Japanese FTC Tackles Airbnb for Suspected Antitrust Practices

The Japanese Fair Trade Commission (JFTC) launched an investigation on Airbnb last month for violating antitrust laws. Regulators have obtained documents from Airbnb in Tokyo on suspicion that it asked users not to list properties on rival sites.

Upon reading an Airbnb contract, one property manager shared that he reluctantly signed an “exclusivity clause” that prohibited agents and owners from posting their listings on other websites. In exchange, Airbnb provided him with access to availability and other vital data.

Airbnb, however, denies the claims, saying it does not make property postings conditional on exclusivity. “All hosts and partners in Japan who list properties on Airbnb are able to list them on other platforms,” a Singapore-based Airbnb spokesman said.

Airbnb is Japan’s top home-sharing website, with over 50,000 rooms. It competes with hotels and other traditional forms of lodging by letting people rent out their homes or apartments to visitors. The hotel industry views Airbnb and other services as providing unfair competition, since the home-sharing companies provide similar services as the hotel industry without as stringent of licensing requirements and market regulation.

News about Airbnb’s suspected antitrust violations come amid a time of heightened competition in Japan’s vacation rentals market.

Until recently, peer-to-peer lodging (or minpaku) was illegal in Japan. However, this past June, the government passed a new law that allows private citizens to take in fee-paying lodgers for up to 180 days a year without a hotel operator license. A roster of new players have announced their entry to the market following the new minpaku rules, creating a time of intensified competition in the home-sharing market.

Furthermore, Japan is currently facing a tourism boom. As of October, the total number of foreign visitors entering the country reached 23.8 million, making it almost certain to surpass last year’s record of 24 million by the end of the year. This surge in travelers has increased the demand for short-term home rentals.

With increased supply and demand for short-term travel stay in the nation, the JFTC may face suspected antitrust violations with heightened scrutiny. If the investigation finds that Airbnb violated antitrust practices by partaking in actions to diminish business opportunities of rival companies or discourage new businesses to enter the market, the company could be subjected to disciplinary action.

Japanese FTC Tackles Airbnb for Suspected Antitrust Practices (PDF)

Marissa Mayer Subpoenaed to Testify Before Senate Commerce Committee

Last month, Yahoo revealed that all of its approximately three billion accounts were affected by the 2013 data breach. Apologizing for the attacks, former CEO Marissa Mayer stated, “we worked hard over the years to earn our users’ trust. As CEO, these thefts occurred during my tenure, and I want to sincerely apologize to each and every one of our users.”

A Senate Commerce Committee spokesperson confirmed on Tuesday, November 7 that the Committee had subpoenaed Mayer to testify in a hearing concerning the data breaches. After multiple opportunities to testify voluntarily and even after being threatened with legal action, Mayer agreed to testify after the Committee’s top Democrat, Sen. Bill Nelson (D-Fla.) supported the Committee Chairman John Thune’s (R-S.D.) move to subpoena Mayer. Appearing along with Mayer is a Verizon representative, as well as Equifax’s interim CEO Pualino do Rego Barros and its former CEO, Richard Smith.

In her testimony before the Committee, Mayer apologized and noted the breadth of the information stolen. Mayer noted, “we roughly doubled our internal security staff and made significant investments in its leadership and the team.” Filling Yahoo with top security specialists and adopting comprehensive information security programs, Mayer assured the Committee that Yahoo had the systems and personnel in place to thoroughly monitor for and protect against data breaches. Mayer concluded by mentioning the difficulty in protecting against state-sponsored attacks, and the aggressive pursuit the DOJ and the FBI, along with Yahoo, are taking to prevent such attacks.

The Yahoo data breach was revealed to have been a state-sponsored attack by Russian individuals. Two Russian intelligence agents were indicted in connection with the attack of 500 million Yahoo accounts, and are considered some of the most dangerous agents in the world. Several senators asked those before the Committee whether there should be a financial incentive for companies to prevent against hacks and have systems in place to notify consumers. Senators also asked why consumers do not own their own data or have an ability to opt out. Connecticut Democratic Sen. Richard Bluemthal struck a harsh tone, stating, “under current law, even some of the most egregious examples of lax security can be met only with apologies and promises to do better next time. Not fines, or other penalties, or real deterrents. The real deterrent will come when those penalties are imposed on executives like the ones before us today.”

In an exchange with Senator Bill Nelson, Mayer admitted that Yahoo was not protected against a state actor such as Russia. When asked what it was doing to ensure Yahoo’s protection, Verizon said it “long believed” legislation specific to data security and data breach is necessary, and that it is open to collaborating with senators to draft such legislation. With skepticism, Nelson agreed but communicated that “It’s going to take an attitude change among companies such as yours,” adding that they [Yahoo, Verizon, Equifax] must go to “extreme limits” to protect customers’ privacy.

Marissa Mayer Subpoenaed to Testify Before Senate Commerce Committee (PDF)

Sina Concentrated Its Control Shortly After Winning the Proxy Fight Against a U.S. Investor

On November 8, 2017, following the victory of a proxy fight against a U.S. investor, Sina issued a new class of shares and gave 55.5% of the company’s voting power to Charles Chao, Sina’s chairman and chief executive, to avoid facing such fights in the future.

Sina, listed on NASDAQ since 2000, is an Internet pioneer and tech giant in China. Its weibo service is one of China’s most popular social networks. The forced shareholder vote was initiated by hedge fund, Aristeia Capital, who nominated two candidates for the company’s board to push for significant changes of Sina. However, on November 3, 2017, Aristeia Capital failed with more than 77% and 56% of the votes against the two nominations.

The contest draws attention because it is the first proxy fight between a New York-listed Chinese company and a U.S. investor. Some even view it a “test case” to show how far the foreign ownership of Chinese companies listed in the U.S. can go. Sina also seems to take it very serious, changing its shareholder structure in just less than four days after the victory. It “believes any future proxy contest could be costly, time consuming, and disruptive.” The investors may hold another opinion though, as the share price of Sina fell about 10% the day after the announcement.

Some U.S. investors have complained about the lack of shareholder rights in U.S.-traded Chinese companies since their boards are not held to the expected US standards. NASDAQ offers foreign private issuers some exemptions, and many Chinese companies like Sina are incorporated in “business-friendly” places, thus not necessarily subject to US laws.

Many foreign investors have been richly rewarded by China’s Internet market. Back in late 1990s, when Chinese Internet start-ups sought capital and few Chinese venture capital firms existed, the companies’ financing largely depended on foreign investors.

This could be a problem because the Chinese government has some restrictions on foreign investment in certain sensitive areas. Except for the investment structure (variable interest entity or V.I.E) invented for this situation, some analysts speculate that one reason for the foreign investors’ success in avoiding certain scrutiny from the authorities is that they have taken a largely passive role in the companies. But the proxy fight may express some dissatisfaction with such passiveness. Will the approach taken by American activists touch the nerves of the Beijing authorities? Will the Chinese government take a more active role in the management of its corporate giants? Do American investors really understand how China’s Internet sector works and will their active participation truly benefit the shareholders? The answers are still pending.

Sina Concentrated Its Control Shortly After Winning the Proxy Fight Against a U.S. Investor (PDF)

Recap: “BCLBE Leadership Lunch Talk: The Tech Counsel”

On November 6, 2017, the Berkeley Center for Law, Business and the Economy (BCLBE) hosted a conversation with attorney Dana Wagner from Square.

Square is a financial services, merchant services aggregator and mobile payment company. Wagner has worked with Square as the leader of their legal, regulatory, government relations, compliance, and security operations department for more than five years and shepherded the startup through the IPO process last year. Wagner was their first lawyer. He helped shape Square into a global public technology company and built one of the very best legal and regulatory teams in the industry. Before joining Square, Wagner led Google’s antitrust and competition practice. At the beginning of his career, Wagner also served as an Assistant U.S. Attorney in the U.S. Attorney’s Office in the Northern District of California and as a trial attorney in the antitrust division in the U.S. Department of Justice.

Wagner pursued his undergraduate studies at U.C. Berkeley and received his J.D. from Yale Law School. Contrary to most law students, Wagner did not think of going to law school to save the world or do public service. However, after spending his first summer with the government and his second summer in a law firm, Wagner realized that he enjoyed working for the public sector.

While Wagner was working on cartel criminal cases in the U.S. Attorney’s Office, Google reached out to him to create their antitrust division. Wagner had not practiced in such an area for years by then, but managed to quickly acquire the qualifications needed by doing the job itself and by building a team that was able to face antitrust issues that came in every product launch, in the IP strategy and in every partnership.

After four years at Google, Square reached out via e-mail to Wagner to have a conversation when the company was in a very early stage. A combination of elements led Wagner to accept this new challenge: a very good leadership and business model, the fact that he felt that he was not doing legal work at Google anymore, and his thought that you have to run a startup at least once in your life,

At Square, Wagner built his own team from scratch. He looked for lawyers who wanted to do something that would challenge themselves and learn. According to Wagner, another important quality for young lawyers is an ability to take good risks, because there is a lot of risk aversion in the legal world. He wrapped up by stating that risk aversion is something that should be avoided by employees of technology companies.

Recap BCLBE Leadership Lunch Talk The Tech Counsel (PDF)

Pharma Billionaire Arrested for Racketeering Charges

Arizona-based billionaire John Kapoor, 74, owner of Insys Therapeutics, Inc., was arrested by federal agents on October 26, 2017, on charges stemming from an alleged scheme to get doctors to needlessly prescribe his company’s opioid painkiller. He has been charged with RICO conspiracy, as well as other felonies, including conspiracy to commit mail and wire fraud and conspiracy to violate the Anti-Kickback Law.

Kapoor was charged with using bribes to increase sales of Subsys, a fentanyl spray, which is used primarily on cancer patients who are suffering excruciating pain. Just a year ago, former Insys CEO, Michael Babich, and other executives were arrested based on an alleged “nationwide conspiracy.” The arrest also comes amid a nationwide opioid epidemic. President Trump was expected to declare the ongoing opioid crisis as a public health emergency on the same day as the arrest. “These Insys executives allegedly fueled the opioid epidemic by paying doctors to needlessly prescribe an extremely dangerous and addictive form of fentanyl,” Phillip Coyne, a special agent in the Office of Inspector General of the U.S. Department of Health and Human Services, stated in a press release.

The press release from the Department of Justice, also alleges that Kapoor and six other executives conspired to defraud health insurance providers who were unwilling to approve payments when the drug was used for non-cancer patients. Acting U.S. Attorney William Weinreb also shared in a statement that, “in the midst of a nationwide opioid epidemic that has reached crisis proportions, Mr. Kapoor and his company stand accused of bribing doctors to overprescribe a potent opioid and committing fraud on insurance companies solely for profit.”

Fentanyl takes effect faster and more intensely in users. The drug is known to produce effects that are very similar to morphine; however, it is said to be 80 times more potent than morphine. It is meant to be for cancer patients who are going through insufferable pain but the company intended it to be used by many more people than just cancer patients. In response to the opioid crisis, states, cities and counties have sued companies including Purdue, Endo International Plc, and Johnson & Johnson’s Janssen Pharmaceuticals alleging that these companies triggered the opioid epidemic by minimizing the addiction and overdose risks of painkillers such as Percocet.

On the day of his arrest, a federal judge set bail for Kapoor at $1 million. Kapoor was also ordered to wear an electronic monitor bracelet and to surrender his passport. Insys’ stock is down by over 31% since the news of Kapoor’s arrest. The valuation of the company is down to about $350 million, compared to a valuation of over $19 billion in 2015. Kapoor resigned from the board of Insys following his arrest. He has not made any comments or statements since then. However, his defense attorney has stated that “he is not guilty of these charges [and] he intends to fight it vigorously.”  It remains to be seen what will happen to Kapoor during this ongoing opioid crisis that has plagued the nation.

Pharma Billionaire Arrested for Racketeering Charges (PDF)

Chief Executive at Deutsche Börse Group Ousted Amidst Insider Trading Scandal

Amidst growing shareholder pressure, Carsten Kengeter has agreed to step down as the head of Deutsche Börse, one of the world’s largest stock exchanges. German authorities are investing Kengeter for insider trading after he purchased €4.5m worth of Deutsche Börse shares at the end of 2015 (the equivalent of 5.3 million USD). Kengeter purchased the shares just months before the company announced a potential merger with the London Stock Exchange Group (LSEG)—and weeks before formal work on the deal began. Public share value rose for both companies following the announcement and prosecutors now believe actual merger talks might have begun as early as that summer.

The all-stock merger between Deutsche Börse and LSEG would have created the largest operator of stock markets in Europe and likely the most profitable company in its industry. However, the deal faced problems from the beginning with Brexit. Ultimately, European regulators shut it down over monopoly concerns. Both Deutsche Börse and LSEG are now competing for post-Brexit market share as well as searching for new CEOs—Xavier Rolet announced that he will be stepping down as chief executive of LSEG at the end of next year.

Kengeter, once set to lead the exchange behemoth, now faces criminal charges in an investigation that keeps escalating problems for Deutsche Börse. The company was willing to shell out approximately $12.5 million in fines to end the German investigation (€10.5m in corporate fines and €500,000 for Kengeter). However, the Frankfurt court declined the agreement and ruled that the investigation will continue.

Despite Deutsche Börse’s supervisory board largely sticking by Kengeter’s side throughout the investigation, some of the company’s largest shareholders are now calling for its chairman, Joachim Faber, to step down as well. One of the 15 largest shareholders told the Financial Times last week: “Mr. Kengeter and Mr. Faber have been a tandem and should jointly draw the consequences.” While Mr. Faber says that he is willing to run for another term as chairman in May 2018, his continued support of Kengeter has not settled well with many top investors nor other members of the board. As a result, Faber recently hinted that he may consider an earlier departure, should it become necessary.

Kengeter will continue to head Deutsche Börse on an interim basis until December 31st, leaving on a tenure of just three short years. While the board has publicly expressed regret at Kengeter’s early departure, other top investors are breathing a sigh of release. This scandal has created an additional burden on Deutsche Börse which hasn’t preforming well since the LSEG merger failed last year. The company has announced that it isn’t likely to meet its full-year earnings targets and analysts predict their 2018 goals may be “overly optimistic” as well.

Chief Executive at Deutsche Börse Group Ousted Amidst Insider Trading Scandal (PDF)

Celebrity Endorsements Leave ICOs Counting Much More than Coins

The Securities and Exchange Commission (SEC) recently issued a public statement cautioning celebrities like Paris Hilton, DJ Khaled, and Floyd Mayweather from endorsing “initial coin offerings,” commonly referred to as ICOs.

These celebrities were primarily using their various social media platforms to advertise for ICOs. A recent example is Mayweather’s attention-grabbing Instagram post from July, where he is photographed next to a briefcase filled with $100 bills. In the post, Mayweather indicated he would make an exuberant amount of money “on the Stox.com ICO.” Similarly, Hilton tweeted that she was “looking forward to participating in the new @LydianCoinLtdTowken.” However, the tweet has since been deleted.

But why has the SEC taken such an interest in celebrities advertising for ICOs when their social media accounts are often littered with other promotional messages for the latest detox tea or waist trainer? The answer is simple and yet complex. ICOs may technically be selling securities. If this is the case, according to the anti-touting rule, celebrities would then need to make it known if and when they are being paid to promote these ICOs. With nearly $3.3 billion invested in some 200 ICOs within the last year, it is clear why the SEC has taken such an interest in these Twitter and Instagram posts.

However, the SEC’s authority to regulate ICOs is certainly up for debate. Unlike an Initial Public Offering (IPO), ICOs allow companies to get money without obtaining debt or giving its investors equity. Instead, those who invest are given a digital currency called a “token.” It is still not entirely clear which of these tokens qualify as securities that would be subject to the SEC’s many regulations.

Whether or not a token qualifies as a security turns on what it actually represents. We now enter the world of cryptocurrencies. Most tokens are recorded into a “blockchain” known as Ethereum. Ethereum is similar to a ledger, and it also accounts for a type of currency known as “ether.”  Ethereum also maintains “smart contract” programs. Individuals can invest ether into an ICO’s smart contract. As a result, tokens that may be traded are produced, and the ICO issuer of the tokens can choose to keep the ether or use it to finance its company.

The SEC holds that irrespective of the technology behind tokens, they are considered securities when companies use them to raise money. Alternatively, ICO advocates argue that tokens have a utility function beyond financing and should not be subject to SEC regulations.

Although the SEC has not enforced any violations against specific individuals, the Hiltons and Mayweathers of the world should probably add in a protective #ad hashtag when they get paid, to avoid liability for securities regulations that are often harsh.

Celebrity Endorsements Leave ICOs Counting Much More than Coins (PDF)

Lyft to Go Public in 2018

On October 19, 2017, Lyft announced that it has managed to secure a $1 billion investment from CapitalG, a growth investment arm of Google’s parent company, Alphabet. This latest round of funding is expected to help the San Francisco based company prepare for its IPO in 2018.

Before the investment was made, Reuters reported that Lyft was already close to hiring an IPO advisory firm to concretize its step of becoming publicly listed. The New York Times reported that the company has also had discussions with investment banks about becoming a public company, but hasn’t decided which bank will lead the IPO.

As the second largest ride service company in the United States, Lyft’s IPO could benefit a broad and diverse group of investors. Before CapitalG’s investment came into play, Lyft had already raised more than $2.6 billion since its founding. Such investments came from numerous venture and corporate investors, including General Motors, Alibaba, and a Saudi Prince, Alwaleed Bin Talal.

Earlier this year, Uber had already expressed its intention on going public as well. Dara Khosrowshahi, Uber’s new CEO, set a tentative timeline for Uber’s IPO. The IPO is projected to take 18 to 36 months from when Khosrowshahi stated the new timeline last August. In the meantime, the CEO aims to focus more on recovering Uber’s image from a range of scandals, as well as its $3 billion loss last year.

Since Lyft does not have to deal with those sorts of issues, it may find it simpler to list sooner than its larger competitor, Uber. Nonetheless, whichever company has its IPO first will set a benchmark for the valuation of a ride-hailing company and test the belief of many auto industry insiders that individual auto ownership will wane as people will sell their cars and rely on ride share services.

Lyft to Go Public in 2018 (PDF)

Waymo-Uber Sizzles Before Boiling

Alphabet, the parent company of Google and self-driving pioneer Waymo, has faced another setback in its lawsuit against Uber. Judge William Alsup, the Clinton-appointed judge of the Northern District of California, ordered Waymo to strike one of its trade secret claims, leaving it with only eight claims against Uber. Alsup has whittled Waymo’s claims down from 120 trade secret claims at the start of the lawsuit. Waymo is claiming $2.6 billion in damages and seeks permanent injunctive relief in the area of self-driving cars.

The lawsuit, which began in April of this year, involves the design for a custom LiDAR system. Anthony Levandowski, a former Google engineer who worked on LiDAR while at Google, had started a self-driving truck company called Otto, which popped eyeballs when it was acquired by Uber for $680 million with only prototypes and a mere seven months after its founding. Levandowski, who is started a church dedicated to a yet-to-be-built AI deity, was put in charge of Uber’s self driving car initiative, though Judge Alsup has banned Levandowski from working on any LiDAR systems for the duration of the trial. The lawsuit began when a Waymo employee was inadvertently copied on an email from a LiDAR supplier to Uber with designs that were eerily similar to the custom systems Levandowski designed while at Waymo.

While observers have been gripping their seats for the duration of the trial, this is a surprising setback for Waymo. Aside from an early victory in defeating a temporary injunction limiting R&D of autonomous vehicles, Uber has been hit with several roadblocks in the trial. It has been forced to produce its due diligence report of Otto, which suggested that Uber knew Levandowski had stolen trade secrets from Waymo (though, to their credit, told him to delete it); been accused of shredding files; and penalized for its aggressive discovery tactics. Nonetheless, Judge Alsup has suggested that Waymo likely has a stronger case against Levandowski, not Uber, though only the jury trial in December will tell.

Tech has been buffeted by several consequential lawsuits between giants in recent years. Apple and Samsung have been at arms over several design patents, sparking the so-called “smartphone patent wars,” with the $400 million lawsuit even reaching the Supreme Court. Apple is also currently locked in a significant lawsuit with Qualcomm, which claims Apple stole some of its chip designs. In 2012, Oracle and Google were locked in a lawsuit over Java APIs that was also seen as highly consequential for the industry. Oracle v. Google was also adjudicated by Judge Alsup, who became a tech industry folk hero by learning how to code in Java to understand the lawsuit.

Waymo-Uber Sizzles Before Boiling (PDF)

Broadcom’s Proposed Purchase of Qualcomm for $105 Billion

Revealed on Monday, Broadcom Ltd. has made an unsolicited bid to buy Qualcomm Inc. for approximately $105 billion. Broadcom’s bid for Qualcomm offers $70 per share in cash and stock: “$60 a share in cash and $10 a share in Broadcom stock.” The takeover would include Broadcom’s assumption of $25 billion of Qualcomm’s net debt, culminating in a total value of the takeover at $130 billion. The bid presents a 28 percent premium on the closing price of Qualcomm’s common stock on November 2, 2017.

This proposed deal is being classified as the “biggest takeover in the history of the technology industry.” Aside from this deal, both companies are in the process of attempting to acquire other technology companies. Broadcom, a semiconductor maker, is in the process of acquiring Brocade Communications Systems Inc. Qualcomm, the mobile phone chip maker, is in the process of acquiring NXP Semiconductors. Broadcom maintains that it will proceed with acquiring Qualcomm despite the result of the pending NXP Semiconductors transaction. A successful combination of Qualcomm and Broadcom would result in a technology giant that would be responsible for products incorporated into “nearly every smartphone in the world.”

It is anticipated that Qualcomm will reject the bid, as it views the price as undervaluing the company and taking advantage of Qualcomm’s difficult fiscal year and current legal disputes. Qualcomm has experienced an 18% decline in its stock price over the last year and has been embroiled in a legal dispute with Apple regarding patent royalties. Qualcomm will likely advise shareholders to reject the offer and to keep Qualcomm’s current management in place.

In the case that Qualcomm rejects the current offer, Broadcom may engage in a proxy battle to complete a hostile takeover and gain control of Qualcomm. Broadcom has until December 8, 2017 to engage in the proxy battle and move forward with a hostile takeover of Qualcomm.

Broadcom’s Proposed Purchase of Qualcomm for $105 Billion (PDF)