In this edition of Capstone’s Big Tech Antitrust Tracker, we identify key headline risks we think will set the course for the future of antitrust enforcement action.
March 18, 2021 – Capstone believes that despite sharply increasing pressure against Alphabet Inc.’s Google (GOOGL) and the market power of the Big Tech platforms, seismic changes to US antitrust law and dramatic outcomes in the current litigation remain largely implausible in the short and medium term. However, we think investors should pay particular attention to both the lawsuit against Google led by Texas Attorney General (AG) Ken Paxton (R), as well as the immediate reactions to the recently released internal Federal Trade Commission (FTC) communications in its original 2011 antitrust investigation of Google. While these two headline risks are largely generating noise for now, they will set the course for the coming years as they respectively gain momentum and may spark US lawmakers to introduce new legislation to compel federal regulators to take more aggressive enforcement action.
The next catalysts will likely take place in April. In each of the existing cases against Facebook Inc. (FB) and Google, the companies have made their first procedural responses that indicate their likely strategy moving forward. Facebook has filed a motion to dismiss, while Google has requested a change of federal district court venue (from Eastern District of Texas to the Northern District of California) and will likely file a motion to dismiss after that matter is decided. A hearing on the venue change request was heard on March 18th but is not expected to succeed. In a recent virtual policy day Capstone hosted, former state and federal enforcers unanimously expressed the difficulty of litigating against Big Tech and the lengthy timetables (two to five years) likely for any conclusion of the antitrust matters.
After a relatively quiet period after the filing of the complaints and through the presidential transition, the Biden administration has signaled its intention for tough antitrust enforcement with recent nominations. Exhibit 1 provides an overview of the ongoing investigations and litigation:
Exhibit 1: Overview of Ongoing Antitrust Matters Against Big Tech Platforms (03/2021)
In this tracker, we walk through recent developments and key takeaways from Capstone’s recent virtual policy day with former AGs and antitrust experts.
The Texas complaint on Google’s ad-tech dominance gains steam and expands scope:
Although the case presents novel and, at times, sensational claims about alleged collusion between Facebook and Google, we believe the lawsuit has gained credibility. If successful, this challenge would have the most direct business implications on Google’s business model. Unlike the cases led by Colorado and New York AGs and the DOJ focusing on Google’s search business, the Texas-led litigation centers on advertising. On March 16th, in filing amendments that expand the scope of the complaint to include Google’s Privacy Sandbox initiative, Puerto Rico and four additional states (Alaska, Florida, Montana, and the Democratic AG of Nevada) joined the effort. (see “Google’s Chrome to Drop 3rd Party Cookies in Two Years, Negative for Adtech Firms LiveRamp and The Trade Desk,” January 15, 2020). Texas AG Paxton has requested an additional $43 million in funding from the state legislature for the purposes of the Google lawsuit specifically, an amount that would build on the office’s ability to pursue the legal action. The parties are still attempting to reach an agreement over a protective order, much like a previous conflict in the DOJ’s case (see “Two State-Led Antitrust Complaints Against Google Expands Scope of Business Under Scrutiny,” December 17, 2020).
Revelations regarding the FTC’s 2011 antitrust investigation of Google reignite congressional anger and motivation:
In January 2013, the FTC issued a unanimous decision to officially close a 19-month investigation and not pursue antitrust action against Google. Many advocates continue to see the decision as a missed opportunity to curtail Google’s perceived market dominance driven by the Obama administration’s friendly relationship with the technology industry. On March 15th, Politico published lengthy internal staff deliberations spanning 312 pages. Almost immediately, Google dismissed the document and emphasized the unanimous nature of the commissioners’ vote and the opposing recommendations of FTC lawyers and economists. Future antitrust litigation could incrementally shift judicial precedent away from the “consumer harm” theory, but legislation would be the fastest path to material and significant antitrust reform in the US. In a swift response to the publication of the internal FTC’s documents, Senators Josh Hawley (R-MO), Mike Lee (R-UT), and Marsha Blackburn (R-TN) sent a letter to Chairman Dick Durbin (D-IL) and called for the Senate Committee on the Judiciary to convene a hearing on the perceived lax oversight, indicating the ratcheting up of aggression toward Big Tech that will come.
Roadmaps for state lawsuits are unlikely to change significantly despite potential interruptions:
The controversies related to AG Paxton’s office, the continued budgetary restraints from the COVID-19 pandemic, and the routine elections that lead to potential turnovers in state AG positions are unlikely to disrupt the ongoing cases. Former AGs explained to us that career staff and outside counsel are fully capable and equipped to continue the cases.
Biden administration appointments satisfy consumer advocates and progressive lawmakers, but federal judges will likely maintain consumer welfare standard:
In early March, President Biden nominated Tim Wu to the National Economic Council. Wu is a professor of law at Columbia University, most prominently known for his work defining the concept of net neutrality. He is also considered part of the “neo-Brandeisian” movement to expand antitrust theories and strongly supports a breakup of the large technology companies. Shortly thereafter, reports widely emerged on the impending nomination of Lina Khan for the vacancy left at the FTC from the departure of Commissioner Rohit Chopra to the Consumer Financial Protection Bureau. Khan, best known for her Yale Law Journal article on “Amazon’s Antitrust Paradox,” held a position in House Antitrust Subcommittee Chairman David Cicilline’s office and was a key driver of the subcommittee’s year-long investigation of the platforms. Both of these appointments directly acknowledge the calls for tough antitrust enforcement. Still, the nominations will likely stop short of leading to significant policy changes other than a tougher merger enforcement posture. Furthermore, Khan and Chopra likely have similar ideologies, thereby not significantly changing the composition of the commission. Khan’s nomination may still face resistance, as Senator Lee pushed back on press reports regarding her likely nomination to the post, citing her limited experience.
Remedies must balance implications for the involved parties and for the industry at-large:
The cases against Facebook from the FTC and the New York-led coalition argue for the retroactive divestiture of its past acquisitions, specifically Instagram. However, enforcement agencies will likely also be wary of any overly aggressive relief that appears threatening to the business community for approved transactions and consummated mergers. A “break-up” of Instagram or WhatsApp, for example, may create perverse incentives that diminish investments or cause other companies to engineer integrations that are not fully needed (e.g., Facebook’s integration of messaging products). Voiding contracts, such as Google’s exclusive agreements and similar to claims made during the Microsoft Corp. (MSFT) antitrust case two decades ago, may have an easier time in court but present challenges in reaching language that is specific for forward-looking business pursuits. Radical remedies in state-led cases, such as the one in Texas, are even less likely because of the specific jurisdictional focus.
Private litigation is increasing for competition issues, but Facebook is unlikely to prevail in any case against Apple:
Private litigation is also markedly increasing with claims of anti-competitive behavior by the large online platforms. Facebook has vowed to explore taking legal action against Apple Inc. (AAPL) for its various App Store policies, some of which Apple does not follow with its own applications. Facebook has a long-standing conflict with Apple, which escalated with the latter’s upcoming privacy changes in its iOS 14 mobile platform. Smaller companies, such as privately-held Epic Games, have launched a flurry of antitrust lawsuits against the major platforms. In this context, Apple’s privacy-first argument is likely sufficiently persuasive to fend off any drastic court orders and injunctions.
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