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Over the last two decades, the United States government has taken the lead in convincing jurisdictions around the world to outlaw “hard core” cartel conduct.  Such cartel activity reduces economic welfare by artificially fixing prices and reducing the output of affected goods and services.  At the same, the United States has acted to promote international cooperation among government antitrust enforcers to detect, investigate, and punish cartels.

In 2017, however, the U.S. Court of Appeal for the Second Circuit (citing concerns of “international comity”) held that a Chinese export cartel that artificially raised the price of vitamin imports into the United States should be shielded from U.S. antitrust penalties—based merely on one brief from a Chinese government agency that said it approved of the conduct. The U.S. Supreme Court is set to review that decision later this year, in a case styled Animal Science Products, Inc., v. Hebei Welcome Pharmaceutical Co. Ltd.  By overturning the Second Circuit’s ruling (and disavowing the overly broad “comity doctrine” cited by that court), the Supreme Court would reaffirm the general duty of federal courts to apply federal law as written, consistent with the constitutional separation of powers.  It would also reaffirm the importance of the global fight against cartels, which has reflected consistent U.S. executive branch policy for decades (and has enjoyed strong support from the International Competition Network, the OECD, and the World Bank).

Finally, as a matter of economic policy, the Animal Science Products case highlights the very real harm that occurs when national governments tolerate export cartels that reduce economic welfare outside their jurisdictions, merely because domestic economic interests are not directly affected.  In order to address this problem, the U.S. government should negotiate agreements with other nations under which the signatory states would agree:  (1) not to legally defend domestic exporting entities that impose cartel harm in other jurisdictions; and (2) to cooperate more fully in rooting out harmful export-cartel activity, wherever it is found.

For a more fulsome discussion of the separation of powers, international relations, and economic policy issues raised by the Animal Science Products case, see my recent Heritage Foundation Legal Memorandum entitled The Supreme Court and Animal Science Products: Sovereignty and Export Cartels.

What happened

Today, following a six year investigation into Google’s business practices in India, the Competition Commission of India (CCI) issued its ruling.

Two things, in particular, are remarkable about the decision. First, while the CCI’s staff recommended a finding of liability on a litany of claims (the exact number is difficult to infer from the Commission’s decision, but it appears to be somewhere in the double digits), the Commission accepted its staff’s recommendation on only three — and two of those involve conduct no longer employed by Google.

Second, nothing in the Commission’s finding of liability or in the remedy it imposes suggests it approaches the issue as the EU does. To be sure, the CCI employs rhetoric suggesting that “search bias” can be anticompetitive. But its focus remains unwaveringly on the welfare of the consumer, not on the hyperbolic claims of Google’s competitors.

What didn’t happen

In finding liability on only a single claim involving ongoing practices — the claim arising from Google’s “unfair” placement of its specialized flight search (Google Flights) results — the Commission also roundly rejected a host of other claims (more than once with strong words directed at its staff for proposing such woefully unsupported arguments). Among these are several that have been raised (and unanimously rejected) by competition regulators elsewhere in the world. These claims related to a host of Google’s practices, including:

  • Search bias involving the treatment of specialized Google content (like Google Maps, YouTube, Google Reviews, etc.) other than Google Flights
  • Search bias involving the display of Universal Search results (including local search, news search, image search, etc.), except where these results are fixed to a specific position on every results page (as was the case in India before 2010), instead of being inserted wherever most appropriate in context
  • Search bias involving OneBox results (instant answers to certain queries that are placed at the top of search results pages), even where answers are drawn from Google’s own content and specific, licensed sources (rather than from crawling the web)
  • Search bias involving sponsored, vertical search results (e.g., Google Shopping results) other than Google Flights. These results are not determined by the same algorithm that returns organic results, but are instead more like typical paid search advertising results that sometimes appear at the top of search results pages. The Commission did find that Google’s treatment of its Google Flight results (another form of sponsored result) violated India’s competition laws
  • The operation of Google’s advertising platform (AdWords), including the use of a “Quality Score” in its determination of an ad’s relevance (something Josh Wright and I discuss at length here)
  • Google’s practice of allowing advertisers to bid on trademarked keywords
  • Restrictions placed by Google upon the portability of advertising campaign data to other advertising platforms through its AdWords API
  • Distribution agreements that set Google as the default (but not exclusive) search engine on certain browsers
  • Certain restrictions in syndication agreements with publishers (websites) through which Google provides search and/or advertising (Google’s AdSense offering). The Commission found that negotiated search agreements that require Google to be the exclusive search provider on certain sites did violate India’s competition laws. It should be noted, however, that Google has very few of these agreements, and no longer enters into them, so the finding is largely historical. All of the other assertions regarding these agreements (and there were numerous claims involving a number of clauses in a range of different agreements) were rejected by the Commission.

Just like competition authorities in the US, Canada, and Taiwan that have properly focused on consumer welfare in their Google investigations, the CCI found important consumer benefits from these practices that outweigh any inconveniences they may impose on competitors. And, just as in those jurisdictions, all of them were rejected by the Commission.

Still improperly assessing Google’s dominance

The biggest problem with the CCI’s decision is its acceptance — albeit moderated in important ways — of the notion that Google owes a special duty to competitors given its position as an alleged “gateway” to the Internet:

In the present case, since Google is the gateway to the internet for a vast majority of internet users, due to its dominance in the online web search market, it is under an obligation to discharge its special responsibility. As Google has the ability and the incentive to abuse its dominant position, its “special responsibility” is critical in ensuring not only the fairness of the online web search and search advertising markets, but also the fairness of all online markets given that these are primarily accessed through search engines. (para 202)

As I’ve discussed before, a proper analysis of the relevant markets in which Google operates would make clear that Google is beset by actual and potential competitors at every turn. Access to consumers by advertisers, competing search services, other competing services, mobile app developers, and the like is readily available. The lines between markets drawn by the CCI are based on superficial distinctions that are of little importance to the actual relevant market.

Consider, for example: Users seeking product information can get it via search, but also via Amazon and Facebook; advertisers can place ad copy and links in front of millions of people on search results pages, and they can also place them in front of millions of people on Facebook and Twitter. Meanwhile, many specialized search competitors like Yelp receive most of their traffic from direct navigation and from their mobile apps. In short, the assumption of market dominance made by the CCI (and so many others these days) is based on a stilted conception of the relevant market, as Google is far from the only channel through which competitors can reach consumers.

The importance of innovation in the CCI’s decision

Of course, it’s undeniable that Google is an important mechanism by which competitors reach consumers. And, crucially, nowhere did the CCI adopt Google’s critics’ and competitors’ frequently asserted position that Google is, in effect, an “essential facility” requiring extremely demanding limitations on its ability to control its product when doing so might impede its rivals.

So, while the CCI defines the relevant markets and adopts legal conclusions that confer special importance on Google’s operation of its general search results pages, it stops short of demanding that Google treat competitors on equal terms to its own offerings, as would typically be required of essential facilities (or their close cousin, public utilities).

Significantly, the Commission weighs the imposition of even these “special responsibilities” against the effects of such duties on innovation, particularly with respect to product design.

The CCI should be commended for recognizing that any obligation imposed by antitrust law on a dominant company to refrain from impeding its competitors’ access to markets must stop short of requiring the company to stop innovating, even when its product innovations might make life difficult for its competitors.

Of course, some product design choices can be, on net, anticompetitive. But innovation generally benefits consumers, and it should be impeded only where doing so clearly results in net consumer harm. Thus:

[T]he Commission is cognizant of the fact that any intervention in technology markets has to be carefully crafted lest it stifles innovation and denies consumers the benefits that such innovation can offer. This can have a detrimental effect on economic welfare and economic growth, particularly in countries relying on high growth such as India…. [P]roduct design is an important and integral dimension of competition and any undue intervention in designs of SERP [Search Engine Results Pages] may affect legitimate product improvements resulting in consumer harm. (paras 203-04).

As a consequence of this cautious approach, the CCI refused to accede to its staff’s findings of liability based on Google’s treatment of its vertical search results without considering how Google’s incorporation of these specialized results improved its product for consumers. Thus, for example:

The Commission is of opinion that requiring Google to show third-party maps may cause a delay in response time (“latency”) because these maps reside on third-party servers…. Further, requiring Google to show third-party maps may break the connection between Google’s local results and the map…. That being so, the Commission is of the view that no case of contravention of the provisions of the Act is made out in Google showing its own maps along with local search results. The Commission also holds that the same consideration would apply for not showing any other specialised result designs from third parties. (para 224 (emphasis added))

The CCI’s laudable and refreshing focus on consumer welfare

Even where the CCI determined that Google’s current practices violate India’s antitrust laws (essentially only with respect to Google Flights), it imposed a remedy that does not demand alteration of the overall structure of Google’s search results, nor its algorithmic placement of those results. In fact, the most telling indication that India’s treatment of product design innovation embodies a consumer-centric approach markedly different from that pushed by Google’s competitors (and adopted by the EU) is its remedy.

Following its finding that

[p]rominent display and placement of Commercial Flight Unit with link to Google’s specialised search options/ services (Flight) amounts to an unfair imposition upon users of search services as it deprives them of additional choices (para 420),

the CCI determined that the appropriate remedy for this defect was:

So far as the contravention noted by the Commission in respect of Flight Commercial Unit is concerned, the Commission directs Google to display a disclaimer in the commercial flight unit box indicating clearly that the “search flights” link placed at the bottom leads to Google’s Flights page, and not the results aggregated by any other third party service provider, so that users are not misled. (para 422 (emphasis added))

Indeed, what is most notable — and laudable — about the CCI’s decision is that both the alleged problem, as well as the proposed remedy, are laser-focused on the effect on consumers — not the welfare of competitors.

Where the EU’s recent Google Shopping decision considers that this sort of non-neutral presentation of Google search results harms competitors and demands equal treatment by Google of rivals seeking access to Google’s search results page, the CCI sees instead that non-neutral presentation of results could be confusing to consumers. It does not demand that Google open its doors to competitors, but rather that it more clearly identify when its product design prioritizes Google’s own content rather than determine priority based on its familiar organic search results algorithm.

This distinction is significant. For all the language in the decision asserting Google’s dominance and suggesting possible impediments to competition, the CCI does not, in fact, view Google’s design of its search results pages as a contrivance intended to exclude competitors from accessing markets.

The CCI’s remedy suggests that it has no problem with Google maintaining control over its search results pages and determining what results, and in what order, to serve to consumers. Its sole concern, rather, is that Google not get a leg up at the expense of consumers by misleading them into thinking that its product design is something that it is not.

Rather than dictate how Google should innovate or force it to perpetuate an outdated design in the name of preserving access by competitors bent on maintaining the status quo, the Commission embraces the consumer benefits of Google’s evolving products, and seeks to impose only a narrowly targeted tweak aimed directly at the quality of consumers’ interactions with Google’s products.

Conclusion

As some press accounts of the CCI’s decision trumpet, the Commission did impose liability on Google for abuse of a dominant position. But its similarity with the EU’s abuse of dominance finding ends there. The CCI rejected many more claims than it adopted, and it carefully tailored its remedy to the welfare of consumers, not the lamentations of competitors. Unlike the EU, the CCI’s finding of a violation is tempered by its concern for avoiding harmful constraints on innovation and product design, and its remedy makes this clear. Whatever the defects of India’s decision, it offers a welcome return to consumer-centric antitrust.

The terms of the United Kingdom’s (UK) exit from the European Union (EU) – “Brexit” – are of great significance not just to UK and EU citizens, but for those in the United States and around the world who value economic liberty (see my Heritage Foundation memorandum giving the reasons why, here).

If Brexit is to promote economic freedom and enhanced economic welfare, Brexit negotiations between the UK and the EU must not limit the ability of the United Kingdom to pursue (1) efficiency-enhancing regulatory reform and (2) trade liberalizing agreements with non-EU nations.  These points are expounded upon in a recent economic study (The Brexit Inflection Point) by the non-profit UK think tank the Legatum Institute, which has produced an impressive body of research on the benefits of Brexit, if implemented in a procompetitive, economically desirable fashion.  (As a matter of full disclosure, I am a member of Legatum’s “Special Trade Commission,” which “seeks to re-focus the public discussion on Brexit to a positive conversation on opportunities, rather than challenges, while presenting empirical evidence of the dangers of not following an expansive trade negotiating path.”  Members of the Special Trade Commission are unpaid – they serve on a voluntary pro bono basis.)

Unfortunately, however, leading UK press commentators have urged the UK Government to accede to a full harmonization of UK domestic regulations and trade policy with the EU.  Such a deal would be disastrous.  It would prevent the UK from entering into mutually beneficial trade liberalization pacts with other nations or groups of nations (e.g., with the U.S. and with the members of the Transpacific Partnership (TPP) trade agreement), because such arrangements by necessity would lead to a divergence with EU trade strictures.  It would also preclude the UK from unilaterally reducing harmful regulatory burdens that are a byproduct of economically inefficient and excessive EU rules.  In short, it would be antithetical to economic freedom and economic welfare.

Notably, in a November 30 article (Six Impossible Notions About “Global Britain”), a well-known business journalist, Martin Wolf of the Financial Times, sharply criticized The Brexit Inflection Point’s recommendation that the UK should pursue trade and regulatory policies that would diverge from EU standards.  Notably, Wolf characterized as an “impossible thing” Legatum’s point that the UK should not “’allow itself to be bound by the EU’s negotiating mandate.’  We all now know this is infeasible.  The EU holds the cards and it knows it holds the cards. The Legatum authors still do not.”

Shanker Singham, Director of Economic Policy and Prosperity Studies at Legatum, brilliantly responded to Wolf’s critique in a December 4 article (published online by CAPX) entitled A Narrow-Minded Brexit Is Doomed to Fail.  Singham’s trenchant analysis merits being set forth in its entirety (by permission of the author):

“Last week, the Financial Times’s chief economics commentator, Martin Wolf, dedicated his column to criticising The Brexit Inflection Point, a report for the Legatum Institute in which Victoria Hewson, Radomir Tylecote and I discuss what would constitute a good end state for the UK as it seeks to exercise an independent trade and regulatory policy post Brexit, and how we get from here to there.

We write these reports to advance ideas that we think will help policymakers as they tackle the single biggest challenge this country has faced since the Second World War. We believe in a market place of ideas, and we welcome challenge. . . .

[W]e are thankful that Martin Wolf, an eminent economist, has chosen to engage with the substance of our arguments. However, his article misunderstands the nature of modern international trade negotiations, as well as the reality of the European Union’s regulatory system – and so his claim that, like the White Queen, we “believe in impossible things” simply doesn’t stack up.

Mr Wolf claims there are six impossible things that we argue. We will address his rebuttals in turn.

But first, in discussions about the UK’s trade policy, it is important to bear in mind that the British government is currently discussing the manner in which it will retake its independent WTO membership. This includes agricultural import quotas, and its WTO rectification processes with other WTO members.

If other countries believe that the UK will adopt the position of maintaining regulatory alignment with the EU, as advocated by Mr Wolf and others, the UK’s negotiating strategy would be substantially weaker. It would quite wrongly suggest that the UK will be unable to lower trade barriers and offer the kind of liberalisation that our trading partners seek and that would work best for the UK economy. This could negatively impact both the UK and the EU’s ongoing discussions in the WTO.

Has the EU’s trading system constrained growth in the World?

The first impossible thing Mr Wolf claims we argue is that the EU system of protectionism and harmonised regulation has constrained economic growth for Britain and the world. He is right to point out that the volume of world trade has increased, and the UK has, of course, experienced GDP growth while a member of the EU.

However, as our report points out, the EU’s prescriptive approach to regulation, especially in the recent past (for example, its approach on data protection, audio-visual regulation, the restrictive application of the precautionary principle, REACH chemicals regulation, and financial services regulations to name just a few) has led to an increase in anti-competitive regulation and market distortions that are wealth destructive.

As the OECD notes in various reports on regulatory reform, regulation can act as a behind-the-border barrier to trade and impede market openness for trade and investment. Inefficient regulation imposes unnecessary burdens on firms, increases barriers to entry, impacts on competition and incentives for innovation, and ultimately hurts productivity. The General Data Protection Regulation (GDPR) is an example of regulation that is disproportionate to its objectives; it is highly prescriptive and imposes substantial compliance costs for business that want to use data to innovate.

Rapid growth during the post-war period is in part thanks to the progressive elimination of border trade barriers. But, in terms of wealth creation, we are no longer growing at that rate. Since before the financial crisis, measures of actual wealth creation (not GDP which includes consumer and government spending) such as industrial output have stalled, and the number of behind-the-border regulatory barriers has been increasing.

The global trading system is in difficulty. The lack of negotiation of a global trade round since the Uruguay Round, the lack of serious services liberalisation in either the built-in agenda of the WTO or sectorally following on from the Basic Telecoms Agreement and its Reference Paper on Competition Safeguards in 1997 has led to an increase in behind-the-border barriers and anti-competitive distortions and regulation all over the world. This stasis in international trade negotiations is an important contributory factor to what many economists have talked about as a “new normal” of limited growth, and a global decline in innovation.

Meanwhile the EU has sought to force its regulatory system on the rest of the world (the GDPR is an example of this). If it succeeds, the result would be the kind of wealth destruction that pushes more people into poverty. It is against this backdrop that the UK is negotiating with both the EU and the rest of the world.

The question is whether an independent UK, the world’s sixth biggest economy and second biggest exporter of services, is able to contribute to improving the dynamics of the global economic architecture, which means further trade liberalisation. The EU is protectionist against outside countries, which is antithetical to the overall objectives of the WTO. This is true in agriculture and beyond. For example, the EU imposes tariffs on cars at four times the rate applied by the US, while another large auto manufacturing country, Japan, has unilaterally removed its auto tariffs.

In addition, the EU27 represents a declining share of UK exports, which is rather counter-intuitive for a Customs Union and single market. In 1999, the EU represented 55 per cent of UK exports, and by 2016, this was 43 per cent. That said, the EU will remain an important, albeit declining, market for the UK, which is why we advocate a comprehensive free trade agreement with it.

Can the UK secure meaningful regulatory recognition from the EU without being identical to it?

Second, Mr Wolf suggests that regulatory recognition between the UK and EU is possible only if there is harmonisation or identical regulation between the UK and EU.

This is at odds with WTO practice, stretching back to its rules on domestic laws and regulation as encapsulated in Article III of the GATT and Article VI of the GATS, and as expressed in the Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary (SPS) agreements.

This is the critical issue. The direction of travel of international trade thinking is towards countries recognising each other’s regulatory systems if they achieve the same ultimate goal of regulation, even if the underlying regulation differs, and to regulate in ways that are least distortive to international trade and competition. There will be areas where this level of recognition will not be possible, in which case UK exports into the EU will of course have to satisfy the standards of the EU. But even here we can mitigate the trade costs to some extent by Mutual Recognition Agreements on conformity assessment and market surveillance.

Had the US taken the view that it would not receive regulatory recognition unless their regulatory systems were the same, the recent agreement on prudential measures in insurance and reinsurance services between the EU and US would not exist. In fact this point highlights the crucial issue which the UK must successfully negotiate, and one in which its interests are aligned with other countries and with the direction of travel of the WTO itself. The TBT and SPS agreements broadly provide that mutual recognition should not be denied where regulatory goals are aligned but technical regulation differs.

Global trade and regulatory policy increasingly looks for regulation that promotes competition. The EU is on a different track, as the GDPR demonstrates. This is the reason that both the Canada-EU agreement (CETA) and the EU offer in the Trade in Services agreement (TiSA) does not include new services. If GDPR were to become the global standard, trade in data would be severely constrained, slowing the development of big data solutions, the fourth industrial revolution, and new services trade generally.

As many firms recognise, this would be extremely damaging to global prosperity. In arguing that regulatory recognition is only available if the UK is fully harmonised with the EU, Mr Wolf may be in harmony with the EU approach to regulation. But that is exactly the approach that is damaging the global trading environment.

Can the UK exercise trade policy leadership?

Third, Mr Wolf suggests that other countries do not, and will not, look to the UK for trade leadership. He cites the US’s withdrawal from the trade negotiating space as an example. But surely the absence of the world’s biggest services exporter means that the world’s second biggest exporter of services will be expected to advocate for its own interests, and argue for greater services liberalisation.

Mr Wolf believes that the UK is a second-rank power in decline. We take a different view of the world’s sixth biggest economy, the financial capital of the world and the second biggest exporter of services. As former New Zealand High Commissioner, Sir Lockwood Smith, has said, the rest of the world does not see the UK as the UK too often seems to see itself.

The global companies that have their headquarters in the UK do not see things the same way as Mr Wolf. In fact, the lack of trade leadership since 1997 means that a country with significant services exports would be expected to show some leadership.

Mr Wolf’s point is that far from seeking to grandiosely lead global trade negotiations, the UK should stick to its current knitting, which consists of its WTO rectification, and includes the negotiation of its agricultural import quotas and production subsidies in agriculture. This is perhaps the most concerning part of his argument. Yes, the UK must rectify its tariff schedules, but for that process to be successful, especially on agricultural import quotas, it must be able to demonstrate to its partners that it will be able to grant further liberalisation in the near term future. If it can’t, then its trading partners will have no choice but to demand as much liberalisation as they can secure right now in the rectification process.

This will complicate that process, and cause damage to the UK as it takes up its independent WTO membership. Those WTO partners who see the UK as vulnerable on this point will no doubt see validation in Mr Wolf’s article and assume it means that no real liberalisation will be possible from the UK. The EU should note that complicating this process for the UK will not help the EU in its own WTO processes, where it is vulnerable.

Trade negotiations are dynamic not static and the UK must act quickly

Fourth, Mr Wolf suggests that the UK is not under time pressure to “escape from the EU”.  This statement does not account for how international trade negotiations work in practice. In order for countries to cooperate with the UK on its WTO rectification, and its TRQ negotiations, as well to seriously negotiate with it, they have to believe that the UK will have control over tariff schedules and regulatory autonomy from day one of Brexit (even if we may choose not to make changes to it for an implementation period).

If non-EU countries think that the UK will not be able to exercise its freedom for several years, they will simply demand their pound of flesh in the negotiations now, and get on with the rest of their trade policy agenda. Trade negotiations are not static. The US executive could lose trade-negotiating authority in the summer of next year if the NAFTA renegotiation is not going well. Other countries will seek to accede to the Trans Pacific Partnership (TPP). China is moving forward with its Regional Cooperation and Economic Partnership, which does not meaningfully touch on domestic regulatory barriers. Much as we might criticise Donald Trump, his administration has expressed strong political will for a UK-US agreement, and in that regard has broken with traditional US trade policy thinking. The UK has an opportunity to strike and must take it.

The UK should prevail on the EU to allow Customs Agencies to be inter-operable from day one

Fifth, with respect to the challenges raised on customs agencies working together, our report argued that UK customs and the customs agencies of the EU member states should discuss customs arrangements at a practical and technical level now. What stands in the way of this is the EU’s stubbornness. Customs agencies are in regular contact on a business-as-usual basis, so the inability of UK and member-state customs agencies to talk to each other about the critical issue of new arrangements would seem to border on negligence. Of course, the EU should allow member states to have these critical conversations now.  Given the importance of customs agencies interoperating smoothly from day one, the UK Government must press its case with the European Commission to allow such conversations to start happening as a matter of urgency.

Does the EU hold all the cards?

Sixth, Mr Wolf argues that the EU holds all the cards and knows it holds all the cards, and therefore disagrees with our claim that the the UK should “not allow itself to be bound by the EU’s negotiating mandate”. As with his other claims, Mr Wolf finds himself agreeing with the EU’s negotiators. But that does not make him right.

While absence of a trade deal will of course damage UK industries, the cost to EU industries is also very significant. Beef and dairy in Ireland, cars and dairy in Bavaria, cars in Catalonia, textiles and dairy in Northern Italy – all over Europe (and in politically sensitive areas), industries stands to lose billions of Euros and thousands of jobs. This is without considering the impact of no financial services deal, which would increase the cost of capital in the EU, aborting corporate transactions and raising the cost of the supply chain. The EU has chosen a mandate that risks neither party getting what it wants.

The notion that the EU is a masterful negotiator, while the UK’s negotiators are hopeless is not the global view of the EU and the UK. Far from it. The EU in international trade negotiations has a reputation for being slow moving, lacking in creative vision, and unable to conclude agreements. Indeed, others have generally gone to the UK when they have been met with intransigence in Brussels.

What do we do now?

Mr Wolf’s argument amounts to a claim that the UK is not capable of the kind of further and deeper liberalisation that its economy would suggest is both possible and highly desirable both for the UK and the rest of the world. According to Mr Wolf, the UK can only consign itself to a highly aligned regulatory orbit around the EU, unable to realise any other agreements, and unable to influence the regulatory system around which it revolves, even as that system becomes ever more prescriptive and anti-competitive. Such a position is at odds with the facts and would guarantee a poor result for the UK and also cause opportunities to be lost for the rest of the world.

In all of our [Legatum Brexit-related] papers, we have started from the assumption that the British people have voted to leave the EU, and the government is implementing that outcome. We have then sought to produce policy recommendations based on what would constitute a good outcome as a result of that decision. This can be achieved only if we maximise the opportunities and minimise the disruptions.

We all recognise that the UK has embarked on a very difficult process. But there is a difference between difficult and impossible. There is also a difference between tasks that must be done and take time, and genuine negotiation points. We welcome the debate that comes from constructive challenge of our proposals; and we ask in turn that those who criticise us suggest alternative plans that might achieve positive outcomes. We look forward to the opportunity of a broader debate so that collectively the country can find the best path forward.”

 

This week the FCC will vote on Chairman Ajit Pai’s Restoring Internet Freedom Order. Once implemented, the Order will rescind the 2015 Open Internet Order and return antitrust and consumer protection enforcement to primacy in Internet access regulation in the U.S.

In anticipation of that, earlier this week the FCC and FTC entered into a Memorandum of Understanding delineating how the agencies will work together to police ISPs. Under the MOU, the FCC will review informal complaints regarding ISPs’ disclosures about their blocking, throttling, paid prioritization, and congestion management practices. Where an ISP fails to make the proper disclosures, the FCC will take enforcement action. The FTC, for its part, will investigate and, where warranted, take enforcement action against ISPs for unfair, deceptive, or otherwise unlawful acts.

Critics of Chairman Pai’s plan contend (among other things) that the reversion to antitrust-agency oversight of competition and consumer protection in telecom markets (and the Internet access market particularly) would be an aberration — that the US will become the only place in the world to move backward away from net neutrality rules and toward antitrust law.

But this characterization has it exactly wrong. In fact, much of the world has been moving toward an antitrust-based approach to telecom regulation. The aberration was the telecom-specific, common-carrier regulation of the 2015 Open Internet Order.

The longstanding, global transition from telecom regulation to antitrust enforcement

The decade-old discussion around net neutrality has morphed, perhaps inevitably, to join the larger conversation about competition in the telecom sector and the proper role of antitrust law in addressing telecom-related competition issues. Today, with the latest net neutrality rules in the US on the chopping block, the discussion has grown more fervent (and even sometimes inordinately violent).

On the one hand, opponents of the 2015 rules express strong dissatisfaction with traditional, utility-style telecom regulation of innovative services, and view the 2015 rules as a meritless usurpation of antitrust principles in guiding the regulation of the Internet access market. On the other hand, proponents of the 2015 rules voice skepticism that antitrust can actually provide a way to control competitive harms in the tech and telecom sectors, and see the heavy hand of Title II, common-carrier regulation as a necessary corrective.

While the evidence seems clear that an early-20th-century approach to telecom regulation is indeed inappropriate for the modern Internet (see our lengthy discussions on this point, e.g., here and here, as well as Thom Lambert’s recent post), it is perhaps less clear whether antitrust, with its constantly evolving, common-law foundation, is up to the task.

To answer that question, it is important to understand that for decades, the arc of telecom regulation globally has been sweeping in the direction of ex post competition enforcement, and away from ex ante, sector-specific regulation.

Howard Shelanski, who served as President Obama’s OIRA Administrator from 2013-17, Director of the Bureau of Economics at the FTC from 2012-2013, and Chief Economist at the FCC from 1999-2000, noted in 2002, for instance, that

[i]n many countries, the first transition has been from a government monopoly to a privatizing entity controlled by an independent regulator. The next transformation on the horizon is away from the independent regulator and towards regulation through general competition law.

Globally, nowhere perhaps has this transition been more clearly stated than in the EU’s telecom regulatory framework which asserts:

The aim is to progressively reduce ex ante sector-specific regulation progressively as competition in markets develops and, ultimately, for electronic communications [i.e., telecommunications] to be governed by competition law only. (Emphasis added.)

To facilitate the transition and quash regulatory inconsistencies among member states, the EC identified certain markets for national regulators to decide, consistent with EC guidelines on market analysis, whether ex ante obligations were necessary in their respective countries due to an operator holding “significant market power.” In 2003 the EC identified 18 such markets. After observing technological and market changes over the next four years, the EC reduced that number to seven in 2007 and, in 2014, the number was further reduced to four markets, all wholesale markets, that could potentially require ex ante regulation.

It is important to highlight that this framework is not uniquely achievable in Europe because of some special trait in its markets, regulatory structure, or antitrust framework. Determining the right balance of regulatory rules and competition law, whether enforced by a telecom regulator, antitrust regulator, or multi-purpose authority (i.e., with authority over both competition and telecom) means choosing from a menu of options that should be periodically assessed to move toward better performance and practice. There is nothing jurisdiction-specific about this; it is simply a matter of good governance.

And since the early 2000s, scholars have highlighted that the US is in an intriguing position to transition to a merged regulator because, for example, it has both a “highly liberalized telecommunications sector and a well-established body of antitrust law.” For Shelanski, among others, the US has been ready to make the transition since 2007.

Far from being an aberrant move away from sound telecom regulation, the FCC’s Restoring Internet Freedom Order is actually a step in the direction of sensible, antitrust-based telecom regulation — one that many parts of the world have long since undertaken.

How antitrust oversight of telecom markets has been implemented around the globe

In implementing the EU’s shift toward antitrust oversight of the telecom sector since 2003, agencies have adopted a number of different organizational reforms.

Some telecom regulators assumed new duties over competition — e.g., Ofcom in the UK. Other non-European countries, including, e.g., Mexico have also followed this model.

Other European Member States have eliminated their telecom regulator altogether. In a useful case study, Roslyn Layton and Joe Kane outline Denmark’s approach, which includes disbanding its telecom regulator and passing the regulation of the sector to various executive agencies.

Meanwhile, the Netherlands and Spain each elected to merge its telecom regulator into its competition authority. New Zealand has similarly adopted this framework.

A few brief case studies will illuminate these and other reforms:

The Netherlands

In 2013, the Netherlands merged its telecom, consumer protection, and competition regulators to form the Netherlands Authority for Consumers and Markets (ACM). The ACM’s structure streamlines decision-making on pending industry mergers and acquisitions at the managerial level, eliminating the challenges arising from overlapping agency reviews and cross-agency coordination. The reform also unified key regulatory methodologies, such as creating a consistent calculation method for the weighted average cost of capital (WACC).

The Netherlands also claims that the ACM’s ex post approach is better able to adapt to “technological developments, dynamic markets, and market trends”:

The combination of strength and flexibility allows for a problem-based approach where the authority first engages in a dialogue with a particular market player in order to discuss market behaviour and ensure the well-functioning of the market.

The Netherlands also cited a significant reduction in the risk of regulatory capture as staff no longer remain in positions for long tenures but rather rotate on a project-by-project basis from a regulatory to a competition department or vice versa. Moving staff from team to team has also added value in terms of knowledge transfer among the staff. Finally, while combining the cultures of each regulator was less difficult than expected, the government reported that the largest cause of consternation in the process was agreeing on a single IT system for the ACM.

Spain

In 2013, Spain created the National Authority for Markets and Competition (CNMC), merging the National Competition Authority with several sectoral regulators, including the telecom regulator, to “guarantee cohesion between competition rulings and sectoral regulation.” In a report to the OECD, Spain stated that moving to the new model was necessary because of increasing competition and technological convergence in the sector (i.e., the ability for different technologies to offer the substitute services (like fixed and wireless Internet access)). It added that integrating its telecom regulator with its competition regulator ensures

a predictable business environment and legal certainty [i.e., removing “any threat of arbitrariness”] for the firms. These two conditions are indispensable for network industries — where huge investments are required — but also for the rest of the business community if investment and innovation are to be promoted.

Like in the Netherlands, additional benefits include significantly lowering the risk of regulatory capture by “preventing the alignment of the authority’s performance with sectoral interests.”

Denmark

In 2011, the Danish government unexpectedly dismantled the National IT and Telecom Agency and split its duties between four regulators. While the move came as a surprise, it did not engender national debate — vitriolic or otherwise — nor did it receive much attention in the press.

Since the dismantlement scholars have observed less politicization of telecom regulation. And even though the competition authority didn’t take over telecom regulatory duties, the Ministry of Business and Growth implemented a light touch regime, which, as Layton and Kane note, has helped to turn Denmark into one of the “top digital nations” according to the International Telecommunication Union’s Measuring the Information Society Report.

New Zealand

The New Zealand Commerce Commission (NZCC) is responsible for antitrust enforcement, economic regulation, consumer protection, and certain sectoral regulations, including telecommunications. By combining functions into a single regulator New Zealand asserts that it can more cost-effectively administer government operations. Combining regulatory functions also created spillover benefits as, for example, competition analysis is a prerequisite for sectoral regulation, and merger analysis in regulated sectors (like telecom) can leverage staff with detailed and valuable knowledge. Similar to the other countries, New Zealand also noted that the possibility of regulatory capture “by the industries they regulate is reduced in an agency that regulates multiple sectors or also has competition and consumer law functions.”

Advantages identified by other organizations

The GSMA, a mobile industry association, notes in its 2016 report, Resetting Competition Policy Frameworks for the Digital Ecosystem, that merging the sector regulator into the competition regulator also mitigates regulatory creep by eliminating the prodding required to induce a sector regulator to roll back regulation as technological evolution requires it, as well as by curbing the sector regulator’s temptation to expand its authority. After all, regulators exist to regulate.

At the same time, it’s worth noting that eliminating the telecom regulator has not gone off without a hitch in every case (most notably, in Spain). It’s important to understand, however, that the difficulties that have arisen in specific contexts aren’t endemic to the nature of competition versus telecom regulation. Nothing about these cases suggests that economic-based telecom regulations are inherently essential, or that replacing sector-specific oversight with antitrust oversight can’t work.

Contrasting approaches to net neutrality in the EU and New Zealand

Unfortunately, adopting a proper framework and implementing sweeping organizational reform is no guarantee of consistent decisionmaking in its implementation. Thus, in 2015, the European Parliament and Council of the EU went against two decades of telecommunications best practices by implementing ex ante net neutrality regulations without hard evidence of widespread harm and absent any competition analysis to justify its decision. The EU placed net neutrality under the universal service and user’s rights prong of the regulatory framework, and the resulting rules lack coherence and economic rigor.

BEREC’s net neutrality guidelines, meant to clarify the EU regulations, offered an ambiguous, multi-factored standard to evaluate ISP practices like free data programs. And, as mentioned in a previous TOTM post, whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs.

Notably, while BEREC has not provided clear guidance, a 2017 report commissioned by the EU’s Directorate-General for Competition weighing competitive benefits and harms of zero rating concluded “there appears to be little reason to believe that zero-rating gives rise to competition concerns.”

The report also provides an ex post framework for analyzing such deals in the context of a two-sided market by assessing a deal’s impact on competition between ISPs and between content and application providers.

The EU example demonstrates that where a telecom regulator perceives a novel problem, competition law, grounded in economic principles, brings a clear framework to bear.

In New Zealand, if a net neutrality issue were to arise, the ISP’s behavior would be examined under the context of existing antitrust law, including a determination of whether the ISP is exercising market power, and by the Telecommunications Commissioner, who monitors competition and the development of telecom markets for the NZCC.

Currently, there is broad consensus among stakeholders, including a local content providers and networking equipment manufacturers, that there is no need for ex ante regulation of net neutrality. Wholesale ISP, Chorus, states, for example, that “in any event, the United States’ transparency and non-interference requirements [from the 2015 OIO] are arguably covered by the TCF Code disclosure rules and the provisions of the Commerce Act.”

The TCF Code is a mandatory code of practice establishing requirements concerning the information ISPs are required to disclose to consumers about their services. For example, ISPs must disclose any arrangements that prioritize certain traffic. Regarding traffic management, complaints of unfair contract terms — when not resolved by a process administered by an independent industry group — may be referred to the NZCC for an investigation in accordance with the Fair Trading Act. Under the Commerce Act, the NZCC can prohibit anticompetitive mergers, or practices that substantially lessen competition or that constitute price fixing or abuse of market power.

In addition, the NZCC has been active in patrolling vertical agreements between ISPs and content providers — precisely the types of agreements bemoaned by Title II net neutrality proponents.

In February 2017, the NZCC blocked Vodafone New Zealand’s proposed merger with Sky Network (combining Sky’s content and pay TV business with Vodafone’s broadband and mobile services) because the Commission concluded that the deal would substantially lessen competition in relevant broadband and mobile services markets. The NZCC was

unable to exclude the real chance that the merged entity would use its market power over premium live sports rights to effectively foreclose a substantial share of telecommunications customers from rival telecommunications services providers (TSPs), resulting in a substantial lessening of competition in broadband and mobile services markets.

Such foreclosure would result, the NZCC argued, from exclusive content and integrated bundles with features such as “zero rated Sky Sport viewing over mobile.” In addition, Vodafone would have the ability to prevent rivals from creating bundles using Sky Sport.

The substance of the Vodafone/Sky decision notwithstanding, the NZCC’s intervention is further evidence that antitrust isn’t a mere smokescreen for regulators to do nothing, and that regulators don’t need to design novel tools (such as the Internet conduct rule in the 2015 OIO) to regulate something neither they nor anyone else knows very much about: “not just the sprawling Internet of today, but also the unknowable Internet of tomorrow.” Instead, with ex post competition enforcement, regulators can allow dynamic innovation and competition to develop, and are perfectly capable of intervening — when and if identifiable harm emerges.

Conclusion

Unfortunately for Title II proponents — who have spent a decade at the FCC lobbying for net neutrality rules despite a lack of actionable evidence — the FCC is not acting without precedent by enabling the FTC’s antitrust and consumer protection enforcement to police conduct in Internet access markets. For two decades, the object of telecommunications regulation globally has been to transition away from sector-specific ex ante regulation to ex post competition review and enforcement. It’s high time the U.S. got on board.

Unexpectedly, on the day that the white copy of the upcoming repeal of the 2015 Open Internet Order was published, a mobile operator in Portugal with about 7.5 million subscribers is garnering a lot of attention. Curiously, it’s not because Portugal is a beautiful country (Iker Casillas’ Instagram feed is dope) nor because Portuguese is a beautiful romance language.

Rather it’s because old-fashioned misinformation is being peddled to perpetuate doomsday images that Portuguese ISPs have carved the Internet into pieces — and if the repeal of the 2015 Open Internet Order passes, the same butchery is coming to an AT&T store near you.

Much ado about data

This tempest in the teacup is about mobile data plans, specifically the ability of mobile subscribers to supplement their data plan (typically ranging from 200 MB to 3 GB per month) with additional 10 GB data packages containing specific bundles of apps – messaging apps, social apps, video apps, music apps, and email and cloud apps. Each additional 10 GB data package costs EUR 6.99 per month and Meo (the mobile operator) also offers its own zero rated apps. Similar plans have been offered in Portugal since at least 2012.

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These data packages are a clear win for mobile subscribers, especially pre-paid subscribers who tend to be at a lower income level than post-paid subscribers. They allow consumers to customize their plan beyond their mobile broadband subscription, enabling them to consume data in ways that are better attuned to their preferences. Without access to these data packages, consuming an additional 10 GB of data would cost each user an additional EUR 26 per month and require her to enter into a two year contract.

These discounted data packages also facilitate product differentiation among mobile operators that offer a variety of plans. Keeping with the Portugal example, Vodafone Portugal offers 20 GB of additional data for certain apps (Facebook, Instagram, SnapChat, and Skype, among others) with the purchase of a 3 GB mobile data plan. Consumers can pick which operator offers the best plan for them.

In addition, data packages like the ones in question here tend to increase the overall consumption of content, reduce users’ cost of obtaining information, and allow for consumers to experiment with new, less familiar apps. In short, they are overwhelmingly pro-consumer.

Even if Portugal actually didn’t have net neutrality rules, this would be the furthest thing from the apocalypse critics make it out to be.

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Net Neutrality in Portugal

But, contrary to activists’ misinformation, Portugal does have net neutrality rules. The EU implemented its net neutrality framework in November 2015 as a regulation, meaning that the regulation became the law of the EU when it was enacted, and national governments, including Portugal, did not need to transpose it into national legislation.

While the regulation was automatically enacted in Portugal, the regulation and the 2016 EC guidelines left the decision of whether to allow sponsored data and zero rating plans (the Regulation likely classifies data packages at issue here to be zero rated plans because they give users a lot of data for a low price) in the hands of national regulators. While Portugal is still formulating the standard it will use to evaluate sponsored data and zero rating under the EU’s framework, there is little reason to think that this common practice would be disallowed in Portugal.

On average, in fact, despite its strong net neutrality regulation, the EU appears to be softening its stance toward zero rating. This was evident in a recent EC competition policy authority (DG-Comp) study concluding that there is little reason to believe that such data practices raise concerns.

The activists’ willful misunderstanding of clearly pro-consumer data plans and purposeful mischaracterization of Portugal as not having net neutrality rules are inflammatory and deceitful. Even more puzzling for activists (but great for consumers) is their position given there is nothing in the 2015 Open Internet Order that would prevent these types of data packages from being offered in the US so long as ISPs are transparent with consumers.

The latest rankings of trade freedom around the world will be set forth and assessed in the 24th annual edition of the Heritage Foundation annual Index of Economic Freedom (Index), which will be published in January 2018.  Today Heritage published a sneak preview of the 2018 Index’s analysis of freedom to trade, which merits public attention.  First, though, a bit of background on the Index’s philosophy and methodology is appropriate.

The nature and measurement of economic freedom are explained in the 2017 Index:

Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself. . . .  

[The Freedom Index] measure[s] economic freedom based on 12 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom:

  1. Rule of Law (property rights, government integrity, judicial effectiveness)
  2. Government Size (government spending, tax burden, fiscal health)
  3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom)
  4. Open Markets (trade freedom, investment freedom, financial freedom)

Each of the twelve economic freedoms within these categories is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these twelve economic freedoms, with equal weight being given to each. More information on the grading and methodology can be found in the appendix.

As was the case in previous versions, the 2018 Index explores various aspects of economic freedom in several essays that accompany its rankings.  In particular, with respect to international trade, the 2018 Index demonstrates that citizens of countries that embrace free trade are better off than those in countries that do not.  The data show a strong correlation between trade freedom and a variety of positive indicators, including economic prosperity, unpolluted environments, food security, gross national income per capita, and the absence of politically motivated violence or unrest.  Reducing trade barriers remains a proven recipe for prosperity that a majority of Americans support.

The 2018 Index’s three key trade-related takeaways are:

  1. A comparison of economic performance and trade scores in the 2018 Index shows how trade freedom increases prosperity and overall well-being.
  2. Countries with the most trade freedom have much higher per capita incomes, greater food security, cleaner environments, and less politically motivated violence.
  3. Free trade policies also encourage freedom in general. Most Americans support free trade, and believe its benefits outweigh any disadvantages.

Follow this space for further updates on the 2018 Index.

I recently published a piece in the Hill welcoming the Canadian Supreme Court’s decision in Google v. Equustek. In this post I expand (at length) upon my assessment of the case.

In its decision, the Court upheld injunctive relief against Google, directing the company to avoid indexing websites offering the infringing goods in question, regardless of the location of the sites (and even though Google itself was not a party in the case nor in any way held liable for the infringement). As a result, the Court’s ruling would affect Google’s conduct outside of Canada as well as within it.

The case raises some fascinating and thorny issues, but, in the end, the Court navigated them admirably.

Some others, however, were not so… welcoming of the decision (see, e.g., here and here).

The primary objection to the ruling seems to be, in essence, that it is the top of a slippery slope: “If Canada can do this, what’s to stop Iran or China from doing it? Free expression as we know it on the Internet will cease to exist.”

This is a valid concern, of course — in the abstract. But for reasons I explain below, we should see this case — and, more importantly, the approach adopted by the Canadian Supreme Court — as reassuring, not foreboding.

Some quick background on the exercise of extraterritorial jurisdiction in international law

The salient facts in, and the fundamental issue raised by, the case were neatly summarized by Hugh Stephens:

[The lower Court] issued an interim injunction requiring Google to de-index or delist (i.e. not return search results for) the website of a firm (Datalink Gateways) that was marketing goods online based on the theft of trade secrets from Equustek, a Vancouver, B.C., based hi-tech firm that makes sophisticated industrial equipment. Google wants to quash a decision by the lower courts on several grounds, primarily that the basis of the injunction is extra-territorial in nature and that if Google were to be subject to Canadian law in this case, this could open a Pandora’s box of rulings from other jurisdictions that would require global delisting of websites thus interfering with freedom of expression online, and in effect “break the Internet”.

The question of jurisdiction with regard to cross-border conduct is clearly complicated and evolving. But, in important ways, it isn’t anything new just because the Internet is involved. As Jack Goldsmith and Tim Wu (yes, Tim Wu) wrote (way back in 2006) in Who Controls the Internet?: Illusions of a Borderless World:

A government’s responsibility for redressing local harms caused by a foreign source does not change because the harms are caused by an Internet communication. Cross-border harms that occur via the Internet are not any different than those outside the Net. Both demand a response from governmental authorities charged with protecting public values.

As I have written elsewhere, “[g]lobal businesses have always had to comply with the rules of the territories in which they do business.”

Traditionally, courts have dealt with the extraterritoriality problem by applying a rule of comity. As my colleague, Geoffrey Manne (Founder and Executive Director of ICLE), reminds me, the principle of comity largely originated in the work of the 17th Century Dutch legal scholar, Ulrich Huber. Huber wrote that comitas gentium (“courtesy of nations”) required the application of foreign law in certain cases:

[Sovereigns will] so act by way of comity that rights acquired within the limits of a government retain their force everywhere so far as they do not cause prejudice to the powers or rights of such government or of their subjects.

And, notably, Huber wrote that:

Although the laws of one nation can have no force directly with another, yet nothing could be more inconvenient to commerce and to international usage than that transactions valid by the law of one place should be rendered of no effect elsewhere on account of a difference in the law.

The basic principle has been recognized and applied in international law for centuries. Of course, the flip side of the principle is that sovereign nations also get to decide for themselves whether to enforce foreign law within their jurisdictions. To summarize Huber (as well as Lord Mansfield, who brought the concept to England, and Justice Story, who brought it to the US):

All three jurists were concerned with deeply polarizing public issues — nationalism, religious factionalism, and slavery. For each, comity empowered courts to decide whether to defer to foreign law out of respect for a foreign sovereign or whether domestic public policy should triumph over mere courtesy. For each, the court was the agent of the sovereign’s own public law.

The Canadian Supreme Court’s well-reasoned and admirably restrained approach in Equustek

Reconciling the potential conflict between the laws of Canada and those of other jurisdictions was, of course, a central subject of consideration for the Canadian Court in Equustek. The Supreme Court, as described below, weighed a variety of factors in determining the appropriateness of the remedy. In analyzing the competing equities, the Supreme Court set out the following framework:

[I]s there a serious issue to be tried; would the person applying for the injunction suffer irreparable harm if the injunction were not granted; and is the balance of convenience in favour of granting the interlocutory injunction or denying it. The fundamental question is whether the granting of an injunction is just and equitable in all of the circumstances of the case. This will necessarily be context-specific. [Here, as throughout this post, bolded text represents my own, added emphasis.]

Applying that standard, the Court held that because ordering an interlocutory injunction against Google was the only practical way to prevent Datalink from flouting the court’s several orders, and because there were no sufficient, countervailing comity or freedom of expression concerns in this case that would counsel against such an order being granted, the interlocutory injunction was appropriate.

I draw particular attention to the following from the Court’s opinion:

Google’s argument that a global injunction violates international comity because it is possible that the order could not have been obtained in a foreign jurisdiction, or that to comply with it would result in Google violating the laws of that jurisdiction is, with respect, theoretical. As Fenlon J. noted, “Google acknowledges that most countries will likely recognize intellectual property rights and view the selling of pirated products as a legal wrong”.

And while it is always important to pay respectful attention to freedom of expression concerns, particularly when dealing with the core values of another country, I do not see freedom of expression issues being engaged in any way that tips the balance of convenience towards Google in this case. As Groberman J.A. concluded:

In the case before us, there is no realistic assertion that the judge’s order will offend the sensibilities of any other nation. It has not been suggested that the order prohibiting the defendants from advertising wares that violate the intellectual property rights of the plaintiffs offends the core values of any nation. The order made against Google is a very limited ancillary order designed to ensure that the plaintiffs’ core rights are respected.

In fact, as Andrew Keane Woods writes at Lawfare:

Under longstanding conflicts of laws principles, a court would need to weigh the conflicting and legitimate governments’ interests at stake. The Canadian court was eager to undertake that comity analysis, but it couldn’t do so because the necessary ingredient was missing: there was no conflict of laws.

In short, the Canadian Supreme Court, while acknowledging the importance of comity and appropriate restraint in matters with extraterritorial effect, carefully weighed the equities in this case and found that they favored the grant of extraterritorial injunctive relief. As the Court explained:

Datalink [the direct infringer] and its representatives have ignored all previous court orders made against them, have left British Columbia, and continue to operate their business from unknown locations outside Canada. Equustek has made efforts to locate Datalink with limited success. Datalink is only able to survive — at the expense of Equustek’s survival — on Google’s search engine which directs potential customers to Datalink’s websites. This makes Google the determinative player in allowing the harm to occur. On balance, since the world‑wide injunction is the only effective way to mitigate the harm to Equustek pending the trial, the only way, in fact, to preserve Equustek itself pending the resolution of the underlying litigation, and since any countervailing harm to Google is minimal to non‑existent, the interlocutory injunction should be upheld.

As I have stressed, key to the Court’s reasoning was its close consideration of possible countervailing concerns and its entirely fact-specific analysis. By the very terms of the decision, the Court made clear that its balancing would not necessarily lead to the same result where sensibilities or core values of other nations would be offended. In this particular case, they were not.

How critics of the decision (and there are many) completely miss the true import of the Court’s reasoning

In other words, the holding in this case was a function of how, given the facts of the case, the ruling would affect the particular core concerns at issue: protection and harmonization of global intellectual property rights on the one hand, and concern for the “sensibilities of other nations,” including their concern for free expression, on the other.

This should be deeply reassuring to those now criticizing the decision. And yet… it’s not.

Whether because they haven’t actually read or properly understood the decision, or because they are merely grandstanding, some commenters are proclaiming that the decision marks the End Of The Internet As We Know It — you know, it’s going to break the Internet. Or something.

Human Rights Watch, an organization I generally admire, issued a statement including the following:

The court presumed no one could object to delisting someone it considered an intellectual property violator. But other countries may soon follow this example, in ways that more obviously force Google to become the world’s censor. If every country tries to enforce its own idea of what is proper to put on the Internet globally, we will soon have a race to the bottom where human rights will be the loser.

The British Columbia Civil Liberties Association added:

Here it was technical details of a product, but you could easily imagine future cases where we might be talking about copyright infringement, or other things where people in private lawsuits are wanting things to be taken down off  the internet that are more closely connected to freedom of expression.

From the other side of the traditional (if insufficiently nuanced) “political spectrum,” AEI’s Ariel Rabkin asserted that

[O]nce we concede that Canadian courts can regulate search engine results in Turkey, it is hard to explain why a Turkish court shouldn’t have the reciprocal right. And this is no hypothetical — a Turkish court has indeed ordered Twitter to remove a user (AEI scholar Michael Rubin) within the United States for his criticism of Erdogan. Once the jurisdictional question is decided, it is no use raising free speech as an issue. Other countries do not have our free speech norms, nor Canada’s. Once Canada concedes that foreign courts have the right to regulate Canadian search results, they are on the internet censorship train, and there is no egress before the end of the line.

In this instance, in particular, it is worth noting not only the complete lack of acknowledgment of the Court’s articulated constraints on taking action with extraterritorial effect, but also the fact that Turkey (among others) has hardly been waiting for approval from Canada before taking action.   

And then there’s EFF (of course). EFF, fairly predictably, suggests first — with unrestrained hyperbole — that the Supreme Court held that:

A country has the right to prevent the world’s Internet users from accessing information.

Dramatic hyperbole aside, that’s also a stilted way to characterize the content at issue in the case. But it is important to EFF’s misleading narrative to begin with the assertion that offering infringing products for sale is “information” to which access by the public is crucial. But, of course, the distribution of infringing products is hardly “expression,” as most of us would understand that term. To claim otherwise is to denigrate the truly important forms of expression that EFF claims to want to protect.

And, it must be noted, even if there were expressive elements at issue, infringing “expression” is always subject to restriction under the copyright laws of virtually every country in the world (and free speech laws, where they exist).

Nevertheless, EFF writes that the decision:

[W]ould cut off access to information for U.S. users would set a dangerous precedent for online speech. In essence, it would expand the power of any court in the world to edit the entire Internet, whether or not the targeted material or site is lawful in another country. That, we warned, is likely to result in a race to the bottom, as well-resourced individuals engage in international forum-shopping to impose the one country’s restrictive laws regarding free expression on the rest of the world.

Beyond the flaws of the ruling itself, the court’s decision will likely embolden other countries to try to enforce their own speech-restricting laws on the Internet, to the detriment of all users. As others have pointed out, it’s not difficult to see repressive regimes such as China or Iran use the ruling to order Google to de-index sites they object to, creating a worldwide heckler’s veto.

As always with EFF missives, caveat lector applies: None of this is fair or accurate. EFF (like the other critics quoted above) is looking only at the result — the specific contours of the global order related to the Internet — and not to the reasoning of the decision itself.

Quite tellingly, EFF urges its readers to ignore the case in front of them in favor of a theoretical one. That is unfortunate. Were EFF, et al. to pay closer attention, they would be celebrating this decision as a thoughtful, restrained, respectful, and useful standard to be employed as a foundational decision in the development of global Internet governance.

The Canadian decision is (as I have noted, but perhaps still not with enough repetition…) predicated on achieving equity upon close examination of the facts, and giving due deference to the sensibilities and core values of other nations in making decisions with extraterritorial effect.

Properly understood, the ruling is a shield against intrusions that undermine freedom of expression, and not an attack on expression.

EFF subverts the reasoning of the decision and thus camouflages its true import, all for the sake of furthering its apparently limitless crusade against all forms of intellectual property. The ruling can be read as an attack on expression only if one ascribes to the distribution of infringing products the status of protected expression — so that’s what EFF does. But distribution of infringing products is not protected expression.

Extraterritoriality on the Internet is complicated — but that undermines, rather than justifies, critics’ opposition to the Court’s analysis

There will undoubtedly be other cases that present more difficult challenges than this one in defining the jurisdictional boundaries of courts’ abilities to address Internet-based conduct with multi-territorial effects. But the guideposts employed by the Supreme Court of Canada will be useful in informing such decisions.

Of course, some states don’t (or won’t, when it suits them), adhere to principles of comity. But that was true long before the Equustek decision. And, frankly, the notion that this decision gives nations like China or Iran political cover for global censorship is ridiculous. Nations that wish to censor the Internet will do so regardless. If anything, reference to this decision (which, let me spell it out again, highlights the importance of avoiding relief that would interfere with core values or sensibilities of other nations) would undermine their efforts.

Rather, the decision will be far more helpful in combating censorship and advancing global freedom of expression. Indeed, as noted by Hugh Stephens in a recent blog post:

While the EFF, echoed by its Canadian proxy OpenMedia, went into hyperventilation mode with the headline, “Top Canadian Court permits Worldwide Internet Censorship”, respected organizations like the Canadian Civil Liberties Association (CCLA) welcomed the decision as having achieved the dual objectives of recognizing the importance of freedom of expression and limiting any order that might violate that fundamental right. As the CCLA put it,

While today’s decision upholds the worldwide order against Google, it nevertheless reflects many of the freedom of expression concerns CCLA had voiced in our interventions in this case.

As I noted in my piece in the Hill, this decision doesn’t answer all of the difficult questions related to identifying proper jurisdiction and remedies with respect to conduct that has global reach; indeed, that process will surely be perpetually unfolding. But, as reflected in the comments of the Canadian Civil Liberties Association, it is a deliberate and well-considered step toward a fair and balanced way of addressing Internet harms.

With apologies for quoting myself, I noted the following in an earlier piece:

I’m not unsympathetic to Google’s concerns. As a player with a global footprint, Google is legitimately concerned that it could be forced to comply with the sometimes-oppressive and often contradictory laws of countries around the world. But that doesn’t make it — or any other Internet company — unique. Global businesses have always had to comply with the rules of the territories in which they do business… There will be (and have been) cases in which taking action to comply with the laws of one country would place a company in violation of the laws of another. But principles of comity exist to address the problem of competing demands from sovereign governments.

And as Andrew Keane Woods noted:

Global takedown orders with no limiting principle are indeed scary. But Canada’s order has a limiting principle. As long as there is room for Google to say to Canada (or France), “Your order will put us in direct and significant violation of U.S. law,” the order is not a limitless assertion of extraterritorial jurisdiction. In the instance that a service provider identifies a conflict of laws, the state should listen.

That is precisely what the Canadian Supreme Court’s decision contemplates.

No one wants an Internet based on the lowest common denominator of acceptable speech. Yet some appear to want an Internet based on the lowest common denominator for the protection of original expression. These advocates thus endorse theories of jurisdiction that would deny societies the ability to enforce their own laws, just because sometimes those laws protect intellectual property.

And yet that reflects little more than an arbitrary prioritization of those critics’ personal preferences. In the real world (including the real online world), protection of property is an important value, deserving reciprocity and courtesy (comity) as much as does speech. Indeed, the G20 Digital Economy Ministerial Declaration adopted in April of this year recognizes the importance to the digital economy of promoting security and trust, including through the provision of adequate and effective intellectual property protection. Thus the Declaration expresses the recognition of the G20 that:

[A]pplicable frameworks for privacy and personal data protection, as well as intellectual property rights, have to be respected as they are essential to strengthening confidence and trust in the digital economy.

Moving forward in an interconnected digital universe will require societies to make a series of difficult choices balancing both competing values and competing claims from different jurisdictions. Just as it does in the offline world, navigating this path will require flexibility and skepticism (if not rejection) of absolutism — including with respect to the application of fundamental values. Even things like freedom of expression, which naturally require a balancing of competing interests, will need to be reexamined. We should endeavor to find that fine line between allowing individual countries to enforce their own national judgments and a tolerance for those countries that have made different choices. This will not be easy, as well manifested in something that Alice Marwick wrote earlier this year:

But a commitment to freedom of speech above all else presumes an idealistic version of the internet that no longer exists. And as long as we consider any content moderation to be censorship, minority voices will continue to be drowned out by their aggressive majority counterparts.

* * *

We need to move beyond this simplistic binary of free speech/censorship online. That is just as true for libertarian-leaning technologists as it is neo-Nazi provocateurs…. Aggressive online speech, whether practiced in the profanity and pornography-laced environment of 4Chan or the loftier venues of newspaper comments sections, positions sexism, racism, and anti-Semitism (and so forth) as issues of freedom of expression rather than structural oppression.

Perhaps we might want to look at countries like Canada and the United Kingdom, which take a different approach to free speech than does the United States. These countries recognize that unlimited free speech can lead to aggression and other tactics which end up silencing the speech of minorities — in other words, the tyranny of the majority. Creating online communities where all groups can speak may mean scaling back on some of the idealism of the early internet in favor of pragmatism. But recognizing this complexity is an absolutely necessary first step.

While I (and the Canadian Supreme Court, for that matter) share EFF’s unease over the scope of extraterritorial judgments, I fundamentally disagree with EFF that the Equustek decision “largely sidesteps the question of whether such a global order would violate foreign law or intrude on Internet users’ free speech rights.”

In fact, it is EFF’s position that comes much closer to a position indifferent to the laws and values of other countries; in essence, EFF’s position would essentially always prioritize the particular speech values adopted in the US, regardless of whether they had been adopted by the countries affected in a dispute. It is therefore inconsistent with the true nature of comity.

Absolutism and exceptionalism will not be a sound foundation for achieving global consensus and the effective operation of law. As stated by the Canadian Supreme Court in Equustek, courts should enforce the law — whatever the law is — to the extent that such enforcement does not substantially undermine the core sensitivities or values of nations where the order will have effect.

EFF ignores the process in which the Court engaged precisely because EFF — not another country, but EFF — doesn’t find the enforcement of intellectual property rights to be compelling. But that unprincipled approach would naturally lead in a different direction where the court sought to protect a value that EFF does care about. Such a position arbitrarily elevates EFF’s idiosyncratic preferences. That is simply not a viable basis for constructing good global Internet governance.

If the Internet is both everywhere and nowhere, our responses must reflect that reality, and be based on the technology-neutral application of laws, not the abdication of responsibility premised upon an outdated theory of tech exceptionalism under which cyberspace is free from the application of the laws of sovereign nations. That is not the path to either freedom or prosperity.

To realize the economic and social potential of the Internet, we must be guided by both a determination to meaningfully address harms, and a sober reservation about interfering in the affairs of other states. The Supreme Court of Canada’s decision in Google v. Equustek has planted a flag in this space. It serves no one to pretend that the Court decided that a country has the unfettered right to censor the Internet. That’s not what it held — and we should be grateful for that. To suggest otherwise may indeed be self-fulfilling.

  1. Introduction

The International Competition Network (ICN), a “virtual” organization comprised of most of the world’s competition (antitrust) agencies and expert non-governmental advisors (NGAs), held its Sixteenth Annual Conference in Porto, Portugal from May 10-12. (I attended this Conference as an NGA.) Now that the ICN has turned “sweet sixteen,” a stocktaking is appropriate. The ICN can point to some significant accomplishments, but faces major future challenges. After describing those challenges, I advance four recommendations for U.S.-led initiatives to enhance the future effectiveness of the ICN.

  1. ICN Background and Successes

The ICN, whose key objective is to promote “soft convergence” among competition law regimes, has much to celebrate. It has gone from a small core of competition authorities focused on a limited set of issues to a collection of 135 agencies from 122 far-flung jurisdictions, plus a large cadre of NGA lawyers and economists who provide practical and theoretical advice. The ICN’s nature and initiatives are concisely summarized on its website:

The ICN provides competition authorities with a specialized yet informal venue for maintaining regular contacts and addressing practical competition concerns. This allows for a dynamic dialogue that serves to build consensus and convergence towards sound competition policy principles across the global antitrust community.

The ICN is unique as it is the only international body devoted exclusively to competition law enforcement and its members represent national and multinational competition authorities. Members produce work products through their involvement in flexible project-oriented and results-based working groups. Working group members work together largely by Internet, telephone, teleseminars and webinars.

Annual conferences and workshops provide opportunities to discuss working group projects and their implications for enforcement. The ICN does not exercise any rule-making function. Where the ICN reaches consensus on recommendations, or “best practices”, arising from the projects, individual competition authorities decide whether and how to implement the recommendations, through unilateral, bilateral or multilateral arrangements, as appropriate.

The Porto Conference highlighted the extent of the ICN’s influence. Representatives from key international organizations that focus on economic growth and development (and at one time were viewed as ICN “rivals”), including the OECD, the World Bank, and UNCTAD, participated in the Conference. A feature in recent years, the one-day “Pre-ICN” Forum jointly sponsored by the World Bank, the International Chamber of Commerce, and the International Bar Association, this year shared the spotlight with other “sidebar” events (for example, an antitrust symposium cosponsored by UNCTAD and the Japan Fair Trade Commission, an “African Competition Forum,” and a roundtable of former senior officials and academics sponsored by a journal). The Porto Conference formally adopted an impressive array of documents generated over the past year by the ICN’s various Working Groups (the Advocacy, Agency Effectiveness, Cartel, Merger, and Unilateral Conduct Working Groups) (see here and here). This work product focuses on offering practical advice to agencies, rather than theoretical academic speculation. If recent history is in any indication, a substantial portion of this advice will be incorporated within some national laws, and various agencies guidance documents, and strategic plans.

In sum, the ICN is an increasingly influential organization. More importantly, it has, on balance, been a force for the promotion of sound policies on such issues as pre-merger notifications and cartel enforcement – policies that reduce transaction costs for the private sector and tend to improve the quality of antitrust enforcement. It has produced valuable training materials for agencies. Furthermore, the ICN’s Advocacy Working Group, buoyed by a growing amount of academic research (some of it supported by the World Bank), increasingly has highlighted the costs of anticompetitive government laws and regulations, and provided a template for assessing and critiquing regulatory schemes that undermine the competitive process. Most recently, the revised chapter on the “analytical framework for evaluating unilateral exclusionary conduct” issued at the 2017 Porto Conference did a solid job of describing the nature of harm to the competitive process and the need to consider error costs in evaluating such conduct. Other examples of welfare-enhancing ICN proposals abound.

  1. Grounds for Caution Going Forward

Nevertheless, despite its generally good record, one must be cautious in evaluating the ICN’s long-term prospects, for at least five reasons.

First, as the ICN tackles increasingly contentious issues (such as the assessment of vertical restraints, which are part of the 2017-2018 ICN Work Plan, and “dominant” single firm “platforms,” cited specifically by ICN Chairman Andreas Mundt in Porto), the possibility for controversy and difficulty in crafting recommendations rises.

Second, most ICN members have adopted heavily administrative competition law frameworks that draw upon an inquisitorial civil law model, as opposed to the common law adversarial legal system in which independent courts conduct full legal reviews of agency conclusions. Public choice analysis (not to mention casual empiricism and common sense) indicates that as they become established, administrative agencies will have a strong incentive to “do something” in order to expand their authority. Generally speaking, sound economic analysis (bolstered by large staffs of economists) that stresses consumer welfare has been incorporated into U.S. federal antitrust enforcement decisions and federal antitrust jurisprudence – but that is not the case in large parts of the world. As its newer member agencies grow in size and influence, the ICN may be challenged by those authorities to address “novel” practices that stray beyond well-understood competition law categories. As a result, innovative welfare-enhancing business innovations could be given unwarranted scrutiny and thereby discouraged.

Third, as various informed commentators in Porto noted, many competition laws explicitly permit consideration of non-economic welfare-based goals, such as “industrial policy” (including promotion of “national champion” competitors), “fairness,” and general “public policy.” Such ill-defined statutory goals allow competition agencies (and, of course, politicians who may exercise influence over those agencies) to apply competition statutes in an unpredictable manner that has nothing to do with (indeed, may be antithetical to) promotion of a vigorous competitive process and consumer welfare. With the proliferation of international commerce, the costly uncertainty injected into business decision-making by malleable antitrust statutes becomes increasingly significant. The ICN, which issues non-binding recommendations and advice and relies on voluntary interagency cooperation, may have little practical ability to fend off such welfare-inimical politicization of antitrust.

Fourth, for nearly a decade United States antitrust agencies have expressed concern in international forums about lack of due process in competition enforcement. Commendably, in 2015 the ICN did issue guidance regarding “key investigative principles and practices important to effective and fair investigative process”, but this guidance did not address administrative hearings and enforcement actions, which remain particularly serious concerns. The ICN’s ability to drive a “due process improvements” agenda may be inherently limited, due to differences among ICN members’ legal systems and sensitivities regarding the second-guessing of national enforcement norms associated with the concept of “due process.”

Fifth, there is “the elephant outside the room.” One major jurisdiction, China, still has not joined the ICN. Given China’s size, importance in the global economy, and vigorous enforcement of its completion law, China’s “absence from “the table” is a significant limitation on the ICN’s ability to promote economically meaningful global policy convergence. (Since Hong Kong, a “special administrative region” of China, has joined the ICN, one may hope that China itself will consider opting for ICN membership in the not too distant future.)

  1. What Should the U.S. Antitrust Agencies Do?

Despite the notes of caution regarding the ICN’s future initiatives and effectiveness, the ICN will remain for the foreseeable future a useful forum for “nudging” members toward improvements in their competition law systems, particularly in key areas such as cartel enforcement, merger review, and agency effectiveness (internal improvements in agency management may improve the quality of enforcement and advocacy initiatives). Thus, the U.S. federal antitrust agencies, the Justice Department’s Antitrust Division (DOJ) and the Federal Trade Commission (FTC), should (and undoubtedly will) remain fully engaged with the ICN. DOJ and the FTC not only should remain fully engaged in the ICN’s Working Groups, they should also develop a strategy for minimizing the negative effects of the ICN’s limitations and capitalizing on its strengths. What should such a strategy entail? Four key elements come to mind.

First, the FTC and DOJ should strongly advocate against an ICN focus on expansive theories of liability for unilateral conduct (particularly involving such areas as popular Internet “platforms” (e.g., Google, Facebook, and Amazon, among others) and vertical restraints), not tied to showings of harm to the competitive process. The proliferation of cases based on such theories could chill economically desirable business innovations. In countering such novel and expansive condemnations of unilateral conduct, the U.S. agencies could draw upon the extensive law and economics literature on efficiencies and unilateral conduct in speeches, publications, and presentations to ICN Working Groups. To provide further support for their advocacy, the FTC and DOJ should also consider issuing a new joint statement of unilateral conduct enforcement principles, inspired by the general lines of the 2008 DOJ Report on Single Firm Conduct Under Section 2 of the Sherman Act (regrettably withdrawn by the Obama Administration DOJ in 2009). Relatedly, the FTC and DOJ should advocate the right of intellectual property (IP) holders legitimately to maximize returns on their holdings. The U.S. agencies also should be prepared to argue against novel theories of antitrust liability untethered from traditional concepts of antitrust harm, based on the unilateral exploitation of IP rights (see here, here, here, and here).

Second, the U.S. agencies should promote a special ICN project on decision theory and competition law enforcement (see my Heritage Foundation commentary here), under the aegis of the ICN’s Agency Effectiveness Working Group. A decision-theoretic framework aims to minimize the costs of antitrust administration and enforcement error, in order to promote cost-beneficial enforcement outcomes. ICN guidance on decision theory (which would stress the primacy of empirical analysis and the need for easily administrable rules) hopefully would encourage competition agencies to focus on clearly welfare-inimical practices, and avoid pursuing fanciful new theories of antitrust violations unmoored from robust theories of competitive harm. The FTC and DOJ should also work to inculcate decision theory into the work of the core ICN Cartel and Merger Working Groups (see here).

Third, the U.S. agencies should also encourage the ICN’s Agency Effectiveness Working Group to pursue a comprehensive “due process” initiative, focused on guaranteeing fundamental fairness to parties at all stages of a competition law proceeding.  An emphasis on basic universal notions of fairness would transcend the differences inherent in civil law and common law administrative processes. It would suggest a path forward whereby agencies could agree on the nature of basic rights owed litigants, while still preserving differences among administrative enforcement models. Administrative procedure recommendations developed by the American Bar Association’s Antitrust Section in 2015 (see here) offer a good template for consideration, and 2012 OECD deliberations on fairness and transparency (see here) yield valuable background analysis. Consistent with these materials, the U.S. agencies could stress that due process reforms to protect basic rights would not only improve the quality of competition authority decision-making, it would also enhance economic welfare and encourage firms from around the world to do business in reforming jurisdictions. (As discussed above, due process raises major sensitivities, and thus the push for due process improvements should be viewed as a long-term project that will have to be pursued vigorously and very patiently.)

Fourth, working through the ICN’s Advocacy Working Group, the FTC and DOJ should push to substantially raise the profile of competition advocacy at the ICN. A growing body of economic research reveals the enormous economic gains that could be unlocked within individual countries by the removal of anticompetitive laws and rules, particularly those that create artificial barriers to entry and distort trade (see, for example, here and here). The U.S. agencies should emphasize the negative consequences for poorer consumers, reduced innovation, and foregone national income due to many of these anticompetitive barriers, drawing upon research by World Bank and OECD scholars (see here). (Fortunately, the ICN already works with the World Bank to promote an annual contest that showcases economic “success stories” due to agency advocacy.) The FTC and DOJ should also use the ICN as a forum to recommend that national competition authorities accord competition advocacy aimed at domestic regulatory reform relatively more resources and attention, particularly compared to investigations of vertical restraints and novel unilateral conduct. It should also work within the ICN’s guidance and oversight body, the “Steering Group,” to make far-reaching competition advocacy initiatives a top ICN priority.

  1. Conclusion

The ICN is a worthwhile international organization that stands at a crossroads. Having no permanent bureaucracy (its website is maintained by the Canadian Competition Bureau), and relying in large part on online communications among agency staff and NGAs to carry out its work, the ICN represents a very good investment of scare resources by the U.S. Government. Absent thoughtful guidance, however, there is a danger that it could drift and become less effective at promoting welfare-enhancing competition law improvements around the world. To avert such an outcome, U.S. antitrust enforcement agencies (joined by like-minded ICN members from other jurisdictions) should proactively seek to have the ICN take up new projects that hold out the promise for substantive and process-based improvements in competition policy worldwide, including far-reaching regulatory reform. A positive ICN response to such initiatives would enhance the quality of competition policy. Moreover, it could contribute in no small fashion to increased economic welfare and innovation in those jurisdictions that adopted reforms in response to the ICN’s call. American businesses operating internationally also would benefit from improvements in the global competition climate generated by ICN-incentivized reforms.

 

 

 

It’s fitting that FCC Chairman Ajit Pai recently compared his predecessor’s jettisoning of the FCC’s light touch framework for Internet access regulation without hard evidence to the Oklahoma City Thunder’s James Harden trade. That infamous deal broke up a young nucleus of three of the best players in the NBA in 2012 because keeping all three might someday create salary cap concerns. What few saw coming was a new TV deal in 2015 that sent the salary cap soaring.

If it’s hard to predict how the market will evolve in the closed world of professional basketball, predictions about the path of Internet innovation are an order of magnitude harder — especially for those making crucial decisions with a lot of money at stake.

The FCC’s answer for what it considered to be the dangerous unpredictability of Internet innovation was to write itself a blank check of authority to regulate ISPs in the 2015 Open Internet Order (OIO), embodied in what is referred to as the “Internet conduct standard.” This standard expanded the scope of Internet access regulation well beyond the core principle of preserving openness (i.e., ensuring that any legal content can be accessed by all users) by granting the FCC the unbounded, discretionary authority to define and address “new and novel threats to the Internet.”

When asked about what the standard meant (not long after writing it), former Chairman Tom Wheeler replied,

We don’t really know. We don’t know where things will go next. We have created a playing field where there are known rules, and the FCC will sit there as a referee and will throw the flag.

Somehow, former Chairman Wheeler would have us believe that an amorphous standard that means whatever the agency (or its Enforcement Bureau) says it means created a playing field with “known rules.” But claiming such broad authority is hardly the light-touch approach marketed to the public. Instead, this ill-conceived standard allows the FCC to wade as deeply as it chooses into how an ISP organizes its business and how it manages its network traffic.

Such an approach is destined to undermine, rather than further, the objectives of Internet openness, as embodied in Chairman Powell’s 2005 Internet Policy Statement:

To foster creation, adoption and use of Internet broadband content, applications, services and attachments, and to ensure consumers benefit from the innovation that comes from competition.

Instead, the Internet conduct standard is emblematic of how an off-the-rails quest to heavily regulate one specific component of the complex Internet ecosystem results in arbitrary regulatory imbalances — e.g., between ISPs and over-the-top (OTT) or edge providers that offer similar services such as video streaming or voice calling.

As Boston College Law Professor, Dan Lyons, puts it:

While many might assume that, in theory, what’s good for Netflix is good for consumers, the reality is more complex. To protect innovation at the edge of the Internet ecosystem, the Commission’s sweeping rules reduce the opportunity for consumer-friendly innovation elsewhere, namely by facilities-based broadband providers.

This is no recipe for innovation, nor does it coherently distinguish between practices that might impede competition and innovation on the Internet and those that are merely politically disfavored, for any reason or no reason at all.

Free data madness

The Internet conduct standard’s unholy combination of unfettered discretion and the impulse to micromanage can (and will) be deployed without credible justification to the detriment of consumers and innovation. Nowhere has this been more evident than in the confusion surrounding the regulation of “free data.”

Free data, like T-Mobile’s Binge On program, is data consumed by a user that has been subsidized by a mobile operator or a content provider. The vertical arrangements between operators and content providers creating the free data offerings provide many benefits to consumers, including enabling subscribers to consume more data (or, for low-income users, to consume data in the first place), facilitating product differentiation by mobile operators that offer a variety of free data plans (including allowing smaller operators the chance to get a leg up on competitors by assembling a market-share-winning plan), increasing the overall consumption of content, and reducing users’ cost of obtaining information. It’s also fundamentally about experimentation. As the International Center for Law & Economics (ICLE) recently explained:

Offering some services at subsidized or zero prices frees up resources (and, where applicable, data under a user’s data cap) enabling users to experiment with new, less-familiar alternatives. Where a user might not find it worthwhile to spend his marginal dollar on an unfamiliar or less-preferred service, differentiated pricing loosens the user’s budget constraint, and may make him more, not less, likely to use alternative services.

In December 2015 then-Chairman Tom Wheeler used his newfound discretion to launch a 13-month “inquiry” into free data practices before preliminarily finding some to be in violation of the standard. Without identifying any actual harm, Wheeler concluded that free data plans “may raise” economic and public policy issues that “may harm consumers and competition.”

After assuming the reins at the FCC, Chairman Pai swiftly put an end to that nonsense, saying that the Commission had better things to do (like removing barriers to broadband deployment) than denying free data plans that expand Internet access and are immensely popular, especially among low-income Americans.

The global morass of free data regulation

But as long as the Internet conduct standard remains on the books, it implicitly grants the US’s imprimatur to harmful policies and regulatory capriciousness in other countries that look to the US for persuasive authority. While Chairman Pai’s decisive intervention resolved the free data debate in the US (at least for now), other countries are still grappling with whether to prohibit the practice, allow it, or allow it with various restrictions.

In Europe, the 2016 EC guidelines left the decision of whether to allow the practice in the hands of national regulators. Consequently, some regulators — in Hungary, Sweden, and the Netherlands (although there the ban was recently overturned in court) — have banned free data practices  while others — in Denmark, Germany, Spain, Poland, the United Kingdom, and Ukraine — have not. And whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs, a state of affairs that is compounded by a lack of data on the consequences of various approaches to their regulation.

In Canada this year, the CRTC issued a decision adopting restrictive criteria under which to evaluate free data plans. The criteria include assessing the degree to which the treatment of data is agnostic, whether the free data offer is exclusive to certain customers or certain content providers, the impact on Internet openness and innovation, and whether there is financial compensation involved. The standard is open-ended, and free data plans as they are offered in the US would “likely raise concerns.”

Other regulators are contributing to the confusion through ambiguously framed rules, such as that of the Chilean regulator, Subtel. In a 2014 decision, it found that a free data offer of specific social network apps was in breach of Chile’s Internet rules. In contrast to what is commonly reported, however, Subtel did not ban free data. Instead, it required mobile operators to change how they promote such services, requiring them to state that access to Facebook, Twitter and WhatsApp were offered “without discounting the user’s balance” instead of “at no cost.” It also required them to disclose the amount of time the offer would be available, but imposed no mandatory limit.

In addition to this confusing regulatory make-work governing how operators market free data plans, the Chilean measures also require that mobile operators offer free data to subscribers who pay for a data plan, in order to ensure free data isn’t the only option users have to access the Internet.

The result is that in Chile today free data plans are widely offered by Movistar, Claro, and Entel and include access to apps such as Facebook, WhatsApp, Twitter, Instagram, Pokemon Go, Waze, Snapchat, Apple Music, Spotify, Netflix or YouTube — even though Subtel has nominally declared such plans to be in violation of Chile’s net neutrality rules.

Other regulators are searching for palatable alternatives to both flex their regulatory muscle to govern Internet access, while simultaneously making free data work. The Indian regulator, TRAI, famously banned free data in February 2016. But the story doesn’t end there. After seeing the potential value of free data in unserved and underserved, low-income areas, TRAI proposed implementing government-sanctioned free data. The proposed scheme would provide rural subscribers with 100 MB of free data per month, funded through the country’s universal service fund. To ensure that there would be no vertical agreements between content providers and mobile operators, TRAI recommended introducing third parties, referred to as “aggregators,” that would facilitate mobile-operator-agnostic arrangements.

The result is a nonsensical, if vaguely well-intentioned, threading of the needle between the perceived need to (over-)regulate access providers and the determination to expand access. Notwithstanding the Indian government’s awareness that free data will help to close the digital divide and enhance Internet access, in other words, it nonetheless banned private markets from employing private capital to achieve that very result, preferring instead non-market processes which are unlikely to be nearly as nimble or as effective — and yet still ultimately offer “non-neutral” options for consumers.

Thinking globally, acting locally (by ditching the Internet conduct standard)

Where it is permitted, free data is undergoing explosive adoption among mobile operators. Currently in the US, for example, all major mobile operators offer some form of free data or unlimited plan to subscribers. And, as a result, free data is proving itself as a business model for users’ early stage experimentation and adoption of augmented reality, virtual reality and other cutting-edge technologies that represent the Internet’s next wave — but that also use vast amounts of data. Were the US to cut off free data at the legs under the OIO absent hard evidence of harm, it would substantially undermine this innovation.

The application of the nebulous Internet conduct standard to free data is a microcosm of the current incoherence: It is a rule rife with a parade of uncertainties and only theoretical problems, needlessly saddling companies with enforcement risk, all in the name of preserving and promoting innovation and openness. As even some of the staunchest proponents of net neutrality have recognized, only companies that can afford years of litigation can be expected to thrive in such an environment.

In the face of confusion and uncertainty globally, the US is now poised to provide leadership grounded in sound policy that promotes innovation. As ICLE noted last month, Chairman Pai took a crucial step toward re-imposing economic rigor and the rule of law at the FCC by questioning the unprecedented and ill-supported expansion of FCC authority that undergirds the OIO in general and the Internet conduct standard in particular. Today the agency will take the next step by voting on Chairman Pai’s proposed rulemaking. Wherever the new proceeding leads, it’s a welcome opportunity to analyze the issues with a degree of rigor that has thus far been appallingly absent.

And we should not forget that there’s a direct solution to these ambiguities that would avoid the undulations of subsequent FCC policy fights: Congress could (and should) pass legislation implementing a regulatory framework grounded in sound economics and empirical evidence that allows for consumers to benefit from the vast number of procompetitive vertical agreements (such as free data plans), while still facilitating a means for policing conduct that may actually harm consumers.

The Golden State Warriors are the heavy odds-on favorite to win another NBA Championship this summer, led by former OKC player Kevin Durant. And James Harden is a contender for league MVP. We can’t always turn back the clock on a terrible decision, hastily made before enough evidence has been gathered, but Chairman Pai’s efforts present a rare opportunity to do so.

The indefatigable (and highly talented) scriveners at the Scalia Law School’s Global Antitrust Institute (GAI) once again have offered a trenchant law and economics assessment that, if followed, would greatly improve a foreign jurisdiction’s competition law guidance. This latest assessment, which is compelling and highly persuasive, is embodied in a May 4 GAI Commentary on the Japan Fair Trade Commission’s (JFTC’s) consultation on its Draft Guidelines Concerning Distribution Systems and Business Practices Under the Antimonopoly Act (Draft Guidelines). In particular, the Commentary highlights four major concerns with the Draft Guidelines’ antitrust analysis dealing with conduct involving multi-sided platforms, resale price maintenance (RPM), refusals to deal, tying, and other vertical restraints. It also offers guidance on the appropriate analysis of network effects in multi-sided platforms. After summarizing these five key points, I offer some concluding observations on the potential benefit for competition policy worldwide offered by the GAI’s commentaries on foreign jurisdictions’ antitrust guidance.

  1. Resale price maintenance. Though the Draft Guidelines appear to apply a “rule of reason” or effects-based approach to most vertical restraints, Part I.3 and Part I, Chapter 1 carve out resale price maintenance (RPM) practices on the ground that they “usually have significant anticompetitive effects and, as a general rule, they tend to impede fair competition.” Given the economic theory and empirical evidence showing that vertical restraints, including RPM, rarely harm competition and often benefit consumers, the Commentary urges the JFTC to reconsider its approach and instead apply a rule of reason or effects-based analysis to all vertical restraints, including RPM, under which restraints are condemned only if any anticompetitive harm they cause outweighs any procompetitive benefits they create.
  2. Effects of vertical restraints. The Draft Guidelines identify two types of effects of vertical non-price restraints, “foreclosures effects” and “price maintenance effects.” The Commentary urges the JFTC to require proof of actual anticompetitive effects for both competition and unfair trade practice violations, just as it requires proof of procompetitive effects. It also recommends that the agency take cognizance only of substantial foreclosure effects, that is, “foreclosure of a sufficient share of distribution so that a manufacturer’s rivals are forced to operate at a significant cost disadvantage for a significant period of time.” The Commentary explains that a “consensus has emerged that a necessary condition for anticompetitive harm arising from allegedly exclusionary agreements is that the contracts foreclose rivals from a share of distribution sufficient to achieve minimum efficient scale.” The Commentary notes that “the critical market share foreclosure rate should depend upon the minimum efficient scale of production. Unless there are very large economies of scale in manufacturing, the minimum foreclosure of distribution necessary for an anticompetitive effect in most cases would be substantially greater than 40 percent. Therefore, 40 percent should be thought of as a useful screening device or ‘safe harbor,’ not an indication that anticompetitive effects are likely to exist above this level.”

The Commentary also strongly urges the JFTC to include an analysis of the counterfactual world, i.e., to identify “the difference between the percentage share of distribution foreclosed by the allegedly exclusionary agreements or conduct and the share of distribution in the absence of such an agreement.” It explains that such an approach to assessing foreclosure isolates any true competitive effect of the allegedly exclusionary agreement from other factors.

The Commentary also recommends that the JFTC explicitly recognize that evidence of new or expanded entry during the period of the alleged abuse can be a strong indication that the restraint at issue did not foreclose competition or have an anticompetitive effect. It stresses that, with respect to price increases, it is important to recognize and consider other factors (including changes in the product and changes in demand) that may explain higher prices.

  1. Unilateral refusals to deal and forced sharing. Part II, Chapter 3 of the Draft Guidelines would impose unfair trade practice liability for unilateral refusals to deal that “tend to make it difficult for the refused competitor to carry on normal business activities.” The Commentary strongly urges the JFTC to reconsider this vague and unclear approach and instead recognize the numerous significant concerns with forced sharing.

For example, while a firm’s competitors may want to use a particular good or technology in their own products, there are few situations, if any, in which access to a particular good is necessary to compete in a market. Indeed, one of the main reasons not to impose liability for unilateral, unconditional refusals to deal is “pragmatic in nature and concerns the limited abilities of competition authorities and courts to decide whether a facility is truly non-replicable or merely a competitive advantage.” For one thing, there are “no reliable economic or evidential techniques for testing whether a facility can be duplicated,” and it is often “difficult to distinguish situations in which customers simply have a strong preference for one facility from situations in which objective considerations render their choice unavoidable.”

Furthermore, the Commentary notes that forced competition based on several firms using the same inputs may actually preserve monopolies by removing the requesting party’s incentive to develop its own inputs. Consumer welfare is not enhanced only by price competition; it may be significantly improved by the development of new products for which there is an unsatisfied demand. If all competitors share the same facilities this will occur much less quickly if at all. In addition, if competitors can anticipate that they will be allowed to share the same facilities and technologies, the incentives to develop new products is diminished. Also, sharing of a monopoly among several competitors does not in itself increase competition unless it leads to improvements in price and output, i.e., nothing is achieved in terms of enhancing consumer welfare. Competition would be improved only if the terms upon which access is offered allow the requesting party to effectively compete with the dominant firm on the relevant downstream market. This raises the issue of whether the dominant firm is entitled to charge a monopoly rate or whether, in addition to granting access, there is a duty to offer terms that allow efficient rivals to make a profit.

  1. Fair and free competition. The Draft JFTC Guidelines refer throughout to the goal of promoting “fair and free competition.” Part I.3 in particular provides that “[i]f a vertical restraint tends to impede fair competition, such restraint is prohibited as an unfair trade practice.” The Commentary urges the JFTC to adopt an effects-based approach similar to that adopted by the U.S. Federal Trade Commission in its 2015 Policy Statement on Unfair Methods of Competition. Tying unfairness to antitrust principles ensures the alignment of unfairness with the economic principles underlying competition laws. Enforcement of unfair methods of competition statutes should focus on harm to competition, while taking into account possible efficiencies and business justifications. In short, while unfairness can be a useful tool in reaching conduct that harms competition but is not within the scope of the antitrust laws, it is imperative that unfairness be linked to the fundamental goals of the antitrust laws.
  2. Network effects in multi-sided platforms. With respect to multi-sided platforms in particular, the Commentary urges that the JFTC avoid any presumption that network effects create either market power or barriers to entry. In lieu of such a presumption, the Commentary recommends a fact-specific case-by-case analysis with empirical backing on the presence and effect of any network effects. Network effects occur when the value of a good or service increases as the number of people who use it grows. Network effects are generally beneficial. While there is some dispute over whether and under what conditions they might also raise exclusionary concerns, the Commentary notes that “transactions involving complementary products (indirect network effects) fully internalize the benefits of consuming complementary goods and do not present an exclusionary concern.” The Commentary explains that, “[a]s in all analysis of network effects, the standard assumption that quantity alone determines the strength of the effect is likely mistaken.” Rather, to the extent that advertisers, for example, care about end users, they care about many of their characteristics. An increase in the number of users who are looking only for information and never to purchase goods may be of little value to advertisers. “Assessing network or scale effects is extremely difficult in search engine advertising [for example], and scale may not even correlate with increased value over some ranges of size.”
  3. Concluding thoughts. Implicit in the overall approach of this latest GAI Commentary, and in many other GAI assessments of foreign jurisdictions’ proposed antitrust guidance, is the need for regulatory humility, sound empiricism, and a focus on consumer welfare. Antitrust enforcement policies that blandly accept esoteric theories of anticompetitive behavior and ignore actual economic effects are welfare reducing, not welfare enhancing. The very good analytical work carried out by GAI helps competition authorities keep this reality in mind, and merits close attention.