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Today the International Center for Law & Economics (ICLE) submitted an amicus brief to the Supreme Court of the United States supporting Apple’s petition for certiorari in its e-books antitrust case. ICLE’s brief was signed by sixteen distinguished scholars of law, economics and public policy, including an Economics Nobel Laureate, a former FTC Commissioner, ten PhD economists and ten professors of law (see the complete list, below).

Background

Earlier this year a divided panel of the Second Circuit ruled that Apple “orchestrated a conspiracy among [five major book] publishers to raise ebook prices… in violation of § 1 of the Sherman Act.” Significantly, the court ruled that Apple’s conduct constituted a per se unlawful horizontal price-fixing conspiracy, meaning that the procompetitive benefits of Apple’s entry into the e-books market was irrelevant to the liability determination.

Apple filed a petition for certiorari with the Supreme Court seeking review of the ruling on the question of

Whether vertical conduct by a disruptive market entrant, aimed at securing suppliers for a new retail platform, should be condemned as per se illegal under Section 1 of the Sherman Act, rather than analyzed under the rule of reason, because such vertical activity also had the alleged effect of facilitating horizontal collusion among the suppliers.

Summary of Amicus Brief

The Second Circuit’s ruling is in direct conflict with the Supreme Court’s 2007 Leegin decision, and creates a circuit split with the Third Circuit based on that court’s Toledo Mack ruling. ICLE’s brief urges the Court to review the case in order to resolve the significant uncertainty created by the Second Circuit’s ruling, particularly for the multi-sided platform companies that epitomize the “New Economy.”

As ICLE’s brief discusses, the Second Circuit committed several important errors in its ruling:

First, As the Supreme Court held in Leegin, condemnation under the per se rule is appropriate “only for conduct that would always or almost always tend to restrict competition” and “only after courts have had considerable experience with the type of restraint at issue.” Neither is true in this case. Businesses often employ one or more forms of vertical restraints to make entry viable, and the Court has blessed such conduct, categorically holding in Leegin that “[v]ertical price restraints are to be judged according to the rule of reason.”

Furthermore, the conduct at issue in this case — the use of “Most-Favored Nation Clauses” in Apple’s contracts with the publishers and its adoption of the so-called “agency model” for e-book pricing — have never been reviewed by the courts in a setting like this one, let alone found to “always or almost always tend to restrict competition.” There is no support in the case law or economic literature for the proposition that agency models or MFNs used to facilitate entry by new competitors in platform markets like this one are anticompetitive.

Second, the negative consequences of the court’s ruling will be particularly acute for modern, high-technology sectors of the economy, where entrepreneurs planning to deploy new business models will now face exactly the sort of artificial deterrents that the Court condemned in Trinko: “Mistaken inferences and the resulting false condemnations are especially costly, because they chill the very conduct the antitrust laws are designed to protect.” Absent review by the Supreme Court to correct the Second Circuit’s error, the result will be less-vigorous competition and a reduction in consumer welfare.

This case involves vertical conduct essentially indistinguishable from conduct that the Supreme Court has held to be subject to the rule of reason. But under the Second Circuit’s approach, the adoption of these sorts of efficient vertical restraints could be challenged as a per se unlawful effort to “facilitate” horizontal price fixing, significantly deterring their use. The lower court thus ignored the Supreme Court’s admonishment not to apply the antitrust laws in a way that makes the use of a particular business model “more attractive based on the per se rule” rather than on “real market conditions.”

Third, the court based its decision that per se review was appropriate largely on the fact that e-book prices increased following Apple’s entry into the market. But, contrary to the court’s suggestion, it has long been settled that such price increases do not make conduct per se unlawful. In fact, the Supreme Court has held that the per se rule is inappropriate where, as here, “prices can be increased in the course of promoting procompetitive effects.”  

Competition occurs on many dimensions other than just price; higher prices alone don’t necessarily suggest decreased competition or anticompetitive effects. Instead, higher prices may accompany welfare-enhancing competition on the merits, resulting in greater investment in product quality, reputation, innovation or distribution mechanisms.

The Second Circuit presumed that Amazon’s e-book prices before Apple’s entry were competitive, and thus that the price increases were anticompetitive. But there is no support in the record for that presumption, and it is not compelled by economic reasoning. In fact, it is at least as likely that the change in Amazon’s prices reflected the fact that Amazon’s business model pre-entry resulted in artificially low prices, and that the price increases following Apple’s entry were the product of a more competitive market.

Previous commentary on the case

For my previous writing and commentary on the the case, see:

  • “The Second Circuit’s Apple e-books decision: Debating the merits and the meaning,” American Bar Association debate with Fiona Scott-Morton, DOJ Chief Economist during the Apple trial, and Mark Ryan, the DOJ’s lead litigator in the case, recording here
  • Why I think the Apple e-books antitrust decision will (or at least should) be overturned, Truth on the Market, here
  • Why I think the government will have a tough time winning the Apple e-books antitrust case, Truth on the Market, here
  • The procompetitive story that could undermine the DOJ’s e-books antitrust case against Apple, Truth on the Market, here
  • How Apple can defeat the DOJ’s e-book antitrust suit, Forbes, here
  • The US e-books case against Apple: The procompetitive story, special issue of Concurrences on “E-books and the Boundaries of Antitrust,” here
  • Amazon vs. Macmillan: It’s all about control, Truth on the Market, here

Other TOTM authors have also weighed in. See, e.g.:

  • The Second Circuit Misapplies the Per Se Rule in U.S. v. Apple, Alden Abbott, here
  • The Apple E-Book Kerfuffle Meets Alfred Marshall’s Principles of Economics, Josh Wright, here
  • Apple and Amazon E-Book Most Favored Nation Clauses, Josh Wright, here

Amicus Signatories

  • Babette E. Boliek, Associate Professor of Law, Pepperdine University School of Law
  • Henry N. Butler, Dean and Professor of Law, George Mason University School of Law
  • Justin (Gus) Hurwitz, Assistant Professor of Law, Nebraska College of Law
  • Stan Liebowitz, Ashbel Smith Professor of Economics, School of Management, University of Texas-Dallas
  • Geoffrey A. Manne, Executive Director, International Center for Law & Economics
  • Scott E. Masten, Professor of Business Economics & Public Policy, Stephen M. Ross School of Business, The University of Michigan
  • Alan J. Meese, Ball Professor of Law, William & Mary Law School
  • Thomas D. Morgan, Professor Emeritus, George Washington University Law School
  • David S. Olson, Associate Professor of Law, Boston College Law School
  • Joanna Shepherd, Professor of Law, Emory University School of Law
  • Vernon L. Smith, George L. Argyros Endowed Chair in Finance and Economics,  The George L. Argyros School of Business and Economics and Professor of Economics and Law, Dale E. Fowler School of Law, Chapman University
  • Michael E. Sykuta, Associate Professor, Division of Applied Social Sciences, University of Missouri-Columbia
  • Alex Tabarrok, Bartley J. Madden Chair in Economics at the Mercatus Center and Professor of Economics, George Mason University
  • David J. Teece, Thomas W. Tusher Professor in Global Business and Director, Center for Global Strategy and Governance, Haas School of Business, University of California Berkeley
  • Alexander Volokh, Associate Professor of Law, Emory University School of Law
  • Joshua D. Wright, Professor of Law, George Mason University School of Law

by Berin Szoka, President, TechFreedom

Josh Wright will doubtless be remembered for transforming how FTC polices competition. Between finally defining Unfair Methods of Competition (UMC), and his twelve dissents and multiple speeches about competition matters, he re-grounded competition policy in the error-cost framework: weighing not only costs against benefits, but also the likelihood of getting it wrong against the likelihood of getting it right.

Yet Wright may be remembered as much for what he started as what he finished: reforming the Commission’s Unfair and Deceptive Acts and Practices (UDAP) work. His consumer protection work is relatively slender: four dissents on high tech matters plus four relatively brief concurrences and one dissent on more traditional advertising substantiation cases. But together, these offer all the building blocks of an economic, error-cost-based approach to consumer protection. All that remains is for another FTC Commissioner to pick up where Wright left off.

Apple: Unfairness & Cost-Benefit Analysis

In January 2014, Wright issued a blistering, 17 page dissent from the Commission’s decision to bring, and settle, an enforcement action against Apple regarding the design of its app store. Wright dissented, not from the conclusion necessarily, but from the methodology by which the Commission arrived there. In essence, he argued for an error-cost approach to unfairness:

The Commission, under the rubric of “unfair acts and practices,” substitutes its own judgment for a private firm’s decisions as to how to design its product to satisfy as many users as possible, and requires a company to revamp an otherwise indisputably legitimate business practice. Given the apparent benefits to some consumers and to competition from Apple’s allegedly unfair practices, I believe the Commission should have conducted a much more robust analysis to determine whether the injury to this small group of consumers justifies the finding of unfairness and the imposition of a remedy.

…. although Apple’s allegedly unfair act or practice has harmed some consumers, I do not believe the Commission has demonstrated the injury is substantial. More importantly, any injury to consumers flowing from Apple’s choice of disclosure and billing practices is outweighed considerably by the benefits to competition and to consumers that flow from the same practice.

The majority insisted that the burden on consumers or Apple from its remedy “is de minimis,” and therefore “it was unnecessary for the Commission to undertake a study of how consumers react to different disclosures before issuing its complaint against Apple, as Commissioner Wright suggests.”

Wright responded: “Apple has apparently determined that most consumers do not want to experience excessive disclosures or to be inconvenienced by having to enter their passwords every time they make a purchase.” In essence, he argued, that the FTC should not presume to know better than Apple how to manage the subtle trade-offs between convenience and usability.

Wright was channeling Hayek’s famous quip: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” The last thing the FTC should be doing is designing digital products — even by hovering over Apple’s shoulder.

The Data Broker Report

Wright next took the Commission to task for the lack of economic analysis in its May 2013 report, “Data Brokers: A Call for Transparency and Accountability.” In just four footnotes, Wright extended his analysis of Apple. For example:

Footnote 85: Commissioner Wright agrees that Congress should consider legislation that would provide for consumer access to the information collected by data brokers. However, he does not believe that at this time there is enough evidence that the benefits to consumers of requiring data brokers to provide them with the ability to opt out of the sharing of all consumer information for marketing purposes outweighs the costs of imposing such a restriction. Finally… he believes that the Commission should engage in a rigorous study of consumer preferences sufficient to establish that consumers would likely benefit from such a portal prior to making such a recommendation.

Footnote 88: Commissioner Wright believes that in enacting statutes such as the Fair Credit Reporting Act, Congress undertook efforts to balance [costs and benefits]. In the instant case, Commissioner Wright is wary of extending FCRA-like coverage to other uses and categories of information without first performing a more robust balancing of the benefits and costs associated with imposing these requirements

The Internet of Things Report

This January, in a 4-page dissent from the FTC’s staff report on “The Internet of Things: Privacy and Security in a Connected World,” Wright lamented that the report neither represented serious economic analysis of the issues discussed nor synthesized the FTC’s workshop on the topic:

A record that consists of a one-day workshop, its accompanying public comments, and the staff’s impressions of those proceedings, however well-intended, is neither likely to result in a representative sample of viewpoints nor to generate information sufficient to support legislative or policy recommendations.

His attack on the report’s methodology was blistering:

The Workshop Report does not perform any actual analysis whatsoever to ensure that, or even to give a rough sense of the likelihood that the benefits of the staff’s various proposals exceed their attendant costs. Instead, the Workshop Report merely relies upon its own assertions and various surveys that are not necessarily representative and, in any event, do not shed much light on actual consumer preferences as revealed by conduct in the marketplace…. I support the well-established Commission view that companies must maintain reasonable and appropriate security measures; that inquiry necessitates a cost-benefit analysis. The most significant drawback of the concepts of “security by design” and other privacy-related catchphrases is that they do not appear to contain any meaningful analytical content.

Ouch.

Nomi: Deception & Materiality Analysis

In April, Wright turned his analytical artillery from unfairness to deception, long the more uncontroversial half of UDAP. In a five-page dissent, Wright accused the Commission of essentially dispensing with the core limiting principle of the 1983 Deception Policy Statement: materiality. As Wright explained:

The materiality inquiry is critical because the Commission’s construct of “deception” uses materiality as an evidentiary proxy for consumer injury…. Deception causes consumer harm because it influences consumer behavior — that is, the deceptive statement is one that is not merely misleading in the abstract but one that causes consumers to make choices to their detriment that they would not have otherwise made. This essential link between materiality and consumer injury ensures the Commission’s deception authority is employed to deter only conduct that is likely to harm consumers and does not chill business conduct that makes consumers better off.

As in Apple, Wright did not argue that there might not be a role for the FTC; merely that the FTC had failed to justify bringing, let alone settling, an enforcement action without establishing that the key promise at issue — to provide in-store opt-out — was material.

The Chamber Speech: A Call for Economic Analysis

In May, Wright gave a speech to the Chamber of Commerce on “How to Regulate the Internet of Things Without Harming its Future: Some Do’s and Don’ts”:

Perhaps it is because I am an economist who likes to deal with hard data, but when it comes to data and privacy regulation, the tendency to rely upon anecdote to motivate policy is a serious problem. Instead of developing a proper factual record that documents cognizable and actual harms, regulators can sometimes be tempted merely to explore anecdotal and other hypothetical examples and end up just offering speculations about the possibility of harm.

And on privacy in particular:

What I have seen instead is what appears to be a generalized apprehension about the collection and use of data — whether or not the data is actually personally identifiable or sensitive — along with a corresponding, and arguably crippling, fear about the possible misuse of such data.  …. Any sensible approach to regulating the collection and use of data will take into account the risk of abuses that will harm consumers. But those risks must be weighed with as much precision as possible, as is the case with potential consumer benefits, in order to guide sensible policy for data collection and use. The appropriate calibration, of course, turns on our best estimates of how policy changes will actually impact consumers on the margin….

Wright concedes that the “vast majority of work that the Consumer Protection Bureau performs simply does not require significant economic analysis because they involve business practices that create substantial risk of consumer harm but little or nothing in the way of consumer benefits.” Yet he notes that the Internet has made the need for cost-benefit analysis far more acute, at least where conduct is ambiguous as its effects on consumers, as in Apple, to avoid “squelching innovation and depriving consumers of these benefits.”

The Wrightian Reform Agenda for UDAP Enforcement

Wright left all the building blocks his successor will need to bring “Wrightian” reform to how the Bureau of Consumer Protection works:

  1. Wright’s successor should work to require economic analysis for consent decrees, as Wright proposed in his last major address as a Commissioner. BE might not to issue a statement at all in run-of-the-mill deception cases, but it should certainly have to say something about unfairness cases.
  2. The FTC needs to systematically assess its enforcement process to understand the incentives causing companies to settle UDAP cases nearly every time — resulting in what Chairman Ramirez and Commissioner Brill frequently call the FTC’s “common law of consent decrees.”
  3. As Wright says in his Nomi dissent “While the Act does not set forth a separate standard for accepting a consent decree, I believe that threshold should be at least as high as for bringing the initial complaint.” This point should be uncontroversial, yet the Commission has never addressed it. Wright’s successor (and the FTC) should, at a minimum, propose a standard for settling cases.
  4. Just as Josh succeeded in getting the FTC to issue a UMC policy statement, his successor should re-assess the FTC’s two UDAP policy statements. Wright’s successor needs to make the case for finally codifying the DPS — and ensuring that the FTC stops bypassing materiality, as in Nomi.
  5. The Commission should develop a rigorous methodology for each of the required elements of unfairness and deception to justify bringing cases (or making report recommendations). This will be a great deal harder than merely attacking the lack of such methodology in dissents.
  6. The FTC has, in recent years, increasingly used reports to make de facto policy — by inventing what Wright calls, in his Chamber speech, “slogans and catchphrases” like “privacy by design,” and then using them as boilerplate requirements for consent decrees; by pressuring companies into adopting the FTC’s best practices; by calling for legislation; and so on. At a minimum, these reports must be grounded in careful economic analysis.
  7. The Commission should apply far greater rigor in setting standards for substantiating claims about health benefits. In two dissents, Genelink et al and HCG Platinum, Wright demolished arguments for a clear, bright line requiring two randomized clinical trials, and made the case for “a more flexible substantiation requirement” instead.

Conclusion: Big Shoes to Fill

It’s a testament to Wright’s analytical clarity that he managed to say so much about consumer protection in so few words. That his UDAP work has received so little attention, relative to his competition work, says just as much about the far greater need for someone to do for consumer protection what Wright did for competition enforcement and policy at the FTC.

Wright’s successor, if she’s going to finish what Wright started, will need something approaching Wright’s sheer intellect, his deep internalization of the error-costs approach, and his knack for brokering bipartisan compromise around major issues — plus the kind of passion for UDAP matters Wright had for competition matters. And, of course, that person needs to be able to continue his legacy on competition matters…

Compared to the difficulty of finding that person, actually implementing these reforms may be the easy part.

On Thursday I will be participating in an ABA panel discussion on the Apple e-books case, along with Mark Ryan (former DOJ attorney) and Fiona Scott-Morton (former DOJ economist), both of whom were key members of the DOJ team that brought the case. Details are below. Judging from the prep call, it should be a spirited discussion!

Readers looking for background on the case (as well as my own views — decidedly in opposition to those of the DOJ) can find my previous commentary on the case and some of the issues involved here:

Other TOTM authors have also weighed in. See, e.g.:

DETAILS:

ABA Section of Antitrust Law

Federal Civil abaantitrustEnforcement Committee, Joint Conduct, Unilateral Conduct, and Media & Tech Committees Present:

“The 2d Cir.’s Apple E-Books decision: Debating the merits and the meaning”

July 16, 2015
12:00 noon to 1:30 pm Eastern / 9:00 am to 10:30 am Pacific

On June 30, the Second Circuit affirmed DOJ’s trial victory over Apple in the Ebooks Case. The three-judge panel fractured in an interesting way: two judges affirmed the finding that Apple’s role in a “hub and spokes” conspiracy was unlawful per se; one judge also would have found a rule-of-reason violation; and the dissent — stating Apple had a “vertical” position and was challenging the leading seller’s “monopoly” — would have found no liability at all. What is the reasoning and precedent of the decision? Is “marketplace vigilantism” (the concurring judge’s phrase) ever justified? Our panel — which includes the former DOJ head of litigation involved in the case — will debate the issues.

Moderator

  • Ken Ewing, Steptoe & Johnson LLP

Panelists

  • Geoff Manne, International Center for Law & Economics
  • Fiona Scott Morton, Yale School of Management
  • Mark Ryan, Mayer Brown LLP

Register HERE

In its June 30 decision in United States v. Apple Inc., a three-judge Second Circuit panel departed from sound antitrust reasoning in holding that Apple’s e-book distribution agreement with various publishers was illegal per se. Judge Dennis Jacobs’ thoughtful dissent, which substantially informs the following discussion of this case, is worth a close read.

In 2009, Apple sought to enter the retail market for e-books, as it prepared to launch its first iPad tablet. Apple, however, confronted an e-book monopolist, Amazon (possessor of a 90 percent e-book market share), that was effectively excluding new entrants by offering bestsellers at a loss through its popular Kindle device ($9.99, a price below what Amazon was paying publishers for the e-book book rights). In order to effectively enter the market without incurring a loss itself (by meeting Amazon’s price) or impairing its brand (by charging more than Amazon), Apple approached publishers that dealt with Amazon and offered itself as a competing e-book buyer, subject to the publishers agreeing to a new distribution model that would lower barriers to entry into retail e-book sales. The new publishing model was implemented by three sets of contract terms Apple asked the publishers to accept – agency pricing, tiered price caps, and a most-favored-nation (MFN) clause. (I refer the reader to the full panel majority opinion for a detailed discussion of these clauses.) None of those terms, standing alone, is illegal. Although the publishers were unhappy about Amazon’s below-cost pricing for e-books, no one publisher alone could counter Amazon. Five of the six largest U.S. publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) agreed to Apple’s terms and jointly convinced Amazon to adopt agency pricing. Apple also encouraged other publishers to implement agency pricing in their contracts with other retailers. The barrier to entry thus removed, Apple entered the retail market as a formidable competitor. Amazon’s retail e-book market share fell, and today stands at 60 percent.

The U.S. Department of Justice (DOJ) and 31 states sued Apple and the five publishers for conspiring in unreasonable restraint of trade under Sherman Act § 1. The publishers settled (signing consent decrees which prohibited them for a period from restricting e-book retailers’ ability to set prices), but Apple proceeded to a bench trial. A federal district court held that Apple’s conduct as a vertical enabler of a horizontal price conspiracy among the publishers was a per se violation of § 1, and that (in any event) Apple’s conduct would also violate § 1 under the antitrust rule of reason.   A majority of the Second Circuit panel affirmed on the ground of per se liability, without having to reach the rule of reason question.

Judge Jacobs’ dissent argued that Apple’s conduct was not per se illegal and also passed muster under the rule of reason. He pointed to three major errors in the majority’s opinion. First, the holding that the vertical enabler of a horizontal price fixing is in per se violation of the antitrust laws conflicts with the Supreme Court’s teaching (in overturning the per se prohibition on resale price maintenance) that a vertical agreement designed to facilitate a horizontal cartel “would need to be held unlawful under the rule of reason.” Leegin Creative Leather Prods, Inc. v. PSKS, Inc. 551 U.S. 877, 893 (2007) (emphasis added).   Second, the district court failed to recognize that Apple’s role as a vertical player differentiated it from the publishers – it should have considered Apple as a competitor on the distinct horizontal plane of retailers, where Apple competed with Amazon (and with smaller player such as Barnes & Noble). Third, assessed under the rule of reason, Apple’s conduct was “overwhelmingly” procompetitive; Apple was a major potential competitor in a market dominated by a 90 percent monopoly, and was “justifiably unwilling” to enter a market on terms that would assure a loss on sales or exact a toll on its reputation.

Judge Jacobs’ analysis is on point. The Supreme Court’s wise reluctance to condemn any purely vertical contractual restraint under the per se rule reflects a sound understanding that vertical restraints have almost always been found to be procompetitive or competitively neutral. Indeed, vertical agreements that are designed to facilitate entry into an important market dominated by one firm, such as the ones at issue in the Apple case, are especially bad candidates for summary condemnation. Thus, the majority’s decision to apply the per se rule to Apple’s contracts appears particularly out of touch with both scholarship and marketplace realities.

More generally, as Professor Herbert Hovenkamp (the author of the leading antitrust treatise) and other scholars have emphasized, well-grounded antitrust analysis involves a certain amount of preliminary evaluation of a restraint seen in its relevant factual context, before a “per se” or “rule of reason” label is applied. (In the case of truly “naked” secret hard core cartels, which DOJ prosecutes under criminal law, the per se label may be applied immediately.) The Apple panel majority panel botched this analytic step, in failing to even consider that Apple’s restraints could enhance retail competition with Amazon.

The panel majority also appeared overly fixated on the fact that some near-term e-book retail prices rose above Amazon’s previous below cost levels in the wake of Apple’s contracts, without noting the longer term positive implications for the competitive process of new e-book entry. Below-cost prices are not a feature of durable efficient competition, and in this case may well have been a temporary measure aimed at discouraging entry. In any event, what counts in measuring consumer welfare is not short term price, but whether expanded output is being promoted by a business arrangement – a key factor that the majority notably failed to address. (It appears highly probable that the fall in Amazon’s e-book retail market share, and the invigoration of e-book competition, have generated output and welfare levels higher than those that would have prevailed had Amazon maintained its monopoly. This is bolstered by Apple’s showing, which the majority does not deny, that in the two years following the “conspiracy” among Apple and the publishers, prices across the e-book market as a whole fell slightly and total output increased.)

Finally, Judge Jacobs’ dissent provides strong arguments in favor of upholding Apple’s conduct under the rule of reason. As the dissent stresses, removal of barriers to entry that shield a monopolist, as in this case, is in line with the procompetitive goals of antitrust law. Another procompetitive effect is the encouragement of innovation (manifested by the enablement of e-book reading with the cutting-edge functions of the iPad), a hallmark and benefit of competition. Another benefit was that the elimination of below-cost pricing helped raise authors’ royalties. Furthermore, in the words of the dissent, any welfare reductions due to Apple’s vertical restrictions are “no more than a slight offset to the competitive benefits that now pervade the relevant market.” (Admittedly that comment is a speculative observation, but in my view very likely a well-founded one.) Finally, as the dissent points out, the district court’s findings demonstrate that Apple could not have entered and competed effectively using other strategies, such as wholesale contracts involving below-cost pricing (like Amazon’s) or higher prices. Summing things up, the dissent explains that “Apple took steps to compete with a monopolist and open the market to more entrants, generating only minor competitive restraints in the process. Its conduct was eminently reasonable; no one has suggested a viable alternative.” In closing, even if one believes a more fulsome application of the rule of reason is called for before reaching the dissent’s conclusion, the dissent does a good job in highlighting the key considerations at play here – considerations that the majority utterly failed to address.

In sum, the Second Circuit panel majority wore jurisprudential blinders in its Apple decision. Like the mesmerized audience at a magic show, it focused in blinkered fashion on a magician’s sleight of hand (the one-dimensional characterization of certain uniform contractual terms), while not paying attention to what was really going on (the impressive welfare-enhancing invigoration of competition in e-book retailing). In other words, the majority decision showed a naïve preference for quick and superficial characterizations of conduct at the expense of a nuanced assessment of the broader competitive context. Perhaps the Second Circuit en banc will have the opportunity to correct the panel’s erroneous understanding of per se and rule of reason analysis. Even better, the Supreme Court may wish to step in to ensure that its thoughtful development of antitrust doctrine in recent years – focused on actual effects and economic efficiency, not on superficial condemnatory labels that ignore marketplace benefits – not be undermined.

Recent years have seen an increasing interest in incorporating privacy into antitrust analysis. The FTC and regulators in Europe have rejected these calls so far, but certain scholars and activists continue their attempts to breathe life into this novel concept. Elsewhere we have written at length on the scholarship addressing the issue and found the case for incorporation wanting. Among the errors proponents make is a persistent (and woefully unsubstantiated) assertion that online data can amount to a barrier to entry, insulating incumbent services from competition and ensuring that only the largest providers thrive. This data barrier to entry, it is alleged, can then allow firms with monopoly power to harm consumers, either directly through “bad acts” like price discrimination, or indirectly by raising the costs of advertising, which then get passed on to consumers.

A case in point was on display at last week’s George Mason Law & Economics Center Briefing on Big Data, Privacy, and Antitrust. Building on their growing body of advocacy work, Nathan Newman and Allen Grunes argued that this hypothesized data barrier to entry actually exists, and that it prevents effective competition from search engines and social networks that are interested in offering services with heightened privacy protections.

According to Newman and Grunes, network effects and economies of scale ensure that dominant companies in search and social networking (they specifically named Google and Facebook — implying that they are in separate markets) operate without effective competition. This results in antitrust harm, they assert, because it precludes competition on the non-price factor of privacy protection.

In other words, according to Newman and Grunes, even though Google and Facebook offer their services for a price of $0 and constantly innovate and upgrade their products, consumers are nevertheless harmed because the business models of less-privacy-invasive alternatives are foreclosed by insufficient access to data (an almost self-contradicting and silly narrative for many reasons, including the big question of whether consumers prefer greater privacy protection to free stuff). Without access to, and use of, copious amounts of data, Newman and Grunes argue, the algorithms underlying search and targeted advertising are necessarily less effective and thus the search product without such access is less useful to consumers. And even more importantly to Newman, the value to advertisers of the resulting consumer profiles is diminished.

Newman has put forth a number of other possible antitrust harms that purportedly result from this alleged data barrier to entry, as well. Among these is the increased cost of advertising to those who wish to reach consumers. Presumably this would harm end users who have to pay more for goods and services because the costs of advertising are passed on to them. On top of that, Newman argues that ad networks inherently facilitate price discrimination, an outcome that he asserts amounts to antitrust harm.

FTC Commissioner Maureen Ohlhausen (who also spoke at the George Mason event) recently made the case that antitrust law is not well-suited to handling privacy problems. She argues — convincingly — that competition policy and consumer protection should be kept separate to preserve doctrinal stability. Antitrust law deals with harms to competition through the lens of economic analysis. Consumer protection law is tailored to deal with broader societal harms and aims at protecting the “sanctity” of consumer transactions. Antitrust law can, in theory, deal with privacy as a non-price factor of competition, but this is an uneasy fit because of the difficulties of balancing quality over two dimensions: Privacy may be something some consumers want, but others would prefer a better algorithm for search and social networks, and targeted ads with free content, for instance.

In fact, there is general agreement with Commissioner Ohlhausen on her basic points, even among critics like Newman and Grunes. But, as mentioned above, views diverge over whether there are some privacy harms that should nevertheless factor into competition analysis, and on whether there is in fact  a data barrier to entry that makes these harms possible.

As we explain below, however, the notion of data as an antitrust-relevant barrier to entry is simply a myth. And, because all of the theories of “privacy as an antitrust harm” are essentially predicated on this, they are meritless.

First, data is useful to all industries — this is not some new phenomenon particular to online companies

It bears repeating (because critics seem to forget it in their rush to embrace “online exceptionalism”) that offline retailers also receive substantial benefit from, and greatly benefit consumers by, knowing more about what consumers want and when they want it. Through devices like coupons and loyalty cards (to say nothing of targeted mailing lists and the age-old practice of data mining check-out receipts), brick-and-mortar retailers can track purchase data and better serve consumers. Not only do consumers receive better deals for using them, but retailers know what products to stock and advertise and when and on what products to run sales. For instance:

  • Macy’s analyzes tens of millions of terabytes of data every day to gain insights from social media and store transactions. Over the past three years, the use of big data analytics alone has helped Macy’s boost its revenue growth by 4 percent annually.
  • Following its acquisition of Kosmix in 2011, Walmart established @WalmartLabs, which created its own product search engine for online shoppers. In the first year of its use alone, the number of customers buying a product on Walmart.com after researching a purchase increased by 20 percent. According to Ron Bensen, the vice president of engineering at @WalmartLabs, the combination of in-store and online data could give brick-and-mortar retailers like Walmart an advantage over strictly online stores.
  • Panera and a whole host of restaurants, grocery stores, drug stores and retailers use loyalty cards to advertise and learn about consumer preferences.

And of course there is a host of others uses for data, as well, including security, fraud prevention, product optimization, risk reduction to the insured, knowing what content is most interesting to readers, etc. The importance of data stretches far beyond the online world, and far beyond mere retail uses more generally. To describe even online giants like Amazon, Apple, Microsoft, Facebook and Google as having a monopoly on data is silly.

Second, it’s not the amount of data that leads to success but building a better mousetrap

The value of knowing someone’s birthday, for example, is not in that tidbit itself, but in the fact that you know this is a good day to give that person a present. Most of the data that supports the advertising networks underlying the Internet ecosphere is of this sort: Information is important to companies because of the value that can be drawn from it, not for the inherent value of the data itself. Companies don’t collect information about you to stalk you, but to better provide goods and services to you.

Moreover, data itself is not only less important than what can be drawn from it, but data is also less important than the underlying product it informs. For instance, Snapchat created a challenger to  Facebook so successfully (and in such short time) that Facebook attempted to buy it for $3 billion (Google offered $4 billion). But Facebook’s interest in Snapchat wasn’t about its data. Instead, Snapchat was valuable — and a competitive challenge to Facebook — because it cleverly incorporated the (apparently novel) insight that many people wanted to share information in a more private way.

Relatedly, Twitter, Instagram, LinkedIn, Yelp, Pinterest (and Facebook itself) all started with little (or no) data and they have had a lot of success. Meanwhile, despite its supposed data advantages, Google’s attempts at social networking — Google+ — have never caught up to Facebook in terms of popularity to users (and thus not to advertisers either). And scrappy social network Ello is starting to build a significant base without data collection for advertising at all.

At the same time it’s simply not the case that the alleged data giants — the ones supposedly insulating themselves behind data barriers to entry — actually have the type of data most relevant to startups anyway. As Andres Lerner has argued, if you wanted to start a travel business, the data from Kayak or Priceline would be far more relevant. Or if you wanted to start a ride-sharing business, data from cab companies would be more useful than the broad, market-cross-cutting profiles Google and Facebook have. Consider companies like Uber, Lyft and Sidecar that had no customer data when they began to challenge established cab companies that did possess such data. If data were really so significant, they could never have competed successfully. But Uber, Lyft and Sidecar have been able to effectively compete because they built products that users wanted to use — they came up with an idea for a better mousetrap.The data they have accrued came after they innovated, entered the market and mounted their successful challenges — not before.

In reality, those who complain about data facilitating unassailable competitive advantages have it exactly backwards. Companies need to innovate to attract consumer data, otherwise consumers will switch to competitors (including both new entrants and established incumbents). As a result, the desire to make use of more and better data drives competitive innovation, with manifestly impressive results: The continued explosion of new products, services and other apps is evidence that data is not a bottleneck to competition but a spur to drive it.

Third, competition online is one click or thumb swipe away; that is, barriers to entry and switching costs are low

Somehow, in the face of alleged data barriers to entry, competition online continues to soar, with newcomers constantly emerging and triumphing. This suggests that the barriers to entry are not so high as to prevent robust competition.

Again, despite the supposed data-based monopolies of Facebook, Google, Amazon, Apple and others, there exist powerful competitors in the marketplaces they compete in:

  • If consumers want to make a purchase, they are more likely to do their research on Amazon than Google.
  • Google flight search has failed to seriously challenge — let alone displace —  its competitors, as critics feared. Kayak, Expedia and the like remain the most prominent travel search sites — despite Google having literally purchased ITA’s trove of flight data and data-processing acumen.
  • People looking for local reviews go to Yelp and TripAdvisor (and, increasingly, Facebook) as often as Google.
  • Pinterest, one of the most highly valued startups today, is now a serious challenger to traditional search engines when people want to discover new products.
  • With its recent acquisition of the shopping search engine, TheFind, and test-run of a “buy” button, Facebook is also gearing up to become a major competitor in the realm of e-commerce, challenging Amazon.
  • Likewise, Amazon recently launched its own ad network, “Amazon Sponsored Links,” to challenge other advertising players.

Even assuming for the sake of argument that data creates a barrier to entry, there is little evidence that consumers cannot easily switch to a competitor. While there are sometimes network effects online, like with social networking, history still shows that people will switch. MySpace was considered a dominant network until it made a series of bad business decisions and everyone ended up on Facebook instead. Similarly, Internet users can and do use Bing, DuckDuckGo, Yahoo, and a plethora of more specialized search engines on top of and instead of Google. And don’t forget that Google itself was once an upstart new entrant that replaced once-household names like Yahoo and AltaVista.

Fourth, access to data is not exclusive

Critics like Newman have compared Google to Standard Oil and argued that government authorities need to step in to limit Google’s control over data. But to say data is like oil is a complete misnomer. If Exxon drills and extracts oil from the ground, that oil is no longer available to BP. Data is not finite in the same way. To use an earlier example, Google knowing my birthday doesn’t limit the ability of Facebook to know my birthday, as well. While databases may be proprietary, the underlying data is not. And what matters more than the data itself is how well it is analyzed.

This is especially important when discussing data online, where multi-homing is ubiquitous, meaning many competitors end up voluntarily sharing access to data. For instance, I can use the friend-finder feature on WordPress to find Facebook friends, Google connections, and people I’m following on Twitter who also use the site for blogging. Using this feature allows WordPress to access your contact list on these major online players.

Friend-Finder

Further, it is not apparent that Google’s competitors have less data available to them. Microsoft, for instance, has admitted that it may actually have more data. And, importantly for this discussion, Microsoft may have actually garnered some of its data for Bing from Google.

If Google has a high cost per click, then perhaps it’s because it is worth it to advertisers: There are more eyes on Google because of its superior search product. Contra Newman and Grunes, Google may just be more popular for consumers and advertisers alike because the algorithm makes it more useful, not because it has more data than everyone else.

Fifth, the data barrier to entry argument does not have workable antitrust remedies

The misguided logic of data barrier to entry arguments leaves a lot of questions unanswered. Perhaps most important among these is the question of remedies. What remedy would apply to a company found guilty of leveraging its market power with data?

It’s actually quite difficult to conceive of a practical means for a competition authority to craft remedies that would address the stated concerns without imposing enormous social costs. In the unilateral conduct context, the most obvious remedy would involve the forced sharing of data.

On the one hand, as we’ve noted, it’s not clear this would actually accomplish much. If competitors can’t actually make good use of data, simply having more of it isn’t going to change things. At the same time, such a result would reduce the incentive to build data networks to begin with. In their startup stage, companies like Uber and Facebook required several months and hundreds of thousands, if not millions, of dollars to design and develop just the first iteration of the products consumers love. Would any of them have done it if they had to share their insights? In fact, it may well be that access to these free insights is what competitors actually want; it’s not the data they’re lacking, but the vision or engineering acumen to use it.

Other remedies limiting collection and use of data are not only outside of the normal scope of antitrust remedies, they would also involve extremely costly court supervision and may entail problematic “collisions between new technologies and privacy rights,” as the last year’s White House Report on Big Data and Privacy put it.

It is equally unclear what an antitrust enforcer could do in the merger context. As Commissioner Ohlhausen has argued, blocking specific transactions does not necessarily stop data transfer or promote privacy interests. Parties could simply house data in a standalone entity and enter into licensing arrangements. And conditioning transactions with forced data sharing requirements would lead to the same problems described above.

If antitrust doesn’t provide a remedy, then it is not clear why it should apply at all. The absence of workable remedies is in fact a strong indication that data and privacy issues are not suitable for antitrust. Instead, such concerns would be better dealt with under consumer protection law or by targeted legislation.

Microsoft wants you to believe that Google’s business practices stifle competition and harm consumers. Again.

The latest volley in its tiresome and ironic campaign to bludgeon Google with the same regulatory club once used against Microsoft itself is the company’s effort to foment an Android-related antitrust case in Europe.

In a recent polemicMicrosoft consultant (and business school professor) Ben Edelman denounces Google for requiring that, if device manufacturers want to pre-install key Google apps on Android devices, they “must install all the apps Google specifies, with the prominence Google requires, including setting these apps as defaults where Google instructs.” Edelman trots out gasp-worthy “secret” licensing agreements that he claims support his allegation (more on this later).

Similarly, a recent Wall Street Journal article, “Android’s ‘Open’ System Has Limits,” cites Edelman’s claim that limits on the licensing of Google’s proprietary apps mean that the Android operating system isn’t truly open source and comes with “strings attached.”

In fact, along with the Microsoft-funded trade organization FairSearch, Edelman has gone so far as to charge that this “tying” constitutes an antitrust violation. It is this claim that Microsoft and a network of proxies brought to the Commission when their efforts to manufacture a search-neutrality-based competition case against Google failed.

But before getting too caught up in the latest round of anti-Google hysteria, it’s worth noting that the Federal Trade Commission has already reviewed these claims. After a thorough, two-year inquiry, the FTC found the antitrust arguments against Google to be without merit. The South Korea Fair Trade Commission conducted its own two year investigation into Google’s Android business practices and dismissed the claims before it as meritless, as well.

Taking on Edelman and FairSearch with an exhaustive scholarly analysis, German law professor Torsten Koerber recently assessed the nature of competition among mobile operating systems and concluded that:

(T)he (EU) Fairsearch complaint ultimately does not aim to protect competition or consumers, as it pretends to. It rather strives to shelter Microsoft from competition by abusing competition law to attack Google’s business model and subvert competition.

It’s time to take a step back and consider the real issues at play.

In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).

For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.” He writes, “I see no way to reconcile the MADA restrictions with [Android openness].”

Conveniently, however, Edelman neglects to cite to Section 2.6 of the MADA:

The parties will create an open environment for the Devices by making all Android Products and Android Application Programming Interfaces available and open on the Devices and will take no action to limit or restrict the Android platform.

Professor Korber’s analysis provides a straight-forward explanation of the relationship between Android and its OEM licensees:

Google offers Android to OEMs on a royalty-free basis. The licensees are free to download, distribute and even modify the Android code as they like. OEMs can create mobile devices that run “pure” Android…or they can apply their own user interfaces (IO) and thereby hide most of the underlying Android system (e.g. Samsung’s “TouchWiz” or HTC’s “Sense”). OEMs make ample use of this option.

The truth is that the Android operating system remains, as ever, definitively open source — but Android’s openness isn’t really what the fuss is about. In this case, the confusion (or obfuscation) stems from the casual confounding of Google Apps with the Android Operating System. As we’ll see, they aren’t the same thing.

Consider Amazon, which pre-loads no Google applications at all on its Kindle Fire and Fire Phone. Amazon’s version of Android uses Microsoft’s Bing as the default search engineNokia provides mapping services, and the app store is Amazon’s own.

Still, Microsoft’s apologists continue to claim that Android licensees can’t choose to opt out of Google’s applications suite — even though, according to a new report from ABI Research, 20 percent of smartphones shipped between May and July 2014 were based on a “Google-less” version of the Android OS. And that number is consistently increasing: Analysts predict that by 2015, 30 percent of Android phones won’t access Google Services.

It’s true that equipment manufacturers who choose the Android operating system have the option to include the suite of integrated, proprietary Google apps and services licensed (royalty-free) under the name Google Mobile Services (GMS). GMS includes Google Search, Maps, Calendar, YouTube and other apps that together define the “Google Android experience” that users know and love.

But Google Android is far from the only Android experience.

Even if a manufacturer chooses to license Google’s apps suite, Google’s terms are not exclusive. Handset makers are free to install competing applications, including other search engines, map applications or app stores.

Although Google requires that Google Search be made easily accessible (hardly a bad thing for consumers, as it is Google Search that finances the development and maintenance of all of the other (free) apps from which Google otherwise earns little to no revenue), OEMs and users alike can (and do) easily install and access other search engines in numerous ways. As Professor Korber notes:

The standard MADA does not entail any exclusivity for Google Search nor does it mandate a search default for the web browser.

Regardless, integrating key Google apps (like Google Search and YouTube) with other apps the company offers (like Gmail and Google+) is an antitrust problem only if it significantly forecloses competitors from these apps’ markets compared to a world without integrated Google apps, and without pro-competitive justification. Neither is true, despite the unsubstantiated claims to the contrary from Edelman, FairSearch and others.

Consumers and developers expect and demand consistency across devices so they know what they’re getting and don’t have to re-learn basic functions or program multiple versions of the same application. Indeed, Apple’s devices are popular in part because Apple’s closed iOS provides a predictable, seamless experience for users and developers.

But making Android competitive with its tightly controlled competitors requires special efforts from Google to maintain a uniform and consistent experience for users. Google has tried to achieve this uniformity by increasingly disentangling its apps from the operating system (the opposite of tying) and giving OEMs the option (but not the requirement) of licensing GMS — a “suite” of technically integrated Google applications (integrated with each other, not the OS).  Devices with these proprietary apps thus ensure that both consumers and developers know what they’re getting.

Unlike Android, Apple prohibits modifications of its operating system by downstream partners and users, and completely controls the pre-installation of apps on iOS devices. It deeply integrates applications into iOS, including Apple Maps, iTunes, Siri, Safari, its App Store and others. Microsoft has copied Apple’s model to a large degree, hard-coding its own applications (including Bing, Windows Store, Skype, Internet Explorer, Bing Maps and Office) into the Windows Phone operating system.

In the service of creating and maintaining a competitive platform, each of these closed OS’s bakes into its operating system significant limitations on which third-party apps can be installed and what they can (and can’t) do. For example, neither platform permits installation of a third-party app store, and neither can be significantly customized. Apple’s iOS also prohibits users from changing default applications — although the soon-to-be released iOS 8 appears to be somewhat more flexible than previous versions.

In addition to pre-installing a raft of their own apps and limiting installation of other apps, both Apple and Microsoft enable greater functionality for their own apps than they do the third-party apps they allow.

For example, Apple doesn’t make available for other browsers (like Google’s Chrome) all the JavaScript functionality that it does for Safari, and it requires other browsers to use iOS Webkit instead of their own web engines. As a result there are things that Chrome can’t do on iOS that Safari and only Safari can do, and Chrome itself is hamstrung in implementing its own software on iOS. This approach has led Mozilla to refuse to offer its popular Firefox browser for iOS devices (while it has no such reluctance about offering it on Android).

On Windows Phone, meanwhile, Bing is integrated into the OS and can’t be removed. Only in markets where Bing is not supported (and with Microsoft’s prior approval) can OEMs change the default search app from Bing. While it was once possible to change the default search engine that opens in Internet Explorer (although never from the hardware search button), the Windows 8.1 Hardware Development Notes, updated July 22, 2014, state:

By default, the only search provider included on the phone is Bing. The search provider used in the browser is always the same as the one launched by the hardware search button.

Both Apple iOS and Windows Phone tightly control the ability to use non-default apps to open intents sent from other apps and, in Windows especially, often these linkages can’t be changed.

As a result of these sorts of policies, maintaining the integrity — and thus the brand — of the platform is (relatively) easy for closed systems. While plenty of browsers are perfectly capable of answering an intent to open a web page, Windows Phone can better ensure a consistent and reliable experience by forcing Internet Explorer to handle the operation.

By comparison, Android, with or without Google Mobile Services, is dramatically more open, more flexible and customizable, and more amenable to third-party competition. Even the APIs that it uses to integrate its apps are open to all developers, ensuring that there is nothing that Google apps are able to do that non-Google apps with the same functionality are prevented from doing.

In other words, not just Gmail, but any email app is permitted to handle requests from any other app to send emails; not just Google Calendar but any calendar app is permitted to handle requests from any other app to accept invitations.

In no small part because of this openness and flexibility, current reports indicate that Android OS runs 85 percent of mobile devices worldwide. But it is OEM giant Samsung, not Google, that dominates the market, with a 65 percent share of all Android devices. Competition is rife, however, especially in emerging markets. In fact, according to one report, “Chinese and Indian vendors accounted for the majority of smartphone shipments for the first time with a 51% share” in 2Q 2014.

As he has not been in the past, Edelman is at least nominally circumspect in his unsubstantiated legal conclusions about Android’s anticompetitive effect:

Applicable antitrust law can be complicated: Some ties yield useful efficiencies, and not all ties reduce welfare.

Given Edelman’s connections to Microsoft and the realities of the market he is discussing, it could hardly be otherwise. If every integration were an antitrust violation, every element of every operating system — including Apple’s iOS as well as every variant of Microsoft’s Windows — should arguably be the subject of a government investigation.

In truth, Google has done nothing more than ensure that its own suite of apps functions on top of Android to maintain what Google sees as seamless interconnectivity, a high-quality experience for users, and consistency for application developers — while still allowing handset manufacturers room to innovate in a way that is impossible on other platforms. This is the very definition of pro-competitive, and ultimately this is what allows the platform as a whole to compete against its far more vertically integrated alternatives.

Which brings us back to Microsoft. On the conclusion of the FTC investigation in January 2013, a GigaOm exposé on the case had this to say:

Critics who say Google is too powerful have nagged the government for years to regulate the company’s search listings. But today the critics came up dry….

The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated….

The FTC is also a loser because it ran a high profile two-year investigation but came up dry.

EU regulators, take note.

The Federal Trade Commission’s recent enforcement actions against Amazon and Apple raise important questions about the FTC’s consumer protection practices, especially its use of economics. How does the Commission weigh the costs and benefits of its enforcement decisions? How does the agency employ economic analysis in digital consumer protection cases generally?

Join the International Center for Law and Economics and TechFreedom on Thursday, July 31 at the Woolly Mammoth Theatre Company for a lunch and panel discussion on these important issues, featuring FTC Commissioner Joshua Wright, Director of the FTC’s Bureau of Economics Martin Gaynor, and several former FTC officials. RSVP here.

Commissioner Wright will present a keynote address discussing his dissent in Apple and his approach to applying economics in consumer protection cases generally.

Geoffrey Manne, Executive Director of ICLE, will briefly discuss his recent paper on the role of economics in the FTC’s consumer protection enforcement. Berin Szoka, TechFreedom President, will moderate a panel discussion featuring:

  • Martin Gaynor, Director, FTC Bureau of Economics
  • David Balto, Fmr. Deputy Assistant Director for Policy & Coordination, FTC Bureau of Competition
  • Howard Beales, Fmr. Director, FTC Bureau of Consumer Protection
  • James Cooper, Fmr. Acting Director & Fmr. Deputy Director, FTC Office of Policy Planning
  • Pauline Ippolito, Fmr. Acting Director & Fmr. Deputy Director, FTC Bureau of Economics

Background

The FTC recently issued a complaint and consent order against Apple, alleging its in-app purchasing design doesn’t meet the Commission’s standards of fairness. The action and resulting settlement drew a forceful dissent from Commissioner Wright, and sparked a discussion among the Commissioners about balancing economic harms and benefits in Section 5 unfairness jurisprudence. More recently, the FTC brought a similar action against Amazon, which is now pending in federal district court because Amazon refused to settle.

Event Info

The “FTC: Technology and Reform” project brings together a unique collection of experts on the law, economics, and technology of competition and consumer protection to consider challenges facing the FTC in general, and especially regarding its regulation of technology. The Project’s initial report, released in December 2013, identified critical questions facing the agency, Congress, and the courts about the FTC’s future, and proposed a framework for addressing them.

The event will be live streamed here beginning at 12:15pm. Join the conversation on Twitter with the #FTCReform hashtag.

When:

Thursday, July 31
11:45 am – 12:15 pm — Lunch and registration
12:15 pm – 2:00 pm — Keynote address, paper presentation & panel discussion

Where:

Woolly Mammoth Theatre Company – Rehearsal Hall
641 D St NW
Washington, DC 20004

Questions? – Email mail@techfreedom.orgRSVP here.

See ICLE’s and TechFreedom’s other work on FTC reform, including:

  • Geoffrey Manne’s Congressional testimony on the the FTC@100
  • Op-ed by Berin Szoka and Geoffrey Manne, “The Second Century of the Federal Trade Commission”
  • Two posts by Geoffrey Manne on the FTC’s Amazon Complaint, here and here.

About The International Center for Law and Economics:

The International Center for Law and Economics is a non-profit, non-partisan research center aimed at fostering rigorous policy analysis and evidence-based regulation.

About TechFreedom:

TechFreedom is a non-profit, non-partisan technology policy think tank. We work to chart a path forward for policymakers towards a bright future where technology enhances freedom, and freedom enhances technology.

Today the FTC filed its complaint in federal district court in Washington against Amazon, alleging that the company’s in-app purchasing system permits children to make in-app purchases without parental “informed consent” constituting an “unfair practice” under Section 5 of the FTC Act.

As I noted in my previous post on the case, in bringing this case the Commission is doubling down on the rule it introduced in Apple that effectively converts the balancing of harms and benefits required under Section 5 of the FTC Act to a per se rule that deems certain practices to be unfair regardless of countervailing benefits. Similarly, it is attempting to extend the informed consent standard it created in Apple that essentially maintains that only specific, identified practices (essentially, distinct notification at the time of purchase or opening of purchase window, requiring entry of a password to proceed) are permissible under the Act.

Such a standard is inconsistent with the statute, however. The FTC’s approach forecloses the ability of companies like Amazon to engage in meaningful design decisions and disregards their judgment about which user interface designs will, on balance, benefit consumers. The FTC Act does not empower the Commission to disregard the consumer benefits of practices that simply fail to mimic the FTC’s preconceived design preferences. While that sort of approach might be defensible in the face of manifestly harmful practices like cramming, it is wholly inappropriate in the context of app stores like Amazon’s that spend considerable resources to design every aspect of their interaction with consumers—and that seek to attract, not to defraud, consumers.

Today’s complaint occasions a few more observations:

  1. Amazon has a very strong case. Under Section 5 of the FTC Act, the Commission will have to prevail on all three elements required to prove unfairness under Section 5: that there is substantial injury, that consumers can’t reasonably avoid the injury and that any countervailing benefits don’t outweigh the injury. But, consistent with its complaint and consent order in Apple, the Amazon complaint focuses almost entirely on only the first of these. While that may have been enough to induce Apple to settle out of court, the FTC will actually have to make out a case on reasonable avoidance and countervailing benefits at trial. It’s not at all clear that the agency will be able to do so on the facts alleged here.
  2. On reasonable avoidance, over and above Amazon’s general procedures that limit unwanted in-app purchases, the FTC will have a tough time showing that Amazon’s Kindle Free Time doesn’t provide parents with more than enough ability to avoid injury. In fact, the complaint doesn’t mention Free Time at all.
  3. Among other things, the complaint asserts that Amazon knew about issues with in-app purchasing by December of 2011 and claims that “[n]ot until June 2014 did Amazon change its in-app charge framework to obtain account holders’ informed consent for in-app charges on its newer mobile devices.” But Kindle Free Time was introduced in September of 2012. While four FTC Commissioners may believe that Free Time isn’t a sufficient response to the alleged problem, it is clearly a readily available, free and effective (read: reasonable) mechanism for parents to avoid the alleged harms. It may not be what the design mavens at the FTC would have chosen to do, but it seems certain that avoiding unauthorized in-app purchases by children was part of what motivated Amazon’s decision to create and offer Free Time.
  4. On countervailing benefits, as Commissioner Wright discussed in detail in his dissent from the Apple consent order, the Commission seems to think that it can simply assert that there are no countervailing benefits to Amazon’s design choices around in-app purchases. Here the complaint doesn’t mention 1-Click at all, which is core to Amazon’s user interface design and essential to evaluating the balance of harms and benefits required by the statute.
  5. Even if it can show that Amazon’s in-app purchase practices caused harm, the Commission will still have to demonstrate that Amazon’s conscious efforts to minimize the steps required to make purchases doesn’t benefit consumers on balance. In Apple, the FTC majority essentially (and improperly) valued these sorts of user-interface benefits at zero. It implicitly does so again here, but a court will require more than such an assertion.
  6. Given these lapses, there is even a chance that the complaint will be thrown out on a motion to dismiss. It’s a high bar, but if the court agrees that there are insufficient facts in the complaint to make out a plausible case on all three elements, Amazon could well prevail on a motion to dismiss. The FTC’s approach in the Apple consent order effectively maintains that the agency can disregard reasonable avoidance and countervailing benefits in contravention of the statute. By following the same approach here in actual litigation, the FTC may well meet resistance from the courts, which have not yet so cavalierly dispensed with the statute’s requirements.

The Wall Street Journal reports this morning that Amazon is getting — and fighting — the “Apple treatment” from the FTC for its design of its in-app purchases:

Amazon.com Inc. is bucking a request from the Federal Trade Commission that it tighten its policies for purchases made by children while using mobile applications.

In a letter to the FTC Tuesday, Amazon said it was prepared to “defend our approach in court,” rather than agree to fines and additional record keeping and disclosure requirements over the next 20 years, according to documents reviewed by The Wall Street Journal.

According to the documents, Amazon is facing a potential lawsuit by the FTC, which wants the Seattle retailer to accept terms similar to those that Apple Inc. agreed to earlier this year regarding so-called in-app purchases.

From what I can tell, the Commission has voted to issue a complaint, and Amazon has informed the Commission that it will not accept its proposed settlement.

I am thrilled that Amazon seems to have decided to fight the latest effort by a majority of the FTC to bring every large tech company under 20-year consent decree. I should say: I’m disappointed in the FTC, sorry for Amazon, but thrilled for consumers and the free marketplace that Amazon is choosing to fight rather than acquiesce.

As I wrote earlier this year about the FTC’s case against Apple in testimony before the House Commerce Committee:

What’s particularly notable about the Apple case – and presumably will be in future technology enforcement actions predicated on unfairness – is the unique relevance of the attributes of the conduct at issue to its product. Unlike past, allegedly similar, cases, Apple’s conduct was not aimed at deceiving consumers, nor was it incidental to its product offering. But by challenging the practice, particularly without the balancing of harms required by Section 5, the FTC majority failed to act with restraint and substituted its own judgment, not about some manifestly despicable conduct, but about the very design of Apple’s products. This is the sort of area where regulatory humility is more — not less — important.

In failing to observe common sense limits in Apple, the FTC set a dangerous precedent that, given the agency’s enormous regulatory scope and the nature of technologically advanced products, could cause significant harm to consumers.

Here that failure is even more egregious. Amazon has built its entire business around the “1-click” concept — which consumers love — and implemented a host of notification and security processes hewing as much as possible to that design choice, but nevertheless taking account of the sorts of issues raised by in-app purchases. Moreover — and perhaps most significantly — it has implemented an innovative and comprehensive parental control regime (including the ability to turn off all in-app purchases) — Kindle Free Time — that arguably goes well beyond anything the FTC required in its Apple consent order. I use Kindle Free Time with my kids and have repeatedly claimed to anyone who will listen that it is the greatest thing since sliced bread. Other consumers must feel similarly. Finally, regardless of all of that, Amazon has nevertheless voluntarily implemented additional notification procedures intended to comply with the Apple settlement, even though it didn’t apply to Amazon.

If the FTC asserts, in the face of all of that, that it’s own vision of what “appropriate” in-app purchase protections must look like is the only one that suffices to meet the standard required by Section 5’s Unfairness language, it is either being egregiously disingenuous, horrifically vain, just plain obtuse, or some combination of the three.

As I wrote in my testimony:

The application of Section 5’s “unfair acts and practices” prong (the statute at issue in Apple) is circumscribed by Section 45(n) of the FTC Act, which, among other things, proscribes enforcement where injury is “not outweighed by countervailing benefits to consumers or to competition.”

And as Commissioner Wright noted in his dissent in the Apple case,

[T]he Commission effectively rejects an analysis of tradeoffs between the benefits of additional guidance and potential harm to some consumers or to competition from mandating guidance…. I respectfully disagree. These assumptions adopt too cramped a view of consumer benefits under the Unfairness Statement and, without more rigorous analysis to justify their application, are insufficient to establish the Commission’s burden.

We won’t know until we see the complaint whether the FTC has failed to undertake the balancing it neglected to perform in Apple and that it is required to perform under the statute. But it’s hard to believe that it could mount a case against Amazon in light of the facts if it did perform such a balancing. There’s no question that Amazon has implemented conscious and consumer-welfare-enhancing design choices here. The FTC’s effort to nevertheless mandate a different design (and put Amazon under a 20 year consent decree) based on a claim that Amazon’s choices impose greater harms than benefits on consumers seems manifestly unsupportable.

Such a claim almost certainly represents an abuse of the agency’s discretion, and I expect Amazon to trounce the FTC if this case goes to trial.

Over at the blog for the Center for the Protection of Intellectual Property, Richard Epstein has posted a lengthy essay that critiques the Obama Administration’s decision this past August 3 to veto the exclusion order issued by the International Trade Commission (ITC) in the Samsung v. Apple dispute filed there (ITC Investigation No. 794).  In his essay, The Dangerous Adventurism of the United States Trade Representative: Lifting the Ban against Apple Products Unnecessarily Opens a Can of Worms in Patent Law, Epstein rightly identifies how the 3-page letter issued to the ITC creates tremendous institutional and legal troubles in the name an unverified theory about “patent holdup” invoked in the name of an equally overgeneralized and vague belief in the “public interest.”

Here’s a taste:

The choice in question here thus boils down to whether the low rate of voluntary failure justifies the introduction of an expensive and error-filled judicial process that gives all parties the incentive to posture before a public agency that has more business than it can possibly handle. It is on this matter critical to remember that all standards issues are not the same as this particularly nasty, high-stake dispute between two behemoths whose vital interests make this a highly atypical standard-setting dispute. Yet at no point in the Trade Representative’s report is there any mention of how this mega-dispute might be an outlier. Indeed, without so much as a single reference to its own limited institutional role, the decision uses a short three-page document to set out a dogmatic position on issues on which there is, as I have argued elsewhere, good reason to be suspicious of the overwrought claims of the White House on a point that is, to say the least, fraught with political intrigue

Ironically, there was, moreover a way to write this opinion that could have narrowed the dispute and exposed for public deliberation a point that does require serious consideration. The thoughtful dissenting opinion of Commissioner Pinkert pointed the way. Commissioner Pinkert contended that the key factor weighing against granting Samsung an exclusion order is that Samsung in its FRAND negotiations demanded from Apple rights to use certain non standard-essential patents as part of the overall deal. In this view, the introduction of nonprice terms on nonstandard patterns represents an abuse of the FRAND standard. Assume for the moment that this contention is indeed correct, and the magnitude of the problem is cut a hundred or a thousand fold. This particular objection is easy to police and companies will know that they cannot introduce collateral matters into their negotiations over standards, at which point the massive and pointless overkill of the Trade Representative’s order is largely eliminated. No longer do we have to treat as gospel truth the highly dubious assertions about the behavior of key parties to standard-setting disputes.

But is Pinkert correct? On the one side, it is possible to invoke a monopoly leverage theory similar to that used in some tie-in cases to block this extension. But those theories are themselves tricky to apply, and the counter argument could well be that the addition of new terms expands the bargaining space and thus increases the likelihood of an agreement. To answer that question to my mind requires some close attention to the actual and customary dynamics of these negotiations, which could easily vary across different standards. I would want to reserve judgment on a question this complex, and I think that the Trade Representative would have done everyone a great service if he had addressed the hard question. But what we have instead is a grand political overgeneralization that reflects a simple-minded and erroneous view of current practices.

You can read the essay at CPIP’s blog here, or you can download a PDF of the white paper version here (please feel free to distribute digitally or in hardcopy).