Below is a topical update from our Legal Analyst Paul Glenchur detailing key antitrust and economic regulatory implications stemming from the Kavanaugh confirmation. He also provides an updated contextualization around decisive Tech Cases - including AAPL and ORCL - set to be considered by the Supreme Court. If you’d like to be added to Paul’s Legal Catalyst distribution, please email Paul or
- Justice Kavanaugh could encourage reliance on efficiencies to facilitate merger approvals
- Justice Kavanaugh joins core group of Justices that could limit the power of regulatory agencies
- Apple seeks a Supreme Court ruling that would prevent consumer challenges to its 30% app store commissions
- Google Supreme Court petition is the company's last hope to dodge a big damages pay day for Oracle
Justice Brett Kavanaugh's confirmation and elevation to the Supreme Court has important implications across a range of substantive areas, but antitrust and economic regulation will be crucial points of interest for investors.
Antitrust: A Court more receptive to efficiencies as a defense to merger challenges?
There has been a diversity of opinions among courts and scholars regarding the importance of efficiencies as a defense to merger challenges. Generally, in horizontal merger challenges, a government case demonstrating rising prices from higher market concentration will be sufficient to win an injunction blocking the proposed deal despite assertions of offsetting efficiencies. Justice Kavanaugh has indicated an openness to the efficiencies defense, elaborating on his views in the D.C. Circuit's 2017 decision affirming an injunction to block the Anthem-Cigna transaction.
In that expedited appeal, a majority of judges (two out of three) affirmed the trial court injunction. It rejected Anthem's defense that medical cost savings from hospitals and providers would more than offset the post-merger increase in health care network access fees on employers. Judge Kavanaugh dissented. In his view, modern antitrust law clearly embraces the efficiencies defense and that a balancing of the adverse competitive impact of the proposed merger (between $48 million and $930 million in increased annual access fees on employers) would be amply offset by lower rates charged by health care providers and hospitals (between $1.7 billion and $3.3 billion annually).
The only question, in Judge Kavanaugh's view, was whether the efficiency gains were the result of unlawful monopsony power, i.e., anti-competitive market power to unfairly squeeze upstream health care suppliers. He would have rejected the district court's basis for the injunction and remanded the case for a trial on the monopsony theory.
Of course, Justice Kavanaugh is only one of nine members on the Supreme Court. His antitrust analysis of merger efficiencies, however, invites companies in future horizontal mergers to pursue an aggressive efficiencies defense, recognizing that the Court could now be trending toward more favorable consideration of offsetting efficiencies that could pass through to affected consumers.
Monopsony power has been a more complicated and challenging basis to attack horizontal mergers. Perhaps it could gain additional credibility in the years ahead, but it is worth noting that the newest member of the Supreme Court would probably have allowed the Anthem-Cigna merger to go through, calling into question today's conventional assumption that a DOJ or FTC demonstration of post-merger price increases will essentially dictate the result. A meaningful and provable efficiencies defense could be equally vital to the ultimate determination of net consumer harm and thus the lawfulness of a proposed transaction. How this dynamic plays out on the Court has substantial implications for companies as they evaluate transaction regulatory risk.
Economic Regulation: Discouraging Government Agency Overreach
Critics of ambitious economic regulation often contend federal agencies adopt rules beyond their statutory power to implement policies that cannot win congressional support. To validate such regulation in court, agencies generally rely on the Chevron doctrine, a well-established judicial precedent that encourages federal courts to defer to an agency's reasonable interpretation of its regulatory authority.
There are indications the Supreme Court could curb such deference. Justice Neil Gorsuch, President Trump's first Supreme Court choice, has previously criticized the reach of the Chevron doctrine and Chief Justice John Roberts, in a critical Obamacare case, authored an opinion rejecting the power of the Internal Revenue Service to determine subsidy eligibility on federally-administered health care exchanges.
And now comes Justice Kavanaugh who, as a DC Circuit Judge, rejected the FCC's authority to impose common carrier regulation of broadband services because such sweeping regulation, in his view, cannot be validated under the Chevron doctrine. A regulation of such economic magnitude needs explicit direction from Congress.
Justice Kavanaugh's perspective is grounded in basic constitutional principles. As he wrote in a major EPA case: "Undue deference or abdication to an agency carries its own systemic costs. If a court mistakenly allows an agency's transgression of statutory limits, then we green-light a significant shift of power from the Legislative Branch to the Executive Branch. The Framers of the Constitution did not grant the Executive Branch the authority to set economic and social policy as it sees fit."
It's quite possible that a core group of Justices could represent a coalition signaling a major curtailment of Chevron deference. A doctrinal retreat of this nature would curtail the inherent power of federal agencies, rendering vulnerable the adoption of sweeping, ambitious mandates. It could also discourage agencies from implementing substantive rules that even arguably push beyond the boundaries of generally-accepted regulatory powers. Although the Trump Administration has pursued a deregulatory agenda, a Supreme Court trend limiting deference to agency actions could prevail over several ensuing Administrations.
Apple in the Supreme Court: a Challenge to its 30% App Store Cut
Meanwhile, the Supreme Court opened the new term on October 1 and one of the key business cases on the docket involves Apple as it defends against claims it abuses monopoly control of the Apple ecosystem by charging a 30 percent commission on apps sold in its app store.
Last year, app commissions represented roughly $11 billion of the company's $230 billion in total revenue but this segment of the business is experiencing significant growth.
A federal appellate court allowed a class action against Apple to proceed, asserting a damages claim for billions in overcharges, an amount that can be tripled (treble damages) under the relevant antitrust statute. At a minimum, if litigation moves forward, pressure could mount to modify or reduce commission levels for app store sales.
The Supreme Court has agreed to determine whether consumers purchasing apps in the app store have standing to sue for antitrust damages. The Court has previously held that only direct purchasers have antitrust standing because calculating pass-through damages of secondary plaintiffs or other indirect purchasers would be administratively difficult. Developers set the price of their apps and Apple takes its 30 percent commission before remitting the remaining 70 percent to the developer. Thus, according to Apple, the developers are the direct purchasers of Apple's app store agency services and they are the only parties with standing to assert antitrust injury.
The government has weighed in on Apple's side but there is a split of opinion among federal appellate courts. We give the edge to Apple but anticipate additional insights from oral arguments. Briefs have been filed and we expect a scheduling announcement for oral arguments soon. The case will be decided no later than late second quarter of next year.
Oracle v. Google: Oracle Seeks a Big Pay Day for Copyright Infringement
This is a case that has ping-ponged through the federal court system for years. For Oracle, however, the prospect of final victory appears to be coming within reach.
As we noted (Hedgeye Potomac, Oracle Court Victory in Android Copyright Battle, March 27, 2018) (click here), a federal appellate court recently rejected Google's claim that it could -- without a license -- incorporate Java APIs (application programming interfaces) to facilitate the utility of the Android mobile operating system. Oracle took ownership of Java when it acquired Sun Microsystems several years ago. Google went ahead and incorporated parts of Java in its Android operating system despite failed negotiations with Oracle over a potential licensing arrangement.
The Federal Circuit Court of Appeals, a court that specializes in intellectual property cases, previously held that the Java APIs were subject to copyright protection. Oracle has pursued a copyright infringement claim against Google seeking about $9 billion in damages.
In round two of the litigation, Google asserts it need not pay for a license to use Java APIs because such usage is "fair use" under the copyright laws. As an oversimplified generalization, the doctrine of fair use basically allows unlicensed use of protected content when such use promotes collateral benefits (like in an academic context) without undue impairment of the IP holder's commercial opportunities.
The fair use claim was rejected and the appellate court recently denied Google's request for an en banc (full court) rehearing. Google has one last hope if it hopes to avoid the final phase of this proceeding -- a trial to assess the total amount of damages owed to Oracle. Google is asking the Supreme Court to take the "fair use" case on review, contending an Oracle victory in this case would undermine software compatibility and impair innovation.
Google has till the end of November to file its petition with the Supreme Court. A few months later, we should hear whether the Court is taking the case. But the Supreme Court only takes a handful of the roughly 7,000 appeals it receives each year. About 80 to 100 cases are argued in a given term. Google faces long odds at this point, but we expect the company will marshal support from every tech interest willing to back its view that limited, license-free use of Java to launch the Android mobile platform is critical to high tech innovation.
