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THE LATEST: Enforcers Continue Recent Focus on Innovation Concerns with Emerson/Pentair Consent Agreement

The FTC’s recent consent agreement addressing concerns regarding Emerson Electric Co.’s (Emerson) acquisition of Pentair Plc (Pentair) demonstrates a continued focus on whether transactions will reduce the incentive for merging parties to develop new, innovative products in the future. This is the latest in a string of cases which show that when the antitrust regulators raise innovation concerns, the merging parties need to propose a remedy that will involve the necessary research and development resources for the products at issue.

WHAT HAPPENED:
  • The FTC alleged that the acquisition combines the two largest suppliers of switchboxes, which monitor and control certain valves that regulate the follow of liquids through pipes in industrial applications.
  • The FTC found that switchbox customers have a distinct preference for Pentair’s and Emerson’s switchbox brands, which account for approximately 60 percent of the switchbox market in the United States.
  • The FTC was concerned that the transaction would reduce innovation in the switchbox industry.
  • The parties reached a consent agreement whereby Emerson would divest Pentair’s switchbox manufacturer subsidiary, including all facilities, personnel, and intellectual property associated with Pentair’s design and manufacturing of switchboxes.
WHAT THIS MEANS:
  • The Emerson/Pentair transaction is the latest in a string of transactions where regulators in the US and the EU have raised concerns that a transaction would lead to less innovation in the relevant market.
    • In 2015, Applied Materials abandoned its acquisition of Tokyo Electron after the DOJ raised concerns that the transaction would lessen competition for products in the merging parties’ pipelines and decrease the incentive for innovation generally.
    • The DOJ’s 2016 complaint to block the Halliburton/Baker Hughes transaction emphasized that the merging parties “possess unrivaled product portfolios, research and innovation capabilities, and the scope and scale necessary to address the most difficult technological challenges facing the oil and gas industry they serve.”
    • In March of this year, the European Commission cleared the merger of Dow and DuPont on the condition that the merging parties would divest DuPont’s global pesticide research and development division due to concerns that the transaction would have reduced the number of players that “are globally active throughout the entire research and development (R&D) process.”
  • These cases show two significant trends:
    • First, the agencies are likely to investigate not only reductions in competition among existing products, but also whether potential transactions combine competing innovation sources in an industry.
    • Second, regulators with innovation concerns will seek remedies that divest stand-alone business units that deal with the products at issue, including any necessary research and development resources. Merging parties that are structured with separate research and development departments that address multiple product lines may need to develop a creative solution that alleviates a regulator’s concerns about future innovation.



2014 Cartel Penalties On Pace to Set Record

Global antitrust regulators are on pace to levy record-breaking cartel penalties in 2014.  If global regulators keep pace, cartel penalties will surpass 2013’s record total.  Through June, U.S. antitrust regulators issued fines totaling $709 million (USD), while European regulators imposed fines of $1.95 billion.

The record-breaking fines are the result of global regulators more actively enforcing antitrust and competition laws.  While the U.S. and Europe have been rigorously investigating cartel activity, Russia and many Asian countries have also seen a noticeable uptick in activity.  To date, China has levied $36.3 million in fines, and Japan and South Korea are considerably ahead of the pace needed to exceed 2013 totals.  If the current rate continues through the second half of 2014, global regulators are likely to hit all-time highs by the end of the year, especially considering that many large fines are frequently handed out near year’s end.

In addition to increased fines and enforcement activity, many jurisdictions are also more proactively taking a role in multinational cartel investigations.  Particularly, Asian countries have been more vocal about the extraterritorial reach of U.S. and European antitrust laws.  For example, in Motorola Mobility LLC v. AU Optronics Corp., et al., Taiwan, Japan and South Korea submitted letters to the Seventh Circuit expressing concerns about allowing recoverable damages for the purchase of end-products made with price-fixed products sold abroad.




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