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The Impact of Innovation and Technological Advancements on Mergers (Concentrations) in EU Law

Innovation, Advancements, EU Law, Mergers

PUBLICATIONS

Att. Mehmet Topluyıldız

6/15/20208 min read

person holding orange flower petals
person holding orange flower petals

Introduction

This section will evaluate the European Commission's analysis of the impact of a merger (concentration) on innovation within the scope of the EU Merger Regulation.

According to the Oxford Dictionary, innovation means the introduction of new things, ideas, or ways of doing something. In today's modern world with advanced technology, innovation is the key to the future, higher incomes, and a better world. However, especially within the scope of competition law in the European Region, innovation and innovators have encountered many problems in benefiting from legal actions. Conversely, they have also created many issues. In this section, the European Commission's analyses of innovation in the context of mergers will be evaluated, and it will be argued that many developments are necessary in this area. To discuss this, the European Commission's analysis, perspective, and relevant cases should first be outlined from both sides, and a conclusion should be presented.

Innovation Discussions and Competition Law

Discussions on innovation in competition law began with the fundamental theories of Joseph Schumpeter and Kenneth Arrow. The European Commission's written guide for innovation assessments, outside of case law, is the Guidelines on the Assessment of Horizontal Mergers. In short, when innovation is a significant competitive force, the Commission considers both effects of a concentration. This can increase the abilities and incentives of enterprises to come up with new innovative research, ways, services, or products. On the other hand, according to the Commission's guidelines, a concentration between two major innovators in an innovative market can significantly impede effective competition. A small market share undertaking can become a significant player due to innovation. The final topic is exemplified by the pipeline product market.

Innovation is a crucial part of the European Commission's agenda. Clearly, innovation plays a critical role in developments and other issues in the European Region. Therefore, in the overview section of the Horizontal Merger Guidelines, paragraph 8 mentions that one of the positive effects of effective competition is lower prices, higher quality products, and others.

The Commission’s Minor Assessment of Innovation

From the perspective of competition law in Europe, innovation cases only came before the European Commission in 2015. While this topic had been examined in earlier stages, the main issues only emerged in 2015. Before that, the Commission only considered research and development (R&D) and commercialization matters, such as the pipeline product market. The Commission's very early assessment of innovation was about a concentration between Areva and Urenco. Each intended to control 50% of ETC's capital and voting rights and, therefore, jointly control ETC under the proposed transaction. Regarding the innovation section, the Commission noted that the concentration did not raise serious doubts about the centrifuge or uranium enrichment equipment market. Additionally, regarding innovation markets, the Commission mentioned that these markets are typically dependent on many uncertain factors and generally do not warrant regulatory innovation.

The Commission’s approach contained almost no information or facts about innovation areas. In this very brief assessment, the only issue was that innovation markets are typically dependent on many uncertain factors, which did not provide us with a legal basis. In short, the Commission adopted a very limited approach to innovation markets and did not form an argument based on legal or commercial grounds.

Furthermore, in the Medtronic/Covidien cases in 2014 and the Novartis/GlaxoSmithKline Oncology Business cases in 2015, the Commission raised the same weak concerns about innovation.

The Commission’s Broad Approaches

A concentration between General Electric and Alstom in the heavy-duty gas turbine market was discussed in a 2015 decision. This was a broader and primarily innovation-based discussion case in Europe. The Commission noted that the removal of a significant innovator was highly likely to result in long-term innovation harm. Additionally, the Commission feared that if a significant innovator were removed, new innovative undertakings would be unlikely to emerge due to high entry barriers. As mentioned above, especially after the Horizontal Merger Guidelines, innovation began to be discussed as a very important part of development and began to signify a better market, whether it was an innovative market or not. It can be seen that the Commission has developed its approaches to innovation over the years and has started to consider innovation more.

The Commission's Different Approach

A very famous concentration between Dow and DuPont was examined by the Commission and decided in 2017. These two major undertakings are in the agriculture and chemicals industries. The Commission primarily focused on the main related product, crop protection. The Commission approved the transaction. In the decision's innovation assessment, the Commission conducted more in-depth reviews than in previous decisions. For the agricultural chemicals industry, it stated that innovation is vital for competition. Due to high entry barriers and a limited number of players in the market, the market has effective intellectual property protection. The Commission also examined previous merger waves, noting that consolidation waves led to decreased innovation intensity. Additionally, it noted that the merging parties were innovative and close competitors. Despite all these reviews, the Commission concluded that the remaining competitors could compensate for the necessary innovation in the market.

Until then, the Commission had thoroughly examined the market and found many factors that could lead to a less innovative market. However, the Commission found that this loss of innovation could be compensated for by other actors. Simply put, this was an in-depth examination of the innovation market, but with DuPont's commitments to divest R&D organizations, the Commission approved the transaction.

This decision raises many concerns about innovation market concentrations. Because if the Commission can decide with the commitment mentioned above, then any concentration can be approved by the Commission regardless of close competitors and limited leading innovators. Because, if a market is innovative and contains only limited innovators, a merger between two undertakings with a simple R&D divestiture will likely avoid prohibition due to the creation of unknown areas in the merging undertakings that cannot be examined after the transaction. Even if such a commitment is not feasible in real life, the Commission decided this way.

A merger without an R&D organization would allow the merging firms to maximize profit. After all, profit is necessary for R&D activities, and this concentration will indirectly but inevitably affect R&D activities.

Bayer-Monsanto

Another significant decision was made in 2018 regarding Bayer's acquisition of Monsanto. The Commission reviewed the concentration in depth from an innovation perspective, as in the Dow/DuPont case. In this decision, the Commission identified three main review topics related to innovation concerns, such as broad field characteristics, non-selective herbicides, and herbicide tolerance systems. As seen, the Commission conducted an even more in-depth review. As in the Dow/DuPont case, concerns focused on the R&D organization. As mentioned above, it is clear from this decision that the Dow/DuPont decision allowed Bayer to proceed with the acquisition with a divestiture commitment. More concerns may arise because the undertakings mentioned above and those in this case are almost in the same product market, i.e., the global crop protection market.

According to the Commission, the innovation harm related to fungicides, insecticides, microbial, and bee health products was not confirmed. This is because the remaining actors' innovative potential is sufficient, and the merging parties did not closely compete with each other in some markets. On the other hand, Bayer is obliged to divest assets worth $9 billion to the German chemical undertaking BASF.

Bayer's commitments are to eliminate the parties' current overlaps in the seeds and pesticides markets. Where concerns arise, they will manage the concerns by divesting the relevant Bayer businesses and assets. It also includes Bayer's worldwide R&D organization for seeds and traits and Monsanto's research activities to develop a product to rival glyphosate. Additionally, it includes some Monsanto assets that could compete with Bayer's nematode seed treatment. Finally, Bayer has committed to licensing its entire global digital agriculture product portfolio and pipeline products to ensure continued competition in this emerging market. These commitments are vital not only because of legal innovation review issues but also for humanity. Because Bayer and Monsanto are the two most powerful undertakings in the corporate protection industry worldwide, owning countless products.

The Commission's Possible Approach and Disadvantages

Finally, it is possible to add that the Commission is examining whether Amazon's e-book practices reduce innovation incentives by copying its competitors' products. The Commission's initial decisions were based on definitions and went beyond being aware of innovation. After the agenda change, it is clear that the Commission began to research innovative markets using innovation tools such as R&D organization and integrated product markets. However, the Commission's approach is still not feasible in real life. Because innovation assessment does not only depend on the R&D process or being close competitors in an innovative market. The Commission should also consider that profit is essential for innovation and continues to allow significant competition exclusion and decreased incentives for innovative undertakings by permitting such concentrations. Especially due to the decisions in agricultural protection innovation, there are now very few competitors left, and it is highly likely that we will experience the adverse effects of these decisions together in the near future.

Conclusion

In previous decisions, it is clear that the Commission's innovation concentration analysis was only related to market type definition. It was quite unpredictable and not in touch with developments or legal and economic grounds. Over time, the Commission made decisions with detailed analyses such as different but close market integration and the importance of the R&D process on innovation. However, the Commission's approaches show that innovation relies solely on innovations. It should not be forgotten that the R&D process depends on the economic power of the undertakings. In terms of innovation, real-life issues should also be determined in decisions. The Commission should improve its approach by producing better solutions than R&D divestitures to avoid reducing innovation, preparing real-life simulations. Since then, especially in the corporate protection market, it is clear that innovation has decreased. Finally, the commitments in the Bayer/Monsanto concentration are vital not only because of legal innovation review issues but also for humanity.

References

  • Legislations, Guidelines, Notices

    • Guidelines on the Assessment of Horizontal Mergers Under the Council Regulation on the Control of Concentrations Between Undertakings, OJ C 31 [2004]

    • Commission Notice on Case Referral in Respect of Concentrations OJ C56

    • Commission Notice on the Definition of Relevant Market for the Purposes of Community Competition Law OJ C 372 [1997]

    • Guidelines on the Assessment of Horizontal Mergers Under the Council Regulation on the Control of Concentrations Between Undertakings, OJ C 31 [2004]

    • Guidelines on the Assessment of Non-horizontal Mergers Under the Council Regulation on the Control of Concentrations Between Undertakings, OJ C265 [2008]

    • OJ C/267 Commission Notice on Remedies [2008]

  • Cases

    • Case IV/M.1846 Glaxo Wellcome/SmithKline Beecham

    • Comp/M.7217 - Facebook/ WhatsApp

    • C-413/06P Bertelsmann and Sony [2008]

    • C-41/90 Klaus Höfner and Fritz Elser v Macrotron GmbH [1991] I-01979

    • M.3916 T-Mobile/Tele Ring [2007]

    • M.1524 Airtours/First Choice [1999]

    • M.7758 Hutchison 3G Italy/WIND/JV [2016]

    • M.4381 JCI/FIAMM [2007]

    • M.3099 Areva/Urenco/ETC JV [2004] para 52

    • M.7326 Medtronic/Covidien [2014]

    • M.7275 Novartis/GlaxoSmithKline’s Oncology Business [2015]

    • M.7278 General Electric/Alstom [2015]

    • M.7932 Dow/DuPont [2017]

    • 2822 ENI/EnBW/GVS [2002]

    • M.7932 Dow/DuPont, 2017/C 353/05

    • M.8084 Bayer/Monsanto [2018]

    • M.8869 RyanAir/Laudamotion [2018]

    • T-342/99 Airtours v Commission [2002]

  • Other Sources

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