Baker McKenzie's article on the Dow/DuPont Theory of Innovation Harm written by Fiona Carlin, Bill Batchelor and Gavin Bushell has been named as the best business article on mergers this year at the Concurrences Writing Awards 2018. A summary of the article is as below, please see the full article here.

The European Commission's innovation theory of harm in the Dow/DuPont decision appears to be a regulatory carte blanche. By virtue of this theory, any merger in concentrated IP-reliant, innovative sectors is open to challenge on the basis that it will impair innovation competition. This is not a matter of product market overlaps. Nor of overlaps in pipeline products due to come to market. The theory assumes that innovation competition will be harmed in "innovation spaces" or indeed sector wide. So covering an unknown and potentially unknowable number of potential future markets. The decision relegated pro-innovation influences to a category of “efficiencies”, placing an impossible burden on the parties to prove the unknowable – how would innovation develop for as-yet-unknown future products absent the merger?

Despite a limited number of actual product overlaps, Dow/DuPont reportedly came within a hair's breadth of prohibition. The price of clearance was high. The Commission demanded that DuPont's global R&D function be divested.

But both legal and economic theory, as well as common sense, suggest that a negative presumption on innovation is untenable. Sharing scientific breakthroughs across research teams can spur new discoveries. With a broader R&D reach, a merged entity will have a greater understanding of the promising targets to pursue, and the false trails to avoid, making successful innovation more likely. Innovations can move markets, outpacing all previous demand expectations, as next-generation products mean far richer features, services or converged offerings. The merged entity will have a greater incentive to reach these disruptive goals. So too do innovators targeting new niches of unmet need or new demographics to serve. This product repositioning or differentiation can be still more rewarding post-merger than if each party remained independent, so fostering faster execution.

The European Court of Justice has warned of the evidential burden that faces novel theories of harm where cause and effect is "dimly discernible." The Court has ruled against prior innovation-harm claims of the Commission precisely for lack of evidence. And a review of past authority decisional practice (Axalto/Gemplus, Navitaire/Amadeus, Tokyo Electron/Applied Materials (Germany), and indeed the high water mark US case, Genzyme/Novazyme (US FTC)) shows that regulators have been just as ready to find positive effects on innovation as negative ones.

Legal advisers are accustomed to looking at potential overlaps in the pipeline where it is possible to observe tangible products likely to come to market. But a vague sector-wide or "innovation space" theory of harm creates damaging legal uncertainty, potentially deterring pro-competitive deals. Dow/DuPont, like so many EU merger cases, will not be tested in court as the parties settled rather than spend years in litigation. Absent judicial scrutiny, it is all the more important that the theory's economic underpinnings are robustly debated. Any theory must be based on rigorous economic analysis grounded in an administrable legal framework. It should respect the need for legal certainty, fair appraisal of evidence and justiciable outcomes.

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