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War on Google: Vestager Strikes Back

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About The Author

Matt Bogdan (Former EU & International Law Editor)

Matt graduated with an LLB (2:1) from Durham University in July 2014. Most recently, he has been assisting with research on comparative company law at the Durham Law School. Matt is primarily interested in the TMT sector, but has also been involved in matters of public international law through Durham United Nations Society.

Back in December 2014, I wrote about the newly elected European Commission, noting the strong character of Ms Margrethe Vestager, the new Commissioner for Competition, and predicting that the European Union may be entering a new, dynamic era of competition law enforcement. Half a year into her tenure, Ms Vestager is evidently living up to the expectations.

Over the past month, she has, amongst other actions: proposed a competition inquiry into the e-commerce sector, accused Gazprom of unfair pricing and market meddling, and launched a state aid inquiry into the national mechanisms for ensuring electricity supplies, earning herself this rather impressive cartoony portrayal in a recent issue of the Economist. None of these events, however, attracted as much publicity as her mid-April decision to revive the Commission’s long-standing case against Google Inc. and its Internet search engine. On 15 April, the European Commission’s Directorate-General for Competition sent a Statement of Objections to Google, stating that the company was potentially breaching Article 102 of the Treaty on the Functioning of the European Union (TFEU) by systematically giving favourable treatment to its comparison shopping service, ‘Google Shopping’, on its general search website ‘google.com’. Accordingly, it is alleged that ‘Google Shopping’ is shown more prominently on the search results screen than the competing services (see this example), thus artificially diverting traffic from rival comparison shopping services and ultimately distorting competition in the market. Concurrently, the Commission has also opened a formal investigation into Google’s mobile phone operating system ‘Android OS’, a move that I have already discussed in one of my earlier contributions.

This article will first consider the events lead up to the Commission’s decision to issue the Statement of Objections and analyse the importance of this action for both Google and the Commission. Then, the hypothetical legal pathways available to the Commission for use in their proceedings against Google will be evaluated.

Looking Ahead Retrospectively

The controversy surrounding the Commission’s decision to challenge Google’s web search practices stems from the fact that these allegations are far from being novel. Back in 2009, Foundem, a shopping comparison website, filed a complaint against Google, alleging that the company was hindering competition by discriminating against its rivals in the vertical search market for comparison shopping. Somewhat unsurprisingly, the Foundem action was followed by similar complaints from more than 30 other companies, all claiming that their vertical search services were unfavourably treated in Google general search results. In 2010, the Commission responded with a formal investigation into Google’s web search practices, but ultimately decided not to pursue a legal action against the American company. Instead, in accordance with Article 9 of the Regulation 1/2003, the Commission sought to resolve its competition-related concerns by securing a number of concessions and commitments from Google to change their practices. This has translated into a set of prolonged, back-and-forth settlement negotiations between the parties involved, which have become the hallmark of Mr Joaquim Almunia’s (former Commissioner for Competition) tenure at the Commission. Unfortunately, despite as many as three separate settlement packages being at the table over the course of four years, no agreement was ultimately secured. This rather underwhelming record may actually serve as a great motivating factor for Ms Vestager to seek definitive actions in her quest to finalise the Commission’s “Google ordeal”; after all, failing to reach any final resolution, whether in settlement or in court, during her 5-year tenure as Commissioner for Competition would undermine the Commission’s perceived effectiveness as a competition enforcement authority.

Assessing the Risk

The Statement of Objections issued against Google is merely an initial, formal step in the Google investigation and it need not necessarily translate into a full-blown legal enforcement action later on. The American company now has ten weeks to respond to the Commission’s Statement and attend possible oral hearings. Taking a clue from past proceedings, we should prepare ourselves to wait for up to a year for the Commission’s decision regarding the investigation, which may then be potentially followed by an even lengthier period of settlement negotiations. This, however, is all assuming that Google manages to avoid being brought to court, which this time could prove more difficult than four years ago. Ms Vestager is reported to be much more receptive than her predecessor to the idea of suing Google in court rather than searching for settlement options.

If that were the case, the stakes for Google are high. If found guilty, aside from stopping the anti-competitive conduct, Google could face a fine of 10% of its global operating revenue, which as of now would translate to over $6 billion in fines: six times the record fine imposed on Intel in 2009. But, perhaps there is even more at stake for Google. In 2013, the US competition law enforcers decided not to file a lawsuit against Google after completing a two-year long investigation into the company’s search practices. If the European Commission finds Google guilty of anti-competitive conduct, then there are good chances that the US competition enforcers will reopen their own investigation. This could also indirectly reassure competition enforcers in India and Russia, where investigations of similar nature are already under way. All things considered, however, it may be the potential aftereffect acknowledged by Ms Vestager herself that should instil the most fear into Google’s ranks. If the company is indeed found guilty of breaching competition law in the comparison shopping market, it could establish a strong precedent for future actions against Google in relation to other vertical search markets, such as that for travel (‘Google Flights’) or mapping services (‘Google Maps’), thus producing a “litigious snowball effect”.

It is therefore evident that Google is facing some serious risks to their business not only in the EU, but also worldwide. This time, failing in Europe may actually lead to the ‘tsunami of litigation’ warned of by the chief of Foundem few years ago, back when the company was filing its original complaint against Google. Lawsuits could multiply both because of actions being brought in new jurisdictions and because of novel claims being submitted by various vertical search businesses that demand to be treated equally in Google’s general search results. With that in mind, we must now move on to evaluate the legal pathways available to Commission to use in their potential legal action against Google.

Taking Legal Action Against Google: Prerequisites

The basis for a legal action against Google is found in Article 102 TFEU, which identifies ‘applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage’ as abusive if conducted by a dominant market player. Thus, the initial step involves finding out whether the company in question is indeed dominant in the relevant market, or at least in a substantial part thereof.

The notion of a ‘dominant position’ was referred to in United Brands v Commission as a ‘position of economic strength which enables [a company] to prevent effective competition being maintained on the relevant market’, and to a certain extent, behave independently of its competitors and consumers. Identifying a dominant position involves a number of considerations, which are generally set out in the Guidance on Commission's enforcement priorities in applying Article 102 TFEU (the Guidance). These include, among others, assessing the company’s actual market share (though not an absolute rule, any market share over 40% may be potentially regarded as indicative of a dominant position) and examining any constraints imposed on the competitors, such as the legal barriers arising from the ownership of IP rights by the dominant company, the economic barriers deriving from the possession of economies of scale and/or of an ‘essential facility’, and any constraints caused by the existence of relevant network effects.

In Google’s case, the situation is not entirely straightforward at first glance. While its share of the search market in the Eurozone is evidently overwhelming, reportedly reaching over 90%, it remains questionable whether Google’s position in the market may be characterised as ‘dominant’ when the service it provides is actually free. It can be convincingly argued that there are hardly any constraints put on Google’s competitors because consumers are free to switch to any search service of their preference, free of charge, which is a proposition strongly advocated by Robert Bork in his formidable defence of Google in the US. Nonetheless, while these constraints may indeed be relatively negligible, consumers are generally unlikely to switch to other search engines. This is because of a self-perpetuating effect whereby the accuracy and effectiveness of Google’s search algorithms corresponds to the number of its users. In other words, the more people use Google search, the better it becomes and thus the more people are likely to continue/begin using it. Furthermore, Google search is well integrated with the rest of Google’s services, which are aplenty (e.g. email, cloud-based storage, etc.). Once on board of the ‘Google platform’, consumers are unlikely to make the leap even when the competitors’ services are a short URL away.

It is also crucial to recognise the strong connection between search and advertising, the latter of which is a major source of revenue for Google. In fact, Giacomo Luchetta’s ‘two-sided market analysis’, which identifies the advertising market as a neighbouring one to the search market, is consistent with this interpretation. In practice, it is therefore immaterial that the search engine itself is free to use because it is closely related to the highly profitable advertising channel. Consequently, it appears safe to conclude that Google is in fact dominant in the European search market within the meaning of Article 102 TFEU. Dominant position of itself, however, does not automatically trigger liability – there must be also evidence of an abuse, which is considered next.

Identifying Abusive Conduct

The Statement of Objections sent by the Commission alleged that Google abuses its dominant position in the general search market by discriminating against its competitors in a vertical search market. Accordingly, ‘Google Shopping’, Google’s very own vertical search product, is getting better exposure on google.com than its competitors. The question at the heart of the dispute, therefore, is whether a dominant company like Google is entitled to discriminate in favour of its own services or not? The answer we get depends on which theory of liability do we, and ultimately the Commission, lean towards; some of the more probable options are considered below.

a) Objective Justification as the Only Helpline

One of the possible approaches involves treating discrimination in favour of one’s own services as a prima facie infringement of competition law, in which case the only way for Google to defend itself would be to give an objective justification for its abusive conduct. According to the Guidance, this could, among others, include pointing to any efficiencies that arise from or despite the abusive conduct. The most persuasive objective justification available to Google is that their search algorithm benefits consumers and thereby fulfils competition law’s fundamental goal of maximising consumer welfare.

Given the two-sided nature of the search-engine market, it is essential for Google to centralise their innovation around the consumer, thereby increasing the consumer base and maximising profits from advertising. In this way, Google’s conduct is automatically regulated by the market itself (a concept derived from the Chicagoan interpretation of competition law), since failing to improve the search algorithms or focusing excessively on advertising would discourage consumers from using Google search, thus diminishing Google’s advertising revenue. What follows is that forcing Google to give equal treatment to its rivals on its own service may discourage Google from innovating, which would ultimately harm the consumers by virtue of, for instance, less accurate search results.

Google could also argue that its search-engine is not hindering competition because consumers can access its competitors’ websites at any time and for free. Furthermore, particularly following the development of the more dynamic and interactive Web 2.0, there exist no technical limitations impeding consumer’s search for competitors’ services. Nevertheless, it was argued that Google’s sheer market power prevents the successful growth of its competitors because the company is more likely to acquire them than to allow for competition. Interestingly, Google contradicted this proposition in its first, unofficial blog-response to the Statement of Objections by providing statistical data that indicated rapid innovation and growth of Google’s competitors in vertical search markets. Google attributed this growth to the existence of healthy competition in the sector.

b) A Classic 'Refusal to Supply' Case?

In his comment addressing the European Commission’s investigation against Google, Bo Vesterdorf contends that a dominant company may only be forced to deal in any way with its competitors where it controls a truly indispensable, essential facility. The doctrine of essential facilities is designed to impose upon a ‘dominant company’ a duty to negotiate and/or give access to a facility to other companies (for our purposes – companies from downstream markets such as vertical search), which cannot pursue their own activities without access to such a facility. There are two important aspects to this doctrine: first, it is important to consider what exactly amounts to a ‘truly essential’ facility; second, corollary to indispensability of the facility is the requirement that it eliminates competition in the relevant market.

The Indispensability Test

The ‘indispensability test’ was developed in the Oscar Brönner case and consists of two parts: a facility is ‘indispensable’ only when there are no alternatives to it (imperfect alternatives must also be considered) and when it is not economically viable to create a second such facility.

The importance of the first criterion was emphasised strongly in Mr Vesterdorf’s paper, where he argued that Google search cannot be deemed ‘indispensable’ because there exist ‘other routes’ (other than Google search) for distribution of vertical search services. These include, among others, direct access (i.e. using the exact URL rather than ‘googling it’), access through smartphone applications and social media websites, and using other search engines such as Bing or Yahoo.

Contrariwise, Nicolas Petit in his response to Mr Vesterdorf assigns greater importance to the second criterion, arguing that the concept of ‘economic viability’ is the key component of the indispensability test in post-Brönner case law. Accordingly, for Google search to be considered ‘indispensable’, the costs of creating another search engine would have to be particularly exorbitant, thus creating an economic barrier to market entry for any potential competitors.

While Mr Vesterdorf’s analysis does not seem to be giving sufficient credit to the ‘economic viability’ criterion (as rightly pointed out by Mr Petit), it nonetheless is more persuasive, particularly given the current technology trends surrounding search. In general, consumers are gradually moving away from Internet browsers (and thus, Google search) and towards app-based Internet experience. Concurrently, new types of search engines are being developed by businesses like Quixey to accommodate this change. And most recently, even Facebook is having a go at Google’s market share with its new ‘Add a Link’ functionality. This not only confirms that there are indeed other viable routes for distribution of vertical search services, but also shows that the economic obstacles to challenging Google’s search engine are not as exorbitant as suggested. Thus, the argument for treating Google search as ‘indispensable’ does not appear to be particularly convincing.

Eliminating Competition

If the Commission arrived at a different conclusion regarding ‘indispensability’, there still remains the corollary requirement that competition in the market (in our case, vertical search market) is eliminated. The key question here is how much competition needs to be eliminated? Mr Vesterdorf leans towards a strict interpretation (following Brönner) and submits that the essential facilities doctrine will only be triggered where all competition is eliminated. However, the Brönner approach has been relaxed in Microsoft v Commission, where the more flexible criterion of ‘the risk of eliminating competition’ was used. Indeed, according to Vassilis Hatzopoulos, the commonly agreed criterion among EU institutions is that of substantial elimination of competition. While Mr Vesterdorf’s strict interpretation therefore appears misguided, even the more lenient approach does not seem to (at least) automatically make Google search look like an essential facility. The evidence presented earlier implies the existence of healthy competition in the market and Google itself appears to have a strong case to support that.

Concluding Thoughts

Over the past year, the Commission has essentially made some key substitutions, re-entered the battlefield with renewed vigour and promptly made its first offensive move. While this competition law duel will undoubtedly make headlines of many news stories to come, at first glance it appears that Google is in a relatively strong legal stand.

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Tagged: Commercial Law, Competition, Technology

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