Competition Law

Break-up of Dominant Enterprises: It’s Not Me, its You [Part I: Understanding Break-ups]

Of late, there have been passionate political calls throughout the world to break-up the ‘big tech’ companies like Facebook, Amazon, Apple, etc. This is primarily because of the overwhelming power that these companies hold in their relevant markets and the near-monopolist advantage that these companies hold over the new entrants in their market. At the outset, this call purports to base itself on the touchstone of the principle of break-up of dominant/monopolistic companies and groups under competition/anti-trust laws. While some of the reservations presented under this call to break-up do raise some pertinent questions, while some of the allegations made against these companies are only clothed as competition concerns but are only extra-legal in nature. We will be focusing on the principles of competition/anti-trust law on the matter.

In this series of articles, the author makes a holistic analysis of the concept of break-up/division of dominant enterprises/monopolies along with the jurisprudence on the subject. The other parts of this series can be found here:

Part I –Understanding the Remedy of Break-up of Dominant Enterprises

Part II – Understanding the Law of Break-ups

 

1. What is meant by ‘break-up of dominant companies’?

In cases of abuse of dominant position or extraordinary instances of dominance by an enterprise, structural or behavioural remedies are available. A structural remedy seeks to alter the structure of a company. A behavioural remedy, by contrast, targets a firm’s conduct, by proscribing certain practices and/or requiring others. Break-up or division is a structural remedy whereby a company or a group is divided by way of divestiture, sale or winding up of parts thereof, etc. by the competition regulator or the courts, at the instance of such regulator for either abuse or holding of a dominant position.

While the remedy stands as such, the conditions precedent for the invocation of this remedy varies across jurisdictions. For example, in India division of an enterprise can be ordered merely on basis of it holding a dominant position whereas under the US law, break-up of monopolies is ordered only where there is both a monopoly position held and consequent anti-competitive conduct arising therefrom.

 

2. Suitable Cases

While a structural remedy may be available in both merger and non-merger cases, its application varies across jurisdictions.  For example, in the case of Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP the Supreme Court of the United States of America has interpreted the monopolization offence to require both monopoly power in the market at issue and anticompetitive conduct, under the Sherman Act. Thus, to be broken up in the United States, inter alia, these conditions are necessary to be fulfilled. In contradistinction, an enterprise merely holding a dominant position and not engaging in its abuse can be broken up under Section 28 of the Competition Act, 2002.  There are numerous other inter-jurisdiction differences. For the present analysis, we will be focusing on break-ups in non-merger cases.

 

3. Burden of Proof and Reasoning

Use of the break-up remedy must not be looked at lightly. At its core, the break-up remedy is the imposition of an artificial view of the market imposed by the regulator in place of the actual development of the market. Furthermore, it is arguably the harshest remedy that can be imposed by the competition regulator in monopolization/dominance cases. Not only does it substantially disrupt the operation of the company, but it also has far-reaching consequences on the markets themselves.

The competition regulator must conclusively determine/prove that the break-up remedy is firstly, necessary in order to redress the anti-trust violation or market position and is only sought as a last resort. Secondly, in the judgment of the Regulator, it should be presumable on consideration of the facts, the nature of the market, the effect, etc. that the break up of the impugned enterprise or group would leave the market and the competitive environment therein in a superior or better off position than it was in before such break-up through the elimination of the bad conduct. Thirdly, it must be shown that it is the best remedy available. Fourthly, even in cases where the result of the break-up would be positive, a sound balance must be sought looking to the exigencies of the factual matrix and the complexity of the market structure along with other pertinent factors. Lastly, this question of whether a firm ought to be broken up or not must be looked at from a problem-solving vantage and not some misplaced sense of biblical justice.

In the case of United States Vs. Microsoft (“Microsoft”) the Supreme Court of the United States reversed the decision of the trial court that had directed for the break-up of Microsoft over violation of Sections 1 & 2 of the Sherman Antitrust Act, 1890. In doing so, it laid down the following precautions for seeking break-up as a remedy for monopolization:

  • divestiture is a remedy that is imposed only with great caution, in part because its long-term efficacy is rarely certain;
  • a clearer indication of a significant causal connection between the conduct and creation or maintenance of the market power where the remedy is structural relief. This means that there needs to be a clear link between the cause or anti-competitive conduct for which the remedy is being sought and the fact of monopolization;
  • the decision as to whether break up is the appropriate remedy in a case must be based on sufficient evidence and rational analysis of the same. The object of this analysis ought to be based around problem-solving.

Judge Frank H Easterbrook in his Article titled ‘Breaking Up is Hard to Do’[1], had stated that in seeking the break-up remedy, one should not “fall prey to the nirvana fallacy, the belief that if a cost or flaw in existing affairs can be identified, it must follow that some other state of affairs (the ‘remedy’) is better.” One of the five Commissioners of the Federal Trade Commission of the United States, Mr. Noah Joshua Phillips had questioned that in a non-merger case, if restructuring a market is sought, why does a regulator presume its vision for how that market ought to work will, in fact, work, much less actually work better? To this, he suggested that the greater the proposed interference with the status quo of a complex system like a market, the less confident it should be of the desired outcome, both that it will be the outcome and, if so, that it will be desirable. This principle acknowledges the nirvana fallacy and counters with a sober assessment of our limited ability to control complexity and guard against unintended consequences.

Beyond the cases to case basis, the break-up remedy cannot be made part of the course. Regard must be had to the frequency and extent of the invocation of this provision within and across markets in order to avoid cascading and harsh effects of this remedy on the market and the economy.

 

4. Challenges

The application of the remedy of break-up or division raises various concerns and challenges, these are:

4.1. High Degree of Uncertainty

As it was rightly held in Microsoft, “divestiture is a remedy that is imposed only with great caution, in part because its long-term efficacy is rarely certain.” What must be established, therefore, is a causal connection between the conduct and creation or maintenance of the market power.

To argue for break-up as a remedy, one must show, at a minimum, that the market structure contributed to the harmful conduct, that the break-up is very likely to enhance competition and benefit consumers by eliminating the bad conduct, and that behavioural alternatives do not offer equal or greater expected benefits at equal or lower costs. This is a sine qua non. Without any presumable material benefits to competition, a. break-up is only an arbitrary remedy. This decision must also be based on sufficient material evidence and be subjected to sound analysis.

4.2. Implementation Risk

Firstly, along which lines ought the company’s business be divided? This question might be easier to answer for businesses with structural demarcations in the form of separate lines of trade, different areas of operation, a multiplicity of factories and offices, etc. However, the problem arises when these lines are unclear or even non-existent. For example, in the case of United States Vs. United Shoe Machinery Corp. (“United Shoe”) after the Government successfully proved the liability of the Defendant for monopolization, it prayed for the Court to divide the Defendant Company into three separate manufacturing companies. The Judge, however, refused this prayer on the ground that the Defendant conducted the entirety of its production operation in a single plant “with one set of jigs and tools, one foundry, one laboratory for machinery problems, one managerial staff, and one labour force.” He concluded that this entity cannot be divided into three parts for want of sufficient divisibility.  

Secondly, if a break-up is indeed possible, what would be the fate of the resulting pieces? With break-ups, the outcome should be the post-break-up structuration of the assets of the impugned company, implemented such that the outcome is the creation of sustainable and independent entities or assets. If the break-up remedy divides the impugned company/group into multiple unsustainable entities, break-up as a remedy, in that case, is an inviable option. The case of United Shoe is a good example of this.

4.3. Over-Intrusion Risk

Break up of a company involves the imposition of an inorganic view of the ideal market situation in place of the actual growth and structuration that the market has seen, by the competition regulator. This is a very slippery slope. While generally a regulator is seen as an umpire of the game, a competition regulator is also tasked with ensuring freedom of trade in the market along with its healthy development. This role cannot yet be utilised to over interfere with the market structure and processes. The decision ought to be based on just principles and a system of checks and balances.

Especially in cases of ever-changing and cutting-edge industries like the big tech and data, the general conceptions of growth, market structure, market power, etc. cultivated using the study of traditional industries of yesteryears cannot be applied straight away. That would essentially be judging what can only be called the market of tomorrow on the touchstone of the past market economies, a standard which it clearly has foregone. Imputation of a conventional understanding upon these markets would be a regressive move, harkening back to what was and not what is to be.

 4.4. High Costs

There are two kinds of costs associated with breaking up of dominant companies. The first, direct costs are in the nature of the process costs and administration costs which are needed to put the break-up into action effectively, these get progressively higher according to the size and complexity of the structure of the company/group. The second, indirect costs are in the nature of, loss of innovation and initiative in the market, reduction of efficiency, loss of investor confidence, etc. The remedy has a large scale effect on the public. both the core and penumbra of the costs of break-up are necessary considerations. This is where indirect costs come into the picture. Illustratively, a consistent practice of breaking down the ‘big’ companies negatively affects incentives to enter and innovate along with a loss of investor confidence.

 

5. The Pitfalls of Breaking Up

Breaking up of a dominant enterprise/group is one of the harshest remedies that can be met out in dominance or monopolization cases. The severity of implications it comprehends of, lead to the following pitfalls:

  • As discussed above, the imposition of the Government’s view at the cost of market realities can be harsh and even toxic to the corporation/group, the competitive climate and the market structure.
  • There is a reduction of efficiency along with a loss of incentive to enter and further innovate in the market if it has a putative glass ceiling.
  • These interventions would condemn the innocent, distort dynamic markets and reduce consumer incentives to engage actively.
  • No one mentions increased economies of scale and scope, widespread innovation and lower prices – or even free services. These are the cost of overzealous use of the break-up remedy.
  • While domestic companies within the scope of the national competition authority may be broken up, the globally competing companies, Chinese or otherwise may operate compete unhindered. The now divided company would find it hard to sustain itself against such foreign competitors because of its relatively crippled position.
  • Breaking up of companies, especially ones in the more path-breaking industries like big tech, involve the imposition of a possibly outmoded standard of market performance and structure to a market of today. This can cripple such a market where its constitution and nature are not in line with past standards, which this new industry comprehends in its consequences.

 


End-notes:

[1]5 REGULATION 25 (1981).


 

Siddharth is the Founder of CorpLexia and serves as its Editor. He is a student of BBA LL.B (Hons.) and has a special focus on corporate, commercial, insolvency, arbitration, securities and competition laws. He can be reached at siddharth@corplexia.com

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