Know Your Investors – Their Holdings and Board Seats Can Create Antitrust Risk for Your Company

A recent divesture ordered by the Federal Trade Commission should serve as a reminder that private equity- and venture capital-backed companies need to evaluate the other holdings of their investors and directors to avoid potential antitrust problems.

Background

Red Ventures and Bankrate are marketing companies that connect consumers with providers in various industries. In 2017, Red Ventures entered into an agreement to acquire Bankrate for $1.4 billion. Among other interests, Bankrate operated “Caring.com,” a website used to generate customer leads for providers of senior living facilities. Red Ventures did not offer a competing product in this space, but the FTC nonetheless required the divestiture of Caring.com, citing competitive concerns generated by operations of Red Ventures’ investors and directors.

Specifically, two of the largest shareholders in Red Ventures are private equity firms General Atlantic and Silver Lake Partners, with a combined 34 percent stake, two of seven board seats, and other substantial rights over operations. General Atlantic and Silver Lake separately owned “A Place for Mom” which, like Caring.com, provides an online referral service for providers of senior living facilities. According to the FTC’s complaint, “A Place for Mom” and “Caring.com” were each other’s closest competitors, with the number one and number two positions in the market. Here, the FTC looked behind the actual parties to the transaction to identify potential competitive concerns.

Takeaways

Private equity- and venture capital-backed companies must be aware of the competitive, or potentially competitive, holdings of their investors and directors.

  • As in the Red Ventures/Bankrate acquisition, the separate holdings of significant investors may become a focus of the government’s antitrust review of a transaction.
  • An investor simultaneously holding seats on the boards of two competing companies may violate the statute prohibiting interlocking directorates.[1]
  • Finally, companies should ensure that protections are in place to prevent any scenario – real or implied – where the investor or director could serve as a conduit for the sharing of competitively sensitive information between competing companies.[2]

___________________________

[1] See 15 USC § 19.

[2] See 15 USC § 1.

Is Amazon the Next Big Case? – GAFA Under Antitrust Scrutiny

Margrethe Vestager, head of the European Union’s Directorate-General for Competition (“DG Comp”), recently announced that the EU was once again investigating actions of a high-profile tech company – Amazon.

During a press conference held in Brussels in September, Commissioner Vestager affirmed that DG Comp had already sent questionnaires to market participants and started looking into Amazon’s potential abuse of dominance. However, DG Comp has not yet opened a formal case. As the Commissioner stated, “[t]hese are very early days and we haven’t formally opened a case. We are trying to make sure that we get the full picture.”

This investigation comes only a year after Amazon was found to have received illegal state aid through tax rulings of the State of Luxembourg, which was then ordered to recover more than €250 million.

The Issue at Stake

It is no secret that Amazon wields significant influence in retail e-commerce. The tremendous visibility of Amazon’s platform around the world attracts many third-party sellers and enables the company to act as both seller and host.

The recurrent concerns on the market relate to the dual nature of the Seattle-based company. The issue put forward by Commissioner Vestager concerns the use of third-party sellers’ data by Amazon as a host to increase the efficiency of Amazon as a seller.

How? Easy as pie. When a product sells well, Amazon is immediately informed through the data it collects, and the company then simply needs to adjust its own offerings and lower the price of its similar house-made products.

One could argue that these practices could put third-party vendors at a disadvantage and potentially amount to anti-competitive abuse of a dominant position under article 102 of the TFEU.

Amazon’s Strategy – A Fertile Ground for Global Competition Issues

Because Amazon is active in many different markets – as retailer, book publisher, marketing platform, host of cloud server space and in the television industry – its global strategy is to expand its integration across many business lines, exploiting the data it collects and being aggressive on pricing. The company appears to encourage growth over profits.

Those practices have been questioned over the past years. For instance, Lina M. Khan recently published an article in The Yale Law Journal discussing the alleged predatory pricing behavior of Amazon and related vertical relationship issues. For Ms. Khan, there is an ambient underappreciation of the risk to competition posed by the company, due, maybe, to an outdated vison of market power.

After Commissioner Vestager’s conference, it seems that the EU has taken preliminary steps to assess these risks.

Big Tech Companies – Sources of New Antitrust Challenges

DG Comp has only one toolbox: the EU treaties. Commission Vestager, however, proved to the world that there are many, many tools in this box.

Under Commissioner Vestager’s mandate, Google has been fined (twice) a total of almost $8 billion for abuse of dominance, Apple has been asked to reimburse the Irish State more than $14 billion in illegal State Aid and Facebook was sanctioned €110 million for providing misleading information about the WhatsApp takeover.

In reality, these cases point out the viability of EU competition instruments. The EU State Aid regime is precise and strong enough to catch hidden favorable tax schemes while venerable Article 102 is still able to catch unfair market practices, even those put in place in a new, digital economy.

Last but not least, it seems that EU Commissioner Vestager has found an impromptu ally in the war for fair competition: President Donald J. Trump himself, who recently argued in favor of antitrust actions against Amazon as part of an effort to exert more control over powerful multinationals.

This may be the first time when U.S. and EU antitrust agencies align their views toward a tech giant. That may not be not the kind of first-time attention Amazon would like.

The Antitrust Review of the Americas 2019

As part of Global Competition Review’s The Antitrust Review of the Americas 2019, Orrick attorneys Jay Jurata, Alex Okuliar, and Emily Luken contributed a chapter titled “IP and Antitrust,” examining three important developments this year evolving from recent trends at the intersection of IP and antitrust law.  The chapter is part of GCR’s The Antitrust Review of the Americas 2019, first published in September 2018.

The whole publication can be found here.

FTC Kicks Off Hearings on Competition and Consumer Protection in the 21st Century

Antitrust policy, once relegated to wonk status, has taken center stage in recent years: it seems as if each day there is a new debate over the need – or lack thereof – for more robust competition enforcement in today’s economy. In the past few weeks alone, competition law and big tech have been in the spotlight in both a call to reopen a Federal Trade Commission (“FTC” or “Commission”) investigation into Google and a forthcoming meeting among Attorney General Jeff Sessions, state Attorneys General investigating social media companies and a representative from the Department of Justice’s Antitrust Division (“DOJ”).

The FTC jumped into the fray on September 13, 2018 when it kicked off its hearings on Competition and Consumer Protection in the 21st Century, which had been announced earlier this year. The purpose of the hearings is to utilize the agency’s Section 6 authority “to consider whether broad-based changes in the economy, evolving business practices, new technologies, or international developments might require adjustments to competition and consumer protection law, enforcement priorities, and policy.” Among the announced topics are issues that have dominated the news lately, including: competition in technology markets, particularly those featuring two-sided “platform” businesses (ones that cannot make a sale to one side of the market without simultaneously making a sale to the other); the intersection of privacy, data and competition; evaluating the competitive effects of vertical mergers (those that join firms at different levels of the supply chain, e.g., the AT&T-Time Warner deal challenged unsuccessfully by DOJ); and the consumer welfare standard, which has served as the economic principle guiding antitrust enforcement since the 1980s. The FTC has accepted more than 500 public comments on 20 announced topics and continues to invite public comment in advance of specific hearing sessions.

Commission Chairman Joe Simons set the stage for the opening session by highlighting the combination of increased economic concentration and decreased antitrust enforcement that has generated calls to reassess the very nature of antitrust policy, noting that he is approaching the discussions “with a very open mind.”

The panel discussions that followed the opening session focused on the current landscape of competition and consumer protection law and policy, concentration and competitiveness in the U.S. economy, and the regulation of consumer data. Key takeaways so far include:

  • The Commission is eager to set competition enforcement priorities. Tech companies appear to be in the crosshairs.
  • Although there is growing concern about increased concentration in the economy, there is no consensus that big equates to bad. While some panelists cited data linking concentration to income inequality and reduced innovation, others cautioned that protecting less efficient businesses in the name of competition is misguided.
  • Effective privacy and data breach enforcement likely require new, modern tools both for detection and regulation. The FTC’s consumer protection mission likely will need to account for changes in federal legislation and/or voluntary rules established by the tech industry.

Videos of past hearing sessions are available online, along with public comments and additional information.

The FTC’s end goal is to produce one or more policy papers, patterned after the fruits of the 1995 hearings hosted by then-FTC Chairman Robert Pitofsky. Those hearings, which focused on global competition and innovation, led to two staff reports on competition and consumer protection policy “in the new high-tech, global marketplace” and helped pave the way for U.S. agency actions blocking mergers primarily based on harms to innovation. The Commission once again is revisiting its approach.

In the interim, stay tuned for additional updates as the hearings continue.

UK’s Proposed Investment Scrutiny Powers Are Far-Reaching

Douglas Lahnborg and Matthew Rose present a comparative discussion on the recently issued National Security and Investment White Paper, which proposes a significant expansion of the UK government’s powers to scrutinize foreign investment beyond those available in other leading economies. The white paper introduces powers to intervene in a broad range of transactions in any sector, regardless of deal value, the transaction parties’ market shares, or their revenues. If the proposals are brought into force in their current form, the UK regime would be one of the most stringent in the world, with wide-ranging implications for foreign and domestic companies and projects in sensitive sectors, including technology, energy, infrastructure, telecommunications, real estate and financial services. Read more here.

Japan SEP Licensing Guide Also Aims To Prevent Abuse

In response to a recent article by former director of the U.S. Patent and Trademark Office David Kappos, Orrick Antitrust attorneys John “Jay” Jurata and Emily Luken weigh in with their perspective on the Japan Patent Office’s “Guide to Licensing Negotiations Involving Standard Essential Patents.” While they agree that the Guide provides a balanced approach to the issues, they also provide insight into how the Guide acknowledges and expands upon potential abuses of standard essential patents. Read more here.

DOJ Encourages Self-Disclosure of FCPA Violations Discovered Through M&A Activity

Deputy Assistant Attorney General Matthew Miner, head of the DOJ’s Fraud Section, recently discussed the DOJ’s efforts to address corruption discovered during mergers and acquisitions. During his remarks at the American Conference Institute 9th Global Forum on Anti-Corruption Compliance In High Risk Markets, DAAG Miner explained that the DOJ would apply the principles in the FCPA Corporate Enforcement Policy (“FCPA Policy”) to successor companies that disclose and cooperate with the agency after discovering wrongdoing in connection with a merger or acquisition.

The FCPA Corporate Enforcement Policy. The Foreign Corrupt Practices Act prohibits corporate bribery of foreign officials and requires strong accounting practices. Last year, Deputy Attorney General Rod Rosenstein announced a revised FCPA Policy to help companies understand the costs and benefits of cooperation when deciding whether to voluntarily disclose misconduct. Absent aggravating circumstances or recidivism, and provided certain conditions are met, companies that voluntarily disclose, cooperate and remediate misconduct benefit from a presumption that they will receive a declination. (9-47-120 – FCPA Corporate Enforcement Policy.) Where a criminal resolution is warranted and (again) absent recidivism, the DOJ will recommend a reduction in the fine range. (Id.)

Application in the Mergers and Acquisition Context. With respect to M&A activity, especially in high-risk industries and markets, DAAG Miner explained that application of the FCPA Policy will give companies and their advisors more certainty when evaluating a foreign deal and determining how, and whether, to proceed with the transaction. (Deputy Assistant Attorney General Matthew S. Miner Remarks at the American Conference Institute 9th Global Forum on Anti-Corruption Compliance in High Risk Markets.) Recognizing the benefits of having companies with strong compliance programs entering high-risk markets, the DOJ wants to encourage acquiring companies to “right the ship” by enforcing robust compliance. (Id.) Not only does application of the FCPA Policy in the M&A context encourage greater corporate compliance, it also frees up DOJ resources and enables the agency to focus on other matters. (Id.)

If potential misconduct is discovered during due diligence, the DOJ recommends the company seek guidance through its FCPA Opinion Procedures. (Id.) These procedures allow a party to assess the risk by obtaining an opinion about whether certain conduct conforms with the DOJ’s FCPA Policy. (Foreign Corrupt Practices Act Opinion Procedure.) Even for companies that discover misconduct after the acquisition, the DOJ wants to “encourage its leadership to take the steps outlined in the FCPA Policy, and when they do … reward them[.]” (Deputy Assistant Attorney General Matthew S. Miner Remarks at the American Conference Institute 9th Global Forum on Anti-Corruption Compliance in High Risk Markets.)

Takeaways. The DOJ’s approach highlights the need for strong cross-disciplinary team staffing on mergers and acquisitions. For example, white-collar counsel can advise buyers on strategy once misconduct is flagged by corporate or antitrust counsel during the M&A process. Counsel for sellers that learns of misconduct during due diligence can discuss options with the client and coordinate as necessary to take advantage of the DOJ’s policies and guidance in mitigating any issues. Moreover, counsel for either party may uncover conduct from documents reviewed or conversations with the client that should be flagged to further assess whether misconduct has occurred. It is important to keep in mind that some of these documents may get produced to the DOJ or FTC during a merger review. Entities involved in deals in high-risk markets or industries should therefore involve deal, regulatory and enforcement experts where necessary.

Potential Antitrust Issues Lurking in Blockchain Technology

Blockchain technology has burst onto the scene and into the public consciousness over the last few years. While the securities and privacy law questions surrounding blockchain technology have received much attention, perhaps less obvious are the potential antitrust issues raised by the technology.

Although these issues are nascent, they are not wholly theoretical. For example, on March 16 the FTC announced that it is creating a Blockchain Working Group to look at, inter alia, competition policy. “Cryptocurrency and blockchain technologies could disrupt existing industries. In disruptive scenarios, incumbent companies may sometimes seek to hobble potential competitors through regulatory burdens. The FTC’s competition advocacy work could help ensure that competition, not regulation, determines what products will be available in the marketplace” (FTC Blog Post). And in January of this year, the Japan Fair Trade Commission also indicated that it may look into the competition policy issues involving blockchain-based cryptocurrencies.

This blog post briefly discusses some of the potential antitrust issues associated with blockchain technology. READ MORE

European Crackdown on Violations of Merger Control Procedural Rules Continues

Last year on this Blog we wrote about the uptick in enforcement action by European competition authorities against violations of merger control procedure (see here).

Yesterday, the UK Competition and Markets Authority (“CMA”) indicated that this trend is set to continue, issuing a fine of £100,000 for a breach of an Interim Order imposed on Electro Rent in its acquisition of Microlease. This is the first time the CMA has fined a company for such a procedural breach.

On the face of it, the fine seems harsh given that the relevant action – serving notice of termination of a lease without the CMA’s prior consent – was discussed with the appointed Monitoring Trustee prior to coming into effect.[1] Indeed, the European Court of Justice (“ECJ”) recently confirmed that parties may take certain actions without violating the standstill obligation imposed under the EU Merger Regulation – including terminating agreements – where such actions do not contribute to the implementation of a transaction.[2] In doing so, the ECJ’s ruling confirmed the commonly held view that merging parties are permitted to take certain steps allowing them to prepare for implementation of a transaction without violating merger control procedural rules.

Given the developing case law on standstill obligations, companies involved in M&A will need to revisit pre-completion protocols, noting that the EU approach seems to be diverging from the CMA’s somewhat more rigid approach to merger control. READ MORE

Out of Sync? : DOJ’s Policy Reversal Towards SEPs Lacks Legal Support

Jay Jurata and Emily Luken co-authored an article for Global Competition Review about the troubling policy shift by the DOJ’s Antitrust Division regarding the application of competition law to the assertion of standard-essential patents.

Please click here to read the full article.

Check Your Rates – Comply with FTC Variable Rate Marketing Guidelines

Rising Interest Rates Likely to Lead to Increased Scrutiny of Variable Rate Loan Marketing

On March 21, 2018 the Federal Reserve lifted its federal funds rate by a quarter percentage point to a range of 1.5% to 1.75%, the highest level since 2008. The Fed also significantly boosted its economic forecast and hinted that it may be more aggressive in its plan to continue to raise rates, signaling that the market should prepare for higher interest rates. For consumers with variable rate loan products, the rise in interest rates will result in the first substantial increase in loan payments in more than 10 years.

If history is our guide, the increase in interest rates will lead to an increase in consumer complaints of deceptive marketing for variable rate loan products. The Federal Trade Commission (“FTC”) takes such complaints seriously and has a history of investigations and enforcement actions based on deceptive marketing of financial products. For newer lenders who entered the lending marketplace after 2008, this may be the first time their variable rate marketing is scrutinized by the FTC. It’s a good time for all lenders to perform a “check-up” of variable rate marketing campaigns for compliance with the FTC’s rules and regulations and avoid allegations of deceptive or misleading ad copy.

To read the full article, click here.

CMA Launches Consultation Concerning Changes to its Jurisdiction over M&A in the Tech Sector

The UK government considers that transactions in the following sectors can raise national security concerns:

1. quantum technology;
2. computing hardware; and
3. the development or production of items for military or military and civilian use.

In order to allow the UK’s Secretary of State to intervene in transactions in these sectors, the UK government has proposed amendments to the Enterprise Act 2002 that would expand the Competition & Markets Authority’s (“CMA”) jurisdiction to review transactions in these sectors from a competition perspective. READ MORE

Stock Compensation May Trigger HSR Filing

The requirements of the Hart-Scott-Rodino (“HSR”) Act and Rules are well known to companies that engage in significant M&A transactions. But less well known is their applicability to acquisitions of stock by individuals as part of compensation practices. Especially where relatively young and successful companies are involved, HSR obligations may unexpectedly arise where equity compensation is given to founders, board members, executives, and other employees (whom we will group together and call “Insiders”). Companies and individuals potentially caught in the HSR process for this reason should ensure they are aware of the trigger rules, as a failure to file can result in significant fines.
READ MORE

Chinese Company’s Use of Foreign Sovereign Immunity Defense Linked to FTAIA Standard for “Direct” Impact on U.S. Commerce

On February 1, 2018, the Northern District of California court handling the sprawling In re Cathode Ray Tube (CRT) Antitrust Litigation[1] (“CRT”) declined to enter a default judgment against related Chinese defendants, finding the companies had made a sufficient showing of immunity under the Foreign Sovereign Immunities Act[2] (“FSIA”) for the issue to be addressed on the merits more fully.  The decision by Judge Tigar turned on the court’s interpretation of the “commercial activity” exception to the FSIA’s general preclusion of jurisdiction against foreign sovereigns and their agencies and instrumentalities, an exception that requires conduct having a “direct effect” in the United States.  That statutory construction in turn was drawn from the alternative test for Sherman Act claims under the Foreign Trade Antitrust Improvements Act[3] (“FTAIA”) that requires foreign conduct have a “direct, substantial, and reasonably foreseeable” effect on U.S. commerce.  In looking to the FTAIA to interpret the FSIA, the court made a pair of assumptions that are not thought to be correct in all circuits:  That the similar (but different) FTAIA and FSIA “direct effect” provisions have the same meaning, and that the correct meaning is one in which a “direct” effect must follow ‘immediately” from the defendant’s predicate act.  The court’s decision may have implications for the construction of both the FTAIA and the FSIA, certainly in antitrust cases and, while this remains to be seen, perhaps more broadly. READ MORE

Antitrust Issues with Joint Ventures – PLI CLE presented by Howard Ullman

Orrick Antitrust Of Counsel Howard Ullman will present a Practising Law Institute (PLI) One-Hour Briefing on the topic of Antitrust Issues with Joint Ventures.  This One-Hour Briefing will analyze the potential antitrust ramifications of joint ventures and other collaborations between competitors and how to balance the pro-competitive efficiencies against the anti-competitive effects of a proposed JV.  Registration for the webcast can be found here, and to read Howard’s series on Orrick’s Antitrust Watch Blog analyzing the antitrust effects on joint ventures, click here.

2018 Antitrust Writing Awards Nominees

 

Four articles authored (or co-authored) by Orrick attorneys have been nominated for a 2018 Antitrust Writing Award from Concurrences, published by The Institute of Competition Law.  Concurrences picks its Antitrust Writing Award winners in part by popular vote.  You can view the articles and cast your vote(s) here:

 

 

Voting closes on February 9, 2018.

Enhancing Fairness in Platform-to-Business Relations in the EU Through a Change of Legal Landscape

Online platforms have become a crucial infrastructure for businesses. They enable small businesses to have easy access to millions of potential customers and create an unprecedented choice of products and services for them. According to a recent Eurobarometer survey on the use of online marketplaces and search engines by small and medium-sized enterprises (“SMEs”),[1] 42% of the respondents declared that they use online platforms and marketplaces to sell their products or services.[2] This survey also indicates that 82% of the respondents rely on search engines to promote and sell their products or services. In short, online platforms play a key role in the growth of the economy and help the digital transformation of small businesses. READ MORE

Intellectual Ventures Wins Summary Judgment to Defeat Capital One’s Antitrust Counterclaims

Patent License agreement on a table Intellectual Ventures Wins Summary Judgment to Defeat Capital One’s Antitrust Counterclaims

Antitrust partner David Goldstein recently wrote an article for the Antitrust, UCL and Privacy section of the State Bar of California regarding Intellectual Venture’s recent summary judgment win to defeat Capital One’s antitrust counterclaims asserted in response to IV’s patent infringement claims. The decision addresses recurring issues involving patent assertion entities, including the definition of the relevant market, the Noerr-Pennington doctrine, and collateral estoppel. The article can be accessed here.

Don’t Hold Back: FTC Offers New Guidance on HSR Filing Obligations

As discussed previously on this blog, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires parties to certain proposed transactions to submit detailed premerger notification filings and wait for clearance before consummating the deal. To facilitate the antitrust review, merging companies that meet the HSR thresholds are required to submit a wealth of information about their businesses and the proposed transaction, including annual reports, market analyses, and agreements and other documents bearing on the deal. Despite these broad requirements, the FTC found that some merging companies were withholding side agreements relevant to the antitrust review process on the theory that they were ancillary to the main agreement and/or protected by a common interest privilege or joint defense agreement. READ MORE

Antitrust Analysis of Joint Ventures: How Big Is Too Big?

In the first post in this series, we introduced the concept of joint ventures (“JVs”), outlined why antitrust law applies to their formation and operation, identified the major antitrust issues raised by JVs, and discussed why you should care about these issues.  In the second installment, we unpacked some of the major antitrust issues surrounding the threshold question of whether a JV is a legitimate collaboration.  The third post in the series discussed ancillary restraints–what they are and how they are analyzed. READ MORE