LAW OF COMPUTER TECHNOLOGY FALL 2018

Presentation on theme: "LAW OF COMPUTER TECHNOLOGY FALL 2018"— Presentation transcript:

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LAW OF COMPUTER TECHNOLOGY FALL 2018 © 2018 MICHAEL I. SHAMOS
Technological Antitrust
Michael I. Shamos, Ph.D., J.D.Institute for Software ResearchSchool of Computer ScienceCarnegie Mellon University
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Corporate TrustsInvented by John D. Rockefeller, founder of Standard Oil (now Exxon-Mobil)Trust: a legal structure in which stockholders in a group of companies transfer their shares to a single set of trustees who then control all the companies.Stockholders receive trust certificates entitling them to a share in the profits of those companiesRockefeller used his trust to monopolize the oil industry by(1) controlling prices(2) exploiting economies of scale in controlling almost all oil refined in the U.S.(3) pressuring railroads and other suppliers of goods and services into giving him bargain rates.
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Antitrust Law
Rockefeller was the richest man in the world by far, worth more than twice as much as Jeff Bezos ($340 billion in present dollars)Rockefeller controlled 1.5% of U.S. economic outputHis trust was a monopoly, which harmed consumersWhat’s wrong with monopolies?Unchecked prices. Without competition, no pressure to keep prices low.No incentive to invest in R&D, improvements.Lack of consumer choice.Monopolies are not illegal if they result from skill. Actions to create or maintain them can be illegal.
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Sherman Act (1890)
“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” 15 U.S.C. §1. Fine: $10 million + 3 yearsEvery person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony. 15 U.S.C. §2. Fine: $10 million + 3 years
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Sherman Act (1890) Prohibits
Price fixingAdvertising agreements Bid rigging Market allocation by competitors – exclusive territories Market tampering – illegal agreements that affect market behavior Coordinated use of information – collusion, costsOutput planning Collective exclusionary activity – boycotts,concerted refusal to deal, e.g. agreement not to sell to price-cuttersALL ILLEGAL REGARDLESS OF PURPOSE OR EFFECT
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Technological Antitrust
Historically, antitrust violations resulted from human activity, usually through conspiracy or collusive agreements (often unwritten)In the computer age, MACHINES can be used to engage in anticompetitive activityWe receive information, shop and communicate through computing platformsAnyone who controls the platform (e.g., Microsoft on Windows, Google on Android) can use technology to protect its market position
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U.S. v. Microsoft
Microsoft destroyed Netscape with Internet Explorer (IE)(1) Microsoft bound IE to Windows by contract and technology to guarantee the presence of IE on every Windows user's PC system, and to increase the costs of installing and using Netscape Navigator;(2) Microsoft imposed limits on the freedom of OEMs to reconfigure or modify Windows 95 and Windows 98 in ways that might generate usage for Navigator;(3) Microsoft used incentives and threats to induce OEMs to design their distributional, promotional and technical efforts to favor IE over Netscape
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Microsoft Antitrust Cases
The U.S. sued Microsoft for antitrust violationsFinal court decree November 2002Microsoft was prohibited fromRetaliating against OEMs who use competing software or sell dual-boot systemsRestricting OEMs from displaying icons and links to non-Microsoft productsPreventing automatic launching of non-Microsoft software at bootPaying companies not to produce competitive software
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Google and Microsoft
Microsoft Vista offers a search bar that connected to Microsoft’s own desktop search engineIt is nearly impossible to turn off the Microsoft indexing engineUsers who want to use Google desktop search are at a disadvantage – they have two indexing programs running simultaneously, which degrades performanceThis makes Google desktop search undesirable and pushes out Microsoft’s competition
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TicketMaster v. RMG Technologies,C.D. Cal., Oct. 16, 2007
TicketMaster sells tickets to entertainment events via the InternetTicketMaster’s site contains a “Terms of Use” linkTerm: “When purchasing tickets on Ticketmaster.com, you are limited to a specified number of tickets for each event (also known as a ‘ticket limit’). This amount is included on the unique event page and is verified with every transaction. This policy is in effect to discourage unfair ticket buying practices.”
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TicketMaster v. RMG Technologies
Term: “You agree that you will not use any robot, spider or other automatic device, process or means to access the Site … You agree that you will not take any action that imposes an unreasonable or disproportionately large load on our infrastructure. You agree that you will not access, reload or "refresh" transactional event or ticketing pages, or make any other request to transactional servers, more than once during any three second interval.” TicketMaster uses Captchas to ensure that it is dealing with real humans.(Captchas invented by CMU Professor Luis von Ahn)
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The TicketMaster Captcha
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TicketMaster v. RMG Technologies
RMG Technologies of Pittsburgh developed software call the Ticket Broker Acquisition Tool (TBAT) whichcircumvents TicketMaster’s Captchasfloods Ticketmaster with thousands of automated requests to freeze out legitimate customersenables the purchase of large numbers of tickets to popular eventsRMGs customers use the software to corner the market on hot tickets, such as Hannah Montana, enabling them to resell the tickets for thousands of dollars apieceOne such RMG customer made 425,000 ticket requests in a single day
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TicketMaster v. RMG TechnologiesTicketMaster sued RMG and sought a preliminary injunction on five grounds:copyright infringement (exceeding license)Digital Millennium Copyright Act (circumventing Captchas)breach of contract (violating Terms of Use)Computer Fraud and Abuse Act (intentionally accessing a computer in excess of authorization)The Court issued an injunction to prevent repetition of the above violationsTicketMaster had to post a bond of $300,000 (to be used to compensate RMG in the event the injunction was wrongly issued)LAW OF COMPUTER TECHNOLOGY FALL 2018 © 2018 MICHAEL I. SHAMOS
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TicketMaster v. RMG TechnologiesAntitrust Implications
Does TicketMaster have monopoly power in the relevant market (It is the sole source for most of the tickets it sells as agent for the arena or producer.)Is RMG a competitor? (It buys from TicketMaster)Does RMG benefit competition or stifle it (by causing prices to rise since RMG has no competitors)?
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U.S. v. Apple (2d Cir. 2015)The U.S. sued Apple and the publishers under the Sherman act for price-fixing.The question was whether the conduct “stem[s] from independent decision or from an agreement, tacit or express.” In this case, it was obviously by agreement.The District Court found for the U.S. and issued an injunction against the agency agreements: “Apple shall not enter into or maintain any agreement with a Publisher Defendant that restricts, limits, or impedes Apple’s ability to set, alter, or reduce the Retail Price of any E‐book or to offer price discounts or any other form of promotions.”2d Circuit affirmed. Supreme Court refused reviewApple agreed to pay $400 million to e-book consumers, $20 million to the states, and $30 million in legal fees.
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U.S. v. Apple (2d Cir. 2015)affirmed (Sp. Ct. 2016)
After the release of Amazon’s Kindle ebook reader in 2007, sales of ebooks increased dramatically, largely because of Amazon’s $9.99 price.Book publishers were unable to raise their prices because Amazon had set a “wretched $9.99 price point” (in the words of one publisher).Because of Amazon, other online merchants lowered their price to $9.99 also.A group of major publishers (“the Publishers”) wanted the price of ebooks to stabilize at a higher price.PROBLEM: No one publisher alone could get Amazon to change its pricing.
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U.S. v. Apple (2d Cir. 2015)
At the same time, Apple introduced its iPad and wanted to sell ebooks for that platform. But the $9.99 retail price was unacceptable to Apple.Apple and the Publishers conspired to change the ebook business model. Instead of selling ebooks bought from the Publishers, Apple would become an “agent” for the Publishers and would be forced to sell ebooks at a higher price (keeping a 30% commission).Problem: Amazon refused to become an “agent”The only way to defeat Amazon was to have all the Publishers refuse to sell to Amazon unless it became an “agent” and could no longer sell ebooks at $9.99.
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U.S. v. Apple (2d Cir. 2015)
Steve Jobs agreed that $30 bestsellers could sell for $14.99. Hardcovers between $25 and $27.50 would be $12.99. Hardcovers selling over $30, would be between $16.99 and $19.99. Jobs responded it would be OK “as long as [the publishers] move Amazon to the agency model too.”At first, Amazon resisted, but ALL the Publishers refused to sell to Amazon unless it agreed to the agency model, so it did. “You’re going to sign an agency contract or we’re not going to give you the books.”
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Clayton Act (1914)
Outlaws kickbacks (payments must be for services)Can’t discriminate in price against purchaser of a commodity bought for resale (to further a monopoly)Can’t sell at low prices to harm or destroy a competitorCan’t sell on condition that buyer not buy products of a competitorCan make “due allowance for differences in the cost of manufacture, sale, or delivery.”15 U.S.C. §12
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Clayton Act (1914)
“Whenever the United States is hereafter injured in its business or property by reason of anything forbidden in the antitrust laws it may sue therefor in the United States district court for the district in which the defendant resides ... and shall recover threefold the damages by it sustained and the cost of suit.”15 U.S.C. §15a. Allows action by state attorneys general
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Collaboration Among Competitors
Permitted if the “rule of reason” is satisfiedAntitrust conduct which is not a per se offense is judged by the reasonableness of the activity.When otherwise unlawful action is found, if the action is ancillary to some lawful activity, and its procompetitive consequences outweigh its anticompetitive effects, it will be allowed.Examples:Combination of capital, technology or assets to achieve a result not available to any single partyEfficiency-enhancing integration
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Google in Europe
In June 2017, Google was fined $2.7 billion by the European Union for antitrust violations (Google search favored Google’s own services over rivals)In July 2018, Google was fined $5 billion by the European Union for more antitrust violations (forced phone manufacturers to pre-install Google Search and Chrome together with the Google Play app store on Android devices, paying them to pre-install only Google Search and blocking them from using rival Android systems). Alphabet, Google’s parent, generates $5B every 2 weeks. Alphabet holds >$100B in cash
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European Antitrust LawSimilar to U.S. law:1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:(a) directly or indirectly fix purchase or selling prices or any other trading conditions;(b) limit or control production, markets, technical development, or investment;(c) share markets or sources of supply;(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. Treaty on the Functioning of the European Union - PART THREE, TITLE VII: COMMON RULES ON COMPETITION, TAXATION AND APPROXIMATION OF LAWS, Article 101
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Google AdSense
Not to be confused with Google Ads, which places ads on Google search hit pagesGoogle AdSense places ads on non-Google web pages. The advertiser pays per impression (appearance) or per click. The site on which the ad appears receives a percentage.Examples: TechCrunch, PerezHilton.com
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Google AdSense & Antitrust
The EU alleges that Google protects its dominant position in online search advertising and prevents competitors, from entering and growing the marketExclusivity: Google requires third parties not to source search ads from Google's competitors.Premium placement of a minimum number of Google search ads: Google requires third parties to take a minimum number of search ads from Google and reserve the most prominent space on their search results pages for Google-placed ads. Competing search ads cannot be placed above or next to Google search ads.Right to authorize competing ads: Google requires third parties to obtain Google's approval before making any change to the display of competing search ads.
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Major Ideas
Monopolies per se are not illegalThe Sherman Act prohibits certain anticompetitive acts outrightUnder the Clayton Act, certain anticompetitive acts are permitted if the “rule of reason” is satsified“Technological antitrust” means using technology (as opposed to human acts) to violate the antitrust lawsMakers of operating systems have unparalleled ability to engage in anticompetitive conduct
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Q
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Safety Zone
Agreements not challenged if:Not facially anticompetitiveMeet ONE of these criteria:Parties occupy less than 20% of the marketThree or more independent entities exist with assets, skills and incentive to develop a close substituteIn licensing arrangements, four or more independently controlled technologies exist that could be substituted
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B2B Exchanges
Permitted if the “rule of reason” is satisfiedPotential anticompetitive harm: Increased ability toraise priceslower output, quality, service or innovationcollude through exchange of dataMonopoly or monopsony (combination to reduce prices) risk
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QSGI v. IBM Global FinancingQSGI sold used IBM mainframe computersIBM Global Financing, owned by IBM, is the largest reseller of used IBM mainframesIn 2007, IBM created a “Six-Month Rule”: resellers other than IBM Global Financing could not obtain parts and code from IBM for the resold computers until they had been installed for six monthsEarlier, QSGI could buy parts from IBM to turn off unwanted mainframe capacity, leading to lower licensing costs for its customers.QSGI was forced out of the mainframe business and went bankruptCourt dismissed the case in 2012 because QSGI could not show harm to the market (as opposed to itself)LAW OF COMPUTER TECHNOLOGY FALL 2018 © 2018 MICHAEL I. SHAMOS
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U.S. v. Microsoft
The offense of “monopoly power” requires two elements:(1) the possession of monopoly power in the relevant market; and(2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.Monopoly power: can consumers turn to other suppliers? In the Intel-compatible O/S market, no.Is Microsoft’s conduct “exclusionary”? (Has it restricted significantly the ability of other firms to compete in the relevant market on the merits of what they offer customers?)
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U.S. v. Microsoft (Tying)
Tying:(1) two separate "products" are involved;(2) the defendant affords its customers no choice but to take the tied product in order to obtain the tying product;(3) the arrangement affects a substantial volume of interstate commerce; and(4) the defendant has “market power” in the tying product market.(Have to take Windows Explorer to get Windows)Microsoft says: OS + browser are one integrated product“commercial reality is that consumers today perceive operating systems and browsers as separate products, for which there is separate demand.
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U.S. v. Microsoft
Internet Access Providers (IAPs)(1) Microsoft licensed Internet Explorer and the Internet Explorer Access Kit to hundreds of IAPs for no charge;(2) Microsoft gave payments and rebates to IAPs that upgraded existing subscribers to software that came bundled with Internet Explorer instead of NavigatorJava. Microsoft maximized the difficulty with which applications written in Java could be ported from Windows to other platforms Exclusive dealing arrangements. Microsoft required dealers to promote and distribute Internet Explorer to the exclusion of Navigator in return for payments and technical support
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Microsoft Antitrust Cases
Microsoft was compelled toDisclose to OEMs and ISVs the APIs and communication protocols for Microsoft middleware for interoperation with WindowsAllow end users to “enable or remove access to each Microsoft Middleware Product by … displaying or removing icons, shortcuts or menu entries on the desktop of Start menu”Allow end users to designate a non-Microsoft product to be invoked in place of a Microsoft productEnsure that Windows does not “automatically alter an OEM’s configuration of icons, shortcuts or menu entries.”
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Microsoft European Antitrust Case
Microsoft refused to share details of its protocols that would allow non-Microsoft software to interact with Microsoft’sMicrosoft abused its market powerA dominant company can be forced to share its intellectual property with competitors (for a fee)Microsoft paid fines of $1.4 billion to settle
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Rambus v. Micron & Hynix(Verdict November 16, 2011)Rambus makes memory chips called RDRAM. It also licenses its patentsMicron and Hynix also chip manufacturers who make RDRAM under Rambus license but also SDRAM chipsIn 2005 it sued Micron and Hynix for $12.9 billion for “a secret and unlawful conspiracy to kill a revolutionary technology, make billions of dollars and hang onto power” It alleged that Micron and Hynix raised the prices of RDRAM and underpriced SDRAM so sales of RDRAM would go down, reducing royalties to Rambus and making it difficult for Rambus to sell its RDRAMOn November 16, 2011 a jury found against Rambus

LAW OF COMPUTER TECHNOLOGY FALL 2018

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LAW OF COMPUTER TECHNOLOGY FALL 2018

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