Antitrust Alert: DOJ Allows Google Acquisition of ITA with Settlement that Reflects Antitrust Enforcement Trends
The U.S. Department of Justice has announced that, to allow Google's proposed acquisition of ITA Software, DOJ and the parties have agreed to a set of requirements that will govern Google's future operation of the ITA business. This action is notable as another challenge to a vertical merger and another example of DOJ imposing "regulatory" conditions on merging parties' future conduct. Both once rare, these elements have become cornerstones of the current administration's merger policy.
As most people know, Google is the largest internet search provider. ITA is less well known, but has developed the leading independent airfare pricing and shopping system, "QPX." QPX collects and organizes airline flight schedules, pricing, and seat availability for travel services companies. It is used by online travel agents (such as Orbitz and Hotwire) and other flight search services (such as Kayak and Bing Travel). Google itself plans to launch an internet travel site to offer comparative flight search services.
In July 2010, Google agreed to acquire ITA, and DOJ has been investigating the proposed transaction ever since. On April 9, 2011, DOJ filed a lawsuit challenging the acquisition and simultaneously filed a consent decree (an agreed judgment) that contained conditions that would resolve DOJ's antitrust concerns.
DOJ alleged that, after acquiring ITA, Google could deny QPX to other flight search companies or disadvantage their access to it, in order to gain an advantage for Google's new flight search service. Most "vertical" mergers, combining companies at different levels of the supply chain, do not raise significant problems, and indeed can bring tremendous efficiencies. But where there is a question, it usually arises where the combined company will be able to foreclose rivals from some important input. Here, the DOJ concluded that after QPX the remaining options are not suitable alternatives. Thus, if denied access to QPX, competition from other flight search services would be undercut.
Requirements for Google/ITA
To address DOJ's concern that Google/ITA could disadvantage other flight search companies, the consent decree includes the following provisions:
- Google/ITA must continue to license QPX to other flight search companies by honoring and extending existing license agreements and negotiating new ones. The terms of extended and new agreements must be substantially similar to those of existing agreements or fair, reasonable, and nondiscriminatory.
- Google/ITA must make available to other flight search services any QPX upgrades it makes available to other customers. Certain currently-anticipated innovations must be made available to other flight search services, as spelled out in great detail. (But in what must be a concession to Google, the consent decree states that Google/ITA need not share products or features that it develops exclusively for Google.)
- Google/ITA must continue to improve QPX, as the consent decree requires that the company not reduce resources devoted to R&D for the product.
- Where Google/ITA and customers cannot agree on certain price terms, the consent decree provides for a baseball-style arbitration.
- The consent decree requires that Google/ITA build an internal firewall to prevent competitive information obtained by ITA from being communicated to Google's flight search employees.
- For purposes of monitoring its compliance with the consent decree, the company must establish a website to which complaints can be submitted. Google/ITA is obliged to report to DOJ all complaints that the company is not complying with the consent decree or is "acting, directly or indirectly, in an unfair manner in connection with flight search advertising." (Contrary to some news reports, this consent decree does not facilitate oversight of Google's conduct generally, such as how it ranks search results in other areas.)
The term of the consent decree is five years. It is subject to court approval following a 60-day public comment period.
This action against Google/ITA highlights several important trends in DOJ enforcement.
Challenges to vertical mergers. Antitrust policy has come to recognize that vertical deals are more likely to be procompetitive than anticompetitive, and enforcement against vertical combinations had become almost unknown. But the current administration has made reviving vertical challenges a priority. DOJ has brought actions against Comcast's acquisition of NBCU (combining television content and distribution) and Ticketmaster's acquisition of LiveNation (combining ticketing and event promotion and venues). Still, there remains little guidance on what vertical combinations may attract DOJ's interest.
Conduct regulation. To ensure that a merger will not lessen competition, historically DOJ has relied on divestiture as a remedy, requiring the merged company sell off one of their competing business lines to restore competition. To be clear, this usually has been in the context of horizontal combinations, where divestitures can be very effective and any sort of fair competition requirement makes little sense. To remedy a vertical combination, non-discrimination regulations are a better fit. But any conduct regulation risks undercutting the company's future competitiveness if the government hasn't accurately predicted the future of the market in question. It also makes DOJ more a regulatory agency as it must police compliance with a consent decree going forward.
Furthermore, DOJ's recent conduct remedies are extraordinary for their reach and the detail of their prescriptions. Some elements of the Google/ITA decree carefully control what usually would be left to companies even in highly regulated markets – requiring the company deal with all comers, agree to fair terms, and maintain certain levels of R&D.
Similarly, in the recent Comcast/NBCU deal, DOJ seeks a decree requiring the new company to license programming to online competitors to Comcast's cable TV services, in order to foster competition by online video distributors. The consent decree in Ticketmaster/Live Nation prohibits tying sales of ticketing services to concerts or artists that the combined company promotes, to lower entry barriers to new competitors.
Despite the burden of ongoing conduct requirements and government oversight, and the possibility it may undercut the efficiencies of the deal, the availability of regulatory obligations as a merger remedy in some circumstances may be valuable to merging parties. The alternative may be an unpalatable divestiture, litigation to defend the transaction, or losing the deal altogether. Google must have thought so in this situation.
Arbitration controlled by DOJ. One of the most regulatory elements of the Google/ITA decree allows arbitration of certain price terms in contracts between the company and customers. DOJ acts as the gatekeeper, to determine whether the customer will be allowed to initiate arbitration. The consent decree requires use of a baseball-style arbitration under American Arbitration Association rules, with arbitrators chosen by the parties and AAA in consultation with DOJ. A similar provision in also found in Comcast/NBCU decree, to resolve disputes with online video distributors, suggesting this regulatory innovation may become more common in DOJ enforcement.
Shorter term. The term of the Google/ITA decree is five years, shorter than the typical ten. (Comcast/NBCU is seven, Ticketmaster/LiveNation is ten.) This deviation seems appropriate for conduct decrees, especially in fast-moving technology industries, where the accuracy of any regulatory prescription is bound to decline quickly.
DOJ's U.S. v. Google and ITA court filings can be found here: http://www.justice.gov/atr/cases/google.html
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
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