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  • AS Vamsi Krishna

Scrutinizing Innovation: The European Commission’s New Evidentiary Standards

[AS Vamsi Krishna is a student at Rajiv Gandhi National University of Law.]


On 12 October 2023, the European Commission (Commission) implemented restorative measures resulting in the divestment of GRAIL by Illumina. The verdict follows in the footsteps of the twin decisions in Dow/DuPont (DuPont) and Bayer/Monsanto (Monsanto), to apply the newly emerging "innovation theory of harm". Typically, the theory is applied to determine whether a merger would lessen effective competition across lines of innovation and research in a market. It involves investigation into overlapping research goals, pipeline products and overall market indicators to determine whether a merger would result in lesser competition across lines of innovation. However, the past few years have observed a stark increase in the theory’s notoriety as a “monster”, a manifestation of the Commission’s increasingly interventionist approach that effectively creates a “de facto presumption” of harm in the assessment of merger activities in innovation markets. The issue is not one to take lightly. The Commission’s ability to meet a certain standard of proof is crucial. Since the theory involved is predictive, how well the Commission satisfies this standard is an area to be examined. In this context, this article shall discuss the means of investigation utilised by the Commission to assess a merger’s impact on effective innovation competition, and whether these evidentiary tools have created a de facto presumption against merger activities.


Innovation as a Metric of Assessment


The notion of evaluating competition along the lines of innovation is not unfamiliar to the Commission. We have to look no further than the mid-1990s to Pasteur-Mérieux/Merck, wherein the Commission scrutinized the pipeline products and the research capabilities of the two pharmaceutical companies to decide whether a joint venture by both would impede innovation in the market. Following the decision, innovation analysis not only became commonplace in pharmaceutical mergers but also expanded into other research and development driven industries including inter alia crop protection, digital communication, energy, etc. During this period, the Commission’s assessment was confined to the anti-competitive effects on overlap in existing products or late-stage pipeline products which were close to being released. However, the Commission gradually adopted a protectionist approach towards the overall innovation industry which resulted in greater emphasis on early pipeline products which may even not have been released to the market. In 2015, the DuPont decision broke new ground by expanding the scope of its review to ‘innovation spaces’.


The DuPont decision fails to clearly define innovation spaces, but broadly, it may be understood as a review of the lines of research of the merging parties and innovation in a macro perspective. To illustrate, A and B are two innovators that operate in different product markets but share the same innovation industry. Even if the Commission found no rivalry in their lineup of existing products or even pipeline products, it may investigate the long-term research goals or other innovation efforts of the parties to diagnose if any competition may arise between A and B further in the future. This has raised questions regarding the type and amount of evidence the Commission requires to arrive to a conclusion regarding future anti-competitive effects. Article 2 of Council Regulation 1/2003 places the burden to prove any such infringement on the Commission, which it may satisfy via a method of evaluation of evidence it considers most appropriate. Thus, to evaluate the requisite standard of proof, we shall scan the evidentiary tools used to assess innovation competition.


Evidentiary Tools in Innovation Assessment


Broadly, the Commission relies on three evidentiary tools to prove adverse effects on innovation under the merger control regime: (1) scanning the internal documents of the merging parties; (2) detailed investigation of the relevant markets; and (3) applicability of the multiplicity of rivals standard.


Internal documents


Internal documents have been a key tool in the Commission’s arsenal to investigate the merging parties’ intentions concerning competing lines of research. Generally, the probative value of internal documents is determined by their origin, content, circumstances in which it was drawn up, and the recipients. The Commission, however, has not drawn a distinction between “high-level strategic documents” and “working level (documents) within the post-integration team.” Simply put, it means that the Commission does not hold a lower probative value for documents which were produced by employees who do not necessarily have the authority to actually sign off on the plan to exit competing research efforts. Thus, these plans may not be definitive or even authorised by the merging parties. In DuPont, the Commission relied upon an initial presentation to investors that mentioned an objective to “eliminate duplicative R&D programs” in its assessment. This process of investigation attempts to balance the interests of the merging parties against those of the investigation authorities, who are tasked with the unenviable task of proving an abstract harm to innovation. Thus, internal investigation plays a primary role in innovation assessment cases to better understand the intent of the merging parties and their post-merger exit plans.


Market investigation


The process of market investigation involves an exhaustive assessment of the parties’ incentives, a thorough examination of the relevant product market, and interviews with competitors and consumers, to help paint a clearer picture of the parties’ post-merger plan (and any subsequent discontinuation). In GE/Alstom, the Commission’s use of market incentives analysis along with revealing internal documents were instrumental in its decision to deem the merger anti-innovation. However, the findings of a market investigation alone are hardly dispositive. The Commission has the ability to dismiss market concerns in circumstances wherein other substantive evidence is absent, or even rule in contrary to market analysis if the remaining evidence points otherwise. Even though market investigation and analysis is a handy tool to assess where the wind blows, its probative value is auxiliary at most. However, owing to the paucity of evidentiary tools in the hands of the Commission to prove a significant impediment to innovation, market investigation has become a go-to tool in innovation analysis.


Multiplicity of rivals


In innovation markets consisting of a limited number of innovators, mergers usually pose a greater threat to innovation than in comparison to highly populated markets due to the vulnerability of such markets to tip in favour of the dominant innovator. Identifying the heightened risks in these markets, the ‘multiplicity of rivals’ standard suggests that a minimum number of innovators ought to be maintained to prevent harm to innovation competition. The standard was first codified in the Guidelines for the Assessment of Technology Transfer Agreements 2014, which govern the transaction of intellectual property between innovators. Subsequently, it was applied in Monsanto to presume that a merger between two out of a limited number of significant innovators is likely to reduce product innovation in that market, subsequently leading to the imposition of conditions. The effect of this rule on the standard of proof in innovation competition is significant. The standard perpetuates a presumption against merger activities in sparsely populated innovation markets, considerably lowering the evidentiary standard requisite for the Commission to decide the merger as anti-innovation. This standard thus allows for the Commission to block a merger in absentia of evidence if it deems the relevant innovation market to lack sufficient innovators (an undefined amount as held in Monsanto).


Conclusion


Proving anti-competitive effects in innovation is a rather tricky affair since there exists no simple metric to assess damage (unlike abusive price changes) nor sufficient information to comprehensively examine the post-merger plans of the parties. From the above discussion, it appears that the Commission has used a protectionist approach towards innovation. This approach may inadvertently lead to lesser benefits of innovation to the consumers in some instances, wherein the blocked merger would have created efficiencies in terms of economies of scale or dissemination of products and services. The accusations of the evidentiary standard being lowered to stand equivalent to a de facto presumption against mergers is only partially true. A presumption against mergers may be seen only in the ‘multiplicity of rival’ standard, which is employed in innovation markets which are sparsely populated by innovators (high-concentration markets) and thus, likely to create a tipping effect. Illumina/GRAIL, the newest addition to the theory of harm, further expands its scope to bring vertical mergers & foreclosure concerns within its folds. Given the extended jurisdiction, now is an opportune moment for the Commission to reassess the evolving evidentiary standards in cases of innovation harm. A balance must be found between protecting innovation competition and preventing the development of such a high standard of proof that even the most beneficial mergers may struggle to overcome it.

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