Technological Innovation and the Law
September 15, 2014
By Matthew Colligan, W’16
Many believe that in the current social media, data-driven landscape, the law cannot keep up with technology, and the bridge between the two will perpetually widen.
The Federal Trade Commission is responsible for protecting consumers against deceptive and anti-competitive business practices. The Bureau of Competition, where I interned, reviews mergers and acquisitions and enforces antitrust law. Many of the mergers reviewed by the FTC feature companies with high-tech, patented products that have only recently been made available to the public. Without a full understanding of the industries and products involved and a lack of historical market data, it is difficult to predict how the proposed deals will impact consumers.
In addition to the FTC, which is an independent agency with congressional oversight, the Department of Justice, an executive branch agency, has anti-trust enforcement authority. When companies wish to merge, if the merger meets certain transaction and company size requirements specified by the Hart-Scott-Rodino Act, the companies must file with both the FTC and the Department of Justice. The FTC and DOJ then decide who will review the case based on which agency has more experience with cases involving the industry in question. In cases dealing with new technology and industries, however, neither side might have relevant experience, and the investigation might be delayed as the two agencies debate who is best suited for the case.
When reviewing proposed mergers and acquisitions, the FTC considers horizontal and vertical concerns. Horizontal concerns generally emerge when the two parties are competitors, and greater market share after the merger will cause the new company to have greater control over prices. Vertical concerns arise when a merger may enable and incentivize the combined company to block other potential market participants from using the company’s technology or resources. When reviewing horizontal merger proposals, the FTC evaluates what synergistic effects the merger might have. The combined company may be better suited to refine, market, and efficiently produce the new product, resulting in benefits to consumers. However, the merger might also reduce competition and greatly increase market share of the new company, which is a concern since new high-tech products are often difficult and expensive to produce. For vertical mergers, the FTC considers how the merger might affect access to new technology. For example, if a company is acquired by one of its customers, the combined company may no longer wish to offer products to competitors of the acquiring company.
In order to determine the consumer impact of a merger without historical industry data, the FTC reviews a wide range of documents submitted by the two companies, conducts calls with current and potential consumers and competitors, and conducts depositions with executives of each company to determine their motives for merging and whether they participated in any anti-competitive practices prior to the proposed merger. During my internship, I had the opportunity to review thousands of business documents, including CEO presentations and financial forecasts, in an attempt to gain insight into the dynamics of new industries. I also participated in calls with pioneers of the technology in question and drafted reports for use by attorneys and economists. The research I and my colleagues conducted helped determine the potential value to consumers, both quantitative and qualitative, of new products and services. We could then compare our findings to the value of the proposed merger to help determine if the companies believed the deal would reduce competition. For example, if our research led us to believe that company A’s technology is worth much less than company B proposed to pay for it, then company B might be paying extra to create a less competitive market. Depositions with company executives can help solidify theories about the companies’ motivations behind the proposed merger.
In addition to placing a value on new technology, the FTC conducts research to help determine whether existing companies are capable of or plan on creating competitive products to the technology in question. Through document review and interviews with companies in similar industries, the FTC can gain insight into whether existing companies have the resources, incentives, and knowledge necessary to become competitive in the new industry. If many companies are capable and have plans to produce competitive products, the proposed merger is less likely to give the combined company control over prices. If many companies have the resources to produce competitive products but are unable to because one of the merging parties has patents on necessary technology, then the FTC must balance the desire to keep a competitive landscape with the importance of intellectual property protection.
In addition to the Bureau of Competition, the Bureau of Consumer Protection must keep up with rapidly changing technology. From creating privacy guidelines for smart phone apps to testing claims about the biological effects of new health products, the FTC continuously strives to understand how technology will affect consumers and formulate the best plans to protect them.
While there are clearly a number of obstacles faced in regulating businesses in a continuously advancing society, the FTC tirelessly works to prevent the gap between technology and the law from expanding beyond society’s control when it comes to consumer protection. Interning at the FTC has proved to be a valuable experience for learning more about the intersection of government and business and has exposed me to the mutual dependence, rather than exclusivity, of innovation and regulation.
The views expressed in this post are those of the author and do not express the views of the Federal Trade Commission.
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