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Interlocking Directorates and Risk to Businesses

As conflicts of interest between Alphabet Inc. and Uber Technologies Inc. have continued to grow, David Drummond, the senior vice president of corporate development of Alphabet, has recently resigned from his board position at Uber. ((Greg Bensinger & Jack Nicas, Executive David Drummond Leaves Uber Board, The Wall St. J. (Aug. 30, 2016), Competition between Alphabet and Uber has come in the form of the development and commercialization of self-driving cars. ((Id.)) Drummond’s resignation “highlights how a little-noticed prohibition against interlocking directorates can cause problems for technology firms and private equity groups.” ((Eleanor Tyler, Interlocking Directorates May Pose Risk for Tech, PE Firms, Bloomberg, 17 CLASS 999 (Issue No. 18, 9/23/16).)) Companies that are competitors are prohibited from having any person serve as a director or officer for both boards under section 8 of the Clayton Act. ((Id.)) Section 8 specifically provides that “no person shall, at the same time, serve as director or officer in any two corporations that are competitors, and was intended to prevent collusion among rivals.” ((Id.)) The Act is enforced by the Federal Trade Commission (FTC) and the Justice Department. ((Id.)) However, these agencies will typically not file claims under Section 8, but will force the removal of a director in common for one of the companies. ((Id.)) If claims are rarely pursued, why then should businesses like Alphabet and Uber worry about interlocking directorates and the risk of violating Section 8 of the Clayton Act? In this blog post I will examine the threat of litigation pursued by private plaintiffs in response to interlocking directorates, and some of the guidelines and remedies that business can follow to avoid liability. I will also discuss a few of the implications of the FTC’s investigation into Clayton Act violations.

As is the case with Alphabet, a major concern for businesses with board members in common is the threat of litigation from private plaintiffs, who intend to overlap Clayton Act violations with Sherman Antitrust violations to bolster their claim. ((Id.)) Tech companies and private equity firms with board members in common must be especially cognizant of antitrust regulation and the threat of enforcement. ((Interlocks Under Section 8 of the Clayton Act: Implications of the FTC’s Investigation of Apple and Google, Paul Weiss Rifkind Wharton & Garrison LLP (Oct. 14, 2009), In particular, increases in tech market complexity and private equity investment can lead to a risk of unnoticed interlocks. ((Tyler, supra note 3.)) Litigation may ensue when the existence of overlapping directors between two companies “could support an inference that there was control and information sharing, and that is a real problem.” ((Id.)) Private plaintiffs commencing litigation and seeking relief can be remedied with treble damages and attorney’s fees. ((Interlocking Directorates and Officers – Section 8 of the Clayton Act, Ropes & Gray LLP (Jan. 31, 2011),

With regard to litigation, a major concern for businesses exists when a plaintiff pursues a claim under Section 1 of the Sherman Act “based on allegations that the companies are coordinating their business activities or sharing competitively sensitive information via the common director.” ((Tyler, supra note 3.)) Specifically, plaintiffs may take a “careful look at defendants’ board membership” in hopes of possibly including a Section 8 claim to buttress their Section 1 or Section 2 conspiracy claim. ((Id.))

In light of potential litigation for violations, Section 8 does provide certain safe harbors and upper limitations on competition between corporations. ((Interlocking Directorates and Officers – Section 8 of the Clayton Act, supra note 12.)) For example, board members that are interlocked will not violate Section 8 if competitive sales of either corporation are less than $2,686,700. ((Id.)) Notwithstanding the safe harbors and limitations, when a violation of Section 8 does occur, federal enforcement agencies will seek to remove one of the interlocked directors from the competing companies. ((Id.)) Companies that are at risk of competing should carefully monitor their board membership and be aware of the risks during routine compliance.

In light of past and present FTC investigations, “as products change and develop, companies should re-evaluate who their competitors are and consider whether new competition creates Section 8 issues with respect to any overlapping board members.” ((Interlocking Directorates and Officers – Section 8 of the Clayton Act, supra note 12.)) Furthermore, while safe harbors do exist under Section 8, their application may be complex and any questions regarding their use should result in carefully monitoring compliance. ((Id.))

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Thomas Chmielnik