United States: DOJ and FTC to shift focus to AI as stringent merger enforcement chills tech deals

Introduction

The most notable aspect of US merger enforcement in the technology sector in the past year has been the absence of it. The Federal Trade Commission (FTC)’s and Department of Justice (DOJ)’s enforcement activity has been minimal compared with the first few years of the Biden administration, when the FTC opposed acquisitions by Nvidia, Meta and Microsoft and brought lawsuits challenging consummated acquisitions by Meta and Google. But neither agency brought an enforcement action to stop a tech deal to this point in 2024, and 2023 only saw two enforcement actions in software niches.

There are several reasons for the lack of enforcement actions. One is that US antitrust regulators have adopted a tough attitude and approach towards tech mergers that is likely to have discouraged dealmakers from pursuing acquisitions that could raise antitrust issues from the start.

Another reason is that antitrust regulators outside the US have been more proactive than the US regulators. The most common action US antitrust agencies have taken lately related to tech deals has been to make statements after parties abandon deals due to opposition from antitrust regulators outside the US.

Amid diminished merger activity, US regulators have been investigating major technology companies’ investments in the rapidly growing artificial intelligence (AI) sector via minority interest acquisitions in AI companies, as well as through ‘aqui-hire’ transactions. US antitrust agencies have reportedly started investigating these relationships and transactions in the AI industry.

In the only new tech merger enforcement action brought by US agencies in the past year, the FTC obtained a preliminary injunction to prevent IQVIA’s proposed acquisition of Propel. The court’s decision applied market share threshold precedent, which the agencies cited in their new Merger Guidelines and sided with the FTC regarding its low burden to secure preliminary injunctions. Meanwhile, the FTC is currently litigating an appeal in the 9th Circuit in its ongoing challenge of Microsoft’s acquisition of Activision, and a key issue on appeal is the FTC’s burden to secure a preliminary injunction. The outcome of that case will be a crucial factor in the FTC’s ability and willingness to challenge mergers, including those in the technology sector, in the coming years.

Fewer strategic tech deals due, in part, to antitrust enforcement environment

Early in the Biden administration, both the FTC and DOJ were active in challenging transactions in the technology space, particularly acquisitions by the biggest tech firms. The FTC opposed Nvidia’s purchase of Arm, Meta’s purchase of Within and Microsoft’s purchase of Activision. The FTC also sued Meta over its older purchases of Instagram and WhatsApp, and the Section 1 and Section 2 monopolisation suit that DOJ brought against Google in January 2023 relies largely on Google’s repeated acquisitions in the ad tech sector. In a 2021 public statement, FTC Chair Khan noted that ‘the Commission’s enforcement actions have already focused on how digital platforms can buy their way out of competing’.

While rising interest rates and declining valuations have certainly contributed to a slowdown in the overall M&A market, the hostile antitrust regulatory environment also seems to have had a significant impact on dealmaking activities in sectors where antitrust enforcement has been most aggressive. In 2023, the volume of global tech M&A dropped by 51 per cent year over year. Notably, the largest technology companies were relatively inactive in terms of M&A activity. For example, Google did not report any significant acquisitions in its 2023 annual report. Similarly, Apple removed a line item in its 2023 annual report discussing acquisitions, suggesting it had little to report to investors.

The leaders of the DOJ and FTC believe their actions have made an impact on dealmaking. In November, FTC Chair Khan quoted remarks from bankers and investors indicating that dealmakers have dropped deals at an early stage that would have proceeded in a different antitrust environment. The head of the DOJ Antitrust Division, Jonathan Kanter, expressed a similar sentiment in a February 2024 speech when he said: ‘As a result of our providing clear guidance and backing it up with a willingness to litigate to stop violations of the law, fewer anticompetitive deals are making it out of boardrooms in the first place. That’s progress.’

US agencies investigate, but extra-US regulators’ actions stymie tech deals

Though the US antitrust agencies have been quiet in terms of bringing enforcement actions, they have made public statements about their investigations of deals that fell apart primarily due to opposition by regulators outside the US. Three deals in particular highlight this trend: Adobe/Figma, Amazon/iRobot and Qualcomm/Autotalks.

Adobe/Figma

In September 2022, Adobe publicly announced its plans to acquire Figma. Adobe and Figma were both leading providers of digital design tools. In the US, the DOJ issued second requests to the parties in November 2022.

The European Commission (EC) was the first regulator to take steps to challenge the deal, issuing a Statement of Objections (SO) on 17 November 2023. The SO laid out the EC’s preliminary conclusion that the transaction would significantly reduce competition in the market for interactive product design tools, where Figma was the clear market leader and Adobe was one of its largest competitors. According to the EC, the deal was likely to create a dominant market player and was a reverse killer acquisition because it would be likely to result in the discontinuation of Adobe’s design tool.

The UK Competition and Markets Authority (CMA) followed with its provisional findings shortly thereafter on 28 November 2023. The CMA found that the deal would have eliminated competition between two key competitors in three software markets: product design, image editing and illustration. The CMA also laid out ‘possible remedies’, all of which, according to the parties, would have eliminated the core benefits of the transaction.

From February to November 2023, there were several reports that the DOJ was preparing to challenge the deal, but the DOJ never brought a formal challenge. On 18 December 2023, Adobe and Figma abandoned the proposed merger.

Ultimately, the DOJ merely issued a statement from Assistant Attorney General Jonathan Kanter applauding the abandonment of the transaction, stating that it ‘ensures that designers, creators, and consumers continue to get the benefit of the rivalry between the two companies going forward’.

Amazon/iRobot

A similar dynamic played out with respect to Amazon’s proposed acquisition of robot vacuum cleaner maker iRobot. The parties announced the transaction in August 2022. In September 2022, the FTC issued second requests to the parties. Following a Phase I investigation, the CMA unconditionally cleared the transaction in June 2023. However, the EC issued a SO in November 2023, alleging concerns that Amazon would hamper rival robot vacuum cleaner suppliers’ ability to effectively compete by foreclosing them from Amazon’s online marketplace. On 29 January 2024, Amazon and iRobot abandoned the deal citing the lack of a path to regulatory approval in the European Union.

The FTC did not take action against the proposed transaction. Instead, after the parties abandoned the deal, the FTC issued a statement saying that it was ‘pleased that Amazon and iRobot have abandoned their proposed transaction’.

The Amazon/iRobot transaction demonstrates a difference in the EC’s and the FTC’s approach. The EC took formal action to block the transaction based on a narrow, traditional rival foreclosure theory of harm. The FTC’s investigation, on the other hand, included a range of more novel theories of harm, including ‘effects on innovation, entry barriers, and consumer privacy’ according to its press release. But after a more than year-long investigation, the FTC ultimately took no formal action to challenge the transaction.

Qualcomm/Autotalks

Qualcomm’s proposed acquisition of Autotalks followed a similar pattern. On 8 May 2023, major global chip maker Qualcomm announced an agreement to acquire Autotalks, an Israeli semiconductor company specialising in vehicle-to-everything (V2X) communication technologies. The EC launched an investigation into the transaction in August 2023 based on Article 22 of the EU Merger Regulation, which allows the Commission to review mergers that do not meet the usual notification thresholds but may still significantly affect competition within the EU. The Commission was concerned that the parties were close competitors and that there were only three companies currently supplying V2X products, such that the deal would result in a 3-to-2 combination.

In late February 2024, the CMA also launched a merger inquiry. The parties abandoned the merger on 25 March 2024.

As in Amazon/iRobot, the FTC undertook a lengthy second request investigation, but did not take any formal action to challenge the deal. In March 2024, about a year after the deal was publicly announced, the FTC merely issued a statement that indicated that its investigation revealed concerns about the transaction: ‘Based on its probe into this proposed merger, FTC staff was concerned that the deal might harm competition in markets for V2X chipsets and related products.”

The long period following the DOJ’s and FTC’s issuances of second requests, their decisions not to bring formal challenges to the deals, and their post-abandonment public statements suggesting that they had significant competitive concerns with the deals suggest that the DOJ and FTC are coordinating closely with extra-US regulators’ parallel investigations of transactions. Those regulators often face lower burdens in challenging transactions, particularly because they are not required to bring lawsuits in a separate court as the US agencies are required to do in order to preliminarily enjoin a transaction’s closing. As a result, whereas US regulators have historically been seen as leaders of global merger investigations – particularly those involving US companies – there is now a widespread perception that the US agencies have become more willing to allow the regulatory process in other jurisdictions to play out first.

In May 2024, the House Committee on Oversight and Accountability opened an investigation into the FTC’s coordination with antitrust regulators outside the US, specifically with respect to Amazon/iRobot. According to the committee chairman, ‘[t]he FTC’s actions indicate to American businesses that the FTC will work outside of US antitrust law by using the EC to realise its desired outcomes’. The committee has issued several requests for documents and information, including all communications and documents shared between the FTC and European officials regarding the Amazon/iRobot merger. The investigation is ongoing.

FTC probes AI partnerships and transactions

While tech merger enforcement activity has been slower, US antitrust regulators have focused on other kinds of transactions in the AI space, which has been one of the fastest-growing areas of technology over the past two years. The boom was spurred by the upstart company OpenAI with its release of ChatGPT in late 2022. Since then, the biggest technology players have been working to accelerate development of their own AI technology, such as Microsoft’s CoPilot and Google’s Gemini. To do so, they have looked to access technology and acquire talent from smaller AI companies.

Legacy technology companies’ efforts to acquire AI technology and talent have involved two notable approaches apart from outright acquisition. First, large established tech players have taken minority positions in newer AI companies. For example, Microsoft has invested more than US$13 billion in OpenAI since 2019, giving it a significant minority position in the for-profit arm of the company. As part of this relationship, Microsoft has licensed OpenAI’s technology and used OpenAI’s capabilities as the basis for its CoPilot offering, which integrates AI features into Microsoft Office products. Similarly, Apple recently invested in OpenAI and plans to incorporate its large language model into a new lineup of Apple products set for release in late 2024. In September 2023, Amazon announced an investment of up to US$4 billion in the AI company Anthropic. Under this deal, Anthropic gains access to Amazon’s cloud computing resources, while Amazon incorporates Anthropic’s Claude models into its Bedrock AI offering.

Another approach that has emerged is for large technology companies to hire key employees and license technology from startup AI companies. In March 2024, Microsoft announced that it had hired the co-founders and other key employees from AI company Inflection. The deal also included a non-exclusive licence agreement by which Microsoft would license Inflection’s technology.

A common aspect of these two approaches is that neither involves reportable acquisitions under the US merger control law, the Hart-Scott-Rodino (HSR) Act. HSR laws only require parties to file and observe suspensory waiting periods for certain acquisitions of voting securities, assets or exclusive licences. However, minority acquisitions of non-corporate entities, as in Microsoft’s and Apple’s OpenAI investments, and employee hiring and acquisitions of non-exclusive licences, as in Microsoft/Inflection, do not require HSR filings.

Despite non-reportability, US regulators are investigating these relationships and transactions. In January 2024, the FTC used Section 6(b) of the FTC Act to order Google, Amazon, Microsoft, Anthropic and Open AI to provide information regarding recent AI-related investments and partnerships. Then, in June 2024, the FTC reportedly issued civil investigative demands to Microsoft and Inflection aimed at probing whether Microsoft structured the transaction as a means of avoiding the HSR reportability rules, known as a ‘device for avoidance’. In addition, in July 2023, the DOJ and FTC issued a joint statement with the CMA and EC on competitive concerns with AI. That statement warned that in some cases, ‘Partnerships, financial investments, and other connections between firms related to the development of generative AI . . . could be used by major firms to undermine or coopt competitive threats and steer market outcomes in their favour at the expense of the public’. The regulators’ statement also indicated that they would ‘scrutiniz[e] investments and partnerships between incumbents and newcomers, to ensure that these agreements are not sidestepping merger enforcement or handing incumbents undue influence or control in ways that undermine competition’.

Microsoft and Apple have also reportedly taken steps related to their OpenAI investments in response to antitrust concerns. Both companies’ investments initially included non-voting board seats on OpenAI’s board of directors. However, recent reports indicate that Microsoft will be giving up its board seat and Apple will not be receiving one. Instead, OpenAI reportedly will be providing these investors with ‘regular meetings’ to update them on the firm’s business.

AI and concerns around potential consolidation of key technologies and inputs will remain a focus of intense scrutiny by the US antitrust agencies and any future enforcement actions in this area will have a major impact on future AI M&A activity and the industry as a whole.

FTC successfully challenged IQVIA-Propel transaction based on precedent underlying the new Merger Guidelines

In the last merger enforcement action in the technology space, a federal judge agreed with the FTC and ruled that IQVIA’s acquisition of Propel Media would be likely to violate federal antitrust laws by combining two of the three top providers of programmatic advertising to healthcare professionals. The district court issued a preliminary injunction preventing the transaction from closing while the FTC pursued its case in its administrative court. Less than a week later, IQVIA called off the proposed acquisition.

The case represented the FTC’s first successful challenge brought since the issuance of the new Merger Guidelines, developed jointly with the DOJ and published just weeks before the court’s ruling. The Merger Guidelines describe what factors agencies consider in evaluating transactions. These agency guidelines are not binding on US courts, which independently evaluate the lawfulness of an acquisition and apply standards set by judicial precedent. However, courts have cited past versions of Merger Guidelines as persuasive precedent, and the new Merger Guidelines went to great lengths to demonstrate that they were supported by judicial precedent.

The new Merger Guidelines included several significant deviations from past versions. One of those deviations was to include a market share threshold for transactions. The new Merger Guidelines state that mergers raise a presumption of illegality when the merged firm’s market share is greater than 30 per cent, citing to the 1960s US Supreme Court case, United States v. Philadelphia Nat’l Bank, to support this threshold.

In deciding to issue a preliminary injunction blocking IQVIA’s acquisition of Propel, the district court judge did not cite to the new Merger Guidelines, which were published after the parties made their final written arguments to the court. But the judge’s decision did rely on the Philadelphia Nat’l Bank presumption that is the foundation of the market share threshold in the new Merger Guidelines.

The judge’s reliance on this case law bolsters the antitrust agencies’ attempts to reinvigorate merger review by convincing courts to return to a lower burden of proof and provides support for the updated Merger Guidelines. We expect the antitrust agencies will often cite this case in future merger challenges. If other federal district courts follow this court’s lead in emphasising older Supreme Court cases, including those articulating lower market share presumptions, antitrust agencies are likely to find it easier to meet their burden of demonstrating harm to competition.

Courts split on FTC’s preliminary injunction burden under Section 13(b)

Unlike the DOJ, the FTC challenges transactions through its own administrative adjudication process before an administrative law judge, whose decision may be appealed to the Commission itself. However, to prevent parties from closing transactions in the pendency of this adjudicative process, the FTC is permitted under Section 13(b) of the FTC Act to seek a preliminary injunction in federal court. Courts must determine whether such an injunction is in the public interest by considering whether (1) the FTC has shown a likelihood of ultimate success, and (2) that the equities weigh in favour of the injunction.

The court’s grant (or denial) of the FTC’s request for a preliminary injunction frequently ends the litigation, as parties conclude they are unlikely to get a more favourable decision on appeal or in administrative court. Therefore, the government’s ability to block mergers it deems anticompetitive may hinge on what standard courts use to evaluate the FTC’s likelihood for ultimate success.

In recent tech merger challenges, courts have articulated inconsistent standards for the FTC to demonstrate a likelihood of ultimate success on the merits. Some courts have adopted a ‘serious questions’ test, under which the FTC must ‘raise questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals’. Other courts have adopted a different, lower burden, finding that the FTC need only show ‘a fair and tenable chance of ultimate success on the merits’.

In granting the FTC’s preliminary injunction to block the IQVIA/Propel transaction, the district court adopted the ‘fair and tenable’ standard, determining that there is no meaningful difference between it and the ‘serious questions’ standard, which merely ‘illustrate[s] how the FTC could show a “fair and tenable chance” of success on the merits’.

Other courts have required the FTC to show more. In the FTC’s failed district court challenge to Meta’s acquisition of Within, the Northern District of California court held that, ‘[t]he FTC is . . . required to provide more than mere questions or speculations supporting its likelihood of success on the merits’. Ultimately, the court denied the preliminary injunction, finding that the FTC failed to meet its burden to show a likelihood of ultimate success.

The FTC’s appeal of the district court’s Microsoft/Activision decision to the 9th Circuit Court of appeals in Microsoft/Activision is based in large part on the argument that the district court held the FTC to the wrong standard, namely, that it required the FTC to demonstrate the ultimate merits of its case rather than simply to ‘raise serious and substantial questions on the antitrust merits’. Defending the district court’s decision, Microsoft has pointed to the US Supreme Court’s recent decision in Starbucks Corp v. McKinney, in which the court held that federal courts should not use a deferential standard for preliminary injunctions sought by the National Labor Relations Board (NLRB) while the NLRB pursues its administrative adjudication process. The FTC has responded by arguing that the NLRB statutory language and standards at issue in Starbucks Corp v. McKinney are distinct from the Section 13(b) language.

Whether this issue is resolved by the 9th Circuit or ultimately goes to the Supreme Court, its outcome will have a major impact on the FTC’s merger enforcement strategy. Ultimately, parties considering transactions should be aware that the FTC, for the time being, may be able to strategically forum-shop to find a court that will apply a more favourable standard for preliminary injunctions, increasing the likelihood that the FTC can successfully block a transaction.

Endnotes