative fuels without substantial costs and delay.
The acquisition of mineral rights is also a relevant line of
commerce. To produce natural gas, a firm must first purchase or lease
mineral rights from landowners. The mineral rights held by a producer
can indicate key aspects of the producer's future production plans,
including the areas the producer may drill and the amount of drilling
activity the producer anticipates within a reasonable timeframe.
The Appalachian Basin, consisting of the portions of West Virginia,
Pennsylvania, Ohio, Maryland, Kentucky, and Virginia that lie in the
Appalachian Mountains, is widely recognized as a major natural gas
producing area in the United States, and one of the largest in the
world. A current shortage of available pipeline capacity to transport
natural gas from the Appalachian Basin to demand centers outside of the
Basin is a distinguishing characteristic of the region. Stranded excess
gas supply in the Basin has artificially depressed local prices
relative to pricing locations outside the Basin. Given current pipeline
constraints, customers located within the Appalachian Basin cannot
economically purchase gas from outside the Basin.
IV. Effects of the Agreements
The Commission's Complaint addresses two theories of harm. First,
Quantum's acquisition of up to 55 million EQT shares would make
Quantum--an EQT rival in the production and sale of natural gas in the
Appalachian Basin--one of the largest shareholders of EQT. This
shareholder position would provide Quantum with the ability to sway or
influence EQT's competitive decision-making and to access EQT's
competitively sensitive information. As one of EQT's largest
shareholders, Quantum would have the opportunity to communicate
directly with EQT and could discuss confidential business information
or direct or otherwise influence EQT's competitive actions or
strategies. Knowledge gained via its relationship with EQT could also
influence Quantum's own competitive decisions or development of new
businesses involved in the production and sale of natural gas. The
Commission's Complaint alleges these opportunities are particularly
problematic given certain actions by the Respondents, including the TMC
joint venture and other activities involving providing nonpublic
information that restricted competition, the natural gas industry's
history of encouraging the exchange of competitively sensitive
information, and competitors publicly signaling their strategic moves
to other competitors.
Moreover, the Proposed Transaction explicitly contemplated Quantum
CEO Wil VanLoh's appointment to EQT's Board of Directors. In addition
to his role as CEO, Mr. VanLoh is the Chair of the Investment Committee
for Quantum Energy Partners, Quantum's private equity subsidiary and
the entity that oversees the investment decisions of Respondent Quantum
Energy Partners VI, LP and its subsidiaries. Mr. VanLoh was previously
a member of the Tug Hill Board of Directors and also sits on the Board
of Directors of another natural gas company in which Quantum invests.
As a result, Mr. VanLoh's appointment to EQT's Board of Directors while
simultaneously serving as CEO of Quantum and Chair of Quantum's
Investment Committee would create an illegal interlocking directorate
between EQT and Quantum. Any other director appointed by Quantum would
be, by virtue of the appointment, an agent of Quantum and under its
control. Thus, appointing a Quantum-designated director (other than Mr.
VanLoh) to EQT's Board of Directors would similarly create an illegal
interlock between EQT and Quantum. The Complaint alleges that the above
concerns violate both section 8 of the Clayton Act and section 5 of the
Federal Trade Commission Act.
The Complaint's second theory of harm addresses the TMC joint
venture specifically, as well as information exchange more generally.
The TMC joint venture creates additional opportunities for sharing
competitively sensitive business information. Respondents already may
use TMC as a vehicle for information exchange, either with respect to
competition for the purchase of mineral rights or in connection with
EQT's future drilling plans. Via the TMC joint venture, EQT and Quantum
(through portfolio companies involved in the acquisition of mineral
rights and production and sale of natural gas in the Appalachian Basin)
each can inform the other where it intends to procure mineral rights
for future productions and how much it plans to bid. This information
is forward-looking, non-public, and competitively sensitive, and its
exchange among rivals, coupled with the non-compete agreements in place
[[Page 58272]]
within the joint venture, harms competition in the acquisition of
mineral rights. The Complaint also alleges that the TMC joint venture
violates section 5 of the Federal Trade Commission Act.
V. The Proposed Order
The proposed Order imposes several terms to remedy these concerns.
First, the Order requires Quantum to forego its right to a seat on
EQT's Board. Quantum shall not, directly or indirectly, appoint any
persons to EQT's Board, seek or obtain representation on EQT's Board,
or have any of its agents or representatives serve simultaneously as an
officer or director of EQT or in a decision-making capacity of any EQT
entity. EQT, conversely, shall not, directly or indirectly, have any of
its representatives serve simultaneously in any management capacity
within Quantum, any operating entity controlled by Quantum, or any
investment fund managed by Quantum. This Order provision makes it clear
that Quantum is subject to the prohibition on interlocking directors
and officers under section 8 of the Clayton Act, despite Quantum's
limited liability and limited partnership corporate structure.
Second, absent prior Commission approval, the proposed Order
prohibits Quantum from serving on the Board of any of the top seven
Appalachian Basin natural gas producers, accounting for a substantial
majority of the market.
Third, Quantum shall sell its EQT shares by a non-public date
certain. Failure to sell by that date will result in the transfer of
the shares to a trustee empowered to liquidate the shares unilaterally.
Quantum cannot knowingly divest these shares to an entity that is one
of the top seven natural gas producers in the Appalachian Basin without
prior Commission approval. Quantum is also prohibited from sharing with
EQT any non-public information regarding its stock position or intent
to sell or hold any of the EQT shares.
Fourth, during the period when Quantum owns EQT shares, the shares
will be held in a voting trust, and any votes will be carried out by
the trustee pro rata with all other EQT shareholders. The proposed
Order prohibits Quantum from engaging in the solicitation of proxies in
connection with its EQT shareholder position, and further prohibits
Quantum from directly or indirectly influencing EQT's Board of
Directors, management, or operations. Together, these provisions
effectively render Quantum's shares a passive investment until the
shares are sold.
Fifth, for the duration of the proposed ten-year Order, Quantum is
prohibited from acquiring additional EQT shares absent prior Commission
approval. During the period when Quantum owns EQT shares, however,
prior approval is not needed for shares acquired indirectly as
consideration for EQT's acquisition of a Quantum business that is
subject to a premerger notification under the Hart-Scott-Rodino Act.
Prior approval is also not required during a period when Quantum no
longer owns EQT shares for shares acquired indirectly as consideration
for EQT's acquisition of a Quantum business.
Sixth, the proposed Order also requires Quantum and EQT to unwind
TMC, including any noncompete provisions.
Seventh, the proposed Order imposes further limitations on future
entanglements between EQT and Quantum. For example, as noted above, the
proposed Order prohibits any of EQT's directors, officers, agents, or
representatives from serving simultaneously in any management capacity
within Quantum, any operating entity controlled by Quantum, or any
investment fund managed by Quantum. The proposed Order also prohibits
Quantum and EQT from entering into any noncompete agreements other than
those in connection with and ancillary to the sale of a business,
assets, or company.
Eighth, the proposed Order contains additional provisions designed
to ensure the effectiveness of the relief. A monitor will be appointed
to track compliance, and both Respondents must provide regular
compliance reports. Provisions of the proposed Order that do not end
upon the sale of EQT shares will last up to ten years.
And finally, the proposed Order requires EQT and Quantum to
distribute the Order to each of their respective board members,
officers, and directors, and to design, maintain, and operate an
antitrust compliance program.
The purpose of this analysis is to facilitate public comment on the
Consent Agreement, and the Commission does not intend this analysis to
constitute an official interpretation of the proposed Order or to
modify its terms in any way.
By direction of the Commission.
April J. Tabor,
Secretary.
Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly
Slaughter and Commissioner Alvaro Bedoya
In September 2022, the nation's largest natural gas producer, EQT
Corporation (``EQT''), proposed to acquire certain natural gas assets
from private equity firm, Quantum Energy Partners, LP (``Quantum'').
EQT agreed to offer $2.6 billion in cash, up to 55 million shares of
EQT stock, and a seat on EQT's Board of Directors. Quantum has a host
of investments and operations across the oil and gas industry, and both
companies and their affiliates compete head-to-head in the production
of natural gas in the Appalachian Basin. The proposed transaction would
make Quantum one of EQT's largest shareholders and secure Quantum a
seat on the board of its direct competitor. After conducting a thorough
investigation, the Commission determined it had reason to believe this
deal was illegal.
Today, the Commission announces a settlement of charges that the
proposed transaction would result in an illegal interlocking
directorate in violation of Section 8 of the Clayton Act and an unfair
method of competition in violation of Section 5 of FTC Act due to the
potential for exchange of confidential and competitively significant
information. Specifically, Quantum's anticipated position as one of
EQT's largest shareholders and EQT's obligation to facilitate the
appointment of a Quantum designee to the EQT board raise concerns that
the firms could exchange non-public sensitive business information and
participate in or influence each other's strategic decisions.
The potential risks to competition posed by this transaction are
particularly concerning given the dense and tangled web of co-
investments, joint operations, and other methods of coordination
between and among natural gas producers and investors in the
Appalachian Basin. The sector is characterized by a tight-knit set of
players rife with entanglements and a history of suspicious ventures
and information exchange. Along these lines, the Commission's complaint
separately charges that a pre-existing joint venture between EQT and
Quantum relating to mineral rights acquisitions constitutes an
additional unfair method of competition in violation of the FTC Act.
[[Page 58273]]
The proposed consent order lays out several terms to remedy these
concerns. The order prohibits Quantum from occupying an EQT Board seat
and requires it to divest the EQT shares, imposing a structural remedy
to address concerns about the influence and information access that
arise from Quantum's sizable EQT shareholder position. The order
additionally limits both current and future entanglements between the
firms and reduces opportunities for exchanging confidential and
competitively significant information between the firms, including by
requiring EQT and Quantum to unwind their existing joint venture and
any noncompete provisions.
I. Revitalizing Section 8
Section 8 of the Clayton Act states that ``no person shall, at the
same time, serve as a director or officer in any two corporations . . .
that are (a) engaged in whole or in part in commerce; and (b) by virtue
of their business and location of operation, competitors, so that the
elimination of competition by agreement between them would constitute a
violation of any of the antitrust laws[.]'' \1\ It was designed to
prevent ``control of great aggregations of money, capital, and property
through the medium of common directors.'' \2\ Lawmakers recognized that
interlocking directorates could facilitate undue coordination,
influence, or other means of dampening competition. Congress adopted an
incipiency approach, seeking to eliminate the very structure that would
facilitate these violations by ``removing the opportunity or temptation
to such violations through interlocking directorates.'' \3\
Interlocking directorates that violate Section 8 are per se illegal.\4\
Beyond requiring that the interlocked companies be ``competitors''
whereby the ``elimination of competition'' between them would violate
the antitrust laws, Section 8 does not require any type of showing of
harm to competition.\5\
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\1\ 15 U.S.C. 19.
\2\ Interlocks in Corporate Management, 1965 Staff Report to
Antitrust Subcomm., 89th Cong., 1st Sess., 12 (1965).
\3\ See U.S. v. Sears, Roebuck & Co., 111 F. Supp. 614, 616
(S.D.N.Y. 1953) (``[W]hat Congress intended by Sec. 8 was to nip in
the bud incipient violations of the antitrust laws by removing the
opportunity or temptation to such violations through interlocking
directorates.'').
\4\ Michael Blaisdell, Fed. Trade. Comm'n, Interlocking
Mindfulness (June 26, 2019), <a href="https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness">https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness</a>.
\5\ In re Borg-Warner Corp., et al. 101 F.T.C. 863, 925 (1983)
(The ``role of competition analysis in Section 8 is not to measure
market power or to assess competitive effects; it is to establish a
nexus of competitive interests between corporations sufficient to
warrant concern over collusion or other outright market division
should interlocked directors seek to share or exchange
information.'').
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Legislative efforts to address corporate interlocks were catalyzed
by congressional reports in 1887, 1912, and 1913 that showed firms had
used interlocks to win personal favors or exclusive treatment of
suppliers or customers.\6\ One of the most vocal opponents of board
interlocks was Louis Brandeis. Shortly before his appointment to the
Supreme Court in 1916, Brandeis authored several books and articles
that highlighted the need for addressing interlocking directorates.\7\
He believed that having influential individuals serve on the same
corporate boards intrinsically and inevitably created a host of risks,
including conflicts of interest, collusion, and improper exchange of
competitively sensitive information. In his view, the prohibition on
interlocking directorates ``merely g[a]ve full legal sanction to the
fundamental law of morals and of human nature: that `No man can serve
two masters.''' \8\
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\6\ See Pacific Railway Commission, S. Exec. Doc. No. 51, 50th
Cong., 1st Sess. (1887); Investigation of United States Steel Corp.,
H.R. Rep. No. 1127, 62d Cong., 1st Sess. (1912); House Comm. on
Banking and Currency, Investigation of Concentration of Control of
Money and Credit, H.R. Rep. No. 1593, 62d Cong., 3rd Sess. (1913).
Congress recognized that the concentration of control via
interlocking directorships ``tended to suppress competition or to
foster joint action against third party competitors'' and concluded
that because of ``such [joint] control, the healthy competition of
the free enterprise system had been stifled or eliminated.'' Sears,
111 F. Supp. at 616.
\7\ See L. Brandeis, Breaking the Money Trusts, Harper's Weekly,
Nov. 22, 1913, at 10; id, Nov. 29, 1913, at 9; id, Dec. 6, 1913, at
13; id, Dec. 13, 1913, at 10; id, Dec. 20, 1913, at 10; id, Dec. 27,
1913, at 18; id, Jan. 3, 1914, at 11; id, Jan. 10, 1914, at 18; id,
Jan. 17, 1914, at 18.
\8\ L. Brandeis, Other People's Money and How the Bankers Use It
(1914). As Brandeis observed: ``The practice of interlocking
directorates is the root of many evils. It offends laws human and
divine. Applied to rival corporations, it tends to the suppression
of competition and to violation of the Sherman law. Applied to
corporations which deal with each other, it tends to disloyalty and
to violation of the fundamental law that no man can serve two
masters. In either event it tends to inefficiency; for it removes
incentive and destroys soundness of judgment. It is undemocratic,
for it rejects the platform: `A fair field and no favors,'--
substituting the pull of privilege for the push of manhood.'' Id.
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Though Section 8 has a clear purpose, it has rarely been enforced
in the over 100 years since its passage, and even less so in the past
four decades.\9\ Historically, the antitrust agencies addressed Section
8 violations by dismissing actions or closing investigations after
firms ended the offending interlock.\10\ However, the Commission
eventually recognized that ``informal settlements [we]re not producing
an adequate level of compliance'' and that ``this policy did not
accomplish what Congress set out to do.'' \11\ Throughout the 1970s and
80s, the FTC challenged interlocking directorates under Section 8 on
multiple occasions and entered consent orders in every one of those
cases, even where the interlocks had been terminated.\12\ In the wake
of these actions, the defense bar and industry groups began lobbying
Congress for Section 8 reform, resulting in the Antitrust Amendments
Act of 1990.\13\ This law narrowed the types of interlocks that would
be covered under Section 8. The years since have seen an overall
decline in Section 8 enforcement.\14\ We worry that this has
[[Page 58274]]
over time led to under-deterrence and that corporate actors are not
sufficiently appreciative of Section 8's prohibitions.
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\9\ According to one commentary, Section 8 enforcement has been
``punctuated by a few bursts of mild activity and then followed by
long periods of benign neglect.'' J. Randolph Wilson, Unlocking
Interlocks: The On-Again Off-Again Saga of Section 8 of the Clayton
Act, 45 Antitrust L.J. 317, 317 (1976); see ABA Section of Antitrust
Law, Interlocking Directorates: Handbook on Section 8 of the Clayton
Act 4 (2011) (``This sleepy enforcement effort has been noted by the
courts. . . .'') (citing Bankamerica Corp. v. U.S., 462 U.S. 122,
130-31 (1983)).
\10\ From the effective date of the Clayton Act through 1965,
when the Senate Judiciary Committee issued a report on corporate
interlocks, the Commission filed only thirteen complaints
challenging interlocking directorates. Of those cases, twelve were
dismissed when the directors involved resigned on the directorships,
and only one resulted in a consent order. During the same period,
the Department of Justice brought only ten cases to enforce Section
8. A. H. Travers Jr., Interlocks in Corporate Management and the
Antitrust Laws, 46 Tex L. Rev. 819, 821 n.8 (1968) (citing Staff of
House Comm. On the Judiciary, 89th Cong., 1st Sess., Report on
Interlocks in Corporate Management 227 (1965)); see Vern Countryman,
The Federal Trade Commission and the Courts, 17 Wash. L. Rev. 1, 30
(1942); G.H. Montague, The Commission's Jurisdiction Over Practice
in Restraint of Trade, 8 Geo. Wash. L. Rev. 365, 375 (1940).
\11\ In re Kraftco Corp., 89 F.T.C. 46 (1977).
\12\ See In re Kraftco Corp., 88 F.T.C. 362 (1976); In re
Kraftco Corp., 89 F.T.C. 46 (1977); In re TRW Inc., et al., 90
F.T.C. 144 (1977); In re Int'l Bus. Machines Corp., 89 F.T.C. 91
(1977); In re Midland-Ross Corp., 96 F.T.C. 863 (1980); In re Borg-
Warner Corp., 101 F.T.C. 863 (1983); In re Hughes Tool Co., 103
F.T.C. 17 (1984); In re Big Three Indus., Inc., 103 F.T.C. 24
(1984).
\13\ Pub. L. 101-588, 104 Stat. 2879, Sec. 2 (1990) (increasing
the statute's jurisdictional threshold and creating three de minimis
exceptions in cases of relatively insignificant competitive
overlap).
\14\ See Robert F. Booth Tr. v. Crowley, 687 F.3d 314, 319-20
(7th Cir. 2012) (``Actually, the chance of suit by the United States
or the FTC is not even 1%. The national government rarely sues under
Sec. 8. Borg-Warner Corp. v. FTC, 746 F.2d 108 (2d Cir.1984), which
began in 1978, may be the most recent contested case. When the
Antitrust Division or the FTC concludes that directorships
improperly overlap, it notifies the firm and gives it a chance to
avoid litigation (or to convince the enforcers that the interlock is
lawful).''); Debbie Feinstein, Director, Bureau of Competition, Fed.
Trade Comm'n, Have a Plan to Comply with the Bar on Horizontal
Interlocks (Jan. 23, 2017), <a href="https://www.ftc.gov/enforcement/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks">https://www.ftc.gov/enforcement/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks</a> (``The Commission has generally relied on self-policing
to prevent Section 8 violations, and as a result, litigated Section
8 cases are rare (with none construing the 1990 amendments). In
recent Section 8 investigations, once staff raised concerns, an
individual agreed to step down from one company in order to
eliminate the interlock.''); cf. Press Release, U.S. Dep't of
Justice, Tullett Prebon and ICAP Restructure Transaction after
Justice Department Expresses Concerns about Interlocking
Directorates (Jul. 14, 2016), <a href="https://www.justice.gov/opa/pr/tullett-prebon-and-icap-restructure-transaction-after-justice-department-expresses-concerns">https://www.justice.gov/opa/pr/tullett-prebon-and-icap-restructure-transaction-after-justice-department-expresses-concerns</a>; Press Release, U.S. Dep't of Justice,
Justice Department Requires Divestitures in Commscope's Acquisition
of Andrew Corporation (Dec. 6, 2007), <a href="https://www.justice.gov/archive/atr/public/press_releases/2007/228330.htm">https://www.justice.gov/archive/atr/public/press_releases/2007/228330.htm</a>.
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Over the past year, our colleagues at the Antitrust Division have
sought to reactivate Section 8 and effectively put market participants
back on notice.\15\ Today's complaint and consent order build on that
effort, marking the Commission's first formal Section 8 enforcement in
nearly 40 years.\16\ This action is notable not just because it signals
a return to the Commission's prior approach of seeking binding
prospective relief through consent orders, but also because it expands
upon the remedies previously sought. Notably, the proposed order
includes a prior approval provision that prohibits Quantum from taking
a seat on the boards of any of the top seven natural gas producers in
the Appalachian Basin, accounting for a substantial majority of the
market.
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\15\ See, e.g., Press Release, U.S. Dep't of Justice, Justice
Department's Ongoing Section 8 Enforcement Prevents More Potentially
Illegal Interlocking Directorates (Mar. 9, 2023), <a href="https://www.justice.gov/opa/pr/justice-department-s-ongoing-section-8-enforcement-prevents-more-potentially-illegal">https://www.justice.gov/opa/pr/justice-department-s-ongoing-section-8-enforcement-prevents-more-potentially-illegal</a>; Press Release, U.S.
Dep't of Justice, Directors Resign from the Boards of Five Companies
in Response to Justice Department Concerns About Potentially Illegal
Interlocking Directorates (Oct. 19, 2022), <a href="https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially">https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially</a>.
\16\ See In re Hughes Tool Co., 130 F.T.C. 17 (1984); In re Big
Three Indus., Inc., 103 F.T.C. 24 (1984).
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The proposed order also puts industry actors on notice that they
must follow Section 8 no matter what specific corporate form their
business takes. Firms in the modern economy utilize a variety of
corporate forms and structures to engage in commerce, and industry
actors have become increasingly sophisticated at corporate organization
and venture formation. This is especially true in the private equity
and financial sectors, with various limited liability vehicles, limited
partnerships, and structured funds intricately entangled through a web
of corporate and fiduciary relationships. Indeed, Quantum uses a
limited liability structure when setting up its portfolio companies,
and Quantum itself is a limited partnership. Section 8's specific
prohibition of interlocks among competitor ``corporations'' pre-dates
the development of other commonly used corporate structures, such as
limited liability companies.\17\ Accordingly, we must update our
application of the law to match the realities of how firms do business
in the modern economy.\18\ Today's action makes clear that Section 8
applies to businesses even if they are structured as limited
partnerships or limited liability corporations.
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\17\ Holian et al, 21st Century Section 8 Enforcement:
Legislative Origins and the 1990 Amendments, American Bar
Association, Antitrust Magazine Online (April 2023).
\18\ See Makan Delrahim, AAG., Antitrust Div., U.S. Dep't of
Justice, Remarks at Fordham University School of Law (May 1, 2019),
<a href="https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-fordham-university-school-law">https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-fordham-university-school-law</a> (``Moreover,
whether one LLC competes against another, whether two corporations
compete against each other, or whether an LLC competes against a
corporation, the competition analysis is the same. We and the FTC
review mergers in this way, and we investigate our conduct matters
this way too.'').
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II. Standalone Section 5 Enforcement
The Commission's complaint charges that the proposed transaction
would facilitate the exchange of confidential, competitively sensitive
information in violation of Section 5 of the FTC Act. Specifically,
Quantum's anticipated position as one of EQT's largest shareholders and
EQT's obligation to facilitate the appointment of a Quantum designee to
the EQT board raise concerns that Quantum or EQT could have access to
one another's competitively significant, non-public information and
could participate in, or have influence over, competitive decision-
making at each firm. In addition to these concerns, a pre-existing
joint venture between EQT and Quantum, The Mineral Company (``TMC''),
may also facilitate the improper exchange of competitively sensitive
business information regarding the acquisition of mineral rights within
the Appalachian Basin.
In November 2022, the Commission issued a policy statement
outlining the scope of Section 5 of the FTC Act.\19\ As the policy
statement explains, Congress enacted Section 5 to create a new
prohibition broader than, and different from, the Sherman Act. The text
of the statute, which prohibits ``unfair methods of competition,''
distinguishes the FTC's authority from authority granted in the Sherman
and Clayton Acts. Lawmakers also made clear that Section 5 was designed
to extend beyond the reach of the other antitrust laws.\20\ And the
Supreme Court has repeatedly made clear that Section 5 prohibits not
just those practices that violate the Sherman Act or Clayton Act.\21\
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\19\ Fed. Trade Comm'n, Policy Statement Regarding the Scope of
Unfair Methods of Competition Under Section 5 of The Federal Trade
Commission Act (Nov. 10, 2022), <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf</a>.
\20\ Section 5 of the FTC Act expands these protections to
encompass ``conduct that violates the spirit of the antitrust
laws,'' including ``interlocking directors and officers of competing
firms not covered by the literal language of the Clayton Act.''
Section 5 Policy Statement at 13, 15; see In re Borg-Warner Corp. et
al., 101 F.T.C. 863 (June 23, 1983); In re TRW, Inc., 93 F.T.C. 325
(1979); In re Perpetual Fed. Sav. & Loan Assoc., 90 F.T.C. 608
(1977).
\21\ See, e.g., FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 454
(1986) (holding that ``[t]he standard of `unfairness' under the FTC
Act is, by necessity, an elusive one, encompassing not only
practices that violate the Sherman Act and the other antitrust
laws''); FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 242 (1972)
(holding that ``the Commission has broad powers to declare trade
practices unfair.''); FTC v. Texaco, Inc., 393 U.S. 223, 262 (1968)
(holding that ``[i]n large measure the task of defining `unfair
methods of competition' was left to the [FTC] . . . and that the
legislative history shows that Congress concluded that the best
check on unfair competition would be [a practical and expert
administrative body] . . . [that applies] the rule enacted by
Congress to particular business situations''); FTC v. Brown Shoe,
384 U.S. 316, 321 (1966) (holding that the FTC ``has broad powers to
declare trade practices unfair[,] particularly . . . with regard to
trade practices which conflict with the basic policies of the
Sherman and Clayton Acts'').
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Through the late 1970s, the FTC frequently brought Section 5 cases
against conduct that would not necessarily run afoul of the Sherman or
Clayton Acts. We now call these ``standalone'' Section 5 cases. They
included invitations to collude; \22\ price discrimination claims
against buyers not covered by the Clayton Act; \23\ de facto bundling;
\24\ exclusive dealing; \25\ and
[[Page 58275]]
many other practices.\26\ The Commission also initiated multiple
actions challenging mergers or series of acquisitions on the basis of
Section 5 violations, separate and aside from Sherman or Clayton Act
liability.\27\ In the 1980s, however, the Commission backed away from
bringing standalone Section 5 cases. In 2015, the Commission
effectively collapsed the distinction between Section 5 and the other
antitrust statutes. Today's action represents the first time in decades
that the Commission has challenged a deal as a standalone violation of
Section 5. It should remind market participants that transactions that
might not strictly violate Section 7 can still pose a risk to
competition that the FTC has a statutory obligation to address.
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\22\ FTC v. Cement Inst., 333 U.S. 683, 708 (1948) (holding that
conduct that falls short of violating the Sherman Act may violate
Section 5).
\23\ Alterman Foods v. FTC, 497 F.2d 993 (5th Cir. 1974);
Colonial Stores v. FTC, 450 F.2d 733 (5th Cir. 1971); R.H. Macy &
Co. v. FTC, 326 F.2d 445 (2d Cir. 1964); Am. News Co. v. FTC, 300
F.2d 104 (2d Cir. 1962); Grand Union Co. v. FTC, 300 F.2d 92 (2d
Cir. 1962).
\24\ Atl. Refin. Co. v. FTC, 381 U.S. 357, 369 (1965) (holding
that all that is necessary is to discover conduct that runs counter
to the public policy declared in the Act . . .'' and that ``there
are many unfair methods of competition that do not assume the
proportions of antitrust violations'').
\25\ FTC v. Mot. Picture Advert. Serv. Co., 344 U.S. 392, 394-95
(1953) (noting that ``Congress advisedly left the concept [of unfair
methods of competition] flexible . . . [and] designed it to
supplement and bolster the Sherman Act and the Clayton Act[,] [so
as] to stop . . . acts and practices [in their incipiency] which,
when full blown, would violate those Acts[,] . . . as well as to
condemn as `unfair methods of competition' existing violations of
them'').
\26\ Atl. Refin. Co., 381 U.S. 357.
\27\ See, e.g., Golden Grain Macaroni Co. v. FTC, 472 F.2d 882,
885 (9th Cir. 1972); In re Dean Foods Co., 70 F.T.C. 1146 (1966); In
re Nat'l Tea Co., 69 F.T.C. 226 (1966); In re Beatrice Foods Co., 67
F.T.C. 473 (1965); In re Foremost Dairies, Inc., 52 F.T.C. 1480
(1956).
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Quantum's position on EQT's board of directors and its role as one
of EQT's largest shareholders would provide Quantum with the ability to
sway or influence EQT's competitive decision-making and to access EQT's
competitively sensitive information. The Commission's complaint alleges
these risks are particularly serious given certain past actions by the
parties, as well as the natural gas industry's history of encouraging
the exchange of competitively sensitive information and public
signaling to competitors. The complaint alleges that the two firms' TMC
joint venture separately violates Section 5 of the FTC Act as it
creates additional opportunities for sharing competitively sensitive
business information. Further, there is reason to believe that EQT and
Quantum already may use TMC as a vehicle for information exchange for
the purchase of mineral rights and in connection with EQT's future
drilling plans. This information is forward-looking, non-public, and
competitively sensitive, and its exchange among rivals, coupled with
the noncompete agreements in place within the joint venture, harms
competition.
The proposed order is designed to remedy these concerns. The order
prohibits Quantum from occupying an EQT Board seat and requires it to
divest the EQT shares, which would structurally eliminate key
mechanisms for undue influence and information exchange. The order also
limits both current and future entanglements between the firms and
reduces opportunities for exchanging confidential and competitively
significant information between the firms, including by requiring EQT
and Quantum to unwind their existing joint venture and any noncompete
provisions.
[FR Doc. 2023-18272 Filed 8-24-23; 8:45 am]
BILLING CODE 6750-01-P
</pre></body>
</html>Indexed from Federal Register on August 25, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.