The FTC and The Google

On January 3, the Federal Trade Commission announced that Google has agreed to change some of its business practices to resolve concerns that those practices could stifle competition in the markets for popular devices such as smart phones, tablets and gaming consoles, as well as the market for online search advertising. Under a settlement reached with the FTC, Google will meet its prior commitments to allow competitors access – on fair, reasonable, and non-discriminatory terms – to patents on critical standardized technologies needed to make popular devices such as smart phones, laptop and tablet computers, and gaming consoles. In a separate letter of commitment to the FTC, Google has agreed to give online advertisers more flexibility to simultaneously manage ad campaigns on Google’s AdWords platform and on rival ad platforms; and to refrain from misappropriating online content from so-called “vertical” websites that focus on specific categories such as shopping or travel for use in its own vertical offerings. Google handles about two-thirds of all U.S. Web searches, according to research firm ComScore.

Google will not seek injunctions to block rivals from using patents essential to key technologies
In 2012, Google paid about $12.5 billion to acquire Motorola Mobility, including Motorola’s patent portfolio of over 24,000 patents and patent applications. These patents have been a significant source of revenue for at least a decade, and hundreds of Motorola’s patents are essential to industry standards used to provide wireless connectivity and for internet-related technologies. These standards are essential for smartphones, tablets, gaming systems, operating systems, and the increasing number of devices offering wireless connectivity or high definition video.

Development and use of these types of standards is a cornerstone for many high-tech markets, and encourages innovation and investment in high-tech products, according to the FTC’s complaint. By agreeing to standards, companies can ensure that the numerous components of a device or a technology network can work together seamlessly, often called “interoperability.”

Setting a standard, however, can have the effect of giving market power to the owner of a patent that is deemed essential to the standard, according to the agency. That patent – even if it is only on a small component of a much larger and more complex device – can be used to “hold up” a licensee for an excessive royalty. To avoid this problem, technology companies involved in setting a standard commit to license standard-essential patents on “fair, reasonable and non-discriminatory” terms – known as FRAND terms.

The FTC’s complaint alleges that Google reneged on its FRAND commitments and pursued – or threatened to pursue – injunctions against companies that need to use Motorola’s standard-essential patents in their devices and were willing to license them on FRAND terms. Specifically the company pursued injunctions in federal district court and at the United States International Trade Commission (“ITC”) to block competing technology companies from using MMI standard-essential patents.

The FTC alleged that this type of patent hold-up is what the standard setting organizations sought to prevent by instituting FRAND licensing requirements. According to the FTC, if left unchecked, this type of patent hold-up can lead to higher prices, as companies may pay higher royalties for the use of Google’s patents because of the threat of an injunction, and then pass those higher prices on to consumers. This may cause companies in technology industries to abandon the standard-setting process and limit or forgo investment in new technologies, according to the agency.

To remedy this concern, Google has agreed to a Consent Order that prohibits it from seeking injunctions against a willing licensee, either in federal court or at the ITC, to block the use of any standard-essential patents that the company has previously committed to license on FRAND terms.

Google will remove restrictions hampering advertisers’ management of their ad campaigns across competing ad platforms
Under a separate commitment, Google has agreed to remove restrictions on the use of its online search advertising platform, AdWords, that may make it more difficult for advertisers to coordinate online advertising campaigns across multiple platforms.

Advertisers who wish to use a search advertising platform spend considerable time, effort, and resources preparing extensive bids, including keywords, price information, and targeting information. Once an advertiser has entered the information necessary to create a search advertising campaign, the advertising platform sends critical data back to the advertisers that they need to evaluate the effectiveness of, and to further manage, their campaign. Advertising platforms use application programming interfaces, known as APIs, to give advertisers direct access to these advertising platforms so they can develop their own software programs to automatically manage and optimize their advertising campaigns.

Some FTC commissioners were concerned that Google’s contractual conditions governing the use of its API made it more difficult for an advertiser to simultaneously manage a campaign on AdWords and on competing ad platforms, and that these restrictions might impair competition in search advertising.

Google will give websites the ability to “opt out” of display on Google vertical properties

Under the same commitment, Google also has promised to provide all websites the option to keep their content out of Google’s vertical search offerings, while still having them appear in Google’s general, or “organic,” web search results. The FTC investigated allegations that Google misappropriated content, such as user reviews and star ratings, from competing websites in order to improve its own vertical offerings, such as Google Local and Google Shopping. Some FTC commissioners were concerned that this conduct might chill firms’ incentives to innovate on the Internet.

FTC’s investigation into allegations of search bias

The FTC conducted an extensive investigation into allegations that Google had manipulated its search algorithms to harm vertical websites and unfairly promote its own competing vertical properties, a practice commonly known as “search bias.” In particular, the FTC evaluated Google’s introduction of “Universal Search” – a product that prominently displays targeted Google properties in response to specific categories of searches, such as shopping and local – to determine whether Google used that product to reduce or eliminate a nascent competitive threat. Similarly, the investigation focused on the allegation that Google altered its search algorithms to demote certain vertical websites in an effort to reduce or eliminate a nascent competitive threat. The FTC concluded that the introduction of Universal Search, as well as additional changes made to Google’s search algorithms – even those that may have had the effect of harming individual competitors – could be plausibly justified as innovations that improved Google’s product and the experience of its users. It therefore has chosen to close the investigation. Google, of course, concurred. Chief Legal Officer David Drummond wrote in a blog post, “The conclusion is clear: Google’s services are good for users and good for competition.”

Independent of whether you think Google was being a big, bad, anticompetitive bully, the FTC investigation was hampered by a couple things: First, U.S. antitrust laws would have to stretch to cover cases in which it’s not clear that consumers are harmed; and second, FTC Chairman Jon Leibowitz, who was driving the case, would like to step down from his position soon, and so won’t be around to see a lengthy legal battle through. Chairman Leibowitz had been trying to wrap up the case by the end of 2012, and narrowly missed that window.

“The evidence the FTC uncovered through this intensive investigation prompted us to require significant changes in Google’s business practices. However, regarding the specific allegations that the company biased its search results to hurt competition, the evidence collected to date did not justify legal action by the Commission,” said Beth Wilkinson, outside counsel to the FTC. “Undoubtedly, Google took aggressive actions to gain advantage over rival search providers. However, the FTC’s mission is to protect competition, and not individual competitors. The evidence did not demonstrate that Google’s actions in this area stifled competition in violation of U.S. law.”

Antitrust lawyers not involved in the case have generally agreed that bringing a monopoly case against Google would have been challenging. The FTC likely would have needed to prove not only that Google abused its power, but also that its customers were harmed in the process. "There are many features of this case that made it difficult for the FTC, including the fact that consumers aren't locked into Google," said Keith Hylton, a professor at Boston University's law school. He added that since Google is constantly changing its search algorithm, it would be difficult to regulate that process.

FTC Commissioner J. Thomas Rosch, who is stepping down from the FTC this week, issued a dissenting statement. He said the settlement “creates very bad precedent and may lead to the impression that well-heeled firms such as Google will receive special treatment at the Commission.” That’s both because he doesn’t think Google violated antitrust laws and because he doesn’t think the non-binding search agreement Google made has any teeth. “In other words, after promising an elephant more than a year ago, the Commission instead has brought forth a couple of mice,” he said. Commissioner Rosch voted to close the search investigation and discipline Google on standards-essential patents, but he abstained from voting for Google’s voluntary settlement agreement and a statement on the patent matter. Commissioner Rosch’s point: by stretching to catch Google on something — anything — the FTC reached too far.

Both Politico and the New York Times report that Google’s lobbying won the day. Google spent about $25 million in lobbying, made an effort to cozy up to the Obama administration and hired influential Republicans and former regulators. The company even consulted with the late Robert Bork and The Heritage Foundation and met with senators like John Kerry (D-MA) to make its case. In other words, these traditional outsiders worked the system from the inside. “It was a multiyear campaign focused on this very moment, knowing as the company grew these issues were going to come up,” said Alan Davidson, former head of Google’s office in Washington who left last year for the Massachusetts Institute of Technology. “We had the benefit of watching those who had come before us, and we saw the mistakes that were made. We didn’t want to replicate what they had done.”

“The way they managed to escape it is through a barrage of not only political officials but also academics aligned against doing very much in this particular case,” said Herbert Hovenkamp, a professor of antitrust law at the University of Iowa who has worked as a paid adviser to Google in the past. “The first sign of a bad antitrust case is lack of consumer harm, and there just was not any consumer harm emerging in this very long investigation.”

As for the concessions (will license important mobile technology patents on "fair, reasonable and non discriminatory terms;" it will allow businesses to easily take their advertising campaigns from Google to rival search engines; and it will voluntarily agree to some changes in its relationship with "vertical" search engines like Yelp), Miguel Helft writes in Fortune, they “were merely tactical. Google held firm on these issues until now with one goal: give something to the FTC so it could close the search bias case and save face.”

Writing in the Wall Street Journal, Liz Gannes seems to believe that the standards-essential patents decision is significant:

• The FTC is now on record saying that Google acted unfairly. That’s big.
• Google doesn’t have to drop its existing appeals of SEP cases, according to clarifying comments by FTC spokesman Peter Kaplan. However, Google can’t obtain or enforce any SEP exclusion orders or injunctions.
• Google’s agreement with the FTC is binding. But it is not necessarily as strong as what Apple and Microsoft already committed to voluntarily when the Department of Justice and other agencies in Europe were looking into the matter. They both said that they won’t seek injunctive relief based on SEPs, ever.

But Brent Kendall and Thomas Catan, also writing in the Wall Street Journal, see the decision as the latest example of how the Obama Administration’s enforcement has generally remained cautious and within the mainstream of antitrust law.

The Obama Administration has caused some pain for large corporations including AT&T, which abandoned its bid for rival cellphone provider T-Mobile USA after a Justice Department lawsuit. That case and others like it, though, relied on time-honored antitrust principles about avoiding excess concentration in an industry.

"Being aggressive on antitrust enforcement is a lot harder in practice than it looks," said David Wales, a former antitrust regulator now at the law firm Jones Day, in part because regulators must ultimately win their cases in courts that have proved skeptical of expansive interpretations of antitrust law.

Chairman Leibowitz faced stubborn divisions in the Google case. He and his two fellow Obama appointees had concerns that Google unfairly "scraped" or misappropriated content from competing websites, such as those that post user reviews of restaurants, travel and other businesses. But two other commissioners didn't agree. And Chairman Leibowitz won only one commissioner's assent over his concern that Google was placing unreasonable restrictions on advertisers.

For years, Chairman Leibowitz has sought to revive a long-dormant power to tackle unfair business practices beyond the scope of antitrust law under Section 5 of the law giving the FTC its powers. It is a powerful but vaguely defined tool, and using it against Google would have been risky.

"The remedies were likely tempered by the litigation risk, which would have been significant," said Mr Wales of Jones Day. "The FTC doesn't want to lose on these legal theories, because of the potential negative precedent."