In the latest installment of the ongoing net neutrality legal battle, the D.C. Circuit Court of Appeals upheld the Federal Communications Commission’s 2017 move to repeal Obama-era internet regulations. Current FCC Chairman Ajit Pai called the ruling a “victory for consumers, broadband deployment, and the free and open internet.” However, this decision may prove to be a hollow victory for the Republican FCC. Because the court also held that the FCC cannot preempt state internet regulations, states have a green light to enact their own net neutrality laws.

Net neutrality is the principle that all internet traffic should be treated equally, with no internet service provider (“ISP”) having the power to prioritize or stifle specific online content. Proponents argue that regulation of broadband companies ensures open access to information and boosts innovation. Critics assert that internet regulation discourages investment and overly constrains ISPs.

The majority of Americans support net neutrality, and states have stepped up where the FCC has stepped down. After the Republican-led FCC’s repeal of net neutrality regulations in 2017, dozens of states have introduced bills and resolutions to establish their own internet protections. Several states, including California, have already enacted net neutrality laws. The D.C. Circuit decision is an important boost for these state efforts to regulate.

However, the D.C. Circuit ruling may also prove to be a hollow victory for net neutrality supporters and broadband providers. A patchwork of state-by-state internet regulations will be difficult for ISPs to navigate and may result in higher costs and slower services being passed onto consumers. Inconsistent internet regulations will also be problematic for ISPs like AT&T that recently invested in their own streaming services. Far from settling the net neutrality debate, the D.C. Circuit decision has potentially created fifty new legal battle lines.

Net Neutrality Legal Battle Shifts to States

On September 24, Uber obtained a two-month permit to continue operating in London—a permit that falls far short of the five-year permit it sought. This signifies the second time that Transport for London (TfL), the city’s licensing authority, has rebuffed the ride-hailing firm. Further signaling distrust of the ride-sharing app, TfL imposed conditions on the two-month permit that allows it to scrutinize the company. With Uber already struggling with regulatory pressures and large net losses, TfL’s decision comes at a most inopportune time.

TfL and Uber’s stormy relationship goes back a few years. After initially issuing a five-year license to the company in 2012, TfL announced in 2017 that it would not renew Uber’s operating license. That decision was motivated in part by concern for passenger safety and Uber’s use of a software that could block authorities from accessing the app. However, the decision also sparked a court battle whereby TfL eventually had to grant the app-based company a 15-month license—an outcome characterized by London’s mayor, Sadiq Khan, as putting Uber “on probation.”

Now, a day before the 15-month license was set to expire, Uber has obtained a short two-month permit. The permit comes with additional requirements that, according to TfL, are aimed at ensuring passenger safety. While the transport authority has provided few details, under the new requirements, Uber must regularly provide assurance reports and must work with the London Metropolitan Police to report passenger complaints. Further, Uber will have to notify TfL of changes to its operating model in London at least twenty-eight days in advance, and it will have to add three non-executive members to its board.

The disappointingly short permit for the largest European taxi market is another in a streak of setbacks for the company. On the other side of the Atlantic, Uber is currently fighting Assembly Bill 5, a new California legislation that could significantly increase costs by reclassifying drivers as employees from their current status as independent contractors. Meanwhile, this August, Uber reported its largest quarterly net loss—$5.24bn—with the company resorting to cutting more than 400 jobs. With its stock price slipping since its initial public offering in May, pressure for Uber to succeed is now higher than ever.

London Transport Authorities Serve Uber a Disappointing Two-Month Permit

Bankers and lawyers have recently recommended that companies use direct listings as an alternative to initial public offerings (IPOs). A direct listing allows a company’s shareholders to sell their existing stock on the stock exchange without having to go through the underwriting process involved in an IPO. However, a direct listing cannot be used as a means for generating capital since it does not entail the issuance of new shares.

Companies that have recently completed a direct listing are Spotify and Slack. However, especially in the case of Spotify, the companies did not require any additional capital. Therefore, there was no need for an IPO in these cases. Furthermore, Spotify’s transaction involved two components: a partial direct listing and a partial IPO.

Bankers from Morgan Stanley to Goldman Sachs and lawyers at Goodwin Procter and Latham & Watkins have argued that the underwriting banks involved in an IPO typically price shares at a price cheaper than their true market value. This is common practice among conservative underwriting banks who believe that a company’s IPO will not generate a high return. Furthermore, these advisers were involved in the Spotify transaction, and after realizing the gains from the direct listing, now seek to corner the direct listing market.

Within the IPO context, it is the SEC’s objective to get U.S. companies to launch their IPOs early, thereby increasing the total number of publicly traded companies. As a result, this would increase the number of retail investors by giving them access to buying shares on the stock exchange. However, given the criticism mentioned above, an IPO may not be the best way for a company to raise capital. Moreover, this criticism is not recent. In fact, within the context of venture capital or private equity transactions, critics question whether an IPO or a M&A transaction is a viable exit strategy. On October 1, 2019, leading venture capitalists met at an invitation-only summit in San Francisco to discuss the viability of a direct listing as an alternative to an IPO. However, the outcome of these discussions is not subject to the purview of the public.

As mentioned above, a pure direct listing does not provide a means of generating capital. Therefore, one solution is to adopt a transaction similar to that of Spotify that includes a direct listing of existing shares coupled with an issuance of new shares. An additional solution is to have companies sell private convertible notes to raise money ahead of a direct listing. This solution is based on an article circulated by Latham & Watkins in the wake of the Spotify transaction. However, critics worry that concurrently raising capital will increase first day price swings of a company’s shares after the direct listing. In any case, a direct listing appears to be a viable alternative to an IPO so long as companies do not require further capital in the short term.

Silicon Valley bankers and lawyers push for alternative to IPOs

Warren and Zuckerberg Clash Over Breaking up Big Tech

On September 26, 2019, Peloton Interactive Inc. (“Peloton”) launched its IPO – priced at $29/share and ended at $25.76/share (down 11%)*. As a result, Peloton’s IPO became the second-worst performing IPO of 2019 and the third-worst debut offering since the financial crisis. Peloton offers fitness equipment integrated with a workout-streaming subscription service that can be purchased together or separately. The company raised $1.2 billion by selling 40 million shares at $29/share, and the launch of the IPO resulted in $900 million dollars of investor capital lost.

According to Peloton’s filings with the SEC, the company sells stationary bikes for $2,245, treadmills for $4,295, and connected fitness subscriptions for either $19.49/month or $39.00/month. In 2019, the company generated $915 million in revenue (up 110% from 2018) but incurred net losses of $195.6 million, which are nearly quadruple the losses from 2018.

Experts attribute Peloton’s disappointing IPO to an unrealistically high valuation of its stock price – ranging from $26/share to $29/share – as well as the company’s decision to sell at the upper limit of that range. Unfortunately, the increasingly common divergence between VC valuations and market expectations has resulted in disappointing IPO launches (Lyft and Uber), and caused companies to abandon their planned IPOs altogether (WeWork and Endeavor).

Although some may interpret this recent trend as an indicator of diminished investor confidence in the IPO market, it is likely that the disparity between valuations in the private sector and expectations in the public market is creating unreasonably high IPO prices. Professor Aswath Damodaran from NYU Stern School of Business recently stated, “[VCs are] overestimating the value of scaling up and underestimating the value of the business model.” In response, investor confidence in companies like Peloton, Uber, Lyft, and WeWork that focus solely on massive growth and scale without clearly delineating a plan to increase profitability appears limited.

Peloton launched its IPO without the typical indicators of profitability. By coming to the market at a loss, Peloton discouraged investors from having confidence in its valuation. Additionally, Peloton filed with a dual-class share structure, presumably to retain more control over the company, but this certainly deterred many investors that, as a rule, do not invest in this stock structure.

What this means for Peloton’s future remains to be seen, but it may indicate that companies looking to initiate an IPO should be more conservative with their valuations, come to the market with a clear path for profitability, and align more closely with market expectations going forward.

*When this article was written, Peloton was trading at $22.33 (down 23% from IPO).

Peloton’s IPO Falls Flat: Implications for the Future IPO Market

In late March, Bayer and Johnson & Johnson settled more than 25,000 lawsuits surrounding Xarelto, a blood thinner medication jointly developed by both companies. This $750 million settlement was in response to thousands of allegations that Xarelto causes uncontrollable bleeding leading to severe bodily injury and death. In addition to winning all six cases that went to trial, both companies continue to deny any and all responsibility associated with the alleged harmful side effects of Xarelto. So, why did both companies decide to settle?

While all pending cases were settled for a total of $750 million, Bayer and J&J are equally footing the bill. Therefore, both are responsible for less than $390 million. Moreover, Bayer’s product liability insurance will offset this figure substantially. Thus, on its face, the burden this settlement will have on both Bayer and J&J appears minimal.

In 2018, J&J’s Xarelto sales encompassed $2.5 billion of its total revenue. However, this figure is dwarfed by the company’s total $78.7 billion revenue in 2018. As for Bayer, Xarelto contributed $4.07 billion to their revenue streams last year. Moreover, as compared to similar lawsuits, this settlement is quite low. For example, amidst comparable allegations to those made within the complaints against J&J and Bayer, Boehringer Ingelheim recently settled 4,000 cases for nearly $650 million. In comparison, J&J and Bayer’s financial exposure is substantially less.

With that said, this recent settlement follows a significant increase in total litigation exposure for both companies. In March, Bayer announced that the Xarelto settlement allows both companies to move forward unencumbered by future costly and time-consuming litigation. For instance, J&J spent $1.72 billion on litigation last year alone. This figure is nearly double the amount spent in 2016. As for Bayer, after recently acquiring Monsanto Co., the company has been subject to many toxic tort claims. For example, after losing two cases involving Mansanto’s popular weed-killer, Roundup, Bayer’s stock took a hit in late March of this year. Thus, while the settlement amount encompasses a small portion of Bayer and J&J’s revenue in 2018, the litigation expenses associated with the Xarelto lawsuits were substantial. This suggests that settlements of this kind will remain crucial tools for large companies to avoid incurring excessive litigation costs, evade liability, and, ultimately, continue keeping investors happy.

Rising Litigation Costs Pressure Bayer and J&J to Settle Xarelto Lawsuits

Last week, Amazon founder Jeff Bezos’ personal security consultant Gaven De Becker went public with findings that concluded “with high confidence that the Saudis had access to Bezos’ phone.” Following The National Enquirer’s publishing of Jeff Bezos’ intimate text messages with Lauren Sanches, Bezos hired investigators to look into who was behind the data breach and subsequent leak to the controversial tabloid. The revelation took America by storm—the idea that the richest and most well-connected man in technology could have his personal data stolen is one that remains deeply unsettling. In addition to the probe, Bezos released a personal statement on Medium, wherein he exposed AMI, the parent company behind The National Enquirer, for what amounted to extortion before going public with the text messages.

The implication of Saudi involvement is not all too surprising, given The Washington Post’s unrelenting coverage of the murder of its columnist Jamal Khashoggi within the walls of a Saudi consulate. The coverage helped lead Saudi Arabia’s attorney general to concede that the murder was premeditated, and the CIA to conclude the Crown Prince himself as the mastermind behind the killing. As the owner of the Post, Bezos clearly had a target on his back.

The Saudi campaign against Bezos is not an isolated incident. According to Becker, Saudi Arabia attacks people in many ways, utilizing an extensive social media program that sometimes plants operatives within the company hierarchies themselves. It is thought that one of these many insiders may be AMI CEO David Pecker himself. The connections between Crown Prince Mohammad bin Salman, Pecker, and Donald Trump are conspicuous: Pecker bringing an MBS intermediary to the White House, publishing a pro-MBS magazine titled “The New Kingdom” shortly after a meeting with the Prince, and reports of AMI sending advance copies of the magazine to the Saudi Embassy.

To better understand the full picture of the Bezos debacle, it is important to understand that historically innocuous tabloids have become increasingly intermixed with politics, as the U.S. Attorney in the Southern District of New York emphasized in its case against Michael Cohen. Becker explains, “Though relatively benign at first, the Trump/Pecker relationship has metastasized: In effect, the Enquirer became an enforcement arm of the Trump presidential campaign and presidency.” Although there is no concrete evidence that indicate the Kingdom ever gave AMI the text messages that were released, the evidence is convincing.

Both AMI and the Saudi government have since released public statements, denying any involvement by the Saudis.

Investigator Claims Saudi Arabia Had Access to Bezos’ Phone