After more than a year of complaining about Google and being met with responses from me (see also here, here, here, here, and here, among others) and many others that these complaints have yet to offer up a rigorous theory of antitrust injury — let alone any evidence — FairSearch yesterday offered up its preferred remedies aimed at addressing, in its own words, “the fundamental conflict of interest driving Google’s incentive and ability to engage in anti-competitive conduct. . . . [by putting an] end [to] Google’s preferencing of its own products ahead of natural search results.”  Nothing in the post addresses the weakness of the organization’s underlying claims, and its proposed remedies would be damaging to consumers.

FairSearch’s first and core “abuse” is “[d]iscriminatory treatment favoring Google’s own vertical products in a manner that may harm competing vertical products.”  To address this it proposes prohibiting Google from preferencing its own content in search results and suggests as additional, “structural remedies” “[r]equiring Google to license data” and “[r]equiring Google to divest its vertical products that have benefited from Google’s abuses.”

Tom Barnett, former AAG for antitrust, counsel to FairSearch member Expedia, and FairSearch’s de facto spokesman should be ashamed to be associated with claims and proposals like these.  He better than many others knows that harm to competitors is not the issue under US antitrust laws.  Rather, US antitrust law requires a demonstration that consumers — not just rivals — will be harmed by a challenged practice.  He also knows (as economists have known for a long time) that favoring one’s own content — i.e., “vertically integrating” to produce both inputs as well as finished products — is generally procompetitive.

In fact, Barnett has said as much before:

Because a Section 2 violation hurts competitors, they are often the focus of section 2 remedial efforts.  But competitor well-being, in itself, is not the purpose of our antitrust laws.

Access remedies also raise efficiency and innovation concerns.  By forcing a firm to share the benefits of its investments and relieving its rivals of the incentive to develop comparable assets of their own, access remedies can reduce the competitive vitality of an industry.

Not only has FairSearch not actually demonstrated that Google has preferenced its own products, the organization has also not demonstrated either harm to consumers arising from such conduct nor even antitrust-cognizable harm to competitors arising from it.

As an empirical study supported by the International Center for Law and Economics (itself, in turn, supported in part by Google, and of which I am the Executive Director) makes clear, search bias simply almost never occurs.  And when it does, it is the non-dominant Bing that more often practices it, not Google.  Moreover, and most important, the evidence marshaled in favor of the search bias claim (largely adduced by Harvard Business School professor, Ben Edelman (whose work is supported by Microsoft)) demonstrates that consumers do, indeed, have the ability to detect and counter allegedly biased results.

Recall what search bias means in this context.  According to Edelman, looking at the top three search results, Google links to its own content (think Gmail, Google Maps, etc.) in the first search result about twice as often as Yahoo! and Bing link to Google content in this position.  While the ICLE paper refutes even this finding, notice what it means:  “Biased” search results lead to a reshuffling of results among the top few results offered up; there is no evidence that Google simply drops users’ preferred results.  While it is true that the difference in click-through rates between the top and second results can be significant, Edelman’s own findings actually demonstrate that consumers are capable of finding what they want when their preferred (more relevant) results appears in the second or third slot.

Edelman notes that Google ranks Gmail first and Yahoo! Mail second in his study, even though users seem to think Yahoo! Mail is the more relevant result:  Gmail receives only 29% of clicks while Yahoo! Mail receives 54%.  According to Edelman, this is proof that Google’s conduct forecloses access by competitors and harms consumers under the antitrust laws.

But is it?  Note that users click on the second, apparently more-relevant result nearly twice as often as they click on the first.  This demonstrates that Yahoo! is not competitively foreclosed from access to users, and that users are perfectly capable of identifying their preferred results, even when they appear lower in the results page.  This is simply not foreclosure — in fact, if anything, it demonstrates the opposite.

Among other things, foreclosure — limiting access by a competitor to a necessary input — under the antitrust laws must be substantial enough to prevent a rival from reaching sufficient scale that it can effectively compete.  It is no more “foreclosure” for Google to “impair” traffic to Kayak’s site by offering its own Flight Search than it is for Safeway to refuse to allow Kroger to sell Safeway’s house brand.  Rather, actionable foreclosure requires that a firm “impair[s] the ability of rivals to grow into effective competitors that erode the firm’s position.”  Such quantifiable claims are noticeably absent from critic’s complaints against Google.

And what about those allegedly harmed competitors?  How are they faring?  As of September 2012, Google ranks 7th in visits among metasearch travel sites, with a paltry 1.4% of such visits.  Residing at number one?  FairSearch founding member, Kayak, with a whopping 61% (up from 52% six months after Google entered the travel search business).  Nextag.com, another vocal Google critic, has complained that Google’s conduct has forced it to shift its strategy from attracting traffic through Google’s organic search results to other sources, including paid ads on Google.com.  And how has it fared?  It has parlayed its experience with new data sources into a successful new business model, Wize Commerce, showing exactly the sort of “incentive to develop comparable assets of their own” Barnett worries will be destroyed by aggressive antitrust enforcement.  And Barnett’s own Expedia.com?  Currently, it’s the largest travel company in the world, and it has only grown in recent years.

Meanwhile consumers’ interests have been absent from critics’ complaints since the beginning.  And not only do they fail to demonstrate any connection between harm to consumers and the claimed harms to competitors arising from Google’s conduct, but they also ignore the harm to consumers that may result from restricting potentially efficient business conduct — like the integration of Google Maps and other products into its search results.  That Google not only produces search results but also owns some of the content that generates those results is not a problem cognizable by modern antitrust.

FairSearch and other Google critics have utterly failed to make a compelling case, and their proposed remedies would serve only to harm, not help, consumers.

Filed under: antitrust, exclusionary conduct, exclusive dealing, technology Tagged: antitrust, Bing, expedia, FairSearch, Federal Trade Commission, google, Nextag, tom barnett, Yahoo

Excerpt

Regulators around the world have grown increasingly uncomfortable with the way business is being done on the Internet. From Brussels to Buenos Aires, they are most frustrated with Google, far and away the most popular search engine and advertising platform. As the company has evolved, expanding outward from its core search engine product, it has come to challenge a range of other firms and threaten their business models. This creative destruction has, in turn, caused antitrust regulators — usually prodded by Google’s threatened competitors — to investigate its conduct, essentially questioning whether Google’s very success obligates it to treat competitors neutrally.

This controversy runs deeper than a short-term economic conflict between companies or even countries. At base lies a conflict of visions of Internet governance. The European approach was summed up by the former French President Nicolas Sarkozy’s declaration at last year’s G8 summit that “the Internet is the new frontier, a territory to conquer. But it cannot be a Wild West. It cannot be a lawless place.”

Continue reading on Foreign Affairs

After more than a year of complaining about Google and being met with responses from me (see also here, here, here, here, and here, among others) and many others that these complaints have yet to offer up a rigorous theory of antitrust injury — let alone any evidence — FairSearch yesterday offered up its preferred remedies aimed at addressing, in its own words, “the fundamental conflict of interest driving Google’s incentive and ability to engage in anti-competitive conduct. . . . [by putting an] end [to] Google’s preferencing of its own products ahead of natural search results.”  Nothing in the post addresses the weakness of the organization’s underlying claims, and its proposed remedies would be damaging to consumers.

Read the full piece here.

When I speak on today’s “smart phone war,” I often point out to the surprise of my audience that such patent wars are nothing new.  Patent scholars call these wars by the more boring label of a “patent thicket” (proving once again that geeks like us just don’t know how to coin a good phrase).  My research into the very first patent thicket — the Sewing Machine War of the 1850s — has made me the “sewing machine guy” in the patent and tech law world.  I don’t mind; as I recently pointed out, as have others, there have been many patent wars since the 1850s, including the “diaper wars” and “stent wars” of the 1980s, which are all very well known within patent law circles. I must admit that I prefer being the “sewing machine guy” to being the “diaper guy.”

Read the full piece here.

The claim that there is a “patent litigation explosion” is a myth, but there’s a related patent litigation myth that has proven cantankerously resilient in the patent policy debates — there’s an “explosion” of patent-owners racing to the International Trade Commission (ITC) who are obtaining exclusion orders against infringers.

Well, this argument has crashed and burned against the hard facts of the actual numbers, but even before patent filings at the ITC dropped, this argument was still problematic.

The reason is that it was an example of a great game that we all learn in college: fun with statistics!  It’s the old rhetorical saw: If actual numbers don’t make something look bad, then just reframe the point as an out-of-context statistical claim and now it sounds like a complete disaster that demands immediate action by everyone—by Congress, by courts, and, given that the season is almost upon us, by Santa Claus (who should punish these allegedly rent-seeking patent-owners with coal in their stockings).

You may think I jest, but it’s common fare for commentators and academics to paint the situation in the ITC entirely in terms of statistical increases by patent-owners.  To take but one representative example from a 2009 academic article:

The ITC has become a popular forum for enforcing patents, with the number of actions increasing by nearly 80% since 2003.

An 80% increase in patent filings in six years!  This is clearly a litigation hurricane of historic proportions!  We must do something about this before the ITC is flooded like New York City was by Hurricane Sandy!

Yet, when one looks behind the statistics at the actual numbers, it’s almost laughable that numerous law journal articles, newspaper articles, and blog postings are breathlessly reporting on this as if this is a pressing policy problem in both the patent system and the ITC.  Congress even spent more taxpayer dollars holding hearings this past summer on this allegedly pressing problem, and what a waste of time this was.

Here’s the actual numbers behind the statistics: From 2003 to 2009 (fiscal year), patent filings in the ITC increased from 19 to 29.  In the ten years from 2001 to 2011, patent case filings in the ITC went from 29 to 70.  (Note the drop between 2001 and 2003, a drop that has occurred again and to which we will return shortly.)

So, commentators and academics want Congress to change the law to make it harder for patent-owners to seek relief at the ITC because patent filings increased in ten years from 29 cases to 70 cases.  Alas, 70 total cases doesn’t sound too bad, especially when hundreds of thousands of lawsuits and other regulatory cases are filed annually.  So, the easy answer to this problem is to reframe rhetorically the total cases: the shift from 29 to 70 cases is an increase of 141%!  In ten years!  Yep, fun with statistics.

But even if one thinks for some strange reason that 70 cases is a huge number of filings at the ITC, this is still an out-of-context assertion that doesn’t mean anything.  As empirical economists and statisticians always ask: What’s the baseline?

One good baseline is to compare ITC filings to patent infringement cases filed in plain-old-vanilla federal court. How many patent infringement cases are filed each year in federal court?  In 2010, the total number of patent infringement lawsuits was 3,605 cases.  Yes, you read that number right: 3,605 cases.  (That’s the last year for which we have numbers.)  And before readers jump to the conclusion that 3,605 cases is an unmitigated patent litigation explosion, this would be incorrect as well — as I explained in a previous blog posting, patent litigation rates today are approximately the same or less than the patent litigation rates from 1790 to 1860.

In sum, we’re supposed to be filled with shock and awe by the 70 patent cases that were filed in the ITC in 2011, as compared to the 3,605 cases filed in federal court.  These 70 patents cases at the ITC, we’re told, demand immediate congressional action to impose a regime change on the ITC in limiting its jurisdiction over patents.  To put it bluntly, people are getting their patent policy knickers in a twist because 1.94% of total patent infringement cases are also being filed in the ITC.  Yep, fun with statistics.

And as Billy Mays would say: But wait, there’s more!  (That OxiClean was definitely worth it.  My sneakers were never so clean.)

Lest one still thinks that the number of patent filings in the ITC is a problem, the ITC released last month its fiscal-year 2012 report on patent filings — a report that got about as much attention as a report on dryer lint accumulations in fiscal-year 2012.  Given the ongoing uproar over patent filings in the ITC, one would expect that the ITC’s report would be have been trumpeted in news articles, blog postings, and by the commentators and academics who have been singing this tune for the past several years.

Nope, not a single peep about this report has been made in the more-than-30 days since its release.  Why the silence — the deafening silence — about the most recent data from the ITC on patent filings?

The reason is simple: the facts in the latest ITC fiscal-year report don’t fit the policy narrative.  The ITC reported that patent cases filed in the ITC dropped from a high of 70 cases in 2011 to a total of 48 cases in 2012 (fiscal year).  In the statistical terms loved so much by the critics of patent filings at the ITC, patent filings dropped by 31.4% between 2011 and 2012 (fiscal years).  Now that’s an interesting statistical number about which much could be said — or, as is the case, not said and ignored in the hope that it’ll just go away.

So, what happened to the loud, incessant complaints about skyrocketing patent filings in the ITC?  Well, to paraphrase the old man at the end of every Scooby Doo episode: And I would have gotten away with it, too, if it wasn’t for you meddling facts!

UPDATE: I made some minor copy-edit changes to the text after I posted it.

Filed under: intellectual property, international trade, litigation, patent

It’s an appropriate question, both figuratively and literally. Today’s news headlines are now warning of a looming pilot shortage. A combination of new qualification standards for new pilots and a large percentage of pilots reaching the mandatory retirement age of 65 is creating the prospect of having too few pilots for the US airline industry.

But it still begs the question of “Why?” According to the WSJ article linked above, the new regulations require newly hired pilots to have at least 1,500 hours of prior flight experience. What’s striking about that number is that it is six times the current requirement, significantly increasing the cost (and time) of training to be a pilot.

Why such a huge increase in training requirements? I don’t fly as often as some of my colleagues, but do fly often enough to be concerned that the person in the front of the plane knows what they’re doing. I appreciate the public safety concerns that must have been at the forefront of the regulatory debate. But the facts don’t support an argument that public safety is endangered by the current level of experience pilots are required to attain. Quite the contrary, the past decade has been among the safest ever for airline passengers. In fact, the WSJ reports that:

Congress’s 2010 vote to require 1,500 hours of experience in August 2013 came in the wake of several regional-airline accidents, although none had been due to pilots having fewer than 1,500 hours.

Indeed, to the extent human error has been involved in airline accidents and near misses over the past decade, federally employed air traffic controllers, not privately employed pilots, have been more to blame.

The coincidence of such a staggering increase in training requirements for new pilots and the impending mandatory retirement of a large percentage of current pilots suggests that perhaps other forces were at work behind the scenes when Congress passed the rules in 2010. Legislative proposals are often written by special interests just waiting in the wings (no pun intended) for an opportune moment. Given the downsizing and cost-reduction focus of the US airline industry over the past many years, no group has been more disadvantaged and no group stands more to gain from the new rules than current pilots and the pilots unions.

And so the question, as we face this looming shortage of newly qualified pilots: Who’s flying the plane?

 

Filed under: barriers to entry, consumer protection, markets, political economy, regulation, Sykuta

A nice way to take a break from Election Day stress about this fingernail-biting-close election is to listen to some panelists talk about something that is truly important — software patents!

It a great panel, notwithstanding my participation, and it promises to be a lot of fun and informative.  So, call in for the teleforum and even ask a question or two of us while you’re at it.  Here’s the information:

Boon or Bane for Technological Innovation?: Software Patents

Intellectual Property Practice Group Teleforum

Although pure software patents are only a couple decades old, they have become the focus of a heated innovation policy debate. On the one hand, new technological innovation once imagined only as science fiction is now a commonplace feature of our lives—tablet computers, smart phones, wireless telecommunication, cloud computing, and streaming television, movies and songs, to name just a few of our modern marvels.  On the other hand, the high-tech industry seems awash in patent litigation, especially in the “smart phone war” between Apple, Samsung, Google, Microsoft, and other high-tech firms.  As a result of this extensive litigation, commentators in newspaper articles, in blogs, and at conferences now complain about the “problem of software patents.” Conventional wisdom seems to be quickly gelling around the proposition that software patents are a problem that demands a solution from Congress or the courts. This Teleforum panel will consider whether software patents advance development of new technological innovation or hinder this vital innovation. The panelists represent all viewpoints on this topic, and they bring their extensive academic, legal and industry experiences to bear on this increasingly important issue in the innovation policy debates today.

Featuring:

• Mr. Robert R. Sachs, Partner, Fenwick & West LLP
• Prof. Adam Mossoff, George Mason University School of Law
• Prof. David Olson, Boston College Law School
• Moderator: Prof. Mark Schultz, Southern Illinois University School of Law

Agenda:

Call begins at 2:00 p.m. Eastern Time.

Registration details:

Teleforum calls are open to all dues paying members of the Federalist Society. To become a member, sign up here. As a member, you should receive email announcements of upcoming Teleforum calls which contain the conference call phone number. If you are not receiving those email announcements, please contact us at 202-822-8138.

Filed under: truth on the market

About a week ago, I was lucky to moderate the digital equivalent of a “fireside chat” with Richard Epstein about the patent system.  The topic was “Patent Rights: A Spark or Hindrance for the Economy?,” and Richard offered his usual brilliant analysis of the systemic viritues of securing patents as property rights.  you can listen to the podcast here.

The podcast is also available via iTunes, for readers of this blog who are members of the “cult of Apple.”

Here’s the description of the podcast:

Innovation and entrepreneurship are integral to America’s economic strength, and the U.S. patent system has been critical to nurturing the innovation economy.  With its foundation in Article One, Section 8 of the Constitution, the U.S. patent system has been the strongest in the world.  In recent years, some critics, including Judge Richard Posner, have argued that the patent system has led to excessive patenting, too much litigation, and unwarranted costs for consumers.  Patent defenders have responded that with every spike in innovation comes a corresponding increase in the number of patent suits, and efforts to weaken patent rights will inevitably lead to less innovation.  With the passage of the America Invents Act — the broadest overhaul of the patent system in 50 years America — many people believed that the dispute over patent rights would recede.  However, with a string of high profile patent infringement suits in the smartphone industry – and a new effort to roll back patent rights at the International Trade Commission certain patents held by so-called “non-practicing entities” (NPEs) – the debate over intellectual property has grown more intense.  Would reduced patent rights diminish U.S. competitiveness and depress innovation?  In a diversified economy, should NPEs have fewer patent rights than those that manufacture their inventions?   Will innovation continue apace even if patent protections are scaled back?

 

Filed under: intellectual property, patent

My colleague, Eric Claeys, has posted to SSRN an interesting and important review of Robert Merges’s new book, Justifying Intellectual Property (Harvard University Press, 2012).  Here’s the abstract…

Read the full piece here.