Last month, the Center for American Progress hosted a conversation with Federal Trade Commission (FTC) Chair Lina Khan and Sen. Ben Ray Luján (D-NM) about the agency’s efforts to bolster the government’s preferences for competition in innovation.
“There’s no doubt that America has been just on the cutting edge for decade after decade,” Khan said, but that statement is not entirely correct.
America has begun falling behind in innovation, and we can’t afford it. A December 2023 study found that more than 75% of tech workers and experts surveyed said the U.S. is losing or has already lost the race for global leadership in the next wave of science and technology research and development.
Here are three ways the FTC under Khan’s leadership has stifled innovation:
- Burdening merging companies with unnecessary compliance costs.
Chair Khan’s efforts at the agency have stifled mergers and acquisitions. The FTC recently imposed sweeping changes to the Hart-Scott-Rodino (HSR) program, which requires companies involved in proposed transactions to submit information to the FTC and DOJ so the agencies can determine whether to challenge the deal as anticompetitive.
But the change to the filing process, even by the FTC’s own estimate (which likely undercounts), “would increase the time required for a filer to prepare an HSR Filing, on average, 127 hours, resulting in additional costs of approximately $39,644 per filing on average.”
The Partnership for the U.S. Life Science Ecosystem said in a statement: “Those bearing the brunt of these new restrictions are small, early-stage companies in the U.S. which not only make up the vast majority – more than 85 percent – of the world’s biopharmaceutical companies, but which also frequently operate without a profit. These flawed policies could further stifle the pro-competitive, innovative life science ecosystem that has been a driving force of economic growth and medical advancements in the U.S. for decades.”
A new aspect of the HSR requirements that could be particularly damaging for innovative companies is that merging parties must self-identify whether they have any “overlaps” in their products. As even the FTC acknowledges, this is a substantive change from the old rule which required companies only to use an established numerical code system to describe their businesses.
Now, companies have to determine whether their products could be deemed to be in the same product market – exactly the issue on which merger lawsuits often turn.
This is relatively easy for products that have existed for decades. For example, when Whirlpool bought Maytag, both companies clearly made clothes dryers. It is much less clear in highly innovative markets such as those involving emerging technological innovations like generative artificial intelligence. Does a foundation model product trained on large datasets overlap with AI products that have been trained on narrow ones? Can an autonomous vehicle limited to driving in a single city substitute for one capable of driving cross country?
These are the questions – which companies must answer under penalty of perjury – likely to make merger filings much more difficult and expensive than the FTC’s estimate will admit. Chair Khan’s new rules will delay deals and put many smaller companies at a disadvantage because they may not have the resources to handle the enhanced filing requirements.
- Making exits via acquisition more difficult
The FTC’s merger and acquisition policies deter investment in innovation because exit via acquisition has become so difficult. In 2021, the National Venture Capital Association warned that “expanding antitrust law to restrict acquisitions could chill investment into startups.”
Today, acquisitions make up about 90% of exits, with the remainder being IPOs in which companies go public. According to a 2020 survey, 58% of American founders hope to sell their company. But if acquisitions become more difficult due to higher compliance costs and pushback from the FTC, startups not only lose the hope of the big exit, but fewer of them will get funding in the first place.
Many great ideas may stay just that – great ideas. They need investors to bet on them. In September, Mario Draghi, the former Prime Minister of Italy and former President of the European Central Bank, released his report on “The Future of European Competitiveness” to the European Parliament. In his presentation, he noted that Europe is “full of talented researchers and entrepreneurs,” but they lack the market conditions to make them commercially successful: “Innovative companies that want to scale up in Europe are hindered [by] an integrated capital market.” While Chair Khan assumes that American innovation will continue regardless of the market conditions she’s trying to create, Europe demonstrates that innovation requires certain conditions to flourish.
VC deals have declined by 20%, and deal value has been cut in half since Khan took over, according to The Atlantic. As investor Howard Tullman wrote in Inc. in 2022, the FTC has “[declared] war on entrepreneurs.”
- Blocking Amazon’s acquisition of iRobot.
The FTC tried to block Amazon’s acquisition of iRobot before the companies decided to abandon the deal in January 2024, specifically citing regulatory compliance concerns. As a result, iRobot had to lay off 31% of its workers. This not only lost Americans their jobs, but also limited the potential for more affordable and technologically advanced products to reach consumers.
Now that critics have called out the damage from the abandonment of the deal, Khan’s allies claim “it had nothing to do with Lina Khan or the FTC.” But at the time, the FTC proudly declared itself “pleased that Amazon and iRobot have abandoned their proposed transaction.”.
The agency’s attempts to block the deal ended up harming iRobot, which “was relying on the deal to stay afloat” in the competitive robot vacuum market. A sale could have helped iRobot “better compete in the global marketplace, particularly against companies, and from countries, that aren’t subject to the same regulatory requirements in fast-moving technology segments like robotics,” said Amazon General Counsel David Zapolsky when the company announced it was abandoning the deal.
“What a coup—for the Chinese,” wrote The Wall Street Journal Editorial Board after the deal was called off. While iRobot was forced to cut its workforce and R&D spending, pausing “all work related to non-floorcare innovations,” its foreign competitors rejoiced. “It’s hard to see who benefits from the deal’s collapse besides Beijing, which aims to dominate robotics and mass-produce humanoid robots by 2025,” concluded the Editorial Board.
Time and again, Khan’s approach has benefited competitors – often other huge businesses – over the welfare of consumers and their power in the free market.
Under Chair Khan, the FTC has abandoned not just the consumer welfare standard but also its mission. America’s strong free market principles created an economy where businesses of all sizes can compete in the same marketplaces – and consumers want this.
Instead, businesses now back off from deals or growth strategies that would benefit consumers for fear of regulatory challenges. Chair Khan may claim she’s pro-innovation, but her actions say otherwise.