While the precise contours of ‘high technology’ in merger review are not always consistent, there is no question that both the Antitrust Division of the United States Department of Justice (DoJ) and the United States Federal Trade Commission (FTC) view enforcement in this area as a priority, and potentially an area for developing new precedents for future cases. For example, the DoJ has described the protection of future innovation in high-technology deals as ‘a decisive factor in our enforcement decisions’.2 Likewise, the newest commissioner at the FTC has defined the ‘task of 21st century competition enforcers’ as ensuring ‘that hi-tech markets remain dynamic, fertile grounds for new products and ideas’.3
Although the agencies are actively pursuing cases in high technology, in many ways the precise legal standards remain unsettled. In certain transactions, this may make it difficult for enforcers to have a consistent approach and for practitioners to advise their clients on whether a new deal will be subject to challenge. Innovation markets, commonly suggested in high-technology merger cases, have yet to be commonly accepted by the courts, and precedents on assessing future competition are also limited. Moreover, because of various factors unique to high-technology markets, even where the agencies can establish an accepted theory of competitive harm, defining an appropriate remedy is not always intuitive. These issues, among others, make high technology a particularly interesting area of development in US merger review.
II Wrestling with Innovation markets and Future Competition
All merger enforcement is, of course, forward-looking, but the exercise of predicting future effects on competition when high technology is implicated can be especially complicated. First, defining a proper market in which competition is constrained is impossible using traditional methods when either the market does not yet exist or where one of the parties does not yet compete. Second, given the nature of innovation competition, it can be challenging to know when innovation will best be promoted by pooling research and development resources or by preserving separate, independent competitors pursuing competing solutions.
The FTC wrestled with these issues in the acquisition of Arbitron Inc by Nielsen Holdings NV. The agency took the position that the transaction would be likely to:
- a eliminate future competition ‘for the provision of national syndicated cross-platform audience measurement services’;
- b allow Nielsen to ‘unilaterally exercise market power in the market for national syndicated cross-platform audience measurement services’; and
- c result in ‘higher prices for national syndicated cross-platform audience measurement services’.4
At the heart of the FTC’s case was the position that Nielsen and Arbitron were the ‘best-positioned’ to develop audience measurement across television, mobile devices, tablets, and personal computers – a service that did not at that time exist.5 Although this theory of harm related to ‘a future market’, the Commission noted that, based on the evidence, a remedy was necessary ‘to address the likely competitive harm that would result from the acquisition’. On the basis of the FTC’s position, the parties agreed to support new entry by providing a third-party with a royalty-free licence to Arbitron’s cross-platform audience measurement business for at least eight years.
The FTC had a more difficult time in its challenge to Steris Corp’s acquisition of Synergy Health plc. While Steris and Synergy were two of the three largest providers of sterilisation services, they provided different sterilisation technologies. Steris used a gamma radiation process while Synergy relied on a technology referred to as ‘e-beam’.6 Because the different technologies targeted different products, Steris and Synergy were not current competitors, which the FTC acknowledged. Rather, Synergy was considering entering the United States with an x-ray technology that would have competed with Steris’ gamma ray technology at the time of the transaction. Although Synergy abandoned those plans, the FTC sued, describing Synergy as an ‘actual potential entrant’ and arguing that Synergy only ceased its attempts to enter in light of its proposed acquisition by Steris. However, unlike in Nielsen/Arbitron, the parties in this transaction sought to challenge the FTC’s position in court, arguing that Synergy’s future competition was too speculative. Here, the court agreed with the parties and denied the FTC’s request to enjoin the transaction, at which point the FTC dropped its challenge and the acquisition was consummated.
In contrast to the FTC’s focus on future competition in Steris/Synergy and Nielsen/Arbitron, the DoJ refused to take into account potential future competitors in its case against Bazaarvoice Inc’s acquisition of PowerReviews Inc. This was a consummated merger that the DoJ sought to unwind based on concerns that the two companies were the primary providers of ratings and review platforms for online retailers. The court categorised ratings and review platforms as part of the ‘social commerce industry’, which is ‘at an early stage of development, rapidly evolving, fragmented, and subject to potential disruption by technological innovations’, meaning that ‘the future composition of the industry as a whole is unpredictable’.7 In addition, Bazaarvoice pointed out that over 100 customers had provided depositions in the case, and none stated that the merger had disadvantaged them.8
In arguing that the merger was anticompetitive, the DoJ took the position that in spite of the evolving nature of the market, the parties’ internal documents provided strong evidence that they viewed each other as primary competitors, and they viewed the merger as reducing competition. In a lengthy opinion, the court agreed with the DoJ, while nonetheless acknowledging that ‘[t]his case inescapably adds fuel to the debate over the proper role of antitrust law in rapidly changing high-tech markets’.9
The court’s observation in Bazaarvoice is particularly poignant in light of the exponential speed of change in virtually all markets touched by technology. As noted author and inventor Ray Kurzweil has been teaching for more than a decade:
[W]e’re doubling the power of information technologies, as measured by price-performance, bandwidth, capacity and many other types of measures, about every year. That’s a factor of 1,000 in 10 years, one million in 20 years, and one billion in 30 years.10
The exponential speed of change stands in stark contrast to the rudimentary tools of merger review, which tend to rely on a linear view of past performance, combined with the dated notion that only a current, revenue-producing market participant may discipline innovation. Clearly, one need not accept the premise that we will soon be ruled by robots (a controversial Kurzweil conclusion) to grasp the otherwise widely accepted view that technology markets advance exponentially. There are simply no government guidelines or economic models that have captured this fundamental aspect of today’s ‘relevant product markets’.
A key takeaway from the enforcement outcomes in high-technology cases today may be found toward the end of the Bazaarvoice opinion, where the court noted that:
…while Bazaarvoice indisputably operates in a dynamic and evolving field, it did not present evidence that the evolving nature of the market itself precludes the merger’s likely anticompetitive effects.11
Here, the Court acknowledged that in light of the DOJ making a prima facie showing of an anticompetitive effect (largely based, as noted, on bad internal documents), Bazaarvoice had the burden to overcome a presumption of anticompetitive harm, and it was unable to do so. In contrast, the court in Steris/Synergy concluded that the FTC had failed to establish its prima facie case, which was based on the development of new technology by Synergy in the future. In short, because of the lack of adequate tools to predict change in technology markets, the burden of proof will carry particular significance in all high-technology cases. Any predictions about future outcomes in a high-technology space will necessarily be viewed as speculative compared to predictions about traditional markets where linear analysis of historical data is both easier to grasp and supported by court and agency precedent.
III difficult balancing in Remedy decisions
When regulators conclude that a given transaction is likely to result in a reduction in competition, they still may face a difficult decision regarding the type of remedy to impose. In some high-technology cases, the agencies have sought to block the deal entirely on concerns over high-technology innovation. In others, a much more limited remedy, such as the licensing of key patents, has been permissible.
The DoJ’s opposition to Applied Materials’ acquisition of Tokyo Electron is an interesting example of a high-technology case where no remedy was apparently capable of alleviating the potential innovation issues. Applied Materials and Tokyo Electron were, in the DoJ’s view, ‘the two largest competitors with the necessary know-how, resources, and ability to develop and supply high-volume non-lithography semiconductor manufacturing equipment’.12 In other words, in addition to having a handful of traditional horizontal overlaps, the DOJ viewed Applied Materials and Tokyo Electron as the two primary competitors in a future market for products being developed.
Applied Materials and Tokyo Electron offered a divestiture package to the DoJ, which was targeted at eliminating horizontal overlaps in key product lines – a solution with a good track record in traditional antitrust cases. In doing so, the parties described the DoJ’s concerns about future products in the high-volume non-lithography space as speculative. However, the DoJ persisted in its view, and ultimately deemed the divestiture package to be insufficient, primarily because the DoJ viewed the parties as having unique incentives to innovate. The parties subsequently abandoned their deal, evidently concluding that it would not be possible to create a divestiture package that would effectively address these innovation concerns.13
In other cases, the DoJ and FTC have been willing to allow more limited divestitures in order to preserve innovation competition. One example is the DoJ’s approach to Google Inc’s acquisition of ITA Software Inc.14 ITA developed software used by airlines, online travel agents and online travel search sites to provide airline flight information. Google intended to enter the market for online travel searching, and the DoJ was concerned that once it did so, Google would have the incentive to foreclose rivals from using ITA, raise the costs or degrade the software’s performance. In order to address this concern, the DoJ required Google to license the software on fair, reasonable and non-discriminatory terms, to continue development of the software, and to create certain firewalls. This remedy preserved the ability of existing providers to compete using the ITA software, but also allowed Google to enter the market as a new, vertically integrated competitor.
The DoJ’s treatment of a series of patent acquisitions relating to mobile handsets is perhaps at the far end of the spectrum from Applied Materials/Tokyo Electron. The transactions at issue were:
- a the acquisition of certain Nortel Networks Corporation patents by Microsoft RIM, and Apple; and
- b the acquisition of Novell, Inc patents by Apple.15
In the Nortel and Novell investigations, the DoJ specifically noted that it ‘took into account the fact that during the pendency of these investigations’ Apple and Microsoft made public statements establishing ‘that they will not seek to prevent or exclude rivals’ products from the market in exercising their [standard essential patent] rights’. The DoJ then concluded that ‘[i]f adhered to in practice, these positions could significantly reduce the possibility of a hold up or use of an injunction as a threat to inhibit or preclude innovation and competition’. In essence, the DoJ relied on public statements by the parties about their willingness to license the patents in question on non-discriminatory terms and allowed each of these deals to proceed.
These examples present a broad spectrum of approaches to potential issues. In high-technology cases, this is perhaps not surprising given the wide range of potential factors that can be relevant and the varying degrees of certainty that exist when dealing with future markets and innovation. In any event, parties must be cognisant that in high-technology transactions, remedy discussions will often deviate from the standard set of structural remedies seen most commonly in traditional horizontal cases.
IV Multi-Sided Markets and High technology
An evolving area of interest in merger review is how the FTC and DoJ are likely to view competition issues raised in high-technology mergers implicating multi-sided platforms. Unlike traditional markets, multi-sided markets tend to involve businesses that generate revenue by providing a platform on which customers and sellers can interact with each other, rather than by providing a product or service directly. The most common example in past analysis has been the newspaper industry, which generates a large portion of its revenue from selling advertisement space rather than by selling newspapers. Today, we are witnessing more and more examples in the high-technology space, particularly when it comes to online sales solutions or social media platforms.
For the purposes of merger review, the most significant issue with a multi-sided market is that it raises the potential that competition concerns on one side of the platform may be offset or outweighed by procompetitive benefits on the other side of the platform. Traditional merger analysis, which proceeds by defining a single-sided relevant market and then assesses effects within that market, does not readily account for this balancing. While existing agency merger precedents have not explicitly set forth issues in terms of single-sided versus multi-sided markets, the DoJ confronted these issues in its analysis of collaboration between Google and Yahoo! in 2008 and then between Microsoft and Yahoo! in 2010.
Google and Yahoo! both provide online search services and include advertised search results in addition to natural search results when a user runs a query. Under the parties’ agreement, Yahoo planned to ‘replace a significant portion of its own internet search results advertisements with search results advertisements sold by Google’, and the companies would have shared the resulting revenue.16 In evaluating the proposed deal, the DoJ seems to have taken a traditional approach, defining an internet search advertising market covering ads delivered on each search engine’s search results page and an internet search syndication market, covering syndication of each provider’s search services to third parties, such as online retailers and newspapers. Looking at these two markets, the DoJ concluded that the combined shares would lead to a presumption that the agreement would result in lost competition, at which point the parties elected to terminate their agreement.
Two years later, the Division approved an advertising agreement between Microsoft Corp and Yahoo!, noting that ‘[t]he search and paid search advertising industry is characterized by an unusual relationship between scale and competitive performance’, and that the agreement would result in ‘more rapid improvements in the performance of Microsoft’s search and paid search advertising technology than would occur if Microsoft and Yahoo! were to remain separate’.17 While not an explicit nod to the multi-sided nature of the internet search platform, this statement at least suggests greater acknowledgement of the need to consider the user-facing side of the platform when assessing the competitive effects on advertising.
The agencies are already facing multi-sided market arguments directly in other contexts, including in the DoJ’s recent suit against American Express for its anti-steering rules.18 Credit and debit cards are multi-sided platforms in which the card networks compete for purchasing consumers on one side and for acceptance at selling merchants on the other side. While the court in American Express ultimately declined to adopt American Express’ position that it must analyse both sides of the platform together as part of a single relevant market, it did note that it was obligated to ‘account for the two-sided features of the credit card industry in its market definition inquiry, as well as elsewhere in its antitrust analysis’.19
As the internet has grown, more and more multi-sided platforms have developed, and we are likely to see increasing focus here in the coming years. Indeed, today many household names are players in high-technology multi-sided markets, including Google, Uber, Airbnb, Expedia, Amazon, Facebook and eBay. It will be particularly interesting to see the degree to which the agencies apply traditional, single-sided analysis or develop new tools in cases that raise multi-sided market issues.
While it would be impossible to touch on all the unique aspects of high-technology merger enforcement in this chapter, the foregoing issues are some of the more prominent ones in this area. It is the nature of high technology to be rapidly evolving, and the antitrust agencies will likely continue to balance traditional models of enforcement with modified approaches that are intended to better promote innovation. Undoubtedly, parties will continue to face challenges in convincing regulators to depart from commonly accepted guidelines regardless of their applicability to high-technology transactions. We can expect continued development of precedents in this space as parties and regulators test their approaches in the courts.
1 C Scott Hataway is a partner and Michael S Wise is a senior associate at Paul Hastings LLP.
2 Renata Hesse, ‘At the Intersection of Antitrust & High Tech: Opportunities for Constructive Engagement’, p. 2 (January 2014).
3 Terrell McSweeney, ‘The role of Antitrust Enforcers in Dynamic High-Tech Markets’, p. 7 (January 2015).
4 Draft Complaint at 3-4.
5 Statement of the Commission at 1-2.
6 See Order, Fed Trade Comm’n v Steris Corp, Case No. 1:15-CV-1080 (ND Ohio 24 September 2015).
7 United States v. Bazaarvoice, Inc, No. 13-CV-00133-WHO, 2014 WL 203966, at *10 (ND Cal 8 January 2014).
8 Id. at *4.
9 Id at *76.
10 Kurzweil, R, ‘Singularity Q&A,’ www.kurzweilai.net/singularity-q-a; see also Kurzweil, R, ‘The Law of Accelerating Returns,’ www.kurzweilai.net/the-law-of-accelerating-returns.
11 2014 WL 203966 at *76.
12 Press Release, ‘US Dep’t of Justice, Applied Materials Inc and Tokyo Electron Ltd Abandon Merger Plans After Justice Department Rejected Their Proposed Remedy’ (27 April 2015).
13 Applied Materials, Inc, Applied Materials, Inc and Tokyo Electron Limited Agree to Terminate Business Combination Agreement (26 April 2015).
14 See United States v. Google Inc, Case No. 1:11-cv-00688, Competitive Impact Statement (DDC 8 April 2011).
15 US Dep’t of Justice, ‘Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigations of Google Inc’s Acquisition of Motorola Mobility Holdings Inc and the Acquisitions of Certain Patents by Apple Inc, Microsoft Corp and Research in Motion Ltd’ (13 February 2012).
16 US Dep’t of Justice, ‘Yahoo! Inc. and Google Inc Abandon Their Advertising Agreement’ (5 November 2008).
17 Microsoft/Yahoo!, Press Release, ‘Statement of the Department of Justice Antitrust Division on its Decision to Close its Investigation of the Internet Search and Paid Search Advertising Agreement between Microsoft Corporation and Yahoo! Inc’ (18 February 2010).
18 US v. American Exp Co, 2015 WL 728563 (EDNY 19 February 2015).
19 Id at *26.