Federal Trade Commission

A Boiling Frog? Merger Enforcement of Early-Stage Tech Companies

Fable has it that a frog placed in tepid water slowly brought to a boil will not perceive danger until it is too late to leap. According to some critics, U.S. high tech merger review has a similar problem insofar as it fails to adequately consider and challenge acquisitions of startups that, on their face, appear to constitute incremental changes to competitive dynamics but that over time may suppress competition. Indeed, a U.S. Federal Trade Commission (FTC) official confirmed last week that the agency faces “withering criticism of antitrust” and its enforcement with respect to competitor acquisitions of startup companies.

The comments were made during a conference in San Francisco by Michael Moiseyev, Assistant Director of the FTC’s Bureau of Competition and a leading enforcer with responsibility for merger and acquisition review. Without identifying particular transactions, he acknowledged that players in the venture capital (VC) space have characterized the U.S. antitrust agencies as “snookered” in permitting certain early-stage companies to be acquired.

Making the case that an existing competitor’s acquisition of a nascent, potential rival poses “a substantial lessening of competition” (Clayton Act, § 7) is a high hurdle for the U.S. agencies to clear. Mr. Moiseyev assessed the state of current case law as both “terrible” and “unforgiving.” The agency’s most recent challenge invoking a potential competition theory resulted in a district court concluding that the FTC had failed to provide evidence the target would have launched a new, competing technology. FTC v. Steris Corp., No. 1:2015cv01080 (N.D. Ohio 2015). In that matter, the FTC had sued and invoked the theory that the target, if it were not acquired, was poised to create “actual potential competition” for the U.S. market leader by importing technology currently offered by just one European facility. The merging parties undermined that theory by demonstrating a dearth of customer commitment to using the would-be-imported technology.

Yet criticism of a perceived lack of U.S. agency challenges in the tech sector continues to mount.

Under this pressure, will the U.S. agencies take a fresh lens to acquisitions of new and innovative competitors? The key analytical question is how to evaluate whether those companies would evolve to constrain actual, current competition. This fall, the FTC’s ongoing policy hearings devoted a day to acquisitions of potential competitors in tech markets. Nearly all participants endorsed studies of the effects of past transactions via merger retrospectives. Several panelists advised that the agencies scrutinize more closely transactions involving dominant platforms and whether the underlying deal removes a nascent competitive threat. Other participants in the hearings emphasized that the competitive analysis should focus on harms to innovation but that an information imbalance at times constrains the agencies’ ability to assess emerging industry developments.

We do not know whether a boiling frog is in our midst. Nevertheless, if you are advising VCs or a company that is considering an acquisition involving an innovative, new or potential competitor, reach out to antitrust counsel to consult on these issues.

FTC v. Qualcomm: Trial and Possible Implications

Orrick partner Jay Jurata has published an article in Competition Policy International weighing in on the important issues raised in the closely-watched trial now under way in FTC v. Qualcomm. This article analyzes important developments in the case as it has proceeded – including the significant motion to dismiss and partial summary judgment rulings – and offers thoughts on the just commenced trial. To read the full article, please visit here.

Courts Question FTC Enforcement Method

The FTC has long asserted it has the authority to bring actions in federal court to obtain injunctive relief and equitable monetary remedies (e.g. disgorgement, consumer redress) for unfair and deceptive practices. This view of the agency’s scope of authority has stood for years without much question or challenge. But two recent district court decisions may change all that by limiting the agency’s ability to petition a federal court to those situations in which it can demonstrate a defendant is “about to violate” the law. On December 11, 2018, the United States Court of Appeals for the Third Circuit Court heard oral argument in one of the district court cases – FTC v. Shire ViroPharma, Inc. – with a decision expected in the first half of 2019. If the Third Circuit upholds the district court’s ruling, it will complicate FTC enforcement efforts and push more cases into the agency’s administrative process.

The FTC’s Enforcement Powers

The FTC can initiate an enforcement action if it has “reason to believe” that the consumer protection or antitrust laws are being violated. Before 1973, the FTC could exercise its enforcement powers only through administrative adjudications, which do not allow for financial relief or an immediate prohibition on future wrongdoing.[1] While the FTC has the power to seek financial remedies through its administrative process, the penalties are limited by a three-year statute of limitations, and the FTC must demonstrate that the conduct was clearly “dishonest or fraudulent.”[2]

In 1973, Congress amended the FTC Act to add Section 13(b) and give the FTC the authority to (1) seek injunctive relief in federal court pending the completion of the FTC administrative proceeding when the FTC “has reason to believe” that a person or entity “is violating, or is about to violate” any law enforced by the FTC, and (2) seek a permanent injunction “in proper cases.” Following the enactment of Section 13(b), the FTC adopted an expansive view of its power to bring federal court enforcement actions, and started bringing cases in federal court seeking monetary relief under equitable doctrines such as restitution, disgorgement, and rescission of contracts. The FTC also asserted that its statutory power to seek a “permanent injunction” was a standalone grant of authority that entitled the FTC to bring a federal court action irrespective of whether a defendant “is violating, or is about to violate” the law. By tying its theories to these doctrines, the FTC took much of its enforcement activity outside otherwise applicable requirements, including the three-year statute of limitations and proof of a defendant’s dishonesty or fraud. Until this year, courts universally accepted the FTC’s expansive view of its authority under Section 13(b). As a result, it is the FTC’s policy that “[a] suit under Section 13(b) is preferable to the adjudicatory process because, in such a suit, the court may award both prohibitory and monetary equitable relief in one step.”[3]

Recent Decisions

Two recent court decisions have raised questions about the FTC’s view of its authority to sue in federal court solely over a defendant’s prior conduct. In FTC v. Shire ViroPharma, Inc., the FTC sued the defendant in the U.S. District Court for the District of Delaware, alleging that between 2006 and 2012 ViroPharma had engaged in an anticompetitive campaign of repetitive and meritless filings with the FDA to delay generic competition and therefore maintain its monopoly on its branded drug. ViroPharma moved to dismiss the FTC’s complaint, arguing that the FTC had exceeded its authority under Section 13(b). Specifically, ViroPharma asserted that Section 13(b) does not provide the FTC with independent authority to seek a permanent injunction under Section 13(b), but rather limits permanent injunction actions to those cases where the FTC can show that a defendant “is violating or is about to violate” the law. On March 20, 2018, Judge Richard Andrews granted ViroPharma’s motion to dismiss, and rejected the FTC’s long-held assertion that Section 13(b) provides it with the independent authority to seek permanent injunctive relief in federal court, including relief for past violations of the FTC Act and regulations.[4] Judge Andrews held that the FTC’s authority to seek permanent injunctive relief is dependent on the FTC alleging facts that plausibly suggest a defendant is either (1) currently violating a law enforced by the FTC or (2) is about to violate such a law. Because the FTC’s complaint against ViroPharma was based on conduct that occurred five years before the filing of the complaint, the court found that the FTC failed to plead facts that demonstrate that ViroPharma was either violating or “about to” violate the law.

Subsequently, on October 15, 2018, Judge Timothy Batten, in the Northern District of Georgia, cited the ViroPharma decision in finding that the FTC’s permanent injunction authority under 13(b) authority is limited to situations where a defendant is “about to” violate the law. In FTC v. Hornbeam the FTC brought a federal court enforcement action alleging that the defendants were marketing memberships in online discount clubs to consumers seeking payday, cash advance or installment loans, in ways that violated the FTC Act, the FTC’s Telemarketing Sales Rule, and the Restore Online Shoppers’ Confidence Act. The court rejected the FTC’s argument that courts must defer to the FTC’s determination that it has “reason to believe” that the defendants were about to violate the law.[5] Rather, the court – citing the decision in ViroPharma – held that when the FTC exercises its Section 13(b) authority it must meet federal court pleading standards and set forth sufficient facts that each defendant is “about to” violate the law.

Takeaways

If followed, the ViroPharma and Hornbeam decisions could significantly limit the FTC’s ability and willingness to pursue claims in federal court, and shift enforcement actions to the FTC’s administrative process. It is unclear how such a shift to administrative enforcement will impact how the FTC approaches enforcement actions and negotiates consent orders to resolve its investigations. On the one hand, companies may be hesitant to go through the FTC’s administrative process given that it is a notoriously slow process over which the FTC Commissioners exercise the final decision-making authority. On other hand, the FTC’s limited ability to seek financial remedies through the administrative process may provide companies greater leverage in negotiating consent decrees.

The FTC is acutely aware of the potential threat posed by these decisions, as evidenced by its decision to forgo filing an amended complaint in favor of immediately appealing the court’s ruling in ViroPharma to the Third Circuit. In its appeal to the Third Circuit, the FTC stated that if the ViroPharma holding had been applied in past cases it “would likely have doomed hundreds of other Section 13(b) actions that the FTC has filed over the years – cases that collectively have recovered many billions of dollars for victimized American consumers.”[6]

On December 11, 2018, the Third Circuit heard oral argument in ViroPharma. During oral argument the three-judge panel expressed skepticism at the FTC’s argument that Judge Andrews applied the wrong pleading standard by requiring that the FTC plead sufficient facts to show that a violation of federal law was “imminent.” A decision by the Third Circuit is expected in the first half of 2019. The Hornbeam case is still pending in the Northern District of Georgia as the FTC decided to amend its complaint following the court’s ruling on the motion to dismiss.

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[1] 15 U.S.C. § 45(b).

[2] 15 U.S.C. § 57b.

[3] https://www.ftc.gov/about-ftc/what-we-do/enforcement-authority.

[4] FTC v. Shire ViroPharma, Inc., No. 17-131-RGA, 2018 WL 1401329 (D. Del. 2018).

[5] FTC v. Hornbeam, No. 1:17-cv-03094-TCB (N.D. Ga. Oct. 15, 2018).

[6] FTC v. Shire ViroPharma, Inc., No. 18-1807, Document No. 003112960825 at 47 (3d Cir. June 19, 2018).

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.