Why An FTC Case Against Google Is A Really Bad Idea (Part V)

[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. Check out Part I, Part II, Part III and Part IV.]

The FTC, a federal agency established in 1914, enjoys some unique powers. It can prosecute some claims before an Administrative Law Judge instead of the courts. Additionally, Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45) allows the agency to challenge “unfair methods of competition.” Use of Section 5, expanded to include “unfair or deceptive practices” in 1938, has received a rather checkered reaction from the federal judiciary.

There have been hints by the FTC that it may rely on Section 5 as the basis for a potential case against Google. This strategy could have serious repercussions because the FTC’s use of unfair competition as a surrogate for what the antitrust laws do not or cannot reach would be unbounded from the rigorous Sherman Act standards of unlawful monopolization. The FTC has never won a pure Section 5 lawsuit before.

5.   A “Pure” Section 5 Case Would Almost Certainly Lose, And Should

There is one point of law on which everyone agrees. As the Supreme Court held, Section 5 can reach business conduct that is not, of itself, violative of the antitrust laws. But exactly how far the statute extends beyond the Sherman Act is unclear; in the FTC’s 2008 public workshop on Section 5 As A Competition Statute there was much debate on that issue. Here’s how the FTC described the problem:

The precise reach of Section 5 and its relationship to other antitrust statutes has long been a matter of debate. The Supreme Court observed in Indiana Federation of Dentists that the “standard of ‘unfairness’ under the FTC Act is, by necessity, an elusive one, encompassing not only practices that violate the Sherman Act and the other antitrust laws but also practices that the Commission determines are against public policy for other reasons.” In the early 1980s, however, lower courts were critical of efforts by the FTC to enforce a reading of Section 5 that captured conduct falling outside the Sherman Act. In striking down the FTC’s orders, the Second Circuit in its “Ethyl” decision expressed concern that the Commission’s theory of liability failed “to discriminate between normally acceptable business behavior and conduct that is unreasonable or unacceptable.”

The vast majority of non-merger FTC cases enforce the Sherman Act. However, beginning in the early 1990s the Commission reached a number of consent agreements involving invitations to collude, practices that facilitate collusion or collusion-like results in the absence of an agreement, and misconduct relating to standard setting. Because the complaints in these cases did not allege all the elements of a Sherman Act violation, the Commission’s theory of liability rested on a broader reach of Section 5.  As consent decrees, none of these cases was reviewed, let alone endorsed, by the courts.

And that’s the rub. Take “invitations to collude” for instance. Under Section 1 of the Sherman Act, an agreement among competitors, whether express or tacit, is the predicate to illegality. This has been interpreted to mean attempts at price-fixing are not unlawful unless the other company says “yes.” Famously, the Justice Department initially lost, but then won on appeal, a 1982 challenge to American Airlines’ overt attempt at fixing airfare rates using an antitrust theory of attempted joint monopolization, fashioned to end-run the requirement of a horizontal agreement. That case presented unique market circumstances (American and Braniff sharing dominance of Dallas “hub” flights) and unequivocally anticompetitive behavior that lacked any efficiency or competitive justification. Most antitrust scholars and practitioners thus generally agree that an invitation to fix prices is something the FTC should, as it has in the past, prosecute pursuant to Section 5, because the underlying conduct itself has no economic legitimacy other than to override marketplace competition.

Hence the problem where Google is concerned. First, there is a recognized basis under Section 2 for attacking unilateral attempts to monopolize a relevant market. Absent the necessary dangerous probability of success, something woefully lacking here, an unfair competition case premised on conduct by a dominant firm that falls short of attempted monopolization is very likely to receive the same hostile judicial reaction the Commission acknowledged in 2008. Second, as private unfair competition cases (which may only be brought under state law, not Section 5) have explained, the absence of legitimate business justification can support an inference of anticompetitive behavior. Yet, in organizing and structuring its organic search results, no one disputes that Google has a real business justification to deliver better results to users and thus more eyeballs to advertisers: in other words to make money. Without the predatory sacrifice of short-run profits — i.e., with normal, profit-maximizing behavior — there is real economic legitimacy to the conduct forming the basis for a case against Google.

A traditional legal definition of unfair competition is “any fraudulent, deceptive, or dishonest trade practice that is prohibited by statute, regulation or the common law.” The most well-known aspect of unfair competition is trademark infringement, where a firm intentionally means to defraud and confuse buyers or does it unintentionally, but there is a likelihood of confusion. Some state unfair competition statutes have been interpreted more broadly to outlaw “immoral, unethical, oppressive or unscrupulous” business practices.

It is tremendously difficult to translate this vague, amorphous standard into something offering concrete tests for illegal behavior. That’s not to say such an effort cannot be undertaken — rather the FTC would need to explain with some specificity how its interpretation of Section 5 offers what the federal courts have insisted is the necessary line “between conduct that is anticompetitive and legitimate conduct that has an impact on competition.” In order to guard against overreaching by the government, Section 5 requires “definable standards” that provide guidance to private companies. In rejecting an FTC challenge to oligopolistic pricing — by which firms in a concentrated market may achieve price uniformity without overt or tacit coordination, that is without contravening the antitrust laws — the Second Circuit emphasized:

the Commission owes a duty to define the conditions under which conduct claimed to facilitate price uniformity would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.

Like any litigant, the FTC is allowed to seek to develop new law in the course of its prosecutions. Given the problem of defining with some rigor what differentiates “unfair” competition from conduct otherwise lawful for antitrust purposes, however, there is a real risk the Commission will once again fail if it attacks Google purely under Section 5. Not only are there no objective standards for defining what is “fair” business behavior in Web search and search advertising, the marketplace impact of Google’s unilateral search practices has hardly been shown to have substantially exclusionary consequences. Therefore, unlike the Justice Department in American Airlines, the FTC would be taking on a huge legal burden by proposing Section 5’s unfairness standard should extend to conduct competitors dislike merely because it presents a threat of disintermediation.

Take travel bookings, for instance. Expedia and others apparently believe Google’s prominent placement of direct links to airline sites in its organic search results is exclusionary. Yet what they really dislike is that Internet users can more easily find and buy travel products from the providers directly, without using Expedia’s or Travelocity’s own travel sites — and with them both airline commissions and extra ticket booking fees — to make those purchases. Just as Amazon.com disintermediated brick-and-mortar book retailers like Borders, this is a competitive result the antitrust enforcement authorities should applaud, not condemn. Cutting out a middleman and delivering lower total costs to consumers is a good thing. Unfairness is a label the federal government should not seek to attach to business behavior that disrupts established players by delivering easier and cheaper products to consumers.

Conversely, since the basic criticism by Google’s opponents is that so-called “demoting” of search links for would-be vertical rivals is deceptive — whether or not it is the “evil” Google’s founders initially pledged not to do — a Section 5 case premised on lack of disclosure might have some legs. But bear in mind, the linchpin here is deception not of potentially competing firms, but rather of consumer demand. If the FTC can prove that Google told search users one thing but secretly delivered something else, for instance with undisclosed paid links intermingled with organic search results, there may be a lurking Section 5 case for deceptive practices. But claims that Google is too big or evasive to “trust” do not amount to consumer deception. Fraud is something that’s been unlawful for centuries; its basis is a false statement of material fact, intended to deceive, something which even Google’s critics have yet to demonstrate.

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That wraps our five-part series on FTC v. Google, Inc. Of necessity, these posts do not analyze the evidence presumably compiled by the FTC, because its investigation is not public. But with some educated guesses, knowledgeable observers can assess whether such a prosecution would succeed, and whether it would be a good idea. Others may (and do) differ, but this author believes an FTC monopolization case — or a “pure” Section 5 case — against Google would be a really bad idea.

Note:  Originally prepared for and reposted with permission of the Disruptive Competition Project.