By Jeff John Roberts
July 20, 2017

U.S. tech companies have soared to the top ranks of the Fortune Global 500 in recent years. Foreign regulators say they did it by cheating. Could their crackdown put an end to a great growth story?

It was no ordinary fine. After the European Commission hit Google (rank no. 65, Fortune Global 500) with a $2.7 billion antitrust penalty in June, in a case related to its shopping results, the search giant scrambled legal teams on two continents to seek redress—while the rest of the U.S. tech industry swallowed hard.

The money wasn’t the issue: $2.7 billion, while a hefty sum, would barely dent Google’s (googl) $92 billion cash reserve. But there is genuine fear the EC fine could be the opening salvo in a grisly shoot-out, as regulators in Europe and elsewhere grow emboldened to punish American tech firms, and even meddle in their decision-making, in the name of fairness, privacy, or security.

For years, a handful of the most successful U.S. tech giants have ridden their innovations to rapid global growth, leaving observers and some shareholders with the impression that they can conduct business as they see fit wherever they want. Over the past year, though, national governments have shown they can still bend mighty firms like Apple (rank no. 9, Fortune Global 500) and Facebook (rank no. 393) to their laws. Ironically enough, amid fears that the Trump administration would spook global markets with a wave of protectionist policies, foreign regulators are the ones landing the first high-profile, cross-border blows.

“Legislators, administrative bodies, and courts around the world are starting to take on giants like Google, Facebook, and Amazon,” says Ivo Entchev, a transnational lawyer at Holwell Shuster & Goldberg in New York. What’s less clear is whether their recent bold decisions are just a temporary burst of activity, or whether they amount to a long-term, existential threat to the tech behemoths. The fundamental worry, Entchev adds, is that regulators could use local laws to intrude in unprecedented ways into the firms’ operations—potentially putting an end to a remarkable streak of revenue growth.


The vanguard of regulatory action is Europe, where national capitals and the EC, the European Union’s executive arm, are putting the screws to U.S. tech firms. Some on the U.S. side of the Atlantic see the recent Google ruling, and others like it, as examples of Eurocrats behaving like sore losers. As then-President Barack Obama put it in 2015, “Their service providers—who, you know, can’t compete with ours—are essentially trying to set up some roadblocks.”

Google is hardly the only U.S. tech firm getting a rough ride abroad, of course. (See “Fighting on Five Fronts,” at the end of this article.) Over the past year, Apple (aapl) was hit by the EC with an order to pay more than $13 billion in back taxes, while Europe’s top court is set to bless a decision by French authorities to hit Uber managers with criminal charges for unlicensed taxi operations. Outside of Europe, tech giants are also taking lumps. In June, an intellectual property decision by the Supreme Court of Canada forced Google to delete certain search results not just in Canada but everywhere in the world. Russia and China routinely invoke national security to require American tech innovators to share intellectual property.

Europe’s strict data and privacy laws, meanwhile, are showing their bite. Facebook (fb) has been dinged for privacy infractions related to its WhatsApp acquisition, while other companies have run up bills scrubbing information under “right to be forgotten” laws. The General Data Protection Regulation, a new legal regime intended to give EU citizens more control over their data, could create still more heartburn for U.S. general counsels when it goes into effect next year. Noncompliance with the GDPR could incur eye-popping penalties of up to 4% of a company’s global revenues. Such laws are not just a nuisance but a barrier to future growth: For the likes of Facebook and Google, they could choke off the user data that turbocharges their advertising businesses.

In the recent Google case, cynics pointed out that the EC’s analysis did not include Amazon (amzn) in the definition of the market for online shopping searches—a seeming legal error that would undercut the case for an antitrust penalty. The most troubling part of the ruling for Google, though, was its requirement that the company rearrange its homepage to accommodate competing shopping services. Ted Ullyot, a partner at venture capital firm Andreessen Horowitz who worked on antitrust issues for the George W. Bush administration, points out that tech firms in particular resent governments ordering them to change their product designs. Such orders, they believe, amount to governments behaving as de facto software developers, even though they lack knowledge of the challenges this may entail—or of the business models that depend on the status quo.


The shopping decision, which Google may still appeal, is only one part of the company’s antitrust trouble. As of July, the EC was also conducting two other major investigations, including one that looks at whether contracts that oblige Android device makers to preload Google’s apps are anticompetitive. But Google and other tech leaders also face a bigger problem: the tension between their culture and those of national-interest-minded lawmakers.

“Moving fast and breaking things works differently when it comes to government,” says Bradley Tusk, a venture capitalist who has held senior political roles under Sen. Chuck Schumer (D-N.Y.) and former New York Mayor Michael Bloomberg and worked as a fixer for Uber. Tusk adds an aphorism from Pericles to the effect that just because you don’t take an interest in politics doesn’t mean politics won’t take an interest in you.

The ire the tech giants are engendering from regulators stems in part from a culture clash, agrees Entchev, the lawyer. “Silicon Valley titans have at times exhibited an evangelical and single-minded devotion to the logic of disruption,” he says. “The corollary has been an insensitivity and a perceived, if not actual, hostility to local values and traditions.” Indeed, the idea of Amazon punching holes in England’s beloved high streets or Uber invading France with Ayn Rand–style capitalism rankles ordinary European citizens as much as shuttered factories gall U.S. populists.

European officials, unsurprisingly, frame their conflicts with Silicon Valley as a cut-and-dried matter of law. Margrethe Vestager, the EU antitrust chief who became the tech industry’s prime tormentor after taking up her post in 2014, has disavowed any political agenda. In the Google case, she told CNBC in mid-July, “the fine is a reflection of the abuse and how long the abuse has taken place.”

Vestager may well be sincere. Indeed, the Google decision seems harsh to American lawyers in part because, unlike U.S. antitrust law, European competition policy focuses on harm to companies as well as to consumers. Meanwhile, EU countries aren’t the only ones accused of playing politics in regulatory actions—some Europeans are asking whether the U.S. federal and state penalties raining down on Volkswagen for its emissions scandal would be as severe if the automaker was American.

Ullyot, who served as Facebook’s first general counsel until 2013, notes that the recent regulatory onset by the Europeans and other governments is hardly new. “We’ve seen a few cycles of this,” he says, pointing to the EU’s $794 million fine against Microsoft (msft), in 2004, for bundling its media player with Windows, and the 2001 decision to block a merger between GE (ge) and Honeywell (hon), as other high-water marks of regulatory zeal.

Ironically, while the enforcement actions might trip up U.S. tech companies, they are unlikely to do much to help European consumers. In last month’s Google decision, the EC flexed its muscles to defend an Internet product—vertical search shopping engines—that has become obsolete for many in the age of Amazon and apps. (The Eurocrats, incidentally, are pecking at Amazon too, forcing a recent antitrust settlement over book sales and probing the company’s Luxembourg tax arrangements.)

“Antitrust regulation usually comes way too late in the day. It’s chasing yesterday’s problems and controversies,” says Ullyot. Unfortunately for U.S. companies and their shareholders, even if the current regulatory outburst proves futile on the policy front, it will cost them a lot of money and headaches.


Fighting on Five Fronts

Governments around the world are mounting more legal challenges against the tech sector, wielding tools that U.S. regulators are slower to deploy. Here are the main battlegrounds:

Antitrust litigation
Powerful and unpredictable tools, competition laws have driven sprawling European Union investigations into Google, over its shopping verticals and apps (ongoing), and Amazon, over its book sales (recently settled).

Data storage and privacy laws
The EU has repeatedly fined Facebook over data-related privacy violations (including a $122 million levy in May), while Apple in July installed its first servers in China to comply with rules requiring local data storage.

Labor laws
France not only levied fines against Uber and its managers but also brought a criminal case over unlicensed taxi operations.

National security
Russia has invoked concerns about “back doors” into U.S.-built devices in order to force companies like Cisco (csco) and IBM (ibm) to reveal sensitive source code. Most firms have complied, in order to retain access to the market.

Tax law
The tech industry’s exotic tax arrangements are under extra scrutiny in Europe, with investigators probing companies like Microsoft and Amazon. One investigation led to an order last year for Apple to pay more than $13 billion in back taxes—an arrangement CEO Tim Cook called “political crap.”


A version of this article appears in the Aug. 1, 2017 issue of Fortune with the headline “Globalization Bites Back.”

SPONSORED FINANCIAL CONTENT

You May Like

EDIT POST