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16 Nov 2018

KFTC Proposes Merger Review Standard for Innovation (R&D) Mergers and Big Data Mergers

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Antitrust LEGAL UPDATE + 2018.11.

KFTC Proposes Merger Review Standard for
Innovation (R&D) Mergers and Big Data Mergers

In its notice of request for public comments dated November 16, 2018 (but posted on its website on November 12th), the KFTC announced its proposed revisions to the KFTC Merger Review Guidelines to assess more accurately the competitive effects of “innovation (or R&D)” mergers and “Big Data” mergers. The public comment period remains open until November 26, 2018 Korean time. The KFTC proposes to add six new provisions to its existing Merger Review Guidelines that were last revised on December 20, 2017. No existing provision is slated to be deleted or modified.

The six new provisions are as follows:

  • Section II.11. defines the term “Big Data” as “a large information asset that companies collect, comprehensively manage, analyze and utilize for various purposes. Big Data usually contains a large volume of data, is created and processed at a high speed, and can be in various formats and types.”
  • Section V.1.c. defines an “innovation market” for merger review purposes: “If the nature of the industry to which the merging parties belong is such that R&D is essential or there is continuous R&D competition, and at least one of the merging parties is an important competitor in such R&D competition, then an innovation (or R&D) product market maybe defined separately or as part of a broader market encompassing manufacturing and sales.”
  • Section V.1.d. defines a “Big Data” market for merger review purposes: “If the collection, management, analysis and utilization of Big Data are an important element of the merging parties’ business operations or are the main purpose of the merger, then a market that is closely related to Big Data may be separately defined as a relevant product market.”
  • Section VI.1.c. provides an alternative method to calculate market concentration in an “innovation market”: “It may be calculated based on the size of R&D expenditures, the size of specialized assets and capabilities for innovation activity, the number of patents issued or referenced in the relevant area, the number of participants that substantially participate in innovation competition.”
  • Section VI.2.d. explains how to assess potential anticompetitive effects for innovation competition: “Post-merger, the merged firm may substantially reduce innovation competition if it has the incentive and ability to retard R&D and other innovative activity. To assess such competitive effects, the following factors should be comprehensively considered:
  • 1) Whether the merging parties are important innovators in the relevant field;
    2) Similarities in innovation activity by the merging parties;
    3) Post-merger, whether there will be a sufficient number of remaining companies that substantially participate in innovation competition;
    4) Differences in innovation capabilities between the merging parties and other competitors; and
    5) Is one merging party, via innovation activity, a potential competitor of the other merging party in the latter’s product market [presumably goods market]?”
  • Section VI.5. explains how to assess potential anticompetitive effects for Big Data competition: “Post-merger, the merging parties may substantially reduce competition in a relevant market if they gain, strengthen or maintain market power by utilizing Big Data. In that case, in addition to assessing the competitive effects of a merger involving Big Data depending on the type of the merger [presumably, horizontal v. vertical v. conglomerate mergers], the following factors should be considered:
  • 1) Differences in Big Data collection, management, analysis and utilization capabilities between the merging parties and other competitors;
    2) Whether the merging parties will have the incentive and ability to limit competitors’ access to the data;
    3) Whether new entry will become more difficult due to the network effect based on the size or scope of the data; and
    4) Whether the merging parties are highly likely to reduce the quality of personal information-related services such as reducing the level of privacy protection.”

This is a noteworthy development in that the KFTC endeavors to provide formal guidance on how it will assess the competitive effects of proposed mergers in “innovation” and “Big Data” markets. Regarding innovation competition, the U.S. DOJ & FTC Merger Guidelines (last revised in August 2010) have long discussed reduction of innovation competition as a possible anticompetitive effect. The U.S. DOJ & FTC IP Guidelines (last revised in January 2017) already embraced the concepts of “technology markets” and “research and development markets” back in 1995. Thus, the factors that the KFTC would consider in assessing the potential competitive effects of a proposed merger are rather familiar to us by now.

However, “Big Data” has become a buzzword in the antitrust bar relatively recently and understandably no clear consensus has emerged as to its proper role in general antitrust analysis, let alone in merger analysis. Thus, the KFTC’s enunciation of its review standard for mergers with “Big Data” implications is certainly noteworthy and possibly even courageous. Furthermore, some may also question whether privacy protection is a proper topic for antitrust merger analysis, especially when the EU’s GDPR and similar national privacy protection laws may already require fairly stringent privacy protection.

It remains to be seen what the KFTC’s finally revised and adopted version will look like and, more importantly, how it will apply the revised Merger Review Guidelines in practice, especially to mergers with so-call “Big Data” implications.

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