This afternoon, the California Law Revision Commission (CLRC) will continue its series of meetings to consider changes to the state’s antitrust laws. Today, our topic is the potential introduction of antitrust regulations specifically for certain technology companies. 

In a report submitted to the CLRC, a working group did not make a policy recommendation but discussed pros and cons of European-style legislation. A tech-specific antitrust approach would go far beyond what is necessary to protect competition and instead threaten California’s world-leading innovation ecosystem.

California’s innovation economy is second to none.

– “It is universally acknowledged that California’s technology sector is world class. It has been an incubator for tech startups for decades,” the authors proclaim. They note that San Francisco and Los Angeles are home to the most and third-most startups in the United States. 

The CLRC’s working group reached no consensus that “specific legislation is needed” for technology companies.

– Given the strength of California’s startup ecosystem, the working group could not reach consensus on any tech-specific antitrust legislation. “It should be noted that there is not a consensus among the antitrust advisors of this working group that specific legislation is needed to address” competition in the tech sector, the authors write. 

Existing antitrust laws address competition issues in the tech sector.

– The report’s authors note that existing antitrust laws have been sufficient to address competition concerns in the tech sector. “Section 2 of the Sherman Act is very broad in its language and thus has been used to cover virtually every manner of industry, from traditional brick and mortar to modern online companies,” they explain. 

– They also conclude that previous concerns that antitrust laws would be insufficient for the high-tech age did not materialize. “Early in the internet era (late 1990s and early 2000s), there was some debate about whether traditional antitrust statutes were sufficient to address software companies operating on the internet. The prevailing view from that debate was that the existing federal antitrust statutes were prophylactic enough to address competition online,” the working group remarks.

– The evidence backs up this conclusion that “tech”-specific measures are misguided. In his study of competition law, University of Southern California antitrust expert Jonathan Barnett notes that it is “puzzling” to say that the realities of the tech age require a solution outside the current antitrust framework, because previous cases have already used that framework to address them. He explains: “While adapted for the digital context, [the] template [courts have developed] represents an extension of the fact-intensive, case-specific analysis that [Supreme Court Justice Louis] Brandeis had pioneered almost a century earlier.” In fact, the large number of federal and state actions against technology companies under current law itself suggests they are not beyond the reach of existing antitrust laws.

Tech-specific, European-style antitrust frameworks harm innovation, small businesses, and consumers.

– The working group discusses a legislative proposal that would single out a handful of companies such as Google and Amazon with presumptive prohibitions. The authors’ hypothetical proposal would deem several practices by these companies—but only by these companies—”presumptively unlawful,” meaning that courts will have to assume a practice is unlawful before they consider any evidence.

– These presumptive prohibitions ignore the principles of fair, evidence-based antitrust analysis that have fueled American innovation for a century. Singling out certain companies is “misguided because of its focus on the overall size of a covered firm rather than on market power in a particular product,” University of Pennsylvania law professor Herbert Hovenkamp wrote in an article last year. It also “singles out for adverse treatment one of the most productive areas of the economy,” Hovenkamp argues.

– Beyond these shortcomings in principle, the EU-style proposal has damaging practical implications. One of the most important practices that the proposal would presumptively outlaw is “self-preferencing.” Self-preferencing—or what economists and business people call “vertical integration”—allows companies to offer their products alongside those of third parties. This is a common and crucial tool that both offline and online companies use to provide better offerings for customers. Offline, this means Target can put its store-brand batteries on the shelf next to Duracell and Energizer. Online, this is a crucial capability on search platforms that draws business to small enterprises like hotels and allows consumers to find what they need.

– Considering “self-preferencing” in an offline context reveals that outlawing it in an online context makes no sense, CCIA’s Matt Schruers explains. “Anyone who has shopped in a grocery store will understand what self-preferencing is: ‘house’ or store brands are often visibly situated on end caps, or at eye-level, next to popular premium brands. By making the store brand visible, the store hopes to compete with name brands and introduce consumers to a more affordable option. But this would be prohibited online.”

– Recent European laws that prohibit “self-preferencing” are already having detrimental effects for small enterprises and consumers. When a search platform like Google cannot “preference” its own products, it means users can no longer access apps like Maps and Travel directly from the search engine. The result has been that hotels are receiving far fewer direct bookings, which is how they make a large portion of their revenue. The hotel research outlet Mirai finds that, under new European law, “the volume of direct bookings drop[ped] as much as 36%, increasing hotel dependence on intermediaries, which seriously damages their profitability.” Restrictions on vertical integration also may harm phone security.

– Business people are already warning of a similar effect if California adopts tech-specific legislation. Vincent Gonzales, a California realtor, attests: “Policies that seek to break apart platforms or limit their impact, especially their free services like Google Business Profile, will significantly affect my business and many others.”