Blockchain technology: Antitrust risks and safeguards
Blockchain technology is on government enforcers’ radar screens because the shared use of a distributed ledger by competitors in the marketplace may raise antitrust issues. For example, the Federal Trade Commission (FTC) announced on March 16, 2018, that it’s creating a Blockchain Working Group, explaining:
“Cryptocurrency and blockchain technologies could disrupt existing industries. In disruptive scenarios, incumbent companies may sometimes seek to hobble potential competitors through regulatory burdens. The FTC’s competition advocacy work could help ensure that competition, not regulation, determines what products will be available in the marketplace.”
And in an open letter to the FTC, Professor Thiabault Schrepel recently wrote that “blockchain is the biggest challenge faced by antitrust law in the last 20 years.”So what are some potential antitrust risks presented by blockchain technology, and what safeguards can companies take to try to ensure they aren’t unwittingly running afoul of antitrust laws?
Price-fixing (Sherman Act Section 1)Some blockchains simply record the transfers of tokens between and among network participants. But if blockchains contain pricing or other sensitive information – and the information is available to network participants who are competitors in the marketplace – the technology may facilitate the exchange of information that government enforcers could view as evidence of price-fixing.
For example, DOJ recently criminally charged two executives and an e-commerce retailer with price-fixing posters sold on Amazon Marketplace through the use of commercially available algorithm-based pricing software. On the Marketplace platform, a retailer sets the price for its own products, and Amazon determines the order in which to display products based on a customer query. The most responsive product with the lowest price typically appears first in Amazon's search results. Although the members of the conspiracy programmed their algorithms differently, the DOJ alleges that the algorithms were coordinated to accomplish the conspirators' goal of matching prices — and by eliminating the competition between them, they prevented prices from dropping.
To safeguard against claims of price-fixing through blockchain technology, participants should avoid sharing competitively sensitive information like pricing. If such information must be shared, network participants should investigate ways to limit one competitor’s access to another competitor’s competitively sensitive information, such as encryption. Network participants also should also carefully consider which employees have access to competitively sensitive information, and how that information is used. Firewalls can then be used to limit or eliminate access to this information from employees with responsibility over pricing and marketing.
Group boycott (Sherman Act Section 1)Some blockchains like Bitcoin are open to everyone. Alternatively, private (“permissioned”) blockchain ledgers involve closed networks and require an invitation to join. At some point, use of blockchain in an industry may become the only practical way to compete in that space. If certain competitors are excluded from the permissioned blockchain and are not permitted to conduct transactions there, this may result in the excluded companies asserting group boycott claims.
To safeguard against group boycott claims in the use of permissioned blockchains, participants should ensure the existence of fair and objective membership rules. These rules should be uniformly and consistently enforced, and the reasons for removal should be spelled out in advance. Additionally, the rules should be procedurally fair. A member should have an opportunity to be heard prior to taking adverse action such as removal. And if removal takes place, the reasons should be well-documented.
Monopolization (Sherman Act Section 2)Blockchains may lead to a Section 2 monopolization claim if an entity with monopoly power uses the blockchain to willfully maintain power through exclusionary conduct. For example, if a supplier with monopoly power requires its customers to use its blockchain – and not its rivals’ – to complete transactions, this may give rise to a Section 2 claim. A “refusal to deal” claim could also exist if the monopolist owner of a blockchain previously allowed a competitor access to its blockchain but later excluded that competitor without any legitimate business reason.
To safeguard against monopolization or attempted monopolization claims, businesses with a large market share should take care that any exclusion of a competitor from its blockchain has a reasonable business justification, and that this rationale is well-documented.
Blockchain technology is continually emerging and evolving, and the antitrust issues your particular business could face are highly fact-specific. For assistance in effectively navigating these issues, contact the attorney listed below. For more information on blockchain technology, register for our upcoming Business Hour "Blockchain is coming: Are you ready?"