By Gabriele Accardo
On April 6, 2015, the US Department of Justice’s Antitrust Division announced the first criminal prosecution of a conspiracy specifically targeting e-commerce. The case arose from an ongoing federal antitrust investigation into price fixing in the online wall décor industry.
Mr. David Topkins, a former executive of an e-commerce seller of posters, prints and framed art, has agreed to plead guilty to conspiring to fix the prices of posters sold online, and to pay a fine of $20,000. His plea agreement requires court approval. Price fixing in violation of Section 1 of the Sherman Act carries a maximum sentence of 10 years and a fine of $1 million for individuals, which makes the case even more exceptional in that, despite the very serious offence (price fixing), Mr. Topkins would dodge prison time.
According to the charges, Mr. Topkins and his co-conspirators participated in conversations and communications with representatives of other poster-selling firm to discuss (that is fix, increase, maintain and stabilize) the prices of the agreed-upon posters sold online through Amazon Marketplace, from as early as September 2013 until in or about January 2014. Amazon was not charged in the case.
To implement the anticompetitive agreement, Mr. Topkins and his co-conspirators adopted specific pricing algorithms with the goal of coordinating changes to their respective prices and wrote computer code that instructed algorithm-based software to set prices in line with the agreement. Similar algorithm-based pricing software is common in online marketplaces, but its use is not indicative of any wrongdoing absent this sort of coordination.
Although there is little information available, the case appears to show that the companies concerned used the “traditional tool-box” of anticompetitive behavior, such as contacts and exchange of information, etc.
According to the Department of Justice, this case arose from an ongoing federal antitrust investigation into price fixing in the online wall décor industry, so we should expect more of the same in the coming months. Watch this space.
European Commission sends formal charges to Google on comparison shopping services and opens separate investigation on Android
By Gabriele Accardo
On 15 April 2015, the European Commission sent a statement of objections to Google, alleging that the company is abusing its dominant position in the Internet search market, in breach of Article 102 of the Treaty on the Functioning of the European Union (“TFEU”), by systematically favouring its own comparison shopping product “Google Shopping” in its general search results pages.
In parallel, the Commission launched a separate formal investigation concerning the mobile operating system Android. The investigation will focus on whether Google has entered into anti-competitive agreements or abused a possible dominant position, in breach of Article 101 TFEU and/or 102 TFEU, in the field of operating systems, applications and services for smart mobile devices.
- The alleged abuse in the Internet search market
This investigation does not come as a surprise.
In fact, during the past four years, Google has been in talks with the European Commission to address four set of competition issues, including the way Google displays specialized search services vis-à-vis its own products (see Newsletter 1/2014, Newsletter 5-6/2013, Newsletter No. 2/2013, Newsletter 2/2010, for additional background). While the present investigation focuses on Google’s favouring its comparison shopping product, the Commission continues to investigate Google’s conduct with regards to the allegedly more favourable treatment of other specialized search services, as well as Google’s conduct in three other areas of concern: copying of rivals’ web content (AKA “scraping”), advertising exclusivity and undue restrictions on advertisers.
In February 2014, Google was very close to a settlement, having offered a comprehensive package of remedies to the Commission.
However, while complainants made their voices louder, the mandate of the previous Commission was about to expire, so it soon became clear that the new Commissioner in charge for Competition would take over the case.
In recent months, dark clouds over Brussels began to gather.
Last 27 November 2014 the European Parliament passed a non-binding resolution, which called on the Commission to “properly enforce the EU competition rules in order to prevent excessive market concentration and abuse of dominant position and to monitor competition with regard to bundled content and services.” While the appetite of politicians to get involved in the Commission’s own turf may be understandable, that resolution left many perplexed nonetheless.
Yet, even more striking were certain passages of the public speech that EU Commissioner for Digital Economy and Society gave just a day before the Commission sent charges to Google. Commissioner Oettinger hinted at some forms of regulatory actions allegedly needed to fill, amongst others, the gap between EU and US Internet platforms.
That speech was not mere propaganda. In fact, a leaked Commission’s draft document “A Digital Single Market Strategy for Europe” stated that “The market power of some online platforms in the digital economy raises a number of issues that warrant further analysis. The Commission will carry out a comprehensive investigation and consultation on the role of platforms, including the growth of the Sharing Economy. The Commission’s analysis will cover i.a. issues like those arising from the lack of transparency in the search results (involving paid for links and/or advertisement) and the way Platforms use the information they acquire, possible issues relating to fair remuneration of rights-holders and limits on the ability of individuals and business to move from one platform to another [update after Google decision]”. Even a distracted reader may wonder whether that “update after Google decision”, should simply read that either way Google shall adapt its business model to much more stringent requirements. The final version of the Digital Single Market Strategy for Europe and its accompanying Commission Staff Working Document have been released after this issue of the Newsletter had been completed, so these will be addressed in the next issue.
And let’s not forget another leaked document of last March, albeit the leak came from the other side of the Atlantic. As it may be recalled, the Wall Street Journal published the staff report (actually, the document only included every other page of the report) from the US FTC’s bureau of competition recommending the FTC to bring a lawsuit against Google. The leak raised lots of eyebrows because, in early 2013, contrary to the staff recommendation, the FTC’s commissioners voted unanimously (5-0) to end the investigation into allegations of search bias after Google agreed to some voluntary changes to its practices. In that respect, the statement by the FTC reads “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. While some of Google’s rivals may have lost sales due to an improvement in Google’s product, these types of adverse effects on particular competitors from vigorous rivalry are a common byproduct of “competition on the merits” and the competitive process that the law encourages.” Specifically, the Commissioners held that “Product design is an important dimension of competition and condemning legitimate product improvements risks harming consumers. Reasonable minds may differ as to the best way to design a search results page and the best way to allocate space among organic links, paid advertisements, and other features. And reasonable search algorithms may differ as to how best to rank any given website. Challenging Google’s product design decisions in this case would require the Commission – or a court – to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence.”
Interestingly, in its press release, the Commission acknowledged the close cooperation in this matter with the European Commission’s Directorate-General for Competition. In the wake of the recent developments, it is not clear whether that sense of cooperation still exists, or whether the European Commission has had an after-thought about cooperating with the FTC.
Against this background, Commissioner Vestager assured that competition investigations are independent from politics and commercial interests, noting that one out of four individual companies that complained in this case is a US company, and that US companies also play a major role in complaining business associations.
While there is no doubt that Commissioner Vestager is independent from political pressure, too many actors appear very interested to jump onto the stage. The risk of confusion is real, let alone the risk that good and much needed measures to achieve the Digital Single Market in Europe get mixed with or, worse, traded for far-reaching regulatory measures in a sector that has thrived, and can only thrive, thanks to innovation, not regulation.
The preliminary conclusions in the SO
The grievances concerning Google’s alleged abuse in the Internet search market are well known.
In essence, the statement of objections alleges that Google treats its own “Google Shopping” service more favourably in its general search results, compared to rival comparison shopping services. This artificially diverts traffic from these rival services stifling innovation and hindering their ability to compete to the detriment of consumers,
More specifically, the Commission’s preliminary conclusions are:
- Since 2008, Google has systematically positioned and prominently displayed its comparison shopping service in its general search results pages, irrespective of its merits.
- Google does not apply to its own comparison shopping service the system of penalties applied to competing services, which can lead to the lowering of the rank in which they appear in Google’s general search results pages.
- Froogle, Google’s first comparison shopping service, did not benefit from any favourable treatment, and performed poorly, whereas its subsequent comparison shopping services “Google Product Search” and “Google Shopping” experienced higher rates of growth as a result of the alleged abusive conduct, to the detriment of rival comparison shopping services.
- Users do not necessarily see the most relevant comparison shopping results in response to their queries. Incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google’s product.
In brief, as those who still go shopping at supermarkets may understand, this is no different than what supermarket chains do with their private labels. While supermarkets also know a lot about our tastes (guess what customer loyalty cards are made for), the main difference is that shelf space in supermarket alleys is rather scarce, whereas virtual space on Google search pages is not. One may wonder though whether another important difference is that Internet users are considered somewhat lazier when they browse the Internet than when the same individuals go shopping and browse the shelves in search of their favorite cola.
A remedy Google can’t refuse (to offer)?
Allegedly without the aim of seeking to interfere with either the algorithms Google applies or how it designs its search results pages, the Commission takes the preliminary view that in order to remedy the allegedly abusive conduct, Google should treat its own comparison shopping service and those of rivals in the same way. Accordingly, the Commission expects that when Google shows comparison shopping services in response to a user’s query, the most relevant service or services would be selected to appear in Google’s search results pages.
It is hard to imagine that the Commission’s wishes would not interfere with the algorithms applied by Google or the product design, an approach that clearly clashes with that of the Federal Trade Commission, briefly illustrated above.
Under Article 9 of Regulation 1/2003 Google may still offer commitments, albeit of a different nature than those offered last year (see Newsletter 1/2014).
But if Google is not willing to offer something more substantial than it did in 2014, under Article 7 of Regulation 1/2003, with the decision finding an infringement of the EU competition rules, the Commission may impose any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end. In such cases, the Commission can also impose a fine of up to 10% of the worldwide turnover of the undertaking concerned.
The difference between a prohibition decision under Article 7 and a commitment decision pursuant to Article 9 of Regulation 1/2003 is that the former contains a finding of an infringement (and may come with a fine) while the latter makes the commitments binding without concluding on whether there was or still is an infringement.
- The investigation concerning the mobile operating system Android
The second investigation concerns Google’s mobile operating system Android, the leading operating system for smart mobile devices in the European Economic Area.
Other mobile operating systems include Apple’s iOS (which is proprietary to Apple and runs only on iPhones and iPads) and Windows Phone (which is used on Microsoft’s and other manufacturers’ smartphones and tablets).
Android is an open-source mobile operating system that can be freely used and developed by anyone. The majority of smartphone and tablet manufacturers, however, use the Android operating system in combination with a range of Google’s proprietary applications and services. In order to obtain the right to install these applications and services on their Android manufacturers need to enter into certain agreements with Google.
The investigation will focus on the following three allegations:
- Whether Google has illegally hindered the development and market access of rival mobile applications or services by requiring or incentivizing smartphone and tablet manufacturers to exclusively pre-install Google’s own applications or services, in particular Google’s search engine;
- Whether Google is hindering the ability of manufacturers of smartphones or tablets, who want to use the Android operating system, from being able to use and develop other open-source versions of Android (so-called “Android forks”);
- Whether Google has illegally hindered the development and market access of rival applications and services by tying or bundling certain Google products with other apps and services.
In brief, the Commission will assess if, by entering into anticompetitive agreements and/or by abusing a possible dominant position, Google has illegally hindered the development and market access of rival mobile operating systems, mobile communication applications and services in breach of either Article 101 TFEU and/or Article 102 TFEU.
While there are some similarities with the Microsoft case concerning the PC operating system market, it is still too early to say whether the conclusion will be the same.
Some interim thoughts
The last four years have seen Google under the spotlight in different European venues, often portrayed as a villain or the 800-pound gorilla in the room.
What is striking, however, is that the debate in Europe has not done much to change the way we (Europeans) see and reward innovation, and more generally “merit”. Arguably, this is at the root of a bunch of problems that some in Brussels or in other European capitals believe can be solved with more regulation.
In a recent interview, US President Obama, answering a question concerning the investigations that Google and other US Internet companies face in Europe, somewhat provocatively said “We have owned the Internet. Our companies have created it, expanded it, perfected it in ways that they [European companies] can’t compete. And oftentimes what is portrayed as high-minded positions on issues sometimes is just designed to carve out some of their commercial interests.”
President Obama’s statement, however exaggerated, should be taken as an encouragement to do more to support innovation: it is true that US companies are at the forefront of innovation, especially in the Internet space, but it is not true that European companies are mere followers that cannot compete but for the intervention of regulatory measures.
By Gabriele Accardo
On March 26, 2015, Competition Commissioner Margrethe Vestager announced the imminent launch of a competition inquiry in the e-commerce sector. After this issue of the Newsletter had been completed, the Commission announced (see also the Memo) the launch of the E-commerce Sector Inquiry, which will be addressed in the next issue.
The sector inquiry will focus on private—and in particular contractual—barriers to cross-border e-commerce in digital content and goods, since significant cross-border barriers to e-commerce still exist within the EU.
Knowledge gained through the sector inquiry will not only contribute to enforcing competition law in the e-commerce sector but also to various legislative initiatives which the Commission plans to launch to boost the Digital Single Market.
The Commission updated the Block Exemption Regulation and the Guidelines on Vertical Restraints in 2010 (see Newsletter 3/2010, for additional background). The review made clear that, in principle, every distributor must be allowed to use the Internet to sell its products, whereas consumers must be allowed to look for the best deals online wherever they want.
While Commissioner Vestager noted that these rules are there to give legal certainty to companies and make sure that the law is applied in the same way throughout Europe, she also acknowledged that online business and markets move quickly and the Vertical Guidelines can only provide a general framework.
While there are a number of ongoing investigations (licensing contracts between US film studios and European broadcasters; online restrictions in the consumer-electronic market; and geo-blocking measures concerning certain video games sold online), the varied nature and scope of these investigations means that any insights will be incomplete and sector-specific.
In order to obtain thorough market knowledge, the Commission will seek information from, among others, holders of content rights, broadcasters, manufacturers, merchants of goods sold online, and the companies that run online platforms such as price-comparison and marketplace websites. Commissioner Vestager has stated that a possible target date for preliminary findings is mid-2016.
In the past, the Commission has conducted competition inquiries in various sectors, including energy, financial services and pharmaceuticals. As a result of such inquiries, the Commission has carried out a number of individual investigations.
By Gabriele Accardo
On April 21, 2015 the French, Swedish and Italian competition authorities jointly announced they have accepted—and made legally binding—the commitments (see FRA, ITA, SWE) offered by Booking.com, thus closing their respective investigations into the online hotel booking platform. The three authorities had also opened proceedings against Expedia. These proceedings are still pending.
The investigations concerned the clauses in the contracts between Booking.com and hotels that obliged hotels to offer Booking.com the same or better room prices and conditions as the hotels made available on all online and offline distribution channels (so-called “Most Favored Nation” or “MFN” clauses), including, for instance other Online Travel Agencies (“OTAs”) as well as hotels’ direct sales channels (see, Newsletter 1/2015, p. 17 Newsletter 3/2014, p.12 Newsletter 1/2014, p.15, Newsletter 5-6/2013, p.9 and 11, Newsletter No. 4-5/2012, p. 15, for additional background).
Such MFN clauses were deemed in breach of both national and EU competition rules, by restricting competition between Booking.com and other OTAs and hindering new booking platforms from entering the market.
The commitments offered by Booking.com consist of reductions in the scope of the MFN clauses.
Price parity vis-à-vis other OTAs. First, Booking.com committed to abandon the parity requirement in respect of prices which hotel make available to other OTAs. This would enable hotels to offer different room prices and/or better commercial conditions to different OTAs, and allocate them larger quotas of rooms.
Price parity vis-à-vis hotels direct sales. Secondly, hotels may also offer prices at a lower rate than those displayed on the Booking.com website via their offline sales channels (on-site bookings, by telephone, fax, email, instant messaging, physical sales outlets of travel agencies, etc.) as long as these prices are not published on the hotel’s website. They may also offer prices at a lower rate than those displayed on the Booking.com website to customers who are members of loyalty programs.
However, hotels would still have to offer the same or better room prices to Booking.com as are offered to the general public on the hotel’s own online booking channels. Nonetheless, hotels’ websites accessible by the general public may display qualitative information regarding the prices offered via their offline channels, such as “attractive prices”, “good prices”, etc. Furthermore, hotels will be allowed to send emails and SMS messages to consumers informing them of the prices offered via their offline channels, as well as to reach out to previous customers and offer them special discounts.
Other conditions. In addition, hotels may reserve a greater number of rooms to their direct online or offline sales channels than are allocated to Booking.com. Hotels will also be completely free to offer consumers more favourable conditions than those offered on Booking.com via other platforms and via their own offline channels. This includes breakfast or any other service (e.g. gym, spa, Internet access, etc.) as well as booking conditions (e.g. cancellation).
In essence, the commitments accepted by the competition authorities increase the hotels’ margin for maneuver, while acknowledging that price parity may be important in preventing free-riding on Booking.com’s investments and thus ensuring the continued offering of user-friendly search and comparison services free of charge.
In this respect, the three NCAs appear to have acknowledged that MFN clauses may bring about some efficiency. That is somewhat surprising given that during the market tests, stakeholders pointed to the fact that OTAs—not hotels—are the free-riders, notably on the investments made by hotels (e.g., brand, hotel facilities, quality of services provided to customers etc.), e.g. by purchasing hotels brands as keywords for online search. Also, hotels and other stakeholders actually expressed concerns that even a “narrow MFN” clause would produce the same effects as the fully-fletched MFN clause, since hotels would have basically no incentives to grant other OTAs lower prices than the price displayed on their own online sales channel (due to the risk of cannibalizing their direct sales).
It is not clear whether, in the light of their concerns, the intervening parties will decide the appeal the commitment decision(s).
Investigations in Germany…
While the French, Italian and Swedish competition authorities cheered the outcome of their cooperation and the coordination of the European Commission, the Federal Cartel Authority (“FCA”) in Germany was actually heading in the opposite direction on the very same issues in an ongoing investigation against Booking.com.
In fact, on April 2, 2015, the FCA sent formal charges to Booking.com regarding the use of “best price” clauses in its contracts with hotels in Germany.
In so doing, the FCA followed the same path it had already walked against HRS, another online booking portal once dominant in Germany.
In fact, according to the FCA, the statement of objections against Booking.com was necessary because the hotel booking portal had continued to use its best price clauses despite the fact that the FCA had prohibited similar clauses with a decision in the parallel proceedings against HRS.
The FCA’s decision was recently upheld by the Düsseldorf Higher Regional Court, which confirmed that HRS’s “best price” clauses restricted competition to such a degree that they could not be exempted under the EU Block Exemption Regulation (HRS’s market share was higher than 30%) or with an individual exemption (arguably, because the FCA found that such clauses brought about no efficiencies).
…and in the UK
These recent developments are particularly relevant in the context of the new investigation that the UK Competition and Markets Authority (“CMA”) has to carry out into Booking.com’s MFN clauses (the CMA replaced the Office of Fair Trading or “OFT” on April 1, 2014).
On September 26, 2014 the UK’s Competition Appeal Tribunal (“CAT”) reversed the OFT’s January 20th decision to accept commitments from online travel agents Booking.com B.V. (“Booking.com”, and its ultimate parent company Priceline.com Incorporated) and Expedia Inc. (“Expedia”), together with InterContinental Hotels Group plc. (“IHG”) (see Newsletter 4-5/2014, Newsletter 1/2014, Newsletter 5-6/2013 and Newsletter No. 4-5/2012 for additional background).
In the wake of the CAT’s decision, the case has been sent back to the CMA, which has been ordered to reopen the investigation into hotel online booking practices.
In its ruling the CAT noted that “by pursuing its investigation on the basis that it had identified restrictions ‘by object’ the OFT may have deprived itself of the ability properly to appreciate the significance of the role of operators such as Skyscanner, even though it had initially acknowledged the importance of price transparency as a force for competition and was aware, at least, that meta-search operators existed.”
It is worth recalling that in November 2013, the FCA and the OFT closed their respective investigations into Amazon’s price parity policy on its Marketplace platform following Amazon’s decision in August 2013 to end its Marketplace price parity policy across the European Union (see Newsletter 5-6/2013, p. 12, for additional background). The policy prohibited third party retailers from offering products through other online sales platforms cheaper than on Marketplace.
While it is hard to predict the outcome of the new investigation by the CMA, third parties and complainants may point to the recent developments illustrated above to call for a stricter approach by the CMA. In turn, the businesses under investigation may arguably prefer to settle the case once and for all by offering improved commitments in line with the French, Italian and Swedish cases. If that occurs, the German approach will be “singled out” as the stricter one in the European competition arena.
The issues assessed by several national competition authorities in Europe in the online booking sector were the perfect candidate for an EC investigation, which would have provided greater legal certainty at a faster speed. The reasons why this did not happen are unclear to most, and certainly the coordination efforts recently undertaken are no substitute for clear-cut enforcement. Historians of EU competition law may find the issue interesting to investigate