Federal Trade Commission Closes Google Investigation

A DV I S O RY January 2013 Federal Trade Commission Closes Google Investigation On January 3, 2013, the Federal Trade Commission ( FTC or the Commission ) announced the resolution of two pending investigations of Google, Inc.; one relating to several of Google s practices in its search business, the other relating to the conduct of its Motorola Mobility, Inc. ( Motorola ) subsidiary in litigation claims of infringement of standards essential patents. 1 After a lengthy and high profile investigation, the FTC closed its investigation of Google s alleged search bias without taking action while accepting a voluntary commitment from Google addressing its practices in two other areas related to its search business. At the same time, Google agreed to accept a consent order regarding Motorola s licensing practices relating to standards essential patents. In this advisory we describe and explore the implications of the resolution of each of these investigations. Contacts Jonathan Gleklen +1 202.942.5454 In a Significant Victory for Google, the FTC Determined Not to Challenge Google s Practices in the Search Business In a significant victory for Google, a unanimous FTC announced that it had closed its nearly two year investigation into whether Google had engaged in so called search bias Google s alleged practice of giving preference to its own content on its search results page and demoting its competitors content. 2 The FTC s investigation had been serious and high profile, with the FTC previously disclosing its decision to hire an experienced outside litigator, Beth Wilkinson, and a well-known economist, Richard J. Gilbert, to work on the investigation and any subsequent challenge. The FTC s search bias investigation looked at two categories of conduct: (1) the effects of Universal Search a product that prominently displays targeted Google properties in response to specific categories of searches, such as shopping and local ; and (2) how Google altered its search algorithms to demote certain vertical websites, 3 i.e., results for these websites were moved further down the search results page. Given that it seeks to cover the entire Internet, Google itself is a general purpose or horizontal search engine. Vertical search engines, on the other hand, focus on narrowly defined categories of Wilson D. Mudge +1 202.942.5404 Christopher J. Flack +1 202.942.6564 1 Press Release, Federal Trade Commission, Google Agrees to Change Its Business Practices to Resolve FTC Competition Concerns In the Markets for Devices Like Smart Phones, Games and Tablets, and in Online Search (FTC Jan. 3, 2013), available at http://www.ftc.gov/opa/2013/01/google.shtm [henceforth FTC Press Release]. 2 Statement of the Federal Trade Commission Regarding Google s Search Practices, In the Matter of Google Inc., File No. 111-0163 (FTC Jan. 3, 2013), at 1, available at http://www.ftc.gov/os/caselist/1210120/13 0103googlemotorolastmtofcomm.pdf [henceforth Commission Search Statement]. 3 FTC Press Release. Sarah Friedman Roback +1 202.942.5796 arnoldporter.com

content such as shopping or travel. 4 The FTC ultimately found that Google s changes to its search platform could plausibly be justified as innovations, and therefore did not violate the antitrust laws even though they may, in certain instances, have harmed competitors. 5 In remarks prepared for a press conference held on January 3, FTC Chairman Jon Leibowitz concluded that, [a]lthough 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. The Chairman went on to quote the oft-repeated antitrust adage that the focus of our law is on protecting competition, not competitors stating that, [t]ellingly, Google s search engine rivals engaged in many of the same product design choices that Google did, suggesting that this practice benefits consumers. 6 A key question in any investigation of unilateral conduct by a dominant firm is whether the firm has a legitimate business justification for taking the action at issue and whether the conduct at issue arguably benefits consumers. Where that is the case, the Commission is hesitant to second-guess the business judgment of the company even where the firm might have made other choices that would have a lesser impact on competitors. The Commission s closing statement recognized that, [p]roduct design is an important dimension of competition and condemning legitimate product improvements risks harming consumers Challenging Google s product design decisions in this case would require the Commission or a court to secondguess a firm s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence. 7 4 Commission Search Statement at 1. 5 FTC Press Release. 6 Google Press Conference, Opening Remarks of Federal Trade Commission Chairman Jon Leibowitz, As Prepared for Delivery (FTC Jan. 3, 2013), at 5, available at http://www.ftc.gov/speeches/ leibowitz/130103googleleibowitzremarks.pdf [henceforth Leibowitz Remarks]. 7 Commission Search Statement at 3. See, e.g., U.S. v. Microsoft Corp., 147 F.3d 935, 948 (D.C. Cir. 1998) ( Antitrust scholars have long recognized the undesirability of having courts oversee product The Commission s decision to close the Google search bias investigation is a reminder to businesses of the importance of documenting, ideally in real time in internal documents and public communications, the pro-competitive justifications and/or benefits to consumers of any business decisions likely to receive antitrust scrutiny. In its Statement, the Commission confirmed that its decision to close the investigation was supported by internal Google documents, noting for example that contemporaneous evidence demonstrates that Google would typically test, monitor, and carefully consider the effect of introducing its vertical content on the quality of its general search results, and would demote its own content to a less prominent location when a higher ranking adversely affected the user experience. 8 Although the FTC has closed its investigation, the European Commission s investigation of Google s search business continues, and European Union officials have stated that the FTC decision will not affect the outcome in Europe. 9 Google Made Voluntary Commitments to Change Certain of Its Other Practices Under Investigation by the FTC In addition to focusing on alleged search bias, the Commission s investigation also looked at two other practices involving Google s search business. Scraping is Google s practice of including content from other sites, such as restaurant reviews, in its search results. The Commission also looked at Google s practices regarding the tools used to manage online search advertising campaigns, and whether those practices limited so-called multi-homing, the ability of search advertisers to use multiple advertising design, and any dampening of technological innovation would be at cross-purposes with antitrust law. ); In re IBM Peripheral EDP Devices Antitrust Litigation, 481 F.Supp. 965, 1003 (N.D. Cal. 1979) ( Truly new and innovative products are to be encouraged, and are an important part of the competitive process. ), aff d sub nom. Transamerica Computer Co. v. IBM, 698 F.2d 1377 (9th Cir. 1983); Verizon Commc ns v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) ( To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct. ). 8 Commission Search Statement at 2. 9 Frances Robinson, EU: FTC Decision on Google Won t Affect Talks, The Wall Street Journal, Marketwatch, January 4, 2013, available at http://www.marketwatch.com/story/eu-ftc-decision-on-googlewont-affect-talks-2013-01-04. 2

platforms. The investigation of these practices was closed with a highly unusual voluntary commitment, spelled out in a letter agreement signed by Google, rather than by a formal consent order. Under this voluntary commitment, Google agreed to provide all websites the option to keep their content out of Google s vertical search offerings, while still having them appear in Google s general, or organic, web search results, 10 and also agreed to remove restrictions on the use of its online advertising platform, AdWords, that may make it more difficult for advertisers to coordinate online advertising campaigns across multiple platforms. 11 Google published the letter agreement, dated December 27, 2012, on its blog and the letter also appears on the Commission s website. The letter, signed by Google Chief Legal Officer David Drummond, is designed to bind Google without a consent order that is enforceable in a contempt proceeding. In the letter Google states that it will honor the commitments made for a period of five years, 12 and to give the voluntary commitment teeth, Google s letter acknowledges that it understands that these commitments are important; and Google agrees that a material violation of these commitments would be actionable by the FTC under Section 5 of the FTC Act, 15 U.S.C. 45, and that the jurisdictional elements of such an action by the Commission would be satisfied. 13 In other words, while Google did not agree to a judicially-enforceable consent order, it agreed that a breach of its voluntary commitment would constitute an unfair act or practice or unfair method of competition under the FTC Act, though what would constitute a material violation is left undefined. Google s voluntary commitment also includes provisions typically found in consent orders, such as an obligation to submit an initial compliance report within sixty days and to provide annual updates and to cooperate in any FTC investigation. Google s voluntary commitment was controversial within the Commission on both substantive and procedural grounds, 10 FTC Press Release. 11 Id. 12 Letter from David Drummond to Jon Leibowitz, Re: Google Inc., File No. 111-0163, Dec. 27, 2012, at 1. 13 Id. (emphasis added). prompting dissenting statements from Commissioners Rosch and Ohlhausen. On substance, it is not clear that the Commission s majority believed that Google s conduct relating to scraping and multihoming violated the FTC Act. A footnote to the Commission Statement states that Chairman Leibowitz, Commissioner Brill, and Commissioner Ramirez merely had strong concerns regarding Google s alleged misappropriation of third party website content, while Chairman Leibowitz and Commissioner Brill had strong concerns regarding certain of the terms and conditions relating to Google AdWords. 14 The dissents by Commissioners Rosch and Ohlhausen were clear, however, that they did not believe either category of conduct violated Section 5. Commissioner Ohlhausen wrote in a separate statement that she would have closed the investigation without any remedy because she did not believe that Google s conduct violated either Section 2 of the Sherman Act or Section 5 of the FTC Act. On the contrary, the investigation revealed that most websites appear to approve of Google s use of their content in Google s vertical properties because it leads to increased traffic to their sites. Also, Commissioner Ohlhausen stated that [t]he investigation further revealed a lack of evidence that Google s API terms and conditions have harmed competition or consumers in any way. 15 In recent years, what constitutes an unfair method of competition under Section 5 of the FTC Act has been debated vigorously. Debate centers on whether and if so, how far the FTC s antitrust authority under Section 5 extends beyond the Sherman, Clayton, and Robinson-Patman Acts. Both Chairman Leibowitz and Commissioner Rosch have publicly advocated for expanding the reach of Section 5, and the FTC s enforcement actions and the public statements of Commissioners indicate that the Commission views Section 5 s reach as broader than that of the Sherman and Clayton Acts. Nevertheless, in a 2010 prepared statement before a Senate Subcommittee, the Commission clarified 14 Commission Search Statement at 3 n.2. 15 Statement of Commissioner Maureen K. Ohlhausen, In the Matter of Google Inc., File No. 111-0163 (FTC Jan. 3, 2013), at 2 [henceforth Ohlhausen Statement]. 3

that in using our Section 5 authority the Commission will focus on bringing cases where there is clear harm to the competitive process and to consumers. 16 Moreover, both Commissioner Ohlhausen s and Commissioner Rosch s statements in the Google matter make clear that there are limits to the reach of Section 5 in antitrust matters. Commissioner Ohlhausen echoed the 2010 statement and cautioned that, If our cases particularly standalone Section 5 cases are not anchored to competitive and ultimately consumer harm, then they are completely adrift. I am hopeful that the Commission will maintain its focus on competitive and consumer harm as it moves beyond this matter. 17 Furthermore, even Commissioner Rosch, who has stated publicly that he supports expanded use of Section 5 in antitrust cases, also cautioned against expanding the scope of Section 5 here: [T]he seeking of relief by some of my colleagues for Google s scraping and API restrictions practices that are legal under the Sherman Act puts the Commission s standalone Section 5 authority at severe risk. Congress would be unlikely to stand idly by if the Commission continues to challenge conduct under Section 5 without explaining the limiting principles of that authority. The majority s exercise of that authority in this case is particularly problematic and deserving of scrutiny given the utter lack of evidence that Google s actions have harmed consumers or competition the bare minimum requirements for the use of Section 5. 18 On procedure, Commissioners also disagreed whether this unusual voluntary commitment by Google was either appropriate or enforceable. Chairman Leibowitz, in remarks prepared for the Commission s press conference, 16 Prepared Statement of the Federal Trade Commission before the United States Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights (June 9, 2010), at 11-12, available at http://www.ftc.gov/os/testimony/100609dynamiceconomy.pdf. 17 Ohlhausen Statement at 2. 18 Concurring and Dissenting Statement of Commissioner J. Thomas Rosch Regarding Google s Search Practices, In the Matter of Google Inc., File No. 111-0163 (FTC Jan. 3, 2013), at 8 [henceforth Rosch Statement]. stated that Google has made enforceable commitments to resolve the Commission s concerns, and these commitments have reporting requirements that will allow the Commission to vigorously monitor and enforce Google s compliance. 19 In his Concurring and Dissenting Statement, however, Commissioner Rosch characterized Google s commitment as simply a non-binding pledge, and even though he concluded that the practices were not unlawful, Commissioner Rosch believed that, without a consent order, the practices could be revived at any time without penalty, even if they constituted a law violation. 20 In his Concurring and Dissenting Statement, Commissioner Rosch lamented: Instead of following standard Commission procedure and entering into a binding consent agreement to resolve the majority s concerns, Google has instead made non-binding commitments with respect to its search practices. Only two of my colleagues [Chairman Leibowitz and Commissioner Brill] have concluded that these nonbinding promises are an acceptable means of resolving their concerns with Google s search practices. 21 Further, Commissioner Rosch stated that Chairman Leibowitz and Commissioner Brill s reliance on the Statement of Commissioners Orson Swindle and Thomas B. Leary in In re General Mills, Inc./Diageo plc/pillsbury Co. as precedent for this voluntary commitment was incorrect because General Mills had involved structural remedies, whereas the Google matter involves conduct remedies that will require ongoing oversight by the Commission. 22 General Mills concerned a consummated acquisition of certain food businesses of Pillsbury by General Mills. In a split 2-2 vote, the Commission chose neither to litigate nor 19 Leibowitz Remarks at 4. 20 Rosch Statement at 1. 21 Id. at 6. Chairman Leibowitz and Commissioner Brill support the enforceable commitments made by Google, however, [w]hile Commissioner Ramirez is pleased that Google has decided to change certain of its practices, she objects to the form of the commitments made by Google. Commission Search Statement at 3 n.2. 22 Rosch Statement at 6 n.13. 4

enter into a consent order (Chairman Muris was recused). According to the Statement of then-commissioners Swindle and Leary, the merging parties made commitments to divest certain assets, guarantee a certain amount of longterm debt to the buyer of the divested assets, convert a plant for the buyer of the divested assets (under the oversight of an independent trustee), license the Pillsbury trademarks to the buyer (including providing for third party arbitration of any disputes), and that those commitments were sufficient to resolve the investigation. 23 Commissioner Rosch s contention is that, unlike in General Mills where the commitments arguably required Commission oversight only for a certain definite period of time until the commitments were accomplished (except potentially with respect to the trademark license portion), in this case Google can resume engaging in its alleged scraping or API restriction at any time, without penalty. 24 Commissioner Rosch further elaborated that, [t]he Commission has, at times, permitted respondents to avoid an enforcement action by terminating the offending conduct, but only when the underlying conduct was promptly corrected upon notice of a possible violation and the risk of a future violation was remote. 25 However, the closing letters that Commissioner Rosch cited with regard to the foregoing statement all relate to advertising practices investigations carried out under the Commission s consumer protection authority rather than its antitrust authority. Further, it is notable that although Commissioners Swindle and Leary agreed to non-binding relief in the General Mills matter, the Commissioners stated: We would have strongly preferred that these commitments be memorialized in a formal Commission order, consistent with usual practice. Imposition of an order, however, would require an affirmative vote of at least three Commissioners in this situation, and a third vote could not be obtained. On the other hand, 23 Statement of Commissioners Orson Swindle and Thomas B. Leary, In re General Mills, Inc./Diageo plc/pillsbury Co., File No. 001-0213 (Oct. 23, 2001). 24 Rosch Statement at 8. 25 Id. at 7-8. the alternative of asking a court to block the overall transaction would not, in our view, serve the public interest. As indicated above, we recognize that there are hard issues in this case and, even though we differ, we respect our colleagues view that the present settlement is inadequate. We regret that they could not have found a way to assert that view but still vote to include the commitments in an order that the agency can enforce. 26 Finally, Commissioner Rosch stated that, although in the distant past the Commission had used various informal means of resolving enforcement matters, such as Assurances of Voluntary Compliance and Informal Corrective Actions as a result of well-deserved criticism of these practices by the Nader Commission and the 1969 ABA Commission, the FTC abandoned the use of informal settlement agreements decades ago. 27 Given how unusual a voluntary commitment such as the one agreed to here by Google has been in recent memory, it seems unlikely that similar voluntary commitments will become commonplace and replace formal consent orders. However, it is unclear exactly why the Commission chose to accept a voluntary commitment letter rather than a formal consent order in this instance. The Consent Order Limiting Seeking Injunctive Relief in Licensing Disputes Related to Standards-Essential Patents Google also agreed to a Consent Order that effectively requires Google to refrain from seeking an injunction in ongoing patent litigations filed by its Motorola Mobility subsidiary against Apple, Microsoft, and others claiming that such companies infringed patents declared essential to various standards. According to the Commission, the order will remedy Google s allegedly anticompetitive conduct resulting from breaches by Google and its subsidiary Motorola Mobility, Inc. ( Motorola ) of Motorola s commitments to license standard-essential patents ( SEPs ) 26 Statement of Commissioners Orson Swindle and Thomas B. Leary, In re General Mills, Inc./Diageo plc/pillsbury Co., File No. 001-0213 (FTC Oct. 23, 2001). 27 Rosch Statement at 7. 5

on terms that are fair, reasonable and non-discriminatory ( FRAND ). 28 Specifically, the Order requires Google to first follow certain procedures to negotiate FRAND licenses before seeking injunctive relief for patent infringement. The FTC had previously expressed concern about Motorola s litigation conduct in several forums. First, it filed a comment before the International Trade Commission ( ITC ) in an action where Motorola sought to bar the importation of certain allegedly infringing products. 29 Second, it filed an amicus brief in the appeal of a related district court action that had found no damages could issue for patent infringement. 30 In both filings, the FTC had contended that seeking injunctive relief against a potentially willing FRAND licensee (thus potentially depriving the licensee of revenue by declaring their products infringing and banning their importation and distribution) distorts in the patent holder s favor the bargaining that would otherwise occur over appropriate (i.e., fair and reasonable) pricing for a license to the patents in question. The Order has moved these expressions of concern in advocacy filings into a more durable legal precedent that the Commission hopes will serve as a template for the resolution of [standardessential patent] licensing disputes across many industries, and reduce the costly and inefficient need for companies to amass patents for purely defensive purposes in industries where standard-compliant products are the norm. 31 The Google decision builds on previous FTC standards consent orders, reaffirming that conduct by patent holders to exploit market power obtained by breaching standardsetting commitments is subject to enforcement action under 28 Statement of the Federal Trade Commission, In the Matter of Google Inc., File No. 121-0120 (FTC Jan. 3, 2013), at 1, available at http://www.ftc.gov/os/2013/01/130103googlesearchstmtofcomm.pdf [henceforth Commission SEP Statement]. 29 See Third Party United States Federal Trade Commission s Statement on the Public Interest, In the Matter of Certain Wireless Communication Devices, Portable Music and Data Processing Devices, Computers, and Components Thereof, No. 337-T-745 (ITC Jun. 6, 2012), at 1 ( A patentee can make a RAND commitment as part of the standard setting process, and then seek an exclusion order for infringement of the RAND-encumbered SEP as a way of securing royalties that may be inconsistent with that RAND commitment. ). 30 See Brief of Amicus Curiae Federal Trade Commission Supporting Neither Party, Apple Inc. v. Motorola, Inc., No. 2012-1548 (U.S. Ct. App. Fed Cir. Dec 4, 2012). 31 Commission SEP Statement at 1. Section 5 of the FTC Act. But, as in the FTC s earlier SEP enforcement actions, significant disagreements continue among the Commissioners regarding the advisability, legality, and scope of such authority. 32 Support by a majority of Commissioners for applying Section 5 to SEP licensing may not continue, as one of the most forceful advocates of Section 5 enforcement, Commissioner Rosch, has since left the Commission, and Chairman Leibowitz, who is equally voluble in favor of an expansive application of this authority, may soon do so. 33 The Commission has been employing Section 5 in standards matters after the unfavorable opinion in the D.C. Circuit s rejection of the Commission s challenge to Rambus s conduct involving SEPs, which placed significant hurdles to Section 2 claims. 34 In addition, notwithstanding the Commission s hopes, few companies may choose to follow the Order s template for negotiations which subjects disputes on FRAND licensing terms to binding arbitration and instead continue current negotiating practices. The Consent Order s Requirements The Order requires Google to cease seeking injunctive relief based on alleged infringement of a patent subject to a FRAND commitment unless and until it has first made various documented efforts to reach a negotiated agreement on licensing terms. 35 This requirement applies to currently pending cases as well as in the future. It also requires the company to hold open any FRAND commitment it has made 32 See, e.g., In re Rambus, File No. 9302 (FTC Aug. 2. 2006) (Commissioner Leibowitz concurring, asserting that the decision should have employed the FTC s Section 5 authority rather than alleged attempted monopolization under Section 2 of the Sherman Act); In re Negotiated Data Solutions, LLC (In Re N-Data), File No. 0510094 (FTC Jan. 23, 2008) (Commissioners William J. Kovacic and Chair Deborah Platt Majoras dissenting from the Commission s application of Section 5 to reduce a purportedly unreasonable royalty rate); In re Robert Bosch GmbH, File No. 121-0081 (FTC Nov. 26, 2012) (Commissioner Ohlhausen dissenting in application of Section 5). 33 Commissioner Rosch s replacement, Joshua D. Wright, was sworn in on January 11, 2013. Chairman Leibowitz has publicly stated that he is considering leaving the Commission in the coming months. 34 Rambus Inc. v. FTC, 522 F. 3d 456 (D.C. Cir. 2008) (finding that Rambus s purported withholding of information on its patent claims reading on parts of the JEDEC DRAM standard was not exclusionary.). 35 Decision and Order, In re Motorola Mobility LLC and Google Inc., II.B-C., available at http://www.ftc.gov/os/caselist/1210120/13010 3googlemotorolado.pdf [henceforth Consent Order]. 6

until either the underlying standard has been rejected or withdrawn, the patents have expired, or Google abandons its interest in those patents. 36 And the Order applies to all patents Google declares or has declared as essential before any standards body not merely to those involved in the existing litigation, or amassed by Motorola. All provisions of the Order last for ten years. 37 Paragraph III of the Order sets out a negotiation schedule that Google may use to license standard-essential patents. 38 First, a licensee can negotiate for a FRAND license with Google for six months. 39 If that period expires and an agreement is not reached (or if a licensee earlier requests), Google must then offer a proposed license agreement in writing that includes all material terms and limitations. 40 The licensee may then dispute terms in this agreement, providing alternative terms where it wishes, and can then either go to court for a determination of the appropriate royalties or propose binding arbitration to resolve the remaining disputed terms. 41 This process, however, is optional a potential licensee may agree to this procedure but can also agree to any other mutually agreed to procedure that references Paragraph III of the Order. 42 As there is no requirement upon Google that it accede to a potential licensee s request to invoke this procedure, the real value of this provision comes from the Commission having set forth an framework under which it thinks FRAND negotiations should proceed thus spelling out a potential safe harbor for companies seeking to limit the risk of future enforcement action. If a licensee chooses not to enter negotiations under the process outlined above, Google must still meet various prerequisites before seeking injunctive relief. First, Google must provide a potential licensee with an irrevocable offer containing all material terms of a proposed license at least six months before seeking any injunction. 43 Then, if no agreement is reached, and at least sixty days before 36 Consent Order II.A. 37 Consent Order IX. 38 Consent Order III. 39 Consent Order III.A. 40 Consent Order III.B. 41 Consent Order III.D-E. 42 Consent Order III. 43 Consent Order IV.B.1; IV.D.1. initiating a claim for injunctive relief, Google must offer the potential licensee a similarly irrevocable option to enter binding arbitration. 44 A potential licensee can choose to seek district court action to determine appropriate royalty terms instead of arbitration during which time Google may not file for injunctive relief against the potential licensee, if that action is begun within either seven months of the initial license offer or within three months of the arbitration offer. 45 Only once these efforts have all been completed, can Google then seek an injunction alleging infringement. The Order does allow Google to seek injunctive relief when a potential licensee firmly repudiates any intent to accept a license. Google may seek injunctive relief against a potential licensee subject to United States jurisdiction if the potential licensee either: (1) states in writing or in sworn testimony that it will not license a FRAND Patent on any terms; (2) refuses to license on terms set by binding arbitration or court ruling; or (3) fails to assure Google that it is willing to accept the irrevocable FRAND license offer Google provides. 46 By requiring a clear written statement disavowing an intent to license, this provision may remove some of the ambiguity in negotiations as to whether talks have truly been abandoned in favor of litigation. Finally, the Order does not restrict Google s ability to seek damages for alleged infringement or raise any other claims in a patent litigation involving claimed SEPs. 47 Development of Enforcement Consensus Limiting Injunctive Relief to Instances Where There is No Willing Potential Licensee The FTC s position that seeking injunctive relief against alleged infringers of SEPs is anticompetitive or unfair reflects an apparent enforcement consensus that has recently developed in response to the wide-ranging private patent litigation involving SEPs among the world s technology giants. On February 13, 2012, the DOJ announced the closure of three separate investigations of acquisitions that included SEPs: (i) the acquisition of certain Nortel 44 Consent Order IV.B.2; IV.D.2. 45 Consent Order IV.C. 46 Consent Order II.E.2-4. 47 Consent Order IV.E. 7

telecommunications patents by a consortium of technology firms including Apple and Microsoft; (ii) Google s acquisition of Motorola Mobility; and (iii) the acquisition by Apple of certain Novell, Inc. patents. DOJ explained that in each case its investigation had focused on whether the acquiring firms would have an incentive not possessed by the selling firms to exploit ambiguities in FRAND commitments and thus inhibit innovation by holding up rivals. DOJ closed its investigation of the Nortel and Novell patents after public commitments by Apple and Microsoft not to seek injunctive relief with respect to the acquired SEPs. While Google did not make a similar commitment, the Division closed its investigation of the Motorola Mobility acquisition notwithstanding its concerns about the potential inappropriate use of SEPs to disrupt competition because Motorola was already seeking injunctive relief with respect to SEPs, and the acquisition thus would not substantially lessen competition. 48 In his June 22, 2012 opinion dismissing litigation between Motorola and Apple for failure to prove damages, Judge Posner (there sitting as a trial judge) concluded injunctive relief could rarely if ever issue in FRAND royalty disputes because the offer to license implicitly reveals that the patent-holder would accept monetary damages. 49 The DOJ subsequently proposed that injunctive relief should only be sought in situations where the standards implementer is unwilling to have a neutral third-party determine the appropriate F/RAND terms or is unwilling to accept the F/RAND terms approved by such a third party. 50 48 See Statement of the Department of Justice s Antitrust Division on its Decision to Close its Investigation of Google Inc. s Acquisition of Motorola Mobility Holdings Inc. and the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. and Research in Motion Ltd., available at http://www.justice.gov/opa/pr/2012/february/12-at-210.html. 49 Apple Inc. v. Motorola, Inc., 869 F. Supp.2d 901, 913-14 (N.D. Ill. June 22, 2012) ( To begin with Motorola s injunctive claim, I don t see how, given FRAND, I would be justified in enjoining Apple from infringing the 898 unless Apple refused to pay a royalty that meets the FRAND requirement. By committing to license its patents on FRAND terms, Motorola committed to license the 898 to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent. ). 50 Renata Hesse, Acting Assistant Attorney General for Antitrust, Six Small Proposals for SSOs Before Lunch, Remarks as Prepared In late November 2012, the FTC applied this theory as part of its approval of an acquisition of SPX Service Solutions by Bosch. There, the Commission entered into a consent order requiring that SPX Service Solutions abandon litigation claims relating to SEPs involved in air conditioning recycling, recovery, and recharge devices. In that decision, the Commission made its future enforcement intentions explicit: Patent holders that seek injunctive relief against willing licensees of their FRAND-encumbered SEPs should understand that in appropriate cases the Commission can and will challenge this conduct as an unfair method of competition under Section 5 of the FTC Act. 51 Finally, on January 8, 2013, the DOJ and the Patent & Trademark Office ( PTO ) jointly issued a statement addressing the propriety of exclusion orders in ITC actions under section 337 of the Tariff Act of 1930 involving SEPs. 52 In the agencies view, seeking exclusion orders is generally likely evidence of an attempt by patent holders to pressure standards implementers to accept more onerous licensing terms than the patent holder would otherwise receive but may be appropriate where the putative licensee is unable or refuses to take a F/RAND license and is acting outside of the patent holder s commitment to license on F/RAND terms. 53 The Scope of Section 5 in Policing Standards- Related Licensing Negotiations The Google order represents another chapter in the Commission s attempt to articulate the circumstances in which conduct relating to SEP royalties and remedies is actionable under Section 5 of the FTC Act, either as an unfair method of competition or as an unfair act or for the ITU-T Patent Roundtable, October 10, 2012, at 9; see also Joseph F. Wayland, Acting Assistant Attorney General for Antitrust, Antitrust Policy in the Information Age: Protecting Innovation and Competition, (Sept. 21, 2012), at 4 ( The law of injunctions in patent cases must be flexible and sensitive to the concern that opportunistic rights holders can exploit the threat of an injunction to extract royalties well in excess of the value of their intellectual property. ). 51 Statement of the Federal Trade Commission, In re Robert Bosch GMbH, File No. 121-0081 (FTC Nov. 26, 2012), at 2. 52 Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments, United States Department of Justice & United States Patent & Trademark Office (Jan. 8, 2013). 53 Id. at 6-7. 8

practice. But the precise contours of Section 5 liability in this context remain unclear. The Commission first invoked Section 5 to address standards royalty negotiations in its January 23, 2008 Consent Order against Negotiated Data Solutions. There, three Commissioners over a vigorous dissent concluded that seeking royalties far higher than the nominal royalties that the respondent s predecessor in interest had committed to charge constituted both an unfair method of competition and an unfair act or practice. 54 The Commission views the FTC Act s prohibition of unfair methods of competition as reaching conduct that would not violate the antitrust laws, as long as the conduct has some element of coercion or oppressiveness. 55 The Commission has traditionally applied the FTC Act s ban on unfair acts or practices to consumer protection violations, using it to reach conduct that causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or competition. 56 How these rather loose formulations of liability apply to SEP licensing remains a work in progress. In Google, three Commissioners were willing to find that the challenged conduct violated the unfair act or practice prong of Section 5, while a different three-member majority concluded that the conduct was an unfair method of competition that violated Section 5. 57 Commissioners Brill, Leibowitz, and Rosch reasoned that the Commission s unfair act or practice consumer protection authority could 54 In the earlier 2008 N-Data Consent Order, three Commissioners argued that they could employ this authority to protect against a patent-holder purportedly seeking unreasonable royalties for a standards-essential patent; in the November 2012 Bosch Consent Order, litigation conduct against potential licensees similar to that of Motorola was not charged as an unfair act, but as an unfair method of competition. See Statement of the Federal Trade Commission, In re Robert Bosch GmbH, File No. 121-0081(FTC Nov 26, 2012) at 2 n.7 ( We have no reason to believe that, in this case, a monopolization count under the Sherman Act was appropriate. However, the Commission has reserved for another day the question whether, and under what circumstances, similar conduct might also be challenged as an unfair act or practice, or as monopolization. ). 55 See, e.g., E.I. DuPont v. de Nemours & Co. v. FTC, 729 F.2d 128, 139-40 (2d Cir. 1984). 56 15 U.S.C. 45(n). 57 Commission SEP Statement at 3. be invoked because threatening injunctive relief would likely increase costs to consumers. Commissioners Brill, Leibowitz, and Ramirez concluded that Google s conduct could appropriately be characterized as an unfair method of competition. Commissioner Ramirez dissented from the Commission s decision to use its unfair acts or practice authority to challenge Google s alleged violation of its FRAND commitments. In her view, the conduct and harm departed significantly from the type of direct consumer transactions and immediate injury traditionally charged as unfair acts by the Commission. 58 In contrast, Commissioner Rosch would not have charged the violation as an unfair method of competition because he believed that declaring Google s actions an unfair method of competition likely would fare poorly in appellate review because of the Complaint s failure to allege a discernible limiting principle for when a standalone Section 5 violation one not based on a traditional antitrust theory could be charged. 59 Commissioner Ohlhausen dissented from the Commission s decision, objecting to liability on both the unfair method of competition and unfair act or practice prongs of Section 5. She reiterated her critique, put forward in her dissent to the November 2012 Bosch Consent Order, that courts are better suited than the FTC to decide complex licensing disputes. 58 Id. at 3 n.9 ( Chairman Leibowitz and Commissioner Brill support an unfair acts claim as well as an unfair methods claim Google s threat of injunctions would likely increase costs to consumers because manufactures using Google s SEPs would be forced, by the threat of an injunction, to pay higher royalty rates, which would be passed on to consumers Commissioners Ramirez and Ohlhausen believe that these injuries are a significant departure from the type of injury contemplated by the Commissions 1980 Unfairness Policy Statement (which sets forth the elements for charging such conduct.). 59 Separate Statement of Commissioner J. Thomas Rosch Regarding Google s Standard Essential Patent Enforcement Practices, In the Matter of Google Inc., No. 121-0120 (FTC Jan. 3, 2013), at 3-4 (identifying several limiting principles that he acknowledges could be present in this case, but should have been pled in the Complaint both so that the Commission could constrain its discretion under Section 5 and present a legal theory that the Commission could defend in an appellate court, those being potentially: (1) monopoly or near-monopoly power; (2) particularly pernicious anticompetitive harm; or (3) deceptive conduct.), available at http://www.ftc.gov/os/caselist/1210120/130103googlemotorolar oschstmt.pdf. 9

First, she claimed that the decision provides insufficient guidance for market participants to know when injunctions are proper. 60 Second, in her view, the majority was walking a fine line by painting Motorola as acting unlawfully given ambiguous factual findings in the underlying litigations about Apple s willingness to license. Third, she rejected use of the unfair acts authority for SEP royalty disputes, objecting to treating sophisticated technology companies, rather than end-users, as consumers under our consumer protection authority, thus making the FTC into a general overseer of all business disputes simply on the conjecture that a dispute between two large businesses may affect consumer prices. 61 Considerations for Standards Organizations and Patent-Holders The FTC s authority to pursue allegedly unlawful actions relating to standards-essential patents under its standalone Section 5 authority has not been endorsed by any court, and remains subject to internal debate among the Commissioners. Two of the most vociferous advocates of enforcement, Commissioner Rosch and Chairman Leibowitz, are likely to leave shortly, and after their departure there will be only a single current Commissioner who supports liability under the unfair act or practice consumer protection prong of Section 5. Nevertheless, now that the FTC has issued two separate consent orders on the subject in rapid succession, when it comes to SEPs, patent holders would be well-advised to consider whether to adopt some variant of the dispute-resolution mechanism that the FTC endorsed in this Order. If you have any questions about any of the topics discussed in this advisory, please contact your Arnold & Porter attorney or the following attorneys: Jonathan Gleklen +1 202.942.5454 Jonathan.Gleklen@aporter.com Wilson D. Mudge +1 202.942.5404 Wilson.Mudge@aporter.com Christopher J. Flack +1 202.942.6564 Christopher.Flack@aporter.com Sarah Friedman Roback +1 202.942.5796 Sarah.Roback@aporter.com 60 Dissenting Statement of Commissioner Maureen K. Ohlhausen, In the Matter of Motorola Mobility LLC and Google Inc., File No. 121-0120 (FTC Jan. 3, 2013), at 2 ( By articulating only narrow circumstances when the Commission deems a licensee unwilling and not addressing the ambiguity in the market about what constitutes a FRAND commitment, the Commission will leave patent owners to guess in most circumstances whether they can safely seek an injunction on a SEP. ), available at http://www.ftc.gov/os/ caselist/1210120/130103googlemotorolaohlhausenstmt.pdf. 61 Id. at 4. 2013 Arnold & Porter LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation. 10