October 24, 2022
On Wednesday, October 19, 2022, the Department of Justice Antitrust Division (DOJ) announced that seven directors resigned from their board positions because of DOJ’s concerns that holding the positions violated the Clayton Act’s prohibition on interlocking directorates. Discussed more fully below, Clayton Act Section 8 generally prohibits a person from sitting on the boards of two competing companies.
Although the interlocking-directorate prohibition has existed since 1914, government challenges to interlocking directorates have been historically rare and largely limited to the merger-review context. Perhaps the most high-profile enforcement action outside the context of a merger review occurred in 2009 when Eric Schmidt—Google’s then-CEO—resigned from Apple’s board and Arthur Levinson—a member of Apple’s board—resigned from Google’s board after the Federal Trade Commission (FTC) opened an investigation. Still, the FTC and the DOJ have, in recent years, repeatedly expressed their intent to increase scrutiny. In particular, in April 2022, DOJ Assistant Attorney General Jonathan Kanter stated that DOJ is “ramping up efforts to identify violations across the broader economy” and “will not hesitate to bring Section 8 cases to break up interlocking directorates,” including through litigation.
The recent wave of resignations this month marks the first concrete result from DOJ’s stated increased scrutiny. The resigning directors, among them private equity executives, are voluntarily stepping down from board positions at five public technology companies. The interlocks at issue were direct, meaning that the same directors were serving simultaneously on the boards of two competing companies. Indirect interlocks, by contrast, occur when different representatives of the organization are appointed to sit on the boards of competing companies (e.g., representatives of a private-equity firm that is an investor in two competing companies). DOJ has warned that this was merely the “first” in a broader review of “potentially unlawful interlocking directorates.”
Section 8 of the Clayton Act prohibits (1) a “person” from (2) being a director or board-appointed officer of (3) two or more “corporations” that (4) are engaged in U.S. commerce and (5) that are “competitors” if (6) certain monetary thresholds are met. The main purpose is to “nip in the bud incipient antitrust violations by removing the opportunity or temptation for such violations through interlocking directorates.” Interlocking directorates that violate Section 8 are per se illegal, meaning that no anticompetitive effects or injury are necessary for liability.
The term “person” is broadly interpreted and includes individuals, corporations and unincorporated entities. Although a literal reading of Section 8 would only apply to “corporations,” antitrust agencies have suggested that it should also apply to other non-corporate contexts, including limited liability companies. Importantly, the antitrust agencies also interpret “competitors” broadly to include companies in the same industry that offer similar products for the same prospective customers. That said, because Section 8 issues have been rarely litigated, there are many unresolved interpretive questions.
Section 8’s prohibition is triggered if each of the corporations has capital, surplus and undivided profits equaling more than $10,000,000 as adjusted (currently $41,034,000). Capital, surplus and undivided profits is generally interpreted to mean the corporations’ net worth, or total assets over total liabilities, measured based on the last completed fiscal year.
Section 8 has three safe harbors, or de minimis exceptions:
Although “competitive sales” has not yet been precisely defined (in either scope or geography), the antitrust agencies would likely interpret the term broadly, as they have with other elements of Section 8.
If a person is initially eligible to serve as an officer or director, but they become ineligible during their term, Section 8 allows for a one-year grace period during which the person may resign from one of the board positions to resolve the interlock. There is no affirmative obligation to notify the antitrust agencies, and Section 8 alone does not allow the antitrust agencies to seek civil or criminal penalties. But they may seek injunctive relief (i.e., an order requiring the person to resign one of their positions). Private plaintiffs may attempt to claim monetary damages.
Companies should expect more interlocking-directorate enforcement actions and subsequent resignations in the near future, independent of merger reviews and not only for high-profile executives. The recent resignations all involved public technology companies (with evidence of the potential violations likely based on public statements and SEC filings) and the interlocks were direct, but the recent guidance from the FTC and DOJ suggests that future enforcement actions could strike more broadly.
Because the matters were all resolved voluntarily prior to litigation, they provide very little guidance on the agencies’ understanding of Section 8. In particular, there are still some uncertainties about the definitions of “competitors” and “competitive sales.” Additionally, it remains to be seen if the FTC will seek enforcement actions against board observers under Section 5 of the FTC Act.
Clients should be mindful and review their board directorships (and board-appointed officer positions). In some instances, particularly in growing businesses, it may be prudent to implement a plan for screening potential interlocks both for existing and incoming directors on the client’s board, as well as employees who are designated by the client to serve as a director in relation to a minority investment. Where one or more elements of a Section 8 interlock exist, it will also be important to implement a plan for periodic checks whether the thresholds are met (e.g., checking annual financial reports against the then in-effect monetary thresholds) and to have a plan for unilaterally unwinding potential unlawful interlocks if necessary.
As a last important reminder, regardless of whether Section 8 thresholds are met, mishandling of competitively sensitive information by directors, board-appointed officers and board observers can still expose a company to civil and criminal liability under Section 1 of the Sherman Act and Section 5 of the FTC Act.
Special thanks to associates Tina Asgharian and Rebecca McCraw for their contribution to this publication.
 Department of Justice, Office of Public Affairs, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates (Oct. 19, 2022).
 Assistant Attorney General Jonathan Kanter’s Opening Remarks at 2022 Spring Enforcers Summit, Washington, DC (Apr. 4, 2022).
 TRW, Inc. v. FTC, 647 F.2d 942, 946–47 (9th Cir., 1981); United States v. Crocker Nat’l Corp., 422 F. Supp. 686, 703 (N.D. Cal. 1976).
 See e.g., TRW, Inc., 647 F.2d at 948 (“In a developing industry in which product variation is just beginning and customer needs are not yet standardized, it is unlikely that two companies will produce products nearly equivalent in their ability to satisfy the needs of a range of customers. Nonetheless, these companies compete. Their competition consists of the struggle to obtain the patronage of the same prospective customers, accompanied by representations of a willingness to modify their respective products. Competition also consists of efforts to make a sale, even if neither succeeds in persuading the buyer to purchase.”); see also Debbie Feinstein, Bureau of Competition, Have a plan to comply with the bar on horizontal interlocks, Jan. 23, 2017.
 Thresholds are adjusted annually based on changes in the gross national product for the preceding year.
 See Interlocking Directorates: Handbook on Section 8 of the Clayton Act. Section of Antitrust Law at 57, American Bar Association (2011).
 See e.g., Statement of Commissioner Rohit Chopra Joined by Commissioner Rebecca Kelly Slaughter at 5, In the Matter of Altria Grp., Inc. and JUUL Labs, Inc. Commission File No. 1910075 (Apr. 2, 2020),(“As part of the transaction between Altria and JUUL, Altria was given the right to appoint a board observer to JUUL’s board of directors. There is significant risk that Altria’s Chief Growth Officer, and later its Chief Financial Officer, may have had access to competitively sensitive information on a wide range of topics related to JUUL’s business strategy, just like any other board member. I have reason to believe this arrangement undermines a key purpose of Section 8 of the Clayton Act’s prohibition on interlocking directorates and was therefore unlawful under Section 5 of the FTC Act, pursuant to the Commission’s 2015 Policy Statement.”)