From the outset, it has been clear that certain issues are going to be top-of-the-agenda items for the Biden Administration, including, for example, climate change, diversity and inclusion, and cybersecurity. In a July 9, 2021 Executive Order (here), the White House made it clear that competition is also going to be a priority as well. The President’s Executive Order sets out a broad range of initiatives that will impact a wide array of industries across the American economy. As discussed below, the new Executive Order has important implications for companies and their executives; among other things, the initiatives proposed in the order could lead to heightened D&O claims risk and exposure.
The Executive Order on Competition
The 16-page Executive Order on Promoting Competition in the American Economy begins with broad statements on the critical importance of competition and of the increasing threats to competition from consolidation and concentration within certain industries. In its opening paragraphs, the Order “affirms that it is the policy of the [Biden] Administration to enforce the anti-trust laws to combat excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony” and to “enforce the antitrust laws to meet the challenge posed by new industries and technologies.”
The Order describes a “Whole-of-Government” approach toward the enforcement of the federal antitrust laws and the advance of the policies behind those laws, involving a host of federal agencies in the effort. The Order also lays out a roadmap for greater agency coordination with respect to antitrust oversight, investigation, and remedies. One of the importance keystones of this approach is the Order’s creation of a new White House Competition Council within the Executive Branch to coordinate and promote efforts “to address overconcentration, monopolization, and unfair competition” in the U.S. economy.
In an extensive section, the Order lays out a total of 72 initiatives proposed in order to try to promote competition and the policy goals behind the promotion of competition. These initiatives cut across a broad swath of industries in the U.S. economy, including healthcare; transportation; consumer finance; agriculture; internet technology; banking, and consumer finance. The topics addressed range from very specific consumer items, such as the pricing for hearing aids and baggage fees, to broader concerns such as providing competition regulation for internet platforms.
While the Order is long on initiatives and proposals, it is shorter when it comes to specifics and mandates. By and large, the initiatives in the Order take the form of directions to relevant agencies to “consider” using their respective statutory authorities to further policies and it “encourages” the agencies to take certain actions. Among the few specific requirements in the Order are the direction of agencies to submit reports and plans to the new Competition Council.
The Order does have a lot to say about oversight of merger activity. Among other things, the Order encourages the FTC and the DOJ to review existing merger guidelines and consider whether changes are needed. The Order emphasizes scrutiny of certain mergers, including serial mergers or those involving developing competitors
The Order also encourages the FTC to engage in rulemaking on such topics as noncompete clauses, data collection and surveillance, occupational licensing, product labeling, prescription drugs, real estate, and “any other unfair industry-specific practices that substantially inhibit competition.”
The new Executive Order is intended to send a clear message that the Administration intends to reinvigorate antitrust regulation and enforcement, and in order to advance that goal the Administration is putting in place a government wide-effort to be carried out through rule-making and enforcement actions.
As Michael Peregrine of the McDermott Will & Emery law firm put it in a July 14, 2021 Forbes article about the Order (here), the initiatives in the Order “may have a profound impact on the competitive landscape of the American economy, and on the strategic direction of many businesses.” As a result, companies across the economy “may need to pivot in advance of the increased competition-based regulation and antitrust enforcement.” This could require corporate boards to become involved in “a broad-based strategic reorientation with management concerning the basic nature of the company’s competitive position.” The issues for board consideration could include “corporate size, organic v. non-organic growth, market strength, efficiencies, economies of scale and pricing models.” Strategic initiatives may need to be reviewed, as well, and the board may need to “re-evaluate risk profile decisions regarding transaction,” particularly those that by their nature are subject to antitrust review.
That said, it should be kept in mind that the initiative proposed in the Order can only be accomplished by rulemaking or through enforcement actions. As discussed in a July 14, 2021 memo from the Skadden law firm about the Order, “any enforcement actions and regulatory changes will be adjudicated under current statutes and precedents.” Enforcement actions spurred by the policies and initiatives in the Order “will be judged through the lens of existing law.” The memo notes the recent dismissal of the FTC’s monopolization suit against Facebook demonstrates that “a change in enforcement priorities can run aground in the courts.” And in any event, the initiatives and goals in the Order will “soon face difficult and time-intensive challenges to implementation.” While the Order “will embolden federal agencies to take a tougher stance in enforcing the antitrust laws,” any changes requiring rulemaking will be “lengthy and complex.”
I know from conversations with industry colleagues and clients that one specific initiative in the order that has drawn a great deal of concern is the initiative with respect to non-compete orders. The order “encourages” the FTC to adopt rules banning or limiting non-compete agreements. The Order is vague on details, simply stating:
To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.
As the Evershands Sutherland law firm points out in a July 13, 2021 memo about this aspect of the order, the FTC will face an “uphill battle” on this issue, for three reasons. First, there is no body of federal law on this issue, as this is an area that has traditionally been left to the states for regulation. Indeed in a January 2020 speech, an FTC commissioner acknowledged several hurdles the FTC faced, “including the lack of clarity in the rulemaking authority, the traditional commitment of the issue to the states, the fact that neither the FTC nor any court has found non-competes to violate the FTC Act’s prohibition against ‘unfair methods of competition’, and the lack of a good historical precedent.” Additionally, from the employer perspective the Order’s lack of clarity and specificity “leaves employers with uncertainty about their current restrictive covenants.”
According to the memo, “employers do not need to make sweeping changes to their non-compete agreements yet” as a result of this Order. However, this is, the memo notes, a good time for companies to “assess their restrictive covenants to make sure that they are narrowly tailored to meet legitimate interests, as opposed to so broad that they prevent an employee for working in an entire industry.”
In any event, it seems likely – indeed, perhaps inevitable – that as a result of the Order there will be increased antitrust oversight, scrutiny, and enforcement activity. These possibilities seem to present many companies with a heightened risk of legal action by regulators. These possibilities could also translate into an increased risk of D&O claims.
Insurance Issues and Implications
The companies caught up in the forthcoming increased antitrust enforcement activity may turn to their D&O insurers for coverage. As I have discussed in prior posts (for example, here) the problem is that antitrust enforcement is an awkward fit with most D&O insurance policies.
In many antitrust enforcement actions and in many civil antitrust lawsuits, the main target or one of the main targets is going to be the company itself. However, public company D&O policies typically provide insurance coverage for securities claims only. Because an antitrust enforcement action or follow on civil action typically will not include an alleged violation of the securities laws, the typical public company D&O insurance policy will not provide coverage for the antitrust enforcement actions.
The coverage for the corporate entity afforded in private company D&O insurance policies is broader; it typically is not limited to securities claims only. However, many private company policies include an antitrust exclusion in their base policy forms. (As discussed here, the preclusive effect of the typical private company D&O insurance policy antitrust exclusion is usually much broader than just antitrust claims but also includes many other kinds of unfair and deceptive trade practices claims as well.). Some – but not all – carriers will agree to remove this exclusion upon request, while others will provide defense cost only protection for antitrust claims, or otherwise restrict the coverage available for antitrust claims through sublimits or coinsurance provisions. In other words, even under private company D&O insurance policies, the extent of coverage available for antitrust claims against the corporate entity often may be limited at best, and in other cases nonexistent.
It is a different story with respect to antitrust claims against individuals. Subject only to the preclusive effect of any antitrust exclusions and any other potentially applicable exclusions, the typical D&O insurance policy would provide coverage for individual defendants in antitrust enforcement actions or follow on civil actions. However, in my experience, antitrust enforcement actions rarely target individuals.
One area where the D&O policy may be more responsive is in connection with civil actions following-on in the wake of antitrust enforcement actions, particularly follow-on securities class action lawsuits. Some recent examples of securities class action activity following on after antitrust enforcement include the securities suits filed against various generic drug businesses following civil and criminal charges based on alleged price-collusion in the industry (discussed here); similar securities litigation against companies in the poultry companies also followed in the wake of price-collusion enforcement activity in that industry (discussed here).
Following news of antitrust enforcement actions against automobile manufacturers, plaintiffs lawyers filed follow-on securities suits against some of the auto companies involved (for example, here). The pattern of civil damages litigation following in the wake of antitrust enforcement goes back many years; and over the years, there have been many instances of this type of follow-on litigation – for example, as noted here, and here.
The pattern of follow-on securities litigation in the wake of antitrust and anticompetitive enforcement activity is sufficiently well-established that it can reasonably be predicted that, to the extent the initiatives in the new Executive Order result in increased antitrust and anticompetitive enforcement activity, that we will see corresponding follow-on securities litigation thereafter. In other words, the initiatives in the Executive Order not only mean increased competition related scrutiny, rulemaking, and enforcement, the initiatives may also translate to increased risk of D&O claims activity.