This article originally appeared in Law360 on July 25, 2022, and is republished here with permission.
Congress is currently considering proposed antitrust legislation known as the American Innovation and Choice Online Act,1 or the self-preferencing bill.
If enacted, the bill would prohibit some of the largest American internet platforms from adopting certain practices that would give preference to their own products, services or lines of business over those offered by other users of those platforms.
Although the bill has attracted stiff opposition, pressure is mounting to bring it to a floor vote before Congress leaves for its August recess.
The bill would apply to any covered platform defined as a "website, online or mobile application, operating system, digital assistant, or online service" with at least 50 million monthly active users — or 100,000 monthly active business users — and an annual market capitalization or U.S. net sales over $550 billion.
It would apply so long as the platform has either been designated as a covered platform by the Federal Trade Commission and the U.S. Department of Justice or is otherwise deemed a critical trading partner based on additional criteria.
This definition of "covered platform" would likely apply to just a small handful of high-profile technology companies.
The bill would make it unlawful for covered platforms to engage in several types of conduct to the extent that such conduct would materially harm competition, including:
Affirmative defenses for such conduct would include showing that "the conduct was narrowly tailored, nonpretextual, and reasonably necessary" for other legal reasons, to protect safety user privacy or data security, or to "maintain or substantially enhance the core functionality of the covered platform."
The FTC and the DOJ's Antitrust Division would be responsible for issuing enforcement guidelines "outlining policies and practices relating to conduct that may materially harm competition" as well as interpretation of affirmative defenses and policies for determining appropriate amounts for civil penalties.
It remains to be seen whether the bill will be able to clear the 60-vote threshold needed to pass in the Senate. And if it does become law, the implementation and enforcement by the FTC and DOJ will be critical to understanding its true implications.
However, the prospect of the bill potentially becoming law raises several issues that should be considered closely by anyone considering starting a new business, making a venture capital investment, or considering a company for merger or acquisition activity that may involve technology platforms.
One consequence of the bill may be to discourage covered platforms from pro-competitive M&A, such as M&A aimed at developing new technologies.
Consider a startup developing a flying car — yes, meet George Jetson. On its own, the flying car business might very well not be viable; however, under the control of a large technology platform with the ability to integrate its own software and products inside the car's cockpit, perhaps the product might have broader commercial appeal and the business might have a more realistic path to viability.
Under the bill, however, a covered platform interested in buying this business could be forbidden from favoring its own applications over those of competitors, preventing the platform from achieving any synergies from the business. In this case, the bill could discourage any plausible buyer from acquiring the business, quite literally keeping the flying car from ever "getting off the ground."
For the same reasons, the bill might also discourage M&A activity by smaller and midsize technology companies. Companies aspiring to become the next Amazon.com Inc. may be chilled from making M&A investments that could put the buyer in the position of becoming a covered platform. In this respect, the bill raises a risk of punishing legitimate success.
Taken together, the two scenarios above may cause a longer-term shift in how founders and early-stage investors view their potential for returns.
Over time, the overall effect of reducing the appetite for M&A in the technology sector could discourage investors from taking the risks required to develop innovative, disruptive technologies.
Conversely, companies that are either approaching or above the covered platform thresholds may look to spin off certain parts of their business, or even break up into multiple companies, to fall below the thresholds for a covered platform. This dynamic could create interesting M&A opportunities for opportunistic investors.
Finally, the bill creates potential complications for M&A involving cross-sector mergers. As an extreme example, if a non-technology-related company with $550 billion in annual U.S. net sales were to acquire an internet platform with 50 million U.S. users but $0 in annual U.S. net sales, then the new combined entity might be deemed a covered platform subject to the bill's restrictions, even though the entity's revenue is entirely based on non-technology-related operations.