Publication
International arbitration report
In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
The European Commission’s prohibition of Illumina's acquisition of GRAIL
Global | Publication | April 2024
On 6 September 2022, the European Commission (EC) prohibited Illumina’s acquisition of Grail, bringing to an end the administrative stage of a legal saga that has attracted interest beyond competition law specialists. According to the EC, the transaction would hinder innovation and reduce choice in the emerging market for early-stage blood-based cancer detection tests. The EC also found that Illumina’s proposed remedies would be insufficient to address its concerns. Illumina has appealed the EC decision (Case T-709/22).
The EC’s decision has several features that make it unusual and which should be noted for future transactions, particularly in the tech, pharma and other innovative sectors:
- The decision rests on an innovation theory of harm in a vertical transaction. In essence, the EC found that Grail and its rivals are engaged in an innovation race to develop and commercialize early-stage blood-based cancer detection tests, and that Illumina could foreclose this innovation competition because Grail’s rivals rely on Illumina's sequencers to develop and run their tests. The theory of harm turns on the impact on third parties’ incentives to innovate1.
- It is the first occasion where the EC has reviewed a transaction over which neither it nor national competition authorities (NCAs) had jurisdiction under Article 22 EUMR.
- The EC is also considering, for the first time, how to unwind a transaction that closed without clearance, in a manner that restores the independence and ensures the viability of Grail in the future.
Content
Background
On 19 April 2021, the EC accepted a referral request, under Article 22 EUMR, from the French NCA (subsequently joined by five other NCAs)2. The transaction did not meet the EUMR turnover thresholds and did not fall within the jurisdiction of any individual Member State. Considering the referral request, the EC found that the transaction could affect trade within the single market and threaten to significantly affect competition within France. The EC took jurisdiction, concluding that Grail's (lack of) EU turnover did not reflect its competitive significance.
On 16 June 2021, the transaction was notified to the EC and, on 22 July 2021, an in-depth investigation was opened. On 18 August 2021, while the EC's review was still ongoing, Illumina announced that it had completed the acquisition. On 13 July 2022, following Illumina’s appeal regarding the EC’s decision to accept the referral, the General Court (GC) confirmed the Commission’s jurisdiction. Illumina has appealed the GC’s judgment to the European Court of Justice and the Advocate General delivered his opinion on 21 March 2024 (see our briefing here).
The Commission’s prohibition decision
The EC found that the merger would give Illumina the ability and incentive to cut off Grail's rivals from accessing its Next-Generation Sequencer (NGS) technology (or otherwise disadvantage them), having a significant detrimental effect on competition in developing and marketing NGS-based cancer detection tests in the EEA.
Competition concerns
The EC found that Grail and its competitors are currently engaged in an innovation race to develop and commercialize early-stage blood-based cancer detection tests, and that protecting this competition is crucial to ensuring that early-stage blood-based cancer detection tests with different features and prices are launched on the market. The EC found that, if it had approved the merger, Illumina would have been able to foreclose Grail's rivals. Grail and the other test developers rely on Illumina's NGS systems to develop and run their tests. Currently, only Illumina's equipment meets the requirements for such tests, and there are no credible alternatives to Illumina in the short-medium term. This finding is in stark contrast to the CMA’s finding in 20193, namely that Illumina competes with a number of other NGS system providers.
The EC also found that there are significant barriers to entry, in particular due to the risk of intellectual property (IP) litigation, the need for Grail's rivals to be able to offer tests that can be run on an installed base of NGS instruments in third-party laboratories that can compete with Illumina's ongoing innovation, are a developed and stable technology, and provide reliable support services. Moreover, being forced to switch NGS system providers would be a long and costly process for Grail's rivals, without any guarantee of success.
The EC also took the view that Illumina would have had clear incentives to foreclose Grail's rivals. The NGS-based early-stage blood- based cancer detection testing market is expected to expand rapidly and become highly lucrative. Given the enormous market potential and the ongoing innovation competition in the development of early-stage blood-based cancer detection tests, the EC found that Illumina would have an incentive to foreclose Grail's rivals now, even if it would benefit from that only in the future.
Illumina's proposed remedies
Illumina offered remedies to address these concerns. However, the EC concluded they did not adequately address its concerns in a way that would have preserved competition on a lasting basis and prevented harm to innovation. According to the EC, the remedies did not entirely remove Illumina's ability or incentives to foreclose Grail's rivals and would have not prevented the transaction's detrimental effect on competition. In particular, Illumina proposed to:
- Grant competing NGS system suppliers a licence to certain NGS patents. It also committed to stop patent lawsuits in the US and Europe against competing NGS system supplier BGI Genomics for three years, to reduce IP-related barriers to entry and make it easier for competing NGS system suppliers to bring their products to market.
- The EC concluded that these commitments would have not ensured the emergence of a credible alternative to Illumina’s NGS systems for Grail's rivals in the short-medium term. The patent licence would have only had a limited impact because the covered patents were due to expire in the short term, and because Illumina has many other patents that competitors would need to avoid infringing when developing alternative NGS systems. Further, it concluded that other important barriers that impede the emergence of a credible alternative to Illumina’s NGS systems for Grail's rivals would not be addressed, such as switching providers (if, and when, this may become possible), a lengthy and costly process for Grail's rivals, with no guarantee of success.
- Conclude agreements with Grail's rivals on standard conditions that would remain in force until 2033 and ensure ongoing access to Illumina’s NGS systems.
The EC concluded that these commitments were unlikely to be effective in practice, as they did not effectively address all of the possible foreclosure strategies that Illumina could undertake. For example, Illumina could foreclose Grail's rivals by degrading the technical support for its NGS systems. Additionally, Illumina could easily circumvent its obligations under the commitments, and grant preferential treatment to Grail. Finally, monitoring these commitments would have been difficult because of their complexity and the fact that Grail's rivals would have difficulty detecting breaches.
Conclusion
The public announcement by the parties that they had completed the acquisition led to an investigation for violation of the standstill obligation.4 The EC came to the conclusion that the infringement had been committed knowingly and intentionally and, on 12 July 2023, fined Illumina and GRAIL approximately €432 million and €1,000 respectively for gun jumping.5
On 12 October 2023, the EC took the rare step of adopting restorative measures requiring Illumina to divest GRAIL and to comply with transitional measures until the transaction has been dissolved. The EC requires that through the divestment GRAIL’s independence is restored to the same level as before the acquisition. The same applies to GRAIL’s viability and competitiveness. Finally, the EC ordered Illumina to pursue the divestment within strict deadlines and with “sufficient certainty”. Following the outcome of parallel US court proceedings Illumina has announced on 17 December 2023 that it will divest GRAIL taking the EC’s requirements into account. On 12 April 2024, the EC approved Illumina’s divestment plan.
Illumina’s appeal against the EC prohibition decision is pending, as it also continues to pursue its ongoing appeals regarding jurisdiction and restorative measures before the European Court of Justice.
Footnotes
1
The Commission initially used the innovation theory of harm in the 2017 Dow/DuPont, M.7932 merger case.
2
Belgium, Greece, Ireland, The Netherlands and Norway.
3
CMA, Illumina Inc. and Pacific Biosciences of California, Provisional findings report of 24 October 2019. Link, accessed on 15 April 2024.
4
Standstill obligation’ consists into an obligation not to implement a concentration until the competent competition authority has cleared the transaction.
5
‘Gun-jumping’ occurs when parties to a concentration fail to notify it to the competent competition authorities when merger thresholds are triggered, and when they implement a notifiable transaction without observing mandatory applicable waiting period and/or clearance requirements under relevant merger control laws.
Partner; Head of Brussels
Email
alexandra.rogers@nortonrosefulbright.com
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