The Merger Control Review: US Merger Control in the Technology Sector
The headlines for the first half of 2020 have been dominated by the global covid-19 pandemic, which has driven changes across the economy, including several direct implications for high-tech mergers and acquisitions. On one hand, many high-tech companies have seen a significant increase in commercial activity as telework, online learning, online shopping, pharmaceutical development and other similar areas of the economy have taken increased prominence during the pandemic. On the other hand, the sudden, increased dependence on many large high-tech companies has resulted in renewed focus by some on curbing potential market abuses and preventing these companies from acquiring smaller rivals that may have struggled due to the pandemic and its aftermath.
Given the current situation, there have been efforts at both the Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) to prioritise existing initiatives aimed at better understanding the high-tech economy and potentially increasing enforcement in the sector. As these initiatives move forward, we expect to see greater scrutiny of high-tech deals by both agencies, including deals that fall below the Hart-Scott-Rodino (HSR) reporting thresholds but otherwise provide opportunities for DOJ or FTC leaders to test new theories or modes of enforcement.
I FTC and DOJ dig into high-tech issues
In February 2019, the FTC announced the establishment of its Technology Task Force dedicated to 'monitoring competition in US technology markets, investigating any potential anticompetitive conduct in those markets, and taking enforcement actions when warranted'.2 Now called the Technology Enforcement Division, it is comprised of 17 members, mainly made up of FTC staff attorneys chosen from across divisions. Similar to other FTC investigations, the Division's investigations will remain confidential, but initial reports indicated the FTC launched the review by visiting Silicon Valley and seeking out complaints of anticompetitive behaviour directly from industry participants.3 In merger enforcement, then-Director of the Bureau of Competition Bruce Hoffman called industry players to action, noting '[t]he bottom line, for right now, is that to find anticompetitive nascent acquisitions, we need to do it the old-fashioned way: by looking and asking, and keeping our ear to the ground. And we need your help. Participants in these various industries might well be best-situated to spot problematic acquisitions and bring them to our attention.'4
A year after the establishment of the Division, the FTC is no longer relying solely on tips from consumers and industry participants. On 11 February 2020, the FTC announced it had issued orders under Section 6(b) of the FTC Act to Alphabet Inc, Amazon.com, Inc, Apple Inc, Google Inc and Microsoft Corporation requiring them to provide information about prior consummated acquisitions not reported to the antitrust agencies under the HSR Act.5 FTC Chairman Joe Simons stated '[t]his initiative will enable the Commission to take a closer look at acquisitions in this important sector, and also to evaluate whether the federal agencies are getting adequate notice of transactions that might harm competition. This will help us continue to keep tech markets open and competitive, for the benefit of consumers.'6 The FTC intends to review acquisitions consummated between 1 January 2010 and 31 December 2019, which will reportedly include hundreds of transactions across these five companies.7 The orders require the companies to disclose information similar to what is called for under the HSR Act, while also requiring the 'companies to provide information and documents on their corporate acquisition strategies, voting and board appointment agreements, agreements to hire key personnel from other companies and post-employment covenants not to compete. Last, the orders ask for information related to post-acquisition product development and pricing, including whether and how acquired assets were integrated and how acquired data has been treated.'8
Efforts in Washington to understand the competitive impact big tech has on the marketplace are not limited to the FTC. On 13 September 2019, the House Judiciary Committee announced that it had sent document requests to Google, Facebook, Amazon and Apple as part of its bipartisan investigation into competition in digital markets.9 Under the direction of the Antitrust Subcommittee, the review 'will focus on three main areas: (1) documenting competition problems in digital markets; (2) examining whether dominant firms are engaging in anticompetitive conduct; and (3) assessing whether existing antitrust laws, competition policies, and current enforcement levels are adequate to address these issues'.10 The House panel is expected to hold hearings and issue finding of facts, which could increase political pressure on regulators to take enforcement action against big tech.
The DOJ has likewise opened an investigation into technology giants. On 23 July 2019, the DOJ announced that it would review 'whether and how market-leading online platforms have achieved market power and are engaging in practices that have reduced competition, stifled innovation, or otherwise harmed consumers'.11 The DOJ has prioritised this effort, and while the Antitrust Chief Makan Delrahim and Deputy Assistant Attorney General Barry Nigro have recused themselves with respect to the investigation into Google, both Attorney General William Barr and Deputy Attorney General Jeffrey Rosen have reportedly added antitrust lawyers to their respective offices to take an active role in the inquiries of big tech.12 Indeed, Attorney General Barr indicated the DOJ's intention to move quickly, touting the bipartisan support from Congress that something should be done in the form of enforcement action or legislative proposals.13 While the DOJ appears to be initially focused on anticompetitive conduct, these statements reflect a sentiment that will undoubtedly lead to careful scrutiny of high-tech mergers as well.
II DOJ gives arbitration a trial run – a move that could benefit high-tech deal reviews
For the first time in 2019, the DOJ challenged a merger in a binding arbitration instead of a courtroom. While the deal itself did not fall in the high-tech space, it has interesting implications for high-tech deals going forward, given that these deals frequently turn on dispositive questions of market definition.
The arbitration involved the proposed acquisition by Novelis Inc of Aleris Corporation. It would have been an alleged four-to-three among producers of rolled aluminium sheet used in auto manufacturing. The merging parties and the DOJ disagreed on definition of the relevant market – whether other products such as steel auto body sheet constrain the price of aluminium – and agreed to binding arbitration on that single issue. The DOJ prevailed, forcing divestiture of Aleris's auto body sheet business in North America.
The arbitration process is intended to provide a more efficient resolution of a narrow dispute. It may provide particular benefits where the government and the merging parties can agree that a single question is dispositive for the outcome of a merger review – in high-tech this may often be the issue of how to define a market around relatively new or novel technology. The merging parties necessarily cede their ability to mount a full assault on the DOJ's case, but the cost-benefit calculation may favour such an approach, particularly given the expense and time necessary for a trial on the merits in federal court.
The arbitration process has its critics. For example, many have pointed out that adjudication in an arbitration setting may be inappropriate if 'the matter significantly affects persons or organisations . . . not party to the proceedings' – such as customers or consumers downstream.14 Moreover, while the arbitration process arguably places issues before an adjudicator with specialised antitrust experience, critics have questioned whether this might not be better accomplished using the existing FTC adjudication process, which places matters before an administrative law judge and ultimately the five FTC commissioners. Nevertheless, in high-tech transactions that raise novel issues before the DOJ, we see potential for this method of dispute resolution to have some ongoing utility.
iii DOJ and FTC adopt new vertical merger guidelines
In January 2020, the US agencies issued new draft vertical merger guidelines. After delays due to covid-19, the final guidelines were published on 30 June 2020. It has been more than 35 years since the last update from the agencies outlining their approach to vertical deals. While the last set of vertical guidelines provided the theories that are investigated, the reality is that challenges to vertical mergers in the United States have been rare – just two in the past 45 years. Additional guidance may be particularly useful in the high-tech space, where the current political environment and the lack of current policy guidance from both agencies drive an increased degree of uncertainty.
While the draft guidelines provided a quasi-safe harbour for vertical transactions – indicating less likelihood of a challenge where one deal party has a 20 per cent or lower market share in the upstream market and the other party has a share of 20 per cent or lower in a related product downstream market – the final guidelines omitted it. The change is not terribly significant; a quasi-safe harbour provides little more than none at all. The final guidelines provide detailed examples of the unilateral effects the regulators look for in investigations and also describe transactions involving companies at different stages of competing supply chains. The guidelines recognise the existing analysis of efficiencies from the horizontal guidelines, along with the elimination of double marginalisation, placing the burden on the merging parties to substantiate such gains.
We do not anticipate any dramatic changes in enforcement as a result of the vertical merger guidelines, but companies in the high-tech space in particular should see marginal benefits from added clarity around how the DOJ and FTC will evaluate potential upstream and downstream effects in future transactions.
IV Multi-sided markets continue to pose questions
When the Supreme Court issued the 2018 decision in Ohio v. American Express,15 observers wondered about its possible reach. While not a merger case, the American Express opinion reasoned that in the context of a multi-sided platform, efficiencies on one side of the platform must be taken into account when evaluating any potential competitive implications on the other side. Practitioners have speculated about the impact that this mode of analysis would have on merger reviews involving multi-sided platforms – many of which involve high-tech platforms such as ride-hailing services, food delivery apps and online shopping hubs. The DOJ's challenge to Sabre's proposed acquisition of Farelogix showed that there is still much refinement to be done on the antitrust principles for these industries.
In Sabre/Farelogix,16 the DOJ was concerned with consolidation in a two-sided platform for airline bookings. Traditionally, bookings have been managed through global distribution systems (GDS) that connect travel agents looking to make bookings with airlines offering available seats. Sabre is one of the largest GDS providers. The DOJ complaint alleged that the next-generation booking software developed by Farelogix was a threat to Sabre's legacy GDS. Farelogix focuses on providing airlines with software allowing them to offer targeted discounts and perks for bookings through a travel agent – potentially offering an alternative means for airlines to sell directly to travel agents without going through a GDS. Airline customers testified that the entry and success of Farelogix provided them with additional negotiating leverage against the traditional GDS providers, including Sabre. The DOJ argued that if the transaction went forward, Sabre would no longer be constrained in its negotiations, and would therefore be able to charge higher prices and have less incentive to innovate.
In litigating the transaction, the parties put the US Supreme Court's American Express decision to the test by arguing about impacts on both sides of the GDS platform – airlines and travel agents. One key point raised by the parties was that while Sabre was indeed a multi-sided platform, selling services to both airlines and travel agents, Farelogix was primarily a software developer for the airlines, meaning that it arguably only operated on one side of the multi-sided platform at issue. Ultimately, the district court latched onto this distinction, reading American Express to rule out, as a matter of law, competition between single-market sellers and their multi-sided counterparts.
The court's interpretation has drawn criticism from the DOJ and others in the antitrust bar. Shortly after the district court decision, the UK Competition and Markets Authority blocked the transaction, leading the parties to abandon their deal. The DOJ has since asked the Court of Appeals to vacate the district court's decision to eliminate its precedential value. Meanwhile, significant uncertainty persists in the proper treatment of multi-sided platforms in merger review matters.
V Pharmaceutical deals face increased scrutiny
Even before the entrance of covid-19 on the global stage, the FTC was gearing up for increased scrutiny of pharmaceutical tie-ups, echoing political concerns that consolidation in the pharmaceutical sector has led to ever-increasing drug prices in the United States.
One key area of focus is whether pharmaceutical deals should continue to be analysed based on individual product overlaps, as has historically been the case, or whether a broader view of potential anticompetitive effects is warranted. This was seen starkly in the dissenting opinions of the two Democratic commissioners to the FTC's decision to clear the acquisition of Celgene by Bristol-Myers Squibb in November 2019. For example, Commissioner Rohit Chopra stated plainly, 'I am deeply skeptical that this approach [focusing on product overlaps and foreclosure incentives] can unearth the complete set of harms to patients and innovation, based on the history of anticompetitive conduct of the firms seeking to merge and the characteristics of today's pharmaceutical industry when it comes to innovation.'17
Commissioner Chopra's statements echo sentiments from lawmakers urging greater scrutiny of large pharmaceutical deals. In September 2019, Senator Amy Klobuchar wrote to FTC Chairman Joe Simons on behalf of herself and eight other senators regarding antitrust enforcement in the pharmaceutical sector.18 Highlighting AbbVie/Allergan and Bristol-Myers/Celgene as two recent deals that 'raise significant antitrust issues', Senator Klobuchar asked the FTC to take note of the fact 'industry consolidation is occurring against a backdrop of ever rising prescription drug spending and reports that one in four people taking prescription drugs have difficulty affording their medication'. Accordingly, she urged the agency to 'take appropriate action to protect consumers', adding that 'if the FTC's competitive concerns cannot be resolved by negotiated settlement, we urge the Commission to take appropriate action in district court to protect competition'.
Concerns over pharmaceutical industry consolidation are likely to be further elevated in the current environment, as the world scrutinises efforts to develop and distribute treatments to combat covid-19. If the Democrat-led scepticisms gain ground, it could mean higher hurdles for FTC clearance in large pharmaceutical deals. And in the meantime, it portends potentially longer antitrust reviews as FTC staff attorneys wrestle with these questions in the context of individual combinations.
The trend over the past several years towards greater scrutiny of high-tech transactions is accelerating, driven by political winds as well as concerns surrounding the response by various segments of the high-tech economy to the covid-19 crisis. While the prospect of additional clarity for tech deals coming from the forthcoming vertical merger guidelines offers some benefit to high-tech deal-makers, we must wait to see how policy shifts more generally will affect merger reviews. Among other things, it remains to be seen whether the FTC and DOJ high-tech initiatives will result in additional challenges to high-tech deals, whether the FTC's merger retrospective will result in changes to its remedy policies, how efficiencies in deals involving multi-sided platforms will be scrutinised, and whether the FTC will pivot to examining a broader range of concerns in the context of pharmaceutical mergers. In the meantime, one thing we can expect is that in high-tech reviews generally, the parties will need to be prepared to spend additional time wrestling with these issues for the foreseeable future.
1 Michael S Wise is of counsel and Noah B Pinegar and Mary H Walser are associates at Paul Hastings LLP.
2 FTC, 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.
3 Steven Overly and Margaret Harding McGill, 'FTC went to Silicon Valley to solicit antitrust complaints', Politico (7 June 2019), available at www.politico.com/story/2019/06/07/ftc-tech-scrutiny-silicon-valley-1511310.
4 Bruce Hoffman, Director, Bureau of Competition, Antitrust in the Digital Economy: A Snapshot of FTC Issues, Remarks at GCR Live Antitrust in the Digital Economy (May 2019), available at www.ftc.gov/system/files/documents/public_statements/1522327/hoffman_-_gcr_live_san_francisco_2019_speech_5-22-19.pdf.
5 FTC, FTC to Examine Past Acquisitions by Large Technology Companies, available at www.ftc.gov/news-events/press-releases/2020/02/ftc-examine-past-acquisitions-large-technology-companies.
6 Federal Trade Commission, FTC to Examine Past Acquisitions by Large Technology Companies, available at www.ftc.gov/news-events/press-releases/2020/02/ftc-examine-past-acquisitions-large-technology-companies.
7 Diane Bartz and Nandita Bose, 'FTC demands data on small buys by Google, Amazon, Apple, Facebook, Microsoft', Reuters (11 February 2020), available at www.reuters.com/article/us-usa-tech-antitrust/ftc-demands-data-on-small-buys-by-google-amazon-apple-facebook-microsoft-idUSKBN205261; see also John D McKinnon and Deepa Seetharaman, 'FTC Expands Antitrust Investigation Into Big Tech', Wall Street Journal (11 February 2020), available at www.wsj.com/articles/ftc-plans-to-examine-past-acquisitions-by-big-tech-companies-11581440270.
8 FTC, FTC to Examine Past Acquisitions by Large Technology Companies, available at www.ftc.gov/news-events/press-releases/2020/02/ftc-examine-past-acquisitions-large-technology-companies.
9 House Committee on the Judiciary, House Antitrust Subcommittee Issues Document Requests as Part of Digital Markets Investigation, available at https://judiciary.house.gov/news/documentsingle.aspx?DocumentID=2110.
11 DOJ, Justice Department Reviewing the Practices of Market-Leading Online Platforms, available at www.justice.gov/opa/pr/justice-department-reviewing-practices-market-leading-online-platforms.
12 Brent Kendall and Sadie Gurman, 'Justice Department's Antitrust Chief removes himself from Google probe', Wall Street Journal (4 February 2020), available at www.wsj.com/articles/justice-departments-antitrust-chief-removes-himself-from-google-probe-11580822369?mod=searchresults&page=1&pos=4.
13 Tim Hanrahan and Brent Kendall, 'Barr sees Big-Tech Probe Wrapping Up by Next Year', Wall Street Journal (10 December 2019), available at www.wsj.com/articles/barr-sees-big-tech-probe-wrapping-up-by-next-year-11576011636.
14 5 U.S.C. § 572(b)(4).
15 138 S. Ct. 2274 (2018).
16 Case No. 1:19-cv-01548 (D. Del. 7 Apr. 2020).
17 Dissenting Statement of Commissioner Rohit Chopra, In the Matter of Bristol-Myers Squibb/Celgene, Comm'n File No. 1910061 (FTC 15 November 2019).
18 Press Release, Klobuchar Leads Letter Warning That Pharmaceutical Mergers May Threaten Drug Competition, Increase Prices and Reduce Patient Access to Essential Medications (17 September 2019).