Antitrust in focus - October 2021

General

• More U.S. FTC merger control policy changes: expanded information requests and reinstated “prior approval” practice
• Talent acquisitions (or “acqui-hires”) and non-competes on FTC’s radar
• Antitrust dawn raids back on the table across the globe
• EU General Court backs European Commission’s tough stance on merger control “gun jumping”
• EU antitrust authorities address information exchange and potential algorithm concerns with behavioural commitments
• UK CMA imposes record GBP50.5m fine for breach of merger control “freeze” order

Digital & TMT

• China’s SAMR penalises Meituan’s exclusivity arrangements with novel refund obligation and substantial fine

 
General

More U.S. FTC merger control policy changes: expanded information requests and reinstated “prior approval” practice

The U.S. Federal Trade Commission (FTC) has recently announced a string of important changes to its merger control policies and practice. Some, such as the use of “warning letters” we reported in last month’s edition, are in response to an expected “record-setting year” of merger filings which the FTC claims are straining U.S. agency resources. Others suggest that the FTC intends to take a more aggressive approach to merger control enforcement under the Biden administration.

This month, merging parties should be aware of two key developments.

Expanded information requests for in-depth reviews

The FTC has identified a number of changes which, according to its announcement, will streamline its in-depth (“second request”) merger review process while also ensuring more rigorous analysis. Some changes are intended to align FTC practices with those of the Department of Justice (DOJ). Others are more significant, and fit with new Chair Lina Khan’s push to expand the framework for assessing transactions beyond traditional merger control standards. For merging parties, it is likely that the measures will make complying with in-depth FTC merger reviews more difficult, unpredictable, and time-consuming.

Following the changes, parties should expect:

1. Expanded second requests to include “additional facets of market competition”. Questions may now cover, for example, how a merger will affect labour markets, cross-market effects and how the involvement of investment firms may affect market incentives to compete. It is possible that questions on environmental issues may also feature.
2. FTC staff to only consider requests for modifications to second requests after the parties have provided “certain foundational information”. This includes identifying and describing the responsibilities of employees/agents for relevant lines of business, as well as those employees responsible for negotiating, analysing or recommending the transaction.
3. While not new, to provide more information on how they intend to use e-discovery tools before applying the tools to identify responsive materials.
4. The full Commission to have automatic access to second request materials through a secure system.
5. To provide full privilege logs on documents being withheld on attorney-client privilege grounds, which runs contrary to the trend in federal court.

Restrictions on future acquisitions after anti-competitive acquisitions

The FTC has announced that it is reinstating its practice of “prior approval”. This means that FTC merger enforcement orders, which put in place remedies to address concerns that a deal is anti-competitive, will now contain provisions that restrict future acquisitions by the acquiring company.

Specifically, the acquirer will have to get FTC approval before closing any future transaction in the markets where the FTC had concerns – or even in broader markets, depending on the circumstances – for a minimum of ten years.

In deciding on the scope of the provision, the FTC will balance a number of considerations, including the nature of the deal, level of market concentration, degree of pre-merger market power, the parties’ history of acquisitiveness and evidence of anti-competitive market dynamics. The FTC says it may seek prior approvals even where parties abandon a transaction.

And the FTC has wasted no time in putting its policy into action. It has included a prior approval provision in a proposed order to address its concerns over DaVita’s planned acquisition of the University of Utah Health’s dialysis clinics. Interestingly, the agency decided to extend the coverage of the prior approval beyond the markets directly affected by the merger. One reason for doing so, it says, was “DaVita’s history of fueling market consolidation”.

The FTC is sending a message. It says that reinstating the policy “forces acquisitive firms to think twice before going on a buying binge”. Going forward, merging parties should carefully weigh up the potential impact on future acquisitions when deciding which transactions to pursue.

Talent acquisitions (or “acqui-hires”) and non-competes on FTC’s radar

At its most recent “open meeting” last month, the FTC presented findings from its inquiry into past acquisitions by tech platforms that did not require notification under the U.S. merger control rules.

Democratic FTC Commissioners, including Chair Lina Khan, used the Commission meeting to focus on how firms can structure deals in order to avoid merger control reviews.

One particular example they give is talent acquisitions, or “acqui-hires”, where a company purchases a start-up primarily for its employees. These are a common practice, particularly in the tech sector. But FTC officials say they can be structured in such a way as to avoid meeting U.S. merger control reporting requirements, and can amount to an anti-competitive transaction or even collusion.

In particular, they point out that many acqui-hire deals incorporate non-compete agreements to ensure that employees are locked into the firm post-transaction. The inquiry into past acquisitions found that more than 75% of transactions included non-compete clauses for founders and key employees of the target.

In terms of what all this means going forward – expect greater scrutiny of acqui-hire deals and of non-competes in merger agreements. And watch out for FTC proposals that aim to close loopholes in the rules in order to make it more difficult for such deals to avoid review.

Antitrust dawn raids back on the table across the globe

Unsurprisingly, antitrust authorities stopped carrying out dawn raids during the height of the Covid pandemic. But recently we have seen a significant uptick in the number of onsite inspections taking place across the globe.

The European Commission (EC) announced this month that it has raided a number of wood pulp companies on suspicion of anti-competitive conduct. The inspections took place in several Member States. It has also inspected a pharmaceutical company active in animal health in Belgium over concerns of abuse of dominance. The EC is clear that the raids were conducted in compliance with Covid health and safety protocols.

These are only the second and third publicly announced EC dawn raids since May 2019 when it inspected the premises of several French grocery retailers. In June 2021 it announced inspections at the premises of a German clothing manufacturer.

And it appears that this is only the start. Just days before the animal health inspection, Competition Commissioner Margrethe Vestager announced that the EC is planning a series of raids in the months to come. She gives no hints as to when or where they will happen, and what sectors will be targeted. Although she does go on to discuss more generally the EC’s interest in buyer cartels, including collusion to fix wages or the use of “no-poach” agreements, and cartels that hold back improvements in quality or sustainability of products.

The EC isn’t the only antitrust authority to have kick-started its dawn raid activities. In the past few months we have seen reports of onsite inspections by antitrust authorities in France, Greece, Hungary, India, Japan, Pakistan, Poland and Russia, across a wide variety of sectors.

For companies, therefore, now is a good time to ensure that:

• dawn raid manuals/protocols are in place and up-to-date
• staff (including senior management, those that work on reception and the IT team) are fully trained on what to expect and how to act in the event of a raid

We stand ready to help you on these matters. Be in touch with your usual antitrust contact, or this month’s editor Noah, if you would like to discuss further.

EU General Court backs European Commission’s tough stance on merger control “gun jumping”

In last month’s edition, we discussed the landmark General Court ruling in Altice. The Court largely upheld the European Commission’s decision to impose a record fine on Altice for jumping the gun in relation to its acquisition of PT Portugal. It agreed with the Commission that certain veto rights in the transaction agreement, as well as Altice’s conduct in practice, amounted to a breach of procedural merger control rules.

Find out more in our alert on the Altice ruling, including how merging parties can avoid similar issues in their transactions.

EU antitrust authorities address information exchange and potential algorithm concerns with behavioural commitments

Uncontrolled information sharing can raise antitrust issues. From a competition law perspective, each company must independently determine its own strategy on the market.

The concern is that the exchange or disclosure of commercially sensitive information could lead to the alignment of rivals’ competitive behaviour or commercial terms, or could increase stability in the market. Commercially sensitive information includes data on current or future pricing structures or policies, costs, other terms of business, customer details, marketing strategies and R&D plans.

Breach of the antitrust rules risks substantial fines. However, within a month, we have seen two cases in the EU where information sharing concerns have been addressed by commitments. The parties involved have avoided financial penalties.

• In Italy, the antitrust authority has been investigating an insurance industry association’s “anti-fraud project”. The association ‒ ANIA ‒ is made up of 131 insurance providers that collect 90% of the premiums paid out of the Italian insurance market.
  
  The authority recognised that fraudulent activities are “widespread” in the insurance sector, and that anti-fraud projects could significantly reduce costs and benefit policyholders, as well as the wider community.
  
  However, the authority was concerned, among other things, that the collective use of any fraud databases could facilitate the sharing of commercially sensitive information and collusion. ANIA, which had in fact notified the authority of its project less than a year before, offered “substantial changes” to resolve those concerns.
  
  The commitments ultimately agreed include limits to the possible use of the databases and the appointment of a third party monitor to ensure any data collected is used within the law.
  
  Interestingly, the authority had particular concerns that the availability of a considerable amount of data could lead the parties involved to develop a common algorithm capable of aligning their business decisions. Therefore, the commitments specifically addressed the technical aspects of the algorithm itself, specifying that it would not feature self-learning characteristics. There has been considerable debate in recent years as to whether the use of artificial intelligence can in certain circumstances give rise to antitrust concerns. This case is significant in being one of the first to consider these issues in practice.
  
  It is also worth mentioning that the Italian antitrust authority is currently investigating an alleged antitrust infringement involving both insurance companies and price comparison platforms. It is concerned that the companies regularly exchanged sensitive information on the economic conditions for the sale of motor vehicle liability insurance, in particular through reports prepared and distributed by the price comparison platforms. The case is expected to conclude by October 2022.
  
  
• In Spain, the antitrust authority has been investigating the main film distributors and an audience measurement company for sharing commercially sensitive information. In particular, the authority was concerned that information on, for example, film release dates, number of viewers and box office sales was disaggregated and given in real time.
  
  To resolve its concerns, the authority has accepted binding commitments which it says will eliminate the sharing of certain non-public information. So, film distributors will not provide audience measurement companies with non-public information about expected premiere dates. And audience measurement companies will not provide film distributors with information from rivals on, for instance, the number of screens on which a movie is to be shown. The commitments will remain in place for five years.

Businesses operating within the EU can expect more guidance on how to avoid anti-competitive information sharing when the European Commission’s horizontal guidelines are revised next year.

In the meantime, it is clear that antitrust authorities in the EU will target action in any sector. And, crucially in view of current supply and environmental issues, they will open enforcement cases even when information sharing systems are set up to achieve legitimate aims.

However, it would appear that some authorities may be open to resolving concerns without a competition law infringement finding or fines where commitments offer a robust, comprehensive and quick means of restoring conditions of competition.

UK CMA imposes record GBP50.5m fine for breach of merger control “freeze” order

The UK Competition and Markets Authority (CMA) has taken a tough approach to breaches of procedural merger control rules in recent years. This month, it has imposed its highest ever fine – GBP50.5m – on Facebook after finding that the company breached an initial enforcement (ie a hold-separate, or freeze) order.

The freeze order was put in place by the CMA in relation to Facebook’s acquisition of Giphy. These types of order are routinely imposed in completed transactions (and sometimes in anticipated deals) in order to prevent merging parties from integrating their businesses while the merger control investigation is ongoing. The CMA sees them as a key part of the UK’s voluntary merger control regime.

The CMA found that Facebook breached the terms of the order by “consciously” not providing all of the information it was required to submit to the authority. It imposed a GBP50m fine, and a further GBP500,000 penalty after concluding that Facebook changed its Chief Compliance Officer without first seeking consent.

Facebook has said that it strongly disagrees with the decision and is considering its options.

For merging parties, there are two key takeaways:

1. The CMA is willing to impose significant fines where it finds a breach of a freeze order, particularly where it concludes that the infringement was deliberate. The CMA has the power to impose fines of up to 5% of global turnover for such breaches. However, until now, the previous highest fine for failure to comply with such an order was GBP325,000, as reported in last month’s Antitrust in focus. This latest penalty marks a considerable increase.
   
   And it fits more generally with the CMA’s desire to impose higher fines for other breaches of procedural rules – UK government proposals are currently on the table, for example, to dramatically increase the maximum fine for failure to comply with information requests issued during a merger review process from GBP30,000 to 1% of global turnover.
   
   
2. UK freeze orders can contain extremely broad obligations. They can stretch across all activities of the acquirer and not just its UK operations. The CMA is able to grant derogations, giving a business consent to do things that are otherwise banned under an order. But it is important, as noted by the UK Court of Appeal (which earlier this year rejected Facebook’s challenge to the CMA’s refusal to grant derogations in its case), that merging companies “properly engage” with the CMA when seeking a derogation.

Digital & TMT

China’s SAMR penalises Meituan’s exclusivity arrangements with novel refund obligation and substantial fine

The State Administration for Market Regulation (SAMR) has found that Meituan abused its dominance in the online food delivery sector through exclusivity arrangements.

SAMR found that Meituan forced merchants to sign a “choosing one from two” agreement and systematically promoted the implementation of the agreement through various mechanisms. And SAMR noted that Meituan also imposed punitive measures to effectively ensure that the agreement was implemented. First, it used big data to monitor and punish merchants’ non-compliance with agreements. Second, it blocked merchants using rival platforms from Meituan’s service. Third, it forced merchants signing up to its service to pay a deposit to ensure their long-term commitment.

Meituan argued that the merchants entered into the agreements “voluntarily”, but SAMR disagreed. It claimed that the arrangements effectively locked restaurants into Meituan’s platform, restricted competition, deterred new entry and weakened incentives to innovate.

The fine is substantial. At CNY3.44bn (approx. EUR460m) it is the second-highest ever imposed by SAMR and amounts to 3% of the company’s Chinese revenue in 2020.

But, most significantly, the authority has ordered Meituan to refund the cooperation deposits, amounting to around CNY1.3bn (approx. EUR172m), to the 1.63 million merchants caught by its exclusivity arrangements.

SAMR has also issued Meituan with “administrative guidance” to direct its future conduct, and demanded annual compliance reports for the next three years. Notably, the scope of the guidance extends beyond traditional antitrust issues to concerns currently dominating platform economies, including delivery workers’ salaries and social security.

Since SAMR’s record fine on Alibaba in April for similar exclusivity requirements, tech companies have clearly been in the authority’s enforcement sights and in line for severe penalties.

This latest development proves that SAMR is not holding back. It is being innovative in its approach to penalties. And investigations are carried out at pace ‒ SAMR only opened its Meituan case in April this year. With SAMR planning to set up a new research centre and expand its antitrust task force, enforcement looks set to remain on the up.

About your editor

Noah is a partner in our global antitrust group, splitting his time between Washington, D.C. and Silicon Valley. He has 20 years of experience advising on complex cross-border antitrust issues, with a focus on innovation and on how the antitrust laws intersect with intellectual property. He works with clients to develop and execute their global antitrust strategies, and also represents them before the U.S. courts, the U.S. Department of Justice and Federal Trade Commission, as well as the various states’ Attorney General offices. Finding imaginative antitrust-based solutions to clients’ business issues is a hallmark of his practice. Noah has successfully defended and asserted antitrust claims in merger and non-merger investigations before the U.S. agencies and in federal district court.

Noah received his BA from the University of California and his JD from Columbia University School of Law. He is an adjunct professor for antitrust at UC Berkeley School of Law, where he teaches an Antitrust and Innovation course, and regularly writes and speaks on a wide range of antitrust topics.

Spotlight on Noah

A typical working day involves…. syncing up with the world with early calls and email during a morning walk, putting out fires back at my desk, more calls and email, and in between attempting to get through my list of to-dos planned the day before.

If I hadn’t become an antitrust lawyer, I would be…. hmm. Maybe running a coffee shop or a wine bar. Hard to imagine doing anything as a lawyer other than antitrust. I consider myself pretty lucky to have discovered this exciting and challenging practice.

The best career advice I’ve been given is…. no one thing. What tops the list are: listen and then listen some more, explore everything, and don’t turn down opportunities.

The most interesting case I’ve worked on is…. too many! In my latest matter, we’re defending a deal in the semiconductor industry. We have had so many issues that are novel and challenging. Not only are we navigating investigations in Asia, Europe and the U.S. at a time of increased global antitrust scrutiny of tech deals, the product at issue is at the intersection of antitrust and national security. This is always a sensitive area, but all more so at a time when the world is facing a critical shortage of chips and rising geopolitical competition for industrial hegemony. It’s a fun time to counsel in antitrust.

For me, being a good lawyer/advisor means…. listening, being responsive to commercial strategy, offering creative and pragmatic solutions, and communicating effectively according to your audience.

Something I’d like to do but haven’t yet done is…. live for some time on each continent, and use it as a base to explore each region of the world.

My ideal weekend in two sentences…. getting out on the water, whether it’s for a simple paddle or row, or for a longer cruise.

My typical weekend in two sentences…. catching up on errands, and oh, yeah, those to-dos I didn’t get to during the week.

Something that might surprise you about me is…. my wife and I tried (and failed) to start our own business while in college. Didn’t sell a thing!

My top tip for visitors to Washington, D.C. and San Francisco/SV (when we can travel again) is…. oh so many things to do. But, if forced to pick… When in D.C., walk the Mall and monuments early in the morning as the sun is rising. When in SF, cross the Golden Gate Bridge and hike Muir Woods with a climb up Mt. Tam, rewarding yourself with a picnic and 360-degree views of the San Francisco Bay at the peak. And to state the obvious, get out and explore the great places to eat in both cities.