Let's talk antitrust - Innovation / competition (Dow/DuPont) and related issues

Ian Giles: Richard, good to see you again. Today, we are going to talk about merger control and, specifically, about innovation competition. Last year, we had the Dow/DuPont case decision in March 2017 -which has created a lot of controversy because whereas traditionally the merger control analysis has focused on horizontal competition between actual products in the market, so are party A’s products competing with party B’s? In that case, there was focus and indeed remedies required in relation to innovation competition. The pipeline of products and, moving beyond that, the possibility of creating a pipeline of products which compete with each other being a theory of harm which the Commission could investigate and potentially sanction. To start with, could you just give us a bit of the background on this? Then we can talk about if is this really novel or really change to the framework.

Richard Whish: Well yes, you are right. There has been a lot of controversy, I have to say from my own point of view, I don’t really understand why this case is so controversial. Because the Commission says this is in the agrichemical sector of course and there are certain products in the pesticide sector where there are conventional horizontal overlaps and the Commission requires remedies there. There also says, Dow/DuPont, are major competitors in the innovation of new products, innovation is very important and we’re worried there is going to be a loss of competition in relation to R&D. Is that new? The moment I knew about this decision, the first thing I thought of was the Commission’s original Block Exemption on R&D Agreements-which I remember reading in 1985 and in the recitals reading about the need to maintain independent polls of research. When I subsequently went back to that Block Exemption, I saw that it referred back to the Commission’s 1968 Notice on Cooperation Agreements, in which they express the same concern as well. I’m not convinced that this is as novel or innovative as people make it out to be.

Ian Giles: Do you have some sympathy for the position of the parties though? So, they would say that the Commission’s track record, when you look at potential competition, the benchmark is set, the threshold is very high, the potential competitor has to have an actual effect on competition in the market before the Commission will treat that as being something which is worthy of sanction or investigation of remedy. Whereas, with innovation competition we are talking about products which don’t event exist yet, ideas which are yet to be developed. I appreciate this is in the guidelines but the extent of remedy in Dow/DuPont and this is interesting that the US looked at the same deal and cleared out a need for remedy in that area. What does that tell us about the way the Commission is looking at this?

Richard Whish: One thing I would say there is that I remember the early days of the Merger Regulation and I do remember cases where the Commission looked at innovation and upstream R&D issues and one of the first cases I can remember actually, I think it was 1992 was DuPont/ICI and the Commission expressed innovation concerns there and required a remedy, which I think was global licensing of technology. So again, I repeat I don’t think this is a new as people make it out to be to be perfectly honest.

Ian Giles: One of the angles that we have seen a lot focus on from the complaints is the context. There was this paper published by a number of members of the Commission’s chief economist’s team - which talks about a simple model of mergers and innovation and there was a quote in there saying “a merger tends to reduce innovation, consumers are always worse off after a merger”. That, I think, has been a bit of catalyst for the response that we have seen to this deal and I think people are jumping the gun possibly as well because the Commission’s decision which sets all the reasoning out is something that is not yet available.

Richard Whish: Exactly, an academically published article is not the policy of the European Commission and I think it is quite wrong to pick out a sentence from an academic piece and construct some worrying theory from that. Carles Esteva Mosso spoke about this case in the ABA a couple of weeks ago in Washington and he was very clear that you select your cases, you look at the particular sector, you don’t get carried away. But I can see in this sector, we are talking about immensely important R&D innovation, which the citizens of the world ultimately depend upon. There are very few players, the cost of investment in this sector is enormous, they are a very powerful intellectual property rights, I can see how there is a theory of harm here.

Ian Giles: The other angle I wanted to ask you about which we’ve seen a number of people commenting on is that the Commission was unfair. So, they looked at the markets and they looked at the reduction in innovation competition but they didn’t really consider, in the view of these objectors, the incentives to continue innovating which would exist for the parties afterwards and that there would be positive, increased appropriability: the ability to blend the innovations of the two companies coming together which there will be an incentive to do because there would still be opportunities to develop the new product out there which would increase revenues and profitability. The Commission’s pushback was that that was something which was an efficiencies argument and, therefore, was for a later stage of the analysis -which I think the parties felt, or at least what you read and hear, was an artificial distinction. The Commission was not allowing those points to be heard because they felt they had not been presented at the right stage of the case. Do you have any sympathy for that?

Richard Whish: Well I haven’t read the entire decision, which as you know is absolutely enormous. Every case has to be decided on its own particular facts. I am aware that there was evidence in this case that the parties had indicated that they would reduce their expenditure on R&D enormously. That must had been a very telling factor as far as the Commission was concerned.

Ian Giles: That is interesting because we have consultations at the moment both at Commission level and in the UK  CMA about the increased importance and role of internal documents, we are seeing a lot of cases where internal documents are making a difference. Do you feel, to round this off, that this reflects an increased level of scepticism from the authorities about some of these big transactions?

Richard Whish: It is an interesting question, what I would say there is that I just think there is increased scepticism in merger control period. Everything I see and watch at the moment suggests to me that there is greater scepticism. I have heard lots of discussions around remedies where I have heard officials from authorities wondering out loud whether perhaps they have been too generous in some cases. In relation to remedies, which is another way of saying perhaps there are some cases that should have been prohibited that were not. I think that generally speaking one is seeing a greater appetite to, what shall I say, push further.

Ian Giles: Which is going to be very interesting in the broader political climate where you have all kinds of developments.

Richard Whish: Exactly, the power of platforms and concerns around digital markets etc. I think it’s a fact of life to date.

Ian Giles: Thank you very much Richard, very interesting.