Is antitrust analysis different for high-tech industries?

For high-tech industries, DOJ and FTC standards are sometimes different in both mergers and non-mergers

Innovation is a key driver of competition. So, high-tech industries shouldn’t have to worry about running afoul of the antitrust laws – right? Well, it’s not that easy. Although the antitrust laws are designed to protect competition and innovation often enhances a company’s competitiveness, high-tech companies sometimes engage in conduct that stifles competition or misuses market power. The Department of Justice (DOJ) and Federal Trade Commission (FTC) vigorously enforce the antitrust laws using fact-specific analysis to balance potentially anticompetitive conduct against the procompetitive factors often present in high-tech industries.

Mergers

A DOJ official recently stated that when evaluating mergers in high-tech industries, “protecting innovation is often a decisive factor” in the enforcement decisions. However, as the antitrust agencies’ Merger Guidelines emphasize, mergers that combine close competitors may lessen competition and reduce incentives to develop new products. Therefore, even in high-tech industries, the government’s investigation begins by assessing whether a merger is likely to result in higher prices or reduced output. Recent mergers successfully challenged by government – Bazaarvoice/Power Reviews and H&R Block/TaxAct – are prime examples of where a merger threatened to eliminate competition that was fueled by innovation. Other factors that frequently are present in high-tech industries are network effects, switching costs and other barriers to entry. The agencies’ fact-intensive review of mergers analyzes whether these factors could cause a merger to result in anticompetitive effects.

On the other hand, in high-tech industries, companies sometimes are able to show that a merger among competitors is not likely to be anticompetitive. For example, a merger of incumbents may not result in anticompetitive effects if the industry is undergoing rapid technological changes or experiencing significant new entry. As the DOJ official observed, “these factors won’t always carry the day. They must be considered in light of many other characteristics of high-tech mergers that can exacerbate the potential for competitive harm.” However, there are several notable examples of mergers that the agencies did not challenge for these reasons, including Office Depot/Office Max, Google/Admeld, and XM/Sirius.

The merging companies’ ordinary course of business documents often provides evidence that the agencies and courts weigh heavily when analyzing a transaction. For example, internal documents often reveal: whether competition was a key factor driving innovation in the market; whether there are significant barriers to entry; and whether the elimination of competition was the central rationale for the merger. In fact, a key takeaway from the recent Bazaarvoice/Power Reviews case is that “hot documents” continue to be important evidence in merger reviews. The court’s opinion highlighted the companies’ ordinary course of business documents as key evidence regarding market definition, market structure, and competitive effects. The court also looked to the companies’ documents to help determine likely competitive effects and to illuminate what the court concluded was an anticompetitive rationale for the acquisition.

Non-mergers

In high-tech industries, the antitrust agencies continually are looking out for signs that a company may be abusing its market power through conduct that stifles innovation or technological progress. For example, based on the DOJ’s complaint, Apple was found to have entered into agreements with book publishers that facilitated horizontal price-fixing regarding electronic books. Also, the FTC investigated Google’s practices regarding search results and policies regarding standard essential patents acquired from Motorola Mobility. Although the FTC did not challenge the search result practices, the FTC required Google to allow competitors to license on fair, reasonable, and non-discriminatory terms various standard essential patents related to smart phones, laptop and tablet computers, and gaming consoles.

In merger and non-merger investigations, the antitrust agencies’ analyses are fact-intensive and increasingly focus on companies’ documents as a source of evidence. High-tech industries do not get a “free pass.” Therefore, companies are well-served to implement an effective antitrust compliance program to ensure that business people are aware of antitrust risks as well as the role that internal documents, including e-mail, can play in the context of a government investigation. The importance of documents to the agencies’ analysis of a merger or non-merger conduct underscores that it is critical to involve antitrust lawyers early in a transaction or new course of conduct so that they can fully analyze the market, review the companies’ documents, and develop legal arguments that are consistent with this information. If an investigation ensues, this also enables the antitrust lawyers to quickly educate the agency staff about the competitive dynamics in the market, allay any potential concerns, and if needed, join issue on the areas that may require additional advocacy.

Contributing Author

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Laura Wilkinson

Laura Wilkinson is an antitrust partner in the Washington, DC office of Weil, Gotshal & Manges with a practice focusing on mergers and acquisitions. Ms....

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