TLJ News from June 21-25, 2011

FTC Investigates Google

6/24. Google announced in a release that the Federal Trade Commission (FTC) notified Google that it "has begun a review of our business". Google did not release a copy of the FTC's notice, or other FTC documents.

Google stated that "It’s still unclear exactly what the FTC's concerns are". However, Google defended its business practices, and asserted that "we know they'll stand up to scrutiny".

The FTC may take no action. If it were to take action against Google, it is not now clear what business practices it would address, what economic arguments it would advance, what remedies it would seek, or under which statute(s) it would proceed.

Geoffrey Manne and Joshua Wright of the Tech Freedom stated in a release that "We are also troubled by statements by FTC Commissioners suggesting that the agency intends to pursue this case as a so-called ``Section 5´´ case rather than the more traditional ``Section 2´´ case. Commissioner Rosch has claimed that a Section 5 ``unfair competition´´ claim could address conduct that has the effect of "reducing consumer choice´´ -- even absent evidence that the conduct actually reduces consumer welfare."

Section 5 is a reference to Section 5 of the FTC Act, which is codified at 15 U.S.C. § 45. It is essentially an anti-fraud provision -- not an antitrust provision. Section 2 is a reference to Section 2 of the Sherman Act, which is codified at 15 U.S.C. § 2. It is an antitrust provision.

While the FTC gave notice that it might use Section 5 as an antitrust tool by asserting it in its settlement with Intel last year, Section 5 has otherwise only been used rarely and long ago for antitrust purposes.

For a detailed discussion of these sections, why the FTC may assert Section 5, how it was applied in the Intel matter, and why it may be considered an abuse of authority by the FTC, see stories titled "FTC and Intel Settle Antitrust Claims", "Reaction to the FTC Intel Settlement", and "Commentary on Antitrust Processes" in TLJ Daily E-Mail Alert No. 2,018, August 4, 2010, and stories titled "FTC Files Antitrust Charges Against Intel by Administrative Complaint Under FTC Act" and "Commentary: FTC Antitrust Procedure" in TLJ Daily E-Mail Alert No. 2,204, December 17, 2009.

Tech Sector Reaction. Tom Lenard, head of the Technology Policy Institute (TPI), and an economist, wrote a short piece for the TPI web site on June 29, 2011, in which he stated that "In theory, the antitrust laws do not penalize size, but it seems that virtually every firm that has become dominant in the technology sector -- IBM, Microsoft, Intel, and now Google -- ultimately becomes the subject of a major antitrust action."

He also stated that Google attained its current position by developing a search algorithm that consumers find useful, and that "there is no publicly available evidence that Google has violated the antitrust laws".

Ryan Radia of the Competitive Enterprise Institute (CEI) stated in a release that "Few modern markets are as vibrant and innovative as Internet search. Google and its rivals are engaged in fierce competition that has benefited consumers tremendously. Yet this FTC appears hell-bent on beating up on big, successful businesses, including Intel, Apple, and now Google. This investigation may be welcome news to Google's rivals, but it's bad news for consumers."

He added that "The FTC's investigation reeks of a desperate attempt to make headlines".

Ed Black, head of the Computer and Communications Industry Association (CCIA), stated in a release that "Big doesn’t automatically equate with bad. So far, it appears that Google is big enough to change the game for dominant players. But being big and disruptive is different from be being dominant and abusive."

Black also said that "increasingly, we’re seeing antitrust charges manufactured and wielded as a cudgel by companies hoping to find any way to hurt successful competitors. Their motives have less to do with the public interest than with a drive to protect their own entrenched business models, bloated margins and legacy revenue streams."

Gary Shapiro, head of the Consumer Electronics Association (CEA), stated in a release that the FTC "is obligated to ensure compliance with antitrust laws. However, the Commission must understand that our industry is characterized by disruptive innovation and constant change. Seemingly dominant market positions quickly erode as consumer preferences change and new competitors emerge. That is why, in the technology industry, competition regulation must occur with a very light hand."

Shapiro continued that "The fact that any given company is big or successful does not inherently make it bad. The real issue the FTC must address is consumer harm. In Google's case, it provides free services that tens of millions of Americans enjoy. Its search and advertising tools generated billions in revenue for small and large businesses. And if a user does not like Google’s services, there are no switching or lock-in costs -- a search engine competitor is just a mouse click away."

"Our international economic competitors promote and protect their crown-jewel companies", said Shapiro, without referencing any specific companies, such as Baidu, which is benefiting from the People's Republic of China's censorship efforts directed at Google. See, story titled "Commentary: Internet Censorship as Protectionism" in TLJ Daily E-Mail Alert No. 2,234, May 6, 2011.

"Unfortunately, in America it seems that our most successful and innovative firms attract the most intrusive regulatory scrutiny. These expensive, drawn-out investigations deter innovation, siphon money from productive uses, and place additional burdens on those trying to grow our economy. We urge the FTC to conduct its investigation narrowly and swiftly, and let Google get back to the critical business of innovation and job creation."

Incentives for Ad Supported Search Providers. Sergey Brin and Lawrence Page wrote a paper in 1998 titled "The Anatomy of a Large-Scale Hypertextual Web Search Engine" when they were graduate students at Stanford University.

They wrote then that "the predominant business model for commercial search engines is advertising. The goals of the advertising business model do not always correspond to providing quality search to users."

"For example, in our prototype search engine one of the top results for cellular phone is ``The Effect of Cellular Phone Use Upon Driver Attention´´, a study which explains in great detail the distractions and risk associated with conversing on a cell phone while driving."

"It is clear that a search engine which was taking money for showing cellular phone ads would have difficulty justifying the page that our system returned to its paying advertisers." Therefore, they concluded, "advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers".

Consumer Watchdog Asks Obama to Distance Himself from Google

6/23. Jamie Court and John Simpson, of the Consumer Watchdog, sent a letter to Kathryn Ruemmler, President Obama's White House Counsel, regarding "the Administration’s inappropriate relationship with Google". They request a "formal opinion" from her.

The Consumer Watchdog is a California based interest group that is, among other things, a frequent critic of the business practices and lobbying activities of Google.

The letter states that "Google is understood to be the target of an antitrust investigation by the Federal Trade Commission". In addition, "Google is under criminal investigation into allegations that it profited from selling online ads to illegal pharmacies. These illicit pharmacies may violate U.S. law by peddling expired or counterfeit prescription medication, or selling medicine without a physician's prescription".

Yet, "Eric Schmidt, Google's executive chairman, and Marissa Mayer, a Google vice president, were both guests at the recent State Dinner".

The two wrote that "We understand that President Obama has had a warm relationship with Eric Schmidt. He advised the campaign, was on the transition team and serves on the President’s Council of Advisors on Science and Technology. Nonetheless, given the current circumstances, the President and top Administration officials must distance themselves from Google until the serious allegations against the company are resolved."

They concluded, "We ask you to render a formal opinion that the President and other top Administration officials must step back and assume a neutral position so the various investigations into Google’s activities can be concluded in a fair and professional manner."

FTC Releases Guidance on Requesting Advisory Opinions on Competition Issues

6/23. The Federal Trade Commission's (FTC) Bureau of Competition (BOC) released a document [10 pages in PDF] that provides information on requesting an advisory opinion involving a competition issue. It is titled "Guidance From the Bureau of Competition on Requesting and Obtaining an Advisory Opinion".

The FTC's rules, at 16 CFR §§ 1.1-1.4, address advisory opinions generally.

The just released document states that there are "Commission advisory opinions" and "advisory opinions provided by the Commission staff", but that most "are issued by FTC staff ... even if a Commission opinion is requested".

Also, "Not all requests for an advisory opinion will be considered by the Commission or its staff."

"Advisory opinions are limited to proposed conduct, and will not be issued regarding ongoing conduct", conduct that has already begun, or hypothetical conduct. And, "the requesting party must intend to engage in the proposed conduct".

It states that a request for a Commission advisory opinion "will be considered if (1) the matter involves a substantial or novel question of fact or law and there is no clear Commission or court precedent, or (2) the subject matter of the request and consequent publication of Commission advice is of significant public interest".

This document continues that "a request for an advisory opinion will ordinarily be considered inappropriate where (1) the same or substantially the same course of action is under investigation; (2) the same or essentially the same course of action is or has been the subject of a current proceeding involving the Commission or another governmental agency; or (3) an informed opinion cannot be made, or could be made only after extensive investigation, clinical study, testing, or collateral inquiry."

Hence, as a practical matter, requests for advisory opinions are "best suited to situations where the important market facts are fairly clear and the legality of the conduct at issue is unlikely to turn on an analysis of market power".

And, a request regarding a "proposed merger or acquisition is unlikely to be appropriate".

As an alternative to a formal request, "Parties also may obtain less formal advice regarding a proposed course of action by contacting FTC staff to discuss issues relating to proposed conduct", "either in person or by telephone".

This document also addresses how to request an advisory opinion, what material to submit, requests for confidential treatment, withdrawals of requests for advisory opinions (which may be denied), deemed withdrawals, FTC requests for further information, duration of the process, and notice and issuance of advisory opinions.

Finally, this document addresses the effect of advisory opinions. It states that "Advisory opinions (like Department of Justice business review letters) normally do not directly opine on the legality of the proposed conduct. Instead, a Commission advisory opinion typically will set forth the Commission's enforcement intentions regarding the proposed conduct. Similarly, an FTC staff advisory opinion will typically state whether the FTC staff would recommend that the Commission initiate law enforcement action to address the proposed conduct, if it were to be undertaken."

Also, "because advisory opinions are based on the information provided by the applicant, they will be expressly conditioned on the accuracy and truthfulness of the representations made by the applicant".

Moreover, "The Commission issues an advisory opinion without prejudice to its right to reconsider the questions involved and, where the public interest requires, to rescind or revoke the opinion."

Judicial Appointments

6/23. The Senate Judiciary Committee (SJC) held an executive business meeting at which it held over consideration of the nominations of numerous judicial nominees: Steve Six (to be a Judge of the U.S. Court of Appeals for the 10th Circuit), Stephen Higginson (to be a Judge of the U.S. Court of Appeals for the 5th Circuit), Jane Milazzo (USDC/EDLa), Alison Nathan (USDC/SDNY), Katherine Forrest (USDC/SDNY), and Susan Hickey (USDC/WDArk).

6/23. President Obama nominated Jennifer Zipps to be a Judge of the U.S. District Court for the District of Arizona. she is currently a U.S. Magistrate Judge. See, White House news office release and release.

6/23. President Obama nominated Rosemary Márquez to be a Judge of the U.S. District Court for the District of Arizona. She is a criminal defense attorney. See, White House news office release and release.

More News

6/23. Khalid Shaikh pled guilty in the U.S. District Court (NDCal) to transmission of a code to cause damage to a protected computer, in violation of 18 U.S.C. §§ 1030(a)(5)(A) & (c)(4)(A). The Department of Justice's (DOJ) U.S. Attorneys Office for the Northern District of California stated in a release that Shaikh was a founder and former CEO of YouSendIt, Inc. It further states that he sent "an ApacheBench computer code to YouSendIt's servers.  ApacheBench is a benchmarking program used for measuring the performance of computers known as web servers.  ApacheBench was designed to determine the number of requests per second a server is capable of serving. By intentionally transmitting the ApacheBench program to YouSendIt’s servers, Mr. Shaikh was able to overwhelm the servers' capabilities and render it unable to handle legitimate network traffic."

Oldale Named Deputy Director of FTC's Bureau of Economics

6/22. Alison Oldale was named Deputy Director for Antitrust in the Federal Trade Commission's (FTC) Bureau of Economics (BOE). See, FTC release.

Alison OldaleOldale (at right) will replace Howard Shelanski, who left the FTC to be a professor at Georgetown University's law school. Joseph Farrell remains the Director of the FTC's BOE. Tim Deyak is the acting Deputy Director.

Oldale has briefly worked as the Chief Economist for the United Kingdom's (UK) Competition Commission. Before that she worked for LECG, a consulting firm that was recently dissolved.

She has degrees from Cambridge University and the London School of Economics. The FTC stated that she will begin "in mid-July".

People and Appointments

6/21. The Senate confirmed Leon Panetta to be Secretary of Defense by a vote of 100-0. See, Roll Call No. 93.

6/21. The Senate confirmed Michael Simon to be a Judge of the U.S. District Court for the District of Oregon. See, Roll Call No. 92. All of the no votes were cast by Republicans.

6/21. On June 16, 2011, the Senate Judiciary Committee (SJC) amended and approved S 1103 [LOC | WW], an untitled bill to extend the term of Federal Bureau of Investigation (FBI) Director Robert Mueller by two years. On June 21, 2011, the SJC reported the bill. See, Report No. 112-23. See also, story titled "Obama Wants to Extend Mueller's Term" in TLJ Daily E-Mail Alert No. 2,240, May 13, 2011, and story titled "Sen. Leahy Introduces Bill to Extend Mueller's Term" in TLJ Daily E-Mail Alert No. 2,246, May 27, 2011.

Go to News from June 16-20, 2011.