Competition Quarterly

We are pleased to bring you our inaugural edition of Competition Quarterly, a concise summary of the latest enforcement priorities and policy initiatives addressed by the Federal Trade Commission (FTC) and Department of Justice (DOJ) Antitrust Division. In this edition, we cover antitrust enforcement in labor markets, agencies’ approach to algorithmic pricing and litigation against technology platforms, continued scrutiny of the healthcare sector, recent focus on pricing for consumer staples and other essentials, and trends in merger enforcement. 

Non-Compete Agreements and Competition for Workers

Competition in labor markets remains a critical priority at the antitrust agencies. The FTC approved a rule, scheduled to take effect September 4, 2024, banning businesses from entering into non-compete agreements with workers. Once the rule kicks in, existing non-competes will no longer be enforceable, except for those that apply to “senior executives.” The rule also includes an exception that will permit non-competes in connection with the sale of a business. Several private plaintiffs immediately filed complaints seeking to block the rule and delay implementation pending the outcome of those court challenges.

This rule closely aligns with existing law in California, which has a long and robust history of prohibiting non-compete agreements under state law. A group of O’Melveny practitioners recently published an article examining what California’s experience can teach us about a world without non-competes. The article analyzes the strategies that California businesses have used to protect their legitimate interests without relying on non-compete agreements and the case law that has developed in response to these efforts.

In addition, as discussed below, the FTC has sued to block two mergers, alleging they would harm competition for workers. O’Melveny is following these and other developments in antitrust enforcement in labor markets, including government enforcement and private suits challenging hiring restrictions.

Technology and AI

Algorithmic Pricing: Antitrust enforcers continue to scrutinize the use of software algorithms to establish prices. DOJ reportedly has had an open probe into the rental housing sector’s use of algorithmic pricing for at least two years and recently expanded its inquiry by opening a criminal investigation. The antitrust agencies have also made their views clear in Statements of Interest filed in private-plaintiff litigation (In re: RealPage, Duffy v. Yardi Systems, and Cornish-Adebiyi v. Caesars Entertainment) and in blog posts. The antitrust agencies’ position on algorithmic pricing is that: (1) using an “agreed upon, shared algorithm” to fix prices is just as illegal as “using a shared human agent”; (2) jointly delegating key aspects of price-setting to a common algorithm can be illegal even if the competitors never communicate directly with each other about using the same algorithm; and (3) using a shared algorithm can be illegal even if the algorithm merely recommends, rather than determines, prices.

O’Melveny is at the forefront of algorithmic pricing litigation. The firm represents one of the defendants in the RealPage litigation, which involves allegations of price-fixing in both the multifamily and student housing rental markets, and O’Melveny partner Steve McIntyre successfully argued the dismissal motion for the student housing action, resulting in dismissal with prejudice.

Technology Platforms: The antitrust agencies continue to prioritize the technology sector, particularly large technology platforms. Entering 2024, the FTC and DOJ already had ongoing monopolization suits against Amazon, Meta, and Google. On March 21, Apple joined the list: following a long-standing investigation, DOJ and a group of states filed a Sherman Act Section 2 lawsuit in the District of New Jersey, alleging that Apple illegally monopolized or attempted to monopolize the smartphone and “performance smartphone” markets. The gist of the complaint is that Apple allegedly “reduces competition… by delaying, degrading, or outright blocking technologies that would increase competition in the smartphone markets by decreasing barriers to switching to another smartphone.”

For a comprehensive overview of legal developments affecting antitrust enforcement against digital platforms, see our 2023 Platform Antitrust Report.

Generative Artificial Intelligence (AI): The antitrust agencies are laser-focused on the latest disruptive technology: generative AI. Both the FTC and DOJ have made clear that they are looking holistically at the AI “stack,” with their analysis covering chips needed to train models, other AI-model inputs such as training data and cloud computing resources, foundational AI models, applications based on these models, and incorporation of AI-based technology into products and services. The antitrust agencies are particularly concerned about “bottlenecks” and “chokepoints” in key inputs and distribution channels, and whether powerful firms might create these chokepoints or take advantage of them to skew competition in their favor.

The FTC announced on January 25 that it has launched an inquiry into Microsoft’s investment in OpenAI and Google’s and Amazon’s investments into Anthropic. FTC Chair Lina Khan subsequently commented that the Commission is interested in whether these investments are coming with the expectation of exclusivity, privileged access, or ability to influence business strategy. DOJ also reportedly has numerous active investigations relating to AI and competition. Both agencies have been ramping up their technological expertise: DOJ announced on February 22 the appointment of Princeton professor Jonathan Mayer as the Department’s first Chief Science and Technology Advisor and AI Officer; the FTC launched the Office of Technology last year and on March 26 signed on to a statement making “clear that integrating technologists and technical experts into the policy and enforcement process is of global importance.”

We have been keeping our finger on the pulse of antitrust and other policy and regulatory developments in AI (see our prior alerts here and here).

Healthcare and Pharma

Healthcare and pharma remain firmly in the antitrust agencies’ crosshairs. Following the FTC’s 2023 challenge to Private Equity firm Welsh Carson’s alleged “roll-up” acquisitions of anesthesiology practices in Texas, leadership at both the FTC and DOJ reaffirmed their focus on private equity in healthcare. FTC Chair Lina Khan remarked at an FTC workshop on the topic that private equity buyouts in healthcare have exposed “a number of concerning extractive practices adopted by private equity in the health care space,” including: (1) short-term profit-extracting strategies; (2) roll-up strategies through serial acquisitions to consolidate power and undermine competition; and (3) interlocking directorates or the practice of buying up significant stakes in rival firms that compete within the same industry, which purportedly softens incentives to compete.

The FTC also remains active in challenging strategic mergers among healthcare providers. On January 25, the FTC challenged Novant Health, Inc.’s proposed acquisition of Lake Norman Regional Medical Center, Davis Regional Medical Center, and related assets in North Carolina. We expect the FTC to continue its aggressive enforcement efforts in this area for the foreseeable future.

Pharma continues to be an enforcement priority as well. On February 14, the FTC and the Department of Health and Human Services jointly issued a Request for Information on how the practices of group purchasing organizations (GPOs) and drug wholesalers may be contributing to generic drug shortages, including whether and to what extent “manufacturers, GPOs, and drug wholesalers are complying with their legal obligations under” laws pertaining to exclusive dealing and price discrimination. This comes on the heels of the FTC’s ongoing 6(b) study of pharmacy benefit managers (PBMs) and GPOs and a series of public statements on the agency’s concerns about rebate contracting.

Pricing for Consumer Staples and Other Essentials

Recent high inflation has drawn attention to pricing, and the antitrust agencies appear especially focused on prices for essentials such as groceries and household goods, rent, and drugs and healthcare. The agencies have taken a multifaceted approach in this area, advancing policy initiatives and pursuing enforcement actions.

• Merger Enforcement: The FTC sued to block Kroger’s proposed acquisition of Albertsons, alleging that consumers and workers alike would be made worse off if competition between the two supermarket chains is lost. According to the complaint, consumers would face higher prices and lower quality offerings, and workers could face lower wages, diminished benefits, and worse working conditions. While the companies have proposed a divestiture, the FTC criticized the proposal as “a hodgepodge of unconnected stores, banners, brands, and other assets” that would not enable the divestiture buyer to replace the competition between Kroger and Albertsons. Separately, Fresh Express abandoned its proposed acquisition of Dole’s packaged salad business in response to DOJ’s concerns that the merger would raise prices.
  
  
• Policy Initiatives: The FTC issued a report examining grocery supply chain disruptions during the pandemic and their impact on competition. According to the report, while consumers faced higher prices and product shortages, larger firms were better able to obtain favorable supplier allocations, and retail grocers achieved higher profits that remain elevated today. The White House also announced the launch of a Strike Force on Unfair and Illegal Pricing—jointly led by the FTC and DOJ—that will target unfair, anticompetitive, deceptive, and fraudulent conduct that results in higher prices.
  
  
• Price Discrimination: The FTC also continues to reinvigorate enforcement of the long-dormant Robinson-Patman Act, which prohibits some forms of price discrimination (e.g., charging competing resellers different prices for the same product). It has been reported that the FTC has ongoing price discrimination investigations in the soft-drink and spirits industries, and both FTC Chair Lina Khan and Commissioner Alvaro Bedoya have previewed that enforcement actions may be on the way.

We previously covered an important Ninth Circuit decision that may affect Robinson-Patman Act enforcement.

Merger Enforcement and Upcoming Changes to HSR Rules

Following the issuance of new Merger Guidelines in December, antitrust agency leadership have put these principles into effect. The Guidelines signaled more aggressive enforcement and previewed scrutiny of labor market harms, serial acquisitions, and platforms in particular. In April, the FTC sued to block Tapestry’s proposed acquisition of Capri, alleging that combining Tapestry’s Coach and Kate Spade brands and Capri’s Michael Kors brand would give the combined company a dominant share of “accessible luxury” handbags. In both this suit and its suit to block Kroger’s proposed acquisition of Albertsons, discussed above, the FTC alleged that competition for workers would be harmed. The Tapestry/Capri challenge also features allegations that Tapestry has a strategy of serial acquisitions, and that the Capri acquisition would “entrench” its “dominance” in the market, both of which are novel theories of harm detailed in the new Merger Guidelines.

The antitrust agencies are signaling greater scrutiny of private equity transactions, indicating that they are on the lookout for deals that are part of a “roll-up” strategy and have concerns about perceived Hart-Scott-Rodino (HSR) filing deficiencies by investment firms. The antitrust agencies’ continued focus on eliminating interlocking directorates is also part of these efforts.

Look for the agencies’ publication of the new HSR rules in the coming weeks. Agency leadership have indicated that there will be significant changes from the draft version issued last summer. Please contact O’Melveny to discuss strategies to prepare for the new rules.

In the next issue, watch for updates on the issuance of new HSR rules and challenges to the non-compete ban, and the latest on the antitrust agencies’ monopolization suits against big tech platforms.

If you have any questions related to the topics in this Competition Quarterly, please reach out to your usual O’Melveny contact or a member of our Antitrust & Competition team.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Sergei Zaslavsky, an O’Melveny partner licensed to practice law in the District of Columbia and Maryland; Julia Schiller, an O’Melveny partner licensed to practice law in the District of Columbia, New Jersey, and New York; Pete Herrick, an O’Melveny partner licensed to practice law in New York and the District of Columbia; Adam Walker, an O’Melveny associate licensed to practice law in the District of Columbia; Sheya I. Jabouin, an O’Melveny associate licensed to practice law in New York; and Ryan J. Fennell, an O’Melveny law clerk, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.