After several years of relative calm in US antitrust enforcement in high-technology sectors, we have seen in recent months a number of signs that technology companies will face a coming period of increased uncertainty and scrutiny from US regulators. As the Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) continue their efforts at enforcement, they face increasing pressure from the public, and from Congress and various presidential hopefuls to score points against perceived 'technology giants' and rethink the antitrust law principles that have allowed these companies to prosper. However, the US antitrust regime does not lend itself to rapid change, and while the agencies are rethinking certain enforcement priorities and polices with respect to high-technology mergers, they are faced with the reality that law is primarily developed through litigated cases, and courts are not always receptive to changing standards. The interplay of these factors is likely to drive an increasing degree of risk for high-technology deals, and parties would be well-counseled to address these risks proactively before reaching a signed transaction agreement.
II Searching for Appropriate Standards
A recurring theme at the intersection of antitrust and high technology is whether existing antitrust enforcement standards are sufficient to police potential threats to the functioning of efficient markets. In recent years, the US agencies have generally adhered to the mantra that existing tools are suitable for challenges in high-technology markets. However, there has been increasing pressure for the agencies to give these issues greater attention and emphasis, including from various influential political candidates who have come out in favour of stepped-up antitrust enforcement against large data companies and social media platforms, among others.
i Mounting political pressure surrounding antitrust and high technology
Over the past year there have been regular calls from various members of the public to reconsider whether the current approach to antitrust enforcement, based on protection of 'consumer welfare', is appropriate in the 21st century. As FTC Commissioner Christine Wilson explained in a recent speech, '[u]nder the consumer welfare standard, business conduct and mergers are evaluated to determine whether they harm consumers in any relevant market. Generally speaking, if consumers are not harmed, the antitrust agencies do not act.'2 Critics, on the other hand, have argued that focusing on consumer welfare has caused the FTC and DOJ to allow companies to become too large and otherwise been an impediment to more aggressive antitrust enforcement. Attacks on the consumer welfare standard from academics and advocates have included contentions that it maximises value rather than protecting the process of competition,3 fails to account for systems of market power in the modern economy,4 and even that it promotes income inequality and jeopardises individual liberty and democracy.5 As one commentator explained during testimony before the Senate Judiciary Committee:
Antitrust is also about protecting and fostering civil society – robust communities in which individuals have multiple sources of information, deep connections to one another, roots in local and regional economies, abiding commitments to the institutions they share, and freedom from intimidation, whether from a giant government or giant corporations that know everything there is to know about them.6
This public debate has not been limited to high technology, but it has particular application to some of the largest high-technology platforms and those that are engaged in media, innovation and public discourse.
During the past year, the US agencies have actively taken up consideration of these issues. One of the most significant steps to date has been the FTC's announcement of a series of 14 public Hearings on Competition and Consumer Protection in the 21st Century. These hearings were targeted at considering 'whether broad-based changes in the economy, evolving business practices, new technologies, or international developments might require adjustment to competition and consumer protection law, enforcement priorities, and policy'.7
Among other topics, the FTC's hearings focused on antitrust treatment of algorithms and artificial intelligence, the intersection of big data, privacy and competition, and competition in communications, information and media technology markets. These hearings concluded in June 2019 and at this point they have yet to result in any announced changes in US antitrust policy. However, over the next year we expect to see continued emphasis from the FTC, and likely divergence among the various commissioners, as the agency wrestles with how to apply learning from these hearings to cases before it. At a minimum, the focus on these issues injects a degree of added uncertainty for parties to high-technology deals, who could face agency staff looking for opportunities to set new precedent in these cases.
Separately, the FTC announced in February 2019 that it would be establishing a new Technology Task Force dedicated to high-technology issues.8 According to the FTC, the Technology Task Force will focus its attention on various complex technology markets, including 'online advertising, social networking, mobile operating systems and apps, and platform businesses'. At this point, the Task Force is still in its early days and, like the FTC's hearings, its existence has not resulted in discernable policy changes. Critics have suggested it could be seen as a bow to pressure from Democrats to proactively address high-technology issues, or alternatively as a means of gaining more expertise to wrestle certain high-technology merger reviews away from the DOJ's review process. However, technology companies should take note that the Technology Task Force is patterned after a prior FTC Task Force on Merger Litigation, which precipitated a number of successfully litigated challenges to mergers in the healthcare and retail sectors.
Even more recently, in June 2019 the House Judiciary Committee announced that it would launch a 'top-to-bottom' antitrust investigation of the tech industry.9 The probe is expected to be wide-ranging, and will focus at least initially on the largest technology companies. While various members of Congress and future presidential candidates have gone so far as to call for using antitrust law to break up some of these technology companies in the manner of intervention in the telephone industry in the 1980s, it remains to be seen whether this rhetoric will drive such severe actions by US regulators.
ii Regulatory divergence
Not surprisingly, in the midst of significant dialogue on the role of antitrust in high-technology markets, we are seeing a degree of divergence between FTC, DOJ and other agency approaches to major deals. These points of divergence have largely revolved around balancing of the merits of intellectual property protections and future innovation against the perceived need for present-day competition.
In one key example, the DOJ and FTC found themselves in opposition to each other in the final stages of the FTC's litigation against chipmaker Qualcomm. While not a merger case, this litigation involved key issues that inevitably come up in a merger review context as well – specifically, the interplay between intellectual property rights and antitrust, and the balancing of present competition and the potential for increased future innovation. The FTC's case was based on the position that Qualcomm's licensing practices for its patents, including standard essential patents, violated the antitrust laws by excluding potential competitors. The FTC asked the court to impose a remedy that would require Qualcomm to renegotiate all of its contracts to remove the allegedly anticompetitive provisions.
In response to the FTC's request, the DOJ took the unprecedented step of filing its own brief with the court on the issue of an appropriate remedy.10 According to the DOJ, the court should hold hearings to consider how to more narrowly tailor a remedy to avoid excessive burden on Qualcomm. The DOJ specifically expressed concern that an unnecessarily broad remedy would limit Qualcomm's ability and incentive to develop 5G technology. The FTC made a short response, arguing that the DOJ filing was 'untimely', that the FTC did not request it, and that the FTC disagreed with the DOJ's positions.11 Ultimately, the court sided largely with the FTC, but the more important takeaway for technology companies monitoring the case is the increased divergence between apparent DOJ and FTC treatment of patent licensing issues.
Another recent instance of regulatory divergence arose in the review of T-Mobile's acquisition of wireless service competitor Sprint. On 20 May 2019, the FCC, which has concurrent jurisdiction over wireless telecommunications mergers and a mandate to consider competition issues, stated that it would approve the T-Mobile/Sprint transaction, subject to various concessions, including the divestiture of Sprint's 'Boost' brand of pre-paid service. The FCC noted that the merger would address top priorities, including 'closing the digital divide in rural America and advancing United States leadership in 5G'.12 According to press reports, however, the DOJ staff has objected to the FCC's approach, believing it does not go far enough in addressing potential competition issues.13 And while the DOJ may ultimately accept a settlement to resolve competition concerns, on 11 June several state attorneys general filed a lawsuit to block the transaction on antitrust grounds, creating additional uncertainty. The fact that the FCC, the DOJ and the state attorneys general are all independently raising concerns over the deal's impact on competition highlights the difficulty in projecting agency receptiveness to high-technology deals.
III AT&T-Time Warner Result Shows Antitrust Law's Limits on Non-Horizontal Enforcement
Because US antitrust law is primarily driven by decisions in litigated court cases, the US agencies have limited opportunities to bring about changes in the law. They must find an appropriate case, bring a lawsuit and prevail at trial. In terms of modifying standards relevant to high technology, the DOJ attempted to bring about change by challenging a key vertical deal when it sued to block AT&T's merger with Time Warner. A victory would have clarified the legal standard by which to measure anticompetitive harm in a vertical transaction, with potentially significant implications for large technology platforms and media companies. It was, after all, the first purely vertical transaction litigated on antitrust grounds in four decades.14 Observers welcomed the chance at some clarification – the US enforcers' own guidelines reflecting their approach to such transactions date to 1984.
US antitrust law and supporting economics have long recognised the potential for efficiency-enhancing benefits from vertical transactions. Among the benefits are the elimination of double-marginalisation and contracting costs between vertically connected firms. And unlike horizontal deals, where US enforcers benefit from a structural presumption of harm based on increased concentration in a relevant market, no such presumption exists in vertical deals.
As we have discussed in previous editions, US antitrust enforcement agencies face a particularly high burden when seeking to expand or create precedent, even when backed by modern economics, and the trial judge perhaps predictably ruled against the government, allowing the deal to proceed. Before the DC Circuit on appeal, the government sought review of just a single alleged theory of harm: whether the combined firm's leverage in negotiations would increase as a result of the deal and allow it to raise prices by threatening blackouts. Importantly, shortly after the Antitrust Division had filed suit to block the deal, Time Warner subsidiary Turner Broadcasting committed to about 1,000 distributors to engage in arbitration if the parties failed to reach agreement on renewal. The arbitration commitment – modelled after a commitment accepted by DOJ in the earlier Comcast-NBC Universal transaction – was compelling to both the trial and appellate courts. The DC Circuit affirmed the decision allowing the transaction to proceed.
While the case outcome provides little additional clarity on the standard, there are lessons to be drawn: (1) US law's ironclad recognition that vertical transactions can bring significant pro-competitive benefits, and (2) the continued relevance of behavioural remedies – restricting or prescribing certain conduct – to mollify concerns about anticompetitive harm in vertical transactions. Both points are likely to have significant implications for future deals in high-technology sectors.
IV Multi-Sided Markets
Following the US Supreme Court's decision in Ohio v. American Express, merging parties are arguably now equipped with a new arrow in the quiver of defences to agency action. In rejecting the government's non-merger challenge to certain anticompetitive effects from the defendant's commercial practices, the American Express Court expressly held that courts must consider both sides of a multi-sided market when weighing net effects under the antitrust 'rule of reason'. Though untested in the merger context, the concept seems likely to significantly increase the complexity of merger review, allowing parties to argue that anticompetitive effects aimed at one class of market participants may be overcome by significant pro-competitive effects benefiting another class. By merging the various 'sides' of today's multi-sided technology platforms, the Court has arguably introduced a new Machiavellian twist to merger review, allowing for far greater aggregation of power in discrete corners of the market so long as the 'ends' of overall market efficiency justify the 'means' of local anticompetitive effects.
Despite strong reactions from observers, the case remains limited in application and arguably outside the mainstream of agency merger decision-making. But we expect increasing pressure on the agencies to consider multi-sided effects analysis where deals involve platforms that unite multiple sides of the economy, such as online shopping platforms and platforms driving the sharing economy.
As the next presidential election cycle heats up through the remainder of 2019 and 2020, it appears that antitrust and high-technology issues will increasingly be in focus. With that increased focus comes increased divergence, as competing views vie for dominance. In the long run, we can anticipate that the US will settle on a more uniform approach to high-technology cases, with that view ultimately baked into the slow, steady machinery of the US federal judiciary. In the meantime, companies in this space will face a prolonged period of uncertainty that will demand a new degree of caution and complex analysis before deploying resources associated with large M&A activity.
1 C Scott Hataway is a partner, Michael S Wise is of counsel and Noah B Pinegar is an associate at Paul Hastings LLP.
2 Christine S Wilson, 'Welfare Standards Underlying Antitrust Enforcement: What You Measure is What You Get' (15 February 2019), available at www.ftc.gov/system/files/documents/public_statements/1455663/welfare_standard_speech_-_cmr-wilson.pdf.
3 See Tim Wu, 'After Consumer Welfare, Now What? The “Protection of Competition” Standard in Practice', Competition Policy International (April 2018), available at www.competitionpolicyinternational.com/wp-content/uploads/2018/04/CPI-Wu.pdf.
4 See Lina Khan, 'Amazon's Antitrust Paradox', 126 Yale L.J. 710 (2017).
5 See Remarks of Barry Lynn, FTC Hr'g on Competition and Consumer Protection in the 21st Century (1 November 2018), available at www.ftc.gov/system/files/documents/public_events/1415284/ftc_hearings_session_5_transcript_11-1-18.pdf.
6 Robert Reich, 'Does America Have a Monopoly Problem?', Testimony before the Senate Judiciary Committee (5 March 2019), available at www.judiciary.senate.gov/imo/media/doc/Reich%20Testimony.pdf.
7 Federal Trade Commission, FTC Announces Hearings On Competition and Consumer Protection in the 21st Century, 20 June 2018, available at www.ftc.gov/news-events/press-releases/2018/06/ftc-announces-hearings-competition-consumer-protection-21st.
8 Federal Trade Commission, FTC's Bureau of Competition Launches Task Force to Monitor Technology Markets, 26 February 2019, available at www.ftc.gov/news-events/press-releases/2019/02/ftcs-bureau-competition-launches-task-force-monitor-technology.
9 Brian Fung, House Judiciary Committee launches 'top-to-bottom' antitrust probe of big tech, CNN Business (3 June 2019), available at www.cnn.com/2019/06/03/tech/tech-antitrust-house-probe/index.html.
10 Federal Trade Commission v. Qualcomm Inc, Case No. 5:17-cv-220-LHK, Statement of Interest of the United States of America (2 May 2019).
11 Federal Trade Commission v. Qualcomm Inc, Case No. 5:17-cv-220-LHK, Plaintiff Federal Trade Commission's Response to Statement of Interest Filed by United States Department of Justice Antitrust Division (9 May 2019).
12 Federal Communications Commission, Chariman Pai Statement on T-Mobile/Sprint Transaction, 20 May 2019, available at https://docs.fcc.gov/public/attachments/DOC-357535A1.pdf.
13 See, e.g., David McLaughlin, DOJ Leans Against Approving T-Mobile's Takeover of Sprint, Bloomberg (20 May 2019), available at www.bloomberg.com/news/articles/2019-05-20/doj-said-to-lean-against-approving-t-mobile-s-takeover-of-sprint.
14 The last was United States v. Hammermill Paper Co, 429 F. Supp. 1271 (W.D. Pa. 1977). See Reynolds Holding, 'As AT&T Case Ends, Trustbuster Woes Begin', Reuters (13 June 2018) ('The Justice Department hasn't sued to block this kind of transaction – a so-called vertical merger – since 1977, when it failed to squelch Hammermill Paper's acquisition of two distributors.')