technology

How the courts could thwart a Silicon Valley crackdown

FTC's new inquiry on tech mergers raised the hopes of antitrust advocates — while a federal judge in New York quashed them.

Federal Trade Commission building

Washington regulators tightened their focus on the tech industry’s biggest players Tuesday — but a judge showed how big a fight the feds may have on their hands.

The two actions came just hours apart: The Federal Trade Commission said it was launching an open-ended study into a decade’s worth of mergers and acquisitions by Amazon, Apple, Facebook, Google and Microsoft, an inquiry that could be a prelude to trying to undo some of those past deals. But separately, a federal judge in Manhattan refused to block the $26.2 billion merger of Sprint and T-Mobile, in yet another sign that the courts have set a high bar to proving that corporate marriages lessen competition and harm consumers.

U.S. District Judge Victor Marrero’s ruling showed the headwinds that federal and state enforcers will face if they mount a serious effort to block future Silicon Valley acquisitions — let alone bust up years-old deals, as politicians like Elizabeth Warren have advocated.

“After something like this, good luck going after the tech companies,” said Gigi Sohn, a fellow at the Georgetown Law Institute for Technology Law & Policy, who served in the Federal Communications Commission during the Obama administration. “Particularly if you want to break up the companies in some way, I don’t know how you do it.”

The news of the FTC’s inquiry pleased antitrust advocates, who said Silicon Valley’s giants have gotten away with buying their most promising rivals — sometimes to scarf up their talent and technology, sometimes to shut them down. But the verdict in the Sprint and T-Mobile case left some of them deflated.

“We already knew it was getting harder and harder to prove antitrust cases in court,” said Andrew Gavil, a Howard University law professor and former FTC official. U.S. courts have made it more difficult for plaintiffs to win antitrust suits over the past several decades, as judges have pushed for greater economic proof that mergers or conduct harm consumers.

FTC Chairman Joe Simons insisted Tuesday that his agency has ample remedies if, based on the information it demanded from the companies Tuesday, it determines that a deal consummated even a decade ago harmed competition. Those steps could include unwinding problematic deals or, if disentangling is too difficult, requiring a company to “clone” its business and then divest it.

“If during this study, we see there are transactions that were problematic, all of our options are on the table,” Simons said on a call with reporters. “We could go back and initiate enforcement actions to deal with those transactions.”

No such actions are imminent: For now, the agency is conducting a study to determine whether its rules on overseeing mergers should be revised, Simons said. Such changes could include lowering the threshold for how big a deal must be before a company has to report it to the agency.

The FTC review will require the five major tech companies to turn over information on every merger between 2010 and the end of 2019 that they hadn’t previously reported to U.S. antitrust authorities. Under federal law, companies must notify the FTC and the Justice Department of any mergers valued at more than $90 million. (That amount is adjusted for inflation each year, and will increase to $94 million at the end of February.)

Many of the companies’ most famous deals already surpassed that threshold and would have been reviewed by antitrust authorities. Those include Facebook’s $19 billion purchase of the secure messaging service WhatsApp and $1 billion deal for the photo-sharing platform Instagram, as well as Google’s $3.2 billion purchase of the smart-thermostat maker Nest Labs and Amazon’s $13.7 billion purchase of Whole Foods. (Warren has specifically pledged to appoint regulators who would undo all those deals.)

The FTC study covers both deals in which the companies bought a smaller competitor to gain access to valuable talent or patents, and those — perhaps more problematic — in which the giant promptly shut its rival down.

The commission’s inquiry comes in addition to a series of other investigations by the FTC, the Justice Department and almost every state attorney general into conduct by Google and Facebook. (The FTC's Facebook investigation includes a probe of the Instagram and WhatsApp purchases.) Those investigations could also result in antitrust enforcement if they turn up abuses.

The FTC has special authority to compel companies to turn over information for research purposes and has used that in the past to examine data brokers and problematic patent settlements in the pharmaceutical industry.

Apple and Google declined to comment on the FTC inquiry, and Facebook and Amazon didn't respond to requests for comment. A Microsoft spokesperson said only, “We look forward to working with the FTC to answer their questions.”

Bill Kovacic, a professor at George Washington University Law School, said the FTC study of tech acquisitions was “overdue.”

“There’s been so much discussion and commentary about the non-reportable transactions in the tech sector in the last decade,” said Kovacic, who served as FTC chairman during the George W. Bush administration. “It would be useful for a systematic review of what the transactions were … and a useful complement to the FTC’s other investigations.”

The FTC review may bring to light problematic deals that have flown under the radar.

“Many of the recent innovations that we associate with Amazon are in fact technologies that it acquired by buying up smaller firms,” said Stacy Mitchell, president of the Institute for Local Self-Reliance, a group opposed to corporate concentration. “While these deals have escaped FTC scrutiny because of their size, they have critical impacts on competition.”

But increased regulatory may not yield much concrete action if the courts stand in the way.

Last year, the Justice Department lost its high-profile challenge of internet and cable provide AT&T’s merger with the major entertainment conglomerate Time Warner, despite presenting what it called strong evidence that the deal would reduce consumers’ choices and raise prices for markets such as cable television. Earlier this month, the FTC lost a suit to block a merger in which international chemical giant Evonik bought U.S. rival Peroxychem, which the agency had said would reduce competition for hydrogen peroxide.

Over the past 40 years, courts have been more reluctant to side with antitrust plaintiffs, and judges have wanted more economic proof of harm before condemning business activities. The result has been fewer successful antitrust suits, both from private plaintiffs and the government.

For the merger of Sprint and T-Mobile, 13 states plus the District of Columbia argued that the combination of two major competitors would reduce the number of wireless network carriers from four to three — a consolidation they said was clearly illegal under the antitrust laws. And in his decision, Marrero agreed that the states offered convincing evidence that the telecom industry is highly concentrated, and that the merger would give a new T-Mobile high enough market share to be presumed anticompetitive.

But Marrero accepted the companies’ arguments that Sprint is already a weakened competitor that might have to stop operating at a national level if not for the merger.

He also credited a settlement the companies reached with the DOJ and FCC, in which T-Mobile and Sprint agreed to sell off assets to DISH Network that would allow the satellite television company to become a fourth wireless competitor. DISH would therefore replace the competition lost by the elimination of Sprint, the companies and the federal enforcers argued.

The states that challenged the deal could appeal Marrero’s decision, but they would have difficulty winning given the deference appeals courts generally offer to trial court judges, Sally Hubbard, director of enforcement strategy at Open Markets Institute.

“The most basic, easiest case is stopped by a judge,” said Hubbard, who worked in the New York attorney general’s office on antitrust issues for six years. “That’s like bread and butter antitrust at a time when asking for antitrust to evolve.”

Kovacic, a Republican, acknowledged that a shift in the courts has made antitrust enforcement more difficult, particularly if agencies are pursuing more novel theories.

T-Mobile-Sprint “plus AT&T-Time Warner,” said Kovacic. “This is a reminder that none of this is going to be easy.”