Berkshire, Google, Pega & Other Catalysts

name is Elliott Stein. I'm a senior litigation analyst covering the financial sector. I'll be your host for today, October thirty first, twenty twenty three. As always, if you have any questions about any of the matters that we'll be discussing on this episode, please don't hesitate to reach out to us at your convenience with questions. So we'll be

discussing a handful of sectors and topics today. First, our anti trust analyst Jen Ree will discuss a number of trials in her space, including the DOJ's case against Google oversearch, DOJ's suit challenging the Jet Blue Spirit merger, and Epic Games's trial against Google over the latter's play store. After that, Matt Schuttenhelm our TMT litigation and policy analyst will preview an anticipated decision on a motion by Meta to stop the FTC from blocking the company's use of teams data.

After that, Tamlin Basin, our tech IP litigation analyst, will discuss Pegasystem's effort to reduce and possibly eliminate a two billion dollar jury award for Appian in a trade secrets case.

Following that, Dwayne Wright, who covers healthcare policy for US in Washington, d C. We'll discuss an FDA proposal to extend medical device oversight to laboratory developed tests, and he'll also discuss the proposal to exempt orphan drugs that treat more than one disease from the drug pricing provisions of the Inflation Reduction Act. After that, Nathan Dean, our financials policy analyst, also in Washington, DC, will talk about a federal reserve proposal to lower the amounts that banks can

charge for debit card transactions. He'll also talk about the Basel three end Game proposal to increase banks capital requirements, and he'll also briefly address what Mike Johnson's ascension to the House speakership means for a potential government shutdown.

barriers around trade data. And finally, let me just add that our colleague Holly Frome, who covers consumer and industrials litigation, couldn't be on today's episode, but she is awaiting key court rulings in Buyer roundup litigation and also Peloton Securities fraud litigation. So if you're interested in those cases, please don't hesitate to reach out to her or to me, and I can point you in the right direction. As always, all of our research is available on the Bloomberg terminal

at BI go. And just a quick word about Bloomberg Intelligence for those who don't know. We are the investment research platform on the Bloomberg term and all, providing in depth research on industries, companies and markets and delivering key data from BI analysts in their given industries. All right, So with all that out of the way, let's get started with the content. Jen Ree, let's bring you in to talk all things antitrust. As always, there's a ton

of stuff going on in your coverage. You have three trials, at least three trials overlapping just in November. Two of them involve Google. The third involves Jeb Blue and Spirit. Why don't you come in and tell us what investors should know about these cases?

It came out in trial about twenty six billion in just twenty twenty one to be set as the default search engine and essentially all the apps and various digital places a user would go to search outside of Microsoft's products, which obviously use BING. So the DOJ claims this has blocked rival search engines from access to the market and made it impossible for them to actually develop into a

good competitor because there's this feed feedback loop. The more searches that are done, the more data a search engine collects, and then each search becomes better after that and they become the best search engine. And it also says that by dominating search, Google then dominates the search ads that pop up when you do your search, and they can charge high prices to advertisers. So we've got halfway done.

The dj completed its case in chief, and we think it presented really compelling evidence to essentially meet the elements that it has to meet, and that is whether Google has a monopoly in a market that's properly defined as general search, and whether it has a foreclosed competitors from more than about forty percent of the outlets for distribution.

I mean, these are all in question right whether that's the proper market or whether being a default search is actually foreclosure because a user can go in and change that. So at least right now on the question of whether there's wrongdoing, we're kind of leaning toward the DOJ. But

the thing is, we only have half the picture. So the view could change because monopolization suits are judged in a very difficult, subjective way called the rule of reason, and this requires first determining whether there's conduct that causes harm, That's what we've done, but then asking whether the defendant has legitimate pro competitive justifications for that conduct. That's what

Google's presenting now, it just started. And if it has valid pro competitive justifications for its agreements that are supported by the evidence, then essentially what the judge has to do is way which one is stronger. So it's really a difficult decision. It's very subjective. So once I see what Google presents, I could change my view on this. The trial is supposed to go through number sixteenth. I think we'll get a ruling in the first half of next year. Toward the end of it, I think either

side will appeal if they lose. This trial is only on liability, that's it wrongdoing, So once it's done, there's going to be an entirely new trial to determine what the remedy should be. The DOJ will seek to have the company broken up. We don't think that's going to happen. It's more likely that Google is going to have to get out of the agreements that has to be the default, or share data with rivals, or provide a choice screen, or somehow educate users on switching defaults, or facilitate that.

We don't even know what the dj is going to ask for, because no one has talked about any of this yet, because that'll be in the second trial, so it remains to be seen. Let me move over to Google play Store, so this is going to start pretty soon. This is a challenge to Google's Playstore policies by Epic Games,

Indmatch dot Com. Now there used to be states and other consumers and developers in it, but they have all settled and the developers basically don't want to have to distribute through the play Store to get on the Android devices, or be required to use Google's payment system for the payment for apps or in app payments, and Google requires that. Now, this exact same case was pretty much brought against Apple by Epic Games, and Apple has largely won, although they're

waiting to hear if the Supreme Court will review those decisions. Now, primarily because of that, we favor Google. But there's a wrinkle because this is a jury trial and that Apple trial was not. It was a judge trial and Apple won on really technical antitrust aspects. This jury may not look at it that way. They may judge the case more on what they view as fair or unfair conduct,

and it's possible there could be a different outcome. This trial starts November six, that's going to run through mid December, and since it's a jury trial, we should get a decision in December now. Really, lastly, because I've taken too much time, lawsuits started today. This is the DOJ suit

to Blockjeptly from buying Spirit. They view it as anti competitive because the deal would remove Spirit, an ultra low cost carrier, from the market, eliminates a lower cost option for consumers that might want the a la carte option

Spirit offers. The companies have agreed to divest a bunch of assets for the routes that they both fly, but I think they have a big problem on the routes They don't fly where Spirit flies today but Jet Blue doesn't because Jet Blue's been clear it intends to retrofit Spirits playing to the Jetlue model, which means fewer seats and higher fares, which means lower output and higher prices which are antitrust harms. So I favor the DOJ on this one. The Tarleston Federal Court in Boston starts today,

it ends December December fifth. I think we'll get a decision in January.

what's an issue here? So, so, Facebook in twenty twenty entered into a settlement with the Federal Trade Commission after the Cambridge Analytica matter, and the company agreed to pay five billion dollars and agreed to a number of terms

related to its privacy compliance. But the twist is that in May of this year, the Federal Trade Commission, now under Lena Kahn's leadership, said that it doesn't think Facebook has complied with with those promises, and so the FTC is going to unilaterally change the terms of those of that settlement, and it pose to add a couple terms that the company doesn't like very much, including a total ban on advertising to kids, as well as a requirement

that anytime the company introduces a new feature or new service, it has to first get a clearance from an assessor that its privacy program is in good shape. So there's good reason for the company to highlight this as presenting a risk to the business. So let's talk about next

steps here from an investor perspective. As Elliott said, there was a hearing October seventeenth here in DC on this, and that is about Facebook's effort, or Meta's effort to stop it before it can even start to say, look this, the Federal Trade Commission doesn't have the ability to unilaterally modify a court approved settlement, and that hearing on October seventeenth tested that effort to stop it before it even starts. In my view, Judge Timothy Kelly at that hearing didn't

seem very warm to that idea. I think there's a general sympathy for Meta's position here, but I don't think that the judge had a sense that he has the authority to stop the process before it starts. So he told us that he's likely to rule before a November thirtieth date for the company to respond at the FTC, and so that tells us this month we're going to see his ruling, and so I think that sort of gives give shape to how this is likely to play out.

I think Meta is likely to suffer an early loss when he releases his decision in the next couple weeks, and that will let the Federal Trade Commission move ahead with this process to modify the settlement along the lines of what it proposed. But that that's where, in my view,

Meta's position gets much stronger legally. If the Federal Trade Commission moves ahead with these changes that it's proposed, I think the company's going to be in a very strong legal position to challenge it after the fact, and I think it will it will race into court to to try to stay anything as soon as the company as soon as the Federal Trade Commission imposes a date for those changes to take effect. So big picture, I'm not

too concerned about a disruption to the company's business. I think it wins this fight, but near term there could be some bumps along the road. Let me pass it back to you, Elliott.

erased entirely. Now a little bit of background, So Peggas Systems and Appian compete in the business process management software space, and there's a lot of the history of litigation between the parties and the instant case was filed after a Appian hired Pega's former head of competitive intelligence and learned that Pega, through a third party software developed developer, had learned some various things about Appian's platform. File to complaint

for trade secret misappropriation in a Virginia state court. There was a seven week trial and it concluded with a May ninth, twenty twenty two verdict in which the jury did award two point zero four billion dollars in damages. Now, if that amount holds, this would be the largest trade secret damages of the award in history, not just in Virginia but anywhere in US state or federal courts. It was already the largest damages award of any kind in

the history of Virginia courts. And just to underscore what an outlier of this award was, what we did is we looked at other significant trade secret awards and compared the amount awarded to the combined pre vertict market caps of both parties in the litigation. Now, this award was twenty four percent of Pega and Appians combined pre market pre verdict market caps. No other awards top five percent

in that metric. And for finalized amounts, that is amounts that have gone through all the appeals, the actual high water mark is zero point zero zero four percent. So again this is not at all in line with any trade taker's case that we could find. Now, how did it get so high. It got so high because the Dury instruction essentially shifted the burden of proof on damages

to the defendant Pega Systems. So in trade secrets cases, a damage of the amount based on independence profits doesn't need to be precise, but it does need to be reasonably based on the profit that was actually stemming from the alleged theft. So Appian should have had to show

some relationship between Pega's sales and Appian's trade secrets. That's not what happened instead, because of a Duran instruction, and the judge gave Appian pretty much simply had had to point to all of the revenue Pega had generated since this alleged trade secret depth of place, and the CORE asked Pega to prove what amount of that revenue had

no relationship to the trade secrets. Now, proving that kind of negative relationship is a incredibly, incredibly difficult and that's one of the reason why it's not actually required in trade cickets law. And it's not just us saying that. An amicus brief pointing out the error in this during instruction was filed by the American Intellectual Property Law Association, So we're quite confident in the Abell's court will either reduce the damage's amount or remand for a new trial.

We also think Pega has a decent likelihood of totally eliminating the award based on its argument that Appian failed to identify protectable trade secrets in the first place and or failed to adequately safeguard those secrets. Now, a win on either of those would wipe out the damages amount entirely. So again, arguments are November fifteenth, and it is a decision could be expected from two to five months after that, so really we're looking out of January to March twenty

twenty four. Timeline I showed. However, note that We do think there's a good chance that this issue goes all the way up to the Virginia Supreme Court, so final resolution could actually be a few years away. I'm with that, Alphin back to you, Elliott.

LDTs are a class of IVDs or in vitro diagnostics designed and made for use in a single clinical laboratory. FDA traditionally viewed LDTs as low risk, developed for diagnosing a rare disease or for use in local community populations. The FDA's exercised enforcement discretion over LDTs by choosing not to require may be subject to pre market review or clearance before use, which is typical for most medical devices. But over time LDTs have become more complex and marketed nationwide.

Even if the test itself is run in a single lab. As I said, LDTs can enter the market without FDA review. They're also not tracked, and because of this lack of transparency, the FDA estimates estimates as many as one hundred and sixty thousand existing tests and fifteen thousand new tests per year are developed. So what would the FDA proposal do.

We would clarify that LDTs are medical devices and subject to regulation under the Federal Food, Drug and Cosmetic Cosmetic Act, and would be the regulation would be phased in over a number of years. In terms of the impact, it's highly speculative at this point, which FDA acknowledges, and that's largely to my earlier point about how many tests are out there and how many tests the anticipate will come

onto the market. It could be roughly six billion, at least that's what the FDA has signaled, but it could be much higher. So why do we think there's a high likeli that the Biden administration will finalize the rule one? The FDA tried in twenty fourteen through guidance to outline and oversight framework for LDTs, but it was withdrawn amid

stakeholder and congressional pushback. Since that time, LDTs continue to grow without oversight on effectiveness, and then since the guidance was removed, Congress did try to take the lead on a legislative solution, but after several legislative sessions, there's been very little movement given the diverging views of stakeholders like academic medical centers and labs that are less keen on FD oversight of these tests, and patient groups and diagnostic

manufacturers that support more oversight. So there's a sense of urgency given the uncertainty with the twenty twenty four elections and the likelihood for a change in administration, which is why you see the administration moving on this now. Now just briefly on the orphan Drug proposal, which was introduced recently.

What would do is exempt orphan drugs from being eligible for negotiation under the Inflation Reduction Act, even with support from there for rare disease research and some members of Congress, we think the likelihood of action in this Congress is pretty small. So just some quick background orphan drugs. They're used to treat rare diseases or conditions that affect fewer

than two hundred thousand people in the US. An orphan DRU designation usually occurs early in the development process and allows companies to qualify for various incentives like R and D text credits and then marketing exclusivity if the drug is f to approved. Now, the IRA does exempt from negotiation orphan drugs designated for only one rare disease or condition, where that approved indication is for the disease or condition.

Drugs that have multiple designations or designations for multiple rare diseases or conditions aren't exempt, even if the additional indications have not been approved by the FDA, And we've heard from some companies that they're now delaying or foregoing additional research for new indications and orphan drugs. For example, over the summer, Relay Therapeutics indicated its shifting research it's research strategy to larger indications first and then following up with

research on smaller indications or more orphan drugs. And this is because drugs that are seven or eleven years marketed or approved by the FDA and have over two hundred million in expenditures within the medicare population are negotiation eligible, So companies like Relay would prefer the clock to start with the larger indication to recruit investment costs. Over the last twelve months, we've heard some arguments from other companies like al Mylin and Genentech that the IRA was impacting

research timelines and priorities. Again, we think the chances of passage or slim. We don't think Democrats are ready to open up the IRA, just as price negotiations on the first ten drugs are underway, and Republicans, as much as they support some aspects of the law like limiting out of pocket drug costs, many would prefer to see aboute on repealing the drug provisions rather than amending them. So I think this is one we'll hear more about in the future, but I don't see a likelihood for passage

anytime soon. So with that, I will turn it back to you.

down the road and offer a continuing resolution to January fifteenth. Now, we think that there's a high probability of that happening, and therefore we don't think the shutdown probability is all that high at the moment, say around thirty percent. And even if there is a shutdown, you know, we just continue to tell our clients that the market impact of that isn't all that great, even if you're talking about contractors. But there's really no sector out there that's really exposed

to government shutdowns all that much. Now, you know you're going to see political hiccups between now and November seventeenth. You know, obviously they've already started wrangling over Israel AID, Ukraine AID. We have a farm bill that has to be done by the end of the year. There's FAA reauthorization, so there's a lot of other things that are in play here. But again, just please note the market impact

of a government shutdown, if it happens, is somewhat low. Now, two other things I want to talk about, primarily with the Federal Reserve. The first is we got an extension to what is known as the Bosle three endgame proposal. Now, the extension pushes the comic period from November thirtieth out to January fifteenth, twenty twenty four. And if you can recall, you know, the Basil three endgame is essentially a recalibration

of risk weighting of assets for the big bank. So if you're Bank of America at JP Morgan, you're looking at probably around a nineteen percent increase in capital requirements or CET one. If you're a smaller bank, you're probably around six percent. Again, this is applicable to banks that are hundred billion in assets and up, and you're also not allowed to include your own internal model restrictions when

you're trying to calculate credit and operational risk. Now, there is a considerable amount of pushback from the industry on this, primarily towards the banks the defense process in doing this, whether it's the Administrative Procedures Act or cost benefit analysis. My guess is is that if you were to listen to this podcast a year or two from now, Elliott will be talking about this in terms of a lawsuit

going against this rule. But you know, as Elliot can also explain, you know, you can't sue these things until they're finalized. So there's gonna be a lot of additional hiccups and headlines and so forth between now and next year. But you know, we still think at this point the regulators have a plan to finalize this in the third quarter of next year. The banking industry comes back and says, look, because of all these hiccups and stuff. You need to

repropose this rule. So who is right and who's wrong. We'll find out next year. But I think at this point the regulators are still trying to finalize that. But with the caveat that, you know, anything could potentially push this back. The other proposal I want to talk about is what is known as Urban Amendment two point zero. So if you're in the credit card space or the debit card space, actually you may recall that back in twenty eleven is part of the Deurbin Amendment of dot Frank.

Banks were capped at how much they could charge merchants in when conducting a debit card transaction, and the interchange fee was capped at twenty one cents plus five percent of the transaction plus one cent additional for fraud prevention purposes. Now, the average cost of transaction has almost decreased by half from two thousand and nine to today, and so the merchants and the retailers were out there will say, look, if the average cost of transaction has declined, well, then

so should the cap. The original intent of the Durbin Amendment was to decrease the amount of fees that banks can charge merchants, and therefore merchants will pass those costs onto consumers. Now, if I could get one hundred bankers on this podcast, I would have one hundred people saying, look, the merchants never passed that along. They pocketed the money. If I get one hundred merchants on this podcast, they would say, look, we're passing this on, you know, and

it's not something that we're keeping. Now, who is right and who's wrong? I've seen studies on both sides suggesting that they are. We've the retailers like to push a study that says seventy percents on the dollar was pushed out. The Reserve of Richmond has put out a study that pretty much nothing was passed on to the consumer. So again, this is one of those things where who's right, who's wrong?

They're probably both bit right and wrong. But what the FED has done is they have come back and they've said, Okay, we're going to propose a new cap, and we've put that from going from twenty one cents to fourteen point four percent cents, from five percent of the transaction to four percent of the transaction, sorry point zero, five percent of attraction to point zero four percent of the transaction, and from one cent in fraud prevention costs to one

point three cents overalls, around a twenty eight point six percent decline in how much banks can charge. And because banks took in about twelve point nine billion dollars in such fees in twenty twenty one, you're looking around three point sixty nine billion in fees disappearing from the banking sector. Now, will all this go to the merchants. No, we don't want to say that just yet, because some of this

probably will be passed on to the consumer. But what we're also saying is is that there's really not much in the way that we think so banks are going to be able to do to minimize this amount. Because you know, when the Dibrin Amendment first came out, banks were like, right, well, we're gonna lose these, but we're

gonna increase fees on checking accounts. The political pressure is different these days, and if you were in the banking sector and you know that banks haven't increased or had to do a way away with what are known as overdraft fees because of political pressure, that political pressure will remain. So it's still to be determined how the banks are

going to try and minimize this loss. The last thing I want to mention on the debit card interchange fee card is if you're exposed to vis are a MasterCard, you see some pretty scary headlines. Those are just headlines. The actual impact of Visa MasterCard is extremely low. They take a very small amount of that actual transaction amount of that twenty one cents. Very few of that goes to Visa MasterCard. The bulk of it goes to the banks. So we think this is going to be finalized in

the third quarter of next year. The comment deadline is probably gonna be around January. The banks are going to be lobbying pretty heavily against this, but we're calling this a secondary risk compared to the Bosle three end game, which is one of the bank's primary risks. So with Elliott that, I'm going to pass it back to you.

A jury returned to verdict for seventeen of the named plaintiffs just in June of this year, and the jury found Pacific Corp liable and awarded ninety million dollars in economic, non economic, and punitive damages. Again, that's just for the seventeen named plaintiffs. Trials to determine the damages for the remaining class of about forty five hundred people. Those trials

are scheduled to begin in January. But before that happens, and what I'm watching this month is that Pacific Corp. Will be in court on November ninth for its post trial motions to reduce its exposure. And we think Pacific Corp has good arguments. It has good arguments at Oregon law bars non economic awards things like pain and suffering. That's usually what constantute, it's non economic damages. But Oregon has this law that bars non economic awards for damage

or injury to property caused by wildfire. So we think, you know, Pacific Corps has good arguments to reduce its potential exposure from what could be about thirteen billion dollars to just a few hundred million dollars. The problem is, you know, they're going before a trial judge on post trial motions, and this trial judge has you know, pretty

consistently ruled against them. So I don't think Pacific Corp. Will necessarily prevail on these arguments before the trial judge at this November ninth hearing, but I think the company could gain traction with the arguments later on appeal when these issues actually you know, move out of the trial

court and onto the appeals court. So as a result, you know, we'll see how compelling these arguments that are at the November ninth argument, and I think, you know, if Pacific Corp. Does gain traction on some of these arguments, could help prompt the settlement, which we think would be

in the mid single digit billion dollars. A second case I'm watching this month is a lawsuit filed by the SEC on September twelfth against market maker virtues broker Dealer Units, accusing them of failing to protect information barriers around sensitive

customer information. Virtue is due to respond to the lawsuit by November thirteenth, and I think the company has a good chance to win dismissal of the fraud type claims in the lawsuit because the alleged false statements don't really pertain to the sale of any specific securities, as the relevant statute I think requires. So you know, either way, I think Virtue's monetary risk in this case is relatively small,

probably no more than twenty five million dollars. But if they can knock out some of the fraud type claims, it's going to reduce that exposure even more, possibly to do single digit millions. So those are the two cases I'm watching in November. But you know, in conjunction with everyone else who spoke on this call, there's a lot going on in November that we think is important for investors to be aware of. But for now, I think

we'll wrap up this episode of Votes and Verdicts. As always, thank you for listening, And as a reminder, you can find all of our research on the Bloomberg terminal at BIG and we encourage you to reach out to us with any questions that you may have, and we also encourage you to listen to other episodes of Votes and Verdicts on whatever podcast platform you like to listen to. So, with that, thank you for listening and have a great day.