The FTC’s Google Search Problem

Whether Google’s Internet search engine favors Google’s own Web offerings to the detriment of its competitors is a matter currently under investigation by the U.S. Federal Trade Commission, the EU competition authority, a dozen or so state Attorneys General and various national antitrust agencies around the world. Both the FTC and its European counterpart are expected to decide whether to bring antitrust charges against Google before the end of the year. While other allegations against the company have also surfaced—that Google appropriates content from rival Web sites, for instance, or discriminates in how it conducts its advertising business, the hot-button issue remains whether the way Google chooses to deliver search results can ever constitute the basis of a violation of the US antitrust laws.

This raises thorny legal and policy issues for the FTC. If the Commission challenges Google’s search results under Section 5 of the FTC Act, as some now advocate, unless the agency can exposit a legal rationale tantamount to a breakthrough in antitrust jurisprudence, it risks tarnishing its own prestige and undermining the antitrust enterprise.

The issues are far more difficult for the FTC than the Europeans. EU competition law expressly prohibits “abuse of dominance.” The Europeans could define abuse of dominance in a way that proscribes self-serving search results by any search engine with a dominant market share, which could force Google (whose market share of search in Europe is around 90%) to abide by a particular code of conduct devised by the Europeans, what antitrust practitioners call “behavioral remedies.” At present, Google is locked in negotiations with Joaquín Almunia, the EU’s competition minister, to head off a Statement of Objections that could kick off an antitrust row taking years to resolve, potentially burdening Google with continuing compliance obligations and a fine of up to ten percent of Google’s annual global revenue, some $ 38 billion in 2011.

By contrast, American law forbids acquiring monopoly by some means other than competition on the merits or maintaining monopoly by anticompetitive means. Thus, the antitrust laws permit a dominant firm that has come by its monopoly lawfully through “superior skill, foresight, or industry” to charge monopoly prices, for example. Unfortunately for advocates of an FTC action against Google Search, even if the company has a monopoly, neither an acquisition theory or a maintenance theory fits the allegations of misconduct particularly well. Several legal commentators have pointed out that the FTC would find itself in a legal minefield and probably losing any Section 2 monopolization case it might bring against Google related to search results.

The impediments to a successful monopolization case under Section 2 of the Sherman Act have not been lost on Microsoft, Oracle, HotWire, Expedia and others claiming injury from Google’s alleged self-dealing. They instead advocate for the FTC to take action using its authority under Section 5 of the FTC Act. Section 5 directs the FTC “to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce.” Under the authority of this provision the FTC can sue firms for violating the antitrust laws, the Sherman or Clayton Acts, which prohibit collusion, exclusion, monopolization, and unlawful mergers, because those are all “unfair methods of competition.” But in 1972 the Supreme Court held that Section 5 also authorizes the FTC to sue firms for conduct not forbidden by the Sherman or Clayton Acts, as long as the conduct is an unfair method of competition or an unfair or deceptive act or practice.

Since then the FTC has used Section 5 sparingly, prosecuting as “unfair” only limited classes of conduct that for largely technical reasons are less susceptible to prosecution under Sections 1 or 2 of the Sherman Act, such as invitations to collude and coercion by standard-essential patentees. The debate over when, if ever, the Commission should bring a “stand alone” case under Section 5 was reignited in 2009, when the FTC sued Intel using Section 5. But in Intel the FTC also charged the company with violating Section 2 for essentially the same “course of conduct” alleged to violate Section 5. Moreover, shortly before the FTC’s action, Intel settled a private Section 2 suit brought by rival AMD for over $1 billion. Charging Intel under both statutes signaled that the Commission’s decision to proceed under Section 5 reflected more its preference for an FTC administrative hearing before an Administrative Law Judge instead of full-blown litigation in a U.S. district court, an option not available in Sherman Act prosecutions, than a desire to expand the substantive reach of the antitrust laws.

Unlike Intel, a Section 5 enforcement action against Google Search would not involve conduct susceptible to an equally meritorious prosecution under Section 2, so it would necessarily attempt to plow new substantive antitrust ground. With no viable Section 2 theory of liability against Google Search, in other words, a Section 5 proceeding could not credibly be chalked up to a mere procedural preference by the FTC.

If the FTC considers Section 5 to be a “gap filler” for those occasions in which “some conduct harmful to consumers may be given a ‘free pass’ under antitrust jurisprudence …,” as Chairman Lebowitz put it in his Statement accompanying his vote to proceed against Intel, the Commission will have to identify the gap in the Sherman Act that the use of Section 5 against Google Search is intended to fill. Aside from Intel, past Section 5 prosecutions have been aimed at the gap in Section 1 that fails to cover attempted conspiracy (invitations to collude) and the gap in Section 2 recognized by the D.C. Circuit Court of Appeals that may give a pass under Section 2 to standard-essential patentees that coerce licensees to pay monopoly fees. By contrast, the gap in Section 2 that derails a monopolization case against Google Search stems not from a technical artifact in Section 2 jurisprudence that impedes efficient prosecution but from the difficulty of demonstrating that favoritism or self-dealing by Google in search results causes any actual anticompetitive effects in a relevant market.

Past Section 5 prosecutions achieved success and legitimacy by building on existing legal traditions and extending liability incrementally to conduct arguably just beyond the reach of existing law. Those cases involve the exclusion of competitive alternatives or a limitation on competitive choice as a result of the raw exercise (or attempted exercise) of market power. Unless the FTC wants to amend the U.S. antitrust laws with an abuse of dominance doctrine, the Commission will have to spell out how Google’s conduct injures consumers by excluding competitive alternatives or restricting competitive choice. And in fashioning a remedy it would have to exposit legal principles governing criteria for mandating a “non-discriminatory” representation of Web sites in search results.

This is not to suggest that Section 5 might not be a suitable vehicle for addressing some very real competition problems that arise when the operator of a competitively significant platform denies access to producers of complimentary products. Modern antitrust doctrine has yet fully to come to grips with the problem of vertically integrated monopolists that implement platform access policies with anticompetitive outcomes across different levels of distribution. It is unlikely, however, that a Section 5 prosecution of Google Search would provide a suitable vehicle to grapple with the so-called “vertical problem.”

The vertical problem is illustrated by the comment of a disgruntled blogger complaining about Apple’s decision to drop Google Maps as an app on the new iPhone 5. The blogger said Apple had “used [its] platform dominance to privilege [its] own app over a competitor’s offering, even though it’s a worse experience for users.” This is precisely the charge leveled against Google, which stands accused of using its “platform dominance” (search) to “privilege” its own (presumably inferior) Web sites over its competitors. Although it sounds as if Apple is doing wrong, the iPhone enjoys only between a 20 and 30 percent share of the smart phone market. Consequently, Apple’s exercise of absolute control over its platform bears little or no relationship to the durable dominance of a market by an incumbent monopolist. Even if producers of complimentary products are denied access to the iPhone platform, consumers still have a competitive array of platform options and a reasonable opportunity to choose among them. Competition law recognizes that platform-level competition in such cases generates enough competition in the complimentary markets that intervention is unwarranted.

On the other hand, if no or just a few meaningful platform alternatives exist or may be expected to enter the market, platform-level competition may not generate sufficient consumer surplus in complementary markets. At that point the analysis turns to the relationship between the platform operator’s access policies and the state of competition in the complementary markets and the extent to which those policies inhibit competitive choice or the ability to choose.

Thus, despite the fact that Microsoft was found to be a platform monopolist in violation of Section 2 for anticompetitive conduct that maintained and strengthened its monopoly, a gap in Section 2 fails to address denials of platform access that cause consumer harm in complementary markets (see, e.g., Novell v. Microsoft, where the maker of WordPerfect failed to meet the requirements of Section 2 because it could not demonstrate that anticompetitive effects in the word processing market contributed to maintaining Microsoft’s dominance in the PC operating systems market). Although Section 5 might be a good vehicle to tackle this problem in an appropriate case, it would be no easy task for the FTC to work out these principles in a case against Google Search.

It would be difficult in the first instance for the FTC correctly to place Google on the continuum between operators of market-dominating platforms that ought to be subject to governmentally imposed access requirements (Microsoft Windows) and platform operators subject to sufficient competitive discipline by alternative platforms (Apple iPhone). Although Google’s platform dominance looks like Microsoft’s market dominance because of Google’s high market share and its first-mover advantage in data collection, Google must continue to satisfy consumers who pay nothing for its service and from which it costs nothing to switch.

Even if one assumes that Google’s dominance is durable because, for instance, changes in technology or consumer preferences are not expected to erode its market position in the foreseeable future, the FTC will still have to examine the state of competition in the complementary markets alleged to be affected (i.e., vertical search engines, travel sites, shopping sites, maps) to determine the extent to which Google has affected consumers’ opportunity to choose between an array of competitive options in those markets. Moreover, intervention would be warranted only if the Commission intended to establish a standard to govern neutrality in search results, to identify how Google’s search results deviate from that standard, and to demonstrate how that deviation prevents or injures competition in the complementary markets. The Commission would need a clear rationale behind its decision amounting to a legal rule governing the obligations of operators of market-dominating platforms to fashion sufficiently open or neutral policies in complementary markets. Otherwise, the Commission runs the risk of mounting an ad hoc prosecution with no guiding legal principles based solely on the notion that favoritism in Google’s search results is unfair to certain market participants.

Alleged unfairness in Google search results, therefore, is a terrible candidate for a Section 5 prosecution, because the analysis of Google’s alleged wrongdoing would get hopelessly conflated with the policy question of how optimally to use Section 5 itself.

In the final analysis, of course, the enforcement decision is not about Section 5 but about whether the government should attempt to impose high standards for search results through antitrust intervention or rely on consumer preferences and market forces to inhibit Google from delivering search results that deviate so much from consumer preferences so as to induce market failure. And while Section 5 could be used to prosecute Google, it is unlikely that in the context of the unique facts surrounding Google Search the FTC could satisfy the cost/benefit analysis of prosecutorial discretion or the need for the orderly and rational development of antitrust law.

Such considerations do not hinder in quite the same way other enforcement efforts related to allegations of wrongdoing by Google involving theft of content or other torts or antitrust violations, if for no other reason than such conduct, if proven, is likely to fall squarely within existing legal proscriptions. The FTC’s Google Search problem is in a class by itself. As proponents for an enlarged role for Section 5 and advocates of intervention against Google Search band together to urge the FTC to prosecute under Section 5, the Commission should proceed with extreme caution, lest it risk injuring its own mission and setting back the noble goals of antitrust.

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