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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But Google Android is far from the only Android experience.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EU regulators, take note.

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

Here’s a taste:

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

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

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

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

 

Over at Law360 I have a piece on patent enforcement at the ITC (gated), focusing on the ITC’s two Apple-Samsung cases: one in which the the ITC issued a final determination in which it found Apple to have infringed one of Samsung’s 3G-related SEPs, and the other (awaiting a final determination from the Commission) in which an ALJ found Samsung infringed four of Apple’s patents, including a design patent. Here’s a taste:

In fact, there is a strong argument in favor of ITC adjudication of FRAND-encumbered patents. As the name suggests, FRAND-encumbered patents must be licensed by their owners on reasonable, nondiscriminatory terms. Despite Apple’s claims that Samsung refused to negotiate, this seems unlikely (and the ITC found otherwise, of course). What’s more, post-adjudication, the FRAND requirement associated with a FRAND-encumbered patent remains.

As a result, negotiation over license terms for FRAND-encumbered patents can only be more likely than for other patents on which there is no duty to negotiate. Agreement over terms is similarly more likely as FRAND narrows the bargaining range for patent holders. What that means is that (1) avoiding a possible ITC exclusion order ex ante is a simple matter of entering into negotiations and licensing, an outcome that is required by FRAND, and (2) ex post (that is, after an exclusion order is issued), reinstating the ability to import and sell otherwise-infringing devices is also more readily accomplished, likewise through obligatory negotiation and licensing.

* * *

The ITC’s threat of injunctive relief can impel negotiation and licensing in all contexts, of course. But the absence of monetary damages, coupled with the inherent uncertainties surrounding design patents, the broad scope of enforcement and the vagaries of CBP’s implementation of ITC orders, is significantly more troubling in the design patent context. Thus, contrary to many critics’ assertions, the White House’s recent proposal and pending bills in Congress, it is actually FRAND-encumbered SEPs that are most amenable to adjudication and enforcement by the ITC

As they say, read the whole thing.

Coincidentally, Verizon’s general counsel, Randal Milch, has an op-ed on the same topic in today’s Wall Street Journal. Notes Milch:

What we have warned is that patent litigation at the ITC—where the only remedy is to keep products from the American public—is too high-stakes a game for patent disputes. The fact that the ITC’s intellectual-property-dispute docket has nearly quadrupled over 15 years only raises the stakes further. Smartphone patent litigation accounts for a substantial share of that increase.

Here are three instances under which the president should veto an exclusion order:

  • When the patent holder isn’t practicing the technology itself. Courts have routinely found shutdown relief inappropriate for non-practicing entities. Patent trolls shouldn’t be permitted to exclude products from our shores.
  • When the patent holder has already agreed to license the patent on reasonable terms as part of standards setting. If the patent holder has previously agreed that a reasonable licensing fee is all it needs to be made whole, it shouldn’t get shutdown relief at the ITC.
  • When the infringing piece of the product isn’t that important to the overall product, and doesn’t drive consumer demand for the product at issue. There are more than 250,000 patents relevant to today’s smartphones. It makes no sense that exclusion could occur for infringement of the most minor patent.

Obviously, the second of these is implicated in the ITC’s SEP case. But, as I have noted before, this ignores (and exacerbates) the problem of reverse holdup—where potential licensees refuse to license on reasonable terms. As the ITC noted in the Apple-Samsung SEP case:

The ALJ found that the evidence did not support a conclusion that Samsung failed to offer Apple a license on FRAND terms.

***

Apple argues that Samsung was obligated to make an initial offer to Apple of a specific fair and reasonable royalty rate. The evidence on record does not support Apple’s position….Further, there is no legal authority for Apple’s argument. Indeed, the limited precedent on the issue appears to indicate that an initial offer need not be the terms of a final FRAND license because the SSO intends the final license to be accomplished through negotiation. See Microsoft Corp. v. Motorola, Inc. (because SSOs contemplated that RAND terms be determined through negotiation, “it logically does not follow that initial offers must be on RAND terms”) [citation omitted].

***

Apple’s position illustrates the potential problem of so-called reverse patent hold-up, a concern identified in many of the public comments received by the Commission.20 In reverse patent hold-up, an implementer utilizes declared-essential technology without compensation to the patent owner under the guise that the patent owner’s offers to license were not fair or reasonable. The patent owner is therefore forced to defend its rights through expensive litigation. In the meantime, the patent owner is deprived of the exclusionary remedy that should normally flow when a party refuses to pay for the use of a patented invention.

One other note, on the point about the increase in patent litigation: This needs to be understood in context. As this article notes:

Over the last 40 years the number of patent lawsuits filed in the US has stayed relatively constant as a percentage of patents issued.

And the accompanying charts paint the picture even more clearly. Perhaps the numbers at the ITC would look somewhat different, as it seems to have increased in importance as a locus of patent litigation activity. But the larger point about the purported excess of patent litigation remains. I hasten to add that this doesn’t mean that the system is perfect, in particular (as my Law360 piece notes) with respect to the issuance and enforcement of design patents. But that may be an argument for USPTO reform, design patent reform, and/or, as Scott Kieff (who, by the way, finally got a hearing last week on his nomination by President Obama to be a member of the ITC) has argued, targeted reforms of the presumption of validity and fee-shifting. But it’s not a strong argument against injunctive remedies (at the ITC or elsewhere) in SEP cases.

Patent Activity by Year (in Terms of Applications Filed, Patents Issued and Lawsuits Filed)

Patent Activity by Year (in Terms of Applications Filed, Patents Issued and Lawsuits Filed)

Patent Lawsuits Normalized Against Patents Issued and Applications Filed

Patent Lawsuits Normalized Against Patents Issued and Applications Filed

Patent Activity by Year (in Terms of Applications Filed, Patents Issued and Lawsuits Filed), 5-year Moving Averages

Patent Activity by Year (in Terms of Applications Filed, Patents Issued and Lawsuits Filed), 5-year Moving Averages

I respect Alex Tabarrock immensely, but his recent post on the relationship between “patent strength” and innovation is, while pretty, pretty silly. The entirety of the post is the picture I have pasted here.

The problem is that neither Alex nor anyone else actually knows that this is “where we are,” nor exactly what the relationship between innovation and patent strength is — in large part because we don’t really know what the strength of patents is.

I love, for example, when the anti-patent crowd crows about patent thickets and their alleged disastrous consequences for complex devices like smartphones — often posted to Twitter from their smart phones.  The reality is that we have smartphones and innumerable other complex products besides.  Would we have more or better ones if the patent system were different?  Maybe – show me the data.  Defining the but-for world is notoriously difficult, and I’m not saying one can’t make principled arguments about the patent system without proving a negative.  But Alex’s graph and most comments by the patent haters imply a lot more precision about what we know than we actually have.  The relevant question is the marginal one, but a lot of the criticism of the patent system seems to me to take advantage of our uncertainty to imply that the benefits of weaker patents would be practically infinite.  You can criticize patents for making complex products more difficult to bring to market on the basis of basic economic logic, but when your analysis defines costs with little more rigor than Alex’s napkin contains, your policy footing should be vanishingly small.  Frankly, as Richard Epstein points out, Judge Posner’s recent foray into this debate, although longer, is equally short on evidence.

Meanwhile Adam Mossoff has explored these issues with some compelling evidence and in great detail in his paper on the sewing machine wars of the 1850s and draws a very different lesson.

In the modern world the evidence supporting dire claims is equally weak, although you wouldn’t know it from media coverage and academic discourse that gloms on to events like the recent Apple-Samsung trial as evidence that the new Dark Ages are upon us.  Between the software Alex used to make that graph, the computer on which that software was run, and the enormous range of other innovations that brought it from his mind to my digital doorstep, we seem to be managing to produce and use an enormous amount of innovation.  What value, exactly, does Alex think is contained in the innovation delta between his red dot and the top of the curve?  As Richard Epstein put it:

Nor is there any obvious global sign of patent malaise in the software industry. Last I looked, the level of technological improvement in the electronics and software industries has continued to impress. The rise of the iPad, the rapid growth of social media, the increased use of the once humble cell phone as a mobile platform for a dizzying array of applications—these do not point to industries in their death throes. It may well be the case that a better patent system could have seen more rapid growth in technology.

I think he meant to add something like: “but we don’t know that, and we sure don’t know how much “better” and at what cost.”

Most important, the patent system just isn’t as “strong” most critics would have you believe.  Our liability regime (especially post-eBay) injects enormous uncertainty into the process.  Enforcement costs are high.  And the patent system doesn’t exist in a vacuum.  Antitrust laws, tax laws, trade laws, financial regulation, consumer protection rules, layer upon layer of regulatory oversight, etc., etc. serve to weaken these “optimal” incentives to innovate that simplistic analyses of the patent system largely assume away.  Ideally, perhaps, we’d remove all that detritus and then follow the critics’ advice.  But that isn’t going to happen, and in the meantime the interactions between various overlapping regulatory and legal rules — including the patent system itself, of course — are complex and poorly-understood.  Perhaps we could do better, but it is by no means clear that further weakening patent rights will get us there.  And in the meantime, reports of innovation’s death seem like a bit of an exaggeration.