FTC Closes Investigation into Google's Search Business But Requires Commitments Regarding Standard Essential Patent Licensing

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

The FTC announced on January 3 that it has unanimously decided to close its investigation into alleged “search bias” by Internet search engine Google, Inc. without taking action after a 19-month investigation. At the same time, the agency released for public comment a proposed consent order with the company that would resolve a separate competition-related investigation into alleged misuse of patent protection (In the Matter of Motorola Mobility LLC, FTC File No. 121 0120).

“Today’s bipartisan Commission action brings to an end the Commission’s investigations of Google in a fashion calculated to bring the maximum relief to American consumers in a timely way,” said FTC Chairman Jon Leibowitz at a press conference announcing the agency's long-awaited decisions.

Search Bias Investigation

The Commission decided not to take action against Google under Sec. 5 of the FTC Act based on allegations that the company unfairly preferences its own content on the Google search results page and selectively demoted its competitors’ content from those results. Google is a “horizontal,” or general purpose, search engine, delivering a comprehensive list of results to any query, according to the FTC. Some vertical websites, which focus on narrowly defined categories of content such as shopping or travel and offer an alternative to Google for specific categories of searches, complained that Google unfairly promoted its own vertical properties through changes in its search results page. It also was alleged that Google manipulated its search algorithms in order to demote vertical websites that competed against Google’s own vertical properties.

The Commission's search bias investigation focused on whether Google's algorithm and design changes were aimed at excluding actual or potential competitors or were intended to improve the quality of its search results. “The totality of the evidence indicates that, in the main, Google adopted the design changes that the Commission investigated to improve the quality of its search results, and that any negative impact on actual or potential competitors was incidental to that purpose,” the Commission explained in a closing statement. The evidence did “not support the allegation that Google’s display of its own vertical content at or near the top of its search results page was a product design change undertaken without a legitimate business justification.”

In a footnote, the Commission statement noted that the agency was concerned with two other practices allegedly engaged in by Google: (1) that Google unfairly “scraped,” or misappropriated, the content of competing websites, passed this content off as its own, and then threatened to delist these rivals entirely from Google’s search results when they protested the misappropriation of their content; and (2) that Google placed unreasonable restrictions on the ability of advertisers to simultaneously advertise on Google and competing search engines, or “multihome.” Google committed to refrain from this conduct in the future.

Google agreed to provide a mechanism to allow websites to opt out of being displayed in Google’s vertical search results but remain in Google’s organic search results to remedy allegations that it misappropriated, or “scraped,” the content of three rival websites that supply local information or shopping comparison services. Google also agreed to give online advertisers more flexibility to simultaneously manage ad campaigns on Google’s AdWords platform and on rival ad platforms.

In a separate statement, Commissioner J. Thomas Rosch concurred with the decision to close the search bias investigation but dissented from the Commission’s closing statement for two reasons: (1) the scraping and multihome practices do not violate the antitrust laws; and (2) the practices could be revived at any time without penalty, even if they constituted a law violation. “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,” Rosch noted.

Commissioner Maureen K. Ohlhausen said in her separate statement that she would have closed the investigation without imposing any remedy, no matter the form. She said that she saw no claim premised on the so-called “scraping” conduct or the terms and conditions related to Google’s AdWords application programming interface (API). “[T]here is no viable theory of harm…for bringing a case in these two areas,” Ohlhausen concluded.

Standard Essential Patents

The FTC also announced a proposed consent order with Google and its wholly-owned subsidiary Motorola Mobility LLC, resolving allegations that the companies engaged in unfair methods of competition and unfair acts or practices in violation of the FTC Act relating to the licensing of standard essential patents (SEPs) for cellular, video codec, and wireless LAN standards.

The Commission’s proposed complaint alleges that, after committing to license the SEPs on fair, reasonable, and nondiscriminatory (FRAND) terms, Motorola sought injunctions and exclusion orders against willing licensees, undermining the procompetitive standard setting process. After purchasing Motorola for $12.5 billion in June 2012, Google allegedly continued Motorola’s anticompetitive behavior. The company pursued injunctions in federal district court and at the U.S. International Trade Commission (ITC) to block competing technology companies from using MMI standard-essential patents, according to the FTC.

Under the proposed consent order, Google has agreed to meet its prior commitments to allow competitors access—on FRAND terms—to patents on critical standardized technologies needed to make popular devices such as smart phones, laptop and tablet computers, and gaming consoles. Google would be prohibited from seeking injunctions against a willing licensee, either in federal court or at the ITC, to block the use of any SEPs that the company has previously committed to license on FRAND terms.

“We are especially glad to see that Google will live up to its commitments to license its standard-essential patents, which will ensure that companies willing to license these patents can compete in the market for wireless devices,” Leibowitz said. “This decision strengthens the standard-setting process that is at the heart of innovation in today’s technology markets.”

The Commission vote to accept the proposed consent order relating to standard essential patents for public comment was 4-1, with Commissioner Ohlhausen voting no, while the vote to issue the Commission statement in that matter was 3-0-2, with Commissioners Rosch and Ohlhausen abstaining.

In his separate statement, Commissioner Rosch said, among other things, that he did not agree with the complaint’s allegation or the majority’s assertion that an injunction enforcing SEPs would constitute “patent hold-up.”

Google Response

“The conclusion is clear: Google’s services are good for users and good for competition,” Google said in a January 3 post on its official blog, in response to the FTC's announcement. Google noted its two voluntary product changes: permitting websites to opt out of Google Search and remove content from specialized search results pages, such as local, travel and shopping; and permitting advertisers to export their ad campaigns from Google AdWords and to mix and copy ad campaign data within third-party services that use its AdWords API. “[W]e made clear when the FTC started its investigation, we’ve always been open to improvements that would create a better experience,” the company said.

House Lawmakers Call on FTC to Avoid Overstepping in Google Investigation

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

Two Democratic members of the House of Representatives have sent a letter to FTC Chairman Jon Leibowitz, expressing concerns over apparent leaks of information regarding the agency’s investigation into Google, Inc. and asking the agency to act within its statutory authority in pursuing the matter.

Rep. Anna G. Eshoo (California), Ranking Member of the House Energy and Commerce Committee's Communications and Technology Subcommittee, and Rep. Zoe Lofgren (California) suggested in the November 19 letter that the purported release of sensitive details from an internal draft FTC report was "irresponsible” and that it “potentially compromises an investigation that has yet to be voted on by the full Commission.”

The congresswomen stressed the need for the agency to “remain fair and impartial” and to protect “the confidentiality of internal discussions among the parties involved.”

In June 2011, Google announced that the FTC was conducting a formal review its business practices. Google did not disclose details of the investigation.

Recent reports have suggested that an FTC enforcement action will soon be announced. The European Commission has already announced an in-depth antitrust investigation into whether Google’s Internet search display practices were designed to shut out competitors.

The letter also questioned the Commission’s use of its authority under Section 5 of the FTC Act to reach allegedly anticompetitive conduct that might not be found illegal under Section 2 of the Sherman Act.

“Expanding the FTC’s Section 5 powers to include antitrust matters could lead to overbroad authority that amplifies uncertainty and stifles growth,” according to the representatives. “If the FTC intends to litigate under this interpretation of Section 5, we strongly urge the FTC to reconsider.”

U.S., E.C. Clear Google’s Acquisition of Motorola Mobility

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

The U.S. Department of Justice Antitrust Division and the European Commission (EC) on February 13 approved Google, Inc.’s proposed acquisition of Motorola Mobility, Inc., and its patent portfolio.

At the same time, the Antitrust Division announced that it had cleared the acquisitions by Apple Inc., Microsoft Corp., and Research in Motion Ltd. (RIM) of certain Nortel Networks Corporation patents, and the acquisition by Apple of certain Novell Inc. patents.

In its statement announcing the closing of the three investigations, the Justice Department said that the transactions were “not likely to significantly change existing market dynamics.” The agency, however, pledged to continue monitoring the use of standard essential patents (SEPs) in the wireless device industry.

“During the course of the division’s investigation, several of the principal competitors, including Google, Apple and Microsoft, made commitments concerning their SEP licensing policies,” the Justice Department said.

“The division’s concerns about the potential anticompetitive use of SEPs was lessened by the clear commitments by Apple and Microsoft to license SEPs on fair, reasonable and non-discriminatory terms, as well as their commitments not to seek injunctions in disputes involving SEPs. Google’s commitments were more ambiguous and do not provide the same direct confirmation of its SEP licensing policies.”

Google entered into an agreement to acquire Motorola Mobility in August 2011. Google is a provider of Internet search and online advertising services. Google is the developer of the Android open source mobile operating system. At the end of 2011, Google’s Android accounted for approximately 46 percent of the U.S. smartphone operating system platform subscribers.

Motorola Mobility is a manufacturer of smartphones and computer tablets. It is the holder of a portfolio of approximately 17,000 issued patents and 6,800 applications, including hundreds of SEPs relevant to wireless devices that Motorola Mobility committed to license through its participation in standard-setting organizations (SSOs).

Apple, Microsoft, and RIM also have developed mobile operating systems for smartphones and tablets. While Apple and RIM manufacture and sell the smartphones and tablets that run on their proprietary mobile operating systems, Microsoft licenses its proprietary mobile operating systems.

Through a partnership entitled Rockstar Bidco, RIM, Microsoft, Apple, and others sought to acquire patents at the June 2011 Nortel bankruptcy auction for licensing and distribution to certain partners. Nortel’s portfolio of approximately 6,000 patents and patent applications includes many SEPs that Nortel committed to license through its participation in SSOs.

Apple sought approval to acquire patents held by CPTN Holdings LLC, formerly owned by Novell, following CPTN’s acquisition in April 2011 of those patents on behalf of Apple, Oracle Corporation, and EMC Corporation.

U.S. Closes Investigation into Google’s Acquisition of Online Advertising Service Provider

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

Google Inc.’s proposed acquisition of Admeld Inc., an online display advertising service provider, will not be challenged by the Department of Justice Antitrust Division. The Justice Department has closed its investigation into the transaction.

In a December 2 statement, the Antitrust Division said that the transaction was not likely to substantially lessen competition in the sale of display advertising.

According to the statement, the Antitrust Division’s investigation focused on the potential effect of the proposed transaction on competition in the display advertising industry. Both Google and Admeld provide services and technology to web publishers that facilitate the sale of those publishers’ display advertising space, the Antitrust Division noted.

The government also evaluated whether Google’s acquisition of Admeld would enable Google to extend its market power in the Internet search industry to online display advertising through anticompetitive means.

The division said it will continue to rigorously enforce the antitrust laws to ensure that transactions affecting evolving markets such as display and other forms of online advertising, as well as search, do not inhibit competition or innovation in any way.

Senators Question Whether Google Channels Searchers to Its Secondary Internet Businesses

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

Lawmakers expressed concern about Google’s decision to expand into secondary Internet businesses and addressed charges that the Google search engine channels customers to its own businesses, during a September 21 hearing by the Senate Judiciary’s Subcommittee on Antitrust, Competition Policy and Consumer Rights.

The hearing was held to consider the competitive impact of the conduct of Google, which has been criticized for allegedly manipulating search results for its own benefit. The Federal Trade Commission is currently investigating Google’s business practices.

“Our inquiry centers on whether Google biases [Internet search] results in its favor, as its critics charge, or whether Google simply does its best to present results in a manner which best serves consumers, as it claims,” said Subcommittee Chairman Herb Kohl (D, Wis.)

“[A]s the dominant firm in Internet search, Google has special obligations under antitrust law to not deploy its market power to squelch competition,” Senator Kohl added.

"Cooperating with FTC's Investigation"

Eric Schmidt, Executive Chairman of Google Inc., defended the company from suggestions that it was hindering competition. Schmidt said that Google was “fully cooperating with the FTC’s investigation” and noted that “every decided antitrust suit that has been brought against Google regarding our search results has been dismissed.

In a statement issued following the hearing, Senator Mike Lee (R, Utah) said that he was “disappointed” by Schmidt’s testimony.

“I had hoped to hear the company acknowledge the responsibilities that accompany its preeminent position in the Internet search market and address concerns many have raised about Google’s possible anticompetitive activities,” the subcommittee ranking member said. “Unfortunately, I fear that some of the testimony in today’s hearing may only encourage those who are calling for legal enforcement or government regulation.”

Issuance of New Merger Guidelines Highlighted FTC's Accomplishments in 2010

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

The FTC’s efforts to substantially revise the Horizontal Merger Guidelines for the first time since 1992 were among the agency’s major accomplishments of 2010.

Working with the Department of Justice Antitrust Division, the FTC issued new joint guidelines in August (CCH Trade Regulation Reporter ¶13,100). The issuance of the guidelines marked the culmination of a process that began in September 2009.

Merger Enforcement Actions

Last year also saw a number of notable merger enforcement actions brought by the Commission. The agency resolved more than a dozen merger challenges in 2010 through consent decrees. Among these was an administrative challenge to Dun & Bradstreet’s consummated acquisition of Quality Educational Data, its nearest rival in the education marketing business.

The FTC's focus on consummated mergers was evidenced by another administrative complaint issued in November. The agency challenged Laboratory Corporation of America’s already-completed acquisition of rival clinical laboratory testing company Westcliff Medical Laboratories, Inc. An administrative trial is set for May 2011.

Before the year ended, the Commission ordered complete divestiture in another administrative action involving a consummated merger. In December, the Commission announced that Polypore International, Inc. must divest assets of a rival manufacturer of battery components acquired in 2008.

The FTC's decision not to take action against Google with respect to the search engine's acquisition of the mobile advertising company AdMob was also a notable development. The Commission unanimously closed its investigation in May after determining that Apple was in a position to nullify any anticompetitive effects of the merger.

The agency also suffered a tough loss in a federal district court challenge to an acquisition in the pharmaceuticals industry in 2010. The federal district court in Minneapolis rejected an action brought by the agency along with the State of Minnesota against global pharmaceutical company Lundbeck, Inc., challenging its predecessor’s acquisition of drugs used to treat premature infants with a heart condition known as patent ductus arteriosus (PDA) (2010-2 Trade Cases ¶77,160). In October 2010, the FTC and State of Minnesota appealed the decision to the U.S. Court of Appeals in St. Louis.

Non-Merger Enforcement Efforts

Also in the pharmaceutical sector, the FTC continued its efforts to target “pay-for-delay” drug patent settlements in 2010. FTC Chair Jon Leibowitz has said that ending these settlements, under which a branded drug company compensates a generic competitor for not bringing its lower-cost drug to market for a certain period of time, is one of the agency's highest priorities.

Legislative efforts to address the conduct failed in 2010. However, the agency will likely weigh in again as private litigants seek U.S. Supreme Court review of a decision of the U.S. Court of Appeals in New York City (2010-1 Trade Cases ¶76,989) rejecting an antitrust challenge to a settlement in a patent infringement lawsuit involving the antibiotic ciprofloxacin hydrochloride (Cipro).

A number of other important non-merger enforcement efforts were highlights of 2010. The agency's August settlement with computer chip giant Intel Corporation after eight months of litigation over the company's alleged monopolistic conduct was one of the them. Last year, Transitions Optical, Inc., the maker of photochromic treatments that darken corrective lenses used in eyeglasses, also agreed to settle FTC charges that it used anticompetitive practices to maintain a monopoly.

Consumer Protection

On the consumer protection front, the FTC in 2010 continued to focus on deceptive practices aimed at financially-distressed consumers. It also proposed revised “green” marketing guides. As the year came to a close, the staff of the agency threw their support behind the implementation of a “do-not-track” mechanism for Internet users that would provide them with a method to opt-out from having their online activity tracked by data-gathering firms.

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.

FTC Closes Investigation into Google-AdMob Merger

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

The FTC will not challenge Google’s proposed acquisition of mobile advertising network company AdMob under federal antitrust law. After thoroughly reviewing the deal, the agency decided that it was unlikely to harm competition in the emerging market for mobile advertising networks.

Mobile ad networks, such as those provided by Google and AdMob, sell advertising space for mobile publishers, who create applications and content for websites configured for mobile devices, primarily Apple Inc.’s iPhone and devices that run Google’s Android operating system.

By "monetizing" mobile publishers’ content through the sale of advertising space, mobile ad networks play a vital role in fueling the rapid expansion of mobile applications and Internet content.

Apple’s Market Entry

In a May 21 statement issued in conjunction with the closing of its investigation into the transaction, the Commission said that, although combination of the two leading mobile advertising networks raised serious antitrust issues, the agency’s concerns ultimately were overshadowed by recent developments in the market, most notably the move by Apple to launch its own, competing mobile ad network.

In addition, a number of firms appear to be developing or acquiring smartphone platforms to better compete against the iPhone and Android systems. These firms would have a strong incentive to facilitate competition among mobile advertising networks, according to the FTC.

"As a result of Apple’s entry [into the market], AdMob’s success to date on the iPhone platform is unlikely to be an accurate predictor of AdMob’s competitive significance going forward, whether AdMob is owned by Google or not," the Commission’s statement explained.

Questions about Transaction

According to the FTC’s statement, evidence gathered by the agency raised important questions about the transaction. Google and AdMob have competed head-to-head for the past few years, with a notable increase in intensity during the past year. This competition has spurred innovation and allowed mobile publishers to keep a large share of the revenue generated from the sale of their ad space. The companies also have economies of scale that give them a major advantage over smaller rivals in the business, the statement says.

These concerns, however, were outweighed by recent evidence that Apple is poised to become a strong competitor in the mobile advertising market, having recently acquired Quattro Wireless and used it to launch its own iAd service.

In addition, Apple could leverage its close relationships with application developers and users, its access to a large amount of proprietary user data, and its ownership of iPhone software development tools and control over the iPhone developers’ license agreement to compete effectively.

The FTC announcement appears here on the Commission’s website, along with a statement, a closing letter to counsel for Google, Inc. and a closing letter to counsel for AdMob, Inc. These documents appear at CCH Trade Regulation Reporter ¶16,453.

Concerns About Combination

The Commission made its decision, despite public expressions of concerns that the combination would allow Google to leverage its dominance of the search advertising market into the emerging mobile advertising market.

On April 6, Senator Herb Kohl (D, Wis.) sent a letter to FTC Chariman Jon Leibowitz, urging the agency to closely scrutinize the acquisition. (See Trade Regulation Talk, April 8, 2010 posting).

Senator Kohl cautioned that the combination could result in higher mobile advertising prices and lower revenues for applications developers. The stakes were high in an emerging market where revenues are predicted to increase from $416 million in 2009 to $1.56 billion in 2013.

Kohl urged the Commission to safeguard consumer privacy if the deal were approved, since the combined company would gain access to “a treasure trove of data on millions of consumers’ behavior, search and product preferences.”