The Legal Infrastructure of Business

In Response to Antitrust Lawsuit: Leading Global PE Firms Exposed to Largest Collusion Allegations

Some weeks ago Marcelo posted the case of a lawsuit against important members of the Private Equity industry; I consider it very interesting so I’m writing my thoughts on it.

First, when reading Marcelo’s post and based on what I heard on other classes I noticed that an important argument PE firms make when defending from collusion is that the deal was so large and the amount of money required to buy the company was so high, that they need other companies to participate in the deal, otherwise they couldn’t make it.

I consider this argument is weak because it’s not questioning the accusation, they are not saying we were not colluded, for me this answer is just telling the reason they had to cooperate with their competitors. In other words, they are just saying we have to do it because one company couldn’t get the business by itself.

One could easily argues against them, that when confronted to situations where the deal is so big that they need other partners, they could search alternatives to get the money without getting their competitors involved, for example other financial institution that don’t have presence on the Private Equity Industry. These PE firms decided to form a consortium with their competitors but maybe they had to look for different partners to form the consortium. The fact that they were not able or did not want to do it, is not a justification to go an make an arrangement with your competitors. Also, people may think this is just a way to share the risk of the deal with your competitors, and it does excuse you from collusion.

Second, but totally unrelated with the previous point, I want to question the bargaining power that these PE firms had when making the business. I’m sure they had an important market share on the PE industry, but I don’t think we have to consider the PE industry as the relevant market to determine the bargaining power they had when making the bids to acquire a company, I think a broader definition is more appropriate. From target company shareholders perspective, they were not reduced to PE firms
when selling their companies. I don’t know how deep is the M&A market but I assume that there more alternatives to sell a company than PE firms. Therefore I consider that the market power these PE firms had, may mislead when determining the bargaining power that had when making the bid.

Third, regarding to Marcelo’s last thought, I agree with him that it would be hard to get a compensation in a deal that did not generate enough for the PE firms. But I think that if the courts determine there was collusion, there has to be compensation. Maybe instead of considering the returns that PE firms had on these deals, the compensation may be calculated based on the price that target companies shareholders would get in the absence of collusion. Also, and using the same idea, the fact that these deals didn’t generate returns for PE companies does not eliminate the potential damage that collusion generated, again the potential damage could be calculated considering the prices that would prevail
in the absence of any collusion.

Sources:

http://www.businessinsider.com/emails-allege-collusion-in-private-equity-2012-10

http://www.cnbc.com/id/49371625/Emails_Purport_to_Show_Private_Equity_Firms_Colluded

http://www.financialexpress.com/news/kkr-blackstone-execs-in-boom-collusion-/1015252/0

Monopoly in Indian arts and entertainment

Notwithstanding my previous post on a film copyright ownership issue, I saw an outstanding independent movie on iTunes last night. I couldn’t help but wonder why India, my home country, doesn’t produce enough independent movies. I was always under the impression that the public demand for cheesy, run-of-the-mill, “feel good”, romantic, incredible potboilers complete with song-and-dance routines were responsible for walloping independent movies in India. While that is certainly true to an extent, this morning, I stumbled upon an antitrust suit that may explain how “mainstream” cinema producers may actually be stifling independent movies in India.

Ironically, the complaint was not filed by an independent movie producer, but by a big movie producer against another with the Competition Commission of India, a state body responsible for enforcing the Competition Act of 2002, which prevents activities that have an adverse effect on competition. In the suit, the plaintiff alleges that the defendant, a big movie banner, abused its dominant position in the Indian film industry by enforcing an agreement with single screen cinema owners. In this agreement, the defendant distributed a much hyped and anticipated summer film to single screen cinema owners on the condition that these owners would show another film from its production banner and only that film during Diwali, India’s holiday season that begins next week.

The importance of a holiday release cannot be understated, whether in India or in the United States. Moviegoers throng cinema halls with the expectation of catching something good, while producers line up movies by balancing the risk of competition with the reward of increased holiday viewership. In this case, the defendant company intends to eradicate its risk by shutting out its competitors’ films, and reaping the full reward of the holiday season viewership. This surely can’t be the first time a big movie production has used such unfair monopolistic tactics to stifle competition. Nor are these tactics confined to one big production company or the holiday season alone.

Sadly, the biggest losers in this game may not be these big fish producers, but independent movie producers who cop both ends of the stick all year. Independent movies are typically high quality, low key and low budget, regional language films that bank on a few single screen cinemas or multiplexes to showcase themselves and to advertise through word of mouth. Without screen availability, producers almost always have to bear a loss despite great movie offerings, and invariably lose the incentive to produce them at all. From an economic standpoint, that means lost jobs and lost revenues and taxes, and in a huge country like India, that amounts to a lot of money. But this also has huge social costs. Independent movies dissect cultural problems, people’s beliefs and attitudes, government bureaucracies, and a host of other social issues in a way that “mainstream” cinema simply cannot. These movies offer people a chance to rationalize their “feel good” entertainment with a healthy dose of practical reality and call to action. After all, isn’t the purpose of art to inspire people as well?

Despite my philosophical banter, unfortunately, India has a long way to go before it adopts a true meritocratic culture. The loopy laws of this developing country are still heavily biased in the favor of the rich and the powerful. Barriers to entry in all areas, including film making and distribution, remain extraordinarily high, because access to new opportunities is still confined to incumbents and politically well connected entities. I don’t expect this lawsuit to go anywhere. There will probably be an out-of-court settlement between the two warring producers, and a tacit agreement to share the holiday season spoils. That’s it. The poor independent movie producer will remain ignored and shunted forever, and viewers will be forced to consume the same garbage they have been ingesting all along. They will leave the cinema halls thinking they have viewed something very entertaining, simply because they haven’t been supplied anything even remotely subliminal.

That brings me to my questions. Should the arts and entertainment industry be subject to a more stringent and enforceable set of antitrust regulations in a country like India? Should quality and merit dictate distribution of arts and entertainment?

 

References:

http://www.timeslive.co.za/entertainment/movies/2012/11/02/ajay-devgan-yash-raj-films-in-legal-spat-over-film-promotions

http://www.newkerala.com/news/newsplus/worldnews-97093.html

http://www.bollywoodmantra.com/news/ajay-devgn-slapped-legal-notice-on-yash-raj-films/10105/

http://m.timesofindia.com/entertainment/bollywood/news-interviews/A-dummies-guide-to-the-Devgn-YRF-legal-battle/articleshow/17087124.cms

A New House on the Block: Penguin and Random House Consider a Merger to Become the Largest Publishing House

As a follow up to the post about e-book pricing from October 22, the battle for pricing power in the e-book market continues with the proposed merger of two of the “Big Six” publishers, Penguin and Random House.  The combined entity, Penguin Random House will control a significant share of the global publishing market (estimated at up to 25% globally, 40% in the US), in both print and digital consumer publishing, and leverage their size in negotiating terms and prices with digital retailers like Amazon and Apple.   

Both publishing houses are part of larger global media conglomerates, which will merge their publishing units into the new joint venture (of which Bertelsmann, Penguin’s parent, will own 53% and Pearson, Random House’s parent, will own 47%).  While the brands of each will remain intact, the marriage of the two firms will allow further global reach through existing channels.  At a time when traditional publishers are concerned about losing market share to digital-only publishers, Penguin and Random House are emphasizing their traditional print business by uniting brands.

Discussions of the merger began when word spread about Pearson’s desire to carve out Penguin, its consumer publishing unit, and focus on its educational publishing business.  However, an outright sale of Penguin would create a significant tax liability for Pearson.  It is likely that the motivation for this separation has to do with the steadily increasing portion of its business from e-books.  Given both the trend toward digital publications and the recent regulatory pressure on e-book prices, it’s likely that this business is less desirable for the larger parent company.  News Corp. has made it known that it is similarly interesting in selling its consumer publishing business, HarperCollins, to also invest in its educational publishing business.  Although News Corp. expressed interest in Penguin, Random House seems to be a better match, because of its stance on the e-book lawsuit (Random House wasn’t implicated where HarperCollins settled) and its recent success with the Fifty Shades of Grey series, making it a consumer publishing powerhouse with a similar view on pricing in the e-book market.

Penguin was one of five publishers implicated by the Department of Justice in an alleged price-fixing scheme for e-books; Penguin was also one of two publishers that refused to settle.  In refusing to settle, Penguin will likely fight the DOJ to protect the “Agency Model,” which became industry standard in 2010 when Apple began selling e-books through the iBookstore for iPads.  In merging with Random House, Penguin adds market power behind its bargaining position by representing the largest part of the digital book market.  Although Random House was not implicated in the DOJ suit (because Random House didn’t move to the agency model until after the other five publishers), it currently uses the agency model and will likely side with Penguin in choosing to keep its current pricing scheme. 

However, this merger is subject to FTC approval, and will likely spark anti-trust proceedings in both the US and the UK.  While market figures are difficult to verify, it is estimated that Penguin Random House could represent up to 40% and 30% of these markets, respectively.  Given that the other “Big Six” publishers have considerable share of the remainder of the market, it’s highly likely that the FTC and DOJ will require an investigation to determine its threat to industry competition.  According to estimated market share data, the consumer publishing industry will fall into the “Moderately Concentrated” on the DOJ-FTC grid after the merger and will be under scrutiny given the current shares of Penguin and Random House.  

http://professional.wsj.com/article/SB10001424052970203880704578084733036102680.html

http://professional.wsj.com/article/SB10001424052970204840504578086080253161770.html

http://www.hollywoodreporter.com/news/what-random-house-penguin-merger-384616

http://www.reuters.com/article/2012/10/29/us-pearson-idUSBRE89S0C120121029

http://www.guardian.co.uk/books/2012/oct/29/penguin-random-house-book-publisher

EC going after Microsoft yet again

Microsoft is once again in trouble with European Union antitrust regulators after the company did not offer users a choice of Web browsers besides Internet Explorer on the most recent version of Windows. The European Commission formally filed a complaint on October 24th against Microsoft, alleging that the company was acting in violation of the measure it agreed to three years ago. The agreement forced Microsoft to provide Windows users with a browser choice screen. Some European users of Windows 7 Service Pack 1, which was released in February 2011, complained that they were not provided with this screen. The EC notified Microsoft in July that the company had breached the 2009 EC order.

The EC stated that Microsoft "acknowledged that the choice screen was not displayed" during the period from February 2011 through July 2012. The EC released a "statement of objections," which is the initial step leading to a formal investigation of Microsoft. The company is allowed to reply in writing to the objections and may request an oral hearing. If Microsoft is found guilty by the EC, a maximum fine of up to 10% of annual revenue of $7.4 billion is a possiblity.  

Microsoft is taking responsiblity for the lack of browser choice screen and is working to ensure that the roll-out of Windows 8 will comply with the requirements already agreed to by the company. Microsoft is blaming the breach of the 2009 EC order on a technical problem.

If we go by past actions taken by the EC against Microsoft, the company will most likely be fined (although not for the fully maximum allowed amount) and once again Microsoft will work out yet another agreement to conform with EC regarding anti-trust matters.  

 

Sources:

http://www.computerworld.com/s/article/9232822/Microsoft_responds_to_EU_antitrust_regulator_39_s_complaint_on_breach_of_browser_choice_order

http://www.pcworld.idg.com.au/article/439967/eu_antitrust_regulator_files_complaint_against_microsoft_breaching_browser_choice_order/

http://www.firstpost.com/tech/eu-regulators-file-antitrust-complaint-against-microsoft-501268.html

http://www.bbc.co.uk/news/business-20066770

 

FTC, EU, Japanese and Korean Trade Commissions put Antitrust allegations on Intel

In 2010, the U.S. Federal Trade Commission accused Intel of illegally using its dominant market position for a decade "to stifle competition and strengthen its monopoly." According to the FTC, Intel tried to block "superior" products by rivals and deprived consumers of choice and innovation for 10 years. The complaint was filed in the U.S. District Court in Delaware in June 2005. The court date, originally scheduled for April 2009, was pushed back to February 2010. One delay was due to the Korea Fair Trade Commission issuing Intel a fine of US$25.4 million.

Intel competes with AMD (Advanced Micro Devices) in designing and manufacturing x86 microprocessors.  Intel controls more than 80 percent of the global market for x86 microprocessors, dwarfing AMD. Intel had contended with antitrust probes dating back more than a decade. According to FTC, Intel used “threats and rewards” aimed to computer manufacturers including Round Rock, DELL, Hewlett-Packard (HP) and International Business Machines (IBM). AMD expressed satisfaction at the FTC’s decision to pursue anti-trust allegations against Intel, a fact that they had been trying to bring to light since 2004. A few months ago, the EU and Japan had filed similar anti-trust claims about Intel’s illegal behavior in their local markets. In EU, Intel was fined 1.45 Biliion Euros for its antitrust violations.

Later that year, both companies agreed on a settlement whereby AMD would drop nearly all its charges and regulatory complaints throughout the world. In return Intel would pay AMD an amount of $1.25 billion in cash and allow AMD to spin off its ailing manufacturing division into a separate entity, Global Foundries. AMD is a licensee of Intel’s x86 architecture which earlier put restrictions on AMD from sharing its x86 license or associating with external manufacturing firms.  Intel would also refrain from the following practices:

• Offering inducements to customers in exchange for their agreement to buy all of their microprocessor needs from Intel, whether on a geographic, market segment, or any other basis
• Offering inducements to customers in exchange for their agreement to limit or delay their purchase of microprocessors from AMD, whether on a geographic, market segment, or any other basis
• Offering inducements to customers in exchange for their agreement to limit their engagement with AMD or their promotion or distribution of products containing AMD microprocessors, whether on a geographic, channel, market segment, or any other basis
• Offering inducements to customers in exchange for their agreement to abstain from or delay their participation in AMD product launches, announcements, advertising, or other promotional activities
• Offering inducements to customers or others to delay or forebear in the development or release of computer systems or platforms containing AMD microprocessors, whether on a geographic, market segment, or any other basis
• Offering inducements to retailers or distributors to limit or delay their purchase or distribution of computer systems or platforms containing AMD microprocessors, whether on a geographic, market segment, or any other basis
• Withholding any benefit or threatening retaliation against anyone for their refusal to enter into a prohibited arrangement such as the ones listed above.

In addition to the above and a renewed patent cross-license agreement, AMD is now exempt from paying any x86 royalties.

Does this in any way highlight Intel’s guilt? This settlement does not change the FTC’s stand on antitrust issues with Intel. So why did Intel agree to give AMD the above concessions? Wouldn’t these in turn weaken Intel’s stand against the FTC? Intel could have continued to pursue litigation to the point where AMD would have been financially drained from legal expenses. Or is that Intel prefers to have a smaller, weaker player in AMD in the market to avoid antitrust issues in the future? Did it then try and extend a helping hand to AMD so that the smaller chip maker could survive, in turn making Intel’s monopolistic stand less obvious in the eyes of the authoritative bodies?

Did the EU, Korean and Japanese actions help strengthen the case against Intel in the U.S? What sort of activities and regulations need to be put in place by the FTC to keep a check on Intel’s market activities. 

 

Resources:

Intel faces Antitrust lawsuit

Intel pays AMD $1.25B for settlement

EU finds Intel guilty

AMD vs Intel

 

 

Antitrust Lawsuit: Leading Global PE Firms Exposed to Largest Collusion Allegations

Last week a federal judge in Boston released a complaint that details a lawsuit against private equity firms, raising new issues about the industry’s “way of doing business”, just as it is getting some indirect criticism for its business practices in the presidential campaign.

Background

The lawsuit was originally filed in 2007, when the leveraged buyout market was at its top, alleging that private equity firms colluded in selecting deals (participating and avoiding), to keep valuations low on their multibillion dollar buyouts and thus boosting returns.

A large group of several pension funds and individual shareholders were combined, and after being allowed to move forward, the plaintiffs updated the complaint with the results of their investigations of 9 private equity firms plus Goldman Sachs Group Inc. and JPMorgan Chase & Co. The lawsuit details 27 deals in which the private equity firms are accused of having worked together to keep acquisition prices down.

Allegation

In the lawsuit, the plaintiffs contend that KKR, Blackstone, Bain Capital Partners LLC, the Carlyle Group, among others, conspired to reduce prices of takeover targets, damaging shareholders of the companies purchased, during the pinnacle of the LBO market (between 2003 and 2007).

According to the lawsuit, Blackstone’s President, Tony James, wrote in an email to KKR’s co-founder, George Roberts: "We would much rather work with you guys than against you. Together we can be unstoppable but in opposition we can cost each other a lot of money." Roberts replied: "Agreed." The emails were supposedly sent after KKR decided to step down in the $17.6 billion bidding for Freescale in 2006 (finally acquired by a consortium led by Blackstone). Details of the case are below:

“Blackstone offered to pay $38 a share for Freescale on Sept. 10. The same day, KKR’s group sent a note to Freescale mentioning a price of $40 to $42 per share. At the same time, KKR was also in the running to buy the hospital chain HCA. The plaintiffs say KKR had asked other private equity firms to back off from making a bid. But after KKR showed interest in Freescale, Blackstone readied a bid for HCA, an apparent attempt to retaliate. The complaint alleges that executives at Blackstone and KKR then talked and decided not to compete against each other”.

Plaintiffs argued that since no rival ever offered a counter bid once a target company's board accepted a written offer, then there was a complete absence of competition.

Defense

Legal and academic experts say much of the alleged collusion outlined in the lawsuit may have been just firms working together in perfectly reasonable ways to mitigate the risk of assuming a large investment. These practices ultimately enabled the private equity firms to pursue larger deals while offering attractive premiums to shareholders.

Thoughts

I believe this case has several potential challenges.

First, it will be difficult for the plaintiffs to prove the case. Many of the deals used as evidence would have never been done by one firm individually. That is, you need to pool firms together in order to close large buyouts (built consortiums) and these firms need to agree on an acquisition strategy prior to negotiating with potential targets in order to reduce the price they pay and boost their returns. Building consortiums and agreeing on acquisition strategies could be seen as different from colluding maliciously. Ultimately, these firms are in the business of buying cheap and selling high.

However, given that substantial evidence of collusion was uncovered initially, the judge allowed the plaintiffs to expand their investigation from 9 to 27 deals. In this sense, private equity firms could be held liable and have to compensate shareholders for what they should have received in a competitive auction. This uncovers a second issue: coming up with the amount plaintiffs are owed. Most of the deals referenced involved significant premiums paid (some over 20%) and in some situations the private equity firms have had to take significant write-downs post-acquisition (i.e. KKR in the TXU acquisition). Thus, even if the plaintiffs are able to prove collusion, they may not be able to prove damages.

Whether the financial sponsors colluded to avoid deal competition or not, I believe it will be too difficult for the plaintiffs to prove it without any evidence that the sponsors got something out of it. Even if the plaintiffs uncover quality evidence of collusion it will be even more difficult to come up with a “compensation” amount.

Sources:

http://newsandinsight.thomsonreuters.com/Securities/News/2012/10_-_October/Analysis__Collusion_lawsuit_in_U_S__against_buyout_firms_is_no_easy_case/

http://www.efinancialnews.com/digest/2012-10-11/new-details-emerge-in-suit-against-major-buyout-firms-over-alleged-collusion

http://www.suntimes.com/business/15697049-420/lawsuit-says-buyout-firms-colluded-on-deals.html

http://finance.yahoo.com/news/lawsuit-says-buyout-firms-colluded-185453753.html

 

The Solar War

Solyndra has always been in the news for all the wrong reasons. The company somehow managed to snatch bankruptcy from the jaws of blockbuster profit potential. Ostensibly, a $537 million loan from the Obama administration and a $1.2 billion more in venture capital funding were not enough to turn its “earth shattering” technology into gold. Now, the company has filed a $1.5 billion antitrust suit against three Chinese companies, accusing them of unfair competition that was aimed to drive Solyndra out of business.

It all started when Solyndra incorporated a patented copper indium gallium diselenide (CIGS) thin-film technology on cylindrical solar modules that captured sunlight across a 360-degree surface capable of converting direct, diffused, and reflected sunlight into electricity. Solyndra touted this as the most consistent energy converting solar panel in the world, capable of capturing light at all angles. Its cylindrical panels also lent themselves to easy installation. However, Solyndra’s solar panels suddenly went dark. Plummeting silicon prices seemed to cause Solyndra to be uncompetitive with manufacturers of more conventional solar panels.

Solyndra is now alleging that this "Solar War" was actually perpetrated through an orchestrated collusion by its Chinese rivals at flooding the market with cheap photovoltaic cells used on flat, conventional solar panels, and driving Solyndra out of business with unfair competition. In its suit, Solyndra claims that these three Chinese manufacturers – Suntech, Trina, and Yingli – took advantage of the Chinese government’s policies aimed at directing commercial growth and dominance in the US market, and conspired with suppliers and lending banks to dump product at “predatory” levels. Just last week, the U.S. Department of Commerce issued a final decision in another case, finding that Chinese solar manufacturers had illegally dumped photovoltaic cells on the American market and imposed various "tariffs" on these companies.

Whether Solyndra was a legitimate threat to these companies or not, I think this case is not going anywhere. Ultimately, Solyndra will have to bear the burden of proof in this matter, and the quality and germaneness of the evidence it submits to the court will ultimately determine its fate in this antitrust suit. I see at least three areas that the court will scrutinize closely in adjudicating the claims of unfair trade practice, none of which particularly favor Solyndra, in my opinion:

1. Shared sources of supply and collusion in fixing the purchase price of goods – Silicon is a commodity good now. Demand for silicon has increased dramatically in the last few years due to the sudden explosion in demand for electronic devices such as smart phones, tablets, and LED TVs that use glass panels. Silicon producers have attained economies of scale, and they seem to be passing these cost reductions to all customers, not just to the defendants. Even if the defendants share common suppliers, it would be interesting to see what fraction of the total silicon supply from a particular supplier is bought by the defendants. 
2. Attempt to limit or control new technology development of rivals – It costs more to produce Solyndra’s copper indium gallium diselenide (CIGS) thin-film than traditional photovoltaic cells, but technologically, it is actually less efficient than photovoltaic cells in converting solar radiation to energy. The advantage it offers is the ability to wrap the film around a cylinder panel, which in turn, offers the advantage of capturing light at more angles than a flat panel would, thus resulting in a more consistent (flat) energy generation during the day. Overall, it cannot be argued that the defendants were colluding to limit or stifle a new, emerging technology to the detriment of consumers at large, because it doesn’t appear as if Solyndra was competing on price in the first place, even if other U.S. solar panel manufacturers, who went out of business, might have been.
3. Direct or indirect collusion in fixing selling price – Solyndra will be hard pressed to prove this point. The free market system, in fact, ensures that firms compete correctly and fairly on all fronts, including price. Solyndra’s other claim that the defendants’ ability to secure “rolling” loans from Chinese banks with deferred payment terms helped them to set temporarily and artificially low prices is not only difficult to prove, but also indefensible. Price competition is the basis for “free” markets, and has worked in everything from durable goods to machinery to retail. Should Craftsman (Sears) file an antitrust suit against all Chinese firms for dumping their products in the U.S. market? If anything, the defendants engaged in healthy competition between themselves, and to the benefit of consumers at large. It is interesting to note that the two largest solar panel companies in the United States, First Solar and SunPower, continue to thrive despite this Chinese “invasion” of the solar panel market.

References:

http://www.forbes.com/sites/toddwoody/2012/10/12/solyndra-files-1-5-billion-antitrust-suit-against-china-solar-companies/

http://www.greentechmedia.com/articles/read/Solyndra-Suing-Chinas-SunTringli-for-1.5-Billion-Anti-Trust-Violation

http://www.businessweek.com/news/2012-10-11/solyndra-sues-suntech-holdings-over-antitrust-claims

http://gigaom.com/cleantech/solyndra-seeks-1-5b-in-anti-trust-suit-against-chinese-rivals/

Are Google’s Anti-Trust Woes Grounded in Privacy?

Recent news suggests that both the European Union and the Federal Trade Union (FTC) are set to launch an investigation into Google and its alleged anti-trust business practices.

 While some may view this as yet another government move to interrupt perfectly legitimate business practices (especially since search engines like Google exist aplenty, have low user switching costs and are free to use), others disagree.

Over the past few years, there has been rapidly growing news literature on the company’s alleged misuse of intellectual property and copyrighted data. For instance, Google’s misappropriation of Yelp and Trip Advisor content and its decision to launch Google Books by scanning millions of books, some even without the copywriter’s permission, are just few of the hotly debated topics today.

However, I believe Google’s antitrust issues are not just limited to these transgressions and are actually grounded in privacy. The changes in privacy regulation few years ago required internet users to provide explicit opt-in consent to search-engines on first use. Google was able to successfully use its seniority in the search engine space to gain maximum user consent and hence, privacy regulation at the time unintentionally resulted in favoring the incumbent and impeding the growth of start-ups. Over the next few years Google furthered its market lead through collection, storage and use of the individual’s personal data.

Specifically, Google was able to use this data to its advantage through two key ways. Firstly, it was able to generate targeted ads based on the user’s browsing history and use these targeted ads as a revenue source by encouraging firms to advertise with Google. The rationale was that advertising with Google would improve the click-through rates of the firm’s website, eventually making the website a “popular result” and hence improving its visibility (users use popular result as a way of assessing the usefulness of a given website during searches).

Secondly (more topical) Google was able to yielded quasi-personalized search results based on the users’ profiles. It is questionable whether the Google search engine could have enjoyed such unprecedented success (and a virtual monopoly) over its rivals without compromising user privacy.

Google’s stance on the issue is that privacy and anti-trust are two separate concerns and are not linked. However with Google’s continually and perhaps even rapidly evolving business model geared towards greater and greater interconnectedness and sharing of information between its products (e.g. Google now scans content from it’s products including GMail and YouTube accounts to collect information to facilitate tailored online searches – without explicit user approval or transparency) has not only worried the privacy pundits further, but has also become a grave concern for anti-trust watchdogs. This new business model is seen as furthering the massive advantage that Google already enjoys in the online advertising space. It is but obvious that this advantage will create an imbalance of power on the supply side by repressing the available substitutes and competition for advertisers, thus, raising the ad prices.

It is therefore not surprising at all that the regulators are closely watching Google and are amassing evidence to launch action against the company. France has already asked the company to demonstrate how the new model of informing searches through YouTube, GMail and other data is not infringing on user-privacy. Germany meanwhile, is investigating whether data was pilfered from wifi connections when the company’s high tech cars were collecting pictures for Google Map’s street view. Additionally, analysts believe that Google may face massive lawsuits soon if it is unable to demonstrate that it does not favor its products during search results.

I feel Google can take some tangible and immediate steps to placate the regulators. Firstly, it could provide greater transparency to users by showing exactly what information is being stored and shared. Secondly, it could provide users greater autonomy by allowing them to keep some information private and control what content can be used to generate the targeted ads and online searches. With lower information control, it is possible Google may wield reduced market power and give its rivals a better shot at competing.

Although the user consensus on whether target searches and ads are more useful or not is unclear, it is obvious that Google has been able to amass a massive fortune and a strong position in its market sector through infringement of user privacy. Going forward, anti-trust regulators need to keep the privacy angle in mind when moving closer to taking Google to the courtroom!

 

References

 http://www.governing.com/blogs/view/gov-texas-leads-antitrust-fight-against-google.html

 http://www.digitopoly.org/2012/04/02/is-privacy-an-antitrust-problem/

 http://www.informationweek.com/security/privacy/google-privacy-audit-leaves-lingering-qu/240008622

 http://thehill.com/blogs/congress-blog/technology/260581-ftc-action-against-google-would-be-unwise

 http://www.nytimes.com/2010/01/19/technology/19antitrust.html

 http://allthingsd.com/20101214/french-watchdog-warns-google/

Applications of the Grokster Decision, and Where Does the Burden of Copyright Protection Lie?

Deadline Hollywood wrote a quick discussion the other day regarding the legal battles of LimeWire, a P2P program for file sharing. Paramount, 20^th Century Fox, Viacom, Disney, Comedy Partners and Warner Brothers are now suing LimeWire for copyright infringement. In the case of LimeWire, the studios seem to have an even more obvious precedent to stand on than MGM had against Grokster, since LimeWire has already lost a similar legal battle with record labels in Arista Records LLC v. Lime Group LLC. 

The contentions below were some of the accusations leveled by Arista Records and the studios; I’m interested in discussing the application of the Metro-Goldwyn- Mayer Studios, Inc. v. Grokster decision in both cases. Specifically, I'm curious about how evidence of inducement was discovered and how broadly this will be applied in the future- in LimeWire and Grokster evidence of inducement and encouragement of illegal activities was a clear sign of liability for infringement, but then so was, to some degree, the fact that the defendant did not actively protect existing copywrights.

Should the burden of protection lie with the copyright holder? Or, much like in the world of patents in which the economically viable model of patent trolls manages to provide enforcement, should copyright enforcement be protected by those with economic interest in that right? If LimeWire was not actively encouraging infringement in its advertising and communications to users, would it still be liable because it did not build filters and actively enforce rights?

The relevant claim from the motion filed by the studios on 10/08/2012 relating to LimeWire's responsibility to actively protect copyrights- 

1. That LimeWire developed a hash-content based filter that would have prevented downloading infringing files, but amusingly made it optional for users to turn it on
2. That LimeWire considered a filter that used "acoustic fingerprinting" to identify copyrighted files, but never implemented it
3. That LimeWire was aware of other filtering mechanisms and chose not to use them
4. That the only time LimeWire did adopt a filter was to limit infringing of recordings purchased from the LimeWire store- i.e. to protect their own rights
5. That although LimeWire made users check a box to say they did not intend to use LimeWire unlawfully, this did not constitute a meaningful effort

Generally, from the Arista decision- the defendants never "implemented in a meaningful way any of the technological barriers and design choices that were available to diminish infringement through file sharing programs."  

Should LimeWire have been responsible for those filters and protections? What amount of effort on their part would have been enough / "meaningful"?

Sources:

http://www-deadline-com.vimg.net/wp-content/uploads/2012/10/LimeWire_Hollywood_Studios_Motion_For_Summary_Judgment__121009231322.pdf

http://www.skadden.com/insights/iarista-records-v-lime-groupi-summary

http://www.deadline.com/tag/limewire/

Trademark Protection or Trademark Bullying?

Reading the “Starbucks going after Starbarks” post reminded me of a similar situation I read about in the New York Times last fall. A Manhattan mother, Christy Prunier, started a line of skin care products targeted towards preteen girls, named after her daughter, Willa. Proctor & Gamble, the consumer products behometh, sent Ms. Prunier a cease and desist letter, saying Willa sounded too much like Wella, their own line of hair care products. The similar names, the company argued, would confuse customers and violate their Wella trademark. 

Instead of changing her company’s name, the Willa founder sued Proctor & Gamble. The New York Times published a lengthy piece on the trademark battle, generating national support for Willa, the “underdog.” The small company spent over $750K in legal fees, and ultimately settled with Proctor & Gamble, with Willa retaining their brand name. Experts have argued that the only way for small companies to attempt to ward off large corporation is to take their battle to the media. Proctor & Gamble, like Starbucks, likely wanted to avoid any potential PR mishaps, and therefore elected settlement.

In 1961, the Polaroid Corp. v. Polarad Electronics Corp. court listed eight factors to consider in a case of trademark infringement.

• Strength of the mark
• Proximity of the goods
• Similarity of the marks
• Evidence of actual confusion
• Marketing channels used
• Type of goods and the degree of care likely to be exercised by the purchaser
• Defendant's intent in selecting the mark
• Likelihood of expansion of the product lines 

In both cases, Starbucks and Proctor & Gamble seem to have a strong case across many of these factors. The strength of Starbucks’ trademark may be stronger than Wella, but the proximity of the goods is closer for Wella vs. Willa than Starbucks vs. Starbarks. Ultimately, these factors seem broad enough that most companies could put together a credible cease and desist letter to potential trademark infringers.

Small businesses have been concerned about “trademark bullying” for years, arguing that large corporations have the time and resources available to litigate small businesses, sometimes putting them out of business. Congress recognized the potential for abuse, and in April 2011, the United States Patent and Trademark Office introduced a study on trademark bullying. They requested comments from small businesses for over four months, but the 79 comments did not confirm whether trademark bullying is a significant problem.

What I found interesting is that large corporations have a right and responsibility to aggressively defend their trademarks. The value and protection of a trademark fluctuates over the mark’s lifetime. If a mark becomes well known, the value strengthens, and the trademark is given greater protection, but the reverse is also true. In this Starbucks case, and many trademark infringement cases, the trademarked company argues that infringement will cause mark dilution. This is a strong argument, since they will eventually lose their trademark protection if the mark becomes too generic. Therefore, I agree with Jeff that Starbucks should move to protect their strong trademark. Companies only have to be guilty of confusion or “similar” marks to qualify as infringing, and to the average consumer, a green circle with two stars around a black and white image invokes recognition of Starbucks.

It is important to consider enforcement when considering whether trademark monitoring crosses over to trademark bullying. In the case of Starbucks vs. Starbarks, I would think Starbarks changing their name and logo would pacify Starbucks. In other cases, such as Apple vs. Samsung, companies may require monetary relief. If a large corporation requires crippling settlement amounts from much smaller businesses, they may be guilty of trademark bullying. Cease and desist letters often result in mutual resolution of the potential infringement with little to no litigation. It is the responsibility of small businesses to respond appropriately and to be flexible if they want to avoid large legal fees like those incurred by Ms. Prunier. 

Ultimately, it does not appear that there is widespread abuse by trademark holders. Only 1.5% of trademark cases filed ever reach trial; most are settled out of court. However, cease and desist letters and settlement details are usually not made public, so it is hard to determine if small businesses are treated fairly. Most cease and desist letters are sent in good faith, and despite the PR implications of engaging with a small business, corporations have a responsibility to their customers and shareholders to defend and invest in their trademarks.  

 

Sources:

http://dealbook.nytimes.com/2011/09/28/a-start-up-takes-on-procter-gamble-over-a-name/

http://boss.blogs.nytimes.com/2011/10/03/defending-david-against-goliath/

http://www.bizjournals.com/cincinnati/news/2011/10/17/procter-gamble-settles-with-startup.html

http://brandgeek.net/2011/10/05/wella-whoop-willa-tm-battle-skin-care-makers/

http://www.uspto.gov/trademarks/notices/TrademarkLitigationStudy.pdf