Free LES Webinar on IP Valuation in M&A Deal Making

The Silicon Valley Chapter of LES is hosting a free webinar titled, IP Valuation in Special Situations: Closing the Intangible Value Gap in M&A Deal Making on Tuesday, June 24 at 9:00 am to 10:30 pm Pacific Time.  The notice concerning the webinar states:

“Efrat [Kasznik] will present four unique strategies for integrating IP assets in M&A deal pricing without disrupting deal workflows, while addressing the needs of both sellers and buyers. Topics to be covered include: Current trends in M&A deals How are companies valued in M&A deals? Why is there an intangible valuation gap in M&A deals? Seller and buyer M&A deal pricing considerations Strategies for bridging the intangible valuation gap Personal Insights from an M&A deal where the valuation gap was addressed using IP Make connections to help discover and drive deals. Engage 75+ registered participants —innovators, investors, IP management experts from startups and established SV organizations, and many more.  Online via Zoom” The Registration Link is, here.

U.S. DOJ and FTC Release Merger Guidelines

U.S. Department of Justice and Federal Trade Commission issued Merger Guidelines on December 18, 2023.  The Press Release states, in part:

Today, the Justice Department and the Federal Trade Commission (FTC) jointly issued the 2023 Merger Guidelines, which describe factors and frameworks the agencies utilize when reviewing mergers and acquisitions. The 2023 Merger Guidelines are the culmination of a nearly two-year process of public engagement and reflect modern market realities, advances in economics and law, and the lived experiences of a diverse array of market participants.

“These finalized Guidelines provide transparency into how the Justice Department is protecting the American people from the ways in which unlawful, anticompetitive practices manifest themselves in our modern economy,” said Attorney General Merrick B. Garland. “Since releasing the Draft Merger Guidelines earlier this summer, we have engaged with stakeholders across the country, and the Guidelines are stronger as a result. The Justice Department will continue to vigorously enforce the laws that safeguard competition and protect all Americans.”

. . . The 2023 Merger Guidelines released today modify the Draft Merger Guidelines, released on July 19, to address comments from the public, including extensive engagement from attorneys, economists, academics, enforcers, and other policymakers at the agencies’ three Merger Guidelines Workshops. They emphasize the dynamic and complex nature of competition ranging from price competition to competition for the terms and conditions of employment, to platform competition. This approach enables the agencies to assess the commercial realities of the United States’ modern economy when making enforcement decisions and ensures that merger enforcement protects competition in all its forms.

. . . The robust process to develop the 2023 Merger Guidelines began in January 2022. The agencies announced an initiative to evaluate possible revisions to the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines and published a Request for Information on Merger Enforcement, which sought public comment on modernizing merger enforcement. The agencies received more than 5,000 comments. Commenters highlighted excessive market consolidation across industries and overwhelmingly urged the agencies to strengthen their approach to merger enforcement. At the agencies’ four listening sessions, business owners, workers, and other advocates similarly highlighted the potential for mergers and acquisitions to undermine open, vibrant, and competitive markets, in industries ranging from food and agriculture to health care. 

Informed by this feedback, agency experience and expertise, as well as developments in the market, law, and economics, the agencies drafted and jointly released a proposed version of the 2023 Merger Guidelines for public comment in July 2023 and received more than 30,000 comments reflecting the views of consumers, workers, academics, interest organizations, attorneys, enforcers, and many others across various sectors of the American economy. The agencies also held three Merger Guidelines Workshops to discuss the draft Merger Guidelines. This engagement informed an in-depth revision process culminating in today’s release of the 2023 Merger Guidelines.

Like the prior horizontal and vertical merger guidelines they replace, the 2023 Merger Guidelines are not themselves legally binding, but provide transparency into the agencies’ decision-making process.   

The 2023 Merger Guidelines do not predetermine enforcement action by the agencies. Although the Merger Guidelines identify the factors and frameworks the agencies consider when investigating mergers, the agencies’ enforcement decisions will necessarily depend on the facts in any case and will continue to require prosecutorial discretion and judgment.

The Merger Guidelines discuss the issue of nascent technology:

2.6.A. Entrenching a Dominant Position Raising Barriers to Entry or Competition. . . .

· Increasing Switching Costs

· Interfering With the Use of Competitive Alternatives. . . .

· Depriving Rivals of Scale Economies or Network Effects. . . .

Eliminating a Nascent Competitive Threat. A merger may involve a dominant firm acquiring a nascent competitive threat—namely, a firm that could grow into a significant rival, facilitate other rivals’ growth, or otherwise lead to a reduction in its power.  In some cases, the nascent threat may be a firm that provides a product or service similar to the acquiring firm that does not substantially constrain the acquiring firm at the time of the merger but has the potential to grow into a more significant rival in the future. In other cases, factors such as network effects, scale economies, or switching costs may make it extremely difficult for a new entrant to offer all of the product features or services at comparable quality and terms that an incumbent offers. The most likely successful threats in these situations can be firms that initially avoid directly entering the dominant firm’s market, instead specializing in (a) serving a narrow customer segment, (b) offering services that only partially overlap with those of the incumbent, or (c) serving an overlapping customer segment with distinct products or services.

Firms with niche or only partially overlapping products or customers can grow into longer-term threats to a dominant firm. Once established in its niche, a nascent threat may be able to add features or serve additional customer segments, growing into greater overlap of customer segments or features over time, thereby intensifying competition with the dominant firm. A nascent threat may also facilitate customers aggregating additional products and services from multiple providers that serve as a partial alternative to the incumbent’s offering. Thus, the success and independence of the nascent threat may both provide for a direct threat of competition by the niche or nascent firm and may facilitate competition or encourage entry by other, potentially complementary providers that may provide a partial competitive constraint. In this way, the nascent threat supports what may be referred to as “ecosystem” competition. In this context, ecosystem competition refers to a situation where an incumbent firm that offers a wide array of products and services may be partially constrained by other combinations of products and services from one or more providers, even if the business model of those competing services is different.

Nascent threats may be particularly likely to emerge during technological transitions. Technological transitions can render existing entry barriers less relevant, temporarily making incumbents susceptible to competitive threats. For example, technological transitions can create temporary opportunities for entrants to differentiate or expand their offerings based on their alignment with new technologies, enabling them to capture network effects that otherwise insulate incumbents from competition. A merger in this context may lessen competition by preventing or delaying any such beneficial shift or by shaping it so that the incumbent retains its dominant position. For example, a dominant firm might seek to acquire firms to help it reinforce or recreate entry barriers so that its dominance endures past the technological transition. Or it might seek to acquire nascent threats that might otherwise gain sufficient customers to overcome entry barriers. In evaluating the potential for entrenching dominance, the Agencies take particular care to preserve opportunities for more competitive markets to emerge during such technological shifts. Separate from and in addition to its Section 7 analysis, the Agencies will consider whether the merger violates Section 2 of the Sherman Act. For example, under Section 2 of the Sherman Act, a firm that may challenge a monopolist may be characterized as a “nascent threat” even if the impending threat is uncertain and may take several years to materialize. The Agencies assess whether the merger is reasonably capable of contributing significantly to the preservation of monopoly power in violation of Section 2, which turns on whether the acquired firm is a nascent competitive threat. (footnotes omitted).

Guideline 9 is titled, “When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform.”  That Guideline provides, in part:

Platforms provide different products or services to two or more different groups or “sides” who may benefit from each other’s participation. Mergers involving platforms can threaten competition, even when a platform merges with a firm that is neither a direct competitor nor in a traditional vertical relationship with the platform. When evaluating a merger involving a platform, the Agencies apply Guidelines 1-6 while accounting for market realities associated with platform competition. Specifically, the Agencies consider competition between platforms, competition on a platform, and competition to displace the platform.

Multi-sided platforms generally have several attributes in common, though they can also vary in important ways. Some of these attributes include:

· Platforms have multiple sides. On each side of a platform, platform participants provide or use distinct products and services. Participants can provide or use different types of products or services on each side.

· A platform operator provides the core services that enable the platform to connect participant groups across multiple sides. The platform operator controls other participants’ access to the platform and can influence how interactions among platform participants play out.

· Each side of a platform includes platform participants. Their participation might be as simple as using the platform to find other participants, or as involved as building platform services that enable other participants to connect in new ways and allow new participants to join the platform.

· Network effects occur when platform participants contribute to the value of the platform for other participants and the operator. The value for groups of participants on one side may depend on the number of participants either on the same side (direct network effects) or on the other side(s) (indirect network effects). Network effects can create a tendency toward concentration in platform industries. Indirect network effects can be asymmetric and heterogeneous; for example, one side of the market or segment of participants may place relatively greater value on the other side(s).

· A conflict of interest can arise when a platform operator is also a platform participant. The Agencies refer to a “conflict of interest” as the divergence that can arise between the operator’s incentives to operate the platform as a forum for competition and its incentive to operate as a competitor on the platform itself. As discussed below, a conflict of interest sometimes exacerbates competitive concerns from mergers. Consistent with the Clayton Act’s protection of competition “in any line of commerce,” the Agencies will seek to prohibit a merger that harms competition within a relevant market for any product or service offered on a platform to any group of participants—i.e., around one side of the platform (see Section 4.3).

The Agencies protect competition between platforms by preventing the acquisition or exclusion of other platform operators that may substantially lessen competition or tend to create a monopoly. This scenario can arise from various types of mergers:

A. Mergers involving two platform operators eliminate the competition between them. In a market with a platform, entry or growth by smaller competing platforms can be particularly challenging because of network effects. A common strategy for smaller platforms is to specialize, providing distinctive features. Thus, dominant platforms can lessen competition and entrench their position by systematically acquiring firms competing with one or more sides of a multi-sided platform while they are in their infancy. The Agencies seek to stop these trends in their incipiency.

B. A platform operator may acquire a platform participant, which can entrench the operator’s position by depriving rivals of participants and, in turn, depriving them of network effects. For example, acquiring a major seller on a platform may make it harder for rival platforms to recruit buyers. The long-run benefits to a platform operator of denying network effects to rival platforms create a powerful incentive to withhold or degrade those rivals’ access to platform participants that the operator acquires. The more powerful the platform operator, the greater the threat to competition presented by mergers that may weaken rival operators or increase barriers to entry and expansion.

C. Acquisitions of firms that provide services that facilitate participation on multiple platforms can deprive rivals of platform participants. Many services can facilitate such participation, such as tools that help shoppers compare prices across platforms, applications that help sellers manage listings on multiple platforms, or software that helps users switch among platforms.

D. Mergers that involve firms that provide other important inputs to platform services can enable the platform operator to deny rivals the benefits of those inputs. For example, acquiring data that helps facilitate matching, sorting, or prediction services may enable the platform to weaken rival platforms by denying them that data.

The Agencies protect competition on a platform in any markets that interact with the platform. When a merger involves a platform operator and platform participants, the Agencies carefully examine whether the merger would create conflicts of interest that would harm competition. A platform operator that is also a platform participant may have a conflict of interest whereby it has an incentive to give its own products and services an advantage over other participants competing on the platform. Platform operators must often choose between making it easy for users to access their preferred products and directing those users to products that instead provide greater benefit to the platform operator. Merging with a firm that makes a product offered on the platform may change how the platform operator balances these competing interests. For example, the platform operator may find it is more profitable to give its own product greater prominence even if that product is inferior or is offered on worse terms after the merger—and even if some participants leave the platform as a result. This can harm competition in the product market for the advantaged product, where the harm to competition may be experienced both on the platform and in other channels.

The Agencies protect competition to displace the platform or any of its services. For example, new technologies or services may create an important opportunity for firms to replace one or more services the incumbent platform operator provides, shifting some participants to partially or fully meet their needs in different ways or through different channels. Similarly, a non-platform service can lessen dependence on the platform by providing an alternative to one or more functions provided by the platform operators. When platform owners are dominant, the Agencies seek to prevent even relatively small accretions of power from inhibiting the prospects for displacing the platform or for decreasing dependency on the platform.

In addition, a platform operator that advantages its own products that compete on the platform can lessen competition between platforms and to displace the platform, as the operator may both advantage its own product or service, and also deprive rival platforms of access to it, limiting those rivals’ network effects. (emphasis in original and footnotes omitted).

Brookings Institute Article on Regulating the Internet (with a nod to antitrust enforcement)

Tom Wheeler at the Brookings Institute has published an interesting article titled, “COVID-19 has Taught Us that the Internet is Critical and Needs Public Interest Oversight.”  Even before COVID-19, the regulation of internet platforms has been a very hot issue in the United States and in other countries.  For example, India recently announced a new regulator for Internet commerce.  In Mr. Wheeler’s article, he discusses why Internet regulation is different from Industrial Age type regulation and proposes four helpful suggestions for moving forward: 

First, do not pretend these challenges can be shoehorned into industrial era regulatory structures. . . .

Second, digital companies should have a seat at the table in the development of the rules rather than having them force-fed. . . . There should be a new federal agency that convenes, oversees, and approves a public-private process that establishes an agency-enforceable Digital Code.

Third, this new Digital Code is not a substitute for antitrust enforcement. The Digital Code is about the behavior of the companies in the services they offer to the public. If a company behaves in an anticompetitive manner, including mergers, that should be the jurisdiction of antitrust enforcers and the Code should not include antitrust exemption.

Fourth, the regulatory oversight needs to be principles-based and agile. Industrial production was a rules-based linear process where each person on the shop floor followed rules for a specific task. Industrial regulation followed the same rigid pattern. In contrast, modern digital products are never finished (think how your smartphone is always updating its software). Digital products are constantly adapting to the changes in their environment. This agile development needs to find its equivalent in agile regulation. Heavy-handed industrial “do this or else” needs to give way to “this is how technology is changing and business practices must evolve as well.”

The full article is available, here.  COVID-19 may speed things up a bit. 

American Antitrust Institute Adds Voice to Criticism of Lax Competition Law Enforcement in the United States

The American Antitrust Institute has released a report titled, “The State of Antitrust Enforcement and Competition in the United States” (Report).  The Report takes the Trump Administration as well as prior administrations to task for a relatively low level of merger and acquisition scrutiny.  The Report also points out that numerous current policy proposals are essentially underdeveloped.  The following is a list of the major conclusions of the Report: 

•  DECLINING COMPETITION PRESENTS A POLITICAL-ECONOMIC DILEMMA IN THE U.S.: The cumulative effects of decades of lax antitrust enforcement, coupled with a step-down in enforcement under the Trump administration, poses fundamental challenges for markets and the democratic values that undergird them. Long-term inaction has compromised the effectiveness of the U.S. antitrust laws, presenting a significant political-economic dilemma around the role of antitrust in solving the broader public policy problem of declining competition.

•  ANTITRUST ENFORCEMENT HAS DECLINED UNDER THE TRUMP ADMINISTRATION: Key metrics indicate a decline in cartel enforcement under the Trump administration, as well as a falloff in second requests and merger challenges. And despite a few high-profile cases, there is no meaningful invigoration of monopolization enforcement. Recent agency actions to block some mergers involving highly concentrated markets reflect “emergency” merger control of the most egregiously anticompetitive transactions.

•  POLICY PRIORITIES AT THE ANTITRUST AGENCIES ARE MARKEDLY DIFFERENT: The Trump DOJ has introduced major changes in government policy surrounding cartel and merger enforcement, the intersection of competition and intellectual property, and competition advocacy. Many of these policies could work against the interests of competition and consumers. The FTC has taken a more pro-active approach, with continued efforts to challenge the expansion of intellectual property to achieve anticompetitive objectives in pharmaceutical markets.

•  SHIFTS IN AGENCY ADVOCACY REFLECT MORE FEDERAL INTERVENTION BY DOJ IN PRIVATE ANTITRUST CASES: The important role of antitrust agency advocacy has shifted markedly under the Trump agencies. The FTC’s competition advocacy, embodied in comments before federal and state agencies and amicus briefs, has fallen off dramatically. In contrast, the DOJ’s competition advocacy has increased but often stakes out positions that work against the interests of competition and consumers.

•  PRIVATE ENFORCERS CAN TAKE UP SOME OF THE SLACK IN FEDERAL UNDER-ENFORCEMENT AND SPUR POLICY CHANGE, BUT THEY FACE SIGNIFICANT CHALLENGES: Key private antitrust cases have had positive impacts by obtaining compensation for victims, deterring future violations, and spurring public debate and state legislative reform. There are also opportunities for private challenges of consummated mergers that have harmed consumers and workers. But challenges remain, with tightening judicial standards for showing collusion and other impediments that make it more difficult to bring, litigate, and win cases.

•  STATE ATTORNEYS GENERAL ARE BECOMING MORE ACTIVE BUT LIMITATIONS PERSIST THAT WILL DEFINE HOW MUCH THE STATES CAN DO IN RESPONSE TO FEDERAL INACTION: State Attorneys General are stepping up efforts in response to weak federal enforcement. These include independent lawsuits to block illegal mergers and confront price fixing, a proactive stance on strengthening federal merger settlements, and investigations into the competitive practices of large digital technology companies. Resource limitations and a change in the tenor of coordination between the DOJ and the states, however, pose challenges.

•  LEGISLATIVE ANTITRUST REFORM IS NEEDED BUT PROPOSALS THUS FAR LACK A COMPREHENSIVE AND COORDINATED APPROACH: Legislative efforts to reform the antitrust laws have accelerated in the 116th Congress and are at levels not seen since the early 1990s. These include comprehensive reform proposals and narrower initiatives targeting specific antitrust issues and particularly vulnerable sectors. Legislative reform is needed to strengthen and clarify the antitrust laws, but these efforts require a coordinated response to ensure that they promote enforcement, not inadvertently weaken it or cause confusion in the courts.

• REVERSING DECLINING COMPETITION IS A PROBLEM THAT WILL REQUIRE A PUBLIC POLICY SOLUTION: Change in the way the U.S. promotes competition and protects the market system is badly needed. Strengthening antitrust to promote more vigorous enforcement of the antitrust laws is part of a broader solution that should be complemented through the use of other tools, including social and economic regulation, standard-setting and interoperability, labor policy, and intellectual property law.

The Report notably discusses the intersection of competition policy and intellectual property, particularly efforts concerning SEPs and pharmaceuticals.  On SEPs, the Report states, in part, that: 

Under the Trump administration, the DOJ has unilaterally reversed course on patent holdup issues. For example, in 2018, the Antitrust Division withdrew from its 2013 Joint Policy Statement with the Patent & Trademark Office on Remedies for Standard Essential Patents (SEPs). The Policy Statement had endorsed sensible limits on court-ordered injunctive relief and the International Trade Commission’s issuance of exclusion orders, which ban imports of products into the U.S. if the products infringe a U.S. patent. It cautioned against such injunctions and orders when the alleged infringer’s products are compliant with industry standards and the patent holder has voluntarily committed to an SSO to license the patent on FRAND terms.

In December 2019, the Antitrust Division issued a new Policy Statement downplaying the concerns and ignoring the public policy justifications against injunctions and exclusion orders on products alleged to infringe SEPs.62 The new Policy Statement offers no tailored rules or meaningful guidance, and it signals increased scrutiny of SSOs rather than SEP owners. The new Policy Statement warns that such heightened scrutiny could result in an investigation or enforcement action when SSO’s take certain steps to clarify their patent policies and procedures to mitigate the risks of hold-up and disputes over licensing terms, whereas the previous statement had encouraged SSOs to make appropriate clarifications to that end.

The Report is available, here. 

Proposed Act on Curbing Anticompetitive Conduct in the United States

On March 10, 2020, former Presidential Candidate and Senator Amy Klobuchar introduced legislation designed to address abuses of market power by basically making it easier to prove violations of the antitrust laws.  The Press Release states, in part: 

The Anticompetitive Exclusionary Conduct Prevention Act would deter anticompetitive abuses that harm consumers and innovation

WASHINGTON – U.S. Senator Amy Klobuchar (D-MN), Ranking Member of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, introduced new legislation today to deter anticompetitive abuses that distort the competitive process and harm consumers, innovation, and new business formation. The Anticompetitive Exclusionary Conduct Prevention Act prohibits anticompetitive exclusionary conduct that risks harm to the competitive process. It also makes reforms to improve antitrust enforcement across the board. The bill was cosponsored by Senators Richard Blumenthal (D-CT) and Cory Booker (D-NJ).

“We have a major monopoly problem in this country, which harms consumers and threatens free and fair competition across our economy. Companies need to be put on notice that exclusionary behavior that threatens competition cannot continue,” Klobuchar said. “Our legislation will deter anticompetitive abuses, helping to protect the competitive markets that are critical to ensuring fair prices for products and services, spurring innovation, and preserving opportunity for American entrepreneurs.”

Today’s economy – including key sectors like online commerce, pharmaceuticals, and agriculture – is characterized by growing market concentration and market power. Harmful exclusionary practices by powerful companies threaten free and fair competition, as decades of federal court decisions have chilled enforcement under existing laws. As a result, U.S. enforcement against the anticompetitive conduct of powerful firms has lagged behind efforts in other countries, creating an increased danger of our markets becoming less competitive and of our economy becoming less prosperous.     

Overview Anticompetitive Exclusionary Conduct Prevention Act of 2019:

KEY PROVISIONS

1. Prohibit Anticompetitive Exclusionary Conduct: Amends the Clayton Antitrust Act to prohibit “exclusionary conduct” that presents an “appreciable risk of harming competition.”

1.       Shifts the Burden of Proof so that powerful companies that have a market share of greater than 50% or that otherwise have substantial market power would have to prove that their exclusionary conduct in the markets they dominate does not present an “appreciable risk of harming competition.”

2.       Allows DOJ and FTC to seek substantial civil penalties for violations of up to 15% of total U.S. revenues or 30% of the affected U.S. revenues in addition to other remedies available under the Clayton Act.

2. Eliminate Unnecessary “Market Definition” Requirements: Courts often require claimants to prove a relevant market to establish liability under the antitrust laws, even in the face of clear evidence of competitive harm. The bill clarifies that the antitrust laws do not require definition of a relevant market, unless the statutory language explicitly requires it to resolve the case. 
3. Prevent Courts from Improperly Implying Antitrust Immunities: Courts have implied immunity from the antitrust laws for certain conduct based on the existence of federal regulation, in certain circumstances ignoring statutory savings clauses passed by Congress. This bill limits the ability of courts to imply antitrust immunity for regulated conduct. 

The legislation has the support of leading national consumer welfare and antitrust policy organizations American Antitrust Institute, Consumer Reports, and Public Knowledge.

“AAI supports Senator Klobuchar’s bill to strengthen U.S. law to limit harmful conduct by dominant firms -an area of antitrust that has been largely unenforced for decades,” said Diana L. Moss, President, American Antitrust Institute. “The bill will set forth clear, strong, and needed criteria for policing conduct that is designed to drive rivals from markets. It should garner broad bi-partisan support from members of Congress who seek to protect our markets, competition, consumers, and workers.”

"Senator Klobuchar's bill addresses a key shortcoming in our law. Current antitrust law doesn't apply to a company until it already has a monopoly, or is on the verge of one -even when it has enough market power to sabotage the competitive process,” said George Slover, Senior Policy Counsel, Consumer Reports. “This targeted, measured bill would move the line where it needs to be to address the kinds of anticompetitive abuse we are seeing too much of in today's marketplace. This is particularly important as commerce and communications increasingly take place online, with dominant platforms presenting new challenges to making sure we have a competitive marketplace that works for consumers and for all who seek to reach them." 

“For far too long, antitrust enforcers have been fighting with one hand tied behind their backs. This legislation will revitalize antitrust enforcement in exclusionary conduct cases by sharpening the tools of our antitrust agencies,” said Charlotte Slaiman, Competition Policy Director at Public Knowledge. “We commend this effort to address the problem of exclusionary conduct to ensure these competitive harms do not escape scrutiny.”

The full press release is available, here.  The full proposed legislation is available, here. 

Alliance for Regenerative Medicine: 2019 is Second Best Year in History for Regenerative Medicine Financing

The Alliance for Regenerative Medicine (ARM) has recently released its annual report.  Notably, ARM states that 2019 was the second-best year in history for regenerative medicine financing.  A whopping $9.8 billion US was raised globally.  $7.8 million was raised for gene modified and cell therapy.  Tissue engineering received $442 million.  The report further specifies deals for significant sums as well as public offerings.  The financing numbers are also broken down by type, such as venture capital, with comparison to 2018 and 2017 numbers.  VC financing is up almost a billion dollars in 2019 over 2018.  Financing numbers are also reviewed for the EU and Israel.  The report also specifies that there are 1,066 clinical trials proceeding at the end of 2019.  New approvals and expected approvals are also discussed.