Government Enforcement

U.S. v. Sabre: Putting the Innovation Theory of Harm to the Test?

In its recent complaint challenging the $360 million acquisition of Farelogix by Sabre, the Department of Justice (“DOJ”) appears to have left the door open to offering proof that harm to innovation in the market for airline bookings is a separate and independent basis to block the merger. When the case goes to trial in January 2020, watch to see if DOJ uses this case to provide a roadmap for the evidence and analytical tools to analyze innovation effects in a technology merger.

The Sabre/Farelogix Lawsuit

The DOJ complaint alleges that Sabre’s acquisition of Farelogix is a “dominant firm’s attempt to eliminate a disruptive competitor after years of trying to stamp it out.” Sabre operates the largest global distribution system (“GDS”) in the United States. A GDS is a computerized system that allows brick-and-mortar and online travel agents to search for fares and schedules and book flights across multiple airlines. The complaint alleges Farelogix is a disruptive competitor that has eroded Sabre’s dominance in airline bookings. Farelogix offers an innovative booking service that allows airlines to bypass GDSs and connect directly to travel agencies. Farelogix has also pioneered the next-generation technology standard, called “New Distribution Capability” (“NDC”). NDC offers more advanced communications between airlines and travel agents and gives airlines greater flexibility to offer travelers ancillary products and services, such as priority boarding and Wi-Fi.

The complaint alleges that over the years Sabre has used its dominant position to engage in a broad range of anticompetitive conduct to delay adoption of NDC and to impede Farelogix’s ability to compete . Despite Sabre’s efforts, Farelogix has loosened Sabre’s grip on the market for airline bookings which has given the airlines leverage to negotiate lower fees from the GDSs. In addition, competition from Farelogix has pushed Sabre to update its own outdated airline booking technology. In spite of Sabre’s efforts to hobble Farelogix, demand for NDC has steadily grown and Sabre has recognized Farelogix as an existential threat to its business model. According to DOJ, “[i]nstead of innovating to compete with Farelogix, Sabre has resorted to eliminating the competitive threat by acquiring Farelogix” and the “acquisition would wipe out this competition and innovation, harming airlines and American travelers.”

In a press statement released the same day the complaint was filed, Sabre wrote that the “DOJ’s claims lack a basis in reality and reflect a fundamental misunderstanding” of the airline booking market. In its answer, Sabre argues the transaction is procompetitive because it will accelerate the delivery of new technology to the airline booking market by combining Farelogix’s NDC technology and retailing capabilities with Sabre’s travel agent network and global footprint. Sabre challenges DOJ’s conclusion that Farelogix is a particularly disruptive and innovative competitor. Sabre contends Farelogix is “not disruptive today and will not become so in the future.” Farelogix’s booking service earned only $7 million in revenues in 2018 and has close to a zero percent share of the airline booking markets alleged in the complaint. Sabre further contends Farelogix is not poised to disrupt the market because there is nothing unique about Farelogix’s technology. NDC is an open standard that is freely available and at least 39 other firms are certified to provide NDC solutions.

Harm to Innovation

Traditional merger analysis has focused on price competition—the merged firm’s ability to raise price or reduce output. In recent decades, nonprice competition—the merged firm’s ability to reduce quality and innovation—has become an important dimension of merger analysis. The emphasis on innovation is nothing new. Section 6.4 of the DOJ/FTC 2010 Horizontal Merger Guidelines makes clear that competition may be harmed if a merger reduces the merged firm’s incentives to innovate:

The Agencies may consider whether a merger is likely to diminish innovation competition by encouraging the merged firm to curtail its innovative efforts below the level that would prevail in the absence of the merger.

Alleging harm to innovation is a well-accepted theory and many DOJ and the Federal Trade Commission (“FTC”) complaints have alleged technology mergers will reduce incentives to innovate. For example, in U.S. v. Bazaarvoice, a litigated case involving the consummated merger of the two leading ratings and review platforms, the DOJ introduced substantial evidence that competition between the parties was the primary driver of innovation in the market. In another recent DOJ case, the proposed acquisition of Tokyo Electron by Applied Materials, the parties abandoned the merger when they were unable to address the DOJ’s innovation concerns. Similarly, the FTC has challenged mergers to protect innovation in high-tech markets. For example, in Nielsen/Arbitron, the FTC required divestitures to protect future competition in the market for cross-platform audience-measurement services and in NXP/Freescale the FTC required divestitures to protect future competition in the semiconductor industry. FTC Chairman Maureen Ohlhausen explained the importance of innovation in the review of high-tech mergers:

Higher prices are obviously a fundamental concern in reviewing mergers of close competitors. The loss of competition to innovate and to develop better, faster, more efficient products, however can be just as concerning – particularly in the technology area, where essential competition often is not on price, but rather on product features.

Assessing Harm to Innovation

Most of these enforcement actions were resolved by consent where the agencies did not go into detail regarding the evidence considered and the analytic tools used to assess harm to innovation. In Bazaarvoice, the one litigated case, DOJ alleged harm to innovation along with effects on price and quality. DOJ did not ask, and the court did not find, that harm to innovation was a separate and independent basis to find the merger substantially reduced competition in the ratings and review market.

The Sabre complaint alleges two separate and distinct theories of competitive harm: (i) higher prices due to the elimination of head-to-head competition between Sabre and Farelogix, and (ii) reduced incentives to invest and innovate next-generation technology. The structure of the Sabre complaint and the extensive references to innovation competition suggests that DOJ may ask the court to make a separate finding that the merger should be blocked based on an innovation theory of harm.

The DOJ’s focus on innovation effects is likely a response to criticism that the agencies have placed excessive focus on price effects and failed to intervene when dominant firms acquire smaller, disruptive competitors. DOJ may seek to use the Sabre case to put harm to innovation on equal footing with price effects. Discovering whether DOJ intends to allege harm to innovation as a separate and independent basis to block the merger will have to wait until DOJ files its pretrial brief and presents expert and other testimony at trial. But if this is DOJ’s intention, the trial may very well answer some open questions about how the agencies approach the elimination of small, innovative competitors. For example, will DOJ articulate a clear standard for blocking a dominant firm’s acquisition of a smaller, innovative competitor? Even if Farelogix has been an aggressive and innovative competitor, will DOJ be able to prove Farelogix is uniquely positioned to push the airline booking industry forward? Expect Sabre to offer evidence that the GDSs have been a source of innovation and that there are many other similarly situated competitors that can match Farelogix’s NDC technology. Will DOJ be able to prove how Farelogix would have developed without the merger? Expect Sabre to argue that Farelogix is a weak competitor that does not have the resources to implement NDC technology at scale. What weight will DOJ give to any integration efficiencies of combining Sabre’s and Farelogix’s respective technologies? Expect Sabre to argue that the merger will lead to better products that will enhance, rather than stifle, innovation. Finally, what, if any, economic tools will DOJ use to measure any potential reduction in innovation in the airline booking market?

No Signs of Slowing Down — Global Antitrust Agencies Focus on Big Tech

Earlier this year, we covered the widespread interest in tech giants among international competition authorities, as well as the potential for divergence in intensity and type of enforcement across jurisdictions. We observed that while the U.S. enforcement agencies did not appear to support a regulatory approach to platforms and the digital economy, others like the Australian Competition and Consumer Commission (ACCC) and the UK Parliament’s Digital Culture, Media and Sport Committee may have a stronger appetite for proactive regulation.

Since that post, competition authorities, both U.S. and other, have intensified their focus, with activities ranging from sector-wide studies to investigations into individual tech companies.

For example, the U.S. Department of Justice Antitrust Division (DOJ) recently announced a broad review of whether online tech companies have harmed consumers or otherwise reduced competition. The probe will cover leading online platforms in “search, social media, and some retail services” and will focus on “practices that create or maintain structural impediments to greater competition and user benefits.”

That DOJ announcement is part of a broader effort by the U.S. antitrust enforcement agencies to address competition in the tech sector. Days later, the Attorney General met with eight State AGs who reportedly are considering opening their own investigations. The FTC launched a tech task force back in February (in addition to its recently concluded hearings on competition and consumer protection) and last month opened a formal antitrust investigation into Facebook (according to a recent press release accompanying Facebook’s Q2 earnings report). Reports also have emerged of FTC information requests to third-party resellers on Amazon. Even the Antitrust subcommittee of the U.S. House Committee on the Judiciary has held a hearing on online platforms and market power as part of its separate investigation.

The U.S. agencies’ overseas counterparts have remained just as active. In Australia, the ACCC just published the Final Report from its Digital Platforms inquiry. The inquiry focused on online search engines, social media platforms and other digital content aggregation platforms with an emphasis on Facebook and Google, and looked into the impact of digital platforms on competition in the advertising and media markets, and on advertisers, media content creators and consumers.

The final report found that Google has “substantial market power” in the supply of general search services and search advertising services in Australia, and that Facebook has “substantial market power” in the supply of social media services and display advertising services in Australia. Both companies were found to have “substantial bargaining power” in their dealings with news media businesses in Australia. The report cautioned that this market power could be used to damage the competitive process, though it did not look at whether these digital players have in fact misused their market power.

The report offered 23 recommendations “aimed at addressing some of the actual and potential negative impacts of digital platforms in the media and advertising markets, and also more broadly on consumers.” The recommendations most directly implicating competition include changing merger law to incorporate additional factors – such as the likelihood that the acquisition would result in the removal of a potential competitor from the market, and the nature and significance of assets, including data and technology, being acquired – and to require advance notice of acquisitions; and creating a new, specialist digital platforms branch within the ACCC to monitor and investigate proactively instances of potentially anticompetitive conduct by digital platforms and take action to enforce competition and consumer laws.

The report also recommended changes to Australia’s Privacy Act, including expanding the definition of “personal information” to include technical data, strengthening notification and consent requirements and pro-consumer defaults, enabling the erasure of personal information, and introducing direct rights of action and higher penalties for breach, as well as establishing an ombudsman scheme to resolve complaints and disputes with digital platform providers. Additional recommendations focused specifically on news media (e.g. creating a code of conduct to promote fair and transparent treatment of news media by digital platforms, improving digital media literacy in schools and the communities, and offering greater funding for public broadcasters and local journalism).

Similar undertakings are in the works around the globe. The ACCC report comes just as the UK Competition and Markets Authority (CMA) announced the start of a formal market study into online platforms and the UK market for digital advertising. The study will examine three potential sources of harm in digital advertising: (1) The market power of online platforms in consumer-facing markets – to what extent online platforms have market power and what impact this has on consumers; (2) Consumer control over data collection practices – whether consumers are able and willing to control how data about them is used and collected by online platforms; and (3) Competition in the supply of digital advertising in the UK – whether competition in digital advertising may be distorted by any market power held by platforms. Platforms not funded by digital advertising are expressly outside the scope of the study.

In keeping with what appears to be a greater openness toward proactive regulation than the U.S. agencies (at least historically), the discussion of potential remedies in the CMA’s Statement of Scope explains that the “current expectation is that any remedies are likely to focus on recommendations to Government for the development of an ex ante regulatory regime … and are likely to require legislative change.” The CMA does not believe that a “one-off” market investigation and intervention is “sufficient to provide a sustainable long-term framework for the sector.” The five main areas in which remedies may be required include: (1) increasing competition through data mobility, open standards, and open data; (2) giving consumers greater protection over data; (3) limiting platforms’ ability to exercise market power; (4) improving transparency and oversight for digital advertisers and content providers; and (5) institutional reform. The CMA plans to publish an interim report with initial findings in January 2020, with a final report to follow no later than July of next year.

Not to be outdone, the EU – which recently has been fairly active in the tech sector, including last year’s highly publicized Google Android decision – recently announced a formal investigation into Amazon. The investigation focuses on Amazon’s role as both a platform provider (through Amazon marketplace) and a participant on that platform (through its first-party retail offerings), asking whether Amazon’s use of sensitive data from independent retailers is in breach of EU competition rules. Specifically, the Commission will look into (1) the standard agreements between Amazon and marketplace sellers, which allow Amazon’s retail business to analyze and use third-party seller data; and (2) the role of data (including competitively sensitive marketplace seller data) in selecting the winners of the “Buy Box,” which allows customers to add items directly to their shopping carts and accounts for the majority of Amazon transactions.

As we cautioned previously, with so many competition authorities weighing in on how to assess tech competition, this confluence of inquiries and investigations can pose a challenge for global enterprises operating under an international patchwork of approaches. Technology-focused, data-intensive businesses should consider seeking antitrust counsel to monitor developing competition trends and implications across jurisdictions.

DOJ Changes Course and Announces That It Will Favorably Consider “Robust” Antitrust Compliance Programs at Both the Charging and Sentencing Stages in Criminal Cases

Benjamin Franklin once observed that “an ounce of prevention is worth a pound of cure.” In the antitrust context, this means that most, if not all, companies will want as a matter of course to adopt and maintain an antitrust compliance program, because doing so will help avoid antitrust problems before they occur.

Until recently, however, the U.S. DOJ Antitrust Division gave no weight to corporate antitrust compliance programs at the charging stage of criminal cases, and provided little public guidance as to how they would be considered at the sentencing stage of such proceedings. As former Deputy Assistant Attorney General Brent Snyder noted in 2014, there were once two hard truths about compliance programs. The first was that the “existence of a compliance program almost never allows the company to avoid criminal antitrust charges.” [1] The second was that “the Division, like the Department of Justice as a whole, almost never recommends that companies receive credit at sentencing for a preexisting compliance program.” [2] That changed late last week with an important announcement by Assistant Attorney General Makan Delrahim. Delrahim described the changes to the Division’s treatment of antitrust compliance programs and also announced the publication of a Division guidance document that Division lawyers will use to apply the policy.

Prior to the policy change, a corporate compliance policy would itself garner no credit at the criminal charging stage; instead, the Division took an “all-or-nothing” approach, rewarding the first company in a cartel to come forward with leniency, and possibly advocating for criminal penalty reductions for other companies that fully cooperate in the investigation.

No longer. Going forward, a company with a “robust” compliance program (even if it is not the first to seek leniency) may be eligible for a deferred prosecution agreement (“DPA”). As Delrahim stated in his recent speech, “a company with a robust compliance program actually can prevent crime or detect it early, thus reducing the need for enforcement activity; minimizing the harm to consumers earlier and saving precious taxpayer resources” even if the compliance program is not 100% effective.

In evaluating whether a compliance program is robust, pursuant to its guidance document, the Division will ask three fundamental questions at the charging stage: (1) Is the corporation’s compliance well designed? (2) Is the program being applied earnestly and in good faith? and (3) Does the corporation’s compliance program work?

In asking and answering these three fundamental questions, the Division will consider nine factors, which the guidance document stresses are not a checklist or formula. The first factor looks to the program’s design and comprehensiveness, and considers whether the program is merely a “paper” program or whether it was designed, implemented, reviewed and revised as appropriate in an effective manner. The second factor looks to the culture of compliance, and asks whether management has clearly articulated —and conducted themselves in accordance with— the company’s commitment to good corporate citizenship. And the third factor looks to whether those with operational responsibility for the program have sufficient autonomy, authority and seniority, as well as adequate resources to implement the program. Other factors include whether the program: is tailored to the best practices of the industry and to the unique circumstances of the company; provides training and communication that is clear and empowers employees to act with confidence of the rules; requires periodic review, monitoring, and auditing; establishes reporting mechanisms to allow for anonymous or confidential reports without fear of retaliation; creates a system of incentives and discipline to ensure the program is well-integrated into the company’s operations and workforce; and implements mechanisms for self-policing, remedying issues and improving the program to prevent future issues. Although many of the factors are fairly straightforward and some reflect prior statements by agency officials, the guidance constitutes the first time in the Division’s criminal program history that it has issued formal guidance regarding how it evaluates antitrust compliance programs.

Perhaps not surprisingly, merely having a robust compliance program will not guarantee a DPA. Instead, the Division will also consider whether the company self-reported the misconduct, whether it cooperated with government investigations, and whether it took remedial action.

The new guidance document also clarifies how the Division will consider compliance programs at the sentencing stage. A company may receive a three-point reduction in its “culpability score” under the U.S. Sentencing Guidelines if it has an “effective” compliance program. However, there is no reduction if there has been an unreasonable delay in reporting illegal conduct to the government, and there is a rebuttable presumption that a compliance program is not effective when certain “high-level personnel” or “substantial authority personnel” participated in, condoned or were willfully ignorant of the offense. An effective guidance program may also avoid the need for the DOJ to recommend corporate probation. Finally, the Division’s guidance provides that a dedicated effort by the company’s senior management to change company culture after an antitrust violation and corporate actions to prevent the recurrence of an antitrust violation are relevant to whether the DOJ should recommend a criminal fine reduction.

In sum, for most companies, it has always made good sense to have, and to periodically update and review, an antitrust compliance policy. Of course, no one ever wants or expects to be involved in a criminal antitrust investigation, but in light of the Antitrust Division’s recent announcement about and guidance concerning how it will take such policies favorably into account in such investigations, it likely makes sense for many companies to dust off their programs to ensure that they are adequately robust in the eyes of the Division.

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[1] Snyder, supra note 1, at 9.

[2] Brent Snyder, Compliance is a Culture, Not Just a Policy, at 8 (Sept. 9, 2014), https://www.justice.gov/atr/file/517796/download.

Toward Uncharted Waters – The CVS-Aetna Merger

On June 4 – 5, 2019, Judge Richard J. Leon of the U.S. District Court for the District of Columbia held an extraordinary and unprecedented evidentiary hearing to decide whether to enter the proposed Final Judgment in U.S. v. CVS/Aetna requiring the divestiture of Aetna’s Medicare Part D business. Judge Leon has been highly critical of DOJ’s proposed remedy and has disrupted long-established DOJ practices to resolve competitive concerns in merger cases. A decision to reject the Division’s proposed remedy would upend established law, interfere with DOJ’s ability to negotiate merger settlements, and create uncertainty in DOJ’s merger enforcement program.

Procedural History

Following an 11-month investigation, the Antitrust Division on October 10, 2018 filed a lawsuit seeking to enjoin CVS Health Corporation’s $69 billion acquisition of Aetna, Inc. The complaint alleged the transaction would substantially lessen competition for the sale of individual prescription drug plans (“individual PDPs”) in 16 regions in the U.S. Individual PDPs provide Medicare beneficiaries with insurance coverage for their prescription drugs (Medicare Part D). To address the harm alleged in the Complaint, the Division filed a proposed Final Judgment that required CVS to divest Aetna’s nationwide individual PDP business to WellCare Health Plans, Inc.

When settling an antitrust case, DOJ must comply with the Tunney Act, which establishes various procedures the parties must follow, after which the settlement can be submitted to the court to determine whether entry of the proposed Final Judgment “is in the public interest.”[1] Consistent with standard Tunney Act practice, Judge Leon entered an order permitting the parties to close their transaction and requiring CVS to hold separate Aetna’s individual PDP business until the assets are divested to WellCare. Pursuant to Judge Leon’s order, the parties closed their transaction on November 28, 2018, and two days later completed the divestiture to WellCare.

Despite having authorized the parties to close the transaction, Judge Leon became concerned the status quo would not be preserved in the event he subsequently concluded the proposed Final Judgment would not be in the public interest. Judge Leon was very critical of the proposed remedy, which he said involved “about one-tenth of one percent” of the value of the transaction. He also expressed concern that the proposed Final Judgement failed to address potential harm in the market for pharmacy benefit management (“PBM”) services. PBM providers manage pharmacy benefits for health plans and negotiate their drug prices with pharmaceutical companies and retail pharmacies. Specifically, Judge Leon wanted to preserve the option to reject the proposed Final Judgment if he found that DOJ, in failing to allege harm in the PBM market, had drafted the Complaint so narrowly as “to make a mockery of judicial power.”[2]

Judge Leon ordered the parties to explain why CVS should not be required to hold Aetna separate and insulate the management of the two companies during the pendency of the Tunney Act process. DOJ vigorously objected that the court did not have the power to consider possible harm in the PBM market because the complaint did not allege harm in the PBM market and the record before the court did not implicate the judicial mockery standard. Ultimately, CVS diffused the issue when it voluntarily agreed to stop further integration efforts and to preserve the status quo by operating Aetna’s health insurance business as a separate unit from CVS’s businesses.

The Tunney Act requires the publication of the proposed Final Judgment followed by a 60-day public comment period. DOJ received 173 comments about the proposed settlement, many criticizing the remedy. DOJ filed its response to the public comments on February 13, 2019. It concluded that the proposed Final Judgment provides an effective and appropriate remedy for the antitrust violation alleged in the Complaint and is therefore in the public interest. Thereafter, the Division filed a motion requesting that Judge Leon enter the proposed Final Judgment.

Tunney Act Hearing

In most Tunney Act proceedings, courts make their public interest determination based on the Complaint, the terms of the proposed Final Judgment, public comments, and DOJ’s response to the public comments. In rare cases, the court will consider argument from the parties and on very rare occasions will hear from other interested parties. Here, Judge Leon accepted briefs opposing the remedy filed by amici curiae the American Medical Association, AIDS Healthcare Foundation, and Consumer Action and U.S. PIRG. In an unprecedented move, Judge Leon ordered a hearing to take live testimony from witnesses presented by the amici and the parties. In connection with the ordered hearing, Judge Leon directed the parties and amici to submit lists of witnesses and a summary of their testimony and issued the following rulings concerning the conduct of the hearing:

  • From the list submitted by the amici, Judge Leon selected three witnesses: an economic expert, the President of the American Antitrust Institute and the Chief Medical Officer from the AIDS Healthcare Foundation.
  • From the CVS list, Judge Leon selected CVS’s economic expert, Aetna’s Vice President of its Medicare Part D business and CVS’s Chief Transformation Officer.
  • Judge Leon refused to hear testimony from DOJ’s economic expert and WellCare’s Executive Vice President of Clinical Operations and Business Development.
  • Judge Leon ordered that witnesses will not be subject to cross-examination and there would be no opening and closing arguments.
  • Judge Leon overruled DOJ’s objection that the proposed hearing procedures gave the amici the ability to frame the issues and denied the DOJ from meaningful participation in the proceedings.

Over the two-day hearing, Judge Leon heard testimony from the amici’s expert witnesses that WellCare is not a suitable divestiture buyer because: (i) WellCare does not have Aetna’s brand recognition, (ii) WellCare will be dependent on CVS to provide PBM services and (iii) the divestiture itself raises concentration levels in several regions. Judge Leon also heard testimony from two amici witnesses that the merger raises vertical competitive concerns. By combining CVS’s thousands of pharmacies and 92 million PBM members with Aetna’s 22 million insurance customers, the merged firm will have a greater ability and incentive to deny its PBM services to rival health plans or raise the prices for its PBM services to rival plans. After the two-day hearing, Judge Leon indicated that he would accept final briefs and hear closing arguments next month.

What’s Next

The CVS/Aetna merger entered murky waters some months ago and is now headed toward uncharted waters. Pressuring merging parties to hold the two companies separate while the Tunney Act process plays out is unnecessary and unwarranted. Nothing in the Tunney Act bars the parties from consummating their merger, and consumers may be harmed by delaying integration activities that may generate efficiencies. Nor does closing prevent DOJ from obtaining additional relief if necessary. Parties that close before the settlement receives final approval by the court bear the risk the proposed remedy is not in the public interest and therefore may have to make additional concessions to obtain court approval. The Tunney Act evidentiary hearing was also highly unusual and did not give DOJ a fair opportunity to defend its settlement. In particular, DOJ had no cross-examination rights and no opportunity to offer expert testimony to rebut the testimony from the amici’s expert. Also unusual was Judge Leon’s decision to reject testimony from WellCare, even though the amici challenged WellCare’s suitability as a divestiture buyer.

The CVS/Aetna proceeding highlights a tension in the Tunney Act. Judge Leon’s public interest determination is limited by binding D.C. Circuit precedent U.S. v. Microsoft. Under Microsoft, DOJ has considerable discretion to settle antitrust cases and the court’s review is limited to reviewing the proposed remedy in relationship to the allegations in the complaint. A Tunney Act court does not have the authority to inquire into matters outside the scope of the complaint. Judge Leon clearly bristles at playing such a limited role. At a November 29, 2018 status hearing, Judge Leon said that he would not take a “rubber stamp” approach to approving the proposed Final Judgment. Judge Leon’s May 13, 2019 order regarding the Tunney Act hearing noted that Microsoft authorized a Tunney Act court to reject a settlement that makes a “mockery of judicial power.” The court’s actions clearly suggest that DOJ’s failure to allege and remedy harm in the PBM market may satisfy the “judicial mockery” standard.

It remains to be seen if Judge Leon, based on a two-day hearing, will second-guess DOJ’s decision that the merger will not harm competition in the PBM market. Given controlling authority in the D.C. Circuit and the irregularities in the Tunney Act proceeding, Judge Leon may conclude his only option is to enter the proposed Final Judgement. If, on the other hand, he rejects the proposed Final Judgment for failing to address concerns outside the scope of the Complaint, he will likely be overruled by the D.C. Circuit.

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[1] The Antitrust Procedures and Penalties Act, 15 U.S.C. §§16(b)-(h).

[2] U.S. v. Microsoft Corp., 56 F.3d 1448, 1462 (D.C. Cir. 1995).

 

M&A HSR Premerger Notification Thresholds Increase in 2019

Takeaways

  • The new minimum HSR threshold is $90 million and applies to transactions closing on or after April 3, 2019.
  • The current threshold of $84.4 million is in effect for all transactions that will close through April 2, 2019.
  • Failure to file may result in a fine of up to $42,530 per day of non-compliance.
  • The HSR Act casts a wide net, catching mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

The Federal Trade Commission has announced new HSR thresholds for 2019. The thresholds are adjusted annually, and were delayed this year by the government shutdown. Transactions closing on or after April 3, 2019 that are valued in excess of $90 million potentially require an HSR premerger notification filing to the U.S. antitrust agencies. The HSR Act and Rules require that parties to certain transactions submit an HSR filing and wait up to 30 days (or more, if additional information is formally requested) before closing, which gives the government time to review the transaction for potential antitrust concerns. The HSR Act applies to a wide variety of transactions, including those outside the usual M&A context. Potentially reportable transactions include mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

Determining reportability: Does the transaction meet the Size of Transaction test?

The potential need for an HSR filing requires determining whether the acquiring person will hold an aggregate amount of voting securities, non-corporate interests, and/or assets valued in excess of the HSR “Size of Transaction” threshold that is in place at the time of closing. Calculating the Size of Transaction may require aggregating voting securities, non-corporate interests, and assets previously acquired, with what will be acquired in the contemplated transaction. It may also include more than the purchase price, such as earnouts and liabilities. Talk to your HSR counsel to determine what must be included in determining your Size of Transaction.

If the transaction will close before April 3, 2019, the $84.4 million threshold still applies; closings as of April 3, 2019 will be subject to the new $90 million threshold.

Determining reportability: Do the parties to the transaction have to meet the Size of Person test?

Transactions that satisfy the Size of Transaction threshold may also have to satisfy the “Size of Person” thresholds to be HSR-reportable. These new thresholds are also effective for all closings on or after April 3, 2019. Talk to your HSR counsel to determine which entity’s sales and assets must be evaluated.

Filing Fee

For all HSR filings, one filing fee is required per transaction. The amount of the filing fee is based on the Size of Transaction.

Failure to File Penalty

Failing to submit an HSR filing can carry a significant financial penalty for each day of non-compliance.

Always consult with HSR counsel to determine if your transaction is HSR-reportable. Even if the Size of Transaction and Size of Person tests are met, the transaction may be exempt from the filing requirements.

Agree to Disagree: Competition Authorities Differ on Approach to Digital Platforms

Tech giants have captured the attention of competition agencies around the world. As we have previously shared, the FTC is in the midst of a series of hearings on Competition and Consumer Protection in the 21st Century, including sessions on Big Data, Privacy, and Competition and the Antitrust Framework for Evaluating Acquisitions of Potential or Nascent Competitors in Digital Marketplaces. Multiple European regulators (the EU, Germany and now Austria) recently launched investigations into Amazon. Technology platforms are a priority for many other enforcers as well, from China to Australia to the UK.

With different competition authorities weighing in on how to assess tech competition, there is the potential for divergence in intensity of enforcement as well as whether existing competition doctrine suffices. Disparities are borne out by recent statements emanating from U.S., Australian, and UK competition agencies and officials.

Fresh remarks from the U.S. DOJ Antitrust Division indicate the agency does not support a regulatory approach to platforms and the digital economy. In a speech last week, agency head Makan Delrahim addressed Antitrust Enforcement in the Zero-Price Economy, noting that while zero-price strategies have “exploded” with the rise of digital platforms, “the strategy of selling a product or service at zero price is not new, nor is it unique to the digital economy.” Mr. Delrahim acknowledged the divergent views of how antitrust enforcement should treat such products and services, which range from exemption from antitrust scrutiny entirely to the creation of new, specially crafted rules and standards. Rejecting both of these “extreme views” as “misplaced,” he emphasized the ability of current antitrust doctrine – including the consumer welfare standard – to tackle the issue, stating: “[W]e do not need a wholesale revision of the antitrust laws to address competitive concerns in these contexts. . . . [O]ur antitrust laws and principles are flexible enough to adapt to the challenges of the digital economy.” Mr. Delrahim called for “careful case-by-case analysis” in enforcement. He touted the innovation and benefits that zero-price strategies have brought to consumers, crediting the country’s “pro-market economic and legal structures” and cautioning against “distortions of our antitrust standards” to address issues like privacy and data protection if they do not impede the functioning of the free market.

His speech echoes a view Mr. Delrahim and others at the Antitrust Division have expressed previously regarding the need (or lack thereof) for new rules to address the antitrust implications of “big data.” In an October 2018 speech regarding startups, innovation, and antitrust policy, Mr. Delrahim remarked that “accumulation of data drives innovation and benefits consumers” in many ways (including by enabling zero-price offerings), and that forced sharing risks undermining innovation by reducing incentives for both incumbents and new entrants. Invoking Trinko,[1] he stated that “free and competitive markets” – not antitrust agencies or courts – are best equipped to determine “how much data should be shared, with whom, and at what price.” Deputy Assistant Attorney General Bernard Nigro, Jr. has taken a similar position, stating that “forced sharing of critical assets reduces the incentive to invest in innovation” and that “where benefits to sharing exist, they can be best captured by the parties negotiating in a free and competitive market, not by government regulation.”

By contrast, other jurisdictions and industry observers considering the competitive implications of digital platforms have questioned the status quo. In their view, control of valuable data provides a competitive advantage and raises entry barriers that may entrench a platform’s dominant position and lead to competitive or consumer harm. At a higher level, France and Germany just announced an effort to overhaul competition rules to enable European companies to better develop technologies that compete on the global stage.

For example, last week the Australian Productivity Commission and the New Zealand Productivity Commission released a joint report that reviews how most effectively to address the challenges and harness the opportunities the digital economy creates (particularly for small- to medium-sized enterprises). In a section titled “Existing competition regulation may not be adequate for digital markets,” the report addressed the challenges of applying existing laws to the digital economy, including (among others) that zero-price goods and services complicate the analysis of market definition and market power, and that data “is an increasingly important business input and may be a source of market power” but is not adequately captured in traditional competition policy. Although the report acknowledged that in some cases technological developments might obviate the need for regulation (and in others the mere threat of regulation may be enough), it posited that new regulation might be necessary to maintain competitive markets: “[I]f ‘winner-take-most’ markets do end up prevailing, competition regulators may need to consider extending tools such as essential service access regimes to digital services.” An essential service (or “essential facilities”) regime would treat a digital platform’s data as an input essential to competition and require the platform to provide its competitors with reasonable access to it. In contrast to the Productivity Commissions’ suggestion, U.S. competition enforcers to date have been loath to treat digital platforms as essential facilities.

The Productivity Commissions’ report comes on the heels of the Australian Competition and Consumer Commission’s (ACCC) Digital Platforms Inquiry preliminary findings released in December. The ACCC expressed similar concerns about the rise of digital platforms and the threat they pose to consumers and the competitive process. Addressing what it found to be Google’s and Facebook’s market power in a number of markets,[2] the report encouraged governments to be “responsive, and indeed proactive, in reacting to and anticipating challenges and problems” posed by digital platforms. It offered eleven preliminary recommendations to address these concerns, including: amending merger law to expressly consider potential competition and the data at issue in the transaction, requiring advance notice of any acquisition by a large digital platform of a business with activities in Australia, and tasking a regulatory authority with monitoring the conduct of vertically integrated digital platforms. The report also proposed areas for further analysis, such as: a digital platforms ombudsman, the monitoring of intermediary pricing and opt-in targeted advertising. As such, indications from Australia suggest calls for more competition intervention have some teeth.

The UK may have a similar appetite, as indicated by a new Parliament publication addressing “Disinformation and ‘fake news.’” The statement calls for increased oversight and greater transparency into “how the big tech companies work and what happens to our data,” highlighting Facebook’s treatment and monetization of user data as an example of why intervention is needed. In addition to recommending a compulsory Code of Ethics overseen by an independent regulator with “statutory powers to monitor relevant tech companies,” the publication advocated for greater competition law scrutiny of and enforcement against digital platforms, including an investigation of Facebook and a “comprehensive audit” of the social media advertising market. Invoking existing “legislative tools” such as privacy laws, data protection legislation, and antitrust and competition law, the report cautioned: “The big tech companies must not be allowed to expand exponentially, without constraint or proper regulatory oversight.”

Operating under an international patchwork of competition approaches can present a challenge to global enterprises. Technology-focused, data-intensive businesses should consider seeking antitrust counsel to monitor developing competition trends and implications across jurisdictions.

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[1] Verizon Communic’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407-08 (2004).

[2] The preliminary report finds that Google has market power in online search, online search advertising and news media referral services, and that Facebook has market power in social media services, display advertising and news media referral services.

The New Madison Approach Goes to Court

On January 11, 2019, the U.S. DOJ Antitrust Division (Division) filed a Notice of Intent to File a Statement of Interest in a lawsuit filed by u-blox against Interdigital in the U.S. District Court for the Southern District of California to obtain a license consistent with Interdigital’s voluntary commitment to license its 2G, 3G and 4G telephony Standard Essential Patents (SEPs) on fair, reasonable, and nondiscriminatory (FRAND) terms. Simultaneous with the filing of its Complaint, u-blox filed a Motion for a Temporary Restraining Order and Preliminary Injunction to prevent Interdigital from further interfering with u-blox’s customer relationships. The Division argued that the Court would benefit from hearing its views on granting a TRO based on u-blox’s claim that Interdigital monopolized the 2G, 3G and 4G cellular technology markets. Intervening in a District Court case is highly unusual and is yet another clear signal that the Division has reversed the Obama Antitrust Division’s antitrust treatment of FRAND violations, despite the disparity between the Division’s current position and numerous well-reasoned U.S. court decisions that have carefully considered these issues and come to precisely the opposite conclusions.

Retro-Jefferson Approach[1]

By way of background, standard setting involves competitors and potential competitors, operating under the auspices of Standard Setting Organizations (SSOs), agreeing on a common standard and incorporating patented technology. Patents that are incorporated into a standard become much more valuable once a standard becomes established and commercially deployed on a widespread level, and it becomes impossible for companies manufacturing devices that incorporate standardized technology to switch to alternative technologies. In these circumstances, patent holders may gain market power and the ability to extract higher royalties than would have been possible before the standard was set. This type of opportunistic conduct is referred to as “patent hold-up.” To address the risk of patent hold-up, many SSOs require patent holders to commit to license their SEPs on FRAND terms. FRAND commitments reduce the risk that SEP holders will exercise market power by extracting exorbitant licensing fees or imposing other more onerous licensing terms. One way to address patent hold-up is through breach of contract and antitrust suits against holders of FRAND-encumbered SEPs.

The Obama Antitrust Division advocated the position that, under appropriate circumstances, the antitrust laws may reach violations of FRAND commitments. This position was, and remains, consistent with applicable legal precedent. For example, in 2007 the Third Circuit recognized in Broadcom v. Qualcomm, 501 F.3d 297, that a SEP-holder’s breach of a FRAND commitment can constitute a violation of Section 2 of the Sherman Act where the SEP-holder makes a false FRAND promise to induce an SSO to include its patents in the standard and later, after companies making devices that incorporate the standard are locked in, demands exorbitant royalties in violation of the FRAND commitment. Numerous other cases similarly stand for the proposition that it is appropriate to apply competition law to the realm of FRAND-encumbered SEPs. See, e.g., Research in Motion v. Motorola, 644 F. Supp. 2d 788 (N.D. Tex. 2008); Microsoft Mobile v. Interdigital, 2016 WL 1464545 (D. Del. Apr. 13, 2016).

The Obama Antitrust Division also took the position that in most cases it is inappropriate to seek injunctive relief in a judicial proceeding or an exclusion order in the U.S. International Trade Commission (ITC) as a remedy for the alleged infringement of a FRAND-encumbered SEP. Injunctions and exclusion orders (or the threat of one) are generally incompatible with a FRAND commitment and unfairly shift bargaining power to the patent holders. In the Obama Antitrust Division’s view, money damages, rather than injunctive or exclusionary relief, are generally the more appropriate remedy. Again, the Obama Antitrust Division’s policy reflected case law recognizing the same principles. See, e.g., Apple v. Motorola, 757 F.3d 1286 (Fed. Cir. 2014).

The Obama Antitrust Division articulated its views on the use of exclusion orders against the infringing use of SEPs in a joint statement issued by the Department of Justice and the U.S. Patent & Trademark Office on January 8, 2013 entitled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments” (Joint Policy Statement). The Joint Policy Statement urged the ITC to consider that “the public interest may preclude issuance of an exclusion order in cases where the infringer is acting within the scope of the patent holder’s F/RAND commitment and is able, and has not refused, to license on F/RAND terms.”

New Madison Approach

The Division is now of the view that the Obama Antitrust Division’s focus on patent implementers and its concerns with hold-up were misplaced, even though many courts and other regulatory bodies around the world have noted the significance of the hold-up problem. The Division currently does not believe that hold-up is an antitrust problem. According to the Division, the more serious risk to competition and innovation is the “hold-out” problem. The hold-out problem arises when companies making products that innovate upon and incorporate the standard threaten to under-invest in the implementation of a standard, or threaten not to take a license at all, until their royalty demands are met. The Division further has questioned the role of antitrust law in regulating the FRAND commitment, even though the Federal Trade Commission (FTC) – and numerous other competition agencies around the world – has engaged in enforcement efforts to curb allegedly anticompetitive SEP licensing practices, many of which are directed at Qualcomm (which is the subject of an ongoing trial between the FTC and Qualcomm in Federal District Court in California).

Assistant Attorney General Makan Delrahim coined the term the “New Madison Approach” to describe his approach to the application of antitrust law to patent rights.[2] The four premises of the New Madison Approach are:

  • The antitrust laws should not be used as a tool to police FRAND commitments that patent holders make to SSOs.
  • To ensure maximum incentives to innovate, SSOs should focus on implementer hold-out, rather than focus on patent hold-up.
  • SSOs and courts should not restrict the right of a patent holder to seek or obtain an injunction or exclusion order.
  • A unilateral and unconditional refusal to license a patent should be considered per se legal.

The Division has taken at least three concrete steps to implement the New Madison Approach. First, it has opened several investigations of potential anticompetitive conduct in SSOs by implementers, for example to exclude alternative technologies. Second, in a December 7, 2018 speech in Palo Alto, California, AAG Delrahim announced that DOJ was withdrawing its support of the Joint Policy Statement. According to AAG Delrahim, the Joint Policy Statement created confusion to the extent it suggests a FRAND commitment creates a compulsory licensing scheme and suggests exclusion orders may not be appropriate in cases of FRAND-encumbered patents. AAG Delrahim noted he would engage with the U.S. Patent & Trademark Office to draft a new statement. Finally, the Division intervened in the u-blox case.

u-blox v. Interdigital

u-blox presents a fact pattern that commonly arises in FRAND cases. Since 2011, u-blox has licensed Interdigital patents that had been declared essential to the 2G, 3G and 4G standards. U-blox relied on Interdigital’s FRAND commitments, and its devices are now allegedly locked into 2G, 3G and 4G cellular technology. u-blox alleges that in its most recent round of negotiations, Interdigital is demanding supra-competitive royalty rates. Among its various claims, u-blox alleges Interdigital breached its contractual obligation to offer its SEPs on FRAND terms and has monopolized the 2G, 3G and 4G technology markets in violation of Section 2 of the Sherman Act. u-blox also alleges that Interdigital threatened its customers to force u-blox to pay excessive, non-FRAND royalties. u-box has asked the court to set a FRAND rate and filed a TRO to prevent Interdigital from interfering with its contractual relationships.

On January 11, 2019, the Division filed its Notice of Intent to explain its views concerning u-blox’s monopolization cause of action. The Division further explained that due to the partial government shutdown, it was unable to submit a brief before the TRO hearing scheduled for January 31, 2019, and asked that the TRO hearing be delayed until after DOJ appropriations have been restored, or in the alternative, to order DOJ to respond. Although not stated in the Notice of Intent, the Division can be expected to argue that it would be improper to grant a TRO based on a claim of monopolization because the antitrust laws should play no role in policing Interdigital’s FRAND commitment where contract or common law remedies are adequate. On January 14, 2019, u-blox responded that it would withdraw reliance on its monopolization claim to support its request for a TRO and instead rely on its breach of contract and other claims.

Implications of the Division’s Intervention in the u-blox Case

The Division’s filing of a Notice of Interest in the u-blox case is highly unusual. The Division rarely intervenes in district court cases, and it may be unprecedented for the Division to intervene at the TRO stage. It is also difficult to explain why the Division chose to intervene on this motion. While u-blox was relying on its antitrust claim, among several other claims, to support its TRO request, u-blox was only seeking an order to prevent Interdigital from interfering with its customer relationships while the court adjudicated its request for a FRAND rate. It is also notable that the Division put its thumb on the scale in the aid of Interdigital, a company that often finds itself in FRAND litigation.

The Division appears to be attempting to aggressively implement the New Madison Approach that the antitrust laws should protect innovators. The Division’s decision to withdraw its assent to the Joint Policy Statement appears to have been a clear signal to the ITC that it is free to grant an exclusion order in SEP cases. The Division’s intervention in the u-blox case is a clear signal that it is willing to intervene at the district court level to advance its view that the antitrust laws are not an appropriate vehicle to enforce FRAND commitments where there are adequate remedies sounding in contract or other common law theories.

To date, the Division has used speeches to make policy arguments that the antitrust laws should not be used to enforce FRAND commitments. If the Division ever gets the opportunity to present its views to a district court, watch to see what legal arguments it can marshal to support its policy position. Also watch to see whether the Division attempts to participate in other FRAND cases.

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[1] Assistant Attorney General Makan Delrahim coined the phrase in his March 16, 2018 speech at the University of Pennsylvania entitled “The ‘New Madison’ Approach to Antitrust and Intellectual Property Law” based on the initial understanding of patent rights held by Thomas Jefferson, the first patent examiner of the U.S. (and a former president and principal author of the Declaration of Independence). AAG Delrahim describes the retro-Jefferson view of patents as conferring too much power on patent holders at the expense of patent implementers and that such power should be constrained by the antitrust laws or Standard Setting Organizations.

[2] The term “New Madison Approach” is based on the understanding of intellectual property rights held by James Madison, the principal drafter of the U.S. Constitution. Madison believed strong IP protections were necessary to encourage innovation and technological progress.

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]

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[1] See 15 USC § 19.

[2] See 15 USC § 1.

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.

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

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

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

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

Putting China’s Fair Competition Review System Into Action

National emblem of the People's Republic of China Law360 Article on Putting China’s Fair Competition Review System Into Action by Shelley Zhang and David Goldstein

In June 2016, China promulgated a Fair Competition Review System (FCRS), which is intended to ensure that competition agencies foster competitive markets in China.  Recently, China’s competition agencies jointly issued the Implementing Rule of the Fair Competition Review System, which provides guidance regarding the FCRS,  including review mechanisms and procedures, review criteria, policy guidance, and supervision and accountability.  Orrick partners Shelley Zhang and David Goldstein have published an article, “Putting China’s Fair Competition Review System Into Action,” in Law360 today providing an overview of the implementing rules.  Click here to access the article.

 

 

First Person Extradited From Europe to the United States for Criminal Antitrust Charges—Continued

Can Germany extradite an EU national to the United States for criminal prosecution when Germany’s own nationals are protected from extradition? This question has been put to the European Court of Justice, and the court’s advisor, Advocate General Yves Bot, has said “yes”. READ MORE

Big Data: German Antitrust Decision Regarding Facebook Expected in 2017

As more internet users entrust their personal data to operators of websites, operators’ use of this “Big Data” has become a growing concern. As a result, government agencies around the world are grappling with whether and how to regulate “Big Data” in the context of social networking websites.  This includes some competition authorities that are trying to expand their purview by using competition laws to regulate “Big Data” in the context of social media.  The possibility that competition authorities around the world may try to become super regulators of “Big Data” should be of concern to all operators of social networking websites.

A case in point is the German competition authority (FCO), which in March 2016 initiated proceedings against one of the most popular social networking sites – Facebook – purportedly based on a concern that it may have infringed data protection rules. Since the case is the first of its kind in Europe, the outcome – which is expected before the end of the year – is awaited with great interest.

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The Chips Are Down: Intel’s Victory in the European Court of Justice Has Implications on How Anticompetitive Conduct Is Analysed in EU Antitrust Cases

 

On 6 September 2017, the Court of Justice of the European Union (“CJEU”) handed down its long-awaited ruling in Intel v Commission (the “Ruling”).[1] The Ruling, which sets aside the appealed judgment of the EU General Court and orders the case to be re-examined for failing to consider the effects of anticompetitive conduct on competition, has potentially broad implications for how the European Commission (“Commission”) conducts its analysis and reasons its decisions in ongoing and future EU antitrust investigations.

Key Takeaways

  • The Ruling signals a return of “effects-based” analysis in EU antitrust cases and a move away from a “form-based” approach where certain conduct is deemed per se illegal.
  • The Ruling not only clarifies how the General Court should assess appeals of Commission decisions, but is likely to have implications for how the Commission approaches its analysis and reasons its decisions in EU antitrust cases going forward. In particular, the burden of proving that specific conduct or practices have anticompetitive effects is placed firmly with the Commission.
  • Intel’s victory may embolden other entities facing similar allegations to defend their corners more aggressively.
  • This is not the end of the road. It cannot be ruled out that the General Court, when it re-examines the case and applies the appropriate analysis, comes to the same ultimate conclusions and upholds the Commission’s original fine.

READ MORE

European Competition Authorities Crack Down on Violations of Merger Control Procedural Rules

Is a wind of change blowing through the European merger control enforcement landscape?

The response is yes, certainly.

Very recent cases or investigations launched by the European Commission alleging potential violations of merger control procedural rules by notifying parties have sent a clear signal to companies: you’d now better think twice before breaking the merger control procedural rules.

It is even truer when one considers that this may well be a trend throughout Europe. These cases have echoed back to recent similar cases, pending or closed, at the member state level (the Altice case in France, the CEE Holding Group limited/ Olympic International Holdings Limited case in Hungary, the AB Kauno Grudai / AB Vievio Paukstynas case in Lithuania, and a very recent bakery case in Slovakia). READ MORE