iOn January 3, 2013, the Federal Trade Commission (FTC or Commission) announced, in bipartisan votes of 4-1 and 5-0, a comprehensive settlement of a 20 month investigation of the business practices of Google Inc. During that time, the FTC received over nine million documents, took sworn testimony of Google executives, and interviewed a number of industry members. It was a win-win result.
First, the FTC closed, without taking any formal action, its investigation into Google’s business practices, including the claim that Google had unfairly “biased” its Internet search results by displaying its own content more prominently than it displayed the content of competitors. The Commission concluded that Google’s search algorithms were designed to benefit consumers. This was a clear win for Google. [1]
Second, the FTC obtained a consent order from Google that limits the company’s ability to seek injunctions and exclusion orders to enforce Standard Essential Patents (SEPs) unless the company first follows a detailed set of procedures designed to allow a willing licensee to receive a neutral determination of the “reasonable” royalty rate. This was a clear win for the Commission. While the Complaint against Google does not allege that Google itself has brought such suits, both the Commission and Department of Justice have taken the position that patent holders have sought injunctions and exclusion orders improperly, rather than offering competitors the opportunity to obtain licenses pursuant to fair, reasonable, and nondiscriminatory (FRAND) terms. The FTC stated that the theory of the Google case and the procedures it established in the settlement are intended to be a template for how it intends to proceed in the future, and that the consent order with Google provides a roadmap for other companies who pursue litigation with respect to SEPS.
This article will discuss both aspects of the settlement.
Google’s Practices Relating to Its Search Engines
The most highly publicized of the claims investigated by the FTC involving Google was the question whether it had engaged in an “unfair method of competition” in violation of Section 5 of the Federal Trade Commission Act (“Section 5”) through alleged “search bias”—the alleged manipulation of its search engine results to give more favorable treatment to its own content than it gives to other websites and search engines that focus on such categories as shopping or travel. It was claimed by some competitors that Google changed its search algorithms to demote competing content. Section 5 prohibits “unfair methods of competition,” which reaches beyond the antitrust laws. Only the FTC has the authority to enforce Section 5. According to Commission Chairman Jon Leibowitz, who announced the settlement:
Although some evidence suggested that Google was trying to eliminate competition, Google’s primary reason for changing the look and feel of its search results to highlight its own products was to improve the user experience. Similarly, changes to Google’s algorithm that had the effect of demoting certain competing websites had some plausible connection with improving Google’s search results, especially when competitors often tried to game Google’s algorithm in ways that benefitted those firms, but not consumers looking for the best search results. Tellingly, Google’s search engine rivals engaged in many of the same product design choices that Google did, suggesting that this practice benefits consumers.[2]
The Commission unanimously concluded that the totality of the evidence indicated that Google’s product design decisions with respect to its search results were intended to improve the quality of Google’s search results and better serve users, and that the impact on competitors resulted from this lawful and beneficial “vigorous rivalry.” The Commission stressed that challenging Google’s product design would improperly require it “to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered.”[3] Although the challenged conduct may have been injurious to individual competitors, the mission of the Commission and the antitrust laws was stated to be the protection of competition, not individual competitors. Accordingly, the FTC decided not to challenge the conduct because it was procompetitive.
The FTC’s decision not to challenge Google’s practices created quite a controversy within the industry and in the consumer press, in large part driven by Google’s competitors. However, the legitimacy of its practices was supported by well-established law. First, Google is not a public utility; it is a private company, and it is not an “essential facility”—operating a business that competitors must have access to in order to compete successfully. See MCI Communications Corp. v. AT&T.[4] It has two major competitors in Bing and Yahoo. A company operating in the private sector generally does not have to do business with a competitor—even if it is a monopolist. See Verizon Comm. Inc. v. Law Offices of Curtis V. Trinko.[5]And if a company—including a monopolist—decides to do business with a competitor, it need not do so in a manner that the competitor would prefer. See Pacific Bell Telephone Co. v. linkLine Comm.Inc.[6] While the leading cases were decided under Section 2 of the Sherman Act, there is no reason to believe that a different result should be reached by the FTC in a case under Section 5 of the FTC Act.
While formal action was not instituted by the FTC, Google did voluntarily commit to discontinue two alleged practices that were of particular concern to the Commission. First, it allegedly “crawled” the user generated reviews of local restaurants and certain travel sites, and allegedly passed such content off as its own. When some of these website owners complained about the practice, Google allegedly threatened to remove the websites from its search results. Second, it allegedly placed unreasonable restrictions on the ability of small business to use tools provided by third parties to manage advertising campaigns on Google and other search engines simultaneously—called “multi-homing.” Google voluntarily committed to alleviate these concerns.
Resolving Commission concerns through a commitment letter rather than by entering a consent order is a rare course of action at the FTC, and one of the Commissioners called it a “very bad precedent.”[7] However, Google did agree to allow the FTC to monitor and enforce its compliance with both commitments. Further, the commitments were made public by Google, and material deviations from these commitments could arguably be seen as a violation of Section 5’s prohibition of “deceptive practices.”
Quite likely, other subjects of Commission investigations may now try to obtain a similar informal remedy. The high-profile nature of the Google case may not make it much of a precedent at the Commission. However, state attorneys general quite often terminate investigations with public “Assurances of Voluntary Compliance” or similar informal resolutions.
FTC Restricts Google’s Ability to Seek Injunctions Relating to SEPs
The second aspect of the FTC’s settlement with Google was the entry, by a 4-1 vote, of a formal consent order settling a claim that Google sought to exclude competitors from using patents that are essential for the interoperability of wireless internet devices and mobile phones. The Standard Essential Patents (SEPs) involved had been obtained by Motorola Mobility, a company acquired by Google in June 2012.
According to the FTC Complaint that accompanied the consent order, years ago Motorola had promised three standard-setting organizations (SSOs) in the United States and Europe that it would license certain patents on fair, reasonable, and nondiscriminatory (FRAND) terms, which allegedly induced the SSOs to incorporate the patents into their standards. When Google acquired Motorola Mobility, it allegedly affirmatively agreed to honor those FRAND commitments. According to the FTC complaint, Motorola Mobility breached its commitments by seeking to enjoin and exclude competitors from marketing products compliant with the applicable SEPs. In somewhat ambiguous and conclusory language, the FTC Complaint alleged that after acquiring Motorola Mobility, Google used these threats of exclusion orders and injunctions to enhance its bargaining leverage against willing licensees and demand licensing terms that tended to exceed the FRAND range. [8]
The Complaint added that “Motorola filed, and Google prosecuted” patent infringement claims before the United States International Trade Commission (ITC), where the only remedy for patent infringement is an exclusion order, The Complaint does not allege, however, that Google instituted any of its own suits after the acquisition.
The consent order requires Google to offer a license on FRAND terms to any company willing to accept such a license. Before it can seek an injunction, Google must negotiate with the proposed licensee for 60 days and provide the option of binding arbitration. If the other party will not accept a license or an offer to arbitrate, Google may then seek an injunction. As part of this process, proposed licensees can be required by Google to commit to honor an independently determined royalty rate. According to the Commission, this process could serve as a “template for the resolution of SEP licensing disputes across many industries.” Of interest, the FTC did not define what constitutes a FRAND license, leaving that to the arbitrators and courts in specific cases.
According to Chairman Leibowitz, the FTC action:
makes clear that commitments to make patents available on reasonable terms matter….Today’s Commission action will relieve companies of some of the costly and inefficient burden of hoarding patents for purely defensive purposes, savings that we hope can be invested in job-creating research and development.[9]
In order to support a claim under Section 2 of the Sherman Act, courts in the past generally have required a finding of deception by the patent holder during the standard-setting process for the purpose of obtaining or maintaining monopoly power.[10] The FTC charged that even absent deceptive conduct at that time, the failure to comply with a FRAND commitment made during the standard-setting process constitutes an unfair method of competition in violation of Section 5 of the FTC Act. The Commission had previously resolved such claims in a case that resulted in a consent order entered in November 2012.[11] This time, the Complaint charged that the conduct also constituted an unfair and deceptive trade practice. It did not claim, however, that the conduct violated Section 2 of the Sherman Act. By proceeding only under Section 5, and not contending that the conduct also violated Section 2 of the Sherman Act, the Commission stated that the Complaint was insufficient to permit private suits under the Sherman Act; the FTC has exclusive authority to enforce the FTC Act.
The Commission declared in the Google case that its action continues a trend in the courts of finding that patent holders may injure competition by breaching FRAND commitments made to induce SSOs to standardize their patented technologies. In fact, just days after entry of the Google consent order, the Antitrust Division of the Department of Justice (DOJ) and U.S. Patent & Trademark Office (PTO) released a joint policy statement directed to the International Trade Court (ITC), asking the court not to allow holders of SEPs to exclude rivals under Section 337 of the Tariff Act of 1930 in most cases.[12] The agencies contended that allowing such conduct would be contrary to the court’s mandate to consider the effect of such exclusion upon competitive conditions in the US economy. Time will tell whether the Commission’s recent actions and the view of the DOJ and PTO will have an effect at the ITC and/or in the federal courts.
[1] Google did voluntarily agree to change two business practices—first, to allow websites to opt-out of the display of content from their own sites on certain of Google’s search pages, and second, to allow third-party tool providers utilizing Google’s AdWords API to implement certain functionality to allow cross-platform copying of data by the third-party.
[2] Opening Remarks of Federal Trade Commission Chairman Joel Leibowitz, In the Matter of Motorola Mobility LLC & Google Inc., FTC File Number 121-0120 (Jan. 3, 2013).
[3] FTC, Statement Regarding Google’s Search Practices, In the Matter of Motorola Mobility LLC & Google Inc., FTC File Number 121-0120 (Jan. 3, 2013).
[4] 708 F.2d 1081, 1132 (7th Cir. 1983). See also Pittsburg County Rural Water Dist. No. 7 v. City of McAlester, 358 F.3d 694(10th. Cir. 2004); City of Anaheim v. Southern Cal. Edison Co. 955 F.2d 1379 (9th Cir, 1992).
[5] 540 U.S. 398, 407 (2004).
[6] 555 U.S. 438.
[7] Concurring & Dissenting Statement of Commissioner J. Thomas Rosch Regarding Google’s Search Practices, In the Matter of Motorola Mobility LLC & Google Inc., FTC File No. 121-0120 (Jan. 3, 2013).
[8] In the Matter of Motorola Mobility LLC & Google Inc., FTC File No. 121-0120 (Compl. Jan. 3, 2013). Republican Commissioner Ohlhasen dissented on the ground that legitimate attempts to obtain an injunction is protected conduct under the Noerr-Pennington doctrine, and also questioned whether certain implementers were in fact willing licensees.
[9] Opening Remarks of Federal Trade Commission Chairman Joel Leibowitz, Jan. 3, 2013.
[10] See Broadcom Corp. v. Qualcomm, Inc.,501 F.3d 297, 313-15 (3d Cir. 2007); Apple Inc. v. Samsung Elec. Co., 2012 U.S. Dist. LEXIS 67103, at *27-28 (N.D. Cal. May 14, 2012); Research In Motion, Ltd. V. Motorola, Inc., 644 F. Supp. 2d 788, 796-97 (N.D. Tex. 2008).
[11] In the Matter of Robert Bosch GmbH,FTC File No. 121-0081 (Consent Order Nov. 26, 2012).
[12] US Dep’t of Justice & US Patent & Trademark Office, Policy Statement On Remedies for Standard-Essential Patents Subject to Voluntary FRAND Commitments (Jan. 8, 2013).
