• What Businesses Need to Know About the FTC’s Settlement With Google
  • January 15, 2013 | Authors: Gregory L. Lippetz; Geoffrey D. Oliver; Craig A. Waldman; David P. Wales
  • Law Firms: Jones Day - Palo Alto Office ; Jones Day - Washington Office ; Jones Day - San Francisco Office ; Jones Day - Washington Office
  • The Federal Trade Commission has announced a settlement with Google that secured limited changes to Google’s practices, but brought no action against Google’s alleged search manipulation. Like many blockbuster antitrust investigations, there are aspects of the FTC’s Google matter unlikely to be repeated in other cases. But the FTC’s announcement may signal some policy shifts and provide reminders of the limits of antitrust enforcement that are useful to businesses of all sizes and industries.

    There are two parts to the FTC-Google settlement: First, Google signed an informal commitment letter in connection with its software advertising platform restrictions and scraping policies. Second, Google agreed to a consent order regarding Google’s patent enforcement policies. In addition, in the aspect that has attracted the most media attention, the FTC closed the core of the investigation regarding whether Google’s manipulation of its search engine violates the antitrust laws. But Google is not out of the woods yet, because a similar investigation continues in five U.S. States and the European Commission (EC).

    Online advertising case - informal commitment letter

    Several Commissioners had expressed concerns that Google was restricting competition by third party advertisers and potentially inhibiting innovation with some of its business practices for online search advertising and use of third party content. In response, Google submitted an informal commitment letter detailing voluntary concessions. Google agreed to remove application programming interface (API) restrictions on its software advertising platform, in response to the FTC’s concern that such restrictions made it difficult for advertisers to manage their ad campaigns on rival networks. Advertisers utilize APIs to receive data on the effectiveness of their campaigns and to manage ad campaigns across multiple networks. Additionally, Google agreed to refrain from misappropriating content from a competitor’s website for display on Google’s own websites. Google will allow websites to “opt out” of being displayed on Google vertical properties, such as Google Shopping, without affecting their rankings in Google’s general web search results. Notably, the commitment from Google was not in the form of a formal consent order, and is the case for virtually all such settlements, but an informal commitment letter. As a result, the FTC will have little to no ability to monitor Google’s activities or impose fines for any violation of the commitment.

    The patent case - consent order

    A consent order addressed Google’s licensing of certain patents to mobile phone rivals. In 2012, Google acquired Motorola Mobility and its patent portfolio. This included patents essential for ETSI, IEEE and ITU industry standards used to provide wireless connectivity in smartphones, tablets, and other internet-related technologies. The FTC alleged that, in the industry establishment of these standards, Motorola had agreed to license its standard-essential patents to companies seeking to implement the standards on “fair, reasonable and non-discriminatory” (FRAND) terms. The FTC further alleged that Motorola, and subsequently Google, had pursued court injunctions to block competitors from using the patents to implement the industry standards. The FTC consent order requires Google to refrain from seeking injunctive relief against potential licensees without first offering to license its standards-essential patents.

    Google search manipulation - investigation closed

    Despite these commitments from Google, most see the real story to be the FTC’s failure to challenge Google’s alleged manipulation of search results. The FTC did find evidence that Google altered its search algorithms to favor its own websites over competitors and that this resulted in significant traffic loss to those websites. Despite this, the FTC determined that the changes to the search algorithm “could be justified as innovations that improved Google’s product and the experience of its users.” For example, the changes to Google’s search algorithm presented the user with a greater diversity of websites on the first search page. As FTC outside counsel stated, “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 details of the Google investigation history and settlement have been reported in many places. We thought it would be useful to answer clients’ most pressing practical questions about the FTC’s Google announcement.

    1. Does the Google settlement mean companies may address FTC concerns through letter commitments rather than formal consent orders?

    No. The FTC and Antitrust Division of the Department of Justice have a long history of requiring formal consent orders in virtually all types of antitrust matters, as these orders give the agencies greater power to monitor and enforce compliance and penalize companies for violations. Very rarely has the FTC agreed to a letter commitment or similar informal resolution, and only (at least historically) when monitoring future compliance is not critical. The use of a commitment letter in the Google settlement primarily speaks more to the unique circumstances of the particular case than any increase in the FTC’s willingness to utilize informal remedies. The investigation into Google was extraordinary, if for nothing else, the attention it received. Moreover, under U.S. law it is especially difficult to challenge a monopolist for engaging in conduct that has not before been found unlawful. The FTC likely wanted to avoid a court ruling that would establish negative precedent for future FTC enforcement actions.

    Google likely refused to enter into a consent order with respect to its software advertising and scraping practices and threatened to litigate, forcing the FTC to accept the less demanding letter commitment. Several of the Commissioners’ blunt criticism of the letter commitment from Google confirms that the FTC is unlikely to change its strong preference for formal orders going forward. In a separate statement, (now former) Commissioner Tom Rosch criticized using an informal letter for settlement: “The Commission’s acceptance of a commitment letter to resolve an alleged violation of the antitrust laws is an unjustified and dangerous weakening of the Commission’s law enforcement authority. Going forward, parties under investigation are likely to demand similar treatment. Failure to do so would imply that Google has received preferential treatment.”

    2. Why did the FTC fail to challenge Google’s alleged search engine bias?

    Despite the FTC’s stated desire to challenge Google’s alleged manipulation of its search results, the lack of an enforcement simply reflects that the FTC did not believe the facts and law supported such an action. Some have speculated that Capitol Hill pressure caused the FTC to refrain from bringing an action. The fact is, under current law, it is an uphill battle for the government to challenge a company’s independent design decisions, even those that exclude competitors, when that company has a plausible justification for how that design change benefits customers. This is especially true in complex and dynamic markets, as in the Google case. Notwithstanding considerable effort over a nineteen-month investigation and going so far as to hire outside litigation counsel to develop a challenge to Google’s search bias, the FTC was unable to make the case. This is a reminder that, even in a time of aggressive antitrust enforcement, the agencies still must identify and be able to support a viable theory of harm to competition before subjecting companies to onerous consent decrees.

    3. Does the FTC’s complaint about the standard essential patents signal a shift in enforcement?

    Likely yes. Although this consent agreement is consistent with positions previously taken by the FTC with respect to FRAND licensing commitments, when viewed in conjunction with the recent FTC settlement with Robert Bosch GmbH (Bosch), it seems to represent a shift in enforcement policy. In recent amicus briefs in federal court and the International Trade Commission and in Congressional testimony, the FTC has taken the position that injunctive relief should not be available to a patent-holder that has committed to license standards-essential patents on FRAND terms. However, there is a significant difference between arguing that a court should deny a patent-holder’s request for injunctive relief and alleging that a patent-holder that requests such relief has engaged in an unfair method of competition in violation of Section 5 of the FTC Act. By alleging such a violation, the Commission has transitioned from advocacy to enforcement on the issue.

    The Google consent order likely represents the current FTC enforcement policy more accurately than the Bosch consent order. The Google consent order appears to clarify the current Commission’s likely enforcement policy in three ways:

    First, future enforcement actions are likely to be limited to the specific commitment made by the patent-holder (in most cases, to offer to license patents that are proven to be essential to practice a standard). The FTC order in the Bosch matter applies to 37 patents that “are or may be” essential to the practice of one or two relevant standards. By contrast, the Google order is narrower because it only applies to patents with respect to which Motorola actually made a FRAND commitment.

    Second, the FTC is likely to avoid determining which patents are essential to practicing a standard. The Bosch order specifies the list of patents to which the order applies, and the Commission did not determine that all the covered patents were essential to the practice of a standard, but included within the scope of the order all patents that may be essential to the practice of the standard. By contrast, the Google order postpones the question of which patents are covered by the order to future determination by a court or arbitrator on whether a particular patent that Google seeks to enforce is in fact subject a FRAND commitment.

    Third, absent a clear benchmark, the FTC is likely to avoid determining the meaning of “FRAND.” In the Bosch matter, the FTC could implicity define FRAND as royalty-free only because Bosch agreed to license its patents on a royalty-free basis to a third party to resolve merger concerns. By contrast, the Google order does not define “FRAND,” but instead details the procedure for the parties to follow to make such determination. (Importantly, the Google consent order recognizes that FRAND involves not just a royalty rate, but also all other relevant terms of a licensing agreement.)

    4. Did the complaints against Google by competitors affect the FTC investigation?

    Yes, to a degree. Competitor complaints may have extended the investigation, because we understand they were numerous and enthusiastic in urging the FTC to leave no stone unturned in a high-profile investigation. However, the FTC’s primary focus is protecting consumers, not competitors, and actions that harm competitors do not always amount to cognizable antitrust concerns. Even if the FTC takes competitor comments with a grain of salt, they often provide very helpful information to the FTC in its investigations, including background information, insights into the relevant markets, evidence of wrongdoing, and even input on legal theories or potential remedies. Ultimately, the FTC is responsible for assessing all the evidence under the applicable law and determining if there has been a violation.

    5. Is it still possible the European Commission (EC) will seek a more onerous remedy from Google?

    Yes. While the FTC tries to coordinate its investigations and enforcement with the EC and other foreign competition agencies, it is not uncommon for the results of U.S. and European investigations to differ. Precedents include the Microsoft operating system monopolization investigation, where the EC sought greater remedies, and the Deutsche Börse/NYSE Euronext and General Electric/Honeywell mergers, both of which the EC blocked despite U.S. approval. Divergent agency action could result from differences in local market dynamics or legal principles. Especially relevant here are the differing approaches to unilateral conduct by dominant firms. European law is more receptive to challenging alleged abuses of a dominant firm and more willing to impose an affirmative duty on the dominant firm to accommodate rivals. Google may very well have resolved the U.S. investigation in the hopes of influencing the EC. However, there is no guarantee the FTC outcome will limit the European investigation. As the EC has announced, “We have taken note of the FTC decision, but we don’t see that it has any direct implications for our investigation, for our discussions with Google, which are ongoing.”

    6. Does the Consent Order provide guidance for the licensing and enforcement of standards-essential patents?

    Yes and no. The Google consent order, negotiated under threat of government prosecution, provides some guidance for both licensors and licensees of FRAND patents, but it leaves open a number of questions. The order suggests that injunctive relief may be inappropriate unless there has been an offer and rejection of a FRAND license. The order also recognizes that any determination of what constitutes FRAND should include an analysis of all of the terms of the license, not just the monetary terms. However, the order provides no guidance as to what are “fair, reasonable and non-discriminatory” terms. While the consent order sets forth a specific procedure that Google must follow going forward (including the possibility of binding arbitration to resolve disputes regarding what constitutes FRAND), it does not answer many of the most difficult open questions that surround FRAND licensing activities.