Renata Hesse explains antitrust impacts on Internet start-ups, and how to start an antitrust investigation.
Renata Hesse from Wilson Sonsini Goodrich & Rosati (WSGR) is with me for this interview about US antitrust law. Renata is a high-powered antitrust attorney who has been in the middle of some of the biggest antitrust cases in US history including the massive Microsoft antitrust case of the 1990′s.
I have found WSGR to be a great law firm to work with and they have helped me on a number of critical issues. My brother Matthew, who some of you have met, works for WSGR also on antitrust issues as in-house counsel at Google.
I’m often surprised by seemingly smart internet companies making a lot of money have really poor legal representation. I think its a competitive advantage to have a great law firm on your side like these guys. They can be difficult to be accepted as a client (they normally represent companies like Google), so if you do want to switch your law firm and you know me personally, drop me a line and we can talk offline.
Antitrust can come across as dry and boring – but in fact it can be a great way for a small company to beat a larger company in the market. Netscape vs Microsoft is obviously a case where it didn’t work too well for Netscape, but there are many examples of smaller companies beating larger ones using antitrust law. Although I’ve talked with my brother about antitrust over the years, I didn’t really understand how it could apply to someone like me – living in the Caribbean – and be an effective business tool – until after this interview. Renata explains how an antitrust investigation can be started for only $20,000 to $50,000 instead of the millions it can cost for a lawsuit – and how you gain tremendous leverage by having the US Government on your side against your competitors.
If you are interested in keeping bigger companies from threatening you, protecting your company and staying competitive, this is a must read interview.
Full Interview Audio and Transcript
Hobbies and Interests: Taking care of her two small kids, reading, politics, and traveling.
Favourite Sports Teams: Oakland A’s.
- All the Kings Men by Robert Penn Warren
Favourite Legal Experts: Joel Klein, former U.S. Assistant Attorney General and Sandra Day O’Connor.
Adrian Bye: I’m here talking with Renata Hesse who works in antitrust at Wilson Sonsini Goodrich & Rosati, which is a top technology law firm in the United States. Antitrust is a pretty important area of law that can affect companies as they become powerful within the market. Renata, thanks for joining us. Can you tell us a little bit about yourself?
Renata Hesse: Sure. I’m happy to be here. I’m a native Californian and grew up in Berkeley. I went to a small women’s college outside of Boston and then went back to Berkeley for law school.
The first part of my legal career I worked for a law firm in San Francisco where I did intellectual property litigation for technology companies. For example, we did a lot of work for Nintendo at a time where Nintendo was alleged to have a lot of market power in the video game industry.
After practicing for about seven years, one of the partners was asked to return to the antitrust division to work on a big merger for two telecom companies. When he left I said, “If you ever need help, I might be interested.” About a year later, he called and asked if I was still interested. I moved from San Francisco to Washington, D.C. and started working at the Justice Department.
Adrian Bye: For clarification, exactly what is antitrust?
Renata Hesse: Antitrust is an area of law designed to preserve the competitiveness of markets. The goal is not to keep people from getting big or to punish companies for getting too large. The goal is to keep the marketplace from suffering from impairments to its ability to function properly.
What it’s trying to do is to make it possible for people who have interesting ideas, new products or innovative ways of doing business to succeed in the marketplace despite the fact that they’re small. It also makes it possible for them to be assured that if one of their large competitors tries to do something bad to keep them from succeeding, the law will be there to protect them.
Adrian Bye: It seems to me that when I hear about antitrust it comes up in the context of Google versus Yahoo!, which are billion dollar companies fighting it out and then getting regulated by the U.S. government. How does that then become relevant to a $50 million a year start-up?
Renata Hesse: One of the easiest and most common ways it can touch a company like that is if you are being acquired by or are acquiring someone and you or the entity you’re doing business with is a certain size, you have to file a form with the Justice Department and the Federal Trade Commission. They essentially review your transaction before you can close. Very often, small companies are subject to these reporting requirements because they’re being acquired by much larger companies. Most foreign jurisdictions have reporting requirements like that as well.
The other way it’s relevant is that our practice involves a lot of small technology companies that are not necessarily at risk but are occasionally being pushed around by larger companies that have already gotten into the market and have what we call market power. The antitrust laws can be used by those companies either through getting the government to start investigations or through directly suing in private litigation. It then becomes a tool to go to war with a larger competitor that is threatening you in some way.
Adrian Bye: Let’s say I’m doing some pretty innovative things in Internet advertising and Internet marketing, and I’m having some problems with Yahoo!’s market power. What is an example where Yahoo! could be an antitrust problem for us? As a start-up doing $50 million a year in revenue, what can we do about it?
Renata Hesse: The kind of cases that are most likely to be successful in this area are where somebody, whether it’s Yahoo! or somebody else, is taking actions that make it difficult or impossible for you to distribute your product effectively to the people who you need to get it to. In the lingo of antitrust, it’s called distribution foreclosure.
Adrian Bye: If I have something that I wanted to sell and assuming it’s legal in all jurisdictions that Yahoo!’s advertising in and the price I can pay for the media is competitive, if Yahoo! is refusing to run my advertising then that’s an antitrust issue, is that correct?
Renata Hesse: It could be if Yahoo! had a product that competed with you. Say both you and Yahoo! are selling Christmas trees.
Adrian Bye: Okay. Let’s say I’m doing $50 million a year selling Christmas trees all year round and Yahoo! decides to go into the same market and sell Christmas trees as well. What you’re saying is that Yahoo! can’t stop me from advertising on its distribution platforms for selling Christmas trees?
Renata Hesse: That could be a potential antitrust problem.
Adrian Bye: That is fascinating. If that actually happens, I can then go and start talking about antitrust to Yahoo! Does that generally force them to open up their platform and allow them to run the advertising?
Renata Hesse: It might. It depends on how good your case is and on how much they’re willing to fight. We’ve advised small companies that are having problems where larger competitors try to shut them out of tradeshows. Another example might be if someone made it impossible for your Internet e-mail program to work for their users, such as if you were a Yahoo! user and couldn’t send messages to people on Hotmail.
In my old section at the antitrust division, we also did a lot of work in the financial markets. Typically people don’t like to have other people, particularly regulators, looking at all their documents because by and large you’re going to find something eventually. I always felt like the big financial companies did everything possible to avoid getting into any kind of issue with us because they never wanted to hand over any documents, as this can lead to trouble.
It can be a very powerful tool. Especially if you’re doing it in a multi-jurisdictional way where you get the United States, Europe, Korea, and Japan interested and even China and India, which all have monopoly laws. As compared to filing your own lawsuit against another company, it’s relatively inexpensive to do that. Depending on how good your case is, you can probably get an investigation started somewhere in the range of $20,000 to $50,000 as opposed to the millions of dollars it would cost you to prosecute a lawsuit against somebody.
Adrian Bye: Let’s say I’m running my company, and I’m based somewhere in the United States. I don’t know anyone in the Department of Justice. How does a little guy like me get the attention of federal regulators to put them onto Yahoo!?
Renata Hesse: You hire a lawyer. You hire somebody who knows how to put together the information in a way that’s going to be persuasive. They will go into the agency and explain why they should look at this and why the conduct you’re concerned about isn’t just bad for you but bad for consumers. The other touchstone of all of this is that antitrust is not about hurting competitors. It’s about hurting consumers.
Whenever anybody is thinking about going into a regulator or suing under the antitrust laws, you really have to think about telling a story on how the harm that’s happening to your business is impairing you and keeping you from bringing better, cheaper products to consumers because that’s what they care about and that’s what the law cares about.
Adrian Bye: I’ve read about the history of John D Rockefeller and Standard Oil. I learned that antitrust is actually against the trust, and you’d have a trust that made your oil, another trust that made your sugar and another trust that made your butter. Everything was run by trust. I don’t actually completely understand what that means. Is it just a collection of companies collaborating or is it always just one single company that had market power? How did the world actually look in those days that caused antitrust regulation?
Renata Hesse: The problem was that these large companies simply had too much power and force in the marketplace; they were impairing the ability of the economy to function in a way that people realised it really needed to function in order to transform itself in the 20th century.
There is a part of antitrust that is about illegal collaborations between competitors. My recollection is that it’s not particularly what was going on at that time, but it is illegal for companies to get together and agree on the prices that they should sell their products at, which parts of the country they’re going to sell in or which kinds of customers they’re going to sell to. It’s illegal regardless of your size and regardless of how much power you have. You simply cannot do that.
Adrian Bye: If it was a bunch of $5 million companies all ganging up against one other company, is that something that antitrust would still step in for?
Renata Hesse: If they were getting together and agreeing to, for example, boycott a particular large distributor, it could be. The classic example of the kinds of things you’re talking about are cases where doctors get together and agree on how they’re going to negotiate with insurance companies or hospitals. Those can be violations of the antitrust law.
Adrian Bye: What if a bunch of $5 million companies get together against a small competitor and have an agreement on how to handle that competitor? Would that be antitrust?
Adrian Bye: What are the typical types of illegal collaborations between competitors?
Renata Hesse: The three big, classic criminal violations are price-fixing, bid-rigging and market allocations. The first two are probably pretty obvious. The third is where you agree with one of your competitors to only concentrate in a particular type of product.
Some examples are “I’m going to take toilet paper. You take paper towels,” “You take DRAM. I’ll take SRAM,” “I’m going to focus my business on selling only to customers in California. You take Nevada and Wyoming,” or “I’m going to focus on just selling to customers that have businesses with more than 500 people in them.” If you’re an ERP software seller, for example, you’d say, “You take all the big companies. I’m going to take all the small ones.”
When you do that you deprive those customers or those geographic areas of the competition between the two entities. You’re essentially agreeing between the number of entities involved that you’re going to be able to have a lock on this particular area or type of customer. As a consequence, you’re going to be able to charge them whatever you want to charge them because the others are not going to compete with you there.
Adrian Bye: Are there lessons start-ups can take from companies that have successfully put themselves into a position where they do get prosecuted by antitrust? In other words, are there things we can look at and can learn to make ourselves more competitive?
Renata Hesse: You can for some of them. People do a lot of things to protect their marketplaces. For example, exclusive relationships with suppliers can be legal if you’re small enough and you’re not foreclosing a rival. For example, the principle tools Microsoft used to hurt Netscape were using primarily its relationships with its OEMs and with its other software developers to impair Netscape’s ability to get on desktops and be used by consumers.
On a smaller level, you can do some of those very same things, which are mostly called exclusive dealing relationships. An example of that might be an arrangement whereby you agree with a particular entity that it will only distribute your product and not the products of your competitors. One would have to look at all the facts, but those kinds of arrangements can be legal under the antitrust laws.
The main thing is that you’re going to be looking at how you keep yourself out in front and legally keep your rivals from getting in the forefront of people’s minds. The ones that are coming to mind are different kinds of exclusive relationships with suppliers, distributors or advertising channels. We talked about the example of selling Christmas trees using internet advertising. Done correctly by a small enough company, those kinds of relationships can help you succeed and can be legal.
Adrian Bye: I bet you haven’t been asked that question many times before.
Renata Hesse: No. Most of the time people want to know, “What can’t I do.” When we do counselling people typically say, “I really would like to do this. Is that okay?” Sometimes you get some pretty interesting questions that way. Usually, the business people are the ones who are thinking of the clever ways of making sure their products succeed and not the lawyers.
On the other hand, one of the most interesting and fun things for antitrust lawyers to do is have someone come to them and say, “I’ve got this big company, and they’re giving me a really hard time. Help me think through all the various ways that I might be able to fight back,” and there are a lot of different options.