Court Opinion

ID: 9910616
Source: CourtListenerOpinion
Date Created: 2023-12-16 01:00:49.249312+00
Date Added: 2024-06-11T12:53:31.038454
License: Public Domain

Case: 23-60167      Document: 00517004299         Page: 1    Date Filed: 12/15/2023

           United States Court of Appeals                                United States Court of Appeals

                for the Fifth Circuit                                             Fifth Circuit

                                                                                FILED
                                 ____________                           December 15, 2023

                                   No. 23-60167                            Lyle W. Cayce
                                                                                Clerk
                                 ____________

   Illumina, Incorporated; GRAIL, Incorporated, now known
   as GRAIL, L.L.C.,

                                                                      Petitioners,

                                       versus

   Federal Trade Commission,

                                                                     Respondent.
                   ______________________________

                   Appeal from the Federal Trade Commission
                                Agency No. 9401
                   ______________________________

   Before Clement, Graves, and Higginson, Circuit Judges.
   Edith Brown Clement, Circuit Judge:
          The Federal Trade Commission determined that Illumina, Inc.’s
   acquisition of Grail, Inc. violated Section 7 of the Clayton Act, and therefore
   ordered that the merger be unwound. Because the Commission applied an
   erroneous legal standard at the rebuttal stage of its analysis, we VACATE
   the Commission’s order and REMAND for further proceedings.
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                                    No. 23-60167

                                         I.
                                         A.
          Founded in 1998, Illumina is a publicly traded, for-profit corporation
   that specializes in the manufacture and sale of next-generation sequencing
   (“NGS”) platforms. NGS is a method of DNA sequencing that is used in a
   variety of medical applications. In September 2015, Illumina founded a
   wholly-owned subsidiary, Grail, which was so-named because its goal was to
   reach the “Holy Grail” of cancer research—the creation of a multi-cancer
   early detection (“MCED”) test that could identify the presence of multiple
   types of cancer from a single blood sample.
          Grail was incorporated as a separate entity in January 2016. Illumina
   maintained a controlling stake in the company until February 2017 when, to
   raise the capital needed to move Grail’s MCED test from concept to clinical
   trials, Illumina decided to bring in outside investors. This spin-off reduced
   Illumina’s equity stake in Grail to 12%. By September 2020, Grail had raised
   $1.9 billion through a combination of venture capital and strategic partners.
   Then, on September 20, 2020, Illumina entered into an agreement to re-
   acquire Grail for $8 billion, with the goal of bringing Grail’s now-developed
   MCED test to market.
          The MCED-test industry had changed dramatically between
   February 2017—when Illumina spun Grail off—and September 2020—when
   Illumina agreed to re-acquire Grail. Grail’s MCED test—which it named
   Galleri—had acquired a breakthrough device designation from the U.S. Food
   and Drug Administration (“FDA”), and Grail had published promising
   results from a clinical study concerning the initial version of Galleri and was
   undergoing additional clinical studies to validate its updated version.
   Meanwhile, Thrive Earlier Detection Corporation had announced that the
   initial version of its own MCED test—CancerSEEK—had also been

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   clinically validated. And other MCED tests—including Singlera Genomics,
   Inc.’s PanSeer—were in development. All of the MCED tests in
   development—including Galleri, CancerSEEK, and PanSeer—relied on
   Illumina’s NGS platforms for sequencing, and there were no available
   alternatives.
             Given their reliance on Illumina’s NGS platforms, Illumina’s
   customers—both within and without the MCED-test industry—expressed
   concern about whether they would be able to continue to purchase Illumina’s
   NGS products post-merger on the same terms and conditions as pre-merger.
   So, Illumina developed a standardized supply contract (the “Open Offer”)
   that it made available to all for-profit U.S. oncology customers on March 30,
   2021. The Open Offer is irrevocable, may be accepted by a customer at any
   time until August 18, 2027, became effective as of the merger’s closing, and
   will remain effective until August 18, 2033. Among other terms, the Open
   Offer requires Illumina to provide its NGS platforms at the same price and
   with the same access to services and products that is provided to Grail.
             Grail first offered Galleri for commercial sale in April 2021 as a
   laboratory-developed test.1 While Galleri is the only NGS-based MCED test
   currently available on the market, others expect to go to market soon and to
   directly compete with Galleri. Illumina’s NGS platforms are still the only
   means of sequencing MCED tests and will remain so for the foreseeable
   future.

             _____________________
             1
             The FDA does not review or validate safety or efficacy data of tests sold as
   laboratory-developed tests. Rather, independent labs self-certify the quality of their own
   product under the regulatory framework set forth under the Clinical Laboratory
   Improvement Amendments. For this reason, laboratory-developed tests have lower
   adoption rates than FDA-approved tests.

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                                           B.
          On March 30, 2021—the same day Illumina released its Open Offer—
   the FTC’s Complaint Counsel issued a complaint alleging that the Illumina-
   Grail merger agreement, if consummated, would violate Section 7 of the
   Clayton Act.2 The merger was, in fact, consummated on August 18, 2021,
   but, due to ongoing regulatory review by the European Commission, Illumina
   held—and continues to hold—Grail as a separate company.
          The FTC’s Chief Administrative Law Judge (“ALJ”) convened an
   evidentiary hearing on August 24, 2021. In the coming months, the parties
   developed an extensive evidentiary record consisting of over 4,500 exhibits
   and the live or deposition testimony of fifty-six fact witnesses and ten experts.
   Based on this record, the ALJ issued his initial decision on September 1,
   2022. The ALJ found that Complaint Counsel failed to prove that the merger
   was likely to cause a substantial lessening of competition in the market for the
   research, development, and commercialization of MCED tests. Specifically,
   the ALJ concluded that Complaint Counsel had not shown a likelihood that
   Illumina would foreclose against Grail’s rivals because Grail has no current
   competitors in the market to be foreclosed, the MCED tests in development
   would not be a good substitute for Grail’s test, and any foreclosing activities
   would cause harm to Illumina’s NGS-sales business. In any event, the ALJ
   determined, the Open Offer “effectively constrains Illumina from harming
   Grail’s alleged rivals and rebuts the inference that future harm to Grail’s
   alleged rivals, and thus future harm to competition, is likely.”

          _____________________
          2
             For clarity, we use “FTC” when discussing the Federal Trade Commission
   generally, “Complaint Counsel” when describing the FTC’s actions as a party to these
   adversary proceedings, and “Commission” when referring to the FTC’s actions as an
   adjudicatory body.

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         Complaint Counsel appealed the ALJ’s decision to the Commission,
   and, after oral argument, the Commission reversed. Upon its de novo review,
   the Commission concluded that the merger was likely to substantially lessen
   competition in the market for the research, development, and
   commercialization of MCED tests. The Commission found that the ALJ had
   factually erred in discussing the capabilities of Grail and other MCED tests
   in development, improperly focused on foreclosure harm to MCED tests on
   the market today as opposed to tests in development, and failed to recognize
   that any losses to Illumina’s NGS sales would be more than offset by
   Illumina’s expected gains in clinical testing. The Commission also held that
   the Open Offer was a remedy that should not be factored into the liability
   analysis. But the Commission evaluated the Open Offer as rebuttal evidence
   anyway, finding that the Open Offer failed to rebut Complaint Counsel’s
   prima facie case because it would not “eliminate the effects” of the merger.
   Finally, the Commission rejected Illumina’s constitutional defenses. The
   Commission therefore ordered Illumina to divest Grail. Illumina now
   appeals.
                                       II.
         We review the Commission’s decision, not that of the ALJ. Impax
   Laboratories, Inc. v. FTC, 994 F.3d 484, 491 (5th Cir. 2021). All legal
   questions pertaining to the Commission’s order are reviewed de novo while
   the Commission’s factual findings are reviewed for “substantial evidence.”
   Chicago Bridge & Iron Co. N.V. v. FTC, 534 F.3d 410, 422 (5th Cir. 2008).
   Under this standard, we are bound by the Commission’s factual
   determinations so long as they are supported by “such relevant evidence as
   a reasonable mind might accept as adequate.” FTC v. Ind. Fed’n of Dentists,
   476 U.S. 447, 454 (1986) (citation omitted). This is so “even if suggested
   alternative conclusions may be equally or even more reasonable and

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   persuasive.” N. Tex. Specialty Physicians v. FTC, 528 F.3d 346, 354 (5th Cir.
   2008) (internal quotation marks and citation omitted).
                                           III.
          Because, as explained below, resolution of Illumina’s statutory claims
   does not “obviate the need to consider” the constitutional issues raised,
   United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988), we begin with
   Illumina’s four constitutional challenges. Each is foreclosed by Supreme
   Court authority.
                                           A.
          First, Illumina contends that the Commission proceedings were the
   result of an unconstitutional delegation of legislative power in violation of
   Article I. Specifically, Illumina claims that Congress delegated to the FTC
   the power to decide whether to bring antitrust enforcement actions in an
   administrative proceeding, pursuant to Section 5(b) of the FTC Act, 15
   U.S.C. § 45(b), or to bring this same enforcement action in an Article III
   court pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), without
   providing “any guidance for purposes of deciding between administrative
   proceedings and federal court.”
          But as the Supreme Court recently clarified, federal-court actions
   under Section 13(b) are not the same as administrative proceedings under
   Section 5(b). Rather, when the FTC goes to federal court under Section
   13(b), it is limited to pursuing injunctive relief; to obtain other forms of relief,
   such as monetary damages, the FTC must resort to administrative
   proceedings under Section 5(b). AMG Cap. Mgmt., LLC v. FTC, 141 S. Ct.
   1341, 1348–49 (2021).
          Moreover, to the extent that Illumina argues that Congress’s directive
   for the FTC to commence an enforcement action when such a proceeding

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   would be “in the interest of the public” does not provide an “intelligible
   principle,” we disagree. To the contrary, the Supreme Court has repeatedly
   “found an ‘intelligible principle’ in various statutes authorizing regulation in
   the ‘public interest.’” Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 474
   (2001) (collecting cases).
                                         B.
          Second, Illumina claims that the FTC unconstitutionally exercised
   executive powers while insulated from presidential removal in violation of
   Article II. But Humphrey’s Executor v. United States held that the FTC’s
   enabling act did not run afoul of Article II because, essentially, the FTC was
   vested with quasi-legislative/quasi-judicial authority rather than purely
   executive authority. 295 U.S. 602, 626–32 (1935). While the Supreme Court
   has cabined the reach of Humphrey’s Executor in recent years, it has expressly
   declined to overrule it. See Seila Law LLC v. CFPB, 140 S. Ct. 2183, 2206
   (2020); accord Collins v. Yellin, 141 S. Ct. 1761, 1783 (2021). Thus, although
   the FTC’s powers may have changed since Humphrey’s Executor was
   decided, the question of whether the FTC’s authority has changed so
   fundamentally as to render Humphrey’s Executor no longer binding is for the
   Supreme Court, not us, to answer. Lefebure v. D’Aquilla, 15 F.4th 650, 660
   (5th Cir. 2021) (“[T]he only court that can overturn a Supreme Court
   precedent is the Supreme Court itself.”).
                                         C.
          Third, Illumina argues that the FTC violated Illumina’s due process
   rights by serving as both prosecutor and judge. But the Supreme Court has
   held that administrative agencies can, and often do, investigate, prosecute,
   and adjudicate rights without violating due process. Withrow v. Larkin, 421
   U.S. 35, 47, 56 (1975). Of course, if there is evidence that a decisionmaker has
   “actual bias” against a party, that raises due process concerns. Id. at 47. But

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   courts cannot “presume bias” merely from the institutional structure of an
   agency. United States v. Benitez-Villafuerte, 186 F.3d 651, 660 (5th Cir. 1999).
   Moreover, this court has already rejected the argument that the FTC’s
   structure, which combines prosecutorial and adjudicative functions, deprives
   parties of due process. Gibson v. FTC, 682 F.2d 554, 559–60 (5th Cir. 1982).
   Illumina points to no evidence of actual bias and instead takes issue with the
   FTC’s structural design. Whatever merit this argument may have, it is barred
   by precedent.
                                         D.
          Fourth, Illumina claims an equal-protection violation because there is
   no rational basis for allocating certain antitrust enforcement actions to the
   FTC and others to the Department of Justice. But rational-basis review is a
   low bar that is satisfied so long as “there is any reasonably conceivable state
   of facts that could provide a rational basis for the classification.” FCC v.
   Beach Commc’ns, Inc., 508 U.S. 307, 313 (1993). Here, the FTC and the DOJ
   have an “interagency clearance process” which allocates antitrust
   investigations to one agency or the other based primarily on which agency has
   “expertise in [the] particular industry or market” of the transaction under
   review. U.S. Gov’t Accountability Off., GAO-23-105790, DOJ
   and FTC Jurisdictions Overlap, but Conflicts are
   Infrequent (2023). This is undoubtedly a rational basis for giving one
   agency the lead over the other.
                                         IV.
          We turn now to Illumina’s Clayton Act challenge. Section 7 of the
   Clayton Act prohibits mergers and acquisitions “where in any line of
   commerce or in any activity affecting commerce in any section of the country,
   the effect of such acquisition may be substantially to lessen competition.” 15

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   U.S.C. § 18.3 To evaluate Section 7 claims, courts apply a burden-shifting
   framework. See, e.g., Chicago Bridge, 534 F.3d at 423; United States v. AT&T
   Inc., 916 F.3d 1029, 1032 (D.C. Cir. 2019) (applying burden-shifting
   framework to Section 7 claim concerning vertical merger).4 Complaint
   Counsel bears the initial burden to “establish a prima facie case that the
   merger is likely to substantially lessen competition in the relevant market.”
   AT&T, 916 F.3d at 1032. If a prima facie case is made, “the burden shifts to
   the defendant to present evidence that the prima facie case inaccurately
   predicts the relevant transaction’s probable effect on future competition or
   to sufficiently discredit the evidence underlying the prima facie case.” Id.
   (internal quotation marks and citations omitted). If such a rebuttal is
   provided, “the burden of producing additional evidence of anticompetitive
   effects shifts to the government, and merges with the ultimate burden of
   persuasion, which remains with the government at all times.” Id. (citation
   omitted). This framework is applied flexibly—“in practice, evidence is often
   considered all at once and the burdens are often analyzed together.” Chicago
   Bridge, 534 F.3d at 424.
                                             A.
          We start by reviewing Complaint Counsel’s prima facie case. The
   Commission concluded that Complaint Counsel had carried its burden of (1)
   identifying the relevant product and geographic market as the market for the

          _____________________
          3
            The statute also prohibits mergers that would “tend to create a monopoly,” 15
   U.S.C. § 18, but that provision is not at issue here.
          4
            We note, as did the D.C. Circuit, that “[t]here is a dearth of modern judicial
   precedent on vertical mergers and a multiplicity of contemporary viewpoints about how
   they might optimally be adjudicated and enforced.” AT&T, 916 F.3d at 1037. Indeed, until
   AT&T in 2018, the government had not litigated a vertical merger case since the 1980s.
   Jonathan M. Jacobson, Vertical Mergers: Is it Time to Move the Ball?, 33 ANTITRUST 6, 6
   (2019).

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   research, development, and commercialization of MCED tests in the United
   States, and (2) showing that the Illumina-Grail merger was likely to
   substantially lessen competition in this market. We find that these
   conclusions are supported by substantial evidence.
                                              1.
          The first step of the prima facie case requires defining the relevant
   market—that is, the “line of commerce” and the “section of the country”
   where the relevant competition occurs. 15 U.S.C. § 18; see also United States
   v. Marine Bancorporation, Inc., 418 U.S. 602, 618 (1974) (“Determination of
   the relevant product and geographic markets is a necessary predicate to
   deciding whether a merger contravenes the Clayton Act.” (internal quotation
   marks and citation omitted)). The parties agree with the Commission’s
   finding that the relevant geographic market is the United States but disagree
   as to its determination that the relevant product market is “the research,
   development, and commercialization of MCED tests.”5
          In antitrust law, the relevant product market is “the area of effective
   competition,” which is typically the “arena within which significant
   substitution in consumption or production occurs.” Ohio v. Am. Express Co.,
   138 S. Ct. 2274, 2285 (2018) (internal quotation marks and citation omitted).
   However, the relevant product market must “correspond to the commercial
   realities of the industry.” Brown Shoe Co. v. United States, 370 U.S. 294, 336
   (1962) (internal quotation marks and citation omitted). So, “courts should
   combine different products or services into a single market” when necessary
   to reflect these realities. Ohio, 138 S. Ct. at 2285 (alteration adopted) (internal
   quotation marks and citation omitted).

          _____________________
          5
              The ALJ defined the relevant product market the same way.

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           To determine the boundaries of the relevant product market, the
   Commission relied on what is known as the “Brown Shoe” methodology,
   which looks to certain “practical indicia” of market demarcation, such as
   “industry or public recognition of the [market] as a separate economic entity,
   the product’s peculiar characteristics and uses, unique production facilities,
   distinct customers, distinct prices, sensitivity to price changes, and
   specialized vendors.” Brown Shoe, 370 U.S. at 325.
           First, the Commission found that MCED tests have “peculiar
   characteristics and uses” as compared to other current standard-of-care
   cancer-screening tests. As the Commission explained, cancer is traditionally
   detected through more invasive procedures, like a tissue biopsy,
   colonoscopy, or mammography, which often screen for only one type of
   cancer and only at a later stage of cancer development.6
           Second, the Commission found that MCED tests are designed for
   distinct customers—asymptomatic patients as opposed to those with
   symptoms or a history of cancer. And, as the Commission noted, MCED test
   developers expect to market their tests to primary care physicians and, in
   Illumina’s case, directly to patients, as opposed to marketing plans for other
   oncology tests, which focus on sales to oncologists and other cancer
   specialists.
           Third, the Commission found that MCED tests, which will be
   targeted toward a more general population than traditional cancer-screening
   tests, will likely have their own distinct pricing strategy. Specifically, MCED
   tests will need to have particularly low out-of-pocket costs to patients in order
   to achieve wide acceptance. Other MCED-test developers testified that they

           _____________________
           6
            As the ALJ noted, “[t]he conclusion that MCED tests are a distinct product from
   other oncology tests borders on the obvious.”

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   anticipated competing with Grail on price, and evidence in the record showed
   that Grail understood that lower-priced MCED tests would pose a
   competitive threat. Finally, the Commission found that “MCED developers,
   including Grail, see themselves as competing in a distinct market and view
   each other as key competitors.”
           Critically, because the Commission viewed the relevant product
   market as one for the research, development, and commercialization of
   MCED tests—not the existing commercial market for MCED tests—it based
   its market definition on what MCED-test developers reasonably sought to
   achieve, not what they currently had to offer. Each of Illumina’s proposed
   bases for why the Commission’s market definition fails springs from the
   presumption that the Commission should have defined the market based on
   the products that currently exist, not those that are anticipated or expected.
   We disagree.7
           First, Illumina argues that there is no evidence of reasonable
   interchangeability of use or cross-elasticity of demand between Galleri and
   other MCED tests in development because the other tests either will not
   match Galleri’s “performance characteristics” or “are years from coming to
   market.” But as the Commission noted, record evidence suggested
   otherwise—CancerSEEK has been shown to detect eight types of cancer in
   an asymptomatic screening population while Galleri has only been shown to
   detect seven. And even if Illumina was correct in its claim that the other

           _____________________
           7
            In any event, the leading antitrust commentators have noted that “the difference
   between actual and potential competition” for purposes of antitrust enforcement is often
   “exaggerate[d]”: “[P]otential competition is competition ‘for’ the market, while ‘actual’
   competition is said to be competition ‘in’ the market. But insofar as antitrust policy is
   concerned, both kinds of competition can be equally ‘actual.’” 4 Phillip E. Areeda &
   Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust
   Principles and Their Application ¶ 907 (4th ed. 2016).

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   MCED tests in development would only be able to detect a subset of the fifty
   cancer types that Galleri can detect, two products need not be identical to be
   in the same market; rather, the question is merely whether they are “similar
   in character or use.” United States v. Anthem, Inc., 236 F. Supp. 3d 171, 194
   (D.D.C.) (quoting FTC v. Staples, Inc., 970 F. Supp. 1066, 1074 (D.D.C.
   1997)), aff’d, 855 F.3d 345 (D.C. Cir. 2017). And the Commission correctly
   noted that these other tests could still take sales from Galleri (i.e., be
   substitutes, albeit not perfect substitutes) if they were priced lower.
           Nor was the Commission required to mathematically demonstrate
   cross-elasticity of demand. Indeed, requiring such hard metrics to prove the
   bounds of a market where only one product has been commercialized but
   there is indisputably ongoing competition to bring additional products to
   market would, in effect, prevent research-and-development markets from
   ever being recognized for antitrust purposes. This, in turn, would directly
   contravene the purpose of Section 7—“to arrest anticompetitive tendencies
   in their incipiency.” United States v. Phila. Nat’l Bank, 374 U.S. 321, 362
   (1963) (internal quotation marks and citation omitted).8
           To be sure, simply labeling a market as one for “research and
   development” does not relieve Complaint Counsel of its burden to delineate
   the bounds of a relevant product market. In some circumstances, there may
   be no firms which can fairly be said to be “competing” in a space. And the
   mere fact that some company, someday may innovate a competing product
   in a given market would be too speculative to support a Section 7 claim, lest

           _____________________
           8
             For similar reasons, the Commission was not required to use the hypothetical
   monopolist test to define the relevant product market. In a research-and-development
   market where most products have yet to reach the consumer marketplace, there are no
   prices from which to build a data set, and thus no way to run a hypothetical monopolist test
   analysis.

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   every acquisition be presumptively unlawful. Cf. FTC v. Elders Grain, Inc.,
   868 F.2d 901, 906 (7th Cir. 1989) (“Section 7 forbids mergers and other
   acquisitions the effect of which ‘may’ be to lessen competition substantially.
   . . . Of course the word ‘may’ should not be taken literally, for if it were, every
   acquisition would be unlawful.”). But that is not the case here. While Grail
   may have the most advanced MCED test, competing tests—particularly
   CancerSEEK—have been clinically validated, and other developers have
   concrete plans to begin the trials necessary for FDA approval. Indeed, Grail’s
   own internal documents show that the company viewed itself as being in
   active competition with these other MCED-test developers.
           For similar reasons, Illumina’s other arguments—that the
   Commission misapplied the Brown Shoe factors and “baseless[ly]” defined
   the market to include products in development—also fail. Specifically,
   Illumina contends that the Commission assessed the Brown Shoe “practical
   indicia” too broadly, examining whether MCED tests were different from
   other oncology tests rather than whether Galleri was different from other
   MCED tests in development. But Illumina’s proposed approach assesses the
   indicia far too narrowly. Indeed, under the narrower application urged by
   Illumina, the relevant market would consist of only one product—Galleri.
   Antitrust law does not countenance such a cramped view of competition,
   particularly in a research-and-development market.9

           _____________________
           9
             Because the relevant “line of commerce” is the research and development of
   MCED tests, Illumina’s reliance on Mercantile Texas Corp. v. Board of Governors of Federal
   Reserve System, 638 F.2d 1255, 1272 (5th Cir. Unit A 1981) for the proposition that market
   entry needs to occur within two to three years is misplaced. Although other MCED test
   developers have not yet entered the consumer market, they have entered the research-and-
   development market.

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                                          2.
          With the relevant market established, we next turn to whether
   Complaint Counsel carried its initial burden of showing that “the proposed
   merger is likely to substantially lessen competition.” AT&T, 916 F.3d at 1032
   (emphasis omitted). As the Commission recognized, courts have used “two
   different but overlapping standards for evaluating the likely effect of a vertical
   transaction”: (1) the Brown Shoe standard, which requires courts to look
   (again) at the factors first enunciated in Brown Shoe and carried on through
   its progeny, including Fruehauf Corp. v. FTC, 603 F.2d 345, 353 (2d Cir.
   1979); and (2) the “ability-and-incentive” standard, which asks whether the
   merged firm will have both the ability and the incentive to foreclose its rivals,
   either from sources of supply or from distribution outlets. Commissioner
   Wilson, concurring in the Commission’s decision, argued that there is no
   Brown Shoe standard—only the “ability-and-incentive” test—for vertical
   mergers in modern antitrust analysis. But we need not resolve this issue
   because we find that, under either standard, Complaint Counsel established
   a prima facie case supported by substantial evidence.
                                           a.
          We begin by addressing the test upon which all Commissioners
   agreed—the ability-and-incentive test. Under this framework, courts
   consider whether the merged firm will have the ability and incentive to
   foreclose rivals from sources of supply or distribution to determine whether
   the merger is likely to substantially lessen competition in the relevant market.
          Illumina concedes that it would have the ability to foreclose Grail’s
   rivals post-merger. But, in its reply brief, Illumina claims that merely having
   the ability to foreclose is not enough; rather, the merger must have “increased
   Illumina’s ability to foreclose.” But we do not consider arguments raised for
   the first time on reply. MDK Sociedad De Responsabilidad Limitada v. Proplant

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                                         No. 23-60167

   Inc., 25 F.4th 360, 367 (5th Cir. 2022). And, in any event, we disagree with
   Illumina’s assertion. As the Commission astutely observed, Illumina was
   already established as the monopoly supplier of a key input—NGS
   platforms—to MCED-test developers pre-merger. So, it would have been
   impossible for Complaint Counsel to show that the merger would increase
   Illumina’s ability to foreclose. Thus, as the Commission explained, requiring
   such a showing would effectively “per se exempt from the Clayton Act’s
   purview any transaction that involves the acquisition of a monopoly provider
   of inputs to adjacent markets.” We decline to adopt a rule that would have
   such perverse results.10
           That leaves incentive to foreclose as the determining factor in
   evaluating the Illumina-Grail merger under the ability-and-incentive test. As
   the Commission explained, the degree to which Illumina has an incentive to
   foreclose Grail’s rivals depends upon the balance of two competing interests:
   Illumina’s interest in maximizing its profits in the downstream market for
   MCED tests vis-à-vis its ownership interest in Grail versus Illumina’s
   interest in maximizing its profits in the upstream market for NGS platforms
   vis-à-vis its sales to all MCED-test developers. Foreclosing Grail’s rivals
   would increase the former (by diverting MCED-test sales from competitors
   to Grail) but decrease the latter (by reducing the total number of MCED tests
   in the marketplace). So, the Commission reasoned, the greater Illumina’s
   ownership stake in Grail, the more its interest in maximizing downstream

           _____________________
           10
              Contrary to Illumina’s assertion, we do not read the Northern District of
   California’s Microsoft decision as reaching a different conclusion. Indeed, that court’s
   ultimate formulation of the ability-and-incentive test stated that Complaint Counsel was
   required to show that “the combined firm (1) has the ability to” and “(2) has the incentive
   to” foreclose. FTC v. Microsoft Corp., No. 23-cv-02880, 2023 WL 4443412, at *13 (N.D.
   Cal. July 10, 2023) (emphases added). The decision does not require a showing that the
   merger “provides” the combined firm with both, as Illumina wrongly claims.

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   profits will outweigh its interest in preserving upstream profits, and thus the
   more incentive it will have to foreclose. And since the merger would increase
   Illumina’s ownership stake in Grail from 12% to 100%, Illumina would “now
   earn much more from the sale of a [Grail] test than from the sale of a rival’s
   test” and would therefore “have a significantly greater incentive to foreclose
   [Grail’s] rivals rather than to keep them on a level playing field.”
          Illumina challenges this conclusion on two bases. First, Illumina
   argues that, even if the merger would result in Illumina earning larger profits
   from the sale of a Grail test than the sale of a rival MCED test, that profit
   differential means nothing without proof of diversion, i.e., Grail’s capture of
   sales lost by rival MCED-test developers. Illumina is correct that diversion is
   necessary for a vertical merger to give rise to foreclosure incentives. If
   Illumina forecloses Grail’s rivals, preventing them from entering the MCED-
   test market or lowering their sales, Illumina’s NGS-sales revenue generated
   from those rivals will suffer. Therefore, a foreclosure strategy is only
   economically rational if Grail can pick up enough of its competitors’ lost
   MCED-test sales to offset the losses to Illumina’s NGS-sales revenue. But,
   Illumina argues, “[b]ecause Galleri is the only test on the market today, there
   are no sales to divert,” so foreclosing Grail’s rivals would only harm
   Illumina’s NGS revenue without any concomitant benefit to Grail’s MCED-
   test-sales revenue.
          This contention suffers from the same fatal flaw as Illumina’s
   arguments concerning the Commission’s market definition—it insists that
   the Commission must consider only the MCED tests on the market right now,
   not those likely to be on the market in the future. But the relevant market is
   not “MCED tests commercialized today,” it is the “research, development,
   and commercialization of MCED tests.” And as explained earlier, there is
   substantial evidence in the record showing that other MCED-test developers
   are, right now, working on creating tests that will rival Grail’s capabilities and

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   that are expected to make it to the market in the near future. And when they
   do, they would divert sales from Grail—or vice versa, should a foreclosure
   strategy be pursued.
          Illumina’s second argument—that harm to Illumina’s NGS business
   from foreclosure of Grail’s rivals would outweigh any benefit to Grail’s
   MCED-testing business—is more compelling. Pre-merger, the vast majority
   of Illumina’s revenue—nearly 90% in 2020—was earned through its core
   business of selling NGS products. And Illumina is right that pursuing a
   foreclosure strategy threatens material harm to this business in two ways:
   first, by loss of NGS sales to the foreclosed MCED-test developers, and
   second, by loss of NGS business in areas outside of cancer detection as a
   result of reputational damage. But, as the Commission identified, there are
   two reasons why the risk of such harm is not as great as Illumina claims. First,
   there are myriad ways in which Illumina could engage in foreclosing behavior
   without triggering suspicion in other customers, such as by making late
   deliveries or subtly reducing the level of support services. And second, and
   more importantly, Illumina’s monopoly power in the NGS-platform market
   means that, even if other customers did learn about Illumina’s foreclosing
   behavior and therefore wanted to take their business elsewhere, they would
   have nowhere else to turn.
          In any event, there is a more fundamental reason why any harm to
   Illumina’s NGS business may not disincentivize Illumina from pursuing a
   foreclosure strategy against Grail’s rivals—the Illumina-Grail merger was
   the cornerstone of a foundational change in Illumina’s business model
   through which Illumina planned to “transform [itself] into a clinical testing
   and data driven healthcare company” as opposed to its current iteration as a
   “life sciences tools & diagnostics company focused on genomics.” In other
   words, Illumina was willing to suffer losses to its NGS-platform sales in order
   to accelerate the growth of its MCED-test sales because it now viewed the

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   latter, not the former, as its primary (and far more profitable) business.
   Illumina’s own internal projections bear this out, predicting that, although
   Illumina would lose money in the short term as a result of the merger, by 2035,
   its “net margin profit pool” for clinical testing services would be nearly eight
   times the projected profit pool for its NGS-related sales.
           In light of the foregoing, the Commission had substantial evidence to
   support its conclusion that Complaint Counsel made a prima facie showing
   that, post-merger, Illumina had a significantly increased incentive to crowd
   out Grail’s competitors from the market. MCED testing is a nascent field in
   which, although only one firm—Grail—has begun to commercialize its
   product, numerous firms are researching and developing their own products
   with the end goal of commercialization. And all of the players expect the field
   to one day generate tens of billions of dollars in yearly revenue. To create and
   eventually sell this product, each developer will need access to one critical
   input—NGS platforms. Now, the sole supplier of that input—Illumina—has
   purchased the first mover in this nascent industry. Given Illumina’s
   monopoly power and shifting business priorities, it was reasonable for the
   Commission to conclude that Illumina would likely foreclose against Grail’s
   competitors—even at the expense of some short-term profits—to pursue its
   long-term goal of establishing itself (via Grail) as the market leader in clinical
   testing.11

           _____________________
           11
             We give the evidence about Illumina’s past behavior little weight in this analysis.
   The MCED-test market today, in which multiple firms are racing to develop their own tests
   and earn a share of what is predicted to be a significant market, is very different from the
   market that existed when Illumina last owned Grail, when the use of liquid biopsies for
   cancer screening was highly experimental and not sure to succeed. It is therefore
   speculative at best to draw conclusions about Illumina’s future actions from its past
   behavior as the owner of Grail. Nor can we draw many insights concerning Illumina’s
   potential post-vertical-merger actions in the MCED-test market by looking at its post-
   vertical-merger actions in the noninvasive-prenatal-tests market, which already had

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                                              b.
           The Commission also applied the factors first identified in Brown
   Shoe, and later reiterated in Fruehauf, to determine whether the Illumina-
   Grail merger was likely to substantially lessen competition. These factors
   include:
           [T]he nature and economic purpose of the [transaction], the
           likelihood and size of any market foreclosure, the extent of
           concentration of sellers and buyers in the industry, the capital
           cost required to enter the market, the market share needed by
           a buyer or seller to achieve a profitable level of production
           (sometimes referred to as “scale economy”), the existence of
           a trend toward vertical concentration or oligopoly in the
           industry, and whether the merger will eliminate potential
           competition by one of the merging parties. To these factors
           may be added the degree of market power that would be
           possessed by the merged enterprise and the number and
           strength of competing suppliers and purchasers, which might
           indicate whether the merger would increase the risk that prices
           or terms would cease to be competitive.
   Fruehauf, 603 F.2d at 353. The Commission found that at least four of the
   factors—likely foreclosure, the nature and purpose of the transaction, the
   degree of market power possessed by the merged firm, and entry barriers—
   supported a finding of a probable Section 7 violation. We conclude that the
   Commission’s Brown Shoe determination was supported by substantial
   evidence.
           The first factor the Commission relied upon—likelihood of
   foreclosure—weighs in favor of Complaint Counsel for the reasons set forth

           _____________________
   multiple competing products on the market at the time of Illumina’s acquisition and where
   the company Illumina acquired was not the first mover in the market.

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   in our ability-and-incentive analysis. The second factor—nature and purpose
   of the transaction—also overlaps significantly with our prior discussion and
   supports Complaint Counsel: The “nature” of the transaction is the
   acquisition of a downstream customer by a sole-source supplier, and the
   “purpose” is to fundamentally transform Illumina’s business model such
   that it would be competing most intensely in the downstream market, i.e., the
   same market in which it has the ability to foreclose.
          As for the third factor—degree of market power—the parties’
   arguments reflect a broader debate about how to view the potential
   anticompetitive impact of the merger, which we have now already addressed
   twice: whether the Commission was required to look at the immediate effect
   of the merger (in which case, Illumina would be correct to say that the
   acquisition does not change Grail’s share of the MCED-test market because
   its Galleri test is the only product on the market) or could consider the
   merger’s long-term impact. And as we have already explained, the
   Commission properly considered the longer-term impact of the merger and
   found that the merger was likely to lead to a concentration of market power
   in the merged firm. This factor thus favors Complaint Counsel as well.
          Finally, the Commission found that the merger would increase
   barriers to entry in the relevant market. Specifically, based on testimony from
   other MCED-test developers and Complaint Counsel’s expert witness, the
   Commission found that rival firms would be disincentivized from investing
   in MCED-test development post-merger. Illumina suggests that the
   Commission gave too much weight to this self-interested testimony and too
   little weight to other record evidence. But even if we would have found a
   different conclusion to be “more reasonable and persuasive” had we weighed
   the evidence ourselves, that would not be enough to set aside the
   Commission’s finding on this factor under our deferential “substantial
   evidence” review. See Impax, 994 F.3d at 491–92.

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          Nor did the Commission commit legal error by omitting three of the
   Brown Shoe factors from its analysis. There is “no precise formula[]” when
   it comes to applying these factors. Fruehauf, 603 F.2d at 353. Indeed, the
   Supreme Court has found a vertical merger unlawful by examining only three
   of the Brown Shoe factors. Ford Motor Co. v. United States, 405 U.S. 562, 566
   (1972) (considering the nature and purpose of the transaction, increased
   barriers to entry, and increased concentration).
          At bottom, the record supports the Commission’s findings that the
   merger will result in the potential foreclosure of a key input by the sole
   supplier, that it was intended to transform Illumina’s business model by
   shifting its focus from NGS products to clinical testing, and that investment
   by other MCED-test developers may be chilled, especially given the
   deferential nature of our review. This was sufficient to support a
   determination that Complaint Counsel had made a prima facie showing that
   the merger was likely to substantially lessen competition under the Brown
   Shoe test.
                                         B.
          Next, we address the Open Offer—the long-term supply agreement
   that Illumina offered to rival MCED-test developers. First, we consider where
   in the Section 7 analysis the Open Offer should be evaluated, and second, we
   turn to how it should be evaluated.
                                         1.
          Based on the record, the parties’ arguments, and applicable case law,
   we see three different options for the point in the Section 7 analysis at which
   the Open Offer could come into play. The first option—pressed by
   Illumina—is to require Complaint Counsel to account for the Open Offer as
   part of its prima facie case. The second option—adhered to by the
   Commission’s majority opinion—is to only consider the Open Offer at the

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   remedy stage following a finding of liability. The third option—suggested by
   Commissioner Wilson in her concurring opinion—is to place the burden of
   showing the Open Offer’s competitive effects on Illumina as part of its
   rebuttal to the prima facie case. As explained below, we agree with
   Commissioner Wilson.
                                           a.
          The parties’ divergent views on this issue appear to stem from a
   disagreement over whether the Open Offer should be treated as a “market
   reality”—as Illumina contends—or a remedy—as the Commission found.
   But we do not think that the Open Offer fits neatly into either bucket, and we
   decline to force it into one.
          On the one hand, it is evident that the Open Offer is not just a normal
   commercial supply agreement but instead a direct response to
   anticompetitive concerns over the Illumina-Grail merger. The opening
   sentence of the Open Offer makes this plain; it explains that the Open Offer
   was made “[i]n connection with Illumina’s proposed acquisition of Grail . . .
   to allay any concerns relating to the [merger], including that Illumina would
   disadvantage Grail’s potential competitors.” So, to treat the Open Offer as
   just another fact of the marketplace seems to miss the forest for the trees.
          But, on the other hand, the Open Offer is different in kind from a
   Commission- or court-ordered “remedy,” which, as the Commission itself
   noted, can be imposed “only on the basis of a violation of the law,” i.e., after
   a finding of liability. See Gen. Bldg. Contractors Ass’n, Inc. v. Pennsylvania, 458
   U.S. 375, 399 (1982). Indeed, the Open Offer became effective before the
   evidentiary hearing in this case had even begun and nineteen months before
   the Commission’s liability determination. Thus, the Commission majority’s

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   reliance on cases like Ford Motor Co.12 and du Pont13—which concerned court-
   ordered divestitures after a finding of Section 7 liability—to support its
   position that the Open Offer is a remedy is misplaced. So too is its reliance
   on United States v. Aetna Inc., 240 F. Supp. 3d 1 (D.D.C. 2017), and FTC v.
   Sysco Corp., 113 F. Supp. 3d 1 (D.D.C. 2015). To be sure, both Aetna and
   Sysco—like this case—involved proposals by the parties, not decrees by the
   Commission or court. But in both cases, the proposed divestitures were
   conditional upon the court’s liability determination, coming into effect in
   Aetna only if the court found such divestiture “necessary to counteract the
   merger’s anticompetitive effects,” 240 F. Supp. 3d at 17, and in Sysco “if the
   merger received regulatory approval,” 113 F. Supp. 3d at 15. No such
   conditions accompanied the Open Offer.
          In this sense, the Open Offer is somewhere in between a fact and a
   remedy—a post-signing, pre-closing adjustment to the status quo
   implemented by the merging parties to stave off concerns about potential
   anticompetitive conduct. Take, for example, the arbitration agreement at
   issue in United States v. AT&T, Inc., 310 F. Supp. 3d 161 (D.D.C. 2018), aff’d,
   916 F.3d 1029 (D.C. Cir. 2019). That case concerned a Section 7 challenge to
   the vertical merger between AT&T (which distributes television content via
   its cable platform DirecTV) and Time Warner (which packages television
   content via its networks such as TNT, TBS, CNN, and HBO and licenses
   such networks to distributors). Id. at 167. Shortly after the government filed
   suit, and in an effort to assuage concerns that it would price-discriminate
   against distributors other than AT&T post-merger, Time Warner made an
   irrevocable offer to distributors to engage in “baseball style” arbitration

          _____________________
          12
               405 U.S. at 571.
          13
               United States v. E. I. du Pont de Nemours & Co., 366 U.S. 316, 334 (1961).

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   when it came time to renew their licensing agreements. Id. at 184.14 The
   government argued that the arbitration agreements should be “ignored”
   until the remedy stage, but the court disagreed, holding that the agreements
   would have “real-world effect[s]” that should be considered prior to any
   liability determination. Id. at 217 n.30.
          The Northern District of California reached a similar determination
   in FTC v. Microsoft Corp., where the court considered a “binding offer” by
   Microsoft (the details of which are redacted from the opinion) designed to
   assuage the government’s concerns that Microsoft (the manufacturer of the
   popular Xbox gaming console) would pull certain videogames from
   competing consoles following its vertical merger with videogame publisher
   Activision. No. 23-cv-02880-JSC, 2023 WL 4443412, at *15 (N.D. Cal. July
   10, 2023). The court rejected the government’s argument that, under du
   Pont, Microsoft’s offer was merely a “proposed remedy” to be considered
   after a finding of liability and explained that “offered and executed
   agreements made before any liability trial, let alone liability finding,” should
   be considered at the liability phase. Id.
          The Open Offer is akin to the remedial agreements at issue in AT&T
   and Microsoft. And we agree with those courts that such agreements should
   be addressed at the liability—not remedy—stage of the Section 7
   proceedings.
                                             b.
          Having determined that the Open Offer should be considered at the
   liability stage, the question remains: where does it fit within the burden-

          _____________________
          14
            In “baseball style” arbitration, “each party puts forward a final offer before
   knowing about its counterparty’s offer, and the arbitrator chooses between those two.”
   AT&T, 310 F. Supp. 3d at 217.

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   shifting framework for determining liability? Illumina urges that Complaint
   Counsel was required to incorporate the Open Offer into its prima facie case.
   Commissioner Wilson says that the Open Offer only comes into play as part
   of Illumina’s rebuttal to Complaint Counsel’s prima facie case. We find the
   latter approach most compatible with the “flexible framework” at play. See
   Chicago Bridge, 534 F.3d at 424.
          As we and our sister circuits have recognized, the burden-shifting
   framework is “somewhat artificial.” FTC v. Butterworth Health Corp., No.
   96-2440, 1997 WL 420543, at *1 (6th Cir. July 8, 1997); accord Chicago Bridge,
   534 F.3d at 424–25. “Conceptually, this shifting of the burdens of
   production, with the ultimate burden of persuasion remaining always with
   the government, conjures up images of a tennis match, where the
   government serves up its prima facie case, the defendant returns with
   evidence undermining the government’s case, and then the government
   must respond to win the point.” FTC v. Univ. Health, Inc., 938 F.2d 1206,
   1219 n.25 (11th Cir. 1991). “In practice, however, the government usually
   introduces all of its evidence at one time, and the defendant responds in
   kind.” Id. Thus, the “evidence is often considered all at once and the burdens
   are often analyzed together.” Chicago Bridge, 534 F.3d at 425. This is
   particularly true in vertical merger cases. In horizontal merger cases, the
   government can “use a short cut to establish [its prima facie case] through
   statistics about the change in market concentration.” AT&T, 916 F.3d at
   1032. No such “short cut” exists in vertical merger cases, and the
   government “must make a ‘fact-specific’ showing” even at the prima facie
   stage. Id.
          That is precisely what happened in this case. As the government’s
   brief explains, “[h]ere, Complaint Counsel produced evidence in its case-in-
   chief that the Open Offer was ineffective, and Illumina attempted to produce
   contrary evidence in the defense case.” The Commission then siloed all of

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   this Open-Offer-related evidence into the rebuttal stage of its analysis.15 Had
   the Commission applied the correct standard at the rebuttal stage, there
   would have been no error in this approach. Indeed, we approved such a
   methodology in Chicago Bridge.
           As we explained there, in many Section 7 cases, the “[g]overnment’s
   prima facie case anticipates and addresses the respondent’s rebuttal
   evidence.” Chicago Bridge, 534 F.3d at 426. In such a situation, the
   Commission need only “assess[] the rebuttal evidence in light of the prima
   facie case” rather than switch the burden of production back-and-forth. Id. at
   424.
                                              2.
           At the rebuttal stage of the Section 7 analysis, Illumina bore the
   burden “to present evidence that the prima facie case inaccurately predicts
   the relevant transaction’s probable effect on future competition.” AT&T,
   916 F.3d at 1032 (internal quotation marks and citation omitted). Because
   Complaint Counsel preemptively addressed the Open Offer as part of its
   case-in-chief, Illumina’s burden on rebuttal was “heightened.” Chicago
   Bridge, 534 F.3d at 426. To be sure, Illumina’s burden was only one of
   production, not persuasion; the burden of persuasion remained with
   Complaint Counsel at all times. AT&T, 916 F.3d at 1032. But to satisfy its
   burden of production, Illumina was required to do more than simply put
   forward the terms of the Open Offer; it needed to “affirmatively show[]” why
           _____________________
           15
                As explained above, the Commission majority erroneously viewed the Open
   Offer as a remedy to be properly considered only “at the remedy stage, following a finding
   of liability.” Nonetheless, it examined the Open Offer “at the rebuttal stage” because it
   found that doing so made no difference to “the ultimate analysis or outcome.” But the
   Commission applied the wrong rebuttal-stage standard. We express no view on whether
   the application of the proper standard will change “the ultimate analysis or outcome” in
   this instance.

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   the Open Offer undermined Complaint Counsel’s prima facie showing to
   such an extent that there was no longer a probability that the Illumina-Grail
   merger would “substantially lessen competition.” See United States v. Baker
   Hughes Inc., 908 F.2d 981, 991 (D.C. Cir. 1990) (emphasis added).
           This is where the Commission erred. The Commission held Illumina
   to a rebuttal standard that was incompatible with the plain language of
   Section 7 of the Clayton Act, which only prohibits transactions that will
   “substantially” lessen competition. 15 U.S.C. § 18. And this error pervaded
   the Commission’s analysis of the Open Offer, as the Commission invoked
   the wrong standard in five separate instances. Specifically, the Commission
   held that Illumina was required to “show that the Open Offer would restore
   the pre-[merger] level of competition,” i.e., “eliminate Illumina’s ability to
   favor Grail and harm Grail’s rivals.” In effect, Illumina could only rebut
   Complaint Counsel’s showing of a likelihood of a substantial reduction in
   competition with a showing that, due to the Open Offer, the merger would
   not lessen competition at all. This was legal error.
           The Commission’s standard stems from its mistaken belief that the
   Open Offer is a remedy. Indeed, the source of this total-negation standard is
   the Supreme Court’s holding in Ford Motor Co. that “[t]he relief in an
   antitrust case must be ‘effective to redress the violations’ and ‘to restore
   competition.’” 405 U.S. at 573 (quoting du Pont, 366 U.S. at 326). The
   District of Columbia applied this remedy-stage standard in its liability-stage
   analysis in a string of cases, beginning with Sysco, 113 F. Supp. 3d at 72,
   continuing in Aetna, 240 F. Supp. 3d at 60, and then again in FTC v. RAG-
   Stiftung, 436 F. Supp. 3d 278, 304 (D.D.C. 2020).16 But in its most recent

           _____________________
           16
            We express no view as to whether a total-negation standard is appropriate at the
   remedy stage of the Section 7 analysis.

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   case, the District of Columbia reversed course, recognizing that the total-
   negation standard “contradicts the text of Section 7.” United States v.
   UnitedHealth Grp. Inc., 630 F. Supp. 3d 118, 132 (D.D.C. 2022). As that court
   explained, “the text of Section 7 is concerned only with mergers that
   ‘substantially . . . lessen competition,’” and by requiring on rebuttal a
   showing that the merger will “preserve exactly the same level of competition
   that existed before the merger, the Government’s proposed standard would
   effectively erase the word ‘substantially’ from Section 7.” Id. at 133 (quoting
   15 U.S.C. § 18).
           The Northern District of California agreed with this assessment. See
   Microsoft, 2023 WL 4443412, at *13 (“It is not enough that a merger might
   lessen competition—the FTC must show the merger will probably
   substantially lessen competition.” (citing UnitedHealth, 630 F. Supp. 3d at
   133)). And so do we. To rebut Complaint Counsel’s prima facie case,
   Illumina was only required to show that the Open Offer sufficiently mitigated
   the merger’s effect such that it was no longer likely to substantially lessen
   competition. Illumina was not required to show that the Open Offer would
   negate the anticompetitive effects of the merger entirely.
                                                C.
           Finally, we turn to Illumina’s other proffered rebuttal evidence—
   efficiencies. As it did before the Commission, Illumina contends on appeal
   that the Illumina-Grail merger would have “result[ed] in significant
   efficiencies”      which     would      have      “easily    offset[]     the    supposed
                                   17
   [anticompetitive] harm.”             To be cognizable as rebuttal evidence, an

           _____________________
           17
              The Commission stated that, to rebut the prima facie case, any substantiated
   efficiencies needed “to offset and reverse the likely anticompetitive effects” of the merger.
   This standard gives us pause for the same reasons discussed with respect to the standard
   used to evaluate the Open Offer. But we need not decide whether such a standard is

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   efficiency must be (1) merger specific, (2) verifiable in its existence and
   magnitude, and (3) likely to be passed through, at least in part, to consumers.
   See FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327, 348–49, 351 (3d Cir.
   2016); Anthem, 855 F.3d at 362. The Commission determined that none of
   Illumina’s proposed efficiencies were cognizable. We find that this
   conclusion was supported by substantial evidence.
           First, Illumina claimed that the merger would reduce (if not eliminate
   entirely) Grail’s obligation to pay Illumina a royalty, which would have
   generated a significant consumer surplus. The Commission found that this
   claimed efficiency was neither merger specific nor likely to be passed through
   to consumers. We find that the former determination was not supported by
   substantial evidence, but the latter was. The Commission’s finding that the
   royalty reduction was not merger specific was based on evidence
   demonstrating that Grail had considered other ways to reduce or eliminate
   the royalty without merging with Illumina, such as a buyout or longer-term
   supply agreement. But the Commission did not fairly consider evidence that
   Grail—in coordination with its bankers at Morgan Stanley—had determined
   that it lacked the leverage necessary to bring Illumina to the table on these
   alternative proposals, leaving merger as the only realistic option. We
           _____________________
   appropriate for evaluating efficiencies because the Commission did not rely on it. Instead,
   the Commission found that Illumina had failed to substantiate its claimed efficiencies in the
   first place.
            We also note that our court has never addressed the threshold question of whether
   it is proper for a court to take account of a merger’s efficiencies as a defense in a Section 7
   case. But see Anthem, 855 F.3d at 355 (holding that proof of post-merger efficiencies can
   rebut a Section 7 prima facie case); FTC v. Tenet Health Care Corp., 186 F.3d 1045, 1054
   (8th Cir. 1999) (same); Univ. Health, 938 F.2d at 1222 (same). We do not reach that
   question here, either. Instead, we assume arguendo that such a defense can be properly
   considered. Cf. FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327, 348 (3d Cir. 2016)
   (assuming, without deciding, that efficiencies defense was valid); Saint Alphonsus Med.
   Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 775, 790 (9th Cir. 2015) (same).

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   therefore cannot conclude that substantial evidence supported this finding.
   See Universal Camera Corp. v. NLRB, 340 U.S. 474, 488 (1951) (“The
   substantiality of evidence must take into account whatever in the record fairly
   detracts from its weight.”).
          With respect to pass-through, however, there was substantial
   evidence to support the Commission’s finding that, while Grail could
   decrease the price of Galleri (i.e., pass some of the benefit through to
   consumers) following reduction of the royalty, Illumina had not shown a
   likelihood that Grail would do so. Indeed, as explained earlier, substantial
   evidence supported the Commission’s finding that the merger would
   increase Illumina’s incentive to foreclose against Grail’s rivals such that
   competing MCED tests either never make it to market or the costs of
   bringing such tests to market increase. In other words, Grail had no reason to
   pass its royalty-reduction savings through to Galleri’s customers because, if
   any of Grail’s competitors actually made it to market, Grail could force those
   competitors to pass through extra costs to their customers.
          Second, Illumina argued that the merger would eliminate double
   marginalization—i.e., Illumina would no longer charge Grail a margin, as it
   did before the merger—leading to additional consumer surplus. But Illumina
   never put forward a proposed model for calculating this benefit, only an
   “illustrative” one. Illumina does not contest this fact. Rather, Illumina
   contends that it was Complaint Counsel’s burden to model these benefits.
   But when it comes to efficiencies, “much of the information relating to
   efficiencies is uniquely in the possession of the merging firms.” 4A Areeda
   & Hovenkamp, Antitrust Law ¶ 970f (citation omitted). It is
   therefore Illumina—not Complaint Counsel—that “must demonstrate that
   the intended acquisition would result in significant economies.” Univ.
   Health, 938 F.2d at 1223; see also Steven C. Salop, Invigorating Vertical Merger
   Enforcement, 127 Yale L.J. 1962, 1981 (2018) (“Because the merging

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   parties have better access to the relevant information, they also bear the
   burden of producing evidence of efficiency benefits . . . .”). And because
   Illumina failed to demonstrate that this proposed efficiency was verifiable,
   the Commission had substantial evidence in support of its decision not to
   recognize it.
          Third, Illumina contended that the merger would lead to “significant
   supply chain and operational efficiencies” of approximately $140 million
   over a ten-year period. But, again, it presented no model by which it
   calculated this number. And without an underlying model, including the
   assumptions upon which it was based, the Commission had a sound basis to
   conclude that Illumina had failed to carry its burden of showing this efficiency
   was verifiable. See United States v. H & R Block, Inc., 833 F. Supp. 2d 36, 91
   (D.D.C. 2011) (“[T]he lack of a verifiable method of factual analysis resulting
   in the cost estimates renders [the proposed efficiency] not cognizable by the
   Court.”). Plus, record evidence showed that Grail was in the process of
   improving its operations pre-merger, and Illumina had not shown any
   method of quantifying the incremental value, if any, the merger would
   provide with respect to these operational efficiencies. Thus, there was not
   only a verification issue, but a merger-specificity issue as well.
          Fourth, Illumina claimed that the merger would result in significant
   research-and-development efficiencies. But Illumina made no attempt to
   quantify these claimed efficiencies, instead relying on testimony of its
   executives that such efficiencies would be achieved. But “[w]hile reliance on
   the estimation and judgment of experienced executives about costs [or
   innovation] may be perfectly sensible as a business matter, the lack of a
   verifiable method of factual analysis . . . renders [the efficiency] not
   cognizable.” H & R Block, 833 F. Supp. 2d at 91.

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           Fifth, Illumina argued that due to its “regulatory and market-access
   expertise,” the merger would “accelerate” FDA approval and payer
   coverage for Galleri. But the Commission, again supported by substantial
   evidence, found that Illumina had not established that such acceleration
   would actually occur, much less shown how it would be achieved. For
   instance, Illumina’s own financial modeling of the merger did not assume
   that Galleri’s widespread commercialization would be accelerated. Nor did
   it account for the costs that would be associated with achieving any such
   acceleration, such as diverting Illumina personnel to work on Grail projects.
   And in any event, Illumina had failed to demonstrate that its claimed
   “regulatory expertise” was superior to that which Grail already possessed.
   Indeed, Grail had already obtained breakthrough device designation for
   Galleri on its own. Illumina, on the other hand, had only ever obtained pre-
   market approval for one Class III NGS-based diagnostic test, and in that
   instance, a third party sponsored the clinical study upon which approval was
   granted.
           Sixth, Illumina pointed to “international efficiencies,” i.e., that the
   merger would “accelerate the international expansion of Galleri.” But as the
   Commission explained, Illumina “offered no concrete plans regarding
   countries in which international expansion would occur, how much more
   quickly the international expansion would occur, how much additional data
   the international expansion would generate, how much the international
   efforts would cost, or why such international expansion could only be
   achieved through a merger.”18

           _____________________
           18
              Because we find that substantial evidence supported the Commission’s
   conclusion that Illumina had failed to substantiate its claimed international efficiencies, we
   do not address the question of whether it is proper to consider efficiencies outside of the
   relevant geographic market. But see Phila. Nat’l Bank, 374 U.S. at 370 (rejecting contention

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          At bottom, an efficiency defense is very difficult to establish. See 4A
   Areeda & Hovenkamp, Antitrust Law ¶ 970a (“[W]hile
   efficiencies are commonly asserted as a defense, they are rarely found
   sufficient to undermine a prima facie case against a merger.”) And
   substantial evidence supported the Commission’s determination that
   Illumina failed to establish cognizable efficiencies here.
                                          V.
          To sum up, Illumina’s constitutional challenges to the FTC’s
   authority are foreclosed by binding Supreme Court precedent, and
   substantial evidence supported the Commission’s conclusions that (1) the
   relevant market is the market for the research, development, and
   commercialization of MCED tests in the United States; (2) Complaint
   Counsel carried its initial burden of showing that the Illumina-Grail merger
   is likely to substantially lessen competition in that market under either the
   ability-and-incentive test or looking to the Brown Shoe factors; and (3)
   Illumina had not identified cognizable efficiencies to rebut the
   anticompetitive effects of the merger. However, in considering the Open
   Offer, the Commission used a standard that was incompatible with the plain
   language of the Clayton Act. We therefore VACATE the Commission’s
   order and REMAND the case for reconsideration of the effect of the Open
   Offer under the proper standard.

          _____________________
   that “anticompetitive effects in one market could be justified by procompetitive
   consequences in another”).

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