Innovation and the question of how to reflect it in antitrust analysis is probably the most controversial issue of 2017 in the antitrust scene on this side of the Atlantic. Many observers agree that in its decision in Dow/DuPont the European Commission has developed what can be viewed as a new theory of harm. The German Federal Cartel Office seems reluctant to follow suit, a recently published background paper suggests.

A key catalyst for the ongoing intensive debate on innovation and competition was the decision by the European Commission in the merger proceeding Dow/DuPont of 27 March 2017 (M.7932, available here). The Commission approved the merger of the two large US chemicals companies only on strict conditions. Among other things, DuPont has to divest large portions of its R&D activities in the pesticides division. The Commission based its decision on an intensive analysis of the possible effects of the merger, not only with regard to the current product markets and the price and product competition within them, but primarily with regard to the expected impact of the plan on innovation competition. Since both companies were important competing innovators in the development of active pharmaceutical ingredients (“AIs”) in the pesticides sector before the merger, the Commission feared the companies could consolidate their current R&D activities after the merger due to the lack of pressure to innovate. They also assumed that the plan would generally lead to less incentives to innovate.

Even without knowing the full-fletched reasoning of the decision, which was only published in October, many observers agreed that Dow/DuPont ushered in a new enforcement trend in European merger control practice. Many spoke of a new theory of harm or even a ‘quantum leap’, given the extensive divestment obligations imposed on the companies which were based broadly on the fear that abstract innovation incentives could be reduced by the merger. The European Commission rushed to ‘demystify’ this debate about the decision, and emphasised that the decision was in harmony with “sound law and economics” and, even more importantly, consistent with its previous practice (Competition merger brief of the DG COMP, Issue 2/2017). The Commission refers in this respect to its decisions in GE/Alstom (read more here) and Deutsche Börse/Euronext (read more here).

It is correct that the Commission in many previous cases also prominently investigated the impact on the R&D activities of the companies involved as the focal point. But this was always done with a strong factual link to current or emerging product markets. However, in Dow/DuPont the Commission seems to have gone one step further. In addition to conventional product market-related analysis, it employs a separate analysis of the impact on what it names ‘innovation spaces’. These spaces can best be understood as innovation potentials largely detached from current product and technology markets. The companies compete for these potentials with their R&D activities and the discovery targets they set for themselves (see para. 342-352). The term ‘space’ is obviously used deliberately to make a distinction from what is generally known as a market, since the players’ activities, at least in the prognosis period, do not yet reflect customers’ concrete demand and therefore do not have an economic or monetary equivalent. The usual toolbox of antitrust analysis, especially market structure-related analysis, does not seem to work here. To determine the competitive position of the companies within these innovation spaces, the Commission therefore resorts to innovation indicators or proxies such as patent citations and the number and economic success of newly developed active substances. That this attempt of capturing abstract innovation activities and incentives in antitrust analysis is new at least in terms of its approach can be already derived from the fact that the wording ‘innovation spaces’ appears 96 times in the decision. In the older decision on Deutsche Börse/Euronext (2012) this phrase was only used once. In the GE/Alstom decision in 2015 it is not mentioned at all.

The German Federal Cartel Office took a critical look at the new theory of harm employed by the European Commission in Dow/DuPont in a background paper published on 9 November 2017 (“Innovationen – Herausforderungen für die Kartellrechtspraxis”, available here). It here states that considering abstract innovation spaces in a competition analysis apparently gives rise to ‘theoretical and practical questions’. Indeed, reflecting R&D activities and their impact on the competition in a market is plagued by many uncertainties. In order to do so, a ‘double prognosis’ is required. The first prognosis relates to the actual relevance of the R&D activities with regard to possible innovations, i.e. whether the activity will lead to innovative products or procedures. The second prognosis then has to assess the actual impact of such innovation on the competitive situation. These two prognosis are not independent but will most likely influence each other over time. The German Federal Cartel Office appears cautious in the new paper and refers to a number of ‘particular challenges’.

Nonetheless, the European Commission is proactively tackling these challenges. It will be interesting to see whether the Commission deepens its approach in the ongoing Bayer/Monsanto proceedings. The new (preliminary) deadline for the in-depth investigation is 5 March 2018 (press release on the opening of the in-depth investigation here). But it is already clear that future merger plans, especially those that have to be notified with Brussels, must face greater scrutiny in terms of innovation and competition. The impact of merger plans on the R&D activities of the companies involved will in future have to be prepared for even more comprehensively, especially in highly innovative industries. This preparation should be done as early as possible, in any case before entering into pre-notification talks with the respective competition authority.