Case: 23-60167 Document: 336-1 Page: 1 Date Filed: 12/15/2023
`
`United States Court of Appeals
`for the Fifth Circuit
`____________
`
`No. 23-60167
`____________
`
`Illumina, Incorporated; GRAIL, Incorporated, now known
`as GRAIL, L.L.C.,
`
`
`United States Court of Appeals
`Fifth Circuit
`
`FILED
`December 15, 2023
`
`Lyle W. Cayce
`Clerk
`
`Petitioners,
`
`
`
`versus
`
`
`Federal Trade Commission,
`
`
`Respondent.
`
`
`
`______________________________
`
`Appeal from the Federal Trade Commission
`Agency No. 9401
`______________________________
`
`
`Before Clement, Graves, and Higginson, Circuit Judges.
`Edith Brown Clement, Circuit Judge:
`
`The Federal Trade Commission determined that Illumina, Inc.’s
`acquisition of Grail, Inc. violated Section 7 of the Clayton Act, and therefore
`ordered that the merger be unwound. Because the Commission applied an
`erroneous legal standard at the rebuttal stage of its analysis, we VACATE
`the Commission’s order and REMAND for further proceedings.
`
`

`

`Case: 23-60167 Document: 336-1 Page: 2 Date Filed: 12/15/2023
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`No. 23-60167
`
`I.
`
`A.
`
`Founded in 1998, Illumina is a publicly traded, for-profit corporation
`that specializes in the manufacture and sale of next-generation sequencing
`(“NGS”) platforms. NGS is a method of DNA sequencing that is used in a
`variety of medical applications. In September 2015, Illumina founded a
`wholly-owned subsidiary, Grail, which was so-named because its goal was to
`reach the “Holy Grail” of cancer research—the creation of a multi-cancer
`early detection (“MCED”) test that could identify the presence of multiple
`types of cancer from a single blood sample.
`
`Grail was incorporated as a separate entity in January 2016. Illumina
`maintained a controlling stake in the company until February 2017 when, to
`raise the capital needed to move Grail’s MCED test from concept to clinical
`trials, Illumina decided to bring in outside investors. This spin-off reduced
`Illumina’s equity stake in Grail to 12%. By September 2020, Grail had raised
`$1.9 billion through a combination of venture capital and strategic partners.
`Then, on September 20, 2020, Illumina entered into an agreement to re-
`acquire Grail for $8 billion, with the goal of bringing Grail’s now-developed
`MCED test to market.
`
`industry had changed dramatically between
`The MCED-test
`February 2017—when Illumina spun Grail off—and September 2020—when
`Illumina agreed to re-acquire Grail. Grail’s MCED test—which it named
`Galleri—had acquired a breakthrough device designation from the U.S. Food
`and Drug Administration (“FDA”), and Grail had published promising
`results from a clinical study concerning the initial version of Galleri and was
`undergoing additional clinical studies to validate its updated version.
`Meanwhile, Thrive Earlier Detection Corporation had announced that the
`initial version of its own MCED test—CancerSEEK—had also been
`
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`clinically validated. And other MCED tests—including Singlera Genomics,
`Inc.’s PanSeer—were
`in development. All of the MCED tests
`in
`development—including Galleri, CancerSEEK, and PanSeer—relied on
`Illumina’s NGS platforms for sequencing, and there were no available
`alternatives.
`
`Given their reliance on Illumina’s NGS platforms, Illumina’s
`customers—both within and without the MCED-test industry—expressed
`concern about whether they would be able to continue to purchase Illumina’s
`NGS products post-merger on the same terms and conditions as pre-merger.
`So, Illumina developed a standardized supply contract (the “Open Offer”)
`that it made available to all for-profit U.S. oncology customers on March 30,
`2021. The Open Offer is irrevocable, may be accepted by a customer at any
`time until August 18, 2027, became effective as of the merger’s closing, and
`will remain effective until August 18, 2033. Among other terms, the Open
`Offer requires Illumina to provide its NGS platforms at the same price and
`with the same access to services and products that is provided to Grail.
`
`Grail first offered Galleri for commercial sale in April 2021 as a
`laboratory-developed test.1 While Galleri is the only NGS-based MCED test
`currently available on the market, others expect to go to market soon and to
`directly compete with Galleri. Illumina’s NGS platforms are still the only
`means of sequencing MCED tests and will remain so for the foreseeable
`future.
`
`_____________________
`
`1 The FDA does not review or validate safety or efficacy data of tests sold as
`laboratory-developed tests. Rather, independent labs self-certify the quality of their own
`product under the regulatory framework set forth under the Clinical Laboratory
`Improvement Amendments. For this reason, laboratory-developed tests have lower
`adoption rates than FDA-approved tests.
`
`3
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`B.
`
`On March 30, 2021—the same day Illumina released its Open Offer—
`the FTC’s Complaint Counsel issued a complaint alleging that the Illumina-
`Grail merger agreement, if consummated, would violate Section 7 of the
`Clayton Act.2 The merger was, in fact, consummated on August 18, 2021,
`but, due to ongoing regulatory review by the European Commission, Illumina
`held—and continues to hold—Grail as a separate company.
`
`The FTC’s Chief Administrative Law Judge (“ALJ”) convened an
`evidentiary hearing on August 24, 2021. In the coming months, the parties
`developed an extensive evidentiary record consisting of over 4,500 exhibits
`and the live or deposition testimony of fifty-six fact witnesses and ten experts.
`Based on this record, the ALJ issued his initial decision on September 1,
`2022. The ALJ found that Complaint Counsel failed to prove that the merger
`was likely to cause a substantial lessening of competition in the market for the
`research, development, and commercialization of MCED tests. Specifically,
`the ALJ concluded that Complaint Counsel had not shown a likelihood that
`Illumina would foreclose against Grail’s rivals because Grail has no current
`competitors in the market to be foreclosed, the MCED tests in development
`would not be a good substitute for Grail’s test, and any foreclosing activities
`would cause harm to Illumina’s NGS-sales business. In any event, the ALJ
`determined, the Open Offer “effectively constrains Illumina from harming
`Grail’s alleged rivals and rebuts the inference that future harm to Grail’s
`alleged rivals, and thus future harm to competition, is likely.”
`
`_____________________
`
`2 For clarity, we use “FTC” when discussing the Federal Trade Commission
`generally, “Complaint Counsel” when describing the FTC’s actions as a party to these
`adversary proceedings, and “Commission” when referring to the FTC’s actions as an
`adjudicatory body.
`
`4
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`Complaint Counsel appealed the ALJ’s decision to the Commission,
`and, after oral argument, the Commission reversed. Upon its de novo review,
`the Commission concluded that the merger was likely to substantially lessen
`competition
`in
`the market
`for
`the
`research, development, and
`commercialization of MCED tests. The Commission found that the ALJ had
`factually erred in discussing the capabilities of Grail and other MCED tests
`in development, improperly focused on foreclosure harm to MCED tests on
`the market today as opposed to tests in development, and failed to recognize
`that any losses to Illumina’s NGS sales would be more than offset by
`Illumina’s expected gains in clinical testing. The Commission also held that
`the Open Offer was a remedy that should not be factored into the liability
`analysis. But the Commission evaluated the Open Offer as rebuttal evidence
`anyway, finding that the Open Offer failed to rebut Complaint Counsel’s
`prima facie case because it would not “eliminate the effects” of the merger.
`Finally, the Commission rejected Illumina’s constitutional defenses. The
`Commission therefore ordered Illumina to divest Grail. Illumina now
`appeals.
`
`II.
`
`We review the Commission’s decision, not that of the ALJ. Impax
`Laboratories, Inc. v. FTC, 994 F.3d 484, 491 (5th Cir. 2021). All legal
`questions pertaining to the Commission’s order are reviewed de novo while
`the Commission’s factual findings are reviewed for “substantial evidence.”
`Chicago Bridge & Iron Co. N.V. v. FTC, 534 F.3d 410, 422 (5th Cir. 2008).
`Under this standard, we are bound by the Commission’s factual
`determinations so long as they are supported by “such relevant evidence as
`a reasonable mind might accept as adequate.” FTC v. Ind. Fed’n of Dentists,
`476 U.S. 447, 454 (1986) (citation omitted). This is so “even if suggested
`alternative conclusions may be equally or even more reasonable and
`
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`persuasive.” N. Tex. Specialty Physicians v. FTC, 528 F.3d 346, 354 (5th Cir.
`2008) (internal quotation marks and citation omitted).
`
`III.
`
`Because, as explained below, resolution of Illumina’s statutory claims
`does not “obviate the need to consider” the constitutional issues raised,
`United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988), we begin with
`Illumina’s four constitutional challenges. Each is foreclosed by Supreme
`Court authority.
`
`A.
`
`First, Illumina contends that the Commission proceedings were the
`result of an unconstitutional delegation of legislative power in violation of
`Article I. Specifically, Illumina claims that Congress delegated to the FTC
`the power to decide whether to bring antitrust enforcement actions in an
`administrative proceeding, pursuant to Section 5(b) of the FTC Act, 15
`U.S.C. § 45(b), or to bring this same enforcement action in an Article III
`court pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), without
`providing “any guidance for purposes of deciding between administrative
`proceedings and federal court.”
`
`But as the Supreme Court recently clarified, federal-court actions
`under Section 13(b) are not the same as administrative proceedings under
`Section 5(b). Rather, when the FTC goes to federal court under Section
`13(b), it is limited to pursuing injunctive relief; to obtain other forms of relief,
`such as monetary damages, the FTC must resort to administrative
`proceedings under Section 5(b). AMG Cap. Mgmt., LLC v. FTC, 141 S. Ct.
`1341, 1348–49 (2021).
`
`Moreover, to the extent that Illumina argues that Congress’s directive
`for the FTC to commence an enforcement action when such a proceeding
`
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`would be “in the interest of the public” does not provide an “intelligible
`principle,” we disagree. To the contrary, the Supreme Court has repeatedly
`“found an ‘intelligible principle’ in various statutes authorizing regulation in
`the ‘public interest.’” Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 474
`(2001) (collecting cases).
`
`B.
`
`Second, Illumina claims that the FTC unconstitutionally exercised
`executive powers while insulated from presidential removal in violation of
`Article II. But Humphrey’s Executor v. United States held that the FTC’s
`enabling act did not run afoul of Article II because, essentially, the FTC was
`vested with quasi-legislative/quasi-judicial authority rather than purely
`executive authority. 295 U.S. 602, 626–32 (1935). While the Supreme Court
`has cabined the reach of Humphrey’s Executor in recent years, it has expressly
`declined to overrule it. See Seila Law LLC v. CFPB, 140 S. Ct. 2183, 2206
`(2020); accord Collins v. Yellin, 141 S. Ct. 1761, 1783 (2021). Thus, although
`the FTC’s powers may have changed since Humphrey’s Executor was
`decided, the question of whether the FTC’s authority has changed so
`fundamentally as to render Humphrey’s Executor no longer binding is for the
`Supreme Court, not us, to answer. Lefebure v. D’Aquilla, 15 F.4th 650, 660
`(5th Cir. 2021) (“[T]he only court that can overturn a Supreme Court
`precedent is the Supreme Court itself.”).
`
`C.
`
`Third, Illumina argues that the FTC violated Illumina’s due process
`rights by serving as both prosecutor and judge. But the Supreme Court has
`held that administrative agencies can, and often do, investigate, prosecute,
`and adjudicate rights without violating due process. Withrow v. Larkin, 421
`U.S. 35, 47, 56 (1975). Of course, if there is evidence that a decisionmaker has
`“actual bias” against a party, that raises due process concerns. Id. at 47. But
`
`7
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`courts cannot “presume bias” merely from the institutional structure of an
`agency. United States v. Benitez-Villafuerte, 186 F.3d 651, 660 (5th Cir. 1999).
`Moreover, this court has already rejected the argument that the FTC’s
`structure, which combines prosecutorial and adjudicative functions, deprives
`parties of due process. Gibson v. FTC, 682 F.2d 554, 559–60 (5th Cir. 1982).
`Illumina points to no evidence of actual bias and instead takes issue with the
`FTC’s structural design. Whatever merit this argument may have, it is barred
`by precedent.
`
`D.
`
`Fourth, Illumina claims an equal-protection violation because there is
`no rational basis for allocating certain antitrust enforcement actions to the
`FTC and others to the Department of Justice. But rational-basis review is a
`low bar that is satisfied so long as “there is any reasonably conceivable state
`of facts that could provide a rational basis for the classification.” FCC v.
`Beach Commc’ns, Inc., 508 U.S. 307, 313 (1993). Here, the FTC and the DOJ
`have an “interagency clearance process” which allocates antitrust
`investigations to one agency or the other based primarily on which agency has
`“expertise in [the] particular industry or market” of the transaction under
`review. U.S. Gov’t Accountability Off., GAO-23-105790, DOJ
`and FTC Jurisdictions Overlap, but Conflicts are
`Infrequent (2023). This is undoubtedly a rational basis for giving one
`agency the lead over the other.
`
`IV.
`
`We turn now to Illumina’s Clayton Act challenge. Section 7 of the
`Clayton Act prohibits mergers and acquisitions “where in any line of
`commerce or in any activity affecting commerce in any section of the country,
`the effect of such acquisition may be substantially to lessen competition.” 15
`
`8
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`U.S.C. § 18.3 To evaluate Section 7 claims, courts apply a burden-shifting
`framework. See, e.g., Chicago Bridge, 534 F.3d at 423; United States v. AT&T
`Inc., 916 F.3d 1029, 1032 (D.C. Cir. 2019) (applying burden-shifting
`framework to Section 7 claim concerning vertical merger).4 Complaint
`Counsel bears the initial burden to “establish a prima facie case that the
`merger is likely to substantially lessen competition in the relevant market.”
`AT&T, 916 F.3d at 1032. If a prima facie case is made, “the burden shifts to
`the defendant to present evidence that the prima facie case inaccurately
`predicts the relevant transaction’s probable effect on future competition or
`to sufficiently discredit the evidence underlying the prima facie case.” Id.
`(internal quotation marks and citations omitted). If such a rebuttal is
`provided, “the burden of producing additional evidence of anticompetitive
`effects shifts to the government, and merges with the ultimate burden of
`persuasion, which remains with the government at all times.” Id. (citation
`omitted). This framework is applied flexibly—“in practice, evidence is often
`considered all at once and the burdens are often analyzed together.” Chicago
`Bridge, 534 F.3d at 424.
`
`A.
`
`We start by reviewing Complaint Counsel’s prima facie case. The
`Commission concluded that Complaint Counsel had carried its burden of (1)
`identifying the relevant product and geographic market as the market for the
`
`_____________________
`
`3 The statute also prohibits mergers that would “tend to create a monopoly,” 15
`U.S.C. § 18, but that provision is not at issue here.
`4 We note, as did the D.C. Circuit, that “[t]here is a dearth of modern judicial
`precedent on vertical mergers and a multiplicity of contemporary viewpoints about how
`they might optimally be adjudicated and enforced.” AT&T, 916 F.3d at 1037. Indeed, until
`AT&T in 2018, the government had not litigated a vertical merger case since the 1980s.
`Jonathan M. Jacobson, Vertical Mergers: Is it Time to Move the Ball?, 33 ANTITRUST 6, 6
`(2019).
`
`9
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`research, development, and commercialization of MCED tests in the United
`States, and (2) showing that the Illumina-Grail merger was likely to
`substantially lessen competition in this market. We find that these
`conclusions are supported by substantial evidence.
`
`1.
`
`The first step of the prima facie case requires defining the relevant
`market—that is, the “line of commerce” and the “section of the country”
`where the relevant competition occurs. 15 U.S.C. § 18; see also United States
`v. Marine Bancorporation, Inc., 418 U.S. 602, 618 (1974) (“Determination of
`the relevant product and geographic markets is a necessary predicate to
`deciding whether a merger contravenes the Clayton Act.” (internal quotation
`marks and citation omitted)). The parties agree with the Commission’s
`finding that the relevant geographic market is the United States but disagree
`as to its determination that the relevant product market is “the research,
`development, and commercialization of MCED tests.”5
`
`In antitrust law, the relevant product market is “the area of effective
`competition,” which is typically the “arena within which significant
`substitution in consumption or production occurs.” Ohio v. Am. Express Co.,
`138 S. Ct. 2274, 2285 (2018) (internal quotation marks and citation omitted).
`However, the relevant product market must “correspond to the commercial
`realities of the industry.” Brown Shoe Co. v. United States, 370 U.S. 294, 336
`(1962) (internal quotation marks and citation omitted). So, “courts should
`combine different products or services into a single market” when necessary
`to reflect these realities. Ohio, 138 S. Ct. at 2285 (alteration adopted) (internal
`quotation marks and citation omitted).
`
`_____________________
`
`5 The ALJ defined the relevant product market the same way.
`
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`To determine the boundaries of the relevant product market, the
`Commission relied on what is known as the “Brown Shoe” methodology,
`which looks to certain “practical indicia” of market demarcation, such as
`“industry or public recognition of the [market] as a separate economic entity,
`the product’s peculiar characteristics and uses, unique production facilities,
`distinct customers, distinct prices, sensitivity to price changes, and
`specialized vendors.” Brown Shoe, 370 U.S. at 325.
`
`First, the Commission found that MCED tests have “peculiar
`characteristics and uses” as compared to other current standard-of-care
`cancer-screening tests. As the Commission explained, cancer is traditionally
`detected through more
`invasive procedures,
`like a tissue biopsy,
`colonoscopy, or mammography, which often screen for only one type of
`cancer and only at a later stage of cancer development.6
`
`Second, the Commission found that MCED tests are designed for
`distinct customers—asymptomatic patients as opposed to those with
`symptoms or a history of cancer. And, as the Commission noted, MCED test
`developers expect to market their tests to primary care physicians and, in
`Illumina’s case, directly to patients, as opposed to marketing plans for other
`oncology tests, which focus on sales to oncologists and other cancer
`specialists.
`
`Third, the Commission found that MCED tests, which will be
`targeted toward a more general population than traditional cancer-screening
`tests, will likely have their own distinct pricing strategy. Specifically, MCED
`tests will need to have particularly low out-of-pocket costs to patients in order
`to achieve wide acceptance. Other MCED-test developers testified that they
`
`_____________________
`
`6 As the ALJ noted, “[t]he conclusion that MCED tests are a distinct product from
`other oncology tests borders on the obvious.”
`
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`anticipated competing with Grail on price, and evidence in the record showed
`that Grail understood that lower-priced MCED tests would pose a
`competitive threat. Finally, the Commission found that “MCED developers,
`including Grail, see themselves as competing in a distinct market and view
`each other as key competitors.”
`
`Critically, because the Commission viewed the relevant product
`market as one for the research, development, and commercialization of
`MCED tests—not the existing commercial market for MCED tests—it based
`its market definition on what MCED-test developers reasonably sought to
`achieve, not what they currently had to offer. Each of Illumina’s proposed
`bases for why the Commission’s market definition fails springs from the
`presumption that the Commission should have defined the market based on
`the products that currently exist, not those that are anticipated or expected.
`We disagree.7
`
`First, Illumina argues that there is no evidence of reasonable
`interchangeability of use or cross-elasticity of demand between Galleri and
`other MCED tests in development because the other tests either will not
`match Galleri’s “performance characteristics” or “are years from coming to
`market.” But as the Commission noted, record evidence suggested
`otherwise—CancerSEEK has been shown to detect eight types of cancer in
`an asymptomatic screening population while Galleri has only been shown to
`detect seven. And even if Illumina was correct in its claim that the other
`
`_____________________
`
`7 In any event, the leading antitrust commentators have noted that “the difference
`between actual and potential competition” for purposes of antitrust enforcement is often
`“exaggerate[d]”: “[P]otential competition is competition ‘for’ the market, while ‘actual’
`competition is said to be competition ‘in’ the market. But insofar as antitrust policy is
`concerned, both kinds of competition can be equally ‘actual.’” 4 Phillip E. Areeda &
`Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust
`Principles and Their Application ¶ 907 (4th ed. 2016).
`
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`MCED tests in development would only be able to detect a subset of the fifty
`cancer types that Galleri can detect, two products need not be identical to be
`in the same market; rather, the question is merely whether they are “similar
`in character or use.” United States v. Anthem, Inc., 236 F. Supp. 3d 171, 194
`(D.D.C.) (quoting FTC v. Staples, Inc., 970 F. Supp. 1066, 1074 (D.D.C.
`1997)), aff’d, 855 F.3d 345 (D.C. Cir. 2017). And the Commission correctly
`noted that these other tests could still take sales from Galleri (i.e., be
`substitutes, albeit not perfect substitutes) if they were priced lower.
`
`Nor was the Commission required to mathematically demonstrate
`cross-elasticity of demand. Indeed, requiring such hard metrics to prove the
`bounds of a market where only one product has been commercialized but
`there is indisputably ongoing competition to bring additional products to
`market would, in effect, prevent research-and-development markets from
`ever being recognized for antitrust purposes. This, in turn, would directly
`contravene the purpose of Section 7—“to arrest anticompetitive tendencies
`in their incipiency.” United States v. Phila. Nat’l Bank, 374 U.S. 321, 362
`(1963) (internal quotation marks and citation omitted).8
`
`To be sure, simply labeling a market as one for “research and
`development” does not relieve Complaint Counsel of its burden to delineate
`the bounds of a relevant product market. In some circumstances, there may
`be no firms which can fairly be said to be “competing” in a space. And the
`mere fact that some company, someday may innovate a competing product
`in a given market would be too speculative to support a Section 7 claim, lest
`
`_____________________
`
`8 For similar reasons, the Commission was not required to use the hypothetical
`monopolist test to define the relevant product market. In a research-and-development
`market where most products have yet to reach the consumer marketplace, there are no
`prices from which to build a data set, and thus no way to run a hypothetical monopolist test
`analysis.
`
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`every acquisition be presumptively unlawful. Cf. FTC v. Elders Grain, Inc.,
`868 F.2d 901, 906 (7th Cir. 1989) (“Section 7 forbids mergers and other
`acquisitions the effect of which ‘may’ be to lessen competition substantially.
`. . . Of course the word ‘may’ should not be taken literally, for if it were, every
`acquisition would be unlawful.”). But that is not the case here. While Grail
`may have the most advanced MCED test, competing tests—particularly
`CancerSEEK—have been clinically validated, and other developers have
`concrete plans to begin the trials necessary for FDA approval. Indeed, Grail’s
`own internal documents show that the company viewed itself as being in
`active competition with these other MCED-test developers.
`
`the
`Illumina’s other arguments—that
`reasons,
`For similar
`Commission misapplied the Brown Shoe factors and “baseless[ly]” defined
`the market to include products in development—also fail. Specifically,
`Illumina contends that the Commission assessed the Brown Shoe “practical
`indicia” too broadly, examining whether MCED tests were different from
`other oncology tests rather than whether Galleri was different from other
`MCED tests in development. But Illumina’s proposed approach assesses the
`indicia far too narrowly. Indeed, under the narrower application urged by
`Illumina, the relevant market would consist of only one product—Galleri.
`Antitrust law does not countenance such a cramped view of competition,
`particularly in a research-and-development market.9
`
`_____________________
`
`9 Because the relevant “line of commerce” is the research and development of
`MCED tests, Illumina’s reliance on Mercantile Texas Corp. v. Board of Governors of Federal
`Reserve System, 638 F.2d 1255, 1272 (5th Cir. Unit A 1981) for the proposition that market
`entry needs to occur within two to three years is misplaced. Although other MCED test
`developers have not yet entered the consumer market, they have entered the research-and-
`development market.
`
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`2.
`
`With the relevant market established, we next turn to whether
`Complaint Counsel carried its initial burden of showing that “the proposed
`merger is likely to substantially lessen competition.” AT&T, 916 F.3d at 1032
`(emphasis omitted). As the Commission recognized, courts have used “two
`different but overlapping standards for evaluating the likely effect of a vertical
`transaction”: (1) the Brown Shoe standard, which requires courts to look
`(again) at the factors first enunciated in Brown Shoe and carried on through
`its progeny, including Fruehauf Corp. v. FTC, 603 F.2d 345, 353 (2d Cir.
`1979); and (2) the “ability-and-incentive” standard, which asks whether the
`merged firm will have both the ability and the incentive to foreclose its rivals,
`either from sources of supply or from distribution outlets. Commissioner
`Wilson, concurring in the Commission’s decision, argued that there is no
`Brown Shoe standard—only the “ability-and-incentive” test—for vertical
`mergers in modern antitrust analysis. But we need not resolve this issue
`because we find that, under either standard, Complaint Counsel established
`a prima facie case supported by substantial evidence.
`
`a.
`
`We begin by addressing the test upon which all Commissioners
`agreed—the ability-and-incentive test. Under this framework, courts
`consider whether the merged firm will have the ability and incentive to
`foreclose rivals from sources of supply or distribution to determine whether
`the merger is likely to substantially lessen competition in the relevant market.
`
`Illumina concedes that it would have the ability to foreclose Grail’s
`rivals post-merger. But, in its reply brief, Illumina claims that merely having
`the ability to foreclose is not enough; rather, the merger must have “increased
`Illumina’s ability to foreclose.” But we do not consider arguments raised for
`the first time on reply. MDK Sociedad De Responsabilidad Limitada v. Proplant
`
`15
`
`

`

`Case: 23-60167 Document: 336-1 Page: 16 Date Filed: 12/15/2023
`
`No. 23-60167
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`Inc., 25 F.4th 360, 367 (5th Cir. 2022). And, in any event, we disagree with
`Illumina’s assertion. As the Commission astutely observed, Illumina was
`already established as the monopoly supplier of a key input—NGS
`platforms—to MCED-test developers pre-merger. So, it would have been
`impossible for Complaint Counsel to show that the merger would increase
`Illumina’s ability to foreclose. Thus, as the Commission explained, requiring
`such a showing would effectively “per se exempt from the Clayton Act’s
`purview any transaction that involves the acquisition of a monopoly provider
`of inputs to adjacent markets.” We decline to adopt a rule that would have
`such perverse results.10
`
`That leaves incentive to foreclose as the determining factor in
`evaluating the Illumina-Grail merger under the ability-and-incentive test. As
`the Commission explained, the degree to which Illumina has an incentive to
`foreclose Grail’s rivals depends upon the balance of two competing interests:
`Illumina’s interest in maximizing its profits in the downstream market for
`MCED tests vis-à-vis its ownership interest in Grail versus Illumina’s
`interest in maximizing its profits in the upstream market for NGS platforms
`vis-à-vis its sales to all MCED-test developers. Foreclosing Grail’s rivals
`would increase the former (by diverting MCED-test sales from competitors
`to Grail) but decrease the latter (by reducing the total number of MCED tests
`in the marketplace). So, the Commission reasoned, the greater Illumina’s
`ownership stake in Grail, the more its interest in maximizing downstream
`
`_____________________
`
`10 Contrary to Illumina’s assertion, we do not read the Northern District of
`California’s Microsoft decision as reaching a different conclusion. Indeed, that court’s
`ultimate formulation of the ability-and-incentive test stated that Complaint Counsel was
`required to show that “the combined firm (1) has the ability to” and “(2) has the incentive
`to” foreclose. FTC v. Microsoft Corp., No. 23-cv-02880, 2023 WL 4443412, at *13 (N.D.
`Cal. July 10, 2023) (emphases added). The decision does not require a showing that the
`merger “provides” the combined firm with both, as Illumina wrongly claims.
`
`16
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`Case: 23-60167 Document: 336-1 Page: 17 Date Filed: 12/15/2023
`
`No. 23-60167
`
`profits will outweigh its interest in preserving upstream profits, and thus the
`more incentive it will have to foreclose. And since the merger would increase
`Illumina’s ownership stake in Grail from 12% to 100%, Illumina would “now
`earn much more from the sale of a [Grail] test than from the sale of a rival’s
`test” and would therefore “have a significantly greater incentive to foreclose
`[Grail’s] rivals rather than to keep them on a level playing field.”
`
`Illumina challenges this conclusion on two bases. First, Illumina
`argues that, even if the merger would result in Illumina earning larger profits
`from the sale of a Grail test than the sale of a rival MCED test, that profit
`differential means nothing without proof of diversion, i.e., Grail’s capture of
`sales lost by rival MCED-test developers. Illumina is correct that diversion is
`necessary for a vertical merger to give rise to foreclosure incentives. If
`Illumina forecloses Grail’s rivals, preventing them from entering the MCED-
`test market or lowering their sales, Illumina’s NGS-sales revenue generated
`from those rivals will suffer. Therefore, a forecl