Antitrust for Startups(Not an Oxymoron)

Plug and Play

Chris Compton

Feb. 12, 2014

At the Beginning: The Sherman Act

1890

Concentrations of power must be controlled.

Mr. Gorbachev,take downthat trust!

Fast Forward to Today

Sherman Act

Clayton Act (1914)

Federal Trade Commission Act (1914)

Robinson Patman Act (1936)

Hart-Scott-Rodino Act (1976)

State Antitrust & Unfair Competition Laws

International Competition Regimes

Why Should Startups or SMBs Care?

FIRST: Agencies are Focusing on Tech

SECOND: The Weather on the Hour: Changing, Stormy

SPECIFIC CONCERNS OF STARTUPS:

Protection from the Big Dogs

Mergers as the Exit Strategy

Navigating the Pricing & Distribution Maze

Exploiting Your IP; Getting Access to Theirs

Collaboration and “Coop-etition”

Going Global

When the Government Calls

The Current Antitrust Weather: Changing, with Likelihood of Storms

DOJ is Born Again under Obama Dissonance with FTC a thing of the past

FTC & DOJ engaged in aggressive antitrust enforcement Expanded use of Section 5, FTC Act

90+ Countries competing for your attention Supreme Court a Large but Lonely Counterweight

E.g., resale price maintenance; pleading standards tightened

Specific Reasons for Startups to

Focus on Competition Law

1. Protection from Dominant Competitors

Even larger companies seek protection under the antitrust laws. Sun, Real Networks and Netscape v. Microsoft AMD v. Intel Broadcom v. Qualcomm DRAMs v. Rambus Generics v. Big Pharma Microsoft v. Google & IBM

Typical Abuses by Dominant Companies

Denial of access to networks

Refusals to deal or license

Deliberate incompatibilities

Degraded performance

Foreclosure from customers

Exclusionary pricing

Below cost

Loyalty and bundled discounts & rebates

2. And Note: You May be the “Dominant” One in Your Niche

Even smaller companies have large market shares in certain niches or technologies

Examples?

May come from inventions, first to market, IP, network effects, generous financing or ‘tipping point’

Pricing power is the real key to ‘dominance’

Real Question: Is the dominance transient or structural?

“Abuse of dominance” in EU vs. “monopolistic conduct” in U.S.

Who Might Take on the “Dominant” Company?

DOJ or FTC, investigation and enforcement under Sherman 2 Or FTC under section 5; newly resurrected

EU, under Article 102

DOJ or FTC opposing a merger that may harm competition

State Attorneys General, under state competition laws

You or class action plaintiffs, in state or federal courts If equipped to launch private treble damage litigation

But tougher pleading standards after Twombly;

And $$$

3. Acquisition as the Exit Strategy

Startup alternatives: flail, fail, go public or merge Being acquired often seems best choice

‘Serial acquirers’ such as Google, Cisco, Microsoft, IBM, Oracle and now even Apple are often competitors of the startup target So HSR and international antitrust clearances needed Critical to have a good legal team to minimize delay & cost

Sad example: Oracle’s acquisition of Sun Even deals cleared in the U.S. may be opposed in EU Long delays can fatally harm the target

Note: Even consummated, small deals can be challenged—e.g., Bazaarvoice

4. Staying Safe in Your Distribution & Pricing

Vertical restrictions OK; not Resale Price Maintenance Leegin (2007) went from per se illegality to Rule of Reason But no one told the ROW; MAP programs live on

Bundled rebates and loyalty discounts

Exclusive dealing

Price and promotional discrimination

Special dangers of FTC Section 5 today

5. Exploiting Your IP

Roughly the same rules in licensing as in sales Lots of latitude in refusing to license

But not where fraud on the Patent Office, ties or sham litigation Be aware: patent reform by Congress, PTO and the courts

E.g., business methods, willfulness, obviousness The special issues in standard setting

FTC v. Rambus, nData, Dell; Qualcomm battles Disputes about FRAND

Predatory innovation: area for concern once again? The DOJ joins the FTC in giving IP special attention

Patent settlements in pharma cases

6. Seeking Forced Access to Others’ IP

Conflicting precedents of Kodak and Xerox

Supreme Court has not resolved conflict between 2d and Federal Circuits on refusals to deal

Trinko moved needle to the right.

In a word: “Don’t count on it.”

But maybe in Europe?

Or in monopolization cases

Special role of SEPs & FRAND licensing

7. Collaboration & “Coop-etition”

Formal Joint Ventures May need HSR filing and clearance in US, EU & Asia May be criminal collusion if a ‘sham’—i.e., not economically integrated

Joint R&D, marketing, sales FTC’s Three Tenors action “Single entity?”

Shell and Texaco? Yes (Dagher, 2007) NFL and 49rs? No (American Needle, May 2010)

Ways to lessen risk Business review letters Agreements that “make business sense”

8. Are You Going Global? So is Antitrust

Do you sell outside the U.S.?

Apr. 20, 2010: New EC distribution rules issued

Over 95 countries now have HSR-like merger filing requirements: many cover strictly U.S. deals too.

Europe is the new global center of antitrust. E.g., Google settlement

Korea, Japan and recently China are becoming active

Licensing and distribution laws differ, as do remedies (and politics).

Push toward private litigation in EU

Class actions in the UK?

Extradition in criminal cartel cases

9. Cartels and the Common Man

10. When the Government Calls(“We’re here to help you. . .”)

Cartels: Witness, innocent 3d party, or knowing participant? Tsunami of international enforcement The race to confess for leniency Conflicting laws, processes and remedies Problems of internal investigations Huge privilege issues

Merger & Monopoly Investigations Might your deal be next? Will the parties find out what you tell the Agencies?

So is ‘Antitrust for Startups’ an Oxymoron?

The antitrust laws are not just about monopolies Btw, even startups can be monopolies

Antitrust can be a shield as well as a sword

If you sell goods or license IP, there are rules

Collaboration is fine; but don’t cross the line

IP power & abuse getting lots of attention now

If you sell overseas, the terrain is trickier

Be ready when the government comes, even if it’s just ‘to help you’

Questions?

Copyright 2014

Charles T. (Chris) Compton

Charles T. (Chris) Compton

Chris is a litigator whose focus is on merger regulatory and intellectual property issues. He has overseen the antitrust work in more than 900 mergers, acquisitions, and joint ventures—many of which involved formal investigations by the FTC, DOJ, EC, and other international competition agencies. None of these deals was ever blocked or abandoned due to antitrust challenge.

Named a Northern California “Super Lawyer” annually since 2004 , Chris was also cited in Chambers USA: America's Top Business Lawyers; Best Lawyers in America; and in International Who’s Who of Competition Lawyers. Chris teaches antitrust at Santa Clara University School of Law and at U.C. Hastings. He can be reached by phone at 650-714-8556, or chris@comptonantittrust.com.Website: www.comptonantitrust.com.