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Criticizing the FTC’s Proposed Order in the Google Patent Antitrust Case

Geoffrey Manne —  22 February 2013

I filed comments today on the FTC’s proposed Settlement Order in the Google standards-essential patents (SEPs) antitrust case. The Order imposes limits on the allowable process for enforcing FRAND licensing of SEPs, an area of great complexity and vigorous debate among industry, patent experts and global standards bodies. The most notable aspect of the order is its treatment of the process by which Google and, if extended, patent holders generally may attempt to enforce their FRAND-obligated SEPs through injunctions.

Unfortunately, the FTC’s enforcement action in this matter had no proper grounding in antitrust law. Under Supreme Court doctrine there is no basis for liability under Section 2 of the Sherman Act because the exercise of lawfully acquired monopoly power is not actionable under the antitrust laws. Apparently recognizing this, the Commission instead brought this action under Section 5 of the FTC Act. But Section 5 provides no basis for liability either, where, as here, there is no evidence of consumer harm. The Commission’s Order continues its recent trend of expanding its Section 5 authority without judicial oversight, charting a dangerously unprincipled course.

The standard-setting organizations (SSOs) that govern the SEPs in this case have no policies prohibiting the use of injunctions. Even if an SSO agreement (or a specific license) did disallow them, seeking an injunction would be a simple breach of contract. Reading a limitation on injunctions into the SSO agreement is in severe tension with the normal rules of contract interpretation. To turn Motorola’s effort to receive a reasonable royalty for its patents by means of an injunction into an antitrust problem seems directly to undermine the standard-setting process. It also seems to have no basis in law.

My comments rely heavily on Bruce Kobayashi and Josh Wright’s article, Federalism, Substantive Preemption, and Limits on Antitrust: An Application to Patent Holdup, published in Competition Policy and Patent Law Under Uncertainty: Regulating Innovation (Manne & Wright, eds.).

For previous posts on the topic see, e.g.:

In google, intellectual property, patent
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Powerhouse ABA webinar on the FTC’s investigation of Google this Friday

Geoffrey Manne —  9 January 2013

The suit against Google was to be this century’s first major antitrust case and a model for high technology industries in the future. Now that we have passed the investigative hangover, the mood has turned reflective, and antitrust experts are now looking to place this case into its proper context. If it were brought, would the case have been on sure legal footing? Was this a prudent move for consumers? Was the FTC’s disposition of the case appropriate?

Join me this Friday, January 11, 2013 at 12:00 pm – 1:45 pm ET for an ABA Antitrust Section webinar to explore these questions, among others. I will be sharing the panel with an impressive group:

Hill B. Welford will moderate. Registration is open to everyone here and the outlay is zero. Remember — these events are not technically free because you have to give up some of your time, but I would be delighted if you did.

In announcements, antitrust, federal trade commission, google, Internet search , , , , , ,
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The price of closing the Google search antitrust case: questionable precedent on patents

Geoffrey Manne —  4 January 2013

The Federal Trade Commission yesterday closed its investigation of Google’s search business (see my comment here) without taking action. The FTC did, however, enter into a settlement with Google over the licensing of Motorola Mobility’s standards-essential patents (SEPs). The FTC intends that agreement to impose some limits on an area of great complexity and vigorous debate among industry, patent experts and global standards bodies: The allowable process for enforcing FRAND (fair, reasonable and non-discriminatory) licensing of SEPs, particularly the use of injunctions by patent holders to do so. According to Chairman Leibowitz, “[t]oday’s landmark enforcement action will set a template for resolution of SEP licensing disputes across many industries.” That effort may or may not be successful. It also may be misguided.

In general, a FRAND commitment incentivizes innovation by allowing a SEP owner to recoup its investments and the value of its technology through licensing, while, at the same, promoting competition and avoiding patent holdup by ensuring that licensing agreements are reasonable. When the process works, and patent holders negotiate licensing rights in good faith, patents are licensed, industries advance and consumers benefit.

FRAND terms are inherently indeterminate and flexible—indeed, they often apply precisely in situations where licensors and licensees need flexibility because each licensing circumstance is nuanced and a one-size-fits-all approach isn’t workable. Superimposing process restraints from above isn’t necessarily the best thing in dealing with what amounts to a contract dispute. But few can doubt the benefits of greater clarity in this process; the question is whether the FTC’s particular approach to the problem sacrifices too much in exchange for such clarity.

The crux of the issue in the Google consent decree—and the most controversial aspect of SEP licensing negotiations—is the role of injunctions. The consent decree requires that, before Google sues to enjoin a manufacturer from using its SEPs without a license, the company must follow a prescribed path in licensing negotiations. In particular:

Under this Order, before seeking an injunction on FRAND-encumbered SEPs, Google must: (1) provide a potential licensee with a written offer containing all of the material license terms necessary to license its SEPs, and (2) provide a potential licensee with an offer of binding arbitration to determine the terms of a license that are not agreed upon. Furthermore, if a potential licensee seeks judicial relief for a FRAND determination, Google must not seek an injunction during the pendency of the proceeding, including appeals.

There are a few exceptions, summarized by Commissioner Ohlhausen:

These limitations include when the potential licensee (a) is outside the jurisdiction of the United States; (b) has stated in writing or sworn testimony that it will not license the SEP on any terms [in other words, is not a “willing licensee”]; (c) refuses to enter a license agreement on terms set in a final ruling of a court – which includes any appeals – or binding arbitration; or (d) fails to provide written confirmation to a SEP owner after receipt of a terms letter in the form specified by the Commission. They also include certain instances when a potential licensee has brought its own action seeking injunctive relief on its FRAND-encumbered SEPs.

To the extent that the settlement reinforces what Google (and other licensors) would do anyway, and even to the extent that it imposes nothing more than an obligation to inject a neutral third party into FRAND negotiations to assist the parties in resolving rate disputes, there is little to complain about. Indeed, this is the core of the agreement, and, importantly, it seems to preserve Google’s right to seek injunctions to enforce its patents, subject to the agreement’s process requirements.

Industry participants and standard-setting organizations have supported injunctions, and the seeking and obtaining of injunctions against infringers is not in conflict with SEP patentees’ obligations. Even the FTC, in its public comments, has stated that patent owners should be able to obtain injunctions on SEPs when an infringer has rejected a reasonable license offer. Thus, the long-anticipated announcement by the FTC in the Google case may help to provide some clarity to the future negotiation of SEP licenses, the possible use of binding arbitration, and the conditions under which seeking injunctive relief will be permissible (as an antitrust matter).

Nevertheless, U.S. regulators, including the FTC, have sometimes opined that seeking injunctions on products that infringe SEPs is not in the spirit of FRAND. Everyone seems to agree that more certainty is preferable; the real issue is whether and when injunctions further that aim or not (and whether and when they are anticompetitive).

In October, Renata Hesse, then Acting Assistant Attorney General for the Department of Justice’s Antitrust Division, remarked during a patent roundtable that

[I]t would seem appropriate to limit a patent holder’s right to seek an injunction to situations where the standards implementer is unwilling to have a neutral third-party determine the appropriate F/RAND terms or is unwilling to accept the F/RAND terms approved by such a third-party.

In its own 2011 Report on the “IP Marketplace,” the FTC acknowledged the fluidity and ambiguity surrounding the meaning of “reasonable” licensing terms and the problems of patent enforcement. While noting that injunctions may confer a costly “hold-up” power on licensors that wield them, the FTC nevertheless acknowledged the important role of injunctions in preserving the value of patents and in encouraging efficient private negotiation:

Three characteristics of injunctions that affect innovation support generally granting an injunction. The first and most fundamental is an injunction’s ability to preserve the exclusivity that provides the foundation of the patent system’s incentives to innovate. Second, the credible threat of an injunction deters infringement in the first place. This results from the serious consequences of an injunction for an infringer, including the loss of sunk investment. Third, a predictable injunction threat will promote licensing by the parties. Private contracting is generally preferable to a compulsory licensing regime because the parties will have better information about the appropriate terms of a license than would a court, and more flexibility in fashioning efficient agreements.

* * *

But denying an injunction every time an infringer’s switching costs exceed the economic value of the invention would dramatically undermine the ability of a patent to deter infringement and encourage innovation. For this reason, courts should grant injunctions in the majority of cases.…

Consistent with this view, the European Commission’s Deputy Director-General for Antitrust, Cecilio Madero Villarejo, recently expressed concern that some technology companies that complain of being denied a license on FRAND terms never truly intend to acquire licenses, but rather “want[] to create conditions for a competition case to be brought.”

But with the Google case, the Commission appears to back away from its seeming support for injunctions, claiming that:

Seeking and threatening injunctions against willing licensees of FRAND-encumbered SEPs undermines the integrity and efficiency of the standard-setting process and decreases the incentives to participate in the process and implement published standards. Such conduct reduces the value of standard setting, as firms will be less likely to rely on the standard-setting process.

Reconciling the FTC’s seemingly disparate views turns on the question of what a “willing licensee” is. And while the Google settlement itself may not magnify the problems surrounding the definition of that term, it doesn’t provide any additional clarity, either.

The problem is that, even in its 2011 Report, in which FTC noted the importance of injunctions, it defines a willing licensee as one who would license at a hypothetical, ex ante rate absent the threat of an injunction and with a different risk profile than an after-the-fact infringer. In other words, the FTC’s definition of willing licensee assumes a willingness to license only at a rate determined when an injunction is not available, and under the unrealistic assumption that the true value of a SEP can be known ex ante. Not surprisingly, then, the Commission finds it easy to declare an injunction invalid when a patentee demands a (higher) royalty rate in an actual negotiation, with actual knowledge of a patent’s value and under threat of an injunction.

As Richard Epstein, Scott Kieff and Dan Spulber discuss in critiquing the FTC’s 2011 Report:

In short, there is no economic basis to equate a manufacturer that is willing to commit to license terms before the adoption and launch of a standard, with one that instead expropriates patent rights at a later time through infringement. The two bear different risks and the late infringer should not pay the same low royalty as a party that sat down at the bargaining table and may actually have contributed to the value of the patent through its early activities. There is no economically meaningful sense in which any royalty set higher than that which a “willing licensee would have paid” at the pre-standardization moment somehow “overcompensates patentees by awarding more than the economic value of the patent.”

* * *

Even with a RAND commitment, the patent owner retains the valuable right to exclude (not merely receive later compensation from) manufacturers who are unwilling to accept reasonable license terms. Indeed, the right to exclude influences how those terms should be calculated, because it is quite likely that prior licensees in at least some areas will pay less if larger numbers of parties are allowed to use the same technology. Those interactive effects are ignored in the FTC calculations.

With this circular logic, all efforts by patentees to negotiate royalty rates after infringement has occurred can be effectively rendered anticompetitive if the patentee uses an injunction or the threat of an injunction against the infringer to secure its reasonable royalty.

The idea behind FRAND is rather simple (reward inventors; protect competition), but the practice of SEP licensing is much more complicated. Circumstances differ from case to case, and, more importantly, so do the parties’ views on what may constitute an appropriate licensing rate under FRAND. As I have written elsewhere, a single company may have very different views on the meaning of FRAND depending on whether it is the licensor or licensee in a given negotiation—and depending on whether it has already implemented a standard or not. As one court looking at the very SEPs at issue in the Google case has pointed out:

[T]he court is mindful that at the time of an initial offer, it is difficult for the offeror to know what would in fact constitute RAND terms for the offeree. Thus, what may appear to be RAND terms from the offeror’s perspective may be rejected out-of-pocket as non-RAND terms by the offeree. Indeed, it would appear that at any point in the negotiation process, the parties may have a genuine disagreement as to what terms and conditions of a license constitute RAND under the parties’ unique circumstances.

The fact that many firms engaged in SEP negotiations are simultaneously and repeatedly both licensors and licensees of patents governed by multiple SSOs further complicates the process—but also helps to ensure that it will reach a conclusion that promotes innovation and ensures that consumers reap the rewards.

In fact, an important issue in assessing the propriety of injunctions is the recognition that, in most cases, firms would rather license their patents and receive royalties than exclude access to their IP and receive no compensation (and incur the costs of protracted litigation, to boot). Importantly, for firms that both license out their own patents and license in those held by other firms (the majority of IT firms and certainly the norm for firms participating in SSOs), continued interactions on both sides of such deals help to ensure that licensing—not withholding—is the norm.

Companies are waging the smartphone patent wars with very different track records on SSO participation. Apple, for example, is relatively new to the mobile communications space and has relatively few SEPs, while other firms, like Samsung, are long-time players in the space with histories of extensive licensing (in both directions). But, current posturing aside, both firms have an incentive to license their patents, as Mark Summerfield notes:

Apple’s best course of action will most likely be to enter into licensing agreements with its competitors, which will not only result in significant revenues, but also push up the prices (or reduce the margins) on competitive products.

While some commentators make it sound as if injunctions threaten to cripple smartphone makers by preventing them from licensing essential technology on viable terms, companies in this space have been perfectly capable of orchestrating large-scale patent licensing campaigns. That these may increase costs to competitors is a feature—not a bug—of the system, representing the return on innovation that patents are intended to secure. Microsoft has wielded its sizeable patent portfolio to drive up the licensing fees paid by Android device manufacturers, and some commentators have even speculated that Microsoft makes more revenue from Android than Google does. But while Microsoft might prefer to kill Android with its patents, given the unlikeliness of this, as MG Siegler notes,

[T]he next best option is to catch a free ride on the Android train. Patent licensing deals already in place with HTC, General Dynamics, and others could mean revenues of over $1 billion by next year, as Forbes reports. And if they’re able to convince Samsung to sign one as well (which could effectively force every Android partner to sign one), we could be talking multiple billions of dollars of revenue each year.

Hand-wringing about patents is the norm, but so is licensing, and your smartphone exists, despite the thousands of patents that read on it, because the firms that hold those patents—some SEPs and some not—have, in fact, agreed to license them.

The inability to seek an injunction against an infringer, however, would ensure instead that patentees operate with reduced incentives to invest in technology and to enter into standards because they are precluded from benefiting from any subsequent increase in the value of their patents once they do so. As Epstein, Kieff and Spulber write:

The simple reality is that before a standard is set, it just is not clear whether a patent might become more or less valuable. Some upward pressure on value may be created later to the extent that the patent is important to a standard that is important to the market. In addition, some downward pressure may be caused by a later RAND commitment or some other factor, such as repeat play. The FTC seems to want to give manufacturers all of the benefits of both of these dynamic effects by in effect giving the manufacturer the free option of picking different focal points for elements of the damages calculations. The patentee is forced to surrender all of the benefit of the upward pressure while the manufacturer is allowed to get all of the benefit of the downward pressure.

Thus the problem with even the limited constraints imposed by the Google settlement: To the extent that the FTC’s settlement amounts to a prohibition on Google seeking injunctions against infringers unless the company accepts the infringer’s definition of “reasonable,” the settlement will harm the industry. It will reinforce a precedent that will likely reduce the incentives for companies and individuals to innovate, to participate in SSOs, and to negotiate in good faith.

Contrary to most assumptions about the patent system, it needs stronger, not weaker, property rules. With a no-injunction rule (whether explicit or de facto (as the Google settlement’s definition of “willing licensee” unfolds)), a potential licensee has little incentive to negotiate with a patent holder and can instead refuse to license, infringe, try its hand in court, avoid royalties entirely until litigation is finished (and sometimes even longer), and, in the end, never be forced to pay a higher royalty than it would have if it had negotiated before the true value of the patents was known.

Flooding the courts and discouraging innovation and peaceful negotiations hardly seem like benefits to the patent system or the market. Unfortunately, the FTC’s approach to SEP licensing exemplified by the Google settlement may do just that. Continue Reading…

In antitrust, contracts, exclusionary conduct, federal trade commission, google, intellectual property, Internet search, law and economics, patent , , , , , , , ,
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FTC Deservedly Closes Google Antitrust Investigation Without Taking Action

Geoffrey Manne —  3 January 2013

I have been a critic of the Federal Trade Commission’s investigation into Google since it was a gleam in its competitors’ eyes—skeptical that there was any basis for a case, and concerned about the effect on consumers, innovation and investment if a case were brought.

While it took the Commission more than a year and a half to finally come to the same conclusion, ultimately the FTC had no choice but to close the case that was a “square peg, round hole” problem from the start.

Now that the FTC’s investigation has concluded, an examination of the nature of the markets in which Google operates illustrates why this crusade was ill-conceived from the start. In short, the “realities on the ground” strongly challenged the logic and relevance of many of the claims put forth by Google’s critics. Nevertheless, the politics are such that their nonsensical claims continue, in different forums, with competitors continuing to hope that they can wrangle a regulatory solution to their competitive problem.

The case against Google rested on certain assumptions about the functioning of the markets in which Google operates. Because these are tech markets, constantly evolving and complex, most assumptions about the scope of these markets and competitive effects within them are imperfect at best. But there are some attributes of Google’s markets—conveniently left out of the critics’ complaints— that, properly understood, painted a picture for the FTC that undermined the basic, essential elements of an antitrust case against the company.

That case was seriously undermined by the nature and extent of competition in the markets the FTC was investigating. Most importantly, casual references to a “search market” and “search advertising market” aside, Google actually competes in the market for targeted eyeballs: a market aimed to offer up targeted ads to interested users. Search offers a valuable opportunity for targeting an advertiser’s message, but it is by no means alone: there are myriad (and growing) other mechanisms to access consumers online.

Consumers use Google because they are looking for information — but there are lots of ways to do that. There are plenty of apps that circumvent Google, and consumers are increasingly going to specialized sites to find what they are looking for. The search market, if a distinct one ever existed, has evolved into an online information market that includes far more players than those who just operate traditional search engines.

We live in a world where what prevails today won’t prevail tomorrow. The tech industry is constantly changing, and it is the height of folly (and a serious threat to innovation and consumer welfare) to constrain the activities of firms competing in such an environment by pigeonholing the market. In other words, in a proper market, Google looks significantly less dominant. More important, perhaps, as search itself evolves, and as Facebook, Amazon and others get into the search advertising game, Google’s strong position even in the overly narrow “search market” is far from unassailable.

This is progress — creative destruction — not regress, and such changes should not be penalized.

Another common refrain from Google’s critics was that Google’s access to immense amounts of data used to increase the quality of its targeting presented a barrier to competition that no one else could match, thus protecting Google’s unassailable monopoly. But scale comes in lots of ways.

Even if scale doesn’t come cheaply, the fact that challenging firms might have to spend the same (or, in this case, almost certainly less) Google did in order to replicate its success is not a “barrier to entry” that requires an antitrust remedy. Data about consumer interests is widely available (despite efforts to reduce the availability of such data in the name of protecting “privacy”—which might actually create barriers to entry). It’s never been the case that a firm has to generate its own inputs for every product it produces — and there’s no reason to suggest search or advertising is any different.

Additionally, to defend a claim of monopolization, it is generally required to show that the alleged monopolist enjoys protection from competition through barriers to entry. In Google’s case, the barriers alleged were illusory. Bing and other recent entrants in the general search business have enjoyed success precisely because they were able to obtain the inputs (in this case, data) necessary to develop competitive offerings.

Meanwhile unanticipated competitors like Facebook, Amazon, Twitter and others continue to knock at Google’s metaphorical door, all of them entering into competition with Google using data sourced from creative sources, and all of them potentially besting Google in the process. Consider, for example, Amazon’s recent move into the targeted advertising market, competing with Google to place ads on websites across the Internet, but with the considerable advantage of being able to target ads based on searches, or purchases, a user has made on Amazon—the world’s largest product search engine.

Now that the investigation has concluded, we come away with two major findings. First, the online information market is dynamic, and it is a fool’s errand to identify the power or significance of any player in these markets based on data available today — data that is already out of date between the time it is collected and the time it is analyzed.

Second, each development in the market – whether offered by Google or its competitors and whether facilitated by technological change or shifting consumer preferences – has presented different, novel and shifting opportunities and challenges for companies interested in attracting eyeballs, selling ad space and data, earning revenue and obtaining market share. To say that Google dominates “search” or “online advertising” missed the mark precisely because there was simply nothing especially antitrust-relevant about either search or online advertising. Because of their own unique products, innovations, data sources, business models, entrepreneurship and organizations, all of these companies have challenged and will continue to challenge the dominant company — and the dominant paradigm — in a shifting and evolving range of markets.

It would be churlish not to give credit where credit is due—and credit is due the FTC. I continue to think the investigation should have ended before it began, of course, but the FTC is to be commended for reaching this result amidst an overwhelming barrage of pressure to “do something.”

But there are others in this sadly politicized mess for whom neither the facts nor the FTC’s extensive investigation process (nor the finer points of antitrust law) are enough. Like my four-year-old daughter, they just “want what they want,” and they will stamp their feet until they get it.

While competitors will be competitors—using the regulatory system to accomplish what they can’t in the market—they do a great disservice to the very customers they purport to be protecting in doing so. As Milton Friedman famously said, in decrying “The Business Community’s Suicidal Impulse“:

As a believer in the pursuit of self-interest in a competitive capitalist system, I can’t blame a businessman who goes to Washington and tries to get special privileges for his company.… Blame the rest of us for being so foolish as to let him get away with it.

I do blame businessmen when, in their political activities, individual businessmen and their organizations take positions that are not in their own self-interest and that have the effect of undermining support for free private enterprise. In that respect, businessmen tend to be schizophrenic. When it comes to their own businesses, they look a long time ahead, thinking of what the business is going to be like 5 to 10 years from now. But when they get into the public sphere and start going into the problems of politics, they tend to be very shortsighted.

Ironically, Friedman was writing about the antitrust persecution of Microsoft by its rivals back in 1999:

Is it really in the self-interest of Silicon Valley to set the government on Microsoft? Your industry, the computer industry, moves so much more rapidly than the legal process, that by the time this suit is over, who knows what the shape of the industry will be.… [Y]ou will rue the day when you called in the government.

Among Microsoft’s chief tormentors was Gary Reback. He’s spent the last few years beating the drum against Google—but singing from the same song book. Reback recently told the Washington Post, “if a settlement were to be proposed that didn’t include search, the institutional integrity of the FTC would be at issue.” Actually, no it wouldn’t. As a matter of fact, the opposite is true. It’s hard to imagine an agency under more pressure, from more quarters (including the Hill), to bring a case around search. Doing so would at least raise the possibility that it were doing so because of pressure and not the merits of the case. But not doing so in the face of such pressure? That can almost only be a function of institutional integrity.

As another of Google’s most-outspoken critics, Tom Barnett, noted:

[The FTC has] really put [itself] in the position where they are better positioned now than any other agency in the U.S. is likely to be in the immediate future to address these issues. I would encourage them to take the issues as seriously as they can. To the extent that they concur that Google has violated the law, there are very good reasons to try to address the concerns as quickly as possible.

As Barnett acknowledges, there is no question that the FTC investigated these issues more fully than anyone. The agency’s institutional culture and its committed personnel, together with political pressure, media publicity and endless competitor entreaties, virtually ensured that the FTC took the issues “as seriously as they [could]” – in fact, as seriously as anyone else in the world. There is simply no reasonable way to criticize the FTC for being insufficiently thorough in its investigation and conclusions.

Nor is there a basis for claiming that the FTC is “standing in the way” of the courts’ ability to review the issue, as Scott Cleland contends in an op-ed in the Hill. Frankly, this is absurd. Google’s competitors have spent millions pressuring the FTC to bring a case. But the FTC isn’t remotely the only path to the courts. As Commissioner Rosch admonished,

They can darn well bring [a case] as a private antitrust action if they think their ox is being gored instead of free-riding on the government to achieve the same result.

Competitors have already beaten a path to the DOJ’s door, and investigations are still pending in the EU, Argentina, several US states, and elsewhere. That the agency that has leveled the fullest and best-informed investigation has concluded that there is no “there” there should give these authorities pause, but, sadly for consumers who would benefit from an end to competitors’ rent seeking, nothing the FTC has done actually prevents courts or other regulators from having a crack at Google.

The case against Google has received more attention from the FTC than the merits of the case ever warranted. It is time for Google’s critics and competitors to move on.

[Crossposted at Forbes.com]

In antitrust, federal trade commission, google, Internet search, settlements, technology , , , , , , ,
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“Google and Antitrust” roundtable at AALS

Geoffrey Manne —  13 December 2012

I will be participating in a wide-ranging discussion of Google and antitrust issues at the upcoming AALS meeting in New Orleans in January. The Antitrust and Economic Regulation Section of the AALS is hosting the roundtable, organized by Mike Carrier. Mike and I will be joined by Marina Lao, Frank Pasquale, Pam Samuelson, and Mark Patterson, and the discussion will cover Google Book Search as well as the FTC investigations/possible cases against Google based on search and SEPs.

The session will be on Saturday, January 5, from 10:30 to 12:15 in the Hilton New Orleans Riverside (Newberry, Third Floor).

 Google and Antitrust

(Papers to be published in Harvard Journal of Law & Technology Digest)

Moderator:

Michael A. Carrier, Rutgers School of Law – Camden

Speakers:

Marina L. Lao, Seton Hall University School of Law

Geoffrey A. Manne, Lewis & Clark Law School

Frank A. Pasquale, Seton Hall University School of Law

Mark R. Patterson, Fordham University School of Law

Pamela Samuelson, University of California, Berkeley, School of Law

How should the antitrust laws apply to Google? Though the question is simple, the answer implicates an array of far-reaching issues related to how we access information and how we interact with others. This program will feature a distinguished panel engaging in a fastpaced discussion (no PowerPoints!) about these topics.

The panel will explore the Federal Trade Commission’s potential case against Google. It will discuss Google’s position in the search market and potential effects of its conduct on rivals. The panel also will explore the nuances of the Google Book Search settlement. What would – and should – antitrust law do about the project? How should the procompetitive justifications of the increased availability of books be weighed against the effects of the project on rivals?

Antitrust’s role in a 21st-century economy is frequently debated. Google provides a fruitful setting in which to discuss these important issues.

In announcements, antitrust, google , , , , ,
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The market realities that undermine the antitrust case against Google

Geoffrey Manne —  26 November 2012

As the Google antitrust discussion heats up on its way toward some culmination at the FTC, I thought it would be helpful to address some of the major issues raised in the case by taking a look at what’s going on in the market(s) in which Google operates. To this end, I have penned a lengthy document — The Market Realities that Undermine the Antitrust Case Against Google — highlighting some of the most salient aspects of current market conditions and explaining how they fit into the putative antitrust case against Google.

While not dispositive, these “realities on the ground” do strongly challenge the logic and thus the relevance of many of the claims put forth by Google’s critics. The case against Google rests on certain assumptions about how the markets in which it operates function. But these are tech markets, constantly evolving and complex; most assumptions (and even “conclusions” based on data) are imperfect at best. In this case, the conventional wisdom with respect to Google’s alleged exclusionary conduct, the market in which it operates (and allegedly monopolizes), and the claimed market characteristics that operate to protect its position (among other things) should be questioned.

The reality is far more complex, and, properly understood, paints a picture that undermines the basic, essential elements of an antitrust case against the company.

The document first assesses the implications for Market Definition and Monopoly Power of these competitive realities. Of note:

  • Users use Google because they are looking for information — but there are lots of ways to do that, and “search” is not so distinct that a “search market” instead of, say, an “online information market” (or something similar) makes sense.
  • Google competes in the market for targeted eyeballs: a market aimed to offer up targeted ads to interested users. Search is important in this, but it is by no means alone, and there are myriad (and growing) other mechanisms to access consumers online.
  • To define the relevant market in terms of the particular mechanism that prevails to accomplish the matching of consumers and advertisers does not reflect the substitutability of other mechanisms that do the same thing but simply aren’t called “search.”
  • In a world where what prevails today won’t — not “might not,” but won’t — prevail tomorrow, it is the height of folly (and a serious threat to innovation and consumer welfare) to constrain the activities of firms competing in such an environment by pigeonholing the market.
  • In other words, in a proper market, Google looks significantly less dominant. More important, perhaps, as search itself evolves, and as Facebook, Amazon and others get into the search advertising game, Google’s strong position even in the overly narrow “search” market looks far from unassailable.

Next I address Anticompetitive Harm — how the legal standard for antitrust harm is undermined by a proper understanding of market conditions:

  • Antitrust law doesn’t require that Google or any other large firm make life easier for competitors or others seeking to access resources owned by these firms.
  • Advertisers are increasingly targeting not paid search but rather social media to reach their target audiences.
  • But even for those firms that get much or most of their traffic from “organic” search, this fact isn’t an inevitable relic of a natural condition over which only the alleged monopolist has control; it’s a business decision, and neither sensible policy nor antitrust law is set up to protect the failed or faulty competitor from himself.
  • Although it often goes unremarked, paid search’s biggest competitor is almost certainly organic search (and vice versa). Nextag may complain about spending money on paid ads when it prefers organic, but the real lesson here is that the two are substitutes — along with social sites and good old-fashioned email, too.
  • It is incumbent upon critics to accurately assess the “but for” world without the access point in question. Here, Nextag can and does use paid ads to reach its audience (and, it is important to note, did so even before it claims it was foreclosed from Google’s users). But there are innumerable other avenues of access, as well. Some may be “better” than others; some that may be “better” now won’t be next year (think how links by friends on Facebook to price comparisons on Nextag pages could come to dominate its readership).
  • This is progress — creative destruction — not regress, and such changes should not be penalized.

Next I take on the perennial issue of Error Costs and the Risks of Erroneous Enforcement arising from an incomplete and inaccurate understanding of Google’s market:

  • Microsoft’s market position was unassailable . . . until it wasn’t — and even at the time, many could have told you that its perceived dominance was fleeting (and many did).
  • Apple’s success (and the consumer value it has created), while built in no small part on its direct competition with Microsoft and the desktop PCs which run it, was primarily built on a business model that deviated from its once-dominant rival’s — and not on a business model that the DOJ’s antitrust case against the company either facilitated or anticipated.
  • Microsoft and Google’s other critic-competitors have more avenues to access users than ever before. Who cares if users get to these Google-alternatives through their devices instead of a URL? Access is access.
  • It isn’t just monopolists who prefer not to innovate: their competitors do, too. To the extent that Nextag’s difficulties arise from Google innovating, it is Nextag, not Google, that’s working to thwart innovation and fighting against dynamism.
  • Recall the furor around Google’s purchase of ITA, a powerful cautionary tale. As of September 2012, Google ranks 7th in visits among metasearch travel sites, with a paltry 1.4% of such visits. Residing at number one? FairSearch founding member, Kayak, with a whopping 61%. And how about FairSearch member Expedia? Currently, it’s the largest travel company in the world, and it has only grown in recent years.

The next section addresses the essential issue of Barriers to Entry and their absence:

  • One common refrain from Google’s critics is that Google’s access to immense amounts of data used to increase the quality of its targeting presents a barrier to competition that no one else can match, thus protecting Google’s unassailable monopoly. But scale comes in lots of ways.
  • It’s never been the case that a firm has to generate its own inputs into every product it produces — and there is no reason to suggest search/advertising is any different.
  • Meanwhile, Google’s chief competitor, Microsoft, is hardly hurting for data (even, quite creatively, culling data directly from Google itself), despite its claims to the contrary. And while regulators and critics may be looking narrowly and statically at search data, Microsoft is meanwhile sitting on top of copious data from unorthodox — and possibly even more valuable — sources.
  • To defend a claim of monopolization, it is generally required to show that the alleged monopolist enjoys protection from competition through barriers to entry. In Google’s case, the barriers alleged are illusory.

The next section takes on recent claims revolving around The Mobile Market and Google’s position (and conduct) there:

  • If obtaining or preserving dominance is simply a function of cash, Microsoft is sitting on some $58 billion of it that it can devote to that end. And JP Morgan Chase would be happy to help out if it could be guaranteed monopoly returns just by throwing its money at Bing. Like data, capital is widely available, and, also like data, it doesn’t matter if a company gets it from selling search advertising or from selling cars.
  • Advertisers don’t care whether the right (targeted) user sees their ads while playing Angry Birds or while surfing the web on their phone, and users can (and do) seek information online (and thus reveal their preferences) just as well (or perhaps better) through Wikipedia’s app as via a Google search in a mobile browser.
  • Moreover, mobile is already (and increasingly) a substitute for the desktop. Distinguishing mobile search from desktop search is meaningless when users use their tablets at home, perform activities that they would have performed at home away from home on mobile devices simply because they can, and where users sometimes search for places to go (for example) on mobile devices while out and sometimes on their computers before they leave.
  • Whatever gains Google may have made in search from its spread into the mobile world is likely to be undermined by the massive growth in social connectivity it has also wrought.
  • Mobile is part of the competitive landscape. All of the innovations in mobile present opportunities for Google and its competitors to best each other, and all present avenues of access for Google and its competitors to reach consumers.

The final section Concludes.

The lessons from all of this? There are two. First, these are dynamic markets, and it is a fool’s errand to identify the power or significance of any player in these markets based on data available today — data that is already out of date between the time it is collected and the time it is analyzed.

Second, each of these developments has presented different, novel and shifting opportunities and challenges for firms interested in attracting eyeballs, selling ad space and data, earning revenue and obtaining market share. To say that Google dominates “search” or “online advertising” misses the mark precisely because there is simply nothing especially antitrust-relevant about either search or online advertising. Because of their own unique products, innovations, data sources, business models, entrepreneurship and organizations, all of these companies have challenged and will continue to challenge the dominant company — and the dominant paradigm — in a shifting and evolving range of markets.

Perhaps most important is this:

Competition with Google may not and need not look exactly like Google itself, and some of this competition will usher in innovations that Google itself won’t be able to replicate. But this doesn’t make it any less competitive.  

Competition need not look identical to be competitive — that’s what innovation is all about. Just ask those famous buggy whip manufacturers.

In antitrust, error costs, google, law and economics, markets, monopolization, technology , , , , , , , , , , , ,
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Forget remedies – FairSearch doesn’t even have a valid statement of harm in its Google antitrust criticism

Geoffrey Manne —  20 November 2012

After more than a year of complaining about Google and being met with responses from me (see also here, here, here, here, and here, among others) and many others that these complaints have yet to offer up a rigorous theory of antitrust injury — let alone any evidence — FairSearch yesterday offered up its preferred remedies aimed at addressing, in its own words, “the fundamental conflict of interest driving Google’s incentive and ability to engage in anti-competitive conduct. . . . [by putting an] end [to] Google’s preferencing of its own products ahead of natural search results.”  Nothing in the post addresses the weakness of the organization’s underlying claims, and its proposed remedies would be damaging to consumers.

FairSearch’s first and core “abuse” is “[d]iscriminatory treatment favoring Google’s own vertical products in a manner that may harm competing vertical products.”  To address this it proposes prohibiting Google from preferencing its own content in search results and suggests as additional, “structural remedies” “[r]equiring Google to license data” and “[r]equiring Google to divest its vertical products that have benefited from Google’s abuses.”

Tom Barnett, former AAG for antitrust, counsel to FairSearch member Expedia, and FairSearch’s de facto spokesman should be ashamed to be associated with claims and proposals like these.  He better than many others knows that harm to competitors is not the issue under US antitrust laws.  Rather, US antitrust law requires a demonstration that consumers — not just rivals — will be harmed by a challenged practice.  He also knows (as economists have known for a long time) that favoring one’s own content — i.e., “vertically integrating” to produce both inputs as well as finished products — is generally procompetitive.

In fact, Barnett has said as much before:

Because a Section 2 violation hurts competitors, they are often the focus of section 2 remedial efforts.  But competitor well-being, in itself, is not the purpose of our antitrust laws.

Access remedies also raise efficiency and innovation concerns.  By forcing a firm to share the benefits of its investments and relieving its rivals of the incentive to develop comparable assets of their own, access remedies can reduce the competitive vitality of an industry.

Not only has FairSearch not actually demonstrated that Google has preferenced its own products, the organization has also not demonstrated either harm to consumers arising from such conduct nor even antitrust-cognizable harm to competitors arising from it.

As an empirical study supported by the International Center for Law and Economics (itself, in turn, supported in part by Google, and of which I am the Executive Director) makes clear, search bias simply almost never occurs.  And when it does, it is the non-dominant Bing that more often practices it, not Google.  Moreover, and most important, the evidence marshaled in favor of the search bias claim (largely adduced by Harvard Business School professor, Ben Edelman (whose work is supported by Microsoft)) demonstrates that consumers do, indeed, have the ability to detect and counter allegedly biased results.

Recall what search bias means in this context.  According to Edelman, looking at the top three search results, Google links to its own content (think Gmail, Google Maps, etc.) in the first search result about twice as often as Yahoo! and Bing link to Google content in this position.  While the ICLE paper refutes even this finding, notice what it means:  “Biased” search results lead to a reshuffling of results among the top few results offered up; there is no evidence that Google simply drops users’ preferred results.  While it is true that the difference in click-through rates between the top and second results can be significant, Edelman’s own findings actually demonstrate that consumers are capable of finding what they want when their preferred (more relevant) results appears in the second or third slot.

Edelman notes that Google ranks Gmail first and Yahoo! Mail second in his study, even though users seem to think Yahoo! Mail is the more relevant result:  Gmail receives only 29% of clicks while Yahoo! Mail receives 54%.  According to Edelman, this is proof that Google’s conduct forecloses access by competitors and harms consumers under the antitrust laws.

But is it?  Note that users click on the second, apparently more-relevant result nearly twice as often as they click on the first.  This demonstrates that Yahoo! is not competitively foreclosed from access to users, and that users are perfectly capable of identifying their preferred results, even when they appear lower in the results page.  This is simply not foreclosure — in fact, if anything, it demonstrates the opposite.

Among other things, foreclosure — limiting access by a competitor to a necessary input — under the antitrust laws must be substantial enough to prevent a rival from reaching sufficient scale that it can effectively compete.  It is no more “foreclosure” for Google to “impair” traffic to Kayak’s site by offering its own Flight Search than it is for Safeway to refuse to allow Kroger to sell Safeway’s house brand.  Rather, actionable foreclosure requires that a firm “impair[s] the ability of rivals to grow into effective competitors that erode the firm’s position.”  Such quantifiable claims are noticeably absent from critic’s complaints against Google.

And what about those allegedly harmed competitors?  How are they faring?  As of September 2012, Google ranks 7th in visits among metasearch travel sites, with a paltry 1.4% of such visits.  Residing at number one?  FairSearch founding member, Kayak, with a whopping 61% (up from 52% six months after Google entered the travel search business).  Nextag.com, another vocal Google critic, has complained that Google’s conduct has forced it to shift its strategy from attracting traffic through Google’s organic search results to other sources, including paid ads on Google.com.  And how has it fared?  It has parlayed its experience with new data sources into a successful new business model, Wize Commerce, showing exactly the sort of “incentive to develop comparable assets of their own” Barnett worries will be destroyed by aggressive antitrust enforcement.  And Barnett’s own Expedia.com?  Currently, it’s the largest travel company in the world, and it has only grown in recent years.

Meanwhile consumers’ interests have been absent from critics’ complaints since the beginning.  And not only do they fail to demonstrate any connection between harm to consumers and the claimed harms to competitors arising from Google’s conduct, but they also ignore the harm to consumers that may result from restricting potentially efficient business conduct — like the integration of Google Maps and other products into its search results.  That Google not only produces search results but also owns some of the content that generates those results is not a problem cognizable by modern antitrust.

FairSearch and other Google critics have utterly failed to make a compelling case, and their proposed remedies would serve only to harm, not help, consumers.

In antitrust, exclusionary conduct, exclusive dealing, technology , , , , , , , ,
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Should the FTC Sue Google Over Search? A TechFreedom Debate This Friday

Geoffrey Manne —  25 September 2012

I will be speaking at a lunch debate in DC hosted by TechFreedom on Friday, September 28, 2012, to discuss the FTC’s antitrust investigation of Google. Details below.

TechFreedom will host a livestreamed, parliamentary-style lunch debate on Friday September 28, 2012, to discuss the FTC’s antitrust investigation of Google.   As the company has evolved, expanding outward from its core search engine product, it has come into competition with a range of other firms and established business models. This has, in turn, caused antitrust regulators to investigate Google’s conduct, essentially questioning whether the company’s success obligates it to treat competitors neutrally. James Cooper, Director of Research and Policy for the Law and Economics Center at George Mason University School of Law, will moderate a panel of four distinguished commenters to discuss the question, “Should the FTC Sue Google Over Search?”  

Arguing “Yes” will be:

Arguing “No” will be:

When:
Friday, September 28, 2012
12:00 p.m. – 2:00 p.m.

Where:
The Monocle Restaurant
107 D Street Northeast
Washington, DC 20002

RSVP here. The event will be livestreamed here and you can follow the conversation on Twitter at #GoogleFTC.

For those viewing by livestream, we will watch for questions posted to Twitter at the #GoogleFTC hashtag and endeavor, as possible, to incorporate them into the debate.

Questions?
Email contact@techfreedom.org

In announcements, antitrust, google , , , , , , , , , , , , ,
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When Is Deception an Antitrust Offense? The FTC’s Unorthodox Case Against Google

Hal Singer —  9 May 2012

Last week, the FTC hired outside litigator Beth Wilkinson to lead an investigation into Google’s conduct, which some in the press have interpreted as a grave sign for the search company. The FTC is reportedly interested in pursuing Google under Section 5 of the FTC Act, which prohibits a firm from engaging in “unfair methods of competition.” Along with Bob Litan, who served as Deputy Assistant Attorney General in the Antitrust Division during the Microsoft investigation, I have penned a short paper on the FTC’s seemingly unorthodox Section 5 case against Google. (Disclosure: This paper was commissioned by Google.)

Litan and I explore a few possible theories of harm under a hypothetical Section 5 case and find them wanting, including (1) claims that specialized search results (such as flight, shopping or map results) “unfairly” harm the independent specialized search websites like Kayak (travel) or MapQuest (mapping and directions), or (2) assertions that Google allegedly has “deceived” users or websites by seemingly reneging on pledges not to favor its own sites. For the sake of brevity, I focus on the FTC’s potential deception theory here, and leave it to interested reader to pursue the “unfairness” theory in the paper.

Deception of Users

The alleged bases of Google’s alleged deception are generic statements that Google made, either in its initial public offering (IPO) or on its website, about Google’s attitude toward users leaving the site. The provision of a lawful service, specialized search, launched several years after the IPO statement certainly cannot be deceptive. To conclude that it is, and more importantly, to prevent the company from offering innovations in search would establish a precedent that would surely punish innovation throughout the rest of the economy.

As for the mission statement that the company wants users to get off the site as quickly as possible, it is just that, a mission statement. Users do not go to the mission statement when they search; they go to the Google site itself. Users cannot possibly be harmed even if this particular statement in the company’s mission were untrue. Moreover, if the problem lies in that statement, then any remedy should be directed at amending that statement. There is no justification for the Commission to hamper Google’s specialized search services themselves or to dictate where Google must display them.

Deception of Rivals

An alternative theory suggests that Google deceived its rivals, reducing innovation among independent websites. In a February 2012 paper delivered to the OECD, Tim Wu explained that competition law can be used to “increase the costs of exclusion,” which if successful, would promote innovation among application providers. Wu argued that “oversight of platforms is conceptually similar” to oversight of standard-setting organizations (SSOs). He offers a hypothetical case in which a platform owner “broadly represents to the world that he maintains an open and transparent innovation platform,” gains a monopoly position based on those representations, and then begins to exclude applications “that might themselves serve as platforms.” Once the industry has committed to a private platform, Wu argues, the platform owner “earns oversight of its practices from that point onward.”

So has Google earned itself oversight due to its alleged deception? Google is not perceived by web designers as providing a platform for all companies to have equal footing. Websites’ rankings in Google’s search results vary tremendously over time; no publisher could reasonably rely on any particular ranking on Google. To the contrary, websites want their presence to be known to any and all search engines. That specialized search sites did not base their business plans on Google’s commitment to openness is what distinguishes Google’s platform from Microsoft’s platform in the 1990s. To Wu’s credit, he does not mention Google in this section of the paper; the only platforms mentioned are those of Apple, Android, and Microsoft.

It is even more of a stretch to analogize Google’s conduct to that in the FTC’s Rambus case. Unlike websites that do not depend on a Google “standard”–the website can be accessed by users from any search engine, or through direct navigation–computer memory chips must be compatible with a variety of computers, which requires that chip producers develop a common set of standards for performance and interoperability. According to the FTC, Rambus exploited this reliance by, among other things, not disclosing to chip makers that it had additional divisional patent applications in process. That specialized search sites did not make “irreversible technological” investments based on Google’s commitment to a common standard is what distinguishes Google’s platform from SSOs.

The Freedom to Innovate

A change in a business model cannot be a legitimate basis for a Section 5 case because a firm cannot be expected to know how the world is going to unfold at its inception. A lot can change in a decade. Consumers’ taste for the product can change. Technology can change. Business models are required to adapt to such change; else they die. There should be no requirement that once a firm writes a mission statement, it be held to that statement forever. What if Google failed to anticipate the role of specialized search in 2004? Presumably, Google failed to anticipate a lot of things, but that should not be the basis for denying its entry into ancillary services or expanding its core offerings. As John Maynard Keynes famously replied to a criticism during the Great Depression of having changed his position on monetary policy: “When the facts change, I change my mind. What do you do sir?” If Google exposes itself to increased oversight for merely changing its mind, then other technology firms might think twice before innovating. And that would be a horrible consequence to the FTC’s exploration of alternative antitrust theories.

In truth on the market
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AALS Section on Antitrust and Economic Regulation Call for Papers: Google and Antitrust

Josh Wright —  7 May 2012

The AALS Section on Antitrust and Economic Regulation call for papers features a topic near and dear to my heart this year: Google and Antitrust.   Here is the announcement:

Call for Papers Announcement

AALS Section on Antitrust and Economic Regulation

Google and Antitrust

 

2013 AALS Annual Meeting

January 4-7, 2013

New Orleans, Louisiana

The AALS Section on Antitrust and Economic Regulation will hold a program on Google and Antitrust during the AALS 2013 Annual Meeting in New Orleans. The program will explore the Federal Trade Commission’s potential antitrust case against Google and the Google Book Search settlement. The program will feature a roundtable panel involving leading scholars who have addressed these issues: Dan Crane (Michigan), Marina Lao (Seton Hall), Frank Pasquale (Seton Hall), and Pam Samuelson (Berkeley). We are looking to add one additional panelist through this Call for Papers.

Submission procedure:

Anyone interested in participating is encouraged to submit a draft paper (preferred, and roughly in the range of 20-40 pages) or proposal by e-mail to Michael A. Carrier, at mcarrier@camlaw.rutgers.edu by September 4, 2012.

Eligibility:

Full-time faculty members of AALS member law schools are eligible to submit papers. Faculty at fee-paid law schools; foreign, visiting and adjunct faculty members; graduate students; fellows; and non-law school faculty are not eligible to submit. Papers may already be accepted for publication, as long as the paper will not be published before the AALS meeting.

Registration fee and expenses:

Call-for-Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

How will papers be reviewed?

Papers will be reviewed and selected by members of the Executive Committee of the AALS Section on Antirust and Economic Regulation: Darren Bush (Houston), Michael Carrier (Rutgers-Camden), Daniel Crane (Michigan), Hillary Greene (Connecticut), Scott Hemphill (Columbia), and D. Daniel Sokol (Florida).

Will the program be published in a journal?

Yes, as a symposium in the Harvard Journal of Law & Technology Digest.

Deadline date for submission:

September 4, 2012. Decisions will be announced by September 28, 2012.

Program date and time:

Saturday, January 5, 2013, 10:30am – 12:15pm.

Contact for submission and inquires:

Michael A. Carrier

Chair, AALS Section on Antitrust and Economic Regulation

Rutgers Law School – Camden
217 North Fifth Street
Camden, NJ 08102
(856) 225-6380
mcarrier@camlaw.rutgers.edu

In antitrust, copyright, economics, federal trade commission, google, monopolization, settlements
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