The complaint alleges that Amazon “fair pricing policy” requires third-party sellers who sell products through Amazon to agree to what is really a most-favored-nation (“MFN”) provision. According to the complaint, this fair pricing policy restrains third-party sellers, which wish to sell on Amazon’s platform, from selling their products on other websites, including their own websites, at prices lower, or on better terms, than offered through Amazon. This fair pricing policy replaced Amazon’s price parity provision, but the claim is that this new policy has the same effect as Amazon’s old policy.  It is considered a platform most-favored nation agreement and allows for Amazon to penalize third parties found in violation of these policies. Allegedly, the provisions have the effect of creating a price floor with Amazon’s prices being the lowest. Because these third-party sellers incorporate Amazon’s fees – which can be up to 40% of the product’s price – into their prices, they are forced to inflate their product prices on other platforms since they must account for the fees in their sale price. The claim of the Office of the Attorney General is that this policy suppresses competition and unnaturally inflates prices for consumers across all online retail platforms. The complaint asserts that these unreasonably high fees are built into prices market wide, due to the alleged price floor caused by the most-favored nation provisions.

According to the complaint, Amazon allegedly violates D.C. antitrust law in a variety of ways. First, Amazon is alleged to be engaged in unlawful horizontal agreements because Amazon horizontally competes with many third-party sellers (i) as online retailers, and (ii) in particular products. Second, Amazon is alleged to be engaged in unlawful vertical agreements because the most-favored-nation provisions eliminate competition in online retail. Third, Amazon, accounting for 50-70% of all online retail sales and benefiting from network effects, is alleged to monopolize and attempt to monopolize the online retail sales market.

D.C. Attorney General Karl Racine has stated that the lawsuit is an attempt to end Amazon’s illegal use of price agreements which destroy competition and harm the company’s two million third-party sellers. The complaint states that these pricing agreements “are facially anticompetitive and allow Amazon to illegally build and maintain monopoly power in the online retail market in violation of the District of Columbia’s Antitrust Act.”

In 2019, Amazon faced scrutiny from the U.S. Congress and regulatory agencies regarding a clause in their contracts with third party sellers that was known as a price parity provision. Though the company removed this provision, it was then replaced with the similar fair pricing policy that is under scrutiny today.

Amazon has responded to the lawsuit stating that “the D.C. Attorney General has it exactly backwards – sellers set their own prices for the products they offer in our store.” While the complaint seeks to enjoin Amazon from engaging in this allegedly anticompetitive behavior, Amazon has stated that such relief “would force Amazon to feature higher prices to customers, oddly going against core objectives of antitrust law.”

This case is noteworthy because there is not much litigation that has examined the anticompetitive effects of MFNs.  Without precedent indicating that price parity provisions or MFNs are anticompetitive, the DC AG, as the plaintiff, will have a difficult time showing how Amazon’s pricing policies result in anticompetitive effects.  Amazon will likely argue that the company’s pricing practices are pro-competitive or have no competitive effect.  MFN clauses are common in business. MFN clauses can be advantageous to a purchaser in that they eliminate the purchaser’s risk in negotiating a bad deal under unstable pricing conditions and are generally benign when the purchaser does not have market power.  But, Amazon’s MFN has been under scrutiny in the European Union so the DC AG is not on its own in scrutinizing the policy.  Indeed, when a monopolist or a firm with market power uses MFN clauses in its contracts, they can be illegal if they result in anticompetitive effects that harms the competitive process and results in increased prices overall.  For these reasons and more, MFN clauses alone are subject to the rule of reason—a lenient standard that requires a rigorous market analysis.  The difficulty in DC’s case is proving that Amazon has market power.  Market analysis or evidence needs to show that Amazon controls more than 50% of ecommerce.  Many third-party sellers are increasingly using other online platforms run by Etsy, Shopify, Facebook, Walmart Inc., eBay Inc., Target Corp., and others to reach new consumers in the wake of the pandemic.

Moreover, the lawsuit adds to increasing scrutiny over Amazon’s relationship with its third-party sellers, including a probe launched by the FTC in concert with the attorneys general around the country.  It is unclear why the District of Columbia’s lawsuit was filed before the other antitrust enforcers have completed their investigations other than politics.  In fact, D.C. Attorney General Racine is rumored to be in the running to be nominated to chair the Federal Trade Commission.  Even though this case currently involves only the D.C. AG, it still has important implications for the legal future of big tech companies and platforms. Facebook, Google, Apple, and Amazon have been under increased antitrust scrutiny in the United States for the past few years, indicating that federal and state antitrust enforcers will continue to scrutinize their conduct, actions and policies.

By Rachel Sims

According to the New York Times, the smaller rivals, which have largely been publicly quiet until the hearing, finally stepped up to the plate and sounded off on big tech at a hearing in Boulder, Colorado.  The Congressional subcommittee heard stories of technology giants wielding their massive footprints and platforms as weapons, allegedly copying smaller competitors’ features or tweaking their algorithms in ways that stifle competition.

The pleas for regulatory relief resonated with lawmakers, led by Rep. David N. Cicilline (Democrat – Rhode Island), the chairman of the House’s antitrust subcommittee. Cicilline noted that “it has become clear these firms have tremendous power as gatekeepers to shape and control commerce online.”

The executives sounded off on big tech and the bipartisan committee encouraged them to testify about their stories.  The founder and CEO of PopSockets, explained how his company clashed with Amazon over policies that made it hard to sell his products on his preferred terms and prices.

Executives at Sonos, a high-end audio company, and Basecamp, which makes web-based product management tools allege that Google undermines smaller rivals. Sonos has sued Google, alleging patent infringement.  David Heinemeier Hansson the co-founder of Basecamp explained that its competitors have been purchasing ads on Google against the company’s own name, meaning people who search for Basecamp see rivals unless they scroll down their results page.  In other words, Hansson says that Google requires companies “to pay protection money” — or risk obscurity.

Tile makes Bluetooth trackers that can be attached to your personal possessions to help you keep track of them.  A Tile executive explained how Apple rolled out the “Find My” device tool — built into its operating system — that resembled Tile’s app used to find devices making it more difficult for Tile to compete.  From Tile’s perspective, it created a helpful tool for consumers, which was then copied by Apple and then Apple made its app the default on its devices, purposely hurting Tile’s business by making it more difficult for iPhone users to change their default settings, thus creating hurdles for Tile’s app that does not apply to Apple’s app. Tile wants a level playing field.

Along the lines of Tile wanting Apple to simplify what it claims is a too-complicated process right now, Apple shared a statement as part of the congressional hearing suggesting that a fix to this is coming soon. Per the statement shared by a CNBC reporter, Apple noted that:  “When setting up a new device, users can choose to turn on Location Services to help find a lost or misplaced device with ‌Find My‌ ‌iPhone‌, an app that users have come to rely on since 2010. Customers have control over their location data, including the location of their device. If a user doesn’t want to enable these features, there’s a clear, easy to understand setting where they can choose exactly which location services they want enabled or disabled. “…We’re currently working with developers interested in enabling the ‘Always Allow’ functionality to enable that feature at the time of setup in a future software update.”

Democrats and Republicans at the hearing sympathized with the executives.  There was little push back against the testimony of the small rivals.  Indeed, small rivals are encouraged to approach the DOJ Antitrust Division, FTC, and Congress about how the tech giants have used their powerful positions in search, e-commerce, online ads and smartphones to squeeze them out.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

The notion that antitrust enforcement is motivated by politics has hung over the Trump administration since the Department of Justice’s failed attempt to block AT&T’s acquisition of CNN’s owner, Time Warner and some antitrust experts might point out that the Obama administration also influenced the DOJ’s decisions to sue or settle cases.

While politics has always played a role in setting the antitrust agenda, typically antitrust investigations and enforcement decisions are based on the facts.  Indeed, there is no credible evidence that the big tech firms have engaged in unlawful monopolization or that they have stifled innovation.  In fact, Iowa’s Attorney General Tom Miller, who is well known for his role of leading 20 states in the DOJ’s antitrust suit against Microsoft, said this past July that “[w]e are struggling with the law and the theory,” to bring a case against the big tech firms.

But, this didn’t stop the state AGs from entering the fray.  Republicans are concerned that the tech platforms have suppressed conservative viewpoints, Democrats are worried that these tech companies are simply too big and powerful.  But the announcements of the state AG investigations into Google and Facebook have two things in common: a lack of substance as they can point to no consumer harm and publicity to tout their efforts.

The latest announcement of the state AGs’ investigation of Google – from the steps of the Supreme Court no less – demonstrates just how political antitrust enforcement is becoming.  This type of high-profile activism may benefit state AGs’ political aspirations, but it could impose enormous costs on consumers.  Indeed, the mere threat of numerous investigations could have a chilling effect on innovation and competition for as long as these probes last.

Some state AGs appear to be conflating antitrust and other politically popular pet causes, raising the specter of using antitrust enforcement for political gain.  On the same day of his announcement of the Google investigation, Texas Attorney General Ken Paxton sent a fundraising request in an email to his supporters touting his efforts to take on “Silicon Valley titans.” And, according to a copy of the email shared with POLITICO, Paxton asserts “Texans are put at risk” by Google because of the company’s market dominance and privacy practices, and because its “executives clearly display anti-conservative and anti-Republican bias, subtly controlling what Americans see when they search for information about national political issues.”  But political concerns have no place in an antitrust investigation and using antitrust investigations to punish speech raises profound First Amendment concerns.

As the federal antitrust authorities and the state AGs begin their investigations, they must be mindful that companies like Google and Facebook have delivered a tremendous amount of innovation enabling the launch of new products and services that have resulted in many benefits to consumers such as free online search, email, messaging, and artificial intelligence services all while competing in a highly competitive advertising market with the likes of AT&T, Disney, CBS, and Comcast/NBCU.  These multichannel competitors have been locked in the stone age for years, are now finally innovating to compete against the new digital advertising entrants such as Google, Facebook, and Amazon.

In addition to competing with the large entertainment companies for users’ eyeballs and time, Google fiercely competes with Facebook, Amazon, and Apple in various ways, including the development and launch of new products and services such as digital assistant devices, internet of things platforms, and virtual reality products, providing consumers with an abundance of choices and convenience.  In short, the big tech platforms are not successful because they are big and powerful – they are big and powerful because they have been successful.  And that success stems from the nature of a free market economy that provides incentives of firms to innovate and grow.

Without question, this type of efficiency and competition should be preserved.  What’s more, utilizing antitrust enforcement as a political tool is a threat to the rule of law.  Antitrust enforcement should not be turned into a political enterprise to police unrelated, and unsubstantiated, “harms” based on subjective moral and social judgments.  Instead, it must continue to be primarily based on sound theories, objective economic criteria, and evidence of consumer harm.  For years, enforcement decisions were based on the consumer welfare standard – not on populist standards that change with the political winds.

Remember the antitrust laws are focused on consumers and whether any company is disadvantaged by Google’s business practices is not at issue – the central issue to a court will be, do consumers pay more.  And although there may be pockets of disgruntled rivals, there is little to no evidence that consumers have paid more because of the way that Google conducts its business.

Andre Barlow

202-589-1838

On the same day, Assistant Attorney General Makan Delrahim of the Antitrust Division of the U.S. Department of Justice (“DOJ”) said the DOJ is working with a group of more than a dozen state attorneys general as it investigates the market power of major technology companies.  Delrahim said at a tech conference that the government is studying acquisitions by major tech companies that were previously approved as part of a broad antitrust review announced in July of major tech firms with significant market power.  “Those are some of the questions that are being raised… whether those were nascent competitors that may or may not have been wise to approve,” he said.

On July 23, the DOJ said it was opening a broad investigation into whether major digital technology firms engaged in anticompetitive practices, including concerns raised about “search, social media, and some retail services online.”  The investigations appear to be focused on Alphabet Inc.’s Google, Amazon.com, Inc. and Facebook, Inc. (“Facebook”), as well as potentially Apple Inc.

More than a dozen states are expected to announce in the coming weeks that they are launching a formal probe.  “I think it’s safe to say more than a dozen or so state attorneys general (that) have expressed an interest in the subject matter,” Delrahim said.  In July, eight state AGs met with U.S. Attorney General William Barr to discuss the effect of big tech companies on competition, and various antitrust actions.

On August 19, the New York Attorney General’s office said it is continuing to “engage in bipartisan conversations about the unchecked power of large tech companies.”  North Carolina Attorney General Josh Stein is also “participating in bipartisan conversations about this issue,” his office said.  The DOJ is looking not only at price effects, but also at innovation and quality, and the next steps in its broad antitrust review would be seeking documents and other information.  Delrahim also said that after the July announcement, the companies under investigation “immediately reached out to work with us in a cooperative manner to provide information that we need as far as the investigation.  In June, the FTC told Facebook it had opened an antitrust investigation.  Last month, the FTC resolved a separate privacy probe into Facebook’s practices after the company agreed to pay a $5 billion penalty.

Thoughts

The states joining the DOJ’s and FTC’s investigations are not a surprise.  As many as 39 states have been raising antitrust concerns about the big tech firms with both the DOJ and FTC.  They have similar concerns regarding big tech as the federal antitrust agencies.  The issues relate to whether the markets for online advertising, search, social media, app sales and certain retail sectors are currently competitive.  The state AGs involvement in these investigations adds another layer of complexity for Google, Facebook, and Amazon.  This action by the state AGs should remind everyone that sound antitrust enforcement is not just a federal affair.  Indeed, many of the seminal antitrust cases including cases creating key principles of monopolization and merger law were brought by state attorneys generals.

State attorneys generals use the power under federal and their own state statutes to protect consumers against anticompetitive and fraudulent conduct in credit card, pharmaceutical, computer and many other markets crucial to consumers.

States have significant advantages over federal enforcers.  They are closer to the market and consumers and recognize the direct harm to consumers.  They have the ability to secure monetary damages.  States are often customers and victims of anticompetitive behavior.  State enforcers can bring combined antitrust and consumer protection cases.  And although each state has limited antitrust and consumer protection resources, states increasingly are using multi-state task forces to investigate and prosecute unlawful conduct.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Speedy Antitrust Approval

DOJ’s announcement of the settlement agreement is noteworthy because of the speed at which Disney was able to negotiate a remedy to a combination that raised a number of antitrust issues.  Though the parties received second requests on March 5, 2018, and Disney had only recently entered into a new agreement with 21CF on June 20, 2018, the DOJ and Disney were able to negotiate a divestiture worth approximately $20-23 billion within 6 months of review and 4 months after issuing information requests.  The dollar value of the Disney/21CF divestiture will likely double what the DOJ characterized as the largest divestiture in history in Bayer/Monsanto.

Disney was in a hurry to obtain antitrust approval because it is involved in bidding war with Comcast for the 21CF assets.  Indeed, Disney upped its offer on June 20^th because Comcast had started a bidding war for the 21CF assets on June 13^th.  Comcast has its own antitrust issues with its acquisition, but it was hoping to be on a level playing field with Disney in terms of the antitrust reviews at the DOJ. Indeed, Comcast said as much when it made its bid as it indicated that it had already provided documents and information to the DOJ in response to its civil investigative demand regarding the acquisition of 21CF assets.

Comcast was banking on the DOJ conducting a long drawn out second request investigation for Disney’s deal.  But, rather than conducting a lengthy review of the Disney/21CF deal, the DOJ entered into a quick settlement agreement.  This was surprising because the Disney/21CF deal raised a number of horizontal and vertical issues including increasing the size of its motion picture business, content library and cable programming, which would increase its bargaining leverage in negotiations with movie theatres and TV programmers on licensing fees, Multichannel programing distributors (MVPDs) and virtual MVPDs over affiliate fees for its channels, and video streaming services over licensing fees.  Moreover, Disney is taking control of Hulu and launching a number of subscription streaming businesses with the intent on foreclosing its content from rivals such as Netflix.  It could be that none of these issues amount to actual antitrust problems, but certainly they warrant some investigation.

Despite all of these other issues, the DOJ quickly focused on the overlap in cable sports programming.  The DOJ said in its Press Release that “to streamline agency clearance, Disney agreed to divest the 22 RSNs rather than continue with the Antitrust Division’s ongoing merger investigation.”  Anyone who has visited Disney World knows the value of fast passes.  Disney understands the value of time so it used a cooperative approach to get the greenlight for what appears to be the largest divestiture in history without an upfront buyer in record time.

Understanding that the DOJ’s major concern was the overlap in cable sports programming, Disney decided not to challenge that contention or negotiate a lesser divestiture, which would have lengthened the second request investigation many more months.  Disney likely could have argued that ESPN channels and local RSNs really do not compete head to head at all.  ESPN has market power as do the local RSNs to obtain increases in affiliate fees already.  Moreover, watching ESPN is no substitute for watching your home town team on the local RSN.  Disney, however, gave up on those arguments and agreed to a hefty structural remedy that took the issue off the table.

Makan Delrahim’s Editorial in the Washington Times Defending DOJ’s Fast Review

On July 12, 2018, Makan Delrahim wrote an editorial defending the speed in which Disney was able to negotiate a divestiture with the DOJ.  He noted that the divestiture agreement was a “victory for American consumers and should be heralded as an example of merger parties working effectively with Division investigators to resolve antitrust concerns.”  Delrahim noted that “each merger poses unique facts requiring unique market analysis.” He correctly stated that the pace of any review is largely in the hands of the merging parties, who control the timing of their Hart-Scott-Rodino (“HSR”) filings, as well as the pace and timing of compliance with the Division’s information requests.” He added that “parties can accelerate the review by pointing the Division to relevant information early in the investigation, promptly scheduling interviews, and remaining open to timely divestitures that resolve antitrust concerns.”

Competition Concern

The DOJ alleged that without the divestiture the acquisition would likely result in higher prices for cable sports programming licensed to MVPDs in each of the local markets that the RSNs serve.  As the DOJ explained, Disney (ESPN properties) and 21CF’s (RSNs) cable sports programming competed head to head.  The DOJ alleged that the ESPN properties and the 21CF’s RSNs compete to sell cable sports programming to MVPDs in various local markets across the United States.  Because of this competition, the complaint alleges that the proposed acquisition would likely result in MVPDs paying higher prices for cable sports programming in those local markets.

No Allegation of “Must Have” Programming

Interestingly, the DOJ did not allege that Disney or 21CF had “must have” programming.  Arguably, ESPN channels and RSNs would be considered “must have” programming for MVPDs and VMVPDs.  It could be that given Judge Leon’s Opinion in AT&T/Time Warner that the DOJ has given up on being able to prove that certain programming is “must have”.

No Upfront Buyer

Another interesting point is that the DOJ did not require an upfront buyer.  There could be good reasons for why no upfront buyer was necessary. Upfront buyers are usually required when the DOJ is not sure that any appropriate buyers exist or if all of the assets need to be divested to one buyer.  Here, there are numerous buyers and the DOJ decided that the RSNs can be sold to multiple buyers not to a single buyer.  In that scenario, Comcast could be a buyer for some RSNs located in geographic areas where it is not the incumbent cable provider; AT&T and Charter have very little in the RSN space and may want to buy other properties to gain a larger footprint; Discovery has international sports rights so they may be interested in some RSNs; Liberty Media has owned RSNs in the past; Youtube, Facebook, and Amazon may want to dip their toes into the RSN space; and Sinclair, which has a strong local presence in many markets and currently owns the Tennis Channel could be interested in some of the RSNs.

Lessons Learned

The DOJ’s quick settlement demonstrates that the DOJ is willing to streamline investigations if merging parties propose substantial structural fixes upfront.  The settlement and Mr. Delrahim’s editorial reminds merging parties that they control the timing and length of merger investigations.  Merging parties control how fast they file their HSR submissions and when they comply with the DOJ’s second requests.  Some merging parties take their time to comply, hold back submission of documents and information and delay offering any real significant divestitures until exhausting all of their economic arguments.  While the government gets a lot of blame for long antitrust reviews, merging parties are always in control of the timing.  This settlement agreement also demonstrates that the DOJ is willing to work with merging parties that are willing to cooperate in negotiating  a complete solution to a competition concern.  Consistent with its recent enforcement action in Bayer/Monsanto, the DOJ is willing to approve deals with significant divestitures.  Here, the divestitures are worth approximately $20-23 billion—more than double the size of the Bayer divestiture.  Finally, the settlement shows that the DOJ is willing to approve settlements without upfront buyers in situations where multiple buyers can acquire the divested assets, a single buyer is not necessary, and a number of potential buyers exist.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

It is expected that a lot of time will be devoted to the dominant digital two sided platforms (Google, Facebook, and Amazon) as well as the associated network effects.  The FTC is interested in learning more about how their conduct hinders competition and innovation or how their services actually benefit consumers and enhance competition and innovation.

The hearings and public comment process will provide opportunities for FTC staff and leadership to listen to interested persons and outside experts representing a broad and diverse range of viewpoints.  Additionally, the hearings will stimulate thoughtful internal and external evaluation of the FTC’s near- and long-term law enforcement and policy agenda.  The hearings may identify areas for enforcement and policy guidance, including improvements to the agency’s investigation and law enforcement processes, as well as areas that warrant additional study.

In advance of these hearings, public comments on any of the following topics may be submitted to the FTC:

(1) The state of antitrust and consumer protection law and enforcement, and their development, since the Pitofsky hearings in 1995;

(2) competition and consumer protection issues in communication, information, and media technology networks;

(3) the identification and measurement of market power and entry barriers, and the evaluation of collusive, exclusionary, or predatory conduct or conduct that violates the consumer protection statutes enforced by the FTC, in markets featuring “platform” businesses;

(4) the intersection between privacy, big data, and competition;

(5) the FTC’s remedial authority to deter unfair and deceptive conduct in privacy and data security matters;

(6) evaluating the competitive effects of corporate acquisitions and mergers;

(7) evidence and analysis of monopsony power, including but not limited to, in labor markets;

(8) the role of intellectual property and competition policy in promoting innovation;

(9) the consumer welfare implications associated with the use of algorithmic decision tools, artificial intelligence, and predictive analytics;

(10) the interpretation and harmonization of state and federal statutes and regulations that prohibit unfair and deceptive acts and practices; and

(11) the agency’s investigation, enforcement, and remedial processes.  The FTC will invite public comment in stages throughout the term of the hearings:

The FTC will accept public comments through August 20, 2018.

The hearings will begin in September 2018 and are expected to continue through January 2019, and will consist of 15 to 20 public sessions.  All hearings will be webcast, transcribed, and placed on the public record. A website for information about the hearings including the schedule as it evolves can be found at www.ftc.gov/ftc-hearings.

If you are interested in filing comments and need help, let me know.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Delrahim noted that outside of flat out price fixing and naked restraints of trade, which are clearly illegal, “antitrust demands evidence of harm or likely harm to competition, often weighed against efficiencies or procompetitive justifications.”  He added that “taking an evidence-based approach to antitrust law should not be mistaken for an unwillingness to bring enforcement actions.” He said that if there is clear evidence of harm, the antitrust enforcers should vigorously prosecute the antitrust laws. He noted that antitrust enforcers that failed to take action when they had credible evidence and accepted behavioral “band-aid” fixes to anticompetitive mergers should accept some blame.  Delrahim noted that “the Microsoft case proved that an evidence-based antitrust enforcement approach can be flexible in its application to new types of assets and markets—in that case, the computer code and software markets.”

His message was that the U.S. and international antitrust agencies should not simply go to war with digital platform companies rather a more effective approach would be grounded in evidence.  He added that “in certain platform markets involving network effects, there may be barriers to entry or a tendency toward a single firm emerging as the sole winner” and in those situations, “antitrust enforcers may need to take a close look to see whether competition is suffering and consumers are losing out on new innovations as a result of misdeeds by a monopoly incumbent.”

While Delrahim said it should be a high bar to condemn charging a lower price than one’s competitor, he noted that antitrust officials should be “open and receptive” to evidence that some incumbent monopolist tech firms may be engaging in exclusionary conduct, such as below-cost pricing aimed at driving out competitors, to gain control of a market.  Though Delrahim does not share the same views as Lina Khan’s regarding how predatory pricing or other exclusionary conduct claims might apply to digital platforms, he gave her some props.  Lina Khan wrote a paper which outlines the threats Amazon poses to competition, and argues that the framework used by U.S. antitrust enforcers is ill-equipped to take on today’s dominant online platforms.  “Her note surely has been subject to some criticism,” Delrahim said, “but we should encourage fresh thinking on how our legal tools apply to new digital platforms.  We need more thinking – diverse thinking – about these questions.  And, we need a civil discourse on this topic.”

While the Trump Administration has its eye on Facebook and Amazon, Delrahim’s remarks were really about having a measured approach to enforcing the antitrust laws, one based on economic evidence.  He basically said if there is “clear evidence of harm to competition in digital platforms, enforcers must take vigorous action and seek remedies that protect American consumers, so that free markets or consumers don’t instead bear the risk of failure.”

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

When the deal was announced, consumer groups and politicians questioned whether the combination was anticompetitive. Even President Trump, during the campaign, had been quoted as saying “Amazon had a huge antitrust problem”.

Many others were outspoken that the deal should at the very least undergo a thorough investigation because as they saw it, Amazon was adding groceries to its mix in an effort to cement its position as the go to platform where most online commerce takes place. The argument goes that Amazon is a monopolist in online retailing (46% of online retail sales) and it was acquiring Whole Foods, an organic and premium food grocery brick & mortar retailer providing Amazon with additional infrastructure that would allow Amazon to sell and deliver groceries in more cities. Indeed, AmazonFresh is available only in a handful of cities, and doesn’t have the same range of offerings as Whole Foods. Whole Foods delivers through Instacart, but not in a number of of cities. Amazon Prime offers free delivery and Instacart’s delivery fees can add up. Therefore, the deal raised both vertical (online platform along with brick & mortar stores) and horizontal (both firms competed in the retail distribution of food) issues, but combined the merged firm was still a very small retail grocer and the addition of Whole Foods tiny share of the grocery business was trivial.

While the high profile transaction raised horizontal and vertical issues, the FTC determined in very short order that it did not raise significant antitrust concerns. Accordingly, the FTC issued a statement indicating that the Commission decided not to investigate further, but that it “always has the ability to investigate anticompetitive conduct should such action be warranted.”

Basically, the FTC punted for another day without delaying the transaction. In the FTC’s statement there was little discussion regarding its rationale for not launching a longer and more thorough investigation.

But, the FTC’s decision was likely the correct one at least under the current antitrust framework to review mergers. For the most part, the transaction was between a huge online retailer with a small grocery brick & mortar retailer. With the Whole Foods purchase, Amazon will only have a two percent share of grocery market in the United States, while Walmart holds approximately 20% share and Kroger has 7%. Whole Foods was tiny in the grocery store market (brick & mortar or online). While some politicians and consumer groups were understandably concerned about a huge online retailer acquiring a brick & mortar grocery retailer, the transaction may result in consumer savings as the brick & mortar stores would provide Amazon with additional infrastructure that could allow Amazon to deliver groceries faster and at a lower cost in more cities. Indeed, Whole Foods was already known for having notoriously high prices, which is why it has been coined as “Whole Paycheck”. Thus, the prospect of lower prices and speedy delivery is exciting to Amazon Prime Members. Accordingly, from the FTC’s perspective, a second request was not necessary because the transaction presented no clear threat to consumers.

Lessons Learned: While the FTC has most recently demonstrated how aggressive it can be through its second request investigations and challenges of Walgreens/Rite Aid and Draft Kings/Fan Duel deals, the closing of the investigation of Amazon’s acquisition of Whole Foods demonstrated that the current FTC is focused on closing matters promptly that do not merit enforcement action. Indeed, back in April, the FTC indicated that it was implementing process reforms aimed at eliminating wasteful aspects of investigations. The decision to close the investigation without a second request also suggests that this FTC will not fold to pressure from third party complainants and politicians. Likely, the decision to close the investigation was based on a lack of a clear threat that the transaction would harm consumers. In this instance, the FTC restrained itself from engaging in a long fishing expedition despite the high profile nature of the transaction.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

On April 25, 2016, the DOJ submitted a proposed final judgment allowing the creation of New Charter as long as the parties agreed to certain behavioral conditions. The DOJ required conditions to resolve its concern that New Charter would have a greater incentive and ability to impose contractual restrictions on video programmers (producers of TV shows and video content), thereby limiting their ability to distribute their content through online video distributors (“OVDs”), such as Netflix, Amazon or Hulu.  [1]  See Complaint.

New Charter became the second largest cable company and third largest multichannel video programming distributor. MVPDs include cable companies such as Comcast, TWC and Charter, but also direct broadcast satellite providers (i.e., DirectTV and Dish Network) and telephone companies like AT&T and Verizon. Prior to the merger, however, TWC already had substantial power over programmers’ content. The company used this power to influence programmers’ behavior towards its smaller OVD rivals. TWC was the most aggressive cable company or MVPD in terms of obtaining alternative distribution means (“ADM”) clauses in its contracts with programmers that prohibited or greatly restricted programmers from distributing their content to OVDs or through online distribution. Indeed, the DOJ specifically alleged that “[n]o [cable company] has sought and obtained these restrictive ADMs as frequently, or as successfully, as TWC.”  [2]  Complaint at 3.

Acknowledging that no horizontal overlap existed between the merging parties, the DOJ noted that “the Clayton Act is concerned with mergers that threaten to reduce the number of quality choices available to consumers by increasing the merging parties’ incentive or ability to engage in conduct that would foreclose competition.”[3]  Competitive Impact Statement.  Accordingly, the DOJ sought comprehensive relief to ensure that New Charter will not have the ability to foreclose OVD competition and deny customers the benefit of innovation and new services through ADM clauses and other restrictive contracting provisions.

Similarities Between the Charter/TWC and the ABI/SABMiller Mergers

There are many parallels between the Charter/TWC and the ABI/SABMiller transactions. Both deals involve multiple tiers between the producers and the customers.[4] Both transactions involve dominant firms that already have the ability and incentive to pressure companies in other tiers to enter into contracts that have the effect of restricting rivals’ access to consumers, and as a result of the merger, the newly formed mega company would have greater incentive and ability to impose restrictions and/or incentives that could raise entry barriers or foreclose its smaller rivals.

What rings true in Charter/TWC similarly rings true in ABI/SABMiller. For example, in the Charter/TWC complaint, the DOJ expressed concern that:

In the beer industry, it is the emergence of import, craft and small independent brewers that is providing important competition in both product diversity and pricing. For smaller brewers and importers to successfully compete with ABI, they need access to distributors, and ultimately retailers, in order to sell their products to consumers. Large brewers like ABI already enter into agreements that discourage distributors from selling rival beer and prevent retailers from offering adequate or prime shelving space to craft and independent brewers as well as importers.

While the current MillerCoors JV has allowed for open and independent distribution, there is reason to believe that ABI’s proposed divestiture of SABMiller’s share of the JV to Molson Coors to purportedly retain the current levels of competition in the United States, will actually result in New MillerCoors becoming more like ABI. Indeed, the present MillerCoors JV is not a true merger; it is an agreement of limited duration. Currently, MillerCoors is not fully incentivized to maximize its brand portfolio because capital invested in any brand would only benefit its true owner if the JV were to ever be terminated by the parties. Because it is not a full merger, there has not been any realistic incentive for the JV to pursue tactics like ABI’s share of mind incentive program.

Post-transaction, however, New MillerCoors will be a completed merger as Molson Coors will take over 100 percent ownership. New MillerCoors will have integrated management and the incentive and ability to pursue stronger agreements and incentive programs that restrict craft and independent brewers’, as well as importers’, access to distributors and retailers. To the extent that both a merged ABI/SABMiller and New MillerCoors pursue the same strategy, their effectiveness in eliminating craft will increase and distributors will eventually find it financially unattractive for distributors to carry craft brands as distributors are strong-armed into participation in incentive programs or given other carrot or stick threats such as ownership transfer approvals to compel compliance. Moreover, craft brewers will not be able to find or join rival distributors of scale which is critical for volume gains in all retail accounts.[6]

Thus, the competitive concerns in the ABI/SABMiller and MillerCoors transactions effectively mirror the concerns in Charter/TWC: “[t]o the extent a transaction, such as the one at issue here, enhances [a brewer’s] ability or incentive to restrain [craft and independent brewers’] access to [distributors and retailers], and thus to prevent [craft and independent brewers] from becoming a meaningful new competitive option, consumers lose.”[7]

The New Charter Remedies

The conditions that the DOJ negotiated with New Charter are entirely behavioral in nature and serve as a good example of remedies that would be beneficial in resolving the wide-ranging competitive concerns raised by the ABI/SABMiller merger.[8]  Proposed Final Judgment.  The remedies restrict New Charter’s post-merger conduct in the following ways:

• New Charter is prohibited from entering into or enforcing agreements with programmers that limit, or forbid, OVDs’ access to video content.

• New Charter is prohibited from entering into agreements that create incentives for video programmers to limit access of programming to OVDs.

• New Charter is prohibited from discriminating against, retaliating against, or punishing any video programmer for providing its content to any video distributor.

• New Charter is prohibited from entering into or enforcing agreements with programmers that make it financially unattractive for programmers to license their content to OVDs.

• New Charter is prohibited from entering into or enforcing unconditional most favored nation provisions against a programmer for licensing their content to OVDs.

In sum, the conditions contain broad prohibitions on restrictive contracting practices to ensure that New Charter will not replace ADMs with other contracting practices that would increase barriers for OVDs or otherwise make OVDs less competitive. Indeed, the prohibitions were put in place because the DOJ was concerned that New Charter could enter into certain contracts that are designed to circumvent the order, create incentives to limit distribution to OVDs, or create economic disadvantages for a programmer to license content to an OVD.

The New Charter Remedies Are Not Industry Specific

The behavioral remedies used to resolve the vertical foreclosure concerns raised by the creation of New Charter are applicable to any industry with a multi-tier supply chain and dominant firms that already exert power over other tiers of the supply chain. The DOJ’s goal in New Charter is to prevent the merged firm from raising barriers to entry for smaller horizontal rivals or otherwise make smaller horizontal rivals less competitive. The DOJ is concerned about a merged firm’s increased incentive and ability to protect its market power by denying or raising the costs of an input to its rivals. In other words, the DOJ is concerned about transactions that substantially enhance the merged firm’s ability and incentive to foreclose competition through restrictive contracting provisions or incentive programs that make it economically unattractive to work with the merged firm’s rivals. The New Charter conditions are aimed at protecting competition and consumer choice.

Like TWC, ABI has been squeezing its smaller rivals. Unlike TWC, ABI is a much more dominant firm within its industry. ABI influences the distribution tier through direct ownership or limiting distributors’ ability to carry competitors’ products through its “share of mind” incentive program. ABI’s incentive program discourages distributors from carrying rival beers if they want to be eligible for substantial financial rewards. Post-merger, ABI’s increased global scale and New MillerCoors’ full portfolio of brands will substantially enhance their ability and incentive to obtain provisions in their contracts or promotional agreements that restrict or limit the ability of distributors from distributing their smaller rivals’ products, foreclosing these smaller rivals from effectively competing. While there is nothing illegal about ABI using incentive programs that focus on increased sales of its beer, the DOJ needs to make sure that ABI’s contracts with distributors do not contain terms that create economic disadvantages for them carrying smaller brewers’ beers. The DOJ must be mindful that no beer producer has sought and obtained these incentive programs as frequently, or as successfully, as ABI.

The New Charter remedies line up very well with what the DOJ should do in the proposed ABI/SABMiller transaction. Comparable remedies in the proposed ABI merger would: (1) prohibit or limit ABI’s and New MillerCoors’ ability to use distributor incentive programs or MFN-type agreements with ABI or MillerCoors aligned distributors that create economic disadvantages or make it financially unattractive for them to distribute independent brewers’ beer; (2) prohibit ABI from retaliating or discriminating against distributors for distributing other brewers’ beers; and (3) prohibit ABI and New MillerCoors from engaging in other conduct that would foreclose other independent brewers’ ability to distribute their products to retailers.

Such conditions would not be overly restrictive. ABI and New MillerCoors should be allowed to incentivize their distributors to increase sales of their products. But, as the DOJ addressed in the case of New Charter, they should not be allowed to engage in promotional programs that are designed to make it unattractive for distributors to carry rival products.

Approving a merger is risky business and the DOJ is increasingly aware that it needs to be as thorough as possible to prevent post-merger mischief. The approach in Charter/TWC is sound, and DOJ should take a similar one with respect to ABI/SABMiller.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

[1] See, Complaint, U.S. v. Charter Communications, Inc., Time Warner Cable, Inc., No. 16-0795 (D.D.C. 2016).

[2] Id. at 3.

[3] See Competitive Impact Statement, U.S. v. Charter Communications, Inc., Time Warner Cable, Inc., No. 16-0795 (D.D.C. 2016). “For example, a merger may create, or substantially enhance, the ability or incentive of the merged firm to protect its market power by denying or raising the price of an input to the firm’s rival.” Id.

[4] It does not matter that the Charter/TWC and the ABI/SABMiller merger concerns involve different tiers or that the power flows in different directions. What matters is that the effects are the same – both mergers involve using power over a different tier of the supply chain in order to disadvantage horizontal rivals.

[5] Complaint, supra note 1 at 3 (emphasis added).

[6] Most local markets are primarily, if not exclusively, served by an ABI aligned distributor and/or a MillerCoors aligned distributor as the only distributors of sufficient scale and scope to service all retail accounts on a daily basis.

[7] Mirroring the language in the Complaint at footnote 5.

[8] See, proposed final judgment, available at https://www.justice.gov/opa/file/846051/download. The behavioral remedies are outlined on pages 5-7.