However, the parties are required to demonstrate that innovation-related efficiencies:

• will be passed on to the consumers,
• are verifiable, and
• merger-specific (i.e. can be achieved only when the merger is allowed and not otherwise) and that such efficiencies

outweigh merger’s anti-competitive effects. Moreover, the European Commission’s Non- Horizontal Merger Guidelines provide a similar framework for assessing innovation effects in case of vertical mergers. Non horizontal mergers may reduce the transaction costs between vertical entities leading to increase efficiency but may create foreclosure effects by restraining innovation by other players, for example when a competitor may lose access to the merged entity’s product.

In General Electric’s acquisition of Alstom’s energy business case, the European Commission (EC) was concerned about the loss of Alstom as ‘an independent innovator’ as a result of the merger. The approval was, therefore, made conditional upon the divestiture of Alstom’s heavy-duty gas turbines business to a third party. The EC had concerns that the transaction would eliminate one of the main global competitors of GE in the heavy duty gas turbines market, thus leading to less innovation and higher prices in a market for a technology vital to meeting climate change goals..

Innovation rivalry is a significant competitive factor especially in the pharmaceutical and medical devices sector which is characterized by high paced R&D activities. Owing to the large public policy concerns associated with the sector, the competition authorities tend to be very cautious while dealing with merger cases in this sector. For e.g., in the Pfizer/Hospira case , the EC approved acquisition of Hospira by Pfizer conditional upon divestiture of certain sterile injectable drugs and its infliximab biosimilar drug under development by Pfizer. The EC expressed concerns that the merged entity would have faced insufficient competitive pressure from the remaining players in the corresponding markets, with a risk of price rise and discontinuation of the development of Pfizer’s infliximab biosimilar drug for treating autoimmune diseases (such as rheumatoid arthritis). Pertinently, Hospira was independently co-marketing an infliximab biosimilar developed by Celltrion which was the only infliximab biosimilar available in the market at that time. With Pfizer being at an advanced stage of development of a competing biosimilar, the EC found that the merger could have two

probabilities – either Pfizer would have delayed or discontinued development of the biosimilar drug to focus on Hospira’s product, thus resulting in net loss of future competition, or Pfizer would have handed back Hospira’s product to Celltrion, thus leading to the loss of current price competition between the two companies. The remedy by way of full divestment of Pfizer’s infliximab biosimilar drug under development preserved future innovation in infliximab biosimilar market. Commissioner Margrethe Vestager of the EC stated, “This is not just about keeping prices low for patients and healthcare services. We have also made sure that the merger of Pfizer / Hospira does not stand in the way of the research and development of medication that could have huge benefits for society.”

Similarly, the EC also approved acquisition of the oncology business of GlaxoSmithKline plc (GSK) by Novartis conditional upon the divestment of two of Novartis’ cancer treatment inhibitors. The EC had concerns that the transaction would have reduced competition and innovation for these products in skin cancer treatments, leading to a duopoly between the merged entity and Roche, the only competitor which would be left in the market after the merger. The EC also assessed the transaction’s specific impact on innovation, by taking into account the expected role of both products in the treatment of a number of other cancers such as ovarian, colorectal or lung cancer. The EC’s assessment revealed that the merger would not only have led to the abandonment of Novartis’ launch of its treatment for skin cancer, but also to the abandonment of the clinical trial program.

Needless to state, when the proposed merger has the effect of reducing innovation and increasing prices, the EC prohibits it in entirety. The proposed acquisition of O2 by Hutchison was prohibited by EC as it had strong concerns that UK mobile customers would have had less choice and paid higher prices as a result of the takeover, and that the deal would have harmed innovation in the mobile sector. Regarding the deal, Commissioner Vestager said, ‘We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality … Allowing Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector … It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this’

Delivering a speech on 24.05.2016 on ‘How competition supports innovation,’ Commissioner Margrethe Vestager said ‘In business, innovation is the answer to the need to compete’….but ‘to encourage innovation, you need both competition and a reward for innovators’, and ‘striking that balance is exactly what the Commission has done with standard-essential patents’……….‘If you’re a company whose technology is part of a standard,………you can do pretty well out of it. Because no one can make a product that meets the standard without paying to use your technology. And that’s the way it should be. It’s those rewards that make innovation happen. But that doesn’t mean you should have the right to decide who can make, let’s say, a 3G-compatible phone. So, when standardessential patent holders try to go back on their promises to offer their technology to everyone on fair terms, which can be a serious problem for competition. It’s in this context, just over two years ago, the EC decided that Motorola abused its power by asking for injunctions against companies that were willing to pay a fair price to use its technology. On the same day, Samsung agreed not to ask for injunctions in those circumstances. And last year, the European Court of Justice confirmed the EC’s approach, in a case involving Huawei and ZTE. That doesn’t stop companies that innovate from getting a fair reward for their work. They can still ask for injunctions, if the phone maker isn’t willing to pay a fair price. But they can’t use them as a threat to get more than a fair deal…. In other words; our basic principle is that innovators should get rewards. But they shouldn’t be able to stop others having the chance to innovate and compete. And that’s one reason why our cases involving Google are important … I certainly don’t want to take away the rewards Google has got from that. But those rewards can’t include the right to hold back innovation in the future.’

The U.S. antitrust agencies’ approach to innovation in merger cases is largely the same as that of the EC. The U.S. Horizontal Merger Guidelines, 2010 (Guidelines) includes an entire section titled ‘Innovation and Product Variety’ which explains how the agencies view the potential impact of a merger on competition. The Guidelines note that ‘Competition often spurs firms to innovate. The Agencies may consider whether a merger is … encouraging the merged firm to curtail its innovative efforts below the level that would prevail in the absence of the merger. That curtailment of innovation could take the form of reduced incentive to continue with an existing product-development effort or reduced incentive to initiate development of new products. …. The Agencies also consider whether a merger will diminish innovation competition by combining a very small number of firms with the strongest capabilities to successfully innovate in a specific direction.’

The Guidelines also note, ‘When evaluating the effects of a merger on innovation, the Agencies consider the ability of the merged firm to conduct research or development more effectively. On the other hand, just as the EC is skeptical of innovation-based efficiencies defence, the U.S. Guidelines note, ‘Efficiency claims will not be considered if they are vague, speculative, or … cannot be verified by reasonable means. … Cognizable efficiencies are mergerspecific efficiencies that have been verified and do not arise from anticompetitive reductions in output or service.’ For example, Department of Justice (DoJ)’s challenge to the proposed Halliburton/ Baker Hughes merger resulted in abandonment of the deal. DoJ complained that combination of two of the three largest providers of oilfield services would eliminate substantial head-to-head competition which would lead to higher prices and less innovation in this critically important industry because the merging parties possessed ‘unrivaled product portfolios, research and innovation capabilities, and the scope and scale necessary to address the most difficult technological challenges facing the oil and gas industry they serve.’ Similarly, while challenging AT&T’s proposed acquisition of T-Mobile, DoJ focused on innovation competition for the semi-conductor manufacturing equipment. The DoJ complained that T-Mobile’s vision of future,

as articulated in its strategy, was to ‘find innovative ways to overcome scale disadvantages’ and to ‘break down industry barriers with innovations.’

In the Indian context, while the Competition Commission of India (CCI) has factored in R&D and innovation claims in few its decisions, it is yet to come out with any guidelines or give guidance in its case laws as to how it analyses the relationship between a proposed combination and its impact on innovation. For the purposes of determining whether a combination is likely to have an appreciable adverse effect on competition (AAEC), the CCI is mandated to give regard to all or any of the factors provided under sub-section(4) of Section 20 of the Competition Act, 2002. Clause (l) thereof specifically mentions “nature and extent of innovation” as one of the factors.

For instance, in Sun Pharma / Ranbaxy case, the CCI identified two pipeline products of Ranbaxy which fell under therapeutic category ‘Oral Anti-diabetics’ that were expected to be launched in the near future. As Sun Pharma had already marketed formulations containing these molecules, with only one more player which also marketed its products in both of these markets, the CCI observed that postcombination the development of these formulations by Ranbaxy could be stalled and the product(s) would not be launched in the market. However, in this regard, the CCI noted that the validity of the said patent was under dispute and if the same was upheld by the judicial authorities, then the generic versions of these formulations could not be launched and if rejected, then considering the attractiveness of the market, many companies would be able to launch their generic versions of these molecules. The CCI, therefore, decided that the proposed combination was not likely to have an AAEC in these pipeline products.

Pertinently, demonstration of nexus between increase in innovation and the merger is an important factor considered by the CCI too while deciding the combination cases. In Holcim / Lafarge case, the CCI observed, “the efficiencies are not combination specific, i.e., it cannot be said that that there are no less anticompetitive ways to achieve the efficiencies……that the submissions of the Parties lack quantification and verifiability and no specific suggestion has been made or evidence provided as regards the efficiencies translating into lower prices for customers.”

In DuPont / Dow Chemical merger, the CCI nade its assessment on two main concerns of potential adverse effect on competition, viz. whether decrease in competition will lead to rise in prices of seed and agrochemical products and reduction in investment for R&D and innovation in the future. Likewise, in the competition assessment of the Syngenta / ChemChina, the CCI showed its concern as to ‘the enhanced market power of the combined entity to impede local system and innovation and ability of farmers as well as public sector research institutions to offer alternative integrated solutions.’

Thus, while it is evident that the CCI does not merely examine the price effects of a merger but also assesses its non-price effects, including whether it would be bad for innovation. Accordingly, it would be immensely helpful for the stakeholders to have detailed guidelines from the CCI on the subject.