“Rockefeller built his fortune by taking on a youthful, wild, unpredictable, and unreliable industry, and relentlessly transforming it according to his own logic into a highly organized, far-flung business that satisfied the basic hunger for light around the world.”- The Prize, by Daniel Yergin

Standard Oil Company founder John D. Rockefeller brought structure to chaos, bringing safer and cheaper products to more people. Yet, in 1911, the US Supreme Court ordered the dissolution of Standard Oil. Chief Justice White delivered the decision, remarking that “no disinterested mind can survey the period in question without being irresistibly drawn to the conclusion that the very genius for commercial development and organization … soon begat an intent and purpose to exclude others … from their right to trade and thus accomplish the mastery which was the end in view.”[1]

Standard Oil’s history appears relevant today as federal antitrust agencies investigate nascent industries that are striving for economic efficiency. This article explores recent developments in antitrust enforcement, particularly in response to probes into big tech, to provide some context for why the cannabis industry has been subject to antitrust merger investigations, and offers insights on what to anticipate in the next episode of antitrust enforcement.

Despite the low prevalence of Second Requests, reportable cannabis acquisitions began to receive such burdensome requests for “additional information and documentary material” in Q1 2019. A Second Request is an extensive subpoena that calls for broad categories of internal business documents, including emails and text messages, and extensive data relating to costs and prices. Compliance with a Second Request typically takes several months and costs usually exceed six figures given the extensive electronic discovery required—the agencies can demand the production of hundreds of thousands, if not millions, of pages of documents. It took merging cannabis parties three to five months to comply with the Second Requests.

In light of the material burdens of a Second Request, antitrust agencies typically issue Second Requests when they are fairly confident they could persuade a court to block the transaction because it would substantially lessen competition. Only two to three percent of the approximately 2,000 transactions reported annually receive Second Requests. agencies challenged 39 of the 45 transactions that received Second Requests in 2018. Most of these cases were resolved through negotiated settlements that required divestment of certain overlapping business lines. Despite the inordinate burden placed on these merging parties, the process is rarely challenged by parties hoping to close a transaction because of the cost and timing concerns associated with litigation.

Parties can close the deal when the Hart-Scott-Rodino (HSR) Antitrust Act waiting period expires, typically 30 days after the parties certify they have complied with the Second Request (barring other required approvals like state cannabis ownership transfers). But antitrust agencies retain the ability to challenge transactions post-consummation. They can also challenge transactions below the HSR Act reportability threshold. Just last week, Axon Enterprise Inc., a police camera and taser manufacturer, sued the Federal Trade Commission (FTC) “seeking to expose the unfair and unconstitutional procedures and structures employed by the FTC to extract unjustified remedies” after the FTC sought to “unwind” Axon’s consummated acquisition of Vievu in a $7 million transaction.

Many have questioned why so many cannabis deals were delayed by Second Requests. The legal cannabis industry is still in its infancy, regulations continue to shift, market share swings, and thousands of eager potential entrants have sought to enter limited license jurisdictions, and many have entered open jurisdictions like California. At first glance, these market characteristics hardly give rise to the typical market dynamics of concentrated markets with few players and little entry that cause federal authorities to pursue expensive Second Request investigations.

In early 2019, politicians on both sides of the aisle were criticizing antitrust agencies for failing to vigilantly enforce competition laws. The agencies were being scrutinized for allowing big tech to get so big, including by acquiring nascent competitors. But it is difficult for the government to prove that a small startup firm, but for the acquisition, would have grown into a viable competitor. Senior officials lamented the lack of hard data to show that serial acquisitions by big tech companies were anticompetitive. They explained that they need facts on the ground—so they launched broad investigations into the tech industry to gather the facts and hard data to assess whether big tech companies grew so big through anticompetitive practices.

Just as alarms were ringing regarding the serial tech acquisitions that perhaps “slipped through” in a nascent industry, the antitrust enforcers were witnessing a string of consolidations occur in the cannabis industry—and they had no “facts on the ground” regarding this emerging industry. At the cost of millions of dollars to the merging parties, the Second Requests provided the Department of Justice (DOJ) the opportunity to gather data and information to learn about the cannabis industry in many states. The Second Requests also signaled that the DOJ can, and will, enforce antitrust laws in the cannabis industry, even if cannabis remains federally illegal.

The recent outcries against big tech also question how the agencies have evaluated competitive harm. Since the 1980s, the consumer welfare standard has guided antitrust enforcement, evaluating practices based on whether they cause harm to the consumer, typically through increased prices, rather than injury to a specific competitor. The consumer welfare standard, which celebrates economic efficiency, departed from historical antitrust precedent that sought to protect small competitors and prevent any company from gaining too much power.

Today, antitrust agencies explain that obtaining a monopoly by superior products, innovation or business acumen is legal; however, the same result achieved by exclusionary or predatory acts may raise antitrust concerns. As the big tech inquiries continue, the agencies will be looking hard at whether the big tech companies engaged in unlawful exclusionary or predatory acts to cut off their rivals. Did they cut their rivals off through exclusionary supply or IP agreements, did they unlawfully bundle products to ensure success in adjacent markets, did they undercut on price to drive out competition, or did they lock up key talent, distribution channels or manufacturing? The agencies’ renewed focus on foreclosure concerns is evidenced by their January 10 release of their refreshed Vertical Merger Guidelines—which had sat dormant since 1984.

As the pressure mounts to effectively regulate competition, federal authorities may feel empowered to depart from the limitations of conventional antitrust analyses that have required identification of precisely defined affected markets, calculation of high market shares and harm to consumers rather than competitors. The analysis of competitive effects may be freed from its formulaic shackles. While the technology industry may be the catalyst for an invigorated focus on exclusionary conduct, the effects will be felt by all industries. As the legal cannabis industry moves from chaos to efficiency, players will have to be mindful of antitrust pitfalls, as the winners, like Rockefeller, will have targets on their back. Cannabis industry participants may find the sentiments of John Archbold, Rockefeller’s successor, upon the order dissolving Standard Oil relatable: “Life’s just one damn thing after another.”

[1]Standard Oil Co. of N.J. v. United States, 221 US 1, May 15, 1911.