Archives For federal trade commission

Behavioral Merger Remedies and the Hippocratic Principle

Thom Lambert —  22 April 2013 — Leave a comment

Last Thursday, the FTC settled a challenge to a company’s acquisitions of two key rivals. The two acquisitions, each of which failed to meet the threshold for required reporting under Hart Scott Rodino, occurred in 2005 and 2008. Because the acquired companies have been fully integrated into the acquirer and all distinct operations have been shut down, it was impossible for the Commission to “unscramble the eggs” by imposing a structural remedy that separates the companies or parts thereof. The Commission therefore opted for a behavioral remedy — i.e., a list of restrictions on how the combined company may operate its business in the future. The purported goal of the behavioral remedy is to enhance consumer welfare by restoring competition that was destroyed by the anticompetitive acquisitions.

Commissioner Josh Wright took exception to a couple of the restrictions in the consent order. In a separate statement, he set forth a principle reflecting his concerns that antitrust implementation be both evidence-based and sensitive to error costs. One hopes that the principle he articulated — a version of the Hippocratic maxim, “First, do no harm” — will influence future FTC decisions on behavioral remedies.

The defendant here was Graco, the leading manufacturer of “fast set equipment” (FSE) used by contractors to apply polyurethane foams and coatings. The two companies it purchased, Gusmer in 2005 and GlasCraft in 2008, were its two closest competitors in the North American market for FSE. Graco’s acquisitions of those companies eliminated almost all market competition. In addition, Graco allegedly coerced and threatened FSE distributors so that they would not carry competitors’ products, and it filed a questionable lawsuit against a rival, Gama/PMC, causing FSE distributors to grow leery of that supplier and drop its products.  These post-acquisition actions have helped cement Graco’s market power by denying its actual and potential rivals access to the distribution networks they need to effectively market their products.

In light of Graco’s post-acquisition conduct, the consent order agreed to Thursday prohibits Graco from threatening, coercing, or retaliating against distributors who carry its rivals’ products.  It also requires settlement of the lawsuit that was impairing Gama/PMC’s access to distributors, and it forbids Graco from bringing a similar suit in the future.

But the order then goes further.  It prohibits Graco from entering into exclusive dealing contracts with distributors, and it places limits on Graco’s freedom to give loyalty discounts to distributors.  (Specifically, it limits the purchase and inventory levels upon which Graco may condition distributor discounts.)

The problem, in Commissioner Wright’s view, was that there was no evidence that these forbidden activities – exclusive dealing arrangements and loyalty discounts – contributed to the absence of competition in the FSE market.  Because exclusive dealing arrangements and loyalty discounts are usually procompetitive, prohibiting their use by Graco in the absence of evidence that they are responsible for the lack of competition in the market or are likely to be used to effect anticompetitive harm rather than to achieve a procompetitive benefit is more likely to hurt than help consumers.

Wright notes (and the Commission acknowledges), for example, that the market for FSE is precisely the sort market in which exclusive dealing arrangements achieve the procompetitive benefit of avoiding “inter-brand free-riding.”  Manufacturers of FSE will enhance total sales if they train distributors on the proper use and various complicated features of FSE.  Consumers benefit from (and sales are increased by) such training, because the distributors pass along their learning to end-user purchasers.  But if one FSE manufacturer trains a distributor on how to use the equipment, other manufacturers whose product is carried by that distributor won’t need to do so themselves.  The possibility that they will “take a free-ride” on the manufacturer providing the training tends to dissuade all manufacturers from providing such training, to the detriment of consumers.  Exclusive dealing helps out by preventing free-riding and thereby assuring a manufacturer that it will receive the full benefit of its training efforts.  By banning exclusive dealing, then, the Commission’s consent order may cause a consumer injury, and there’s no reason to take that risk absent evidence that exclusive dealing has been used – or is likely to be used in the future – to create anticompetitive harm.  First, do no harm!

It is important to note that not including exclusive dealing and loyalty discounts on the list of behaviors prohibited by the consent order would not give Graco free rein to use those practices in a manner that causes anticompetitive foreclosure.  The Commission or a competitor could always challenge a future exclusive dealing arrangement or loyalty discount if there were evidence that the practice had caused anticompetitive harm.  The remainder of the Commission’s behavioral remedy assures that there will be a viable competitor – Gama/PMC – that is in a position to challenge any such conduct, and, in light of the consent order, the Commission and any reviewing court would take any future complaints quite seriously.  Doesn’t it make more sense, then, to limit the behavioral remedy to actions that have contributed to the anticompetitive situation at hand and not ban behaviors that may well inure to the benefit of consumers?  As Commissioner Wright put it:

A minimum safeguard to ensure [that] remedial provisions … restore competition rather than inadvertently reduce it is to require evidence that the type of conduct being restricted has been, or is likely to be, used anticompetitively to harm consumers.

I think Wright’s right on this one.

In antitrust, error costs, exclusive dealing, federal trade commission, mergers & acquisitions, regulation
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Commissioner Wright lays down the gauntlet on Section 5

Geoffrey Manne —  16 April 2013

joshua-wright As Thom noted (here and here), Josh’s speech at the ABA Spring Meeting was fantastic.  In laying out his agenda at the FTC, Josh highlighted two areas on which he intends to focus: Section 5 and public restraints on trade.  These are important, even essential, areas, and Josh’s leadership here will be most welcome.

I’m especially encouraged by his comments on Section 5.  As readers of this blog know, Section 5 has been an issue near and dear to our hearts, and Josh’s intention to make it a centerpiece of his agenda at the Commission should come as no surprise. (There are too many posts on topic to link them individually here, but this link includes all our posts tagged with Section 5.  My own most recent discussion of the general topic (with Berin Szoka) is here).

Of perhaps greatest significance is this bit from Josh’s speech:

The Commission, however, has another choice available. It can and should issue a policy statement clearly setting forth its views on what constitutes an unfair method of competition as we have done with respect to our consumer protection mission…. I firmly believe this Commission is up to this important task and I look forward to working with my fellow Commissioners. In that spirit, I will soon informally and publicly distribute a proposed Section 5 Unfair Methods Policy Statement more fully articulating my views and perhaps even providing a useful starting point for a fruitful discussion among the enforcement agencies, the antitrust bar, consumer groups, and the business community.

This is great news, and I eagerly look forward to Josh’s proposed Policy Statement.  As Berin and I noted (and as others, including most notably Bill Kovacic, have noted, as well), this kind of guidance is sorely lacking and much needed:

Rather than attempting to do this in the course of a single litigation, the agency ought to heed Kovacic and Winerman’s advice and do more to “inform judicial thinking” such as by “issu[ing] guidelines or policy statements that spell out its own view about the appropriate analytical framework.”

Not surprisingly, my views line up with Josh’s, and his speech is full of important comments on the current state of Section 5 enforcement at the Commission. Of note:

(1) Objective evaluation of the historical record reveals a remarkable and unfortunate gap between the theoretical promise of Section 5 as articulated by Congress and its application in practice by the Commission;

(2) There is little hope for Section 5 to play a productive role in antitrust enforcement unless the Commission articulates in a policy statement about precisely what constitutes an unfair method, how the agency will decide whether to bring unfair method claims, and a general framework including guiding and limiting principles for evaluating Section 5 cases.

* * *

What does a frank assessment of the 100 year record of Section 5 tell us about its contribution to the competition mission? Or as I might put it, has Section 5 lived up to its promise of nudging the FTC toward evidence-based antitrust? I believe the answer to that question is a resounding “no.” There is no shortage of scholars and commentators filling the empty vessel of Section 5 with visions or further promise or purpose of, for example, creating convergence among international jurisdictions, shifting the attention of competition policy from economic welfare to consumer choice, or incorporating behavioral economics into modern antitrust. History, however, tells us that Section 5 has fallen far short of its intended promise. Section 5 has not produced more than a handful of adjudicated decisions with any durable impact on antitrust doctrine or economic welfare.

* * *

After one hundred years the balance of evidence more than suggests the Commission’s use of Section 5 has done little to influence antitrust doctrine and less to inform judicial thinking or to provide guidance to the business community. This void is not a small matter for an administrative agency whose institutional blueprint contemplated such a significant role for Section 5. In my view, it is the Commission’s duty to provide that guidance. But beyond our obligation as responsible stewards of the FTC and consumers through execution of our competition mission, there is considerable risk to the agency of continuing on its current path of putting Section 5 to use without providing guidance. I simply do not believe that path is sustainable or sound competition policy. Section 5 will not live up to its promise of offering an analytically coherent contribution to competition policy if the Commission continues not to offer guidance.

Focusing in particular on the problem of the currently unfettered Section 5 and how it might sensibly be circumscribed, Josh makes some great points:

First, Section 5 should not be used to evade existing antitrust law. Where courts have proven competent to evaluate a particular type of business conduct under the traditional antitrust laws, there is little reason for the Commission to step in under its unfair methods authority. This is especially the case when Section 5 is used to take advantage of a weakened requirement to prove consumer harm in the rigorous manner required in, for example, Section 2 cases. Evading the consumer welfare proof requirements of existing Sherman Act jurisprudence reduces the credibility of the agency, runs the risk that procompetitive conduct will be condemned under Section 5, and circumvents the healthy development of Sherman Act jurisprudence in the courts.

* * *

A second potential limiting principle is a restriction that Section 5 unfair methods cases – as is the case with invitation to collude cases – do not involve plausible efficiency claims. Not only does the lack of efficiency justification reduce any potential collateral consequences associated with false positives, but determining the presence of absence of cognizable efficiencies also plays to a core institutional strength of the Commission. The Commission’s learning and expertise in this regard has already influenced the evolution of the Merger Guidelines, and is applied on a regular basis.

I have no doubt Josh can and will deliver on his promise of working with the other Commissioners to bring some much needed sense to this problematic aspect of the FTC’s authority. This is an enormously important issue, one in great need of attention, and I can think of no one better than Josh to lead the effort to address it.

In antitrust, consumer protection, federal trade commission, regulation, Section 5 , , , , ,
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Commissioner Wright’s Speech at the ABA Antitrust Section’s Spring Meeting

Thom Lambert —  15 April 2013

Friday I discussed FTC Commissioner (and TOTM alumnus) Josh Wright’s speech at the Spring Meeting of the ABA’s Antitrust Section.  Wright’s speech, What’s Your Agenda?, is now available online.

As I mentioned, Commissioner Wright emphasized two matters on which he’d like to see FTC action.  First, he hopes the Commission will help fulfill the promise of Section 5 of the FTC Act by articulating an “Unfair Methods Policy Statement” that includes both “guiding principles for Section 5 theories of liability outside the scope of the Sherman and Clayton Acts” and “limiting principles confining the scope of unfair methods claims.”  Articulation of such principles would reduce the incidence of market power-enhancing conduct that could be difficult to pursue under the Sherman and Clayton Acts (the “guiding principles” would put firms on notice that such conduct is to be avoided), but they would also avoid chilling procompetitive conduct (the “limiting principles” would create zones of safety).  Giving guidance to business planners on what the FTC is likely to pursue — and what it’s not — would thereby enhance the effectiveness of the antitrust enterprise.

Commissioner Wright also stated his intention to utilize the FTC’s powers to pursue public restraints — i.e., output-limiting conduct authorized or required by governmental entities.  Wright explained:

An agency sensitive to efficiently executing its competition mission will look for low hanging fruit—in other words, it will identify and bring enforcement actions to prevent conduct that is clearly anticompetitive and thus bring immediate and certain benefits for consumers.

Public restraints upon trade represent precisely this type of increasingly rare low hanging fruit and, thus, should be a more central concern of U.S. competition policy. The legal hurdles facing enforcement against public restraints often render policy advocacy the primary weapon for the FTC in this area; and it is a weapon the FTC has wielded effectively and consistently over time. The FTC also has brought enforcement actions to challenge public restraints in recent years in appropriate cases. I support vigorous use of both tools….

I’m heartened by Commissioner Wright’s leadership on these matters and look forward to seeing how things develop at the Commission.

In antitrust, error costs, federal trade commission
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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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Off to the FTC and a Blogging Hiatus from TOTM

Josh Wright —  2 January 2013

As Geoff mentioned, I was fortunate enough to be confirmed by the Senate yesterday as Commissioner of the Federal Trade Commission.  I’m excited about the opportunity and very much looking forward to getting started in the new job.   Unfortunately, this means I will be taking a hiatus from blogging here at TOTM for awhile.  I’ve greatly enjoyed blogging here and exchanging ideas with co-bloggers and our commenters and will looking forward to coming back when I return to the academy.

Happy New Year!

In federal trade commission
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Congratulations to FTC Commissioner Josh Wright

Geoffrey Manne —  2 January 2013

All of us here at TOTM are thrilled to announce that the Senate yesterday confirmed Josh Wright to be the next Commissioner of the Federal Trade Commission.

As I wrote upon Josh’s nomination:

Josh is widely regarded as the top antitrust scholar of his generation. He is the author of more than 50 scholarly articles and book chapters, including several that were released as ICLE White Papers. He is a co-author of the most widely-used antitrust casebook, and co-editor of three books on topics ranging from Competition Policy and Intellectual Property Law to the Intellectual History of Law and Economics. And he is the most prolific blogger on the preeminent antitrust and corporate law and economics blog, Truth on the Market.

The FTC will benefit enormously from Josh’s expertise and his error cost approach to antitrust and consumer protection law will be a tremendous asset to the Commission — particularly as it delves further into the regulation of data and privacy . His work is rigorous, empirically grounded, and ever-mindful of the complexities of both business and regulation.

I am honored to have co-authored several articles with Josh, and I have learned an incredible amount about antitrust law and economics from him. The Commissioners and staff at the FTC will surely similarly profit from his time there.

We’ll miss him around these parts, but presumably he’ll provide us with plenty of good fodder for the blog.

In administrative, announcements, antitrust, federal trade commission , ,
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Time for Congress to Cancel the FTC’s Section 5 Antitrust Blank Check

Geoffrey Manne —  20 December 2012

By Geoffrey Manne and Berin Szoka

A debate is brewing in Congress over whether to allow the Federal Trade Commission to sidestep decades of antitrust case law and economic theory to define, on its own, when competition becomes “unfair.” Unless Congress cancels the FTC’s blank check, uncertainty about the breadth of the agency’s power will chill innovation, especially in the tech sector. And sadly, there’s no reason to believe that such expansive power will serve consumers.

Last month, Senators and Congressmen of both parties sent a flurry of letters to the FTC warning against overstepping the authority Congress granted the agency in 1914 when it enacted Section 5 of the FTC Act. FTC Chairman Jon Leibowitz has long expressed a desire to stake out new antitrust authority under Section 5 over unfair methods of competition that would otherwise be legal under the Sherman and Clayton antitrust acts. He seems to have had Google in mind as a test case.

On Monday, Congressmen John Conyers and Mel Watt, the top two Democrats on the House Judiciary Committee, issued their own letter telling us not to worry about the larger principle at stake. The two insist that “concerns about the use of Section 5 are unfounded” because “[w]ell established legal principles set forth by the Supreme Court provide ample authority for the FTC to address potential competitive concerns in the relevant market, including search.” The second half of that sentence is certainly true: the FTC doesn’t need a “standalone” Section 5 case to protect consumers from real harms to competition. But that doesn’t mean the FTC won’t claim such authority—and, unfortunately, there’s little by way of “established legal principles” stop the agency from overreaching. Continue Reading…

In antitrust, consumer protection, federal trade commission , ,
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Policy Debates On Patents Should Focus On Facts, Not Rhetoric (Forbes.com Op-Ed)

Adam Mossoff —  18 December 2012

A heavily revised and expanded verison of one of my earlier blog postings was just posted as an op-ed on Forbes.com.  This op-ed addresses how the FTC and DOJ have let themselves become swept up in anti-patent rhetoric, as evidenced by the FTC-DOJ workshop on December 10 that I participated in. Here’s a small taste of the op-ed:

Although the public hears the mantra almost daily that “the patent system is broken,” what we really need is a thorough evaluation of the historic impact the patent system has had on innovation without the negative hype and misinformation that is perpetuated in news headlines or blogs. On December 10, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) held the first of a series of workshops on the patent system and innovation. This first workshop dived into the workings of what some people call “patent assertion entities” (PAE), which are firms that acquire and license patents. The FTC and DOJ, as well as most of the invited participants at the workshop, adopted the “PAE” label as the subject of their critical scrutiny.

 Of course, identifying these firms by their business model of patent licensing denies the patent system naysayers the pejorative rhetorical force of their “PAE” label.  In fact, patent licensing firms have come under attack in newspaper reports, in blogs, and in academic commentary, prompting the FTC and DOJ to consider whether to sanction patent licensing firms for allegedly undermining the innovation made possible by the patent system through some nebulous notion that patent licensing is somehow “anti-competitive.” If anything, this reveals the power of rhetoric.

The truth is that these patent licensing firms maximize value in patented innovation, proving once again Adam Smith’s classic economic insight that specialization and division of labor is key to the success of a commercial economy. There has always existed since the early nineteenth century a secondary market in the sale and purchase of patents, but these firms make use of modern developments in corporate law, finance, and technology to reap new value for inventors or other firms who lack either the knowledge or resources to monetize their innovation assets. In short, patent licensing firms reflect the exact same value-maximizing aggregation and specialization that other firms have long employed in our successful invention economy, such as when 3M or Thomas Edison’s Menlo Park Laboratory aggregated inventors for research and development itself. Patent licensing firms, by better enabling inventors to sell and exchange their ideas, bring the same efficiencies to our invention economy as did the invention of R&D departments over one hundred years ago.

As the blogging master (Instapundit) likes to say: Read the whole thing!

In antitrust, doj, federal trade commission, intellectual property, licensing, patent
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