Google to Pay $22.5 Million to Settle FTC Charges of Misrepresenting Internet Tracking

This posting was written by John W. Arden.

Google, Inc. has agreed to pay a $22.5 million civil penalty to settle Federal Trade Commission misrepresentation charges concerning its promise not to place tracking “cookies” on the computers of users of Apple Inc.’s Safari Internet browser and not to direct targeted ads to those users, the FTC announced today.

The Commission charged Google with violating an October 2011 settlement, in which the company agreed not to misrepresent the extent that it protected the privacy and confidentiality of any information it collected from those visiting Google and partner websites and the extent to which consumers may exercise control over the collection, use, or disclosure of such information.

According to the FTC complaint, Google informed Safari Internet browser users that they did not need to take any action to be opted out of DoubleClick targeted advertisements and that it would not (1) place DoubleClick Advertising cookies on a user’s browser, (2) collect interest category information about the user, or (3) serve targeted advertisements to the user.

Despite these representations, Google overrode the Safari default browser setting and placed the cookies on Safari browsers, the FTC charged. The initial cookie enabled Google to collect, store, and transmit a user’s Google account ID. After the Safari browser accepted the initial cookie, Google set additional third-party cookies onto the user’s browser, it was alleged. Setting these cookies on users’ Safari browsers enabled Google to collect information and serve targeted advertisements to the users, the FTC said.

Besides making misrepresentations about its information collection and ad targeting practices, Google misrepresented that it adhered to the National Advertising Initiative’s Self-Regulatory Code of Conduct, which required the posting of a notice describing a company’s data collection, transfer, and use practices, the FTC claimed.

The civil penalty to be paid by Google is the largest the agency has ever obtained for a violation of an FTC consent order. In addition to the civil penalty, the consent order required Google to disable all the tracking cookies it said it would not place on consumer computers.

“The record setting penalty in this matter sends a clear message to all companies under an FTC privacy order,” said FTC Chairman Jon Leibowitz. “No matter how big or small, all companies must abide by FTC orders against them and keep their privacy promises to consumers or they will end up paying many times what it would have cost them to comply in the first place.”

The Commission voted 4-1 to authorize the staff to refer the complaint to the Department of Justice and to approve the proposed consent decree. Commissioner J. Thomas Rosch dissented.

In a statement, the Commission said that the settlement was in the public interest because there was strong reason to believe that Google violated the October 2011 consent order and the $22.5 million fine was an appropriate remedy. In his dissenting statement, Commissioner Rosch objected to Google’s denial of liability in the consent decree. Rosch saw “no reason why the more common ‘neither admits nor denies liability’ language would not adequately protect Google from collateral estoppel in [civil] lawsuits.”

The Commission strongly disagreed with the view that if it allowed a defendant to deny the complaint’s substantive allegations that the settlement would not be in the public interest.

The complaint is United States v. Google, Inc., filed yesterday by the Department of Justice in federal district court in San Jose, California. Text of the complaint and the proposed stipulated order appear on the FTC website, along with a news release on the case.

Further information will appear in CCH Trade Regulation Reporter.

Claims Against Apple, Publishers for "E-book" Pricing Survive Motion to Dismiss

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Purchasers of electronic books plausibly alleged that Apple, Inc. and five of the six largest U.S. publishing companies took part in a per se unreasonable conspiracy to raise prices for “e-books,” the federal district court in New York City has ruled.

It was reasonable to infer that the defending publishers had agreed among themselves to adopt a joint strategy to force an increase in the price of e-books.

The allegations of parallel conduct—including the publishers’ rapid and simultaneous switch from a wholesale or retail distribution model with e-book retailers to an agency model of distribution—raised a suggestion of preceding agreement, the court explained.

Each defending publisher’s decision to sign its particular agency agreement with Apple and to demand that online marketplace Amazon accept the agency model would have contravened the defendant’s self interest in the absence of similar behavior of its rivals. The complaining purchasers claimed that the agency agreements emerged from a horizontal agreement among the defending retailers in order to raise prices.

While allegedly coordinating a series of substantively-identical vertical agreements with the publishers, Apple purportedly made clear to its vertical partners that it was offering each of them "the first" deal. While allegedly coordinating a series of substantively-identical vertical agreements with the publishers, Apple purportedly made clear to its vertical partners that it was offering each of them a similar deal..

Although the purchasers did not claim that Apple had an interest in higher retail prices, they plausibly alleged that Apple had an interest in limiting retail competition. The agency agreements included clauses that granted Apple "most favored nation" pricing guarantees--to eliminate price competition among e-book retailers.

Even though the defendants' motive for joining the conspiracy might have been different, the complaining purchasers plausibly alleged that each of the defendants shared the twin purposes of raising the price of e-books and eliminating retail competition.

The court rejected the assertion that a hub-and-spoke conspiracy was not plausibly alleged because Apple Inc. (the alleged hub) was not a dominant firm. A hub was generally a dominant purchaser or supplier, but it did not have to be.

The court also rejected Apple's contention that its agency agreements with the publishers should be found lawful under a rule of reason analysis because they were simply agreements by a principal to set the price charged by its agent.

Regardless of the nature of the specific terms of the vertical agency agreements when examined in isolation, complaining e-book purchasers plausibly alleged a horizontal agreement among the publishers, furthered by Apple, to raise the prices of the e-books and eliminate retail competition in per se violation of the Sherman Act.

The decision is In Re: Electronic Books Antitrust Litigation, 2012-1 Trade Cases ¶77,889.

Publishers, Apple Conspire to Fix Prices of E-Books: State Attorneys General

This posting was written by John W. Arden.

Publishers Penguin, Simon & Schuster, and MacMillan have conspired with Apple, Inc. to fix the sales prices of electronic books, according to an antitrust lawsuit filed by 16 state attorneys general in the federal district court in Austin.

The publishers and Apple were charged with a horizontal conspiracy to raise e-book retail prices in violation of Sec. 1 of the Sherman Act and the antitrust laws of the 16 states. The complaint, filed today, seeks injunctive relief, an award of trebled damages, civil fines, and attorneys’ fess and costs.

The lawsuit was based on a two-year investigation into allegations that the defendants conspired to raise e-book prices. The investigation—led by the Texas Attorney General’s office and coordinated by the Connecticut Attorney General and the U.S. Department of Justice—revealed that Penguin, Simon & Schuster, and MacMillan conspired with other publishers and Apple to artificially raise prices by imposing a distribution model in which the publishers set prices for bestsellers at $12.99 and $14.99, according to the Texas Attorney General.

The complaint charges that when Apple entered the e-book market, the publishers and Apple agreed to adopt an agency distribution model—rather than the traditional wholesale distribution model—to allow them to fix prices. Because the publishers agreed to charge the same prices, retail price competition was eliminated and customers paid more than $100 million in overcharges.

Prior to filing suit, the states reached an agreement in principle with publishers Harper Collins and Hachette on issues of injunctive relief and consumer restitution.

Text of a news release on the lawsuit appears here on the Texas Attorney General’s website. The 56-page complaint in State of Texas v. Penguin Group (USA) Inc. appears here.

Users Lacked Standing to Assert Privacy Claims Against Apple, Mobile App Developers

This posting was written by Thomas A. Long, Editor of CCH Privacy Law in Marketing.

Users of mobile applications on Apple’s devices could not maintain an action against Apple and mobile app developers for alleged violations of various federal and state privacy laws, because the users failed to allege that they had suffered any injury, the federal district court in San Jose has decided.

Without sufficient allegations of any injury in fact, a federal district court concluded that the users did not have constitutional standing.

Users may download apps for Apple devices only through Apple’s "App Store" application and website. According to the complaint, Apple represented to users that it took precautions to safeguard their personal information against "theft, loss, and misuse, as well as against unauthorized access, disclosure, alteration, and destruction."

Apps Access User Information

However, the devices’ operating system allows apps—without consent of the users—to access, use and track the following information: address book, cell phone numbers, file system, geolocation, International Mobile Subscriber Identity, keyboard cache, photographs, SIM card serial number, and unique device identifier. Developers of apps are able to exploit this access to collect and track personal data without the user’s permission or knowledge.

The users brought suit against Apple and eight mobile app developers for violations of various federal and state laws, including the Computer Fraud and Abuse Act and California’s Computer Crime Law. Apple and the developers argued that the users lacked standing to bring suit, because they did not allege any injury in fact. Apple also argued that its privacy agreements with users barred the users’ claims.

Injury in Fact

To satisfy the constitutional standing requirements of Article III, plaintiffs must show that:

(1) They have suffered an injury in fact that is concrete and particularized and actual or imminent;

(2) The injury is fairly traceable to the challenged action of the defendant; and

(3) It is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

In their complaint, the users alleged three injuries:

(1) Misappropriation or misuse of personal information;

(2) Diminution in value of the personal information, which is an "asset of economic value" due to its scarcity; and

(3) "Lost opportunity costs" in having installed the apps and diminution in value of the Apple devices because their insufficient security made them less valuable in light of the privacy concerns.

The court determined, however, that the users failed to allege any injury to themselves. The users did not identify which devices they used, if any of the developers accessed or tracked their personal information, and what harm, if any, resulted from such activity. As a result, the users failed to identify any concrete harm from Apple’s or the developers’ activities.

Injury Traceable to Defendants

In addition, the users failed to allege any injury that was fairly traceable to Apple or the developers. The users’ only allegation as to Apple was that Apple designed a platform that could potentially be used by the developers for harmful acts. Such conjectural or speculative allegations about the risk of harm are not sufficient for standing, the court concluded.

Lastly, Apple argued that "click-through" agreements with the users governed any potential liability for third-party apps on the users’ devices, and the express terms and conditions of the agreements barred claims against Apple for any alleged injuries.

The users argued that the agreements were unconscionable, providing no meaningful choice for users. While the court declined to determine whether the agreements were an absolute bar to the users’ claims, it noted that there is always a meaningful choice when a challenged term in a contract involves nonessential recreational activities—forgoing the activity.

The decision is In re iPhone Application Litigation, CCH Guide to Computer Law ¶50,268.

Apple Subscription Service Draws Antitrust Scrutiny in U.S., EU: News Reports

This posting was written by John W. Arden.

Subscription terms set by Apple Inc. for media companies seeking to sell content on the iPad. iPhone, and its other devices have attracted the interest of antitrust officials in both the United States and the European Union, according to news reports.

The Wall Street Journal reported on February 18 that, according to unnamed sources, the Justice Department and Federal Trade Commission were examining whether the Apple “was running afoul of U.S. antitrust laws by funneling media companies’ customers into the payment system for its iTunes store—and taking a 30% cut . . . ”

Under Apple’s terms, companies selling digital subscriptions to content on Apple devices would have to make the content available for sale through the iTunes App Store at the best available price. They could not link to stores other than its App Store and could not offer better terms to subscribers elsewhere. This “most favored nation” clause could be considered anticompetitive if it distorts pricing.

U.S. antitrust enforcers would have to show that Apple has market power and was abusing it. Market definition is always a key issue.

While the iPhone is very popular, it has only a 16% share of smartphones and a very small share of the mobile telephone market, according to the Journal. Although Apple currently has about 75 percent of the tablet computer market, that share could drop when competitive brands start appearing.

Officials from the Justice Department, FTC, and Apple declined to comment to the Journal.

Meanwhile, a spokeswoman for the European Commission said that the Commission was “carefully monitoring the situation.”

The Independent, an Irish newspaper, quoted competition lawyer Guy Lougher of Pinsent Masons as predicting that the Apple subscription service was likely to appear on the European Commission’s radar “sooner rather than later.”

He added that a competition investigation would have to determine whether Apple has a dominant position in the market. Apple might successfully argue that the market is all digital media—a market where Apple does not have a monopoly.

The Wall Street Journal article (“Regulators Eye Apple Anew,” February 18, 2011) appears here. The Independent article (“Apple subscription service attracts regulators’ attention,” February 18, 2011) appears here.

Tech Firms Resolve U.S. Antitrust Challenge to Hiring Practices

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

As the Department of Justice Antitrust Division continues its investigation into the use of “no solicitation” agreements among employers to hold down employee salaries and defections, six high technology companies have agreed to modify their recruiting practices to settle a federal antitrust action.

The Antitrust Division alleged that the companies entered into agreements that restrained competition between them for highly skilled employees. Under the terms of a proposed consent decree, the companies would be prohibited from entering into an agreement not to cold call or recruit an employee.

The civil complaint and proposed consent decree were filed on September 24 in the federal district court in Washington, D.C. The consent decree, if approved by the court, would resolve the government's suit.

Ban on Recruitment "Cold Calling"

The Department of Justice alleged that the six companies—Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar—entered into five substantially similar agreements that banned "cold calling" of employees for recruitment purposes.

Senior executives of the companies purportedly entered the express agreements and enforced them. According to the government, the agreements—some of which date back to 2005—were naked restraints of trade that were per se unlawful under Sec. 1 of the Sherman Act.

The government contended that the agreements to ban “cold calling” were not justified by the legitimate collaborative projects in which the companies engaged. They were broader than reasonably necessary for any collaboration between the companies. The agreements were not tied to any specific collaboration, nor were they narrowly tailored.

Investigation of Employment Practices

In announcing the matter on September 24, the Justice Department said that the complaint arose out of a larger investigation by the Antitrust Division into employment practices by high tech firms. The statement went on to say that the Antitrust Division continues to investigate other similar no solicitation agreements.

This is not the first Justice Department action to challenge alleged efforts to hold down employee wages. In its Competitive Impact Statement explaining the settlement, the government cited a 1996 consent decree resolving an alleged agreement to curb competition between residency programs for senior medical students and residents of other programs (U.S. v. Assn. of Family Practice Residency Directors, W.D. Missouri, 1996-2 Trade Cases ¶71,533). The consent decree enjoined prohibitions on the solicitation of residents from other programs.

While the companies did not admit to any wrongdoing, the investigation opened the door for private antitrust claims from employees. Recent efforts to pursue antitrust class actions challenging employer efforts to damp wages have, however, not proven successful.

In Reed v. Advocate Health Care(N.D. Illinois, 2009-2 Trade Cases ¶76,758), the federal district court in Chicago rejected a class action against a purported conspiracy to suppress wages of registered nurses. Similarly, a federal district court in New Jersey refused to certify a putative class alleging a conspiracy among major U.S. oil companies to exchange information concerning employee competition.

Summary judgment was ultimately entered in favor of the defending oil companies in the long-running matter (In re: Compensation of Managerial, Professional and Technical Employees Antitrust Litigation, D. New Jersey, 2006-1 Trade Cases ¶75,096; 2008-2 Trade Cases ¶76,438).

A new release on the proposed settlement appears here on the Antitrust Division’s website. Text of the complaint and proposed consent decree appear here.

The proposed consent decree in U.S. v. Adobe Systems, Inc. will appear at CCH Trade Regulation Reporter ¶50,982.

Apple, Google Boards of Directors Lose Members as FTC Investigates Overlaps

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Google announced yesterday that a member of its corporate board of directors, who was also a member of Apple’s corporate board, had stepped down.

Google did not give a reason for the resignation of Dr. Arthur Levinson. However, it follows an August 3 announcement by Apple that Google's chief executive officer, Eric E. Schmidt, was stepping down from Apple's board.

At that time, Apple said that Schmidt's departure was a mutual decision and necessary in light of growing competition between the firms.

“Unfortunately, as Google enters more of Apple's core businesses, with Android and now Chrome OS, Eric's effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest,” said Steve Jobs, Apple's CEO.

FTC Reaction

In response to Google’s announcement about Levinson’s resignation, FTC Chairman Jon Leibowitz said:

“Google, Apple, and Mr. Levinson should be commended for recognizing that overlapping board members between competing companies raise serious antitrust issues and for their willingness to resolve our concerns without the need for litigation.”

Leibowitz added that the agency would “continue to monitor companies that share board members and take enforcement actions where appropriate.”

Government Challenges

The FTC disclosed in August that it was investigating Google/Apple interlocking directorates. Sec. 8 of the Clayton Act conditionally prohibits interlocking directorates in competing corporations. Yet, government challenges to the overlaps are rare.

Over the last few decades, there have only been a handful of government challenges. The most recent Department of Justice complaint alleging a Clayton Act, Sec. 8 violation was filed in 2007. In that case, the government challenged CommScope Inc.'s proposed $2.6 billion acquisition of Andrew Corporation to preserve competition for drop cable.

The government contended that the transaction would have given CommScope the ability to appoint directors to the board of Andes, a substantial competitor, in violation of Sec. 8 of the Clayton Act. The suit was resolved by a consent decree (2008-2 Trade Cases ¶76,247). (See December 10, 2007 entry, Trade Regulation Talk.)

Yesterday’s announcement by the FTC could signal a move toward greater scrutiny of interlocks, however, especially between high profile companies like Google and Apple.

The Google announcement appears here on the company website. Commissioner Leibowitz’s statement is available here.