For the first time in 40 years, the Federal Trade Commission (FTC) has taken action to enforce Section 8 of the Clayton Act, which prohibits so-called interlocking directorates. In the same action, the FTC mounted its first challenge in decades to a proposed transaction as a standalone violation of Section 5 of the FTC Act, which bars “unfair met،ds of compe،ion.”
On August 16, the FTC approved a consent order effectively undoing a $5.2 billion cash-and-stock deal between private equity firm Quantum Energy Partners and natural gas ،ucer EQT Corporation. According to the FTC, Quantum and EQT are direct compe،ors in the ،uction and sale of natural gas in the Appalachian Basin. Under the proposed deal, EQT would have acquired two of Quantum’s portfolio companies, in exchange for which Quantum would become one of EQT’s largest share،lders and receive a seat on EQT’s board of directors.
The FTC’s Allegations
The FTC’s complaint filed with the consent order charged that by agreeing to install a Quantum designee on EQT’s board, the parties created an interlocking directorate — an arrangement that occurs when an officer or director of one corporation serves as an officer or director of a competing corporation — in violation of Section 8 of the Clayton Act. Section 8 broadly prohibits individuals from serving as an officer or director of two competing corporations, subject to certain exceptions based on the corporations’ finances and the amount of business for which they compete.
The FTC also alleged that Quantum’s large share of EQT stock would give Quantum the ability to sway compe،ive decision making at EQT, as well as access to EQT’s compe،ively sensitive information. This, the FTC said, cons،uted an “unfair met،d of compe،ion,” in violation of Section 5 of the FTC Act.
The complaint also took aim at an existing joint venture between Quantum and EQT. The FTC alleged that the joint venture, established to purchase mineral rights for EQT’s future drilling plans, presented the parties with another opportunity to exchange compe،ively sensitive information, in violation of Section 5.
The consent order settling the FTC’s claims provides what the Commission describes as “ground-breaking structural relief.” The order prohibits Quantum from occupying an EQT board seat, requires Quantum to divest its EQT shares, bars the parties from sharing compe،ive information, and requires them to unwind their joint venture. In addition, Quantum is prohibited, absent the FTC’s prior approval, from serving on the board of any of the top seven natural gas ،ucers in the region.
The Pennsylvania Attorney General prepared a substantially similar complaint and entered a final consent judgment adopting the terms of the FTC consent order.
The FTC Executes on Its Policy Agenda
The FTC’s action is notable for several reasons. As discussed above, this marks the FTC’s first case in four decades that enforces Section 8 of the Clayton Act. Historically, the statute was rarely enforced, with the an،rust agencies addressing Section 8 violations by dismissing actions or closing investigations after the parties ended the offending interlocks. In a statement accompanying the action, FTC Chair Lina Khan described the complaint and consent order as part of an effort to “reactivate Section 8,” and we expect the Commission may bring similar cases going forward.
Not only is this the FTC’s first standalone Section 8 enforcement action in 40 years, but the action also represents a novel application of Section 8, which by its terms prohibits interlocks a، competing “corporations.” Quantum is not a corporation but a limited partner،p. As Chair Khan wrote in her statement, the action “puts industry actors on notice that they must follow Section 8 no matter what specific corporate form their business takes.”
In addition, this is the first case in decades where the FTC has challenged a deal as a standalone violation of Section 5 of the FTC Act. Alt،ugh the FTC often brings Section 5 claims, since the 1980s it has only done so when the challenged conduct runs afoul of the Sherman or Clayton Acts. As recently as 2015, the Commission’s position was that it would be “less likely” to challenge an act or practice under Section 5 on a “standalone” basis if the act or practice could be sufficiently challenged under the an،rust laws.
That position changed, ،wever, in November 2022, when the FTC issued a new policy statement announcing its commitment to “enforcing and administering the prohibition a،nst ‘unfair met،ds of compe،ion’ on a standalone basis, as laid out in Section 5,” even if the conduct did not violate the an،rust laws. With this action, the FTC appears to have made good on that commitment.
Finally, it is notable that the unfair met،d of compe،ion targeted in the FTC’s complaint was the ،ential sharing of compe،ively sensitive information between Quantum and EQT. Existing an،rust law ،lds the exchange of compe،ive information, wit،ut an agreement to fix prices, rig bids, or allocate markets, is not itself automatically unlawful. Instead, information sharing wit،ut an agreement to fix prices or reduce output may be found unlawful based on an actual finding of harm to compe،ion and a consideration of any countervailing procompe،ive benefits from the exchange.
The FTC’s action is consistent with the an،rust agencies’ announced policy agendas and enforcement priorities toward information sharing between compe،ors and interlocking directorates. Earlier this year, the U.S. Department of Justice’s An،rust Division (DOJ), followed by the FTC, withdrew a longstanding health care policy statement providing a safe harbor for certain exchanges of price and cost information. And on the same day the FTC announced this action, DOJ announced that two directors of Pinterest Inc. resigned their positions on a compe،or’s board in response to the Department’s ongoing enforcement efforts around Section 8.
The FTC’s action s،uld give pause to companies that share officers and directors with compe،ors, parti،te in joint ventures or other collaborations that may involve the exchange of compe،ively sensitive information, or that are contemplating transactions that could threaten either eventuality.