Contents

Introduction. 1

California’s Antitrust Status Quo Is Working. 2

Mergers And Innovation. 4

Recommendations 6

Conclusion. 6

Introduction

On March 26, 2024, the Technology Platforms Working Group of the California Law Revision Commission (“the Commission”) Study of Antitrust Law issued a report (“Technology Platforms Report”) discussing potential changes to California’s antitrust laws aimed specifically at technology platforms.[1] On the same day, the Mergers and Acquisitions Working Group issued its own report (“Mergers and Acquisitions Report”) analyzing antitrust merger policy.[2] The reports come amidst an ongoing process commissioned by the California legislature in 2022 to review the state’s antitrust laws.[3]

The Information Technology and Innovation Foundation (ITIF) appreciates the opportunity to comment on the reports of the Technology Platforms and Mergers and Acquisitions Working Groups, and in particular to ensure that California and the United States more generally maintain their roles as the leading innovation hubs of the world. This comment follows ITIF’s previous comment to the Commission on its Single Firm Conduct and Concentration Reports.[4] While ITIF applauds the Commission for its efforts to evaluate the adequacy of California’s competition laws and consider possible changes, this comment highlights concerns with both the Technology Platform and Mergers and Acquisitions Reports, specifically regarding their respective legal and economic findings from the standpoint of promoting innovation.

This comment proceeds in four parts. The first analyzes the findings of the Technology Platforms Report and specifically whether the status quo, new general legislation, or some form of specific legislation for technology platforms is the best approach for California going forward. The second part considers the Mergers and Acquisitions Report and, in particular, the need to ensure that merger policy is consistent with Schumpeterian competition and benefits from scale, which can be chilled by structural presumptions of harm. Next, the comment provides the Commission with several recommendations to consider as it continues to reflect upon new legislation. A brief conclusion follows.

CALIFORNIA’S ANTITRUST STATUS QUO IS WORKING

The Technology Platforms Report reflects concerns that the antitrust status quo may not be working as it regards the growth of large technology platforms or “Big Tech.” But as the report admits, not only is it “universally acknowledged that California’s technology sector is world class,” but of the world’s 10 most valuable firms by market capitalization, eight are American and four are headquartered in California: Alphabet, Apple, Meta and Nvidia.[5] Indeed, as the report also recognizes, the revenues from the technology industry account for about a sixth of the Californian economy and over 1.5 million employees.[6] As such, large technology companies have not only made California the world’s leading innovation hub, but brought opportunities to its economy as a whole. Moreover, rather than stagnate, California’s digital markets are again leading the world in the next technological revolution associated with artificial intelligence, driven in part by billions of dollars in investments by “Big Tech.”[7] These are digital markets that are thriving, not failing.

The benefits of this antitrust status quo in the U.S. and California are clear relative to Europe. Unlike the U.S., Europe lacks any large digital giants of its own and has seen its share of global wealth fall precipitously over the past 40 years. One simple reason for this divergence has to do with competition policy. Whereas the U.S. moved away from a structure focused antitrust regime that effectively equated conduct that increased concentration with harm to competition in favor of one that required proof of harm to consumers and reduced market performance, the Europeans continued much more along the former lines—competitive order meant some degree effective competition order in a way that was inherently opposed to monopoly.[8] Additionally, European competition law even proscribed exploitative offenses like excessive pricing, which can reduce the ability for firms to recoup the costs of innovation.[9] 

In so doing, whereas the U.S. approach was open to the Schumpeterian scale driven competition that characterized so much of Silicon Valley’s success, Europe’s competition regime was inapposite to it. Specifically, as ITIF explained in its prior comment, “the success of Silicon Valley and the high-tech economy in America is a testament to Schumpeterian competition at work: for example, IBM’s leadership in personal computing was displaced by Microsoft’s paradigm shifting operating system, which was in turn leapfrogged both by Apple with its mobile platform as well as by Google (who surpassed Yahoo!) in general search, who in turn saw its position in advertising challenged by Facebook (overcoming MySpace) in social media.”[10] Indeed, in the early 2000s, when the results of this transatlantic antitrust experiment were becoming clear, Europe began to adopt a “more economic approach” to antitrust enforcement.[11] But unfortunately for Europe, it was already too late: by the end of 2004, Google had gone public, Apple was drawing up the iPhone, and Meta had already been founded.

The neo-Brandeisian concerns cited by the Technology Platforms Report do not suffice to cast doubt on a system that is working well. First, despite claims that current antitrust laws are insufficient to police “Big Tech,” not only were both Microsoft and Intel to consent decrees by the Department of Justice (DOJ) and Federal Trade Commission (FTC) respectively, but antitrust lawsuits are currently ongoing against Google, Apple—both signed on by California—Amazon, and Meta.[12] Accordingly, the idea that antitrust law “inordinately” focused on higher prices neglects that the consumer welfare standard and antitrust law more generally have long and consistently been viewed to encompass innovation.[13] Moreover, as concerns harm to potential competition from mergers and acquisitions, the perception of inadequate enforcement is explainable by cases like Meta/Within, which makes clear that, even for transactions that the agencies are aware of, actions alleging harm to potential competition appropriately face substantial burdens of proof to ensure that the antitrust laws are not used to chill procompetitive transactions based on speculative theories.[14]

Nor are any general changes to California’s antitrust law necessary to address concerns with digital markets. First, such changes would be almost by definition overbroad, and thus not proportional to issues in digital markets, with the result being increased costs and false positives burdening the Californian economy. Indeed, as ITIF has noted previously, general changes in unilateral conduct enforcement being considered would, among other things, harm—not help—competition in California.[15] Moreover, the Technology Platforms Report itself identifies the House Antitrust Subcommittee’s recommendation to override the Supreme Court’s decision in Spectrum Sports but fails to mention that creating anticompetitive liability for leveraging that falls short of creating monopoly or market power would condemn behavior that does not necessarily result in any harm to consumers, but on the contrary very often benefits them, like self-preferencing. Similarly, eliminating the recoupment requirement for Brooke Group and Weyerhauser would condemn behavior that merely harms competitors without any ultimate harm to consumers and competition and thus also generate false positives.[16]

The alternative of adopting specific legislation to address tech platforms, of which the EU’s Digital Markets Act (DMA) is given as an example, would be even more detrimental to Californian consumers and competition. Indeed, similar legislation in the United States, including the Open App Markets Act and the American Innovation and Choice Online Act (AICOA) have so far stalled in Congress, and for good reason. For example, as concerns the AICOA, Professor Hovenkamp has explained that the “AICOA was a bill that deserved to die” as “[m]any of its consequences are uncertain, but others are just plain bad.”[17] Specifically, not only does the AICOA unfairly target innovative markets and firms based on size rather than market power, but its substantive rules would “condemn competitively harmless conduct by firms defined as gatekeepers.”[18]

More generally, not only is digital regulation justifiable solely in the case of market failure—of which there is scant evidence—but the regulation must also improve the status quo relative to non-regulation. And yet, as the U.S. experience with regulation confirms, ex-ante competition regimes raise a host of problems associated with chilling innovation and regulatory capture or the picking of winners and losers.[19] For example, as with the DMA, applying broad per se rules to myriad forms of very often procompetitive behavior like self-preferencing or certain refusals to deal will inevitably chill procompetitive behavior. Indeed, even in the short time it has been enforceable, the DMA has already resulted in both harm to consumers as well as small businesses while effectively picking winners and losers by sending traffic to large intermediaries.[20] To be sure, while the proposal in the report suggests a regime where platforms could offer procompetitive defenses for their behavior, as ITIF previously explained, making a rule of reason balancing test the general standard for evaluating unilateral conduct will not only be unadministrable but also chill procompetitive behavior.[21]

MERGERS AND INNOVATION

In its review of antitrust merger enforcement, the Mergers and Acquisitions Report contains several notable oversights that risk clouding its analysis of potential changes. First, as the Supreme Court made clear in Brown Shoe—a case which is not cited in the report—for the Clayton Act, “the legislative history illuminates congressional concern with the protection of competition, not competitors, and its desire to restrain mergers only to the extent that such combinations may tend to lessen competition.”[22] Nowhere in its extensive discussion of the purposes behind the Clayton Act did the Supreme Court in Brown Shoe expressly invoke the panoply of specific non-competition goals—“protecting democracy, opportunity, and societal values”—mentioned in the report. To be sure, the Court did link a “rising tide of economic concentration” with a “lessening of competition,” but as early as Philadelphia Nat’l Bank the Court made clear that structural evidence must be tied to some harm to market performance, and General Dynamics confirmed that increases in market concentration do not necessarily suffice to meet the plaintiff’s burden and create a presumption of harm.[23]

Second, from an economic standpoint, the report’s trifurcation of antitrust merger policy into a Chicagoan model, a centrist camp presumably associated with the “post-Chicago” school mentioned elsewhere in the report, and the neo-Brandeisian movement overlooks several other key models for antitrust policy. In addition to the Harvard School, which was critical to the formation of the prior antitrust consensus, one of these alternative models is a dynamic view of antitrust rooted in the work of Austrian economists like Joseph Schumpeter.[24] As ITIF has previously explained, Schumpeterian competition and creative destruction, whereby firms compete for the market by creating new products, captures the essence of the American technology success story:

IBM’s leadership in personal computing was displaced by Microsoft’s paradigm-shifting operating system, which was in turn leapfrogged by the Internet tidal wave beginning with Google (who surpassed Yahoo!) in general search, who saw its position in advertising challenged by Facebook (overcoming MySpace) in social media. This cycle, which continues today, led to the rise of the American technology titans that are the economic envy of the world—each not only driving innovation, but competing with one another as they do it. And that technological leadership led to increased global market share, driving U.S. jobs and competitiveness.[25]

Unfortunately, in its discussion of innovation, the Mergers and Acquisitions Report attempts to cabin Schumpeterian innovation incentives in cases of “imperfect intellectual property rights” and other unspecified conditions, which minimizes the robust body of empirical evidence consistent with Schumpeter’s theory.[26] As ITIF explained in its prior comments:

Schumpeter’s insights have more than withstood the test of time. While the general relationship between market structure and innovation has long been a matter of great debate, numerous studies across many economies around the world continue to confirm that the relationship often takes the form of an inverted-U, where markets characterized by many firms are less innovative than markets with a few firms, and markets with a few firms exhibit more innovation than those characterized by monopoly. In fact, for some U.S. studies the relationship is negative, and thus strongly supportive of the Schumpeterian thesis that firms in less concentrated markets lack robust incentives to engage in the risk-taking and R&D that drives innovation.[27]

Moreover, the Mergers and Acquisitions Report fails to note that while the new Merger Guidelines “make frequent reference to the potential for mergers to harm competition by suppressing innovation,” as ITIF noted in comments, any serious consideration of the incentives underlying Schumpeterian competition is omitted in favor of a thoroughly Arrowian view:

Conspicuously absent from this discussion is any recognition of how mergers can facilitate innovation, including by enhancing the ability for appropriation, increasing scope and scale, and supporting investment in R&D—that is, basic themes of Schumpeterian competition. Although the Draft Merger Guidelines acknowledge that “[d]evelopment of new features depends on having the appropriate expertise and resources,” the only inference they draw is that a merger between two such firms “with specialized employees, development facilities, intellectual property, or research projects in a particular area” can harm competition by reducing innovation—and not that a merger can increase innovation by creating “the appropriate expertise and resources” to foster dynamic competition.[28]

One proposal identified by the Mergers and Acquisitions Report is to amend California's antitrust law to address mergers and acquisitions. And yet, as the report itself notes, “the state Attorney General’s office has exercised enforcement powers under the Clayton Act both on national mergers as well as on mergers of state and local importance.”[29] Furthermore, the report acknowledges that “California cannot, as a practical matter, enact a merger statute that is more lenient than the federal standard.”[30] But it is not all clear how a stricter standard would be worthwhile. For example, the report notes the “appreciable risk” standard under the proposed Consolidation Prevention and Competition Promotion Act (CPCA), which is defined as “more than a de minimis amount.”[31] Deviating from Brown Shoe’s warning that merger policy not focus on “ephemeral possibilities” but transactions that have a “probable anticompetitive effect” would open a Pandora’s Box that would have absurd results in a dynamic economy full of possibility—thousands of ultimately procompetitive mergers may be thought to have some “appreciable risk” of harm ex-ante.[32] 

Another proposal identified in the report is the Platform Competition and Opportunity Act, which is targeted specifically at acquisitions by digital platforms. It places the burden on the platform to show that its deal is not anticompetitive using clear and convincing evidence, in large part to address concerns with so called “killer acquisitions.”[33] However, as ITIF has explained, “fears about underenforcement in the form of failing to protect potential competition in technology markets from ‘killer acquisitions’ appear to be overstated. In particular, concerns about killer acquisitions may be more well-founded in pharmaceutical markets characterized by drastic innovations, and where innovation milestones are easy to observe, rather than in technology markets.”[34]

Recommendations

For these reasons, ITIF has concerns with several of the proposals identified in the reports and offers the following recommendations:

▪ Reassess the need for antitrust changes: California has been the global hub of innovation for the past several decades. Its economy is driven by dynamic Schumpeterian competition in the tech sector, which is experiencing yet another gale of creative destruction with artificial intelligence. Rather than impede this innovation, California should look to conserve the legal ecosystem that made it the innovation leader of the world.

▪ The status quo is working: Unlike Europe, the U.S. and California have a booming tech sector because they were open to the Schumpeterian competition that continues to characterize so much of Silicon Valley’s dynamism. Market concentration is a feature, not a bug, of this type of competition, and proposals to expand antitrust liability either generally or for digital markets specifically are likely to have the overwhelming effect of chilling procompetitive behavior that benefits consumers.

▪ Keep the Cartwright Act consistent with federal standards: To the extent that the Commission wishes to expand the Cartwright Act to encompass unilateral exclusionary conduct, it should not go beyond existing federal standards as reflected in §2 of the Sherman Act. The existing federal framework reflects over a century of judicial experience in shaping an antitrust regime that strikes a delicate balance between crafting administrable legal rules, not unduly chilling procompetitive behavior, and promoting robust antitrust enforcement.

Conclusion

As intimated in our prior comment, California’s digital markets are, without exaggeration, perhaps one of the greatest economic success stories in modern history. In just a few decades, California has become home to four of the most valuable companies in the world, which continue to drive innovation and technological progress forward into the new frontiers of artificial intelligence, robotics, and much more. California’s digital markets thus exhibit the very opposite of the sort of market failure that could justify substantial changes to California’s antitrust regime modeled after federal proposals, which are ironically perhaps far less likely to succeed than responsive Congressional action aimed at curbing antitrust expansionism at the state level. At bottom, amidst continued gales of creative destruction, the antitrust policies that enabled the Schumpeterian and scale-driven competition that made California the economic success story that it is remain just as necessary going forward.

Thank you for your consideration.  

Endnotes