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Sculpture Man Controlling Trade

Author: Steven J. Cernak

How do you tie together evolution, the wave, and market prices?  As Neil Chilson explains in his brilliant little book, Getting Out of Control, all are examples of emergent order.  While Chilson is a former FTC leader, this book is not just for antitrust and consumer protection lawyers and economists but for anyone trying to understand what they can, and cannot and should not, control.

The book is about more than policy and certainly more than antitrust policy.  It explores many ways in which emergent order can play a role in your life, both personal and professional.  After all, the subtitle is “Emergent Leadership in a Complex World.” So parts of the book read like a self-help or leadership book.

Those parts might be the least interesting, at least to many of us.  There is nothing objectionable in those sections but there also did not seem to be many new insights from viewing familiar issues through an emergent-order lens.  For example, Chilson describes how changing your habits can change you and your actions and how changing your environment can help change your habits: “If you want to stop eating sugar, don’t visit candy stores.”

But that advice does not seem much different than the directions that many of us have received in various six sigma or other corporate efficiency seminars. Many of mine while at General Motors were based on lessons learned from the Toyota Production System applied to the white-collar office.  There, changing the environment might mean putting yellow taping around the stapler on the table next to the copier to develop the habit of returning it to the same place every time. Good advice that all of us, whether in the workplace a few weeks or decades, need to hear periodically, but not particularly new.

Chilson’s policy discussions, however, do offer fresh and necessary takes on policy issues, like antitrust and other economic regulation, that are especially important today.  He starts by defining emergent order and distinguishing it from both randomness and designed order. Here, emergent order is the complex behavior of a system created by the interactions of many smaller components following simpler rules with no central control. To illustrate the differences among the three types, he uses various actions of a crowd at a sporting event.

As an example of emergent order, consider “the wave” at a large sports stadium — I will use the University of Michigan football stadium. The system, that is, the attendees, engage in the complex behavior of creating the coordinated, observable pattern of a wave moving around the stadium. No central authority controls the wave — some group of students, though not always the same one, tries to start it at different points in the game — and the small components, each fan, follows the simple rule of standing at about the right time. The wave peters out as enough fans grow disinterested.

An example of randomness would be the fans entering the stadium.  As Chilson notes, “you would be hard pressed to predict when any particular fan would arrive and take their seat” (although, at Michigan Stadium, a safe prediction is that fans named Cernak will be in their seats at the one hour to kickoff announcement). Designed order, on the other hand, would be if placards are handed out that, “when everyone holds them up, spell out ‘GO TEAM’ [or a Block M] across the entire stadium.”

Chilson builds on those definitions and examples to examine “the classic economic example of emergent order,” the price system. From these concepts, he derives principles for anyone dealing with emergent order, such as: expect complicated results even from simple actions; push decisions down to those actors with important local information; and be humble.

While the book is not overly technical or academic, its points are well-supported with quotes and “greatest hits” from top economists like Adam Smith, F.A. Hayek and his knowledge problem, Ronald Coase and his theory of the firm, and Elinor Ostrom. Chilson even interviews Russ Roberts, who has been popularizing emergent order on his EconTalk podcast for years.  (Surprisingly, there does not seem to be a reference to Roberts’s It’s a Wonderful Loaf, an ode to the magic and beauty of emergent order that I suggest to all my antitrust students.)

Specifically on antitrust and other regulatory matters, Chilson has high praise for his former boss at the Federal Trade Commission, former long-time Commissioner and Acting Chairman Maureen Ohlhausen. She frequently spoke about the need for the FTC to exhibit “regulatory humility,” a position that I have supported in the past. Chilson also seems to channel Edmund Burke in advocating for a common law approach to policy decisions, rather than some elaborate rulemaking, as the many cases decided with specific and local knowledge in the past end up embodying wisdom that should be respected now and in the future.

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Author:  Steven J. Cernak

Remember when UPS ran TV commercials, complete with jingles, trying to make logistics something that everyone cares about? No need now. Now, everyone knows how supply chain issues can affect toilet paper supplies, microchips for cars and, perhaps, even make Santa late with toys and decorations for Christmas.

With every supplier, distributor, retailer, and wholesaler scrambling to scrounge supplies and ship finished goods in some reasonably efficient and cost-effective manner, some harried supply chain executives might be tempted to take some bold and dangerous steps. Just as we have done a couple times during the pandemic, your friendly neighborhood antitrust lawyers are here to remind you of the old rules that still apply and speculate on how antitrust might affect these issues in the future.

Price Fixing and Price Gouging Rules Remain the Same

In a time of crisis, one tempting bold but possibly dangerous step for an executive to take is to directly contact or signal intentions to a competitor. For instance, a CEO might want assurance that any price increase to help recover increased transportation costs will be matched by the competitor. Depending on how the conversation goes, antitrust enforcers and courts could find a price fixing agreement — and, as the enforcers have made clear, price fixing is still per se illegal, even during a pandemic or other crisis. An agreement among competitors to boycott logistics providers raising their prices would meet a similar fate.

On the other hand, so-called price gouging does not violate the U.S. federal antitrust laws, as we explained here. So that CEO contemplating a price increase to cover increased transportation costs need not worry about federal antitrust issues; some states, however, do have non-antitrust laws that prohibit price gouging under certain circumstances.

Joint Ventures Might Help

Instead of jail time for price fixing, that phone call between competitor CEO’s could lead to joint efforts that could ease the business pain while staying on the right side of the antitrust laws.  As we explained here, the antitrust rules regarding joint ventures do not change in a crisis and some joint efforts among competitors, if implemented properly, do not violate the antitrust laws.  So if that CEO call will lead to joint research on new shipping methods; a new jointly-run warehouse; or lobbying the local legislature for regulatory relief, the antitrust laws likely will not stand in the way. Looks like some CEO’s are already thinking about joint ventures.

Bottlenecks Turn Out to be Monopolies?

While the antitrust laws have not changed, the changed economic conditions might lead to new outcomes. For instance, bottlenecks in the supply chain might start to look more like monopolies and so be subject to restrictions on monopolizing actions.

As we explained here, the first element in a monopolization claim under the U.S. antitrust laws is finding that the defendant is a “monopolist.” Usually, that process means defining a market and then seeing if the defendant has a high market share; however, the market share method is used more often only because the data are available to make the estimate. What a court really is trying to measure is the ability of the defendant to control its own price, that is, to price with little regard to how competitors might react. The supply chain crisis has uncovered several bottleneck companies that, at least in certain geographic areas, can name their price. As we described above, those high prices themselves would not violate the antitrust laws; however, any additional actions by that company to exclude new competition and maintain that pricing power could be a violation. Look for actions against such companies in the future.

More Merger Challenges Coming

As we have detailed here and here, the FTC is modifying their merger review processes and making it clear that they plan to challenge more mergers, irrespective of any supply chain issues.  And because the number of filings under the Hart-Scott-Rodino Act is way up, the FTC and DOJ Antitrust Division will have that many more chances to challenge mergers. So expecting more merger challenges is an easy prediction.

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Yang YangAuthor: Yang Yang. Ms. Yang is an Antitrust Partner at Fairsky Law Offices in Shangai. She is also a lecturer and researcher at China University of Political Science and Law. She authored a treatise on China Merger Control and is a member of the expert advisory team for Amendments to China Anti-Monopoly Law (with a total number of 8 members). Indeed, she leads the drafting of an expert report on suggested amendments to China Merger Control regime, Chapter 4 of Chinese Anti-Monopoly Law. She is also a frequent contributor to the Antitrust Report of LexisNexis and Competition Policy International (Asia Column and Asia Chronicle).

Merger Control in China

According to Article 20 of the Anti-Monopoly Law of the People’s Republic of China (“Chinese AML”)1, a transaction is subject to a mandatory notification obligation at the State Administration of Market Regulation (SAMR) before being consummated or implemented if the transaction constitutes a “concentration” of undertakings or business operators, which meets or exceeds the relevant thresholds set forth in the Provisions of the State Council on the Notification Thresholds of the Concentrations of Undertakings.2

According to the Turnover Threshold Regulation, the concentrations not meeting the turnover threshold are still subject to the investigation of SAMR regardless of whether they are closed if the SAMR has evidence indicating potential anticompetitive effects of such concentrations.

In Summary, according to all Chinese AML, Turnover Threshold Regulation and the departmental rule, the circumstances when a concentration would fall within the Chinese merger regime would be as follows:

  • Mandatory Notification: Concentration and Turnover Thresholds. For failure to comply with this notification, SAMR has the power to reverse the consummated transaction and can impose a monetary penalty up to RMB 500,000 Yuan (approximately USD 70,000).
  • Voluntary Notification by Parties.
  • Where the turnover thresholds are not triggered, but evidence shows that there may be potential anti-competitive effects, SAMR has the power to initiate a review of the concentration.

Concentration

Under the Chinese AML and the current rules, any of the following transactions may constitute a “concentration” of undertakings:

  • a merger of business operators by absorption;3
  • a merger of business operators by new establishment;4
  • a business operator acquiring control of another business operator through an equity acquisition;5
  • a business operator acquiring control of another business operator through an asset acquisition;6
  • a business operator acquiring control of another business operator through contracts or other means;7 or
  • a jointly-controlled company by two or more business operators also referred to as a joint venture.8

Turnover Thresholds

Turnover thresholds may be triggered when:

  • in the preceding fiscal year, (i) the combined worldwide turnover of the parties participating in the concentration exceeds RMB10 billion (approximately US$1.6 billion) and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million); or;
  • in the preceding fiscal year, (i) the combined turnover within China of the parties participating in the concentration exceeds RMB2 billion (approximately US$315 million), and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million).

Revenues will be calculated on a group basis for each party participating in the concentration. And, “turnover within China” shall include the business operator’s import of products or services into mainland China from countries or regions outside of China, and shall exclude the export of its products and/or services from mainland China to countries or regions outside of China.

According to Guiding Opinions of Notifications of Concentrations, the turnover includes all the revenue from sales of products and provision of services in the preceding year, exclusive of relevant taxes and surcharges.9

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Authors: Steven Cernak and Luis Blanquez

FTC Chairwoman Lina Khan keeps up her frenetic crusade to change the practice of antitrust enforcement. The new––and surely not last––change: the vertical merger guidelines.

On Wednesday, September 15, 2021, the FTC held an open virtual meeting to discuss the following:

Here, we will only discuss the first two items. For more background on these and other recent changes at the FTC, see our previous articles:

The FTC Continues the HSR Antitrust Process’s “Death of a Thousand Cuts”

FTC Guts Major Benefit of Antitrust HSR Process for Merging Parties

FTC Withdraws Vertical Merger Guidelines and Commentary

As expected, the FTC on a 3-2 vote decided to withdraw its approval of the Vertical Merger Guidelines, issued jointly just last year with the Department of Justice Antitrust Division (DOJ), and the FTC’s Vertical Merger Commentary.

According to the FTC’s press release, the guidance documents include unsound economic theories that are unsupported by the law or market realities. The FTC is withdrawing its approval to prevent industry or judicial reliance on this allegedly flawed approach. The FTC reaffirmed its commitment to working closely with the DOJ to review and update the agencies’ merger guidance.

The statements by the various Commissioners show the deep divisions within the FTC since Khan joined the Commission, not just about these Guidelines but more generally about how to enforce the antitrust laws and how to run the FTC.  The statement by the FTC majority asserts that the 2020 Vertical Merger Guidelines had improperly contravened the Clayton Act’s language with its approach to efficiencies. The statement explains the majority’s concerns with the Guidelines’ treatment of the purported pro-competitive benefits of vertical mergers, especially its treatment of the elimination of double marginalization.

The dissenting Statement of Commissioners Phillips and Wilson starts with a bang: “Today the FTC leadership continues the disturbing trend of pulling the rug out under from honest businesses and the lawyers who advise them, with no explanation and no sound basis of which we are aware.” The statement goes on to not only lament the confusion the withdrawal will generate but contrast the process used when the Guidelines were issued — months of public input and debate — with the process used for their withdrawal — no public input and, seemingly, no discussion even at the FTC outside the offices of three Commissioners.

The FTC pledged to work with DOJ to update vertical merger guidance to better reflect how the agencies will review such transactions in the future. Just an hour later, DOJ issued a statement explaining that they are reviewing both the Horizontal Merger Guidelines and the Vertical Merger Guidelines and, as to the latter, have already identified several aspects of the guidelines, such as the treatment of and burdens for the elimination of double marginalization, that deserve close scrutiny.  (We raised those issues when the Guidelines went through public debate last year.)  DOJ expects to work closely with the FTC to update the Guidelines so, perhaps, we will have new Guidance at some point in the future.

FTC Staff Presents Report on Nearly a Decade of Unreported Acquisitions by the Biggest Technology Companies

During the same meeting, FTC presented findings from its inquiry into the hundreds of past acquisitions by the largest technology companies that did not require reporting to antitrust authorities at the FTC and DOJ, generally because they were below HSR thresholds. Launched in February 2020, the inquiry analyzed the terms, scope, structure, and purpose of these transactions by Alphabet Inc., Amazon.com, Inc., Apple Inc., Facebook, Inc., and Microsoft Corp. between Jan. 1, 2010 and Dec. 31, 2019.

“While the Commission’s enforcement actions have already focused on how digital platforms can buy their way out of competing, this study highlights the systemic nature of their acquisition strategies,” said Chair Khan. “It captures the extent to which these firms have devoted tremendous resources to acquiring start-ups, patent portfolios, and entire teams of technologists—and how they were able to do so largely outside of our purview.”

The Commission voted 5-0 to make the report public. Chair Khan and Commissioners Chopra and Slaughter each issued separate statements. While the report did not recommend any changes to the merger review process, we expect that the FTC may utilize the report’s findings to recommend changes in the HSR process.

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Authors:  Steven J. Cernak and Luis Blanquez

In late 2020, the Federal Trade Commission (FTC) and the attorneys-general (AGs) from 48 states filed nearly identical antitrust lawsuits against Facebook for stifling competition by acquiring potential competitors, mainly Instagram in 2012 and WhatsApp in 2014, and for enforcing policies that blocked rival apps from interconnecting their product with Facebook. The alleged effect of this conduct was to (i) blunt the growth of potential competitors that might have used that interoperability to attract new users, and (ii) deter other developers from building new apps or features or functionalities that might compete with Facebook.

This week, the judge hearing the cases agreed to dismiss the claims from the FTC––without prejudice––stating that the lawsuit failed to plead enough facts to plausibly establish that Facebook has monopoly power in the personal social networking services market. Likewise, the Court also dismissed ––with prejudice––a similar case pursued by a group of 48 states on the basis that any alleged violations took place too long ago.

While by no means the final decision on these matters, the motion to dismiss opinion will significantly narrow the FTC case for now. It also highlights some of the difficulties that enforcers will face using the current antitrust laws against Big Tech companies.

Online platforms have been––and continue to be––scrutinized by antitrust enforcers around the world. In the U.S. the Antitrust Subcommittee of the House Judiciary Committee issued last year its long-anticipated Majority Report of its Investigation of Competition in Digital Markets. The Report detailed its findings from its investigation of Google, Apple, Facebook, and Amazon along with recommendations for actions for Congress to consider regarding those firms. In addition, the Report included recommendations for some general legislative changes to the antitrust laws. Since then, online platforms have been involved in high-profile antitrust litigation in the U.S. So even though Facebook has won the first round of this litigation, the war is far from over.

Chinese Translation: Thank you to our friends at the Beijing Fairsky Law Firm for preparing a translation in Chinese of this article.

Update: Please see an important update about the FTC’s amended complaint at the end of the article.

The FTC and State AGs Parallel Antitrust Complaints against Facebook

Both suits focused on the same Facebook categories of conduct. First were the acquisitions of Instagram and WhatsApp, both of which occurred more than five years ago. These deals allegedly increased Facebook’s power over social media networks, facilitating data integration and its sharing among some of the largest social media platforms. Next was Facebook’s requirement that any applications connecting to Facebook may not compete with Facebook or promote any of Facebook’s competitors. The complaint alleged that Facebook enforced these policies by cutting off access to the Application Programming Interface (“API”), the software that allows applications to talk to one another to allow communication with rival personal social networking services, mobile messaging apps, and any other apps with social functionalities.

Both the FTC and AG suits claimed that Facebook’s actions amounted to illegal monopolization in violation of Sherman Act Section 2. The states’ suit also claimed that the two acquisitions violated Clayton Act Section 7, the statutory prohibition of anticompetitive mergers.

In March Facebook Fired Back in its Motion to Dismiss

In March 2021, Facebook moved to dismiss the suits on several grounds.

First, the company claimed that the complaints did not properly allege a relevant market or that Facebook had monopoly power in any market.

Second, Facebook asserted that the FTC could not claim that the two acquisitions were illegal monopolization because the agency had cleared both transactions earlier under the Hart-Scott-Rodino premerger notification system. Even if the agency could make such a claim, the company claimed that the FTC failed to properly allege that such acquisitions were anticompetitive.  (We discussed the concept of post-HSR review both prior to and immediately after the FTC complaint was filed.)

Finally, Facebook claimed that the complaint did not properly allege that the company’s decision not to deal with all potential app developers who were potential competitors was subject  to an exception to antitrust law’s usual rule that even monopolists can choose their own partners. Basically, under U.S. antitrust laws if you are a monopolist, you can still refuse to deal with your competitors, unless: (i) you have already been doing business with them, and (ii) by stopping you are giving up short-term profits for the long-term end of knocking them out of the market.

The District Court’s Opinions Dismissing Both Cases

The judge hearing both cases granted Facebook’s motions to dismiss. The Court dismissed the FTC complaint without prejudice. This means that the FTC is allowed to amend its complaint and refile the case, and now has 30 days to do so. The AGs were not that lucky, and the judge dismissed their complaint with prejudice. The Court applied the doctrine of laches to conclude that AGs waited too long to challenge Facebook’s purchases of Instagram in 2012 and WhatsApp in 2014.

The Opinion against the FTC

In the decision re the FTC, the Court found that the complaint fails plausibly to allege how Facebook has a monopoly over personal social networking (“PSN”) services.

As with all monopolization plaintiffs, the FTC must plausibly allege that Facebook has monopoly power in some properly defined market. As do most plaintiffs, the FTC chose to allege this power indirectly by alleging that Facebook has a high share of the market, here for PSN services.  Despite some misgivings, the court found that the complaint’s allegations make out a plausible market for PSN services.

But that hardly ends the analysis. The FTC must also explain why Facebook enjoys a high share of that market and, therefore, monopoly power.  Here, the court found that the FTC’s allegations were inadequate for two reasons.

First because that “PSN services are free to use, and the exact metes and bounds of what even constitutes a PSN service — i.e., which features of a company’s mobile app or website are included in that definition and which are excluded — are hardly crystal clear.” In other words, the FTC must further explain whether and why other, non-PSN services available to the public either are or are not reasonably interchangeable substitutes with PSN services.

Second, even if the FTC better defines the market(s) of social networking, it must better explain how it developed the allegation that Facebook enjoys a market share of at least 60%: “[T]he FTC’s inability to offer any indication of the metric(s) or method(s) it used to calculate Facebook’s market share renders its vague ‘60%-plus’ assertion too speculative and conclusory to go forward.” Thus, the FTC has also fallen short to plausibly establish the existence of monopoly power by Facebook in the relevant market.

That finding alone was enough to support the court’s granting the motion to dismiss; however, it helpfully went on to discuss Facebook’s other grounds for dismissal.

The court explained that even if the FTC had sufficiently pleaded market power, its challenge to Facebook’s policy of refusing interoperability permissions with competing apps also failed to state a claim for injunctive relief. The Court held in both decisions that there is nothing unlawful about having such a policy in general. While implementation of such a policy can be illegal monopolization in certain limited circumstances, the FTC did not allege such facts.  Finally, all such denials of access occurred in 2013, seven years ago. Thus, the FTC lacks statutory authority to seek an injunction from a court for such past conduct.

On the other hand, the court did find that the FTC might be able to seek injunctive relief relating to Facebook’s past acquisitions of Instagram and WhatsApp. While those acquisitions took place years ago, the court found that Facebook’s continued ownership of the companies could be considered a continuing violation of Section 2. While the doctrine of laches does not apply to the US government, including the FTC, the court did note but did not decide several issues, including remedial ones, with such a long-delayed allegation.

The Opinion Against State Enforcers (AGs)

The judge also dismissed the parallel case brought by the AGs. The court explained that unlike the federal government, the states are bound by the doctrine of laches, in which those who “sleep on their rights” and wait too long to file a case cannot seek court relief. As a result, the allegations regarding the Instagram and WhatsApp acquisitions were insufficient to state a claim under either Sherman Act Section 2 or Clayton Act Section 7.

Using an analysis identical to the one used with the FTC complaint, the judge further rejected the AG’s claims that Facebook’s refusal to allow interoperability with competing apps constituted illegal monopolization. Because all of the claims of the AG’s were rejected in ways that cannot be rectified by the AG’s, the judge dismissed the complaint without any chance for the AG’s to modify the complaint and refile.

Final Remarks

At the time of this writing, the FTC is considering possible next steps. It could beef up its allegations regarding the market definition and Facebook’s share of that market and file an amended complaint regarding Facebook’s prior acquisitions. It could also appeal the dismissal of its current complaint.

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Author: Pat Pascarella

The press is awash in reports on proposed amendments to the antitrust laws and heightened, and in some instances targeted, enforcement agendas at the DOJ, FTC, and state AGs’ offices. While the specifics of each may be fascinating to antitrust attorneys and law professors, the sole question on most general counsels’ minds is whether there is “anything I need to do right now to better protect my client?”  The answer is an unequivocal “not really, but…”

To start, proposed legislation, presidential orders, and enforcement agency  guidelines and statements of interest are not the law. That does not mean however that one should entirely ignore this current antitrust craze. Plaintiff attorneys and certain government enforcers certainly won’t. And I expect an uptick in lawsuits and investigations based on, to be polite, creative interpretations of the antitrust laws.

What it does counsel is that, at present, the most important focus should be on ensuring that internal antitrust guidelines and procedures target not only actual violations, but also conduct that could create the appearance of a potential violation. Price increases, production slow-downs, announcements about future business plans, communications or information exchanges with competitors, and dealer or supplier terminations, are the usual suspects. But care should be taken in any instance in which an action or strategy might appear to be inconsistent with unilateral self-interested behavior in the absence of a conspiracy—or where it will have a significant impact on competitors, suppliers, or downstream market participants (a/k/a plaintiffs).

This of course is not to say that businesses should forego legal strategies or actions for fear of a frivolous antitrust investigation or complaint. But it does mean that in the case of certain activities, there likely will be steps that enable the company to avoid, or at least extract itself more quickly from, lawsuits and investigations based on overly aggressive interpretations of the antitrust laws. Sometimes the solution will be as simple as documenting the business rational for a particular activity, while at other times it could involve active and ongoing oversight by antitrust counsel.

That of course raises its own set of problems for in-house attorneys—i.e., convincing their clients to come to them before taking certain actions. Having been an in-house antitrust attorney myself for many years, I can offer a few suggestions. First, get loud and clear officer-level signoff on any new guidelines or procedures. While you may be the clients’ lawyer, those clients are far more inclined to pay attention to a directive from someone who controls their advancement and salary. Second, market yourselves. Communicate to your clients that you understand their needs both in terms of your substantive guidance as well as in the timing of that guidance.  Your clients have targets and goals they are trying to achieve. They need to believe that engaging with Legal will not delay the achievement of those goals and will only result in a “no go” opinion after every viable option has been exhausted.

Plus, as I often told my clients, some day you are going to be called up to the general counsel’s office and asked, “who approved this?” How the rest of your day goes will be significantly determined by whether your answer is “me” or “our antitrust counsel.”

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Authors: Steve Cernak and Luis Blanquez

New management at the FTC keeps reviewing all aspects of the Hart-Scott-Rodino (HSR) premerger notification process.  On August 26, the current head of the Bureau of Competition posted a change to a long-standing FTC informal interpretation about how potential HSR filers should view debt repayments when determining if the transaction is large enough to warrant a filing.  That particular change could affect many transactions; however, perhaps more importantly, the announcement also described potential larger changes in how the FTC develops and promulgates interpretations of the complicated HSR process.  Any such changes could be more examples of the “death of a thousand cuts” for the current HSR process that at least one commissioner has decried and that we discussed recently.

As we have explained, the Hart-Scott-Rodino Act requires companies to file notice of mergers and similar transactions over a certain size before they can close the deal. The first step in complying with HSR’s notification requirements is to determine whether the transaction satisfies the size of transaction test.  Because that determination can be difficult, given HSR’s complicated rules that cannot anticipate every potential deal structure, merging parties have often sought informal interpretations from FTC Premerger Notification Office (PNO) staff.

For at least 15 years, PNO staff has interpreted HSR rules to exclude from the size of the transaction calculation of the payoff of a target’s debt by the acquiring person in transactions involving the acquisitions of voting securities and noncorporate interests (though not of assets). The rationale was that the purchaser of a majority of an issuer’s stock automatically acquires the issuer’s preexisting liabilities and so that fact presumably is reflected in the stock’s acquisition price.

Effective September 27, the FTC will withdraw that informal interpretation. According to the FTC blog post, it appears that some merging parties have structured their deals to take advantage of this interpretation and avoid an HSR filing. Target companies may take on debt shortly before the merger and then have the acquiring person retire it as part of the transaction, thus reducing the size of the transaction, perhaps to a level whereby the parties can avoid a filing.

At the margin, this change likely will result in more HSR filings. It will affect those transactions where the size of the transaction matters, such as transactions of private equity firms focused on the “middle market” near the current HSR threshold of $92M.

If the main reason for the change is that the FTC is seeing transactions structured as described in the blog post, it is not clear why application of 801.90 is insufficient. That regulation allows the FTC to disregard any device used for the purpose of avoiding the HSR filing obligation.  Indeed, the PNO staff pointed to 801.90 last September as it modified a bright-line rule regarding extraordinary dividends into a more “holistic review” to determine reportability. A similar change could have been made here, suggesting that the more important reason for the change simply is an FTC change in policy about the interpretation.

Such changes in informal interpretations happen often, but a few aspects of last week’s post hint at potential larger future changes.

Last week’s post states that the FTC is in the process of reviewing “the voluminous log of informal interpretations [by PNO staff] to determine the best path forward.”  Implicit in that statement and the rest of the post is that one “path forward” would be to eliminate the informal interpretations and rely only on the formal rules and interpretations approved by commissioners and created with assistance from the Department of Justice.  Any such move would be unfortunate.

While the informal rules do not have the force of law (as the post correctly notes), they do represent the best current thinking of the PNO staff, who reviews the thousands of filings and related questions each year. The formal rules regulating the HSR process are already very complicated and it seems foolhardy at best to think any set of humans, especially if they do not regularly deal with HSR intricacies, will be able to anticipate all potential HSR questions in devising new rules.

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Author:  Steven J. Cernak

In addition to being a full-time antitrust attorney at Bona Law PC, I have taught at least one antitrust course every year since 2009 at three different Michigan law schools. As I prepare for another semester, I had reason to return to an article I wrote six years ago. There, I captured my thoughts on the practical benefits to all future lawyers, not just members of the antitrust community, from taking a well-taught antitrust course. In that article — Antitrust Courses Can Teach Valuable Practical Skills – If Taught Well — I made the case for using hypothetical materials to teach both the law and practical counseling and advocacy skills that any new lawyer can use.

In the intervening six years, I have continued that practice in many seminar and survey courses, always using my Antitrust Simulations book and its hypothetical materials based on some of my past antitrust matters. I still think my original conclusions in the article are valid; however, other aspects of teaching antitrust law have changed, as I explain below.

Six years ago, one of my premises was that law schools, under pressure from employers and accreditation bodies to graduate students more “practice-ready,” would be incorporating experiential learning in many more of their classes. Based on comments from my admittedly small sample of students, that trend seems to have slowed. At least at schools where the majority of the faculty are not current or former practitioners, students have commented that my class is the most practical one they have taken. It appears that experiential learning is still being outsourced exclusively to legal practice classes and clinics. If so, that is too bad, for the reasons explained in my original article — after all, most graduates even from top schools will spend their careers counseling clients and meeting with regulators, not writing law review articles and clerking for justices.

One unfortunate trend among some students is what I call “the Google-ization of legal thinking.”  I refer to the idea that all legal matters can be easily solved by simple application of rules or black letter law or that a perfectly formed query will spit back “the” answer. Such an attitude is especially troublesome in antitrust where more than a century of shifting caselaw based on short statutes turns most questions outside of naked price fixing into grey areas requiring extended consideration.

I try to counter this tendency in two ways. First, I quote Prof. Daniel Crane and his reaction to students who complain he did not teach enough antitrust black letter law: “This is the marker of the student who has not ‘gotten it.’ There is relatively little black letter law in antitrust law.  (Some would say there is relatively little law in antitrust law.)”

Second, discussion of the hypothetical material allows the students to see that changing the facts slightly can lead to a different conclusion. For instance, all my classes end up discussing a hypothetical set of facts and whether it adds up to an “agreement” under the antitrust laws. After the students have reviewed the facts, I “poll the jury” and ask a few students which fact was the one that convinced them. I then ask if their opinion would change if that fact were absent or changed. The students then begin to understand that answers to some questions require gathering and evaluating various bits of evidence, not searching for the one right answer.

Another unfortunate trend among still a minority of students is the “Twitter-ization of legal thinking.” Here, some students will start from a strongly held premise that can be described in under 280 characters (“all government intervention is bad”; “I don’t like that unfair result so antitrust law should change it”) and then reason backwards so that all matters are consistent with that premise. This development seems to be correlated with, and perhaps caused by, the increased amount of questionable “anti-trust” coverage in the general media in the last six years.  Here, discussion of the hypothetical material and a polling of the class (in-person or virtually) can at least show that other students have different opinions and good reasons for them.

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Author: Luis Blanquez

Following DOJ’s remarks on blockchain, it was only a matter of time until antitrust law and the unstoppable blockchain world would meet in court. And it finally happened some months ago in the complex Bitmain case.

In this case a cryptocurrency developer and mining company sued Bitcoin Cash miners, developers, and exchange operators for violating of Section 1 of the Sherman Act and Section 4 of the Clayton Act. It accused them of manipulating a network upgrade to take control of the Bitcoin Cash blockchain. The Court dismissed the Amended Complaint twice (the last one with prejudice), for failing to plausibly show a conspiracy to hijack the network and centralize the market, an unreasonable restriction of trade, and antitrust injury.

  1. Blockchain and cryptocurrencies

Blockchain is such a complicated technology that just the simple task of defining it would require a much longer article. But the Southern District Court of Florida did a great job explaining in very simple terms what these two concepts––blockchain and cryptocurrencies–– are:

Cryptocurrency is a form of digital currency that trades in currency markets. The Satoshi Nakamoto whitepaper, published in October 2008, launched the idea of this “peer-to-peer” version of electronic cash that allows online payments from one party to another, independent of any financial institution. The Whitepaper coined the term “Bitcoin”, and today Bitcoin and Bitcoin Cash are different forms of cryptocurrency.

Cryptocurrencies are a “permissionless” system that rely on a network of decentralized encrypted public ledgers that document all digital transactions, known as a “blockchain”. The blockchain is a series of blocks, which are units of accounting that record new transactions in cryptocurrency. Confidence and trust in the accuracy of the transactions in the blockchain is possible because the decentralized ledgers are identical and continuously updated and compared.

The system has mechanisms that allow for consensus on the validity of the blockchain. One is “Proof-of-Work”, which is designed to eliminate the insertion of fraudulent transactions in the blockchain. Also, the “main chain” (normally, the longest chain) at any given time, is whichever valid chain of blocks has the most cumulative “Proofs-of-Work” associated with it. A consensus being reached on the longest blockchain is essential to the integrity of the network.

New cryptocurrency is created through a process called “mining”. Miners compete to “mine” virtual currencies by using computing power that solves complex math puzzles. The computer servers that first solve the puzzles are rewarded with new cryptocurrency, and the solutions to those puzzles are used to encrypt and secure the currency. The awarded currency is then stored in a digital wallet associated with the computing device that solved the puzzle.

  1. The Bitmain case

In a nutshell, this case is about how certain mining pools, protocol developers and crypto-exchange defendants allegedly colluded to manipulate a network upgrade by creating a new hard fork, taking control of the Bitcoin Cash cryptocurrency. In the end, however, the court concluded that the plaintiff ––a protocol developer of blockchain transactions and mining cryptocurrencies––, failed to (i) show a plausible conspiracy, (ii) define any relevant product market to prove an unreasonable restriction of trade, and (iii) show any antitrust injury.

The Parties

As Konstantinos Stylianou effectively explains in his article What can the first blockchain antitrust case teach us about the crypto economy?, in the cryptocurrency world it is important to understand what the different players are and how they are connected in the market: investors, mining pools (groups of miners that combine their mining resources), crypto-exchanges, and protocol developers. We highly recommend his article.

The plaintiff, United American Corporation (UAC), is a developer of technologies for both the execution of blockchain transactions and mining cryptocurrencies. One of them is called BlockNum, a distributed and decentralized ledger technology that allows the execution of blockchain transactions between any two telephone numbers regardless of their location, eliminating the need for cryptocurrency wallets. The other one is called BlockchainDome, which provides a low-cost energy-efficient solution for mining cryptocurrency. UAC built four domes in total that operate over 5,000 Bitcoin Cash-based miners, investing more than $4 million in technology.

On the flip side, there are three different categories of defendants:

  • The mining pools: (i) Bitmain Technologies operate two of the largest Bitcoin Core and Bitcoin Cash mining pools in the world: Antpool and BTC.com. It is also the largest designer of Application Specific Integrated Circuits (“ASIC”), which are chips that power the Antminer series of mining servers––the dominant servers mining on a number of cryptocurrency networks, including Bitcoin and Bitcoin derivatives; (ii) Wu, CEO of Bitmain Technologies and one of its founders; and (iii) Ver, founder of Bitcoin.com, which provides Bitcoin and Bitcoin Cash services.
  • The crypto exchanges––Kraken and its CEO Jesse Powell––which operate exchanges on which Bitcoin, Bitcoin Cash and other cryptocurrencies are traded.
  • The protocol developers Shammah Chancellor, Amaury Sechet and Jason Cox who––similarly to UAC––, work on the development of the software to execute blockchain transactions and mining of cryptocurrencies.

The Alleged Antitrust Conspiracy

Summarized from the briefing:

Bitcoin Cash (or “BCH”) emerged as a cryptocurrency from the original Bitcoin Core (or “BTC”) on August 1, 2017, as a result of a “hard fork”. A hard fork is a change to the protocol of a blockchain network whereby nodes that mine the newest version of the blockchain follow a new set of rules, while nodes that mine the older version continue to follow the previous rules. Because the two rule-sets are incompatible, two different blockchains are formed, with the new version branching off.

The 2017 hard fork resulted from a dispute over Bitcoin’s utility: whether it should primarily be used to store value or conduct transactions.

(Note: BTC’s resistance to this significant attempt to fork it further strengthened it by demonstrating that it can overcome an attack of this type. If BTC were subject to significant forks that change its nature, it would not have the trust it has now as a store of value. This and other attacks on BTC actually strengthen it—Bitcoin is Antifragile in this way).

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Author: Jon Cieslak

I recently wrote about the DOJ Antitrust Division’s Leniency Program, and the benefits it can provide to a company engaged in criminal antitrust conduct. Those benefits can extend beyond a company’s immunity agreement with the DOJ to the civil litigation that frequently follows a DOJ investigation. The civil law benefits of a successful leniency application are provided by the Antitrust Criminal Penalty Enhancement and Reform Act, Pub. L. No. 108-237, § 213(a)-(b), 118 Stat. 665, 66-67 (2004), commonly referred to by its acronym, ACPERA.

Originally passed in 2004, and made permanent by Congress in 2020, ACPERA provides additional incentives for companies engaged in criminal antitrust conduct to participate in the Leniency Program. ACPERA does so by altering the damages that can be recovered from a successful leniency applicant in two ways:

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