Generative Artificial Intelligence (AI) has become a game-changing technology revolutionizing how businesses interact with their customers, competitors, and partners. However, this groundbreaking tool also poses immense opportunities and risks, prompting the Federal Trade Commission (FTC) to advocate for aggressive antitrust enforcement.
Generative AI startups need to be aware of potential antitrust risks and familiarize themselves with common antitrust theories of harm.
Exclusive Dealing: A Potential Area of Concern
One common business practice in the industry is exclusive dealing, where companies secure exclusive arrangements with suppliers or customers. While exclusive dealing can stimulate competition, it becomes problematic when one firm gains control over critical inputs, distribution channels, or customer segments.
For example, in the case of McWane v. FTC, a federal court condemned an exclusive-dealing arrangement that prevented rivals from accessing necessary distribution channels, subsequently hindering efficient entry and raising costs.
In the context of generative AI, the FTC is particularly concerned about incumbents that offer both compute services and generative AI products. Exclusive deals involving compute resources, like graphical processing units (GPUs), can give these incumbents an unfair advantage and discriminate against new entrants.
Risk and Principles for Exclusive-Dealing Arrangements
While each agreement requires individual assessment, businesses should be aware of several general principles when considering exclusive-dealing arrangements:
- Exclusive-dealing arrangements should not be part of a scheme to exclude or deny rivals the ability to compete. Contracts that block competitors from scaling are inherently risky.
- Companies should document any pro-competitive benefits, such as lower costs, higher quality, or better access to products, and should be prepared to explain how exclusivity leads to improved products or services.
- Exclusive arrangements with companies that have a market share exceeding 30% pose higher risks.
In conclusion, with the rise of generative AI, businesses must be prepared for the FTC’s increased scrutiny on antitrust issues. By understanding the parameters and limits of common antitrust theories of harm, companies can navigate the market competition while minimizing their legal exposure.