Today the FTC filed its complaint in federal district court in Washington against Amazon, alleging that the company’s in-app purchasing system permits children to make in-app purchases without parental “informed consent” constituting an “unfair practice” under Section 5 of the FTC Act.

As I noted in my previous post on the case, in bringing this case the Commission is doubling down on the rule it introduced in Apple that effectively converts the balancing of harms and benefits required under Section 5 of the FTC Act to a per se rule that deems certain practices to be unfair regardless of countervailing benefits. Similarly, it is attempting to extend the informed consent standard it created in Apple that essentially maintains that only specific, identified practices (essentially, distinct notification at the time of purchase or opening of purchase window, requiring entry of a password to proceed) are permissible under the Act.

Such a standard is inconsistent with the statute, however. The FTC’s approach forecloses the ability of companies like Amazon to engage in meaningful design decisions and disregards their judgment about which user interface designs will, on balance, benefit consumers. The FTC Act does not empower the Commission to disregard the consumer benefits of practices that simply fail to mimic the FTC’s preconceived design preferences. While that sort of approach might be defensible in the face of manifestly harmful practices like cramming, it is wholly inappropriate in the context of app stores like Amazon’s that spend considerable resources to design every aspect of their interaction with consumers—and that seek to attract, not to defraud, consumers.

Today’s complaint occasions a few more observations:

1. Amazon has a very strong case. Under Section 5 of the FTC Act, the Commission will have to prevail on all three elements required to prove unfairness under Section 5: that there is substantial injury, that consumers can’t reasonably avoid the injury and that any countervailing benefits don’t outweigh the injury. But, consistent with its complaint and consent order in Apple, the Amazon complaint focuses almost entirely on only the first of these. While that may have been enough to induce Apple to settle out of court, the FTC will actually have to make out a case on reasonable avoidance and countervailing benefits at trial. It’s not at all clear that the agency will be able to do so on the facts alleged here.
2. On reasonable avoidance, over and above Amazon’s general procedures that limit unwanted in-app purchases, the FTC will have a tough time showing that Amazon’s Kindle Free Time doesn’t provide parents with more than enough ability to avoid injury. In fact, the complaint doesn’t mention Free Time at all.
3. Among other things, the complaint asserts that Amazon knew about issues with in-app purchasing by December of 2011 and claims that “[n]ot until June 2014 did Amazon change its in-app charge framework to obtain account holders’ informed consent for in-app charges on its newer mobile devices.” But Kindle Free Time was introduced in September of 2012. While four FTC Commissioners may believe that Free Time isn’t a sufficient response to the alleged problem, it is clearly a readily available, free and effective (read: reasonable) mechanism for parents to avoid the alleged harms. It may not be what the design mavens at the FTC would have chosen to do, but it seems certain that avoiding unauthorized in-app purchases by children was part of what motivated Amazon’s decision to create and offer Free Time.
4. On countervailing benefits, as Commissioner Wright discussed in detail in his dissent from the Apple consent order, the Commission seems to think that it can simply assert that there are no countervailing benefits to Amazon’s design choices around in-app purchases. Here the complaint doesn’t mention 1-Click at all, which is core to Amazon’s user interface design and essential to evaluating the balance of harms and benefits required by the statute.
5. Even if it can show that Amazon’s in-app purchase practices caused harm, the Commission will still have to demonstrate that Amazon’s conscious efforts to minimize the steps required to make purchases doesn’t benefit consumers on balance. In Apple, the FTC majority essentially (and improperly) valued these sorts of user-interface benefits at zero. It implicitly does so again here, but a court will require more than such an assertion.
6. Given these lapses, there is even a chance that the complaint will be thrown out on a motion to dismiss. It’s a high bar, but if the court agrees that there are insufficient facts in the complaint to make out a plausible case on all three elements, Amazon could well prevail on a motion to dismiss. The FTC’s approach in the Apple consent order effectively maintains that the agency can disregard reasonable avoidance and countervailing benefits in contravention of the statute. By following the same approach here in actual litigation, the FTC may well meet resistance from the courts, which have not yet so cavalierly dispensed with the statute’s requirements.

Filed under: consumer protection, federal trade commission, markets, section 5, technology Tagged: Amazon, Amazon.com, Apple, Commissioner Wright, Free Time, ftc, In-app purchases, Kindle, section 5, Unfair Practices, Unfairness

Whereas the antitrust rules on a number of once-condemned business practices (e.g., vertical non-price restraints, resale price maintenance, price squeezes) have become more economically sensible in the last few decades, the law on tying remains an embarrassment.  The sad state of the doctrine is evident in a federal district court’s recent denial of Viacom’s motion to dismiss a tying action by Cablevision.

According to Cablevision’s complaint, Viacom threatened to impose a substantial financial “penalty” (probably by denying a discount) unless Cablevision licensed Viacom’s less popular television programming (the “Suite Networks”) along with its popular “Core Networks” of Nickelodeon, Comedy Central, BET, and MTV.  This arrangement, Cablevision insisted, amounted to a per se illegal tie-in of the Suite Networks to the Core Networks.

Similar tying actions based on cable bundling have failed, and I have previously explained why cable bundling like this is, in fact, efficient.  But putting aside whether  the tie-in at issue here was efficient, the district court’s order is troubling because it illustrates how very unconcerned with efficiency tying doctrine is.

First, the district court rejected–correctly, under ill-founded precedents–Viacom’s argument that Cablevision was required to plead an anticompetitive effect.  It concluded that Cablevision had to allege only four elements: separate tying and tied products, coercion by the seller to force purchase of the tied product along with the tying product, the seller’s possession of market power in the tying product market, and the involvement of a “not insubstantial” dollar volume of commerce in the tied product market.  Once these elements are alleged, the court said,

plaintiffs need not allege, let alone prove, facts addressed to the anticompetitive effects element.  If a plaintiff succeeds in establishing the existence of sufficient market power to create a per se violation, the plaintiff is also relieved of the burden of rebutting any justification the defendant may offer for the tie.

In other words, if a tying plaintiff establishes the four elements listed above, the efficiency of the challenged tie-in is completely irrelevant.  And if a plaintiff merely pleads those four elements, it is entitled to proceed to discovery, which can be crippling for antitrust defendants and often causes them to settle even non-meritorious cases. Given that a great many tie-ins involving the four elements listed above are, in fact, efficient, this is a terrible rule.  It is, however, the law as established in the Supreme Court’s Jefferson Parish decision.  The blame for this silliness therefore rests on that Court, not the district court here.

But the Cablevision order includes a second unfortunate feature for which the district court and the Supreme Court share responsibility.  Having concluded that Cablevision was not required to plead anticompetitive effect, the court went on to say that Cablevision “ha[d], in any event, pleaded facts sufficient to support plausibly an inference of anticompetitive effect.”  Those alleged facts were that Cablevision would have bought content from another seller but for the tie-in:

Cablevision alleges that if it were not forced to carry the Suite Networks, it “would carry other networks on the numerous channel slots that Viacom’s Suite Networks currently occupy.”  (Compl. par. 10.)  Cablevision also alleges that Cablevision would buy other “general programming networks” from Viacom’s competitors absent the tying arrangement.  (Id.)

In other words, the district court reasoned, Cablevision alleged anticompetitive harm merely by pleading that Viacom’s conduct reduced some sales opportunities for its rivals.

But harm to a competitor, standing alone, is not harm to competition.  To establish true anticompetitive harm, Cablevision would have to show that Viacom’s tie-in reduced its rivals’ sales by so much that they lost scale efficiencies so that their average per-unit costs rose.  To make that showing, Cablevision would have to show (or allege, at the motion to dismiss stage) that Viacom’s tying occasioned substantial foreclosure of sales opportunities in the tied product market. “Some” reduction in sales to rivals–while perhaps anticompetitor–is simply not sufficient to show anticompetitive harm.

Because the Supreme Court has emphasized time and again that mere harm to a competitor is not harm to competition, the gaffe here is primarily the district court’s fault.  But at least a little blame should fall on the Supreme Court.  That Court has never precisely specified the potential anticompetitive harm from tying: that a tie-in may enhance market power in the tied or tying product markets if, but only if, it results in substantial foreclosure of sales opportunities in the tied product market.

If the Court were to do so, and were to jettison the silly quasi-per se rule of Jefferson Parish, tying doctrine would be far more defensible.

[NOTE: For a more detailed explanation of why substantial tied market foreclosure is a prerequisite to anticompetitive harm from tie-ins, see my article, Appropriate Liability Rules for Tying and Bundled Discounting, 72 Ohio St. L. J. 909 (2011).]

Filed under: antitrust, law and economics, tying

Today the FTC filed its complaint in federal district court in Washington against Amazon, alleging that the company’s in-app purchasing system permits children to make in-app purchases without parental “informed consent” constituting an “unfair practice” under Section 5 of the FTC Act.

Read the full piece here.

The Wall Street Journal reports this morning that Amazon is getting — and fighting — the “Apple treatment” from the FTC for its design of its in-app purchases…

Read the full piece here.

In our blog post this morning on ABC v. Aereo, we explain why, regardless of which test applies (the majority’s “looks-like-cable-TV” test or the dissent’s volitional conduct test), Aereo infringes on television program owners’ exclusive right under the Copyright Act to publicly perform their works. We also explain why the majority’s test is far less ambiguous than its critics assert, and why it does not endanger cloud computing services like so many contend.

Because that post was so long, and because the cloud computing issue is key to understanding the implications of this case, this post pulls out the cloud computing argument from that post and presents it separately.

Read the full piece here.

Yesterday, the Supreme Court released its much-awaited decision in ABC v. Aereo. The Court reversed the Second Circuit, holding that Aereo directly infringed the copyrights of broadcast television program owners by publicly performing their works without permission. Justice Breyer, who wrote the opinion for the Court, was joined by five other Justices, including Chief Justice Roberts, Justice Kennedy, and the liberal-leaning bloc. Interestingly, Justice Scalia dissented on textualist grounds, joined by his conservative-leaning colleagues Justice Thomas and Justice Alito.

Read the full piece here.

UPDATE: I’ve been reliably informed that Vint Cerf coined the term “permissionless innovation,” and, thus, that he did so with the sorts of private impediments discussed below in mind rather than government regulation. So consider the title of this post changed to “Permissionless innovation SHOULD not mean ‘no contracts required,’” and I’ll happily accept that my version is the “bastardized” version of the term. Which just means that the original conception was wrong and thank god for disruptive innovation in policy memes!

Can we dispense with the bastardization of the “permissionless innovation” concept (best developed by Adam Thierer) to mean “no contracts required”? I’ve been seeing this more and more, but it’s been around for a while. Some examples from among the innumerable ones out there:

Vint Cerf on net neutrality in 2009:

We believe that the vast numbers of innovative Internet applications over the last decade are a direct consequence of an open and freely accessible Internet. Many now-successful companies have deployed their services on the Internet without the need to negotiate special arrangements with Internet Service Providers, and it’s crucial that future innovators have the same opportunity. We are advocates for “permissionless innovation” that does not impede entrepreneurial enterprise.

Net neutrality is replete with this sort of idea — that any impediment to edge providers (not networks, of course) doing whatever they want to do at a zero price is a threat to innovation.

Chet Kanojia (Aereo CEO) following the Aereo decision:

It is troubling that the Court states in its decision that, ‘to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.’ (Majority, page 17)That begs the question: Are we moving towards a permission-based system for technology innovation?

At least he puts it in the context of the Court’s suggestion that Congress pass a law, but what he really wants is to not have to ask “permission” of content providers to use their content.

Mike Masnick on copyright in 2010:

But, of course, the problem with all of this is that it goes back to creating permission culture, rather than a culture where people freely create. You won’t be able to use these popular or useful tools to build on the works of others — which, contrary to the claims of today’s copyright defenders, is a key component in almost all creativity you see out there — without first getting permission.

Fair use is, by definition, supposed to be “permissionless.” But the concept is hardly limited to fair use, is used to justify unlimited expansion of fair use, and is extended by advocates to nearly all of copyright (see, e.g., Mike Masnick again), which otherwise requires those pernicious licenses (i.e., permission) from others.

The point is, when we talk about permissionless innovation for Tesla, Uber, Airbnb, commercial drones, online data and the like, we’re talking (or should be) about ex ante government restrictions on these things — the “permission” at issue is permission from the government, it’s the “permission” required to get around regulatory roadblocks imposed via rent-seeking and baseless paternalism. As Gordon Crovitz writes, quoting Thierer:

“The central fault line in technology policy debates today can be thought of as ‘the permission question,’” Mr. Thierer writes. “Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?”

But it isn’t (or shouldn’t be) about private contracts.

Just about all human (commercial) activity requires interaction with others, and that means contracts and licenses. You don’t see anyone complaining about the “permission” required to rent space from a landlord. But that some form of “permission” may be required to use someone else’s creative works or other property (including broadband networks) is no different. And, in fact, it is these sorts of contracts (and, yes, the revenue that may come with them) that facilitates people engaging with other commercial actors to produce things of value in the first place. The same can’t be said of government permission.

Don’t get me wrong – there may be some net welfare-enhancing regulatory limits that might require forms of government permission. But the real concern is the pervasive abuse of these limits, imposed without anything approaching a rigorous welfare determination. There might even be instances where private permission, imposed, say, by a true monopolist, might be problematic.

But this idea that any contractual obligation amounts to a problematic impediment to innovation is absurd, and, in fact, precisely backward. Which is why net neutrality is so misguided. Instead of identifying actual, problematic impediments to innovation, it simply assumes that networks threaten edge innovation, without any corresponding benefit and with such certainty (although no actual evidence) that ex ante common carrier regulations are required.

“Permissionless innovation” is a great phrase and, well developed (as Adam Thierer has done), a useful concept. But its bastardization to justify interference with private contracts is unsupported and pernicious.

Filed under: contracts, copyright, cost-benefit analysis, intellectual property, Knowledge Problem, licensing, markets, net neutrality, patent, privacy, regulation, technology, telecommunications, television Tagged: Aereo, airbnb, contracts, copyright, innovation, net neutrality, permissionless innovation, Tesla, uber