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THE NEW [2012] ARBITRATION RULES OF

INTERNATIONAL CHAMBER OF COMMERCE [“ICC”]

By

Attorney Arzu ONGUR ERGAN*

Keywords: International Chamber of Commerce, ICC, International Arbitration, New ICC Rules, 2012 ICC Arbitration Rules, Arbitration Rules of International Commerce, Alternative Dispute Resolution, Arbitration, World Business Organization, International Commerce., Terms of Reference, Scrutiny, Case Management, Efficiency in the Arbitration Process.

Abstract: The purpose of this article is to explain the principle characteristics of the new ICC Arbitration Rules that will come into force on 1^st of January 2012 and to analyze how they differ from the prior version. The author focuses to substantial amendments, major procedural innovations, new introduced mechanisms and de-regulated rules of existing ICC principles. In the mean time, the need and reasons for introduction of the new rules are explained in order to provide practical understanding of actual ICC Arbitration mechanism.

1. INTRODUCTION:

The International Chamber of Commerce[1] [“ICC”] has a prominent role in the field of world business by promoting trade and investment, open markets for goods and services, and the free flow of capital since 1919. In a brief definition, the main aim of ICC is to assure effective and consistent actions in the economic and legal fields in order to contribute to the harmonious growth and the freedom of international commerce[2]. Over the years, the ICC has grown into a far-flung international organization with members in more than 150 countries and National Committees[3]. ICC’s international network assured a multidimensional understanding of new patterns of the business and uncontestable contribution to the international commerce.

Additionally, the International Court of Arbitration [“ICC Court”] which was founded in 1923 is remarkably improved the ICC’s value and provided a unique functionality to the organization. Nearly for a century, the ICC has been providing significant juridical supervisions in terms of providing dispute resolution mechanisms in line with international business requirements due to the need of justice free from state interference.

Indeed, since the ICC Court was first established, there has been unprecedented growth in the use of arbitration to resolve international commercial disputes. Shifting patterns of economic development and rapid development of international trade assured that the international arbitration became a standard and a routine method to resolve business disputes. The ICC Court is comprised members from around 90 countries and recently the Court supervises more than 1500 pending cases[4].

1. ARBITRATION RULES OF THE ICC:

Nowadays,  ICC is known as one of the famous institutions for the resolution of international commercial disputes and its rules of arbitration are one of the most respected and implemented sources of the international business community.

The ICC’s first Rules of Arbitration were published in English and French[5] in 1922.After establishment of the Court of Arbitration, the Arbitration Rules are amended respectively in 1927, 1931, 1933, 1939, 1947, 1955, 1975 and 1988.

The ICC rules of arbitration dated 1998 were issued in response to the ICC’s evolving arbitration experience and legal developments in the field. However, fast global developments and globalization required expectation of rapid, cost-effective and efficient dispute resolution in the process of ICC Arbitration. Within this scope, ICC Arbitration Rules have been the subject of criticism by the international business community.

Accordingly, the preparations of new arbitration rules are commenced in 2009. The ICC Commission on Arbitration which contains 620 dispute resolution specialists from 90 countries provided their experiences and advices for a more efficient arbitration rules codification. Additionally, a sub-committee to be constituted from 200 members drafted the New ICC Arbitration Rules in comply with international business community expectations. The new rules were unveiled at an ICC Conference in Paris from 12^th to 13^th September 2011.

• THE NEW PROVISIONS THAT ARE INTRODUCED BY 2012 ICC ARBITRATION  RULES:

1. Provisions regarding the Case Managements of the Arbitration:

Majority of the changes that are accomplished in the new ICC Arbitration Rules aims to make arbitration procedure faster, cheaper and more efficient. In comply with this purpose, Article 22, 24, 27, 37 and Appendix IV of the new arbitration rules put forward innovative provisions to ensure efficiency of the arbitration process. Within this scope, Article 22(1) set forth, the arbitral tribunal and the parties shall make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute.

According to Article 22(2) of the new arbitration rules, in order to ensure effective case management, the arbitral tribunal is authorized to adopt such procedural measure as it considers appropriate, provided that they are not contrary to any agreement of the parties. This amendment ensures adoption of required procedural rules in line with peculiarities and value of the cases; thereof by implementation of this provision the arbitral tribunal can adopt appropriate procedural measures in line with complexity of the case as well.

It is a fact that the confidentiality is a substantial argument for majority of the arbitration cases. Therefore required measures shall be ensured by the arbitral tribunal to protect arbitration parties. Within this scope Article 22(3) is de-regulated in line with confidentiality requirements. Accordingly, upon the request of any party the arbitral tribunal is authorized to make orders concerning the confidentiality of the arbitration proceedings or any other matters in connection with the arbitration and may take measures for protecting trade secrets and confidential information.

One of the unique features of ICC arbitration process in ensuring that the award ultimately rendered addresses all of the issues in dispute is a document called the Terms of Reference, which is to be prepared by the Arbitral Tribunal at the outset of the arbitration. No document of this type is required under any of the major international arbitration rules, whether ad hoc or institutional[6]. The procedural measures regarding the Terms of References are de-regulated by the new rules as well in order to provide efficiency in the process. In line with this aim Article 24 of the new rules set forth that, the parties are required to attend an early case management conference at the time when the arbitration's Terms of Reference are drawn up, or shortly afterwards. Additionally numerous case management techniques are introduced in Appendix IV[7] of the ICC 2012 Rules and in the ICC 's report on Techniques for Controlling Time and Costs in Arbitration[8]. The case management referred to in Appendix IV includes but not limited with the following techniques:

• Bifurcating the proceedings or rendering one or more partial awards on key issues.
• Identifying issues that can be resolved by agreement between the parties or their experts.
• Identifying issues that can be resolved entirely on the basis of the production of documents, without the need for oral evidence.
• Establishing reasonable time limits for the production of evidence.
• Limiting the length and scope of written submissions as well as written and oral witness evidence.
• Using telephone or video conference for procedural and other hearings
• Organizing pre-hearing conferences
• Informing the parties that they are free to settle either by negotiation or through any form of amicable dispute resolution (ADR) methods.

Concerning award drafting process, some new techniques are introduced by the new rules as well. According to Article 27 of the rules; once arbitral proceedings are closed, the tribunal is required to inform the Secretariat of the ICC Court of the date by which it expects to send its draft award to the ICC Court for approval[9]. This provision aims to avoid time consumption in the process of both award drafting and scrutiny that was taking long time in some complex cases. Additionally, the expeditious and cost effective case management provision that is introduced by Article 22(1) is reflected for final stage of the arbitration process by Article 37(5). As a result of new provision, in making decisions as to costs, the arbitral tribunal may take into account such circumstances as it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.

1. Emergency Arbitrator &Urgent Measures:

The lack of appropriate legal measures in terms of emergency situations are criticized during the implementation of 1998 ICC Arbitration rules. Taking into account that functional emergency measures are set forth by several arbitration institutions[10], the need to introduce similar provisions are required by the international community.

As a response of these expectations and critiques, substantial amendments are set forth by Article 29 of the new arbitration rules regarding the emergency arbitrator. When a party needs urgent interim or conservatory measures that cannot await the constitution of an arbitral tribunal, the new ICC rules provide opportunity for appointment of an emergency arbitrator to deal with such issues. The expedited timetable for the appointment of such emergency arbitrator is set forth in Appendix V[11] to the ICC 2012 Rules.

On the other hand the emergency arbitrator procedure is only applicable to arbitration agreements concluded after 1^st of January 2012, and the parties may opt out of it or agree to substitute other procedures for such interim measures. Although orders issued by the emergency arbitrator bind the parties, such orders do not bind the tribunal, which, when constituted, may modify, terminate or annul the emergency arbitrator's order.

Furthermore, according to Article 29(7) the emergency arbitrator procedure does not prevent parties from making applications to national courts for interim measures. Within the scope of these provisions new rules provide an additionally opportunity to the parties in terms of interim measures by introducing emergency arbitrator.

1. Multiple Parties, Multiple Contracts and Consolidation:

In the process of implementation of 1998 ICC Rules the arbitral tribunals confronted with problems where more than two parties are involved to the dispute[12]. Taking into account that majority of the disputes arise out among more than two parties, the lacks of the provisions dealing with multiple parties were not in line with recent international business requirement. Thereby, the multiple parties, multiple contracts and consolidation are set forth by Article 6, 7, 8, 9 and 10 of the new Arbitration Rules.

As it is known, the arbitration is a consensual process, and the new rules do not alter this fundamental principle. The flexibility provided by the new rules remains subject to the ICC Court's prima facie satisfaction that an arbitration agreement binding all parties may exist is a fundamental principle that is set forth by Article 6(4).

It is a fundamental principle of arbitration law that any submission to arbitration must be based on the agreement of the parties. Hence, the new rules dealing with multiple parties, joinder of additional parties, and consolidation of the arbitrations are all stated to be subject of Article 6(3) to Article 6(7), which require the Court to be satisfied that parties are party to an arbitration agreement.

According to Article 6(3) of the new rules, if any party against which a claim has been made does not submit an answer or raises one or more pleas concerning the existence, validity or scope of the arbitration agreement or concerning whether all of the claims made in the arbitration may be determined together in a single arbitration, the arbitration shall proceed and any question of jurisdiction or of whether the claims may be determined together in that arbitration shall be decided directly by the arbitral tribunal, unless the Secretary General refers the matter to the Court for its decision pursuant to Article 6(4).

The provisions regarding the joinder party are set forth by Article 7 of the new ICC Rules. On this basis,  a party may join an additional party to the arbitration by submitting a 'Request for Joinder' of such party to the Secretariat prior to the confirmation or appointment of any arbitrator, or at any time after that date, provided that all parties to the arbitration, including the party to be joined, have consented to the joinder.

Claims between multiple parties are introduced by Article 8 of the new ICC rules. In this respect, in arbitrations involving multiple parties, any party may make a claim against any other party provided that no new claims may be made after the Terms of Reference are signed or approved by the Court without the authorization of the arbitral tribunal.

In addition to above defined provisions, the multiple contracts claims arising out of more than one contract are regulated under the Article 9 of the new arbitration rules. Accordingly, claims arising out of or in connection with more than one contract may be made in a single arbitration.

A significant innovation in connection with consolidation is set forth by Article 10 of the new ICC rules. In this respect, the ICC Court may consolidate separate arbitrations, either with the consent of all parties or where all claims in the arbitrations are made under a single arbitration agreement, and even where the claims arise under multiple arbitration agreements, as long as the arbitrations are between the same parties and arise from the same legal relationship, and the arbitration agreements are compatible.

1. Amendments regarding the Arbitrators:

The new arbitration rules oblige arbitrators to be “impartial” as well as “independent” by provisions of Article 11(1). These requirements correspond with the International Bar Association's (IBA) Guidelines on Conflicts of Interest in International Arbitration[13]. As a matter of fact, ICC has been confronted several criticisms in terms of availability of the arbitrators and conflict of interest arising out the limited number of the arbitrators specialized on several international arbitration issues.

Additionally, a new mechanism introduced by the new ICC Arbitration Rules in terms of arbitrators’ availability and convenience as well. According to Article 11(2) of the new rules, before appointment or confirmation arbitrators are required to sign a statement of acceptance, availability, impartiality and independence.

Thereto in line with performance of the arbitral tribunal a substantial provision is introduced by Article 22(4); the arbitral tribunal hereunder should act fairly and impartially and ensure that each party has a reasonable opportunity to present its case.

1. Constitution of the Arbitral Tribunal:

The general conditions related to the constitution of the Arbitral tribunal de-regulated between Article 12 to 13 of the new ICC arbitration rules. As a matter of fact, where the Court is to appoint an arbitrator, it shall make the appointment upon proposal of a National Committee or Group that it considers to be appropriate. If the Court does not accept the proposal made, or if the National Committee or Group fails to make the proposal requested within the limit fixed by the Court, the Court may repeat its request, request a proposal from another National Committee or Group that it considers to be appropriate or appoint directly any person whom it regards as suitable.

Moreover, a new mechanism is introduced regarding the arbitration cases where a party is a sovereign state or state entity, the ICC Court may appoint arbitrators directly instead of relying upon the proposal of the ICC's National Committees.

Taking into account that the arbitrator appointment procedure were taking long period for some particular cases, these new provisions would ensure avoidance of time consumption and direct supervision of the Court in the said process, whenever it is needed.

1. Other Innovative Steps Provided by ICC 2012 Rules:

The ICC Court claims exclusive authority to administer arbitration by Article 1 of the ICC 2012 Rules. This provision effectively prohibits the use of hybrid arbitration arrangements, such as ad hoc arbitrations administered by the ICC Court, or arbitrations conducted under the ICC Rules but administered by another institution.

Under the 1998 Rules, where a party raises a jurisdictional challenge the Court makes a prima face decision as to whether the arbitration may proceed. However, according to new ICC rules such a decision will be made by directly arbitrators, unless the Secretary General of the ICC refers the matter to the Court.

Consequently, new ICC arbitration rules contain a number of textual improvements as well. For example, new rules adopted a gender –neutral approach with “President” replacing “Chairman” under Article 3(2).

1. CONCLUSION:

It is a fact that, the ICC 2012 Rules introduced more flexibility and cost efficiency in the administration of ICC arbitrations and speed up all arbitration process. The new rules take genuine steps to improve ICC arbitration and to deal with community’s criticisms related to the ICC procedure. The implementation of the new rules will indicate whether ICC arbitration becomes rapid or cost-effective because of the changes to the rules. However, in theory the amended procedural provisions seem in line with expectations of ICC users.

The changes codify several existing practices and expand the arbitral forum to resolve more complex arbitrations, whilst preserving the main features of ICC arbitration such as Terms of Reference, the close supervision of arbitrations by the ICC Court, scrutiny procedure and approval of arbitral awards by the ICC Court.

The major innovations that took place in the new arbitration rules are conspicuous measures in terms of, multi-party arbitration, multi-contracts, joinder parties, consolidation and emergency arbitrator. While unlikely to be a panacea, these rules certainly set a new high water mark for dealing with multi party arbitration, multi party contracts and related dimensions of the issue. Hence these provisions are likely to have long term effects on international arbitration practices.

Consequently, the new ICC Arbitration Rules will be implemented by arbitral tribunal as of 1^st of January 2012.The effects of the amendments would be observed by both international community and the ICC users soon. However, taking into account the innovative patterns of international business and fast global developments, the law always will be quite far being a panacea neither now nor in the future.

BIBLIOGRAPHY:

AKINCI, Ziya, “Milletlerarası Tahkim”, Seçkin Yayınları, Seçkin Yayınları, 2003

DERAINS Y., SCHWARTZ, E.A, “A Guide to the ICC Rules of Arbitration”, Kluwer Law International Publications, 2005

ESEN Emre, “Uluslararısı Ticari Tahkimde Tahkim AnlaÅŸmasının Üçüncü KiÅŸilere TeÅŸmili” Beta Yayınları, 2008

SCHAFER/VERBÄ°S/IMHOOS, “ICC Arbitration in Practice”, Kluwer Law International Publications, 2005

ÅžANLI Cemal, “Uluslararası Ticari Akitlerin Hazırlanması ve UyuÅŸmazlıkların Çözüm Yolları”, Beta Yayınları, 2011

The ICC Rules of Arbitration 1998

The ICC Rules of Arbitration 2012

http://www.chamber.se/about-the-region.aspx

http://www.ibanet.org/ENews_Archive/IBA_July_2008_ENews_ArbitrationMultipleLang.aspx

http://www.iccwbo.org/

http://www.mondaq.com

http://www.siac.org.sg/

* Registered to Ankara Bar Association; LL. M.(Italy); M.A.(Italy);  LL. D.(Ankara); Ph. D. Can. (Ankara)   email: arzu@ongurergan.av.tr

 ** The reader should take into account that this article aims to analyze only major and substantial amendments in the new ICC Rules and it should not be regarded as a legal advice.

[1] The ICC is established in Paris as an “association” under the law of 1901 governing non-profit association by the contribution of Belgium, France, Italy, the United Kingdom and the United States.

[2] http://www.iccwbo.org/

[3] Derains Y., Schwartz, E.A, “A Guide to the ICC Rules of Arbitration” , Kluwer Law International Publications, 2005, pg. 2

[4] http://www.mondaq.com

[5] English and French are ICC’s two working languages.

[6] Derains Y., Schwartz, E.A, “A Guide to the ICC Rules of Arbitration” , Kluwer Law International Publications, 2005, pg. 6

[7] http://www.iccwbo.org/uploadedFiles/TimeCost_E.pdf

[8] http://www.iccwbo.org/uploadedFiles/TimeCost_E.pdf

[9] ICC arbitration carries out another peculiar procedural measure which is called scrutiny of the award by the Court. The scrutiny process is regulated by Article 33 of the Rules. Accordingly, before signing any award, the arbitral tribunal shall submit it in draft form to the Court. The Court may lay down modifications as to the form of the award and, without affecting the arbitral tribunal’s liberty of decision, may also draw attention to points of substance. No award shall be rendered by the arbitral tribunal until it has been approved by the Court as to its form.

[10] The Stockholm Chamber of Commerce [http://www.chamber.se/about-the-region.aspx] and Singapore International Arbitration Centre [http://www.siac.org.sg/ ] has been performing the emergency arbitration procedures as well.

[11] http://www.iccwbo.org/court/arbitration/id4199/index.html

[12] For detailed information regarding the problems in terms of  multi party arbitration: ESEN,E. “Uluslararası Ticari Tahkimde Tahkim AnlaÅŸmasının Üçüncü KiÅŸilere TeÅŸmili” Beta Yayınları, 2008

[13] http://www.ibanet.org/ENews_Archive/IBA_July_2008_ENews_ArbitrationMultipleLang.aspx

OIL MARKET LAW IN TURKEY

“A general overview on Oil Market Law in Turkey”

Att. Arzu ONGUR ERGAN[1]

1. Introduction

Nowadays, the oil sector is on a voyage of major change all over the world and in particular in the European Union. Turkey’s role in the transit of oil supplies to Europe from Russia, the Caspian region and the Middle East is increasingly important. Following the start of the Blue Stream, Baku-Tblisi-Ceyhan and on-going Nabucco pipeline projects, Turkey has become an integral part of the international oil and gas market. Turkey, as an energy corridor, has been following the recent developments in the sector, and making required laws and regulations in order to sustain the development of energy market, and make Turkish market attractive for both nationals and foreign investors.

In this respect, many local and international investors request to obtain more information as regards Turkish Oil Market Law. The main aim of this article is to ensure a brief overview on Oil Market Law in Turkey and accordingly to inform the readers concerning essentials of the legal structures such as the sources of oil market law, the type of oil market licenses, administrative procedures, administrative fines and sanctions,  the pricing conditions, expropriations, security of supply and  competition,

1. Development of the Oil Market Law in Turkey

The first legal framework of the Oil Market in Turkey was regulated by the Law numbered 726 and dated 1926. The Law provided a few provision as to oil exploration and operation; however, no provision as to transmission and distribution of oil was provided. In this respect, it was described by the doctrine as an insufficient law. In that period, oil market structure was totally state-orientated.  Turkey tried to develop the oil market by direct state activities until 1954. Although some limited success was obtained in that period, the importance of private entities and requirement of liberalization was recognized by the government in time.

Accordingly, in 1954, an updated Oil Market Law which had an innovative concept was brought into force. It provided right of entrance to the oil markets for both national and international private investors. In spite of innovative Law concept, the state intervention has been observed after the 1954 as well. However, by the effect of rapidly increasing oil demand, the state needed to take necessary measures in order to provide enough supply to the customers. Hence, as it observed in many contemporary jurisdictions, Turkey also preferred to apply liberal oil market model. Consequently, in 1994, both foreign companies and Turkish companies were permitted to operate in Turkish oil market, regardless whether 51% of their shares are owned by Turkish state or not.

      There are some important factual elements that are effective on legal structure of the energy market in Turkey. First of all, Turkey has a significantly important strategic-geographical position in terms of access to the energy sources. Secondly, by the accession process of EU, Turkey has amended its legislations in comply with EU Legislations. Thirdly, Turkey is an important partner of the international community that request quick adoption of global market requirements such as liberal and competitive oil market structure.

      By the effect of all these factors a new Oil Market Law numbered 5015[2] entered into force in 2003. [Hereinafter referred to as Oil Market Law] The general objective of this law is to obtain an oil market which is transparent, non-discriminatory, sustainable, secure, cost efficient, competitive and equitable.[3] As it is known, these features are significant indications not only for the oil market, but also for any types of markets. Therefore, these elements are crucial to obtain a well-functioning oil market and EU legislation aims to obtain an oil market with these features as well. The functions of Oil Market Law are to provide guidance, surveillance and supervision.

As a result of concentrate steps taken during the liberalization process the share of private sector in Oil refining and distribution activities has reached almost 100%.

III.      Constitutional Background Regarding the Regulation of Energy Markets

The Turkish Constitution puts forward general provisions concerning creation of well-functioning and competitive market structures which are applicable in the energy market as well. Accordingly, Article 167, 168 and Article 47/4 consist constitutional background of the energy market. According to the Article 167 of Turkish Constitution, the State has taken some measures concerning capital markets, credits, goods and services to obtain well-functioning and systematic markets.[4]

According to the Article 168 of Turkish Constitution, the natural sources are under the control of the state. The right of exploration and processing of natural resources are owned by the state; however, the state can transfer there rights to real and   legal persons for a defined time period. The state can regulate the conditions of these transfers by Law, and in the event of transfer of these rights, the state has the right to put these markets under surveillance and supervision.[5] According to the Article 47 of Turkish Constitution, the state defines the public services which shall be undertaken by private entities. In this case, the state can regulate the type of the services which has to be fulfilled under private contracts by real and legal persons.[6]

1. Energy Market Regulatory Authority

The Energy Market Regulatory Authority [hereinafter referred to as EMRA] is an independent regulatory authority with administrative and financial autonomy. It doesn’t have direct control of any public authorities as it has to be fully independent in terms of political effects.

EMRA was established on 19^th November 2001 by the Law numbered 4646 in Turkey. It regulates all energy markets which are electricity, natural gas, oil and LPG markets. The fundamental objective of EMRA is set forth in its founding documents as to ensure the development of financially sound and transparent energy markets operating in a competitive environment and the delivery of sufficient, good quality, low cost and environment-friendly energy to consumers and to ensure the autonomous regulation and supervision of these markets.

1. Oil Market Licenses in Turkey

License, issued by Energy Market Regulatory Board, is a certification that allows real or legal persons to display activities in the Oil market. Accordingly, there are 10 types of oil market licenses in Turkey which are refining license, processing license, lube oil production license, storage license, transmission license, eligible consumer license, bunker license, distributor license, transportation license and vendor license.

The regulations regarding licenses are governed by Article 3 of the Oil Market Law. In principle, any market player should grant the relative type of license before commencing activities. With the ratification of Oil Market Law in 2003, the following ten segments restructured as to-be licensed: Transportation of crude oil via domestic pipelines, refining, processing, lubricant production, storage, transportation of crude oil and Oil products via sea and railway, eligible customer status, bunker delivery, fuel distribution and fuel dealership.

The oil market licenses are grantable for maximum 49 years.[7] However, Energy Market Regulatory Board may decide that no license needs to be granted for some exceptional activities which are stated in Article 6 of Oil Market License Regulation as follows:

• Procedures on adding organic and inorganic additives for improving characteristics of oil;
• Blending procedures which comply with technical specifications and not providing any additional characteristics in terms of oil,
• It is not necessary to grant any transmission license for transportation activities to facilities/storages, which are owned by the individuals who do not provide services for third parties or directly purchase oil from refinery, via pipeline.[8]

Energy Market Regulatory Board has all the authorities concerning procedures and bases of licenses. Accordingly, it has authority to award, amend and cancel licenses.

Market players, who request a license, should apply to the Energy Market Regulatory Board with a written statement. During the application, the applicants should submit information and documents stipulated in the legislation. According to the Law, Private law legal persons to perform the activities specified within the scope of a license shall be subject to the provisions of Turkish Commercial Code. [9]

In Turkish legislation, the foreign companies who display activities in Turkey are subject to the same legal status as the Turkish companies. Hence, there is no difference for foreign companies in the process of license application.

EMRA examines license application regarding the principals and measures stated in Oil Market License Regulation, in a multidimensional manner. It shall assess the technology of the applicant for entrance to the market, quality, and security as well as sustainability of the service and the company structure of the applicant. All applications to the administration should be completed within 60 days in any case that is not limited with energy market.[10] Accordingly, license applications should be concluded within 60 days at the latest.[11] If the administrative authority does not conclude the application regardless, weather in a positive manner or not, the applicant shall have the right to apply to the relevant court.[12]If there is any absence of required documentation, the applicant shall have an additional period for completion of the documents within 10 days at the latest.[13] If the applicant fails to complete the missing documents, the application shall be null and void.[14]

The applicant shall pay 1% of the total amount of license fee according to the type of license required.[15]

The following points should be stated in the license document: Name of the real or legal person granted the right, type of activity, facility type, geographic position, technology, quantities and duration of the license.

1. Basic Rights and Liabilities of the Licensee

Basic rights and liabilities of the licensee are regulated in Article 4 of the Oil Market Law. Accordingly, the licensee should avoid any kind of activity that will result in malicious intent or unsafe activities. Also, the licensee shall take any necessary measures to eliminate any undesirable situation. Briefly, the licensee shall comply with the legislation and prevent environmental risks. At this point, the law emphasizes two important issues. The first of these issues is the malicious intent and the second is unsafe activities. In case of infringement of these issues, administrative sanctions and fines can be imposed.

The licensee shall follow the legal procedures and additional requirements as to license obligations that are regulated in the Oil Market Regulations. In practice especially foreign investors faces some legal problems during their activities due to lack of knowledge or misinformation as regards maintenance conditions of the license. Therefore, it is necessary to take into account that the licensee is obliged to follow up regularly his license conditions and to receive relative permissions and extensions during their activities in Turkey. Furthermore, the licensee must inform relative public authorities’ concerning the ordinary course of their activities as regards their licenses.

As to expiration licenses, if the period given for license is expired, the license becomes null and void. Secondly, in the case of infringement of the legislation by the licensee, EMRA may cancel the license. Thirdly, in the case of inefficient usage of eligible consumer license, the license can be cancelled as well. Last but not least, the license will be cancelled if the contract between the vendor and the distributor expires and another contract with a new distributor is not concluded within 3 months by the vendor.

• Administrative Fines and Sanctions

The penalties and administrative sanctions are stipulated in Article 19 of the Law. There are three types of administrative fines. If a market player infringes the market regulation, the market player shall be sanctioned to pay administrative fine that ranges between 62.000TL – 740.000TL. EMRA is empowered to de-regulate and increase the amount of the fines annually.

Besides mentioned fines, the Energy Market Regulatory Board has the authority to impose administrative sanctions to said market players. These administrative sanctions are regulated in Article 20 of the Oil Market Law. Accordingly, there are two main types of administrative sanctions. Firstly, the Board can suspend the activities temporarily between 30 to 180 days, and secondly, the Energy Board can terminate the activities permanently. Furthermore, Article 274 of Turkish Criminal Code is applicable for market players if necessary. In case of repetition of the infringement for two subsequent years, the Board may double the fines.

In addition, if the Energy Board realizes that contraband product is used or sold, or submission of false statement during license application period, the Board may cancel the license. In the case of vendors, the law maker has provided some exceptional regulations. For example, administrative sanctions to be applied for vendors shall be one fifth of regular fines. Certain administrative sanctions are also regulated for vendors in accordance with Article 20 of the Oil Market Law.

Under normal circumstances, the Board shall give 30 days to the relevant market players to defend themselves. However, in two cases, administrative sanctions can be applied without defense statement of the relevant market players. Firstly, if any illegal products are determined in the process of regular auditing by the Board during routine controls; and secondly, maintaining market activities without license.

Relevant market players may bring a lawsuit against the decision taken by the Board. The Law stipulates that the Council of State shall act as a Court of First Instance for these types of energy cases. Normally, the Council of State is a High Court in accordance with Turkish Administrative Law; however, taking into account the specific feature and technical dimension of energy cases, the Council of State is defined as a Court of First Instance. The Council of State has to resolve these kinds of cases as a matter of urgency.

• Pricing

The pricing is a very important issue on oil markets. The Article 10 of the Oil Market Law regulates pricing conditions in the oil markets.  In principle, the market price is self-defined according to supply and demand in oil markets, however, the State intends to intervene pricing for certain reasons. Firstly, the State aims to support national raw Oil by this intervention. Secondly, the State is interested in pricing due to high indirect taxes on oil products. Also, the Energy Board has the right and authority to intervene in pricing if infringement of Competition Law no. 4054 with regards to pricing is determined.

1. Expropriation

Another important subject is expropriation concerning oil market activities. The private entities may need some lands, estates and buildings during their activities in the market. The Oil Market Law provides an exceptional right to private entities in terms of their requirements. The State can expropriate the needed lands, estates and buildings in favor of private enterprise. In such a case, the procedure and methods stipulated in Expropriation Law no. 2942 is applicable to private entities. In that case, right of usage of expropriated immovable shall be awarded to the private entity and the right of ownership shall remain in the possession of the State.

1. Security of Supply

Security of supply becomes a significant issue as dependence on foreign sources in Turkey is too high. Also, it is important for the national security reasons. Therefore, 90 days of oil stock requirement is stipulated in Article 16 of the Oil Market Law. The main reason of this regulation is firstly to provide sustainability in the market and prevention of crisis; secondly, to comply with EU oil stock Regulation thirdly, to fulfill requirements of International Energy Program Agreement, and last but not the least, to protect the market after the liberalization and privatization process.

The second important issue that assures security of supply is the national marker application. National marker is a sign that ensures to identify the products put on the market legally within the country.[16] National marker indicates that the product is legally produced or imported in Turkey, and it is defined by EMRA according to National Marker Implementation on Oil Market Regulation. As it is commonly known, the oil products directly enter into the market from refineries or indirectly from customs. In both cases, the product put on the market is significantly important in terms of quality, security and tax evasion.

1. Competition

When it comes to competition in the oil market, the general conditions concerning competition is stipulated in the Act on the Protection of Competition in Turkey. This Law applies within the oil market as well. The Competition Regulatory Board has an authority to intervene the market structure in the oil market as well. Three important situations are controlled by Competition Regulatory Board; first, agreements which considerably prevent, restrict and distort competition, second abuse of dominant position, and lastly, mergers and accusations.

Referring to the competition in the oil market, there are two crucial authorities which are Energy Market Regulatory Board and Competition Regularity Board. In compare with the Competition Board, the Energy Board has a limited authority concerning providing competition in oil market.

XII.     Conclusion

            Turkish Oil Market has improved in the liberal manner since the enactment of Oil Market Law dated 2003, and the legal structure is harmonized with EU legislations as of 2011. Turkish government transferred its main role to the private sector in oil market activities; and established an independent authority named Energy Market Regulatory Authority in order to protect and develop the transparent, non-discriminatory, sustainable, and secure, cost efficient, competitive and equitable character of the oil market. In oil sector, the foreign companies who display activities in Turkey are subject to the same legal status as the Turkish companies. Hence, there is no difference for foreign companies in the process of license application. The authorized administration regarding the licenses is EMRA. The actors of the oil market and their activities are examined by EMRA in order to ensure that they act in compliance with relevant regulations. In case of infringement of these regulations, particularly those regarding the malicious intent and unsafe activities, Energy Market Regulatory Board is authorized to impose administrative fines and sanctions. Protection of competition is also of the essence in oil market, and the related authorized administration is Turkish Competition Authority. 

Consequently, Turkey has been following the recent developments in the oil market law, and making required laws and regulations in order to sustain the development of energy market, and make Turkish market attractive for nationals and foreign investors.

Bibliography:

1. ASLAN, Yılmaz, “Enerji Hukuku, Cilt II: Petrol Piyasasında Rekabet ve Regülasyon”, Ankara, 2008
2. GÖZÜBÜYÜK, Åžeref,-DINÇER, Güven, “Ä°dari Yargılama Usulü Hukuku”, Ankara,1996
3. Turkish Energy Market: An Investor’s Guide 2011 http://www.epdk.org.tr/documents/10157/1bda767e-9e95-4030-8e49-baabbb4af698
4. The Constitution of Republic of Turkey
5. Oil Market Law [No:5015 and dated 2003]
6. Oil Market License Regulation [17 June 2004 dated and No:25495 Official Journal]
7. Code of Administrative Procedure [No: 2577 and dated 1982]
8. National Marker Implementation on Oil Market Regulation [12 April 2006 dated and No:26137 Official Journal]
9. Expropriation Law [No: 2942 and dated 1983]
10. Turkish Criminal Code [No: 5237 and dated 2005]
11. Turkish Commercial Code [No: 6762 and dated 1956]
12. The Act on the Protection of Competition [No: 5054 and dated 1994]

[1] Attorney Arzu ONGUR ERGAN L.LM registered to Ankara Bar Association. More information about the author is available on: http:// www.ongurergan.av.tr

[2] Published in the Official Journal dated 20.12.2001 and numbered 25322

[3] Oil Market Law, Article 1:The objective of this Law is to regulate the guidance, surveillance and supervision activities in order to ensure the transparent, non-discriminatory and stable performance of market activities pertaining to the delivery of petroleum supplied from domestic and foreign resources to consumers, directly or after processing, in a reliable, cost-effective manner within a competitive environment...

[4] The Constitution of Republic of Turkey, Article 167: “The state shall take measures to ensure and promote the sound, orderly functioning of the money, credit, capital, goods and services markets; and shall prevent the formation, in practice or by agreement, of monopolies and cartels in the markets...”

[5] The Constitution of Republic of Turkey, Article 168: “Natural wealth and resources shall be placed under the control of, and put at the disposal of the state. The right to explore and exploit resources belongs to the state. The state may delegate this right to individuals or public corporations for specific periods. Of the natural wealth and resources, those to be explored and exploited by the state in partnership with individuals or public corporations, and those to be directly explored and exploited by individuals or public corporations shall be subject to the explicit permission of the law. The conditions to be observed in such cases by individuals and public corporations, the procedure and principles governing supervision and control by the state, and the sanctions to be applied shall be prescribed by law.”

[6] The Constitution of Republic of Turkey, Article 47, para.4: “Those investments and services carried out by the State, State Economic Enterprises and other public corporate bodies which could be performed by or delegated to real or corporate bodies through private law contracts shall be determined by law.”

[7]  Oil Market License Regulation, Article 13

[8]  Oil Market License Regulation, Article 6

[9]  Oil Market Law, Article 3

[10] GÖZÜBÜYÜK, Åžeref,-DINÇER, Güven, “Ä°dari Yargılama Usulü Hukuku”, Ankara,1996 p.14

[11] Oil Market License Regulation, published in the Official Journal  dated  17.06.2004 and Numbered 25495, Article 10

[12] Code of Administrative Procedure, Article 10

[13] Oil Market License Regulation, Article 7, para. 9

[14] Oil Market License Regulation, Article 7, para. 10

[15] Oil Market License Regulation, Article 8

[16] ASLAN, Yılmaz, “Enerji Hukuku, Cilt II: Petrol Piyasasında Rekabet ve Regülasyon”, Ankara, 2008  p.89

PUBLIC TENDERS LAW IN TURKEY

BY ATTORNEY ARZU ONGUR L.LM

ONGUR&PARTNERS INTERNATIONAL LAW FIRM

arzuongur@gmail.com  www.ongurpartners.com

INTRODUCTION

The public tenders became an  significant market,  for both national and international service providers in term of their scale and attractively in Turkey. The necessity of technical knowledge and the public service character of the business have given rise to the search of foreign participants as well. However, it is fact that for a foreign contractor, the laws and procedures of a different country is always complex issue. Therefore the necessity of providing some brief  information emerges regarding the general terms and conditions of  public tenders in Turkey.

Currently there are two laws in force which regulates public tender namely 2886 numbered State Tender Law and 4734 numbered Public Tender Law. The Law numbered 4734 entered into force at the date of 01.01.2003 and abrogated some articles of the Law numbered 2886. On the other hand these two laws are different in terms of their scope. Below, in scope of these two laws public tenders will be discussed generally and with their basic characteristics. Additionally the differences between these two laws numbered 2886 and 4734 will be analyzed.

Pending public tender announcements can be found from Public Administration Authoritiy’s web page at www.ihale.gov.tr 

THE PROCEDURE OF JOINING PUBLIC TENDERS IN SCOPE OF THE LAW NUMBERED 4734

The Law numbered 4734 has entered into force on 01.01.2003 as a result of EU harmonization process. The Law is very large in scope both in manner of the business type and the public administration which issues the tender. The scope of the law has defined under the Art 2 as tenders made by public administrations for procurement of goods, services and construction works. However there are also some exclusions regulated under the Art.3 of the Law; for example tender of tools, arms, military materials, equipments and systems for national defense, security and intelligence and tender of goods, services or works which are to be realized with foreign financing pursuant to international agreements.

The Art.2 also regulates the tenders of which public administrations covered by the Law. For example, according to the Art.2 paragraph 2, tenders made by public administrations in the scope of general budget, public economic enterprises or social security institutions are dependent on the Law numbered 4734.

Differently from the Law numbered 2886, 4734 has made it difficult for public administrations to issue tenders. According to the Art.5 of the Law numbered 4734 the procurement proceedings shall not be initiated unless there is a sufficient budget allocation. There are also some other principals regulated under this article of which its text indicated below:

Article 5- In tenders to be conducted in accordance with this Law, the contracting authorities are liable for ensuring transparency, competition, equal treatment, reliability, confidentiality, public supervision, and fulfillment of needs appropriately, promptly, and efficient use of resources.

Unless there is an acceptable natural connection between them purchase of goods, services and works cannot be consolidated in the same procurement.

Procurement of goods, services or works cannot be divided into lots with the intention of avoiding threshold values.

For the procurements to be held in accordance with this Law, the principal procurement methods are open and restricted procedures. The other methods may be used under the special conditions set out in the Law.

The procurement proceedings shall not be initiated unless there is a sufficient budget allocation.

Where the related legislation requires an Environmental Impact Assessment (EIA) Report for a works project, a positive EIA report must be obtained before the initiation of procurement proceedings. However, in works procurements to be made urgently due to natural disasters, EIA report shall not be asked.

As it is seen above in the text of the Art.5 paragraph 3, the Law numbered 4734 has regulated threshold values for public tenders. These threshold values will be applied in scope of the articles 13 and 63 of the Law. According to the Art.13 “ In procurements to be conducted by restricted procedure whose estimated costs equal to or exceeding the threshold values, it is compulsory to provide a letter of invitation to tender, not less than forty days in advance of the deadline for the submission of tenders to candidates that are qualified as a result of the pre-qualification proceedings”. To the Art.63 “The contracting authorities may insert some provisions to the tender documents with regard to; in procurement of services and works, a price advantage would apply to domestic tenderers up to 15%, and in procurement of goods, a price advantage up to 15 %, would apply to domestic tenderers who offer products which are accepted as domestic products by the Authority by taking the opinions of Ministry of Industry and Trade and of other relevant organizations and institutions, and in cases where the estimated costs are below the threshold values, only domestic tenderers can participate in procurements. In order to be deemed as domestic tenderers, all partners of the joint ventures must be domestic tenderers”. Thus with this provisions the Law brings some price advantages up to 15% for domestic tenderers and implies that in cases where the estimated costs are below threshold values, only domestic tenderers can participate in procurements. Additionally for a foreign tenderer which is part of a joint venture it is not possible to be deemed as a domestic tenderer.

The Law numbered 4734 has defined four different tender procedures which are open tender procedure, restricted tender procedure, negotiated tender and direct supply procedure. Between all these procedures “direct supply” possesses importance with being a procedure newly regulated by the Law numbered 4734 and its similarity to bargain sale contracts. In this procedure no announcement is made before the tender and no guarantee is asked to the bids.

The procedure of joining to the public tenders is regulated in between the Articles 30-35. According to the Art 30 “The documents required for joining tender including letter of tender and bid bond have to be put in an envelope. The name, surname, commercial name and correspondence address, the subject of the tender offer and the address of the administration of which tender made by have to be written on the envelope. The adherend part of the envelope has to be signed and sealed by the bidder. Letter of tender has to be signed and in writing. In the letter it should be indicated that the tender document is read and accepted. In addition, the bid price should be written in both number and writing, there shouldn’t be any defacement, erasure or correction on it and it should be signed by authorized people with their names, surnames and commercial names. In good procurement tenders, if it is indicated on the tender document that an alternative bid can be gave, the same procedures will be also applied to that. After completing these procedures tender offer will be given until tender hour to the administration in exchange of a rotation number”. According to the Art.40 of the Law numbered 4734 after receiving the offers, public administration starts to review the offers in accordance with Articles 37 and 38 and the tender is left to the bidder who has gave “the most advantageous bid economically”. The measure of “the most advantageous bid economically” has taken place newly in the Law numbered 4734.

The result of the tender will be declared to the person whose bid is accepted and to the other bidders within three days after the approval of tendering official in accordance with the Art.41.

The issue of contract is regulated under the Art.42. Within ten days after the conclusion of the period in the Art.41 (three days), the person whose bid is accepted will be invited to sign the contract in condition of giving the contract bond. To “foreign bidders” twelve days more will be given.

THE PROCEDURE OF JOINING PUBLIC TENDERS IN SCOPE OF THE LAW NUMBERED 2886

Effective as of the date that the Law numbered 4734 has entered into force the provisions of the State Tender Law numbered 2886 are not applicable in the public tenders which are within the scope of Law No. 4734. The subject of tenders that are in scope of the Law numbered 2886 are purchase, sale, service, building, rent, barter, establishment of incorporeal rights on property and transportation defined as under the Art1. Again the same Article regulates the administrations of which its tenders are dependent on the Law as, the administrations in scope of the general budget, annexed budget administrations, special administrations and municipals.

According to the Art.2 paragraph 4 of the Law numbered 2886 “the tenders are issued in the seasons when the most reasonable prices can be achieved, unless needed otherwise”. This provision makes it easier for public administrations to issue tenders.

There are five procedures of tender regulated in the Law 2886 as sealed bidding, restricted tender procedure, open tender procedure, negotiated tender procedure, competition procedure.

According to the Art.16 bidders should give the documents completely requested in the tender specifications and declare an address in Turkey for notification. Differently from the Law numbered 4734, the Law numbered 2886 regulated different application procedures for each tender procedure.

1. Joining Sealed Bidding Tenders

According to the Art.37 in the sealed bidding offers should be given written in an envelope. On the envelope the bidder’s name, surname and correspondence address should be written as well. The adhered part of the envelope should be signed and sealed by the bidder. This envelope should be put in another envelope with the letter of guarantee and other requested documents. On the second envelope the name, surname, address of the bidder and the subject of the offer should be written. The letter of offer should be signed by the bidder and he/she should write that the tender specifications are read and accepted by him/herself. Offers which are not in conformance with these issues or have defacement, erasure or correction on it are not accepted valid. According to the Art.38 the offers should have given until the hour of tender in exchange of a rotation number. After making a review in accordance with the Art.40 public administration gives one of the decisions partaking in the Art.41. and declares it to those present.

1. Restricted Tender Procedure

It is regulated under the Art.44 and it is just a procedure applied in certain tenders existing in Art.44 as plane, warship, armament, airports, highways, railways etc. In this procedure the tender can be made between minimum three bidders who are accepted technically competent and powerful by public administration. According to the same Article in this procedure the names of the bidders should be declared to the regarding Minister and should be approved by him/her. It is not obligated to make an announcement in this procedure. If appropriate the invitation of the bidders should be made notwithstanding the Art 17,18, 19 with a pre selection announcement.

1. Open Tender Procedure

This procedure is regulated under the Art. between 45 and 49. According to the Art 45, this procedure can be applied in tenders regulated under the Art.1 of which its amount is under the amount determined by the General Budget Law, each year. In this procedure tender offers are made orally in front of bidding commission, also bidders can send their offers with an envelope in conformance with provisions in Art.37. After the review of required documents by commission president, the bidders accepted to join the tender are declared and in pursuit of it the bidders accepted are invited to sign tender specifications and declare their bids orally. In the end of the declaration of bids the tender concluded accordingly to the Art.41.

1. Negotiated Tender Procedure

Negotiated tender procedure is regulated under the Articles 50 and 51 of the Law numbered 2886. According to the Art. 50 taking the offers do not depend on a certain form. In this procedure tenders can be made by taking oral and written offers and by agreeing on a tender price. In the decision of tender, the form of offers, the tender price and the issue of why the awarded party is preferred have to be written. In the Art.51 the subjects of negotiated tender procedure are regulated as clauses “(a) to (p)”. For the subjects existing in the clauses (a), (b), (c), (d), (i), (l) and (p) it is not obligated to arrange the tender specifications document, to get a guarantee and to make a contract. For the subjects existing in the clauses (i), (l) and (p) the assent of the Ministry of Finance is required.

1. Competition Procedure

If appropriate public administrations can make done works regarding etudes, plans, projects and fine arts, with a competition in accordance with the Art.52 of the Law numbered 2886. To the same Article public administrations arrange regulations regarding the works existing in their establishment law. Regulations regarding an architecture or a construction project arranged by Ministry of Public Works.

All the contracts made in accordance with these procedures have to be signed by each public administration’s authorizing officer.

The last issue about the Law numbered 2886 is the Art.82. According to the article, works will be made in scope of an International Treaty and paid by foreign states or International Organizations will depend on special law, legal decision and treaty’s provisions. Thus if there is a work in question of an International Treaty and paid by foreign states, the special provisions about it will be applied.

-CONCLUSION-

After the entrance in force of the Law numbered 4734, the provisions of the Law numbered 2886 became non applicable which are in scope of the Law numbered 4734. The Law numbered 4734 aims to harmonize public tender legislation with the EU Law. However it is usually criticized in manner of making differences between foreign and local tenderers.

Towards the explanations made above, implementation of these two Laws (numbered 4734 and 2886) depends on the subject of the tender and of which administration is the tender made by. They have also differences in terms of tender procedures. Accordingly to the scope of work, the procedures given above can be followed by the bidders.

  HOW TO INVEST IN TURKEY?

Attorney  ARZU ONGUR L.LM

Top 10 Legal questions about Foreign Direct Investments in Turkey…[1]

1. How does legal framework of the FDI regulated under the Turkish Law?

The legal framework of the Foreign Direct Investments are regulated by the Law numbered 4875 and dated 17.06.2003 (hereinafter “no. and dd.”). This law is structured as a legal guideline for investors, which consists of 7 Articles and regulates general rules and principles about FDI. Additionally, the “Mutual Protection and Promotion of Investments Agreements” (hereinafter “MPPI) are applicable to the Foreign Direct Investments. Turkey has signed MPPI agreements with 80 countries and 64 of these agreements entered into force.

1. How does “Foreign Direct Investors” and “Foreign Direct Investments” defined by Turkish Law?

In a brief definition, foreign investment can be defined as the transfer of movable and immovable assets from one country to another for the profit of multinational companies under partial or complete supervision of asset owners by means of contributing welfare of the invested country.

The concept of foreign investors classified into two groups in the Article 2 of FDI Law. The first group consists of real persons who possess foreign nationality and Turkish nationals who are residents abroad. The second group is foreign legal entities established under the laws of foreign countries and international institutions.

In Paragraph (b) of Article 2 of Law no. 4875 regarding foreign direct investment, the concept of foreign direct investment is classified under two main topics: instruments that are transferred from abroad and instruments that are provided by domestic market.

Instruments that are transferred from abroad are defined as follows:

• Cash capital in the form of convertible money that is bought and sold by Central Bank of Republic of Turkey (hereinafter “Republic of Turkey” shall be referred as “TR”),
• Company securities (with the exception of Government bonds)
• Machinery and equipment
• Industrial and property rights.

Instruments that are provided domestically are defined as follows:

• Reinvested earnings, revenues, financial claims, or any other investment-related rights of financial value,
• Through economic values such as rights regarding the exploration and extraction of natural resources;

1. Establishment of a new company or a branch,
2. To participate in a current company using acquisition of shares outside securities stock markets or acquisition from securities stock markets that provides at least 10% share rate or voting rights at the same rate.

III.  What are the fundamental principles that Foreign Investors shall be subject in Turkey?

The fundamental principles, which foreign investors shall be subject to, are regulated under the title of “Principles Regarding Foreign Direct Investments” in Article 3 of Law no. 4875.

1. Freedom of investment and national treatment principle:

According to sub-paragraph (a) of Article 3 of Law no. 4875, firstly the freedom of investment and principles of equal treatment are regulated. Accordingly, unless otherwise stipulated by international agreements and provisions of specific laws, foreign investors are free to invest directly in Turkey, and they are subject to equal treatment with domestic investors.

2. Expropriation and nationalization restriction:

In the regulations regarding expropriation and nationalization, it is stipulated in sub-paragraph (b) of Article 3 of Law no. 4875 that the direct foreign investments cannot be expropriated and nationalized unless required by the public interest and their considerations are paid in accordance with the current legislation. With the regulation included in the Law, it is assured that the general regulations and principles on expropriation and nationalization specified in Articles 46 and 47 of the Constitution of Republic of Turkey are also applied to foreign investments without exception.

3. The principle of free transfer:

Another principle, stated in sub-paragraph (c) of Article 3 of Law no. 4875, is the principle of free transfer. In line with this principle, foreign investors can freely transfer the followings abroad through banks and special financial institutions: the considerations of net profit, dividend, sale, liquidation and indemnity; amounts arising from license, management and similar agreements; and foreign credit capital and interest payments arising from their business and activities within Turkey.

1. Regulations on the principle of access to real estate:

The regulations concerning access to real estate in Turkey can classify into 3 categories.

1. a) Regulation on foreign real persons:
2. b) Regulation on Foreign Companies outside the Context of FDI Law no. 4875:
3. c) For companies with Foreign Direct Investor status under Law no.4875;

In paragraph (d) of Article 3 of Law no. 4875, freedom of access to real estate was granted for foreign investors. Also the condition of access to real estates regulated under Deed Law no. 2644, Article 35.  The legal and de facto conditions are taken as basis for the determination of the reciprocity. According to these provisions, in the context of real estate acquisition, it is essential that where land property right is not entitled to the citizens of a country, foreign state entities to the citizens of the Republic of Turkey the same rights that it entitles to its citizens. It is a fact that ; after the decision of Constitutional Court regarding the real estate access it should

5. Principles to be applied for resolution of disputes:

It is stipulated that one can resort to national or international arbitration or other dispute settlement methods besides recourse to appointed and authorized courts for the regulation drawn up for the resolution of disputes of a foreign nature and disputes arising from investment contracts subject to private law as well as investment disputes arising from public service privilege stipulations and agreements between foreign investors and administration, provided that the conditions specified in the relevant legislation occur and the parties mutually agree.

6. Value assessment of non-cash capital:

Another principle concerning the foreign investments is about value assessment of non-cash capital. The value assessment of non-cash capital is done within the scope of the provisions of Turkish Commercial Law. In case the stocks and bonds of companies established in foreign countries are used as investment instruments, the assessments of authorities entitled for the value assessment in accordance with the legislation of country of origin or experts assigned by courts of country of origin or international assessment institutions are taken as basis.

7. Employment of foreign personnel:

In case of employment of foreign personnel, the work permits for the personnel with foreign nationalities to be employed at companies, branches or organizations that have been established within the scope of Law no. 4875 are granted by Ministry of Labor and Social Security. More information on this subject shall be addressed in the following sections.

The last principle regarding foreign investments that is included in the Law is about liaison offices. According to this principle, The Undersecretaries of Treasury is authorized to permit foreign companies that are established under the laws of foreign countries to open liaison offices, provided that they do not engage in commercial activities in Turkey.

1. Which company types are commonly used in Turkey?

According to Article 9 of Implementation Regulation for Foreign Direct Investments Law which has come into force by being published in Official Gazette no. 25205 and dd. 20.08.2003, the companies which can be established or affiliated to by foreign investors are the companies stipulated in TCL (Commercial Code) and unincorporated companies stipulated in Obligations Law[2].

The partnerships which have been established by contractual agreements under names such as incorporated partnership consortium, business partnership, joint venture and partnerships that do not bear the specific qualities of the companies stipulated in TCL are deemed as unincorporated companies as far as the application of the Law is concerned. The Joined-Stock-Company and Limited Liability Partnership are the most commonly used company types in Turkey.

A Joint-Stock-Company is a commercial company which is founded by at least five people to deal with a particular economical subject and purpose through a contract under a title and whose capital stock is stated and divided into shares, and which is liable for its debts only with its amount of assets, limited with the capital that the partners subscribed liability, has legal identity and limited capacity.[3] Joint-Stock-Companies are stipulated by Articles 269 etc. of TCL.

A “Limited Liability Company is a company established by two or more persons, real or legal, under a commercial title, the liability of the partners of which is limited with the capital they have undertaken to provide and the capital stock of which is certain.”According to Article 504 of TCL, the number of partners in a limited liability company cannot be less than two and more than fifty.

1. How do legal conditions regulated concerning mergers and acquisition under Turkish Law?

According to Article 146/1 of TCL it is defined as follows: “Merger is the establishment of a new commercial company by combination of two or more commercial companies or accession of one or more companies to another commercial company.” If we are to describe merger in more detail:

“By legal means, a merger is the transfer of the assets of one or more commercial partnerships to one of the partnerships or to a newly incorporated partnership, without liquidation, either automatically or through full subrogation, and thereby merging their assets and automatic obtainment of partnership shares as the consideration of the assets past by the partners of the dissolved partnership in accordance with a calculated exchange rate.”[4]

There are two types of mergers by using the definition of merger. The first type is merger by way of new establishment and the second type is merger by way of transfer.

1. How does legal procedure regulated for Foreign Direct Investors to attribute the privatization process in Turkey?

In Turkey, legal framework regarding privatizations is regulated by Law on Privatization no. 4046 and dd.24.11.1994. Within the scope of the Law, High Board of Privatization, Directorate of Privatization Administration, relevant administrative and organic structure is regulated in detail for carrying out privatization activities in Turkey. In Article 18 of Law no. 4046, methods of privatization are defined. Accordingly, privatizations should be implemented by following ways:

• Sales
• Rent
• Transfer of operating rights
• Establishment of in corporeal rights on property
• Revenue sharing model

In practice, it is seen that foreign investments in Turkey are mainly made by the methods of affiliate to privatization or merger and takeover. There is a regulation for foreigners to affiliate to privatization in Article 14 of the Law no. 4046. The followings are stated in this Article: “Sales and transfer of real estate to foreign real persons and legal entities, within the framework of implementation of privatization according to the provisions of this Law, are subject to the provisions of applicable legislation by taking principle of reciprocity into consideration.”

In Turkey, it is seen that eccentric regulations are made for foreign investors in implementations of privatization which have close relation with national security and strategic public service from time to time. High Board of Privatization determines the procedures and bases of privatization of establishments subject to privatization program; and decisions for this purpose are implemented by Directorate of Privatization Administration. Hence, we believe that it would be useful for foreigners, who are intending to invest in Turkey by affiliate to privatizations, to follow up decisions and announcements made by High Board of Privatization and Directorate of Privatization Administration[5].

VII. How does working permit issue for foreigners regulated in Turkish Law?

With a view to the legislation in Turkey, it is seen that foreigners can have same rights and responsibilities that are enabled to its own citizens. In the same legislation, however, it is stated that these rights and responsibilities can be limited. The rights which are stipulated in TR Constitution under the title of “Fundamental Rights and Responsibilities” applied to citizens as well as foreigners equally. As it is stipulated in Article 16 of TR Constitution, however, these rights and responsibilities for foreigners can be limited in accordance with international law. In the legislation in force in Turkey, these limitations are especially stand out for the issues concerning employment of foreign personnel.

Work permits of foreigners, which were regulated by different laws and executive orders, are endeavored to be collected under the same umbrella by Law no. 4817 put into effect. Since the permissions issued by different institutions cause unsound comments about foreign employees and inability of supervision of these workers in Turkey, Law on Work Permits For Foreigners has been prepared for the purposes of preventing unfair competition and unemployment in Turkey, bringing the unrecorded earnings in our economy and because of the necessity of concentrating work permits at a single center in order to fight against employment of illegal workers in terms of economical status and labor market in Turkey as well as to fulfill our international commitments.[6]

VIII.                 What type of tax practice applicable in Turkey?

1. Corporate Income Tax:
2. Personal Income Tax:
3. Value Added Tax (VAT):
4. Private Consumption Tax (PCT):
5. Banking and Insurance Transactions Tax:
6. Stamp Duty:
7. Legacy and Inheritance Tax:
8. Estate Tax:

1. Which regulations on exemptions and incentives are applicable to the Foreign Direct Investors in Turkey?

The incentives provided by the government have contributed greatly to the development of private sector in Turkey.[7] There are some attractive incentives in Turkey concerning Foreign Direct Investments such as interest support, tax exemptions, investment funds, technology development scenes etc. Additionally, Turkey has bilateral prevention of double taxation agreement with 68 countries. Also various exemptions and incentives can be benefited from depending on the region to be invested in. If we are to examine these regions separately;

1. Advantages of Investing in Free Zones: The legal framework of free zones in Turkey regulated by Law of Free Zones numbered 3218.

• Exemption of Corporate Tax: The companies in the free zone are exempted from the corporate tax they are obliged to pay in Turkey at the end of the period.
• Income Tax Exemption: The revenues and earnings of real and legal persons as a result of their operations conducted in free zones are not subject to Income Tax.
• Withholding Payments exemptions: Since income tax for the staff is not paid a cheaper labor at the rate of 25-40 percent can be maintained.
• VAT Exemptions: Since the goods and services provided to the free zone are deemed as exports such goods and services are exempted from value added tax.
• Customs Tax exemption: Free Zones are deemed to be outside of customs line and the goods entering the zone are exempted from the customs tax.
• Additionally the operations in the Free Zones are exempted from all kinds of duty, fee, fund, bank handling taxes.

2. Supports for Technology Development Regions:

The support for technology development regions regulated by Law No. 4691.Supports for Technology Development Regions can be listed as income and corporation tax exemptions for the revenues obtained from software and R&D based production, VAT exemption for the delivery of some of the products produced in the region; income tax exemption for the salaries of the staff working in the region; exemptions regarding the revenues obtained from software and R&D based production.

3. Advantages Granted to Developing Regions:

Some advantages such as income tax stoppage support, insurance premium support are provided to people who shall invest in such regions.

There are some sectoral, provisional and project based incentives to be introduced, which are in the process of preparation, soon in Turkey. That is why we recommend investors to check out relevant regulations in the actual term of investment.

1. Is Turkish FDI Law system is convenient and compatible with international standards for Foreign Direct Investors?

It is a fact that the process of Turkey’s accession to EU has deeply affected Turkish legal system, and crucial amendments are made since 2000. These revisions and amendments are concluded in the field of FDI Law as well. In particular, the new principles which are introduced by new FDI Law such as freedom of investment and national treatment, access to real estate, expropriation and nationalization restrictions, applicability of ADR and arbitration etc. are very effective and positive provisions to attract and protect Foreign Direct Investors in Turkey. Moreover, newly structured public institutions are mindful and fruitful to support investors during the bureaucratic term of investment. As a result of new legal system and efforts of administrative organizations, quality and quantity of FDI has been rapidly increasing in Turkey since 2000. The actual situation and economical/statistical indicators are available at: http://www.invest.gov.tr

[1] This paper is prepared for the purpose of informing our web users. ONGUR ERGAN Law & Consulting Office does not recommend to users to take decisions and/or to start actions based on this study, and we do not accept any responsibility for these kinds of actions.

[2] PULAŞLI, H. ; Şirketler Hukuku, 6. Bası, Adana, 2007, s. 188.

[3] PULAŞLI, H. ; Şirketler Hukuku, 6. Basım, Adana, 2007, s. 188.

[4] POROY/TEKINALP/ÇAMOÄžLU; Ortaklıklar ve Kooperatif Hukuku; Istanbul 2003; 9. Bası; s. 108.

[5] Updated regulations regarding this issue can be followed at  http://www.oib.gov.tr.

[6] http://www.debud.org/Html/dergi/24/halisk.pdf

[7]http://www.muhasebenet.net/mh_1605_turkiye%20de%20uygulanan%20tesvikler%20ve%20yabanci%20sermaye.html

NATURAL GAS MARKET LAW IN TURKEY

“A general overview on Natural Gas Market Law in Turkey”

Att. Arzu ONGUR[1]

1. Introduction

Nowadays, energy is considered as one of the most important measures of enhancement of welfare and sustainable development. Historical experiences indicate that, attaining sustainable energy and growth in economy are tightly linked to each other.[2] Turkey’s role in the transit of gas is increasingly important due to the fact that it is surrounded by major gas-exporting countries in the Middle East and Central Asia. Following the start of the Blue Stream, Baku-Tblisi-Erzurum and on-going Nabucco pipeline projects, Turkey has become an integral part of the international natural gas market. Turkey, as an energy corridor, has been following the recent developments in the sector, and making required laws and regulations in order to sustain the development of energy market, and make Turkish market attractive for both national and foreign investors.

In this respect, many local and international investors request to obtain more information as regards Turkish Natural Gas Market Law. The main aim of this article is to ensure a brief overview on Gas Market Law in Turkey and accordingly to inform the readers concerning essentials of the legal structures such as the sources of natural gas market law, the type of natural gas market licenses, administrative procedures, administrative fines and sanctions and competition.

1. Development of Natural Gas Market Law in Turkey

The legal framework of the Natural Gas Market is regulated by the Natural Gas Market Law numbered 4646 and dated 2001 [Hereinafter referred to as Natural Gas Market Law].[3] Before the enactment of the Law, the Natural Gas Market was regulated by a statutory decree numbered 397 and dated 02.09.1990.[4]

BOTAS was originally established in 1974 for construction and operation of the Kirkuk-Ceyhan Oil Pipeline. Since 1987, BOTAS has been also involved in the natural gas transportation and trade activities.[5] From 1990 until 2001, BOTAS had monopole rights on natural gas import, distribution, sales and pricing.[6] BOTAS’s monopoly rights on natural gas import, distribution, sales and pricing that were granted by the Decree of Natural Gas Utilization were abolished by the Natural Gas Market Law.

The Natural Gas Market Law, which was enacted during the liberalization process of natural gas market, covers import, transmission distribution, storage, marketing, trade and export of natural gas and the rights and obligations of all real and legal persons related to these activities. The general objective of this law is to supply natural gas with good quality, stable and competitive price.[7] In order to achieve these aims the market is required to be competitive, liberalized, environmentally sound, financially sound, transparent and sustainable. The supervision and control mechanism of the market should be independent. As it is known, these features are significant indications not only for the natural gas market, but also for any types of markets. Therefore, these elements are crucial to obtain a well-functioning natural gas market and EU legislation aims to obtain a natural gas market with these features as well. Although there are delays in reducing BOTAS’s dominant position and market share, it is clearly stated by IEA that Turkish legislation is in compliance with EU laws.[8]

By the Natural Gas Market Law, some important amendments are made in the natural gas market, such as:

• Free entrance to the market by private entities is provided[9]
• Natural Gas Monopoly of the BOTAS is abolished
• Protection of the natural gas end-users by competitive market prices is provided[10]
• Market efficiency for any kind of market activities is provided
• Market shares limits are regulated
• Free consumer structure is created[11]
• Liberalization of distribution grids is commenced
• Constitutional Background Regarding the Regulation of Energy Markets

The Turkish Constitution puts forward general provisions concerning creation of well-functioning and competitive market structures which are applicable in the energy market as well. Accordingly, Article 167, 168 and Article 47/4 consist constitutional background of the energy market. According to the Article 167 of Turkish Constitution, the State has taken some measures concerning capital markets, credits, goods and services to obtain well-functioning and systematic markets.[12]

According to the Article 168 of Turkish Constitution, the natural sources are under the control of the state. The right of exploration and processing of natural resources are owned by the state; however, the state can transfer these rights to real and   legal persons for a defined time period. The state can regulate the conditions of these transfers by Law, and in the event of transfer of these rights, the state has the right to put these markets under surveillance and supervision.[13] According to the Article 47 of Turkish Constitution, the state defines the public services which shall be undertaken by private entities. In this case, the state can regulate the type of the services which has to be fulfilled under private contracts by real and legal persons.[14]

1. Energy Market Regulatory Authority

The Energy Market Regulatory Authority [hereinafter referred to as EMRA] is an independent regulatory authority with administrative and financial autonomy. It doesn’t have direct control of any public authorities as it has to be fully independent in terms of political effects.

EMRA was established on 19^th November 2001 by the Law numbered 4646 in Turkey. It regulates all energy markets which are electricity, natural gas, oil and LPG markets. The fundamental objective of EMRA is set forth in its founding documents as to ensure the development of financially sound and transparent energy markets operating in a competitive environment and the delivery of sufficient, good quality, low cost and environment-friendly energy to consumers and to ensure the autonomous regulation and supervision of these markets.

1. Natural Gas Market Licenses and Certificates in Turkey

License is a permission certificate given to legal entities by the Energy Market Regulatory Board to engage in market activities respectively for each market activity in accordance with the Law.[15] Accordingly, there are 7 types of natural gas market licenses in Turkey which are import license, transmission license, storage license, wholesale license, distributor license, CNG license and exportation license.

Certificate is permit given by Board to real persons or legal entities who will engage in natural gas demonstrating that such person or legal entity is competent to design, construct, revise, maintain, repair, control, consult or conduct similar services for the facilities which shall take part in the system.[16]

The regulations regarding licenses are governed by Article 4 of the Natural Gas Market Law. In principle, any market player should grant the relevant type of license before commencing activities. The difference between the license and certificate is that license is required for the activities and certificate is required for the facilities. It is required to grant separate licenses for each activity and separate certificates for each facility.[17] And the market players have to separate their financial accounts for each activity.[18] Separate financial account obligation is in compliance with the Directive 2003/55/EC[19]

The rules related to the licenses in natural gas market are provided in Natural Gas Market License Regulation.[20] The natural gas market licenses are grantable for 10 to 30 years.[21] The licenses are not transferable.[22] Energy Market Regulatory Board has all the authorities concerning procedures and bases of licenses. Accordingly, it has authority to award, amend and cancel licenses.

Market players, who request a license, should apply to the Energy Market Regulatory Board with a written statement. During the application, the applicants should submit information and documents stipulated in the legislation. According to the Regulation, all shares of incorporations or limited liability corporations which are subject to the provisions of Turkish Commercial Code should be registered.[23]

EMRA examines license application regarding the principals and measures stated in Natural Gas Market License Regulation, in a multidimensional manner. It shall assess the technology of the applicant for entrance to the market, quality, and security as well as sustainability of the service and the company structure of the applicant. All applications to the administration should be completed within 60 days in any case that is not limited with energy market.[24] Accordingly, license applications should be concluded within 60 days at the latest.[25] Financial capacity of the applicant, background and previous experience of the applicant, applicant’s effect on competition, development of the market and market prices are essential points regarded by the authority during the evaluation of the license application.[26] If the administrative authority does not conclude the application regardless, weather in a positive manner or not, the applicant shall have the right to apply to the relevant court.[27]If there is any absence of required documentation, the applicant shall have an additional period for completion of the documents within 10 days at the latest. If the applicant fails to complete the missing documents, the application shall be null and void.[28]

The applicant shall pay 1% of the total amount of license fee according to the type of license required.[29]

The licenses and certificates are automatically terminated in cases of time completion and licensee’s bankruptcy. If the licensee wishes to revoke from the license, decision of the Energy Market Regulatory Board is required.[30]

1. Administrative Fines and Sanctions

Concerning the administrative fines and sanctions in natural gas market the conditions are regulated under the Law. These are; incorrect information premises, breach of the legislation, failure in performing license and certificate conditions, misleading document and information, prohibited affiliate relations, performing activities outside of the license conditions, failure about informing the Board about changed conditions.[31]

If a market player infringes the market regulation, the market player shall be sanctioned to pay administrative fine that ranges between 370.000TL – 740.000TL. Besides mentioned fines, the Energy Board has the authority to impose administrative sanctions to said market players. The Energy Board can start investigation upon a compilation or automatically. The penalties and administrative sanctions are stipulated in Article 9 of the Law. EMRA is empowered to de-regulate and increase the amount of the fines annually if necessary. In case of repetition of the infringement for two subsequent years, the Board may double the fines. Furthermore, Article 274 of Turkish Criminal Code is applicable for market players.

The relevant market player can file a lawsuit against the decision of the Energy Board. The Law stipulates that the Council of State shall act as a Court of First Instance for these types of energy cases. Normally, the Council of State is a High Court in accordance with Turkish Administrative Law; however, taking into account the specific feature and technical dimension of energy cases, the Council of State is defined as a Court of First Instance. Relevant market players may bring a lawsuit against the decision taken by the Board. The Council of State has to resolve these kinds of cases as a matter of urgency.

When it comes to competition in the natural gas market, the general conditions concerning competition is stipulated in Law no. 5054 and dated 1994 in Turkey.[32] This Law applies within the natural gas market. The Competition Regulatory Board has an authority to intervene the market structure in the natural gas market as well. Three important situations are controlled by Competition Regulatory Board; first, agreements which considerably prevent, restrict and distort competition, second abuse of dominant position, and lastly, mergers and accusations.

• Conclusion

Turkish Natural Gas Market has improved in the liberal manner since the enactment of Natural Gas Market Law in 2001 and the abolishment of BOTAS’s monopole; and the legal structure is harmonized with EU legislations as of 2011. Turkish government reduced BOTAS’s dominant position and established an independent authority named Energy Market Regulatory Authority in order to protect and develop the transparent, non-discriminatory, sustainable, and secure, cost efficient, competitive and equitable character of the natural gas market. In natural gas sector, the foreign companies who display activities in Turkey are subject to the same legal status as the Turkish companies. Hence, there is no difference for foreign companies in the process of license application. The authorized administration regarding the licenses is EMRA. The actors of the natural gas market and their activities are examined by EMRA in order to ensure that they act in compliance with relevant regulations. In case of infringement of these regulations Energy Market Regulatory Board is authorized to impose administrative fines and sanctions. Protection of competition is also of the essence in natural gas market, and the related authorized administration is Turkish Competition Authority. 

Consequently, Turkey has been following the recent developments in the natural gas market law, and making required laws and regulations in order to sustain the development of energy market, and make Turkish market attractive for nationals and foreign investors.

Bibliography:

1. ASLAN, Yılmaz, “Enerji Hukuku, Cilt III: AB DoÄŸalgaz Piyasasında Rekabet ve Regülasyon, Türk, DoÄŸalgaz Piyasasında Rekabet ve Regülasyon,Türk LPG Piyasasında Rekabet ve Regülasyon”, Ankara, 2009  GÖZÜBÜYÜK, Åžeref,-DINÇER, Güven, “Ä°dari Yargılama Usulü Hukuku”, Ankara,1996
2. KILIC A.Mahmut, “Turkey’s natural gas necessity, consumption and future perspectives” Energy Policy 34, Elsevier, 2006
3. The Constitution of Republic of Turkey
4. Natural Market Law [No:4646 and dated 2001]
5. Natural Gas Market License Regulation [17 June 2004 dated and No:25495 Official Journal]

6. Decree of Natural Gas Utilization (Abolished), [Published in the Official Journal dated 02.09.1990 and numbered 20428]

1. Code of Administrative Procedure [No: 2577 and dated 1982]
2. Turkish Criminal Code [No: 5237 and dated 2005]
3. Turkish Commercial Code [No: 6762 and dated 1956]
4. The Act on the Protection of Competition [No: 5054 and dated 1994]
5. Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 Concerning Common Rules for the Internal Market in Natural Gas and Repealing Directive 98/30/EC
6.  http://www.botas.gov.tr/index.asp
7. Turkish Energy Market: An Investor’s Guide 2011 http://www.epdk.org.tr/documents/10157/1bda767e-9e95-4030-8e49-baabbb4af698
8. Energy Policies of IEA Countries- Turkey Review 2009 http://www.iea.org/publications/free_new_Desc.asp?PUBS_ID=2276

[1] Attorney Arzu ONGUR ERGAN LL.M registered to Ankara Bar Association. More information about the author is available on: http:// www.ongurergan.av.tr

[2] KILIC A.Mahmut, “Turkey’s natural gas necessity, consumption and future perspectives” Energy Policy 34, Elsevier, 2006, s.1929

[3] Natural Gas Market Law, published in the Official Journal dated 02.05.2001 and numbered 24390

[4] Decree of  Natural Gas Utilization, published in the Official Journal dated 02.09.1990 and numbered 20428

[5] About us, http://www.botas.gov.tr/index.asp

[6] Decree of  Natural Gas Utilization, Article 1.

[7]  Natural Gas Market Law, Article 1.

[8]  Energy Policies of IEA Countries- Turkey Review 2009

[9]  Natural Gas Market Law, Article 2.

[10]  Natural Gas Market Law, Article 7

[11] Natural Gas Market Law, Article 8.

[12] The Constitution of Republic of Turkey, Article 167: “The state shall take measures to ensure and promote the sound, orderly functioning of the money, credit, capital, goods and services markets; and shall prevent the formation, in practice or by agreement, of monopolies and cartels in the markets...”

[13] The Constitution of Republic of Turkey, Article 168: “Natural wealth and resources shall be placed under the control of, and put at the disposal of the state. The right to explore and exploit resources belongs to the state. The state may delegate this right to individuals or public corporations for specific periods. Of the natural wealth and resources, those to be explored and exploited by the state in partnership with individuals or public corporations, and those to be directly explored and exploited by individuals or public corporations shall be subject to the explicit permission of the law. The conditions to be observed in such cases by individuals and public corporations, the procedure and principles governing supervision and control by the state, and the sanctions to be applied shall be prescribed by law.”

[14] The Constitution of Republic of Turkey, Article 47, para.4: “Those investments and services carried out by the State, State Economic Enterprises and other public corporate bodies which could be performed by or delegated to real or corporate bodies through private law contracts shall be determined by law.”

[15] Natural Gas Market Law, Article 3, para 38.

[16] Natural Gas Market Law, Article 3, para 39.

[17] ASLAN, Yılmaz, “Enerji Hukuku, Cilt III: AB DoÄŸalgaz Piyasasında Rekabet ve Regülasyon, Türk, DoÄŸalgaz Piyasasında Rekabet ve Regülasyon,Türk LPG Piyasasında Rekabet ve Regülasyon”, Ankara, 2009  p.177

[18] ASLAN, Yılmaz, “Enerji Hukuku, Cilt III: AB DoÄŸalgaz Piyasasında Rekabet ve Regülasyon, Türk, DoÄŸalgaz Piyasasında Rekabet ve Regülasyon,Türk LPG Piyasasında Rekabet ve Regülasyon”, Ankara, 2009  p.178

[19] Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 Concerning Common Rules for the Internal Market in Natural Gas and Repealing Directive 98/30/EC

[20] Natural Gas Market License Regulation,  published in the Official Journal  numbered 24869 and dated 07.09.2002

[21]  Natural Gas Market License Regulation, Article 7

[22] Natural Gas Market License Regulation, Article 5, para.3.

[23] Natural Gas Market License Regulation, Article 8, para.1

[24] GÖZÜBÜYÜK, Åžeref,-DINÇER, Güven, “Ä°dari Yargılama Usulü Hukuku”, Ankara,1996 p.14

[25] Natural Gas Market License Regulation, Article 11, para.1

[26] Natural Gas Market License Regulation, Article 10

[27] Code of Administrative Procedure, Article 10

[28] Natural Gas Market License Regulation, Article 4

[29] Natural Gas Market License Regulation, Article 9

[30] Natural Gas Market Law, Article 6/d

[31] Natural Gas Market Law, Article 9

[32] The Act on the Protection of Competition numbered 5054 and dated 07.12.1994, published in the Official Journal numbered 13.12.1994 and dated 22149

Recognition and Enforcement of Foreign Court  Judgments in Turkey

-INTRODUCTION-

Legality and application of foreign judgments in Turkey depends on completion of several procedures which are called enforcement and recognition in Turkish Law. The provisions about recognition and enforcement take place in Law numbered 5718 dated 22.11.2007.[1]

Recognition is regulated under Art.58 of Law numbered 5718. According to this Article recognition is the procedure which provides final evidence and definite judgment statute to the foreign judgment.

On the other hand enforcement is regulated under Articles 50 and the following in Law numbered 5718 and defined as the procedure which provides enforceability to the definite judgments decided by foreign courts.

According to the definitions regulated by the Law numbered 5718, the recognition of foreign court decision provides the legal existence and recognition of rights, to be used as conclusive evidence, and if necessary making administrative acts in accordance with these decisions. However enforcement of a foreign judgment provides the enforcement of the decision in the same way as the decision of national courts. At this point award of enforcement differs from award of recognition with its capability of enforcement.

In accordance with the comments above, it is necessary to find out in which cases the award of enforcement, in which ones the award of recognition will be needed. As it is well known, awards of courts can be clarified in three according to their results as; constitutive, performance and declaratory awards. In this context, the matter in dispute in recognition cases is the constitutive awards which provides a new legal statute, remove or changes an existing legal statute. For instance adoption, change of name, divorce awards are constitutive. As a consequence these type of awards given by foreign courts need to be recognized to be valid in law, in Turkey.

On the other hand the matter in dispute in enforcement cases are performance awards which result in doing, not doing or giving something. As an example, compensation, subsistence and alteration of curatorship awards can be given. For this reason, awards which are given by foreign courts and have to be executed in deed, in Turkey, like compensation, subsistence and alteration of curatorship, need to be ratified.

According to the principle of Turkish private law, neither during recognition cases nor enforcement procedure Turkish courts are not able to observe the compliance with substantive law of the decision given by foreign court.[2] By force of principal called “revision au fond” which is also accepted in Turkish Law, the decision of foreign court can be only examined about the conditions of recognition and enforcement.

On the other hand recognition and enforcement is not only regulated in Law numbered 5718. States also sign bilateral or multilateral conventions among them, regarding recognition and enforcement of decisions of foreign courts. Turkey is also counterparty of several conventions in terms of validation of the foreign court decisions. For example European Convention on Recognition and Enforcement of Decisions Concerning Custody of Children and on Restoration of Custody of Children (Luxembourg-20.05.1980), Convention on the Recognition and Enforcement of Decisions Relating to Maintenance Obligations (Lahey, 02.10.1973) are can be indicated as example of these kinds of conventions. Execution area of these conventions will be determined in accordance with Republic of Turkey Constitution Art.90 and the principals lex specialis , lex posterior. If it is necessary articles of conventions will be applied instead of articles of Law numbered 5718.

1. Provisions about Enforcement of Foreign Decisions and The Procedure of Enforcement

The procedure of enforcement is regulated between Art.50-57 of Law numbered 5718. According to the Art.50 to demand enforcement, firstly the existence of foreign court’s decision is needed and this decision has to be approved in accordance with the Law of that country where the Court decision is taken. In the same Article of the Law another condition is requested which is the decision must be given regarding to a civil action. Thereby only a decision given regarding to a civil action can be the matter in dispute of enforcement case. Once again in the Art.50 of the Law numbered 5718 about the clauses regarding personal rights in the criminal decisions, enforcement judgment can be demanded.

At this point, the issue of which court will be competent and in charge to execute enforcement contraption, has to be discussed. Thus, under the Art.51 of Law numbered 5718 this issue is regulated with the topic of “Competence and Jurisdiction”. According to the article, in enforcement cases civil courts of general jurisdiction are in charge. In the same article it is regulated that courts in the same place of the person’s domicile in Turkey, against whom enforcement is demanded are competent. If the person doesn’t have a domicile in Turkey, the courts of the place of person’s residence will be competent. If still the person doesn’t have a residence in Turkey, the courts of Ankara, Ä°stanbul or Ä°zmir will be competent. According to the Art.52 of Law numbered 5718 everyone who has legal interest can demand enforcement with a petition. The samples of petitions accordingly the number of parties must be added. Again in accordance with the Art.52 these issues must be written in the petition:

1. a) Names, surnames and the addresses of the person who demands enforcement, adversary’s and also legal representative’s and attorney’s if there is any,
2. b) The issue of by which state’s court the decision given and the name of the court, the date, number and the summary of decision.
3. c) If the enforcement is demanded about just a part of the decision, which part it is.

Art.53 of the Law is regulating the documents that must be added to the petition, these documents are:

1. The original and the copy of the decision approved by the court according to the procedure and approved translation.
2. A writing or a document approved by state’s posts according to the procedure improving that the decision is effective and its approved translation.

According to the Article above the Law numbered 5718 require the original and the copy of decision approved in accordance with the procedure. The approval according to the procedure means that the decision contents the endorsement of apostile. This endorsement serves the recognition of a document arranged by a foreign institution, in another country. Countries which are contractor of Convention of La Haye dated 1961 are editing endorsement of apostile to provide recognition to a document arranged by their own, in another country which is also contractor.

In the Law numbered 5718 the conditions required for an enforcement decision is regulated under the Article 54. According to the article:

• The presence of a convention based on reciprocity principle, a provision or an actual implementation, between the State at which the decision given and Turkey,
• The decision shouldn’t be about an issue regarding the Turkey’s exclusive competence
• The decision shouldn’t be given by a court that defines itself authorized but not authorized actually because of being disinterested about the matter in dispute or the parties, in condition of being reclaimed by one the parties.
• The decision shouldn’t be in conflict with public order.
• If, up against the person of whom the enforcement is demanded, is not invited to the court in accordance with the procedure or is not represented in the court or in conflict with these laws the award is given in his/her absence and the person don’t reclaim one of these issues in front of Turkish courts that will decide the enforcement

In accordance with the Law numbered 5718 Art 56, the authorized court will give an award of enforcement or not, it can also give an award of enforcement for a part of foreign court’s decision. In case of decision of enforcement, according to Art.57 of the Law, the decision of the foreign court will be legally equal to a decision of Turkish courts and will be dependent on execution provisions. As it is regulated in the same article the decision of refusal or acception can appealed in accordance with general provisions.

1. Provisions About the Recognition of Foreign Decisions and The Procedure of Recognition

The provisions regulating the “recognition” in the Law numbered 5718 are softer than the ones regulating the enforcement. The reason is that, unlike enforcement, recognition doesn’t provide result of execution. Recognition is regulated in the Law numbered 5718 under the Articles of 58 and 59. According to the articles in subject, to have a final judgment and a final evidence statute the determination of foreign award is needed to be made by Turkish court in respect of whether it includes the conditions of enforcement or not. In other words Art.58 of the law demands the conditions which are regulated under the Art.54. However according to the Art.58, the principal of reciprocity which takes place in Art.54 is not demanded. The statute of final judgment and final evidence enure starting from the date that the decision finalized. The Law numbered 5718 hasn’t regulated the procedure of recognition that’s why it should be admitted that the recognition depends on the same procedure as enforcement.

• The Decisions of Court of Cassation Regarding Recognition and Enforcement

Court of Cassation has reviewed awards of court of original jurisdiction given regarding recognition and enforcement, only in terms of conditions partaking in laws and international conventions. Court of Cassation hasn’t made a revision in terms of substantive law.

For instance in a decision of Court of Cassation, 11^th Civil Chamber number,1995/8322 E, 1996/1655 K,11.03.1996 dated, Court of Cassation found the award of court of original jurisdiction in conflict with the law because of not examining the conditions of enforcement. In that act the defendant hasn’t invited to the court during proceeding and hasn’t informed about the case. The defendant has waived an objection about these situations during the enforcement proceeding. However the court of original jurisdiction decided the enforcement of foreign decision by ignoring this objection. In this context the award of court of original jurisdiction has been reversed by Court of Cassation because of being in conflict with the abrogated Law numbered 2675 Art.38/d.

In another decision of Court of Cassation, 4^th Civil Chamber,1992/7081 E, 1993/2756 K, 18.03.1993 dated, the court of original jurisdiction has decided the enforcement of foreign decision in conflict with the abrogated Law numbered 2673 Art.38” in absence of original approved and translated copies of foreign decision”. Court of Cassation has also reversed this enforcement award because of deficiency of conditions needed for enforcement.

-CONCLUSION-

Even if the enforcement and the recognition has been regulated under the Law numbered 5718, before demanding the recognition and the enforcement of a foreign decision, the presence of a bilateral or multilateral convention between Turkey and regarded State must be utilized. If there is such convention, the provisions of the convention must be considered and then recognition and enforcement will be demanded from the court authorized and in charge. The recognition and the enforcement will be realized by following the legal procedure existing in the Law numbered 5718. During the proceeding of recognition and enforcement, Turkish courts are only examining the case in terms of conditions of recognition and enforcement, not substantive law.

[1] Date of publishing in Official gazette 12.12.2007 and 26728 Number

[2] AKINCI, Ziya, “Milletlerarası Tahkim”, Ankara 2003, s. 243

YESTERDAY MICROSOFT, TODAY GOOGLE:

PRODUCT DESIGNS IN HIGH-TECH MARKETS

AND CHALLENGES FOR COMPETITION LAW

DÜN M‹CROSOFT, BUGÜN GOOGLE:

YÜKSEK TEKNOLOJ‹ SEKTÖRLER‹NDE ÜRÜN TASARIMLARI

VE REKABET HUKUKU AÇISINDAN SORUNLAR

Ahmet Fatih ÖZKAN^*

 AyÅŸem DÄ°KER VANBERG^**

Abstract

High-tech markets differ markedly from most of the industries in which modern competition law and policy emerged. In these markets, firms often operate globally and their products can virtually be found all over the world. Although the markets may be global and free from national borders, applicable competition laws are mostly national or regional, meaning that high-tech firms might be subject to different jurisdictions pursuing potentially different objectives. In contrast to the prohibition of cartels and merger control, where there is a growing global convergence, there is substantial divergence on the appropriate scope of control that should be placed upon unilateral conduct. Ironically, most competition cases or investigations in high-tech markets involving global high-tech giants, such as IBM, Microsoft, Google, Intel and Rambus, deal with unilateral conduct and allegations of abuse of market power. In the area of unilateral conduct, a more pressing concern arises when the conduct in question relates to how dominant high-tech firms design their products. Product designs appear to be the most controversial type of unilateral conduct to be challenged under competition law. Competition authorities and courts should not lose sight of the presence of actual consumer harm when ruling product designs as anti-competitive.

• M. (Law and Economics, Bilkent University), PhD Candidate (Competition Law, University of Sussex-United Kingdom), F.Ozkan@sussex.ac.uk.

• M. (European and International Law, Universität Bremen), PhD Candidate (Competition Law, University of Essex-United Kingdom), adiker@essex.ac.uk.

Rekabet Dergisi 2013, 14(1): 111-212                                ÖZKAN - D‹KER VANBERG

Keywords: Unilateral Conduct, Abuse of Dominance, Product Designs, High-Tech Markets, New Economy

Öz

Yüksek teknoloji sektörleri, modern rekabet hukuku ve politikas›n›n do¤du¤u di¤er endüstrilerden belirgin flekilde farkl›l›klar arz etmektedir. Söz konusu sektörlerde teflebbüsler genellikle dünya çap›nda faaliyet göstermekte olup, üretilen ürünler hemen hemen dünyan›n her yerinde bulunabilmektedir. Her ne kadar pazarlar uluslararas› ve ülke s›n›rlar›ndan ba¤›ms›z olsa da, uygulanacak rekabet hukuku kurallar› genellikle ulusal ya da bölgesel olmakta, bu nedenle de yüksek teknoloji ürünleri üreten teflebbüsler birbirinden farkl› amaçlar izleyebilen farkl› hukuk sistemlerine tabi olabilecektir. Artan bir uluslararas› yak›nsaman›n görüldü¤ü kartellerle mücadelenin ve yo¤unlaflmalar›n kontrolünün aksine, tek tarafl› davran›fllar›n kontrolü noktas›nda dünya genelinde belirgin görüfl ayr›l›klar› bulunmaktad›r. ‹flin garip yan› ise yüksek teknoloji sektörlerinde IBM, Microsoft, Google, Intel ve Rambus gibi dünya devleri aleyhine aç›lan rekabet davalar› veya soruflturmalar›n›n büyük ço¤unlu¤unun, tek tarafl› davran›fl sonucu pazar gücünün kötüye kullan›lmas›na yönelik iddialar› konu edinmesidir. Tek tarafl› davran›fllar alan›nda çözüm bekleyen bir husus ise tek tarafl› davran›fl›n teflebbüslerin ürünlerini nas›l tasarlad›klar›na yönelik olmas› halinde ortaya ç›kmaktad›r. Ürün tasar›mlar› rekabet hukuku alt›nda ele al›nabilecek en tart›flmal› tek tarafl› davran›fl olarak öne ç›kmaktad›r. Ürün tasar›mlar›n› rekabete ayk›r› olarak de¤erlendirme hususunda rekabet otoriteleri veya mahkemeleri mevcut tüketici zarar›n›n varl›¤› hususunu gözden kaç›rmamal›d›rlar.

Anahtar Kelimeler: Tek Tarafl› Davran›fllar, Hâkim Durumun Kötüye Kullan›lmas›, Ürün Tasar›mlar›, Yüksek Teknoloji Sektörleri, Yeni Ekonomi

INTRODUCTION

Today we live in a world in which innovation and advances in technology are at the centre of economic activities. Economies of the world have increasingly become interrelated and the business context of our century has radically changed. New markets together with brand-new products have emerged. One of the most noted developments in the last decades is the rise of the “new economy” and high-tech markets. High-tech markets differ from traditional markets in terms of network effects, “winner-takes-all” market models, quick shifts of dominance,

Yesterday Microsoft, Today Google...                    Rekabet Dergisi 2013, 14(1): 111-212

dynamic competition, intellectual property rights, high rates of innovation, and so on.

The implementation of competition law is unlikely to remain intact vis-à-vis advances in technology and radical changes on the way firms do business. Indeed, new concepts, rules and reasonings have been injected into the theory and practice of competition law as a result of its interaction with the realm of technology. In contrast to traditional markets, which are more mature, stable and non-dynamic; the nature of competition in high-tech markets is relatively different and this suggests that the application of competition law rules might differ in these markets. This is aggravated by the global market phenomenon in high-tech markets as high-tech firms are often subject to different competition law systems, pursuing potentially different objectives.

In this changing competitive landscape, high-tech giants are being increasingly targeted by competition authorities and courts, not just in the European Union (EU) and the United States (US), but also in other jurisdictions such as Japan, South Korea, India and Brazil. The biggest ever fine of 1.06bn Euros was imposed on the high-tech giant Intel by the European Commission (Commission) in 2009 for Intel’s exclusionary rebate scheme and other exclusionary practices. A then record fine of 497m Euros was levied against another high-tech giant and almost a worldwide monopolist Microsoft in 2004 by the Commission as a result of its product bundling, and this was followed by a further fine of 899m Euros for the company’s lack of compliance with the remedies. Currently, the leading online search engine, Google, is subject to investigations in several jurisdictions.

Most competition law cases and investigations in high-tech markets involving global high-tech giants, such as IBM, Microsoft, Google, Intel, and Rambus, deal with unilateral conduct and allegations of abuse of market power. Ironically, there is substantial divergence among different competition law systems on the appropriate scope of control that should be placed upon unilateral conduct, in contrast to the prohibition of cartels and merger control where there is a growing global convergence. It becomes even more challenging when the unilateral conduct at hand relates to how dominant high-tech firms design their products, as products are essentially designed through innovative research and development. Product designs appear to be the most controversial type of unilateral conduct to be challenged under competition law.

It is against this background that the purpose of this article is to explore and

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discuss the application of competition law rules on the prohibition of abusive unilateral conduct in the context of product designs in high-tech markets. This article is divided into four parts. Part 1 introduces high-tech markets and their unique features, discusses the role of competition law in high-tech markets and addresses the difficulties experienced in this respect. Part 2 deals with the Microsoft saga in the US and the EU, and analyses antitrust cases against Microsoft. This part asserts that despite being found anti-competitive in some cases, arguably the tying of media players and web browsers with operating systems can be regarded as innovative product designs for the benefit of consumers. Part 3 is concerned with the ongoing antitrust investigations in the EU and the US of Google and its allegedly anti-competitive conduct of designing its algorithms in a way that favours its own services over those of its competitors. In this part, it is stressed that Google’s conduct can merely be a product design which seems prima facie anti-competitive, but may equally be pro-competitive as it enhances consumer welfare more than it generates anti-competitive effects. Finally, Part 4 outlines the authors’ critical assessments of the cases examined in previous parts and draws conclusions.

1. COMPETITION LAW AND HIGH-TECH MARKETS

1.1. Introduction

Compared to the existence of competition law rules, the interaction of competition law with the realm of technology is relatively new, dating back to the 1970s, in which significant technological advances began to take place. The earliest case in which competition law rules faced the realm of technology is the US case against IBM in 1973 where IBM was accused of tying its central processing units (CPU) with main memory in its “System 370” mainframe computers, but the District Court held that the product was an integrated product and technologically superior to the non-integrated version.¹ In 1984, IBM was alleged to have tied its operating system, “MVS”, to a software programme, “DFDSS”, which was being supplied by one of its competitor; however, the District Court concluded that this was “a lawful package of technologically interrelated products.”² This was the year in which IBM faced allegations of

• Telex Corp. v IBM Corp., 367 F.Supp. 258 (N.D. Okla. 1973) reversed in part in Telex Corp. v IBM Corp., 510 F.2d 894 (10^th 1975).

• Innovation Data Processing, Inc. v IBM, 585 F.Supp. 1470 (D.N.J. 1984), para.1476. Several lawsuits were filed against IBM during the 1970s and 1980s on the ground of IBM’s allegedly unlawful tying of certain features to its certain products. See ILC Peripherals Leasing Corp. v IBM , 448 F.Supp. 228 (N.D. Cal 1978); California Computer Products Inc. v IBM Corp., 613 F.2d

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unlawful tying also on the other side of the Atlantic and eventually came to a settlement with the Commission.³

The landmark case, however, is the US case against Microsoft, which is widely known as “a novel antitrust venture carrying the law deep into concerns about technology and innovation”.⁴ Filed in the late 1990s and ruled in the early 2000s; it was held, among other things, that Microsoft had illegally prevented computer manufacturers from uninstalling its web browser, “Internet Explorer” (IE), from its operating system, “Windows 95” and “Windows 98”, and further removing it from the “Add/Remove Programs” utility of Windows.⁵ On the other side of the Atlantic, the Commission decided, among other things, that Microsoft illegally tied its media player, “Windows Media Player” (WMP) to its operating system, “Windows XP”, with a view to strengthening its dominance in the operating system market by foreclosing competition in the media player market.⁶ In a similar case to that in the US, the Commission alleged that Microsoft tied its IE to its operating system, “Windows Vista”, before it settled the case.⁷

As a result of all of these cases, the implementation of competition law experienced brand-new relevant product markets that are unique in its history. In addition to dealing with new products such as “mainframe computers”, “operating systems”, “web browsers”, “media players” and “online search engines”, it would appear that new concepts, rules and reasonings have been

727 (9^th Cir. 1979); Memorex Corp. v IBM Corp., 636 F.2d 1188 (9^th Cir. 1980) and Transamerica Computer Co. v IBM Corp., 698 F.2d 1377 (9^th Cir. 1983). However, in none of these cases was there any ruling that IBM had engaged in unlawful tying.

• Case IV/30.849 IBM Personal Computers [1984] OJ L 118/24. Similar to Telex Corp. v IBM in the US, IBM was alleged to have abused its dominant position by, among other things, not offering its CPUs in System 370 without a capacity of main memory included in the price and without the basic software included in the price. See EUROPEAN COMMISSION (1985), 14^th Report on Competition Policy, Brussels, p.78.

• HOVENKAMP, H. (2008), The Antitrust Enterprise: Principle and Execution, Harvard University Press, USA, p.296.

• United States v Microsoft Corp., 87 F.Supp. 2d 30 (D.D.C. 2000), reversed in part in United States v Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) cert. denied, 534 U.S. 952 (2001) (“Microsoft III”). It should be noted that this case is actually the third case against Microsoft in the US, where the first case was settled with a consent decree and the second case, which was actually related to Microsoft’s alleged infringement of that consent decree, was dismissed by the US Court of Appeals. See infra “2. The Microsoft Saga”.

• Case COMP/C-3/37.792 — Microsoft [2004] OJ L 32/23 upheld in Case T-201/04 Microsoft v Commission [2007] ECR II-3601 (“Microsoft WMP”).

• Case COMP/39.530 — Microsoft (Tying) [2009] (unpublished) (“Microsoft IE”).

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injected into the theory and practice of competition law. To illustrate this, for decades, the practice of tying of certain products to other products was interpreted as a per se illegal restraint of trade (restriction of competition).⁸ However, it has been interpreted under the rule of reason doctrine, since Microsoft III in which US Court of Appeals explicitly endorsed that “[t]here being no close parallel in prior antitrust cases, simplistic application of per se tying rules carries a serious risk of harm.”⁹ As rightly argued, the most important legacy of this case is likely to be, not its impact on Microsoft’s monopoly, but rather its impact on antitrust enforcement.¹⁰ Indeed, much of the attention paid to tying stems from the cases in high-tech markets against IBM in the 1970s and 1980s, and against Microsoft in the 1990s.¹¹

Likewise, tying has become a broad category rather a single type of behaviour and begun to comprise “technological (or technical) tying” and “contractual (or classical) tying”.¹² In Microsoft WMP, the Commission acknowledged that

• In the mid-20^th century, the US Supreme Court held that “[t]ying agreements serve hardly any purpose beyond the suppression of competition” and therefore regarded them as a per se restraint of trade. Standard Oil Co v United States, 337 U.S. 293 (1949), para.305. However, along with the interaction of technology with competition rules towards the end of 20^th century, the reasoning behind some of the competition law rules had changed and those rules began to be implemented in a different way. In United States v Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001), the US Court of Appeals reversed the District Court’s judgment and carved out what can be called as “technology exception” to the per se rule. JACOBSON, J. and QURESHI, A. (2001), “Did the Per Se Rule on Tying Survive ‘Microsoft’?”, http://www.ftc.gov/opp/intellect/020514jacobson2.pdf, Date Accessed: 20.12.2012, p.1. Here the Court made a distinction between “platform software products” and other products, and adopted a new legal standard by concluding that “platform software products” should be assessed under the rule of reason, whereas other products such as wheat, televisions and cigarette would still be subject to the per se rule. It should be noted that the US Supreme Court has not yet had its final say on this “exception” to the existing tying doctrine.

• Microsoft III, para.84 (emphasis added). Similarly it has been argued that prior to its Microsoft decision in 2004, the Commission’s formal approach to tying and bundling could be characterised as “a modified per se illegality standard”. O’DONOGHUE, R. and PADILLA, J. (2006), The Law and Economics of Article 82 EC, Hart Publishing, Great Britain, p.499.

• FOX, E. M. and CRANE, D. A. (2007), Antitrust Stories, Thomson West Foundation Press, USA, p.302. See also MANNE, G. A. and J. D. WRIGHT (2010), “Innovation and the Limits of Antitrust”, Journal of Competition Law and Economics, No: 6(1), p.178 (“Few endeavors have had as large an impact on the history and future of antitrust as the case against Microsoft.”).

• CARLTON, D. W. and M. WALDMAN (2002), “The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries”, The RAND Journal of Economics, No: 33(2), p.197.

• Mostly after the cases in high-tech markets, a distinction has begun to be made between contractual tying and technological tying based on whether the tied products are tied together contractually or physically. As a general observation, a more lenient approach is adopted towards

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Microsoft’s practices could not be characterised as “classical tying” and that there were “good reasons not to assume without further analysis that tying WMP constitute[d] conduct which by its very nature [was] liable to foreclose competition.”¹³ The Commission takes this issue further in the Guidance Paper by removing the element of “coercion” from the constituent elements in the former tying and bundling cases when setting out its enforcement priorities in applying Article 102 of the Treaty on the Functioning of the European Union (TFEU). It is stated that:

“The Commission will normally take action under Article [102] where an undertaking is dominant in the tying market and where, in addition, the following conditions are fulfilled: (i) the tying and tied products are distinct products, and (ii) the tying practice is likely to lead to anti-competitive foreclosure”¹⁴

From this expression, it can be seen that there has been a change in the Commission’s practice after Microsoft WMP in 2004, since the earlier decisions on tying required the element of “coercion”, where the consumers should be forced to buy the tied product together with the tying product.¹⁵ Whereas in Microsoft WMP, the Commission decided that “inasmuch as tying risks foreclosing competitors, it is immaterial that consumers are not forced to “purchase” or “use” WMP”.¹⁶ It seems to have regarded “coercion” as “a lack of consumer choice” about whether or not to obtain WMP from Microsoft.¹⁷ Some

technological tying which is thought to yield significant efficiency gains, whereas contractual tying arrangements tend to be subjected to a more restrictive treatment as they are traditionally regarded as tools to leverage the market power in the tying market to the tied market often to the detriment of competition and consumers. This distinction is now broadly accepted in formal and informal competition law related documents in both the EU and the US. See Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct [2009] OJ C 45/7, paras.47-59 (Guidance Paper) and US DOJ (2008), Competition and Monopoly: Single-firm Conduct under Section 2 of the Sherman Act, www.usdoj.gov/atr/public/ reports/236681.htm, Date Accessed: 20.12.2012, p.77-90.

• Microsoft WMP, para.989 (emphasis added).

• Guidance Paper, para.50 (citations omitted).

• Case IV/30.787 Eurofix-Bauco v Hilti [1988] OJ L 65/19 (“[The tying of the sale of Hilti-compatible nails to the sale of Hilti-compatible cartridge strips, together with other] policies leave the consumer with no choice over the supply of his nails and as such abusively exploit him.”) upheld in Case T-30/89 Hilti AG v Commission [1990] ECR II-163 and a further appeal was dismissed in Case C-53/92P Hilti AG v Commission [1994] ECR I-666. See also Case IV/31.043 Tetra Pak II [1992] OJ L 72/1, upheld in Case T-83/91 Tetra Pak II v Commission [1994] ECR II-755 and Case C-333/94 P Tetra Pak v Commission [1996] ECR I-5951.
• Case COMP/C-3/37.792 — Microsoft [2004] OJ L 32/23, para.833.

• The General Court held that for this condition to be fulfilled, it was irrelevant whether consumers

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commentators have reported other remarkable changes which have occurred in the reasoning of the Commission regarding “essential facilities” after it mandated Microsoft to disclose its interoperability information.¹⁸ One could argue that Microsoft WMP and similar cases show that dealing with technology under competition law involves to a certain extent some difficulty. Challenges to competition law enforcement in high-tech markets must have been influential on the Commission to start seeking expert input to help support its antitrust, merger and state aid cases in telecom, media, information technologies, and consumer electronics markets, and in cases related to the use of internet.¹⁹

In the early years of the interaction of competition law with the realm of technology, particularly towards the end of 20^th century, the role of competition law was initially questioned and there were doubts as to whether the traditional tools of competition law could be effectively used or easily adapted to analyse competition issues in the new economy. New economy markets, including high-tech markets, “differ markedly from most of the industries in which modern antitrust doctrine emerged”.²⁰ The defining feature of new economy markets is a dynamic competitive process where firms compete for the market usually through research and development (R&D) to develop the “killer” product that will confer market leadership and thus diminish or eliminate rivalry.²¹ By contrast, static price or output competition in the market is less important.²² All those differences naturally raised doubts as to whether concepts and analytical paradigm of traditional competition law and policy could be used in high-tech markets. This

did not need to pay a price for the tied product or they were not coerced to use the tied product. Microsoft WMP, paras.967 and 970

• See infra “2.4. Microsoft WMP”.

• CROFTS, L. (2011a), “EC Seeks IT, Media Experts for Competition Cases”, MLex 24 January 2011, http://www.mlex.com/Content.aspx?ID=128531, Date Accessed: 20.12.2012.

• POSNER, R. (2000), “Antitrust in the New Economy”, John M. Olin Law and Economics Working Paper No.106, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=249316, Date Accessed: 20.12.2012, p.2. For a good assessment of competition law and policy in the new economy and how new economy markets differ from traditional markets in terms of cost structures, profit levels, network effects, dynamic competition, intellectual property, dominance, market definition and so on, see AHLBORN, C., D. EVANS and J. PADILLA (2001), “Competition Policy in the New Economy: Is European Competition Law Up to the Challenge?”, European Competition Law Review, No: 22(5), p.156-167.

• EVANS, D. and R. SCHMALENSEE (2002), “Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries”, Innovation Policy and the Economy, No: 2, p.1-2 (emphasis original).

• ibid (emphasis original).

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made some authors to even regard competition law as “a 19^th Century discipline [that] addresses 21^st Century problems”.²³

The foremost criticism of the role of competition law in high-tech markets is that “these are fast-moving industries in which today’s technology is quickly outmoded, opening the way for new competitors to overturn the dominance of incumbents.”²⁴ Firms may be thought of as “fragile monopolists” since they can only retain their market position provided that they continue to innovate.²⁵ The traditional objections against market power as indicating an increase in price or a reduction in output are hardly relevant in these markets, where “standard anti-competitive behaviour turning into a chancy strategy if a new industry paradigm shift can completely annihilate established standards.”²⁶ Therefore, not even a dominant firm can effectively prevent competition and there is always the possibility of potential competitors entering the market or brand-new products becoming a successor of former products.

There seems to be no objection to the prohibition of hard-core restrictions of competition and control of restrictive mergers among high-tech firms.²⁷ However, the same cannot be said in the area of abusive unilateral conduct. There is divergence on the implementation of competition law to challenge unilateral

• PITOFSKY, R. (1999), “Antitrust Analysis in High-Tech Industries: A 19^th Century Discipline Addresses 21^st Century Problems”, Section of Antitrust Law’s Antitrust Issues in High-Tech Industries Workshop, Arizona February 25-26, http://www.ftc.gov/speeches/pitofsky/ shtm#N_2_, Date Accessed: 20.12.2012.

• BAER, W. J. and D. A. BALTO (1999), “Antitrust Enforcement and High-Technology Markets”, 5 Michigan Telecommunications and Technology Law Review, No:73, p.75.

• Ahlborn et al 2001, p.160. The authors further stress the Commission’s understanding of dominance as the heavy reliance on market shares, and maintain that equating high market shares with dominance in the case of these “fragile monopolists” is potentially very damaging to innovation and competition and prevents firms with high market shares to compete vigorously on an equal footing with their competitors. ibid at p.162.

• CAMESASCA, P. D. (2000), “Mayday or Hayday? Dynamic Competition Meets Media Ownership Rules after Premiere”, European Competition Law Review, No:21(2), p.82.

• (“Except for price fixing and other per se violations, competition law should leave such markets alone...”) Baer and Balto 1999, p.75; (“We really don’t know what the effect of applying antitrust principles to the new economy will be, except when they are applied just to stop horizontal price-fixing or mergers of major competitors in highly concentrated markets.”) Posner 2000, p.11; (“There are many things, such as price-fixing, merger to monopoly, or foreclosure of distributional channels, that new-economy companies with substantial market power could in principle do to reduce competition. Such conduct is and should be illegal, as it is in traditional industries.”) Evans and Schmalensee 2002, p.34.

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conduct which fosters innovation and yields efficiency gains, but at the same time excludes competitors from the market. This poses problems in high-tech markets where most firms have considerable market power and operate throughout the world, meaning that they are subject to different jurisdictions pursuing potentially different objectives in the area of abusive unilateral conduct. Indeed, most competition law cases and investigations in high-tech markets deal with the allegations of abuse of market power and involve multinational high-tech firms such as IBM, Microsoft, Google, Intel and Rambus.

It is against this background that some commentators argue that competition law rules (on the prohibition of unlawful unilateral conduct) should not apply where innovation and dynamic competition are at stake due to potential chilling effects on innovators.²⁸ Any effort to create or exercise market power could quickly be corrected by market forces, and thus there is no need for the intervention of competition law.²⁹ By contrast, other commentators contend that competition law infringements are even more likely to stifle innovation and cause consumer harm in the new economy, and therefore enforcers should be “especially active” in high-tech markets.³⁰

Former European Competition Commissioner Monti sums up well the role of competition law in high-tech markets as follows:

“The general nature of the competition rules gives them an important advantage over most other legal rules, because they apply to the factual circumstances of a particular case, no matter how quickly industries develop or change. This allows to keep pace with technological developments. The rules stay the same, but the application of these rules is remarkably adaptable to changing circumstances… arguments against intervention include the difficulty of keeping up with market developments and the possibility that market failures in high technology sectors are far less likely to be enduring than market failures in other, more traditional, industries… keeping up with technical developments is certainly difficult. However,

²⁸ SPULBER, D. F. (2008), “Unlocking Technology: Antitrust and Innovation”, Journal of Competition Law and Economics, No:4(4), p.915-966 cited in Manne and Wright 2010, p.156. See also O’Donoghue and Padilla 2006, p.523 (“Due to huge benefits of innovation to the competitive structure of the markets, innovation should be praised by competition rules. It is probably the most valuable form of procompetitive activity and an enforcement policy that runs even a remote risk of stifling such activity can cause enormous harm to consumer welfare.”).

• Baer and Balto 1999, p.75.

• SHAPIRO, C. (1999), “Exclusivity in Network Industries”, 7 George Mason Law Review 673 cited in Manne and Wright 2010, p.156.

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just because something is difficult cannot provide a basis for not intervening where necessary.”³¹

The high-tech markets of today present legal and economic challenges that go far beyond the issues that were raised in the past.³² There is now, however, broad consensus that neither the high rate of innovation in high-tech markets, nor other differentiating features make these markets immune from competition problems or constitute a valid ground for competition law to turn a blind eye to anti-competitive practices.³³ Special characteristics of high-tech markets should be taken into account just as the special characteristics of every industry, but none of those characteristics “justifies a complete or even substantial exemption.”³⁴ Careful, mainstream and vigorous enforcement of competition law in high-tech markets is important so as to provide consumers with the benefits of innovation.³⁵ Most US courts now appear to have endorsed such conclusions.³⁶

• MONTI, M. (2000), “Competition and Information Technologies”, Conference “Barriers in Cyberspace” Kangaroo Group, Brussels 18 September 2000, http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/00/315&format=HTML&aged =0&language=EN&guiLanguage=en, Date Accessed: 20.12.2012.

• GAL, M. S. and S. W. WALLER (2012), “Antitrust in High-Technology Industries: A Symposium Introduction”, Journal of Competition Law and Economics, No:8(3), p.449.

• Ahlborn et al 2001; Evans and Schmalensee 2002; Posner 2000; Pitofsky 1999. The Antitrust Modernisation Commission (AMO), which is a body established by the US Congress in order to make recommendations for better antitrust law, also addressed the role of competition law in high-tech markets and came to the conclusion that there was “no need to revise the antitrust laws to apply different rules to industries in which innovation, intellectual property, and technological change are central features”. AMO (2007), Report and Recommendations, http://govinfo.library.unt.edu/amc/ report_recommendation/amc_final_report.pdf, Date Accessed: 20.12.2012, p.9.

• Pitofsky 1999, p.3. In a comprehensive report on the role of competition law and policy in new economy markets, The Office of Fair Trading (OFT) has come to the conclusion that “[t]here is a general consensus that competition policy and its active enforcement should be pursued in industries of the new economy but with some caution.” OFT (2002a), Innovation and Competition Policy: Part 1 – Conceptual Issues, Report Prepared for the Office of Fair Trading,

http://www.oft.gov.uk/shared_oft/reports/comp_policy/oft377part1.pdf, Date Accessed: 20.12.2012, p.15.

• Baer and Balto 1999, p.90.

• “This is a case dealing with technology, and the Court recognizes the need to promote pro-competitive conduct in the technology world. Indeed, technological innovation is an important defense in defending antitrust allegations… antitrust law has developed for good reason, and just as courts have the potential to stifle technological advancements by second guessing product design, so too can product innovation be stifled if companies are allowed to dampen competition by unlawfully tying products together and escape antitrust liability by simply claiming a ‘plausible’ technological advancement”. Caldera, Inc. v Microsoft Corp., 72 F.Supp. 2d 1295 (D.Utah 1999),

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1.2. The Changing Nature of Cases

As the Greek philosopher Heraclitus once said well, “everything flows, nothing stands still” and “the only constant is change”, this is certainly the case with the technology. It is self-evident that the most important characteristic of technology is that it is rapidly changing. If people were to say just one word about the concept of technology, it would probably be about its dizzyingly high pace. This is because of innovation as the driving source in high-tech markets where what matters for winning business is not the mere product itself, but the ability to further innovate, since an innovation at one point may be rendered obsolete by competitors’ better innovations. To sell new products, a high-tech firm must bring new products to the market or else it may lose its customers to other suppliers who may be offering better products.³⁷

Without saying more, the following statement of the former Assistant Attorney General for the Antitrust Division of the Department of Justice (DOJ) on the changing nature of the cases in high-tech markets is highly illuminating:

“Microsoft is so last century. They are not the problem. I think we’re going to continually see a problem potentially with Google, who I think so far has acquired a monopoly in internet, online advertising lawfully...”³⁸

This statement verifies that, in accordance with the title of this study, yesterday the target was Microsoft, but now it is Google, which “has become the most discussed antitrust target.”³⁹ In fact Microsoft, which faced significant allegations itself for decades on both sides of the Atlantic, is now an official complainant in the Commission’s Google investigation.⁴⁰ Microsoft was long the

para.1323. However, the same cannot be said for the EU Courts as they seem to have been less concerned with the dynamic nature of markets and the need to protect innovation. This is evident from the General Court’s France Telecom judgment where the Court held that “[t]he fact that there is a fast-growing market also cannot preclude application of the competition rules, in particular Article [102], especially where the undertaking in question has always held a market share much greater than that of its number one competitor, which is a valid indicium of a dominant position, and where it itself considers potential competition to be limited.” Case T-340/03 France Telecom SA v Commission [2007] ECR II-207, para.6. Therefore, the US authorities and EU authorities do not show the same level of concern for the nature of competition in high-tech markets.

• TEECE, D. J. and M. COLEMAN (1998), “The Meaning of Monopoly: Antitrust Analysis in High-Technology Industries”, 43 Antitrust Bulletin 801, p.830.

• Manne and Wright 2010, p.154-155.

• ibid at p.154.

• For some of Microsoft’s allegations against Google, see Microsoft’s Vice President and Deputy General Counsel’s statement at ——, “Company Statement: Microsoft - Competition Authorities and Search”, MLex 1 March 2011, http://www.mlex.com/Content.aspx?ID=91044, Date Accessed: 20.12.2012.

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“enfant terrible” of EU competition law, but now it complains that it is “obviously difficult for competing search engines to gain users when nearly every search box is powered by Google.”⁴¹ It must be ironic for Microsoft to lodge a complaint, as the company has often criticised the European authorities’ handling of competition cases and most of the time blamed them for being considerably influenced by complaints from competitors.⁴²

The pace of technology can be seen from some competition law cases involving technological products, technological means or even the whole market dynamics. The changing nature of the cases involving technological elements may make them look older than they really are. For example in the IBM case, the Commission dealt with the IBM’s anticompetitive practices concerning its “System 370 mainframe computers”. Today, this product may seem weird to the majority of people born in the aftermath of that decision dated 1984.⁴³ Although the case does not date back far from the present due to the relevant product market, it appears older than it really is.

On the contrary, although it dates back almost 10 years before the IBM case, in United Brands the European Court of Justice identified the relevant product market as “bananas” holding that:

“[B]ananas are integral part of the fresh fruit market, because they are reasonably interchangeable by consumers with other kinds of fresh fruit such as apples, oranges,

• CROFTS, L. (2011b), “Microsoft Files Complaint against Google with EC”, MLex 31 March 2011, http://www.mlex.com/EU//Content.aspx?ID=138469, Date Accessed: 20.12.2012. It is ironic that when Microsoft was dominating the market and Google did not have a high degree of market power in 2006 as it has today, it complained to both the US and the EU authorities that Microsoft would tie IE Version 7.0 with Windows Vista and set the MSN search engine as the default. The vice-president for search products at Google Mayer stated that “[t]he market favours open choice for search, and companies should compete for users based on the quality of their search services” and went on to state that “[w]e don’t think it’s right for Microsoft to just set the default to MSN. We believe users should ” MARSON, I. (2006), “Google Claims IE 7 is Anti-competitive”, ZDNET 3 May 2006, http://www.zdnet.com/google-claims-ie7-is-anti-competitive-3039266736/, Date Accessed: 20.12.2012. As an official complainant, Microsoft now seems to repeat what Google was complaining before.

• WATERS, R. and M. WATKINS (2011), “Microsoft Turns to Brussels in Google Complaint”, Financial Times 31 March 2011, http://www.ft.com/cms/s/2/7dd1c7a4-5b61-11e0-b965-00144feab49a.html#axzz1ImHCovvS, Date Accessed: 20.12.2012.

• “Five years after the case, the alleged dominance of IBM sunk under a welter of new products, innovations, PCs, desktops, laptops, etc.” VELJANOVSKI, C. (2001), “EC Antitrust in the New Economy: Is the EU Commission’s View of Network Economy Right?”, European Competition Law Review, No:22(4), p.117.

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grapes, peaches, and strawberries, etc... The banana has certain characteristics, appearance, taste, softness, seedlessness, easy handling, a constant level production which enable it to satisfy the constant needs of an important section of the population consisting of the very young, the old and the sick.”⁴⁴

Due to its unchanging nature, the relevant product market for banana is still the same, even almost half a century later. The banana of yesterday is no different to the banana of today; unless a ground-breaking achievement is occurred, such as its colour or size is altered by intervening with its genes. It should also be noted that in this situation, a genetically altered banana may be of less use and be completely replaced by another banana (as the case with technological products), which is far superior in terms of taste or portability. A new product may not be “just a vastly better version” leading to the demise of the old product; it may be “an entirely different product that eliminates the demand for the old product”.⁴⁵ This hypothetical example illustrates that with the advance of technology, today’s relevant product markets cases may not mean much to next generations.⁴⁶

Over time the technological means, to which firms resort when restricting competition or abusing their market power, are unlikely to remain unaffected by the advance of technology and dynamic competition. To take but one example, as a widespread practice, mobile phone manufacturers equip their mobile phones with the technology of Subscriber Identity Module (SIM) locking as desired by the GSM operators. SIM locks in a mobile phone basically do not allow its possessor to use SIM cards of other GSM operators.⁴⁷ Constrained by the GSM

• Case 27/76 United Brands Co. v Commission [1978] ECR 207, paras.12 and 31.

• Evans and Schmalensee 2002, p.17. The authors give the example of Microsoft Windows 95 which largely eliminated the demand for MS-DOS. Under the current state of technology, it is virtually impossible to effectively use Microsoft Windows 95.

• United Brands is still widely cited under the market definition section of most of the textbooks on EU competition law. See WHISH, R. and D. BAILEY (2012), Competition Law, Seventh Edition, Oxford University Press, Great Britain; JONES, A. and B. SUFRIN (2010), EC Competition Law: Text, Cases and Materials, Fourth Edition, Oxford University Press, Great Britain and KORAH, V. (2007), An Introductory Guide to EC Competition Law and Practice, Ninth Edition, Hart Publishing, Great Britain. One could argue that the case is likely to guide future market definition cases on other fruits, such as the ones explicitly mentioned in the case. However, the same is unlikely to happen with the future market definition of, say “cloud computing”, whether that is in the same relevant product market with IBM’s “System 370 mainframe computers”.

• Mobile phone users can normally change GSM operators simply by changing the SIM card while retaining their phone. Some operators, however, appear to have blocked this by limiting the use of phone only with a single SIM card (usually issued by them). This practice is known as “SIM locking”. This is done because the price of mobile phones is typically subsidised with revenues from subscriptions when customers obtain their mobile phones through contracts with GSM

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operator’s services, the possessor cannot use another SIM card of different GSM operators in that mobile phone, at least for a certain period of time. In this way, GSM operators are able to prevent substitutions to SIM cards of other GSM operators by the use of such technological mean.

In this respect, a possible future scenario would be that mobile phones might be designed in a way that the SIM card functionality of a mobile phone is integrated as a built-in function, meaning that consumers cannot use alternative SIM cards but only the services provided by the manufacturer of that mobile phone. This situation is likely to occur in the form of extending market power in one market into the other where a dominant firm does not have market power (leveraging), and in this respect a dominant mobile phone manufacturer might decide to enter the GSM operator market by technologically tying its mobile phones with the services of a GSM operator. This will certainly generate exclusionary effects on GSM operators, but it is not unequivocal whether such practice harms consumers.⁴⁸

Apple, the manufacturer of iPhone which has been listed as one of the 1001 inventions that changed the world,⁴⁹ is claimed to have planned to produce its new generation mobile phone with a technology which, upon purchase, allows its users to sign up for a service on Apple’s website and start using it immediately, without the need to subscribe to services of GSM operators.⁵⁰ It is reported that any decision by Apple to introduce a new version of iPhone with a SIM

operators, GSM operators simply try to avoid subsidising their competitors’ mobiles. As a result of SIM locks, consumers are deprived of the choice to switch to different GSM operators, even if they offer better or cheaper products. In Australia, Canada, Europe and the United States, many GSM operators lock the mobile phones they sell. Source: http://unlockedcellphone.blogspot.com/ 2007/12/what-is-sim.html, Date Accessed 20.12.2012.

• “[W]here leveraging involves innovation… antitrust authorities are presented with the problem of deciding whether the benefits to consumers of the innovation itself outweigh the anti-competitive effects of leveraging.” FISHER, M. F. (2001), “Innovation and Monopoly Leveraging”, J. Ellig (ed.), in Dynamic Competition and Public Policy: Technology, Innovation, and Antitrust Issues, p.138.

• CHALLONER, J. (2009), 1001 Inventions: That Changed the World, Cassell Illustrated, China, p.936.

• Obviously this would involve huge investment costs, such as building the infrastructure, base stations and satellites as well as advertisement costs to advertise the brand new product. Apple’s strategy might be becoming a mobile virtual network operator (MVNO), since under this model, companies buy wholesale mobile telephony services from the existing GSM operators and subsequently resell under their own names. Therefore, it might be theoretically possible to leverage market power into another market with the use of a technological measure.

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embedded would undermine the operators’ relationship with their customers and such a move could prove to be the first step in a process in which the mobile operators cede customer control to mobile phone manufacturers like Apple, which is objected to by some of Europe’s leading GSM operators.⁵¹

Even the whole market dynamics sometimes show a tendency to change and give way to a different market structure. This is especially the case with markets based on certain standards such as DVD, Blu-Ray, VHS, mp3, pdf and so on. Before a competition authority comes to a conclusion, a completely or partly new standard may come out and totally or partly replace the older standard. Whereas in other industries, which are not based on technological progress and dynamic competition, such as the sugar market, there are hardly any changes in terms of market structure, except some new entrants exerting competitive pressure on incumbents. Therefore, cases in high-tech markets may last for so long relative to the changing conditions of the industry and thus become irrelevant or ineffective at the end.⁵² Even when a case is well handled, “the legal wheels turn far too slowly.”⁵³

In home entertainment markets, frequent and radical changes occur in the market dynamics. Having replaced the older Betamax standard, VHS standard lagged behind in the market and is eventually replaced by DVD standard, which is now on the verge of being replaced by Blu-Ray standard that won the “format war” with HD DVD couple of years ago. Even before a competition authority begins to investigate certain anti-competitive behaviour in this market such as the regional restrictions in DVDs due to a “region code” embedded in DVDs which does not allow the user to play DVDs if their DVD players are equipped with a different region code,⁵⁴ the whole market structure might lose its popularity in the eye of consumers.

Another example is the video games market. This market is characterised by significant “technology waves” in that in every three or four years, a new

• PARKER, A. (2010a), “Apple Warned over Built-in Sim Cards” Financial Times 18 November 2010, http://www.ft.com/cms/s/0/db917464-f344-11df-a4fa-00144feab49a.html#axzz1CjsbEeN8, Date Accessed: 20.12.2012; see also PARKER, A. (2010b), “In-built Sim for Apple’s iPhone 5 Ruled out”, Financial Times 22 November 2010, http://www.ft.com/cms/s/2/fb627cb8-f662-11df-846a-00144feab49a.html#axzz1CjsbEeN8, Date Accessed: 20.12.2012.
• Posner 2000, p.9.

• Hovenkamp 2008, p.299.

• For more information, see ÖZKAN, A. F. (2011), “AB Rekabet Kurallar› Karfl›s›nda DVD Bölge Kodu Korumas›: Teknik, Ekonomik ve Hukuki Bir ‹nceleme”, Rekabet Dergisi, No:12(2), p.165-

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technology platform is introduced to the market.⁵⁵ Video game consoles do not generally offer backward compatibility and often consumers, who are tired of old games, switch quickly and rapidly to newer and/or better games.⁵⁶ A new technology can completely “leap-frog” the market position of existing firms and then quickly attract customers.⁵⁷ In 1994, the UK Monopolies and Mergers Commission (now Competition Commission) conducted a market investigation into the UK video games market and found certain anti-competitive practices.⁵⁸ Some firms that are referred in this investigation exited the market notwithstanding their very high market shares and technological products that are defined in the relevant market are now superseded by the state-of-the-art ones.⁵⁹

1.3. Public Awareness

Special attention is being paid to competition cases involving widely-used technological products and well-known high-tech multinational firms as the world’s economies are becoming increasingly interrelated. A technology-related competition investigation into or a ruling against well-known multinational high-tech firms attracts the attention of not just competition economists or lawyers, but millions of consumers worldwide. Headlines highlighting news about the launch of such investigation into or findings against certain anti-competitive practices of such firms attract remarkable attention.

• OFT (2002b), Innovation and Competition Policy: Part 2 – Case Studies, Report Prepared for the Office of Fair Trading, http://www.oft.gov.uk/shared_oft/reports/comp_policy/oft377part2.pdf, Date Accessed: 20.12.2012, p.25.

• Pitofsky 1999, p.3. Sega’s success with 16-bit video games, quickly surpassing Nintendo’s 8-bit format, demonstrates this point.

• By the time of the investigation, supply was dominated by two firms, namely Sega and Nintendo, both of which operated worldwide and supplied 99 percent of all consoles in the UK. They found to have established a discriminatory pricing scheme for game consoles and games which resulted in prices for games that were excessive compared to prices for consoles, controlled the supply of third party games through the conditions included in licence agreements, incorporated technical features in game consoles and games (similar to region codes in DVDs), some of which also introduced territorial segmentation and so on. OFT 2002b, p.20.

• Although Sega was the leading supplier with 60 percent by value of total trade sales of game consoles, at present it does not produce game consoles but only engages in the market for video games themselves. Likewise, the most up to date game consoles at the time of the investigation were 16-bit consoles (fourth generation consoles), which were then quickly replaced by 32-bit and 64-bit ones. ibid at p.19. At the time of writing, the leading manufacturers of video consoles are Sony with Playstation3, Nintendo with Nintendo Wii and Microsoft with Xbox 360 (the seventh generation of consoles).

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It has been commented that there are not many competition cases that “receive global coverage and are known outside of the small world of competition economists and lawyers”, and the Microsoft case is one of those, being perhaps one of the most interesting and controversial antitrust cases.⁶⁰ “By now, nearly every living person on earth has heard about” the US Microsoft decision.⁶¹ Fox and Crane refer to this issue as follows:

“There is no doubt that, from the public’s perspective, U.S. v Microsoft was the antitrust case of the 1990s and perhaps for decades before that. The investigation, the trial, and its aftermath received wide press coverage throughout. A number of the major actors in the drama became household names, as much as a result of the public relations battle among the parties as of the litigation itself.”⁶²

One can argue that the reason for such attention is the global availability of the products in question. As will be explained below, the relevant geographic market for technological products is vastly international. Such products globally address a vast number of consumers and can virtually be found in the markets of all countries. This is absolutely natural as well, since around 90 percent of global consumers use Microsoft Windows as their client operating system,⁶³ and are most probably interested in what is happening to this company. Likewise, over 70

• O’Donoghue and Padilla 2006, p.496.

• MORSE, H. (2001), “Antitrust Issues in High-Tech Industries: Recent Developments”, The Antitrust Review of the Americas 2002, http://www.global-competition.com/spl_rpts/main_fs.htm, Date Accessed: 20.12.2012.

• Fox and Crane 2007, p.288. US Microsoft case is even regarded as “the case of the century”. See PARDOLESI, R. and A. RENDA (2004), “The European Commission’s Case Against Microsoft: Fool Monti Kills Bill?”, LE Lab Working Paper AT-08-04, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=579814, Date Accessed: 20.12.2012, and RENDA, A. (2004), “Catch Me If You Can! The Microsoft Saga and the Sorrows of Old Antitrust”,

Erasmus Law and Economics Review, February-1, p.3.

• Once regarded as a “vast empire” in the eyes of the critics, Microsoft now faces fierce competition. Microsoft is losing market shares to Apple after this company’s successful innovations regarding both its laptop computers and tablet computers that work with “iOS” as the operating system developed by Apple. It has been observed that Google is also developing its own operating system which will be quite different from Microsoft’s Windows and Apple’s “iOS”. According to initial announcements by Google, this operating system is designed to be internet-based and is going to provide a cheaper alternative to today’s computers: “[t]he Chrome OS laptop marks the culmination of Google’s efforts to build a PC that draws entirely on the information and computing power on the web, rather than running “native” software made by Microsoft or other traditional software companies.” WATERS, R. (2010), “Google Challenge to Microsoft Software Empire”, Financial Times 8 December 2010, http://www.ft.com/cms/s/2/1b38a448-0263-11e0-ac33-00144feabdc0.html#axzz18BhQlCM4, Date Accessed: 20.12.2012.

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percent of consumers use iPod as their portable music player⁶⁴ (or more than just a music player, when its new integrated features are taken into account), and are thus more or less familiar with its producer, Apple. Such high market shares coupled with global availability of technological products triggers a very high public awareness.⁶⁵

However, for example, cases on other products, such as animal phosphates or oxygen peroxide, may not be that interesting to many people, including laymen and to a certain extent even scholars. The number of people that are familiar with operating systems, online search results or social network tweets far outweighs those that are into animal phosphates or oxygen peroxide. According to a study conducted by a business intelligence company, in every single minute of a day, Google receives over 2.000.000 search queries, Facebook users share 684.000 pieces of content, Twitter users send over 100.000 tweets and Apple’s AppStore receives 47.000 application downloads.⁶⁶ Those statistics unequivocally point out to the vast use of technological products and services, and the level of familiarity with some high-tech and innovative firms.

Due to such a high level of public awareness, it appears that consumers appear to somehow take a stance in favour of or against the company in question, depending on the level of satisfaction or dissatisfaction they get from its products. For example, after the announcement of the Commission’s investigation into Google,⁶⁷ numerous consumer comments have been made in favour of or against

• HAYS, T. (2006), “Apple’s Massive Market Bite”, European Lawyer, No:63, p.38.

• Sometimes competitors also play an active role in creating a public awareness campaign against firms that have often outdone them in the market place with a view to winning business against those firms by attacking their popularity. For example, Microsoft has started a campaign to inform internet users that Google’s privacy policies make them vulnerable to advertisers. It alleges that Google, which makes 96 percent of its revenues from advertising, collects users’ information both from their search results and by reading through their personal Gmail accounts, and then sells it to advertisers for billions of US dollars. Consequently, those users unwittingly become specific targets for advertisers. Source: ——, “Microsoft warns people that Google is indeed spying on your every move”, WorldPress Blog 1 February 2012, http://googleexposed.wordpress.com/ 2012/02/01/ microsoft-warns-people-that-google-is-indeed-spying-on-your-every-move/, Date Accessed: 20.12.2012. Microsoft with Internet Explorer and Google with Chrome compete in the market for web browsers. Microsoft’s Bing, which entered the market in 2009, also competes with Google, which has been running its services since 1998, in the market for online search engines.

• JOSH, J. (2012), “How Much Data Is Created Every Minute?”, DOMO Blog 8 June 2012, http://www.domo.com/blog/2012/06/how-much-data-is-created-every-minute/, Date Accessed: 20.12.2012.

• Press Release, “Antitrust: Commission probes allegations of antitrust violations by Google”, IP/10/1624, 30 November 2010. See infra “3. The Google Dilemma”.

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this investigation. Majority of the consumers took a stance against the Commission and expressed their comments as follows: “Google has built up its dominant share by providing an awe-inspiringly brilliant search service. The idea that Google is going to start sullying its reputation by fiddling the results of travel fare searches is simply not credible”, “Google is one of the world’s best search engines for a reason... government’s intervention is frankly speaking really ‘stupid’ and against the fundamentals of capitalism”, “Google is apparently good at what it does – brin[g]ing out sites relevant for us users.” and “the EU is typically going after those high-profile multi-billion dollar foreign firms with no good reason at all other than to get some money”.

Some consumers even levelled harsh criticism against the Commission implying that it is acting “ignorantly”: “dear European Commission, did you know that you can just type “www.yahoo.com” in your browser at any time and you get a whole different search engine?” and “[i]f the EU must do something, if it thinks that it is imperative that they interfere in Google’s (or anyone else’s) web products, let it be in this form: a link somewhere such that when the user clicks, it is led to an EU web site that explains how the Internet works.” Furthermore, one of the consumers accused the Commission of selecting the cases which it wants to be deal with and sarcastically meant that the Commission itself abuses its dominant position in investigating competition infringements: “Seriously, does the EU ever go after high-profile European firms? ...they never went after Porsche/VW, never went after Tesco or Carrefour... I wonder if Google, MS, Intel, Oracle couldn’t bring a case against the Commission in the ECJ for selective enforcement of anti-trust law.” Few consumers account for the Commission’s investigation as follows: “[i]t’s a legitimate case. Most internet users use Google as their gateway to the digital world, so fair competition is key” and “[e]ven if no evil is being done, Google’s dominant position demands a closer look.”⁶⁸

⁶⁸ All of those comments are taken from ——, “Engine Trouble for Google”, The Economist 30 November 2010, http://www.economist.com/blogs/babbage/2010/11/google_and_european_ commission?page=1, Date Accessed: 20.12.2012. It should be stressed that such consumer comments should not be taken seriously as these are not scholarly works and most of those consumers are probably laymen, and therefore not knowledgeable about what competition law is about. In this respect, one consumer expressed that “if Google changes its search results to favor its own products, that’s fair game, since it is their algorithm and they can tune it as they please (e.g., perhaps because they believe that their products are really superior)”, without being aware of the principle that dominant firms have a special responsibility not to impair undistorted competition as set out by the Court of Justice of the European Union in Michelin. Case 322/81 NV Nederlandsche Banden Industrie Michelin v Commission [1983] ECR 3461, para.57. For more information on this

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On the enforcement side, public awareness might lead to increases in both public enforcement and private enforcement of cases involving ubiquitous technological products of transnational companies. The reason for an increase in public enforcement is due to the fact that a competition authority might not remain silent and thus feel the need to launch an investigation into a transnational company, when much is being said in the press or among consumers against that company. It can be argued that this fact may put pressure on competition authorities and courts and thus may give rise to “false positives” (or Type 1 errors) or “false negatives” (or Type 2 errors).⁶⁹ Faced with a high-tech company increasing its market shares rapidly, a competition authority might be willing to challenge its certain prima facie anti-competitive business strategy, although the same authority might not have done so in the absence of such a situation, which might lead to an unnecessary prohibition of an “innocent” behaviour and vice versa.⁷⁰

Both types of errors seem to be costly: in the context of false positives, the costs are efficiencies that are foregone, and in the context of false negatives, the cost is consumer harm.⁷¹ However, the probability of false positives and their

subject, see McMAHON, K. (2009), “A Reformed Approach to Article 82 and the Special Responsibility not to Distort Competition”, in A. Ezrachi (ed.), Article 82 EC: Reflections on its Recent Evolution, Hart Publishing, Great Britain, p.121-145. On the other hand, such comments show customer feedback of Google’s services and may be taken into account as a parameter when analysing the effects of the alleged anti-competitive practices of Google on consumers. For some consumer comments on the Commission’s settlement with Microsoft regarding the unbundling of IE and Windows see KOMAN, R. (2009), “MSFT: EU Would Force Users to Pick Browser”, ZDNet 28 January 2009, http://www.zdnet.com/blog/government/msft-eu-would-force-users-to-pick-browser/4306, Date Accessed: 20.12.2012.

• False positives mean the wrongful condemnation of conduct that benefits competition and consumers, whereas false negatives indicate the mistaken exoneration of conduct that harms competition and consumers. POPOFSKY, M. S. (2006), “Defining Exclusionary Conduct: Section 2, the Rule of Reason, and the Unifying Principle Underlying Antitrust Rules”, 73 Antitrust Law Journal 435, p.448.

• “[E]mpirical evaluation of business practices in high tech-markets is incredibly complex partly because these cases involve conduct that can theoretically prove either pro-competitive or anticompetitive, because regulators must act or forbear in light of the “false positives” which can chill innovation, and because distinguishing pro-competitive from anticompetitive conduct in a technologically advanced setting is particularly difficult.” WRIGHT, J. D. (2011a), “Does Antitrust Enforcement in High Tech Markets Benefit Consumers? Stock Price Evidence from FTC v. Intel”, George Mason University Law and Economics Research Paper Series No.11-02,

http://ssrn.com/abstract_id=1739786, Date Accessed: 20.12.2012, p.27.

⁷¹ AHLBORN, C., D. BAILEY and H. CROSSLEY (2005), “An Antitrust Analysis of Tying: Position Paper”, D. Geradin (ed.), in GCLC Research Papers on Article 82 EC, p.200.

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social costs are both higher as innovation would at stake.⁷² The social costs of false positives are higher because, when competition law is applied in a situation involving innovation and technological advance, where it should not have been applied, this can stifle further innovation and disincentivise the innovator firm, which would obviously have undesirable social costs. Indeed, false positives are more costly than false negatives, because self-correction mechanisms mitigate false negatives but not false positives, and errors of both types are in fact inevitable.⁷³ While cases against high-tech giants grab headlines; pursuing them, however, may not always lead to “high-profile conclusions” for competition authorities and courts.⁷⁴

As for the private enforcement, public awareness may also lead to an increase in the number of private actions. What is being continuously written in the press and spoken among consumers is likely to incentivise consumers to take an action against the high-tech firm in question and claim for the harm they suffered, if any. In addition, given the widespread use of the products of that company, this might even lead to a “snowball effect” in the number of private actions based on both “follow-on” claims and “stand-alone” claims. After knowing that the company is found to have violated competition rules in a country, a consumer in another country might want to file a stand-alone claim against the company in that

• Manne and Wright 2010, p.153; “[T]he risk of over-enforcement (Type I errors) should be preferable to under-enforcement (Type II errors), at least when discussing dynamic markets in general and in the absence of sector regulation.” GALLOWAY, J. (2010), “Driving Innovation: A Case for Targeted Competition Policy in Dynamic Markets”, http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1763676, Date Accessed: 20.12.2012, p.8 (citations omitted) (emphasis original).

• EASTERBROOK, F. H. (1984), “The Limits of Antitrust”, 63 Texas Law Review 1 quoted in Manne and Wright 2010, p.157. In light of this, there is almost always a room for self-correction mechanisms with the advances in technology. This might be in the form of product differentiation or a completely new product or, as this is mostly the case, the use counter-technological means. For instance, if the DVD content providers opt for the use of a region code in their DVDs, which basically limits the use of that DVD to a certain region, the playback of these DVDs are not allowed in the DVD players having a different region code. No matter how lawfully the consumers obtain these DVDs, they are still not allowed to play them if they have a DVD player whose region code does not match with their DVDs. Although this practice seems to harm consumer welfare, there may not be a need for the intervention of competition law, since the outcome can easily be mitigated by the use of “region killer software”. These counter technological means allow consumer to play any DVD they have bought irrespective of its region code. See Özkan 2011, p.177-181.

• CROFTS, L. and R. McLEOD (2010), “MLex Comment: Almunia Faces Tough Choices over Hi-tech Sector Abuse Complaints”, MLex 23 March 2010, http://www.mlex.com/ aspx?ID=94079, Date Accessed: 20.12.2012.

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country and make use of the findings of the court of the first country.⁷⁵ It was observed in the aftermath of US Microsoft case that the case spurred numerous private lawsuits that Microsoft settled at substantial costs, and the case encouraged government actions in the EU, Korea and elsewhere that have been, at the very least, burdensome and costly for Microsoft.⁷⁶

1.4. Global Markets and Jurisdictional Problems

With domestic markets increasingly opening up to foreign trade, there have been tremendous increases in global trade thanks to industrialisation, globalisation, advanced transportation, multinational companies, as well as international bilateral or multilateral agreements between various states. As national borders disappear and the world increasingly transforms into a global market place, companies are seeking out several ways to sell their products in different markets, and thereby addressing vast amounts of consumers. As globalisation has brought competition to the international arena,⁷⁷ firms have to vigorously compete not only with their competitors in national markets, but also with other firms in foreign markets to win business.⁷⁸

Compared to most goods, technological products are globally available and can virtually be found in the market place of all countries. The same smart phones, software, DVDs, portable music players, USB-powered webcams and so on can all be found across the US, Europe, Australia, Japan and many other markets, sometimes only with some minor product differentiations.⁷⁹ In

⁷⁵ It has been observed that sometimes even competition authorities or courts and the undertaking(s) in question tend to make cross-references to the findings, arguments or defences in decisions or judgments from other jurisdictions. See both the Commission’s and Microsoft’s references to the previous US cases and settlements on Microsoft in Microsoft WMP, paras.51-58, 201, 663, 672-673, 687, 703, 947, 959, 973-974, and 1011 (especially paras.893, 902, 972, 1022 and 1363).

• Fox and Crane 2007, p.301.

• Economically speaking, globalisation is the world’s becoming a single market with the gradual removal of trade barriers among countries.

• “In the old economy, fixed assets, financing, and labor were principal sources of competitive advantage for firms. But now, as markets fragment, technology accelerates, and competition comes from unexpected places, learning, creativity, and adaptation are becoming the principal sources of competitive advantage in many industries.” ATKINSON, R. D. and R. H. COURT (1998), “The New Economy Index: Understanding America’s Economic Transformation”, Progressive Policy Institute, Technology Innovation and New Economy Project, http://www.dlc.org/documents/ pdf, Date Accessed: 20.12.2012, p.6.

• Sometimes national laws and regulations bound companies to comply with them in producing their goods for use in that country. These can be in the form of safety standards, health regulations

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Microsoft WMP,⁸⁰ the Commission noted that a worldwide market existed for client PC operating systems, work group server operating systems and streaming media players, and found that multinational computer manufacturers enter into worldwide licence agreements and sell computers globally.

Not only have new products emerged,⁸¹ but also the way how business is made has also changed. With its increasing use and thus growing role in international trade, internet has enabled the sale of products to longer distances easily and quickly without the presence of seller and buyer at the time of transaction. Within this context, internet enables some technological products to be bought and used instantly even without the need of actual delivery. Consumers have the option to buy software, download copyrighted music and film instantly, without waiting for these items to be delivered to their doors. Therefore, those kinds of technological products have become only “one click” away from consumers which leads them to be more and more globalised.⁸² Indeed, the internet has changed the basic economics of many sectors of the economy.

Although the markets may be global and free from national borders, competition laws are mostly national or regional as the case with EU. When the same kinds of products are available in different markets but produced and exported by the same companies (either parent or subsidiary), jurisdictional problems are likely to arise. These can be in the form of extra-territoriality or achieving different outcomes in different jurisdictions leading to inconsistent decisions or rulings. After all, the belief that anti-competitive behaviour is also

or other requirements. The use of three-pin adapter as the power source in the UK is a typical example for safety standards leading to product differentations. Besides, national classification (rating) criteria and age restrictions for films in DVD format have to be complied with, if DVDs are to be commercially sold in the UK market. Within this respect, in every DVD cover the logo of “British Board of Film Classification” has to be shown together with a number or a letter (such as U, PG, 12, 18) specifying the age groups for which the content of that DVD is suitable and to which persons it can be sold.

• Microsoft WMP, paras.23-29.

• “[Today] what we produce is increasingly a line of computer code or a gene sequence rather than an ingot of iron or a barrel of oil or a bushel of wheat.” Morse 2001.

• The development of e-commerce poses important questions in the context of competition law, especially with regard to permissible distribution systems. There has been an interest in regulating the internet sales within exclusive and selective distribution systems in the EU with the adoption of the Guidelines on Vertical Restraints [2010] OJ C 130/1 (see paras.51-54). On the role of internet in EU competition law see GAHNSTROM, A. and C. VAJDA (2000), “EC Competition Law and the Internet”, European Competition Law Review, No:21(2), p.94-106.

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contrary to the public good depends on the acceptance of a certain set of economic and political beliefs.⁸³

As an example of a dispute over extra-territoriality, in the context of DVD region codes, the world has been divided into six different regions by Hollywood based film studios and DVD player manufacturers, and each region has been given a specific region code, which should be matched with the player’s embedded region code. Examining this practice, the Australian Competition and Consumer Commission’s (ACCC) head stated that if the companies agreed on those restrictions, this would look like an “off-shore” anti-competitive agreement breaching not only Australian law but the laws in other countries and in practice and it may or may not be easy to enforce the law against overseas countries.⁸⁴ He further concluded that there were jurisdictional issues and ACCC would make recommendations to the Parliament in a few months, which include forcing the DVD industry to change its ways by international co-operation or legislation to declare Australia a market that would only sell multi-region DVD players.⁸⁵

When companies, resident within a country, export their products and sell them in different countries, extra-territoriality issue gains importance. This is often the case with high-tech companies since they tend to sell their products across different parts of the world, and thus are subject to different competition law regimes. Indeed technological product giants like Microsoft, Google, Apple, IBM and many others usually have a large global portfolio of customers. “Enforcers came to realise that the transnational character of the competition cases of today clashes with the traditionally territorial scope of domestic antitrust rules.”⁸⁶ To overcome disputes over jurisdiction, more and more countries are

• Jones and Sufrin 2010, p.1227.

• FITZSIMMONS, C. (2001), “Restricting DVD’s illegal: ACCC”, The Australian 27 March 2001, http://www.consensus.com.au/ITWritersAwards/ITWarchive/ITWentries02/C1CaitlinFitzsimmons

.htm, Date Accessed: 20.12.2012.

• ibid. In a press statement ACCC “advised consumers to exercise caution when purchasing a DVD video player because of the restrictions that limit their ability to play imported DVDs.” ACCC (2000), “Consumers in Dark about DVD Imports”, http://www.accc.gov.au/content/index. phtml/itemId/87605, Date Accessed: 20.12.2012 (emphasis added). It would appear that both the recommendations that were to be made to the Parliament and the wordings in the press release point out to jurisdictional problems as a result of which the case was closed and consumers were only left with an “advice”.

• MONTI, M. (2001), “Competition in the New Economy”, 10^th International Conference on Competition, Bundeskartellamt, Berlin 21 May 2001,

http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/01/232&format=HTML&aged =0&language=EN&guiLanguage=en, Date Accessed: 20.12.2012.

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now increasingly making use of international co-operation agreements.⁸⁷ Within this context, an international harmonisation movement has been led by the EU and the US.⁸⁸ As the former Assistant Attorney General for the Antitrust Division of the DOJ stated, cooperation is particularly important given the global nature of many markets, including in the high technology sector.”⁸⁹

Another issue in jurisdictional problems is that competition authorities and courts might achieve different outcomes in different jurisdictions which in return lead to inconsistent rulings, when the effects of the alleged anti-competitive behaviour are the same or similar. This situation is very likely given the global availability of technological products in different jurisdictions and the divergence in the applicable laws of the countries where such products are being sold. In fact, this is one of the most highlighted concerns when referring to different handling of anti-competitive behaviour, in particular unilateral conduct,⁹⁰ and different outcomes between the US and EU authorities. This transatlantic divide is caused by different views on how antitrust should protect the market.⁹¹

• For a good list of bilateral competition-specific agreements between different countries, see DABBAH, M. M. (2010), International and Comparative Competition Law, Cambridge University Press, Great Britain, p.532-540.

• See Agreement between the Government of the United States of America and the Commission of the European Communities regarding the application of their competition laws [1995] OJ L 95/47, and Agreement between the European Communities and the Government of the United States of America on the application of positive comity principles in the enforcement of their competition laws [1998] OJ L 173/28.

• Source: http://www.justice.gov/atr/public/press_releases/2007/226070.pdf, Date Accessed: 20.12.2012.

• In contrast to the prohibiton of cartels and merger control, where there is a growing global convergence, there is substantial divergence both within the EU and worldwide as to the appropriate scope of control that should be placed upon unilateral conduct of firms with market power. Article

• TFEU in the EU and Section 1 of the Sherman Act 1890 in the US appear to be quite similar to each other, compared to Article 102 TFEU and Section 2 of the Sherman Act 1890. Article 102 TFEU forbids the “abuse of a dominant position” by one or more undertakings, whereas Section 2 of the Sherman Act prohibits “monopolization”, “attempted monopolization” and “conspiracy to monopolize”. In addition to the differences in their wording, it seems that the real difference centres on the application of those corresponding provisions which has become highly visible after the cases against high-tech firms based on similar facts in both sides of the Atlantic. Cf. Case COMP/38.636 — Rambus [2010] OJ C 30/17 and Rambus Inc. v FTC, 522 F.3d 456 (D.C.Cir 2008).

• MARSDEN, P. (2010), “Some Outstanding Issues from the European Commission’s Guidance on Article 102 TFEU: Not-so-faint Echoes of Ordoliberalism”, F. Etro and I. Kokkoris (eds.), in

Competition Law and the Enforcement of Article 102, p.54.

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US officials have begun to raise growing concerns on the way the Commission handles competition cases against US-based high-tech companies. Herb Kohl, a US Senator, lucidly expressed that “[c]omplying with the antitrust laws of different countries, which often have differing substantive and procedural rules, is increasingly becoming a burden on US businesses” and further stressed that “[o]ver the past several years, foreign and in particular European regulators have been aggressive in their review of American companies’ business practices.”⁹² Likewise, Philipp Verveer, an executive officer at the US State Department, stated that “in Europe there has been a significant antitrust and competition regime that has had significant effects on the way US companies operate.”⁹³ Similar statements can also be found in the press and some blogs.⁹⁴

An obvious example is Microsoft’s tying of WMP to Windows, which was held as an abuse of dominance in EU, but nothing has yet been ruled against Microsoft in US with regard to media players, although Windows is the same in both jurisdictions. The Commission ordered Microsoft to offer Windows without a WMP tied thereon (more technically, to eliminate Windows’ code-commingling with WMP), but Microsoft retained the right to continue selling Windows with WMP. That remedy not only caused Microsoft to incur additional costs for unbundling WMP from the Windows, but also forced Microsoft to redesign specific operating systems for the EU Internal Market based on the meticulous dictations of the Commission.⁹⁵ Although this product was globally

• CROFTS, L. (2011c), “US Senate Panel to Look into EU Antitrust Treatment of American Multinationals”, MLex 11 March 2011, http://www.mlex.com/EU//Content.aspx?ID=135140, Date Accessed: 20.12.2012.

• FRANKLIN, M. (2011), “US Official Cautions against Antitrust Intervention in ‘Dynamic Markets’”, MLex 9 February 2011, http://www.mlex.com/EU/Content.aspx?ID=130295, Date Accessed: 20.12.2012.

• See ——, “Is Microsoft Ruling an Example of EU Protectionism?”, European Voice Blog 29 January 2009, http://www.europeanvoice.com/article/imported/is-microsoft-ruling-an-example-of-european-protectionism-/63776.aspx, Date Accessed: 20.12.2012. The differences in the way competition rules are being implemented is also emphasised in this source. This is evident from the question as to whether “things really look so different in the EU from the way they look to the rest of the world.”

• The response of Microsoft to the Commission is worth mentioning in this respect: According to Microsoft’s General Counsel, “the code-removal approach that the [C]ommission pursued today is an approach that in our view will help a small number of competitors ... it’s worth noting that the same competitors that have sought this outcome in Europe also sought it in the United States ... [but] the District Court ... rejected the precise code-removal remedy that the Commission has endorsed.” Pardolesi and Renda 2004, p.13. Likewise, IBM had also undertaken to offer its mainframe computers in a way that was tailored to the EU Internal Market (either without memory devices or with the minimum capacity required for testing) as a result of the settlement with the Commission.

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available in its original form which included the WMP, it had to be redesigned in order to be sold in the EU Internal Market.⁹⁶ It would be controversial to have two different outcomes on the same product in different jurisdictions, although the rules are similar in certain, but not all, respects. The relationships between the American and European competition laws are becoming increasingly matters of concern to governments and to business communities throughout the world.⁹⁷

A problem is that jurisdictional rules developed in the 19^th century may not be particularly well suited to the business context or the information technology of the 21^st century.⁹⁸ The scope for conflicts could increase as more states adopt their own codes of competition law and business becomes increasingly international.⁹⁹ Competition laws are now a global phenomenon; however, ideas for international competition regimes are unrealistic and overambitious compared to bilateral agreements and co-operative relations between authorities, which seem a better way ahead.¹⁰⁰ As emphasised by enforcers, the inherently global nature of many of the cases involving technology requires effective international co-operation amongst antitrust authorities.¹⁰¹

2. THE MICROSOFT SAGA

Part 2 deals with the Microsoft saga and analyses the cases against Microsoft on both sides of the Atlantic during the last two decades. Emphasis is on the product designs of Microsoft and their implications for the implementation of competition law rules on the prohibition of unlawful exclusionary conduct. This part asserts that despite being found anti-competitive in some cases, arguably the tying of media players and web browsers with operating systems can be regarded as innovative product designs for the benefit of consumers.

2.1. Microsoft I

Microsoft’s market power has led to a series of antitrust challenges on both sides of the Atlantic, and in some Far East countries such as Korea, Japan and

• The Commission’s remedy was limited to the EU; however, its substantive findings were based on a relevant market for streaming media players that was worldwide in scope. O’Donoghue and Padilla 2006, p.731-732.

• GIFFORD, D. J. and R. T. KUDRLE (2003), “European Union Competition Law and Policy: How Much Latitude for Convergence with the United States?”, 48 Antitrust Bulletin 727, p.731.

• Whish and Bailey 2012, p.490.

• Jones and Sufrin 2010, p.1264.

• Monti 2001.

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Taiwan.¹⁰² The Microsoft saga began with Microsoft I.¹⁰³ In the early 1990s, the DOJ began investigating Microsoft’s acquisition and maintenance of monopoly power in the market for operating systems contrary to the Section 2 of the Sherman Act 1890. In 1994, it filed a complaint against Microsoft concerning the company’s anti-competitive practices with original equipment manufacturers (OEM). According to the DOJ, the following practices of Microsoft were exclusionary:¹⁰⁴

1. Using contract terms requiring OEMs to make “per processor” payments for each computer they sell regardless of the installation of Windows,

1. Executing long-term contracts that exacerbated the anti-competitive effects of the “per processor” payment requirements,

• Imposing overly restrictive non-disclosure requirements that precluded certain independent application developers (software vendors) from working with competitors.

The major anti-competitive practice of Microsoft was the use of contract terms which required OEMs to make “per processor” payments. OEMs manufacture computers by assembling components some of which are purchased from other sellers, install an operating system and subsequently retail those computers under their brand. Though every computer needs an operating system, that operating system does not have to be Microsoft’s Windows. In practice, OEMs also use other operating systems.

However, Microsoft imposed contract terms on OEMs which required them to pay Microsoft a licence fee (royalty) for each and every computer they sell

¹⁰² In February 2006, the Korean Fair Trade Commission denied Microsoft’s arguments on efficiency gains in distribution and decided that Microsoft abused its “significant market dominant position” by tying Windows Media Server, Windows Media Player and Messenger with its client operating system, thereby excluding competitors and also harming consumers. CHOI, Y. S. (2010), “Analysis of the Microsoft, Intel and Qualcomm Decisions in Korea”, European Competition Law Review, No:31(11), p.471. Microsoft was mandated to distribute a new version of Windows Server 2003 without such tie-ins, which provides download links to rivals’ products through “Media Center” and “Messenger Center” to original equipment manufacturers and system builders in 2006. ibid at p.472. Likewise in Japan, the Japanese Fair Trade Commission found Microsoft’s tying of Microsoft Word, Excel and Outlook to Windows unlawful and ordered Microsoft to stop engaging in the anti-competitive practice. CHO, J. W. (2007), Innovation and Competition in the Digital Network Economy: A Legal and Economic Assessment on Multi-tying Practice and Network Effects,

Kluwer Law International, The Netherlands, p.33.

• United States v Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995) (“Microsoft I”) (all references are made to the judgment of the US Court of Appeals).

• Microsoft I, paras. 6-7.

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regardless of whether Microsoft’s operating system is included in that computer.¹⁰⁵ This licensing practice had the effect of increasing the costs of rival operating systems, since any other operating system would be an additional cost for OEMs and thus be a disadvantage. Consequently, OEMs were incentivised to install Windows because they have already paid a “per processor” licence fee, rather than a “per Windows” licence fee.

In order to reinforce “per processor” payments, Microsoft engaged in executing long-term contracts with major OEMs that exacerbated their anti-competitive effects. Under those contracts, Microsoft opted for minimum commitment requirements and credited unused balances to future contracts, and thus practically created a room for longer contracts. Those practices hindered innovation by suppressing the opportunities of smaller rivals who were placed at a competitive disadvantage to have their own operating systems installed on new computers.¹⁰⁶ As for the abovementioned third practice, the DOJ did not contend that it was of crucial significance to the case.¹⁰⁷

The DOJ and Microsoft settled the case by entering into a consent decree which was refused by the District Court but approved by the US Court of Appeals. The consent decree prohibited Microsoft from requiring OEMs to make “per processor” payments and other related arrangements such as minimum requirements and lump-sum payments, executing contracts that exceed one year unless the customer renews the contract for another year, and imposing unduly restrictive non-disclosure requirements on application developers. It has been observed that despite the consent decree, by that time “the damage was already done”; IBM’s alternative operating system, OS/2, was “virtually dead and never recovered”.¹⁰⁸

The consent decree was mainly concerned with the anti-competitive way how Microsoft commercialised its operating system; however, for the purposes of our study, it has one important aspect related to the use of technology in designing products in a way that breaches competition law rules on the prohibition of unlawful exclusionary conduct: that is, the anti-bundling provision. Pursuant to § IV (E) of the consent decree:

• “As a result, if the computer was to have a different operating system than Windows, the license fee for that system would have to be paid on top of the Windows fee, thus making any computer with a non-Windows operating system more costly than a Windows-based system.” Hovenkamp 2008, p.266.
• ibid at p.267.

• Microsoft I, para.8.

• Hovenkamp 2008, p.299.

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“Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon: (i) the licensing of any other Covered Product, Operating System Software product or other product (provided, however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products); (ii) or the OEM not licensing, purchasing, using or distributing any non-Microsoft product.”¹⁰⁹

This provision prohibited Microsoft from bundling other software with its operating system under its contracts with OEMs.¹¹⁰ However, Microsoft was allowed to develop new functions for its operating systems and integrate them with its current and future operating systems. Put differently, the sale of products on condition to the sale of other products (contractual tying) was prohibited, but the design of integrated products in a way that customers only obtain one product together with another (technological tying) was allowed.¹¹¹ “It seems to be in retrospect clear that the integrated product caveat would eventually lead to conflict, given the inherent difficulties of determining whether a bundle is one integrated product or two bundled items.”¹¹² This paved the way for Microsoft II as discussed immediately below.

2.2. Microsoft II

Microsoft II judgment¹¹³ examines Microsoft’s alleged violation of the 1995 consent decree as the DOJ claimed that Microsoft unlawfully bundled its web

• Final Judgment, Civil Action No. 94-1564.

• The consent decree also prohibited Microsoft from discriminating among OEMs by using price or other terms to retaliate against OEMs who decide to install non-Microsoft products. See ibid at § IV(G)(iii).

• “Microsoft has expanded over the years before and after the 1995 consent decree the functionality included in Windows, leading to the elimination of some stand-alone add-ons markets. For example, Microsoft included a disk defragmenter in Windows 1995 and the market for defragmenters promptly died. Similarly, when hard disk compression was included in Windows 1995, the market for disk compression software died”. ECONOMIDES, N. (2001), “United States v. Microsoft: A Failure of Antitrust in the New Economy”, Stern School of Business, New York University, http://www.stern.nyu.edu/networks/UWLA.pdf, Date Accessed: 20.12.2012, p.6. In accordance with this observation, the Commission observes in the Guidance Paper that “[t]he risk of anti-competitive foreclosure is expected to be greater where the dominant undertaking makes its tying or bundling strategy a lasting one, for example through technical tying which is costly to reverse.” Guidance Paper, para.53.

• LANGER, J. (2007), Tying and Bundling As a Leveraging Concern under EC Competition Law, Kluwer Law International, The Netherlands, p.77.

• United States v Microsoft Corp., 980 F. Supp. 537 (D.D.C. 1997) reversed in United States v Microsoft Corp., 147 F.3d 935 (D.C. Cir 1998) (“Microsoft II”) (all references are made to the judgment of the US Court of Appeals).

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browser, IE Version 4.0, with its operating system, Windows 95. Microsoft released the first three versions of IE on the same disc with Windows 95, but Version 4.0 was initially distributed on a separate disc and sold to the users of other operating systems as well. Microsoft’s Windows 95 licence agreements required OEMs to install IE and prohibited them from removing any features. The DOJ became concerned that this practice violated § IV(E)(i) by effectively conditioning the licence for Windows 95 on the licence for IE 4.0, creating in its view what antitrust law terms a “tie-in” between the operating system and the browser.¹¹⁴

On appeal to the Court of Appeals, Microsoft stressed the “integrated product” exemption in § IV(E)(i) defending that adding any feature to an operating system, as by simply putting the disc containing a compatible application in the same box with the operating system and requiring OEMs to install both, creates an integrated product unless Microsoft also licenses the feature on a stand-alone basis to OEMs.¹¹⁵ It defined an “integrated product” as a product that “combines” or “unites” functions that although capable of functioning independently, undoubtedly complement one another and insisted that Windows with IE constituted such a product. In short, Microsoft argued that it had simply integrated the products as allowed by the consent decree by pre-installing IE on Windows.

It is evident from the judgment that the US Court of Appeals had to deal with the meaning of “integration” and when a product is “integrated”. This is because the 1995 consent decree contained “a critical ambiguity in that it could not be construed to prohibit Microsoft from developing integrated products.”¹¹⁶ Interpreting the decree, the court held the view that an integrated product “combines functionalities (which may also be marketed separately and operated together) in a way that offers advantages unavailable if the functionalities are bought separately and combined by the purchaser.”¹¹⁷ It concluded that the

• Microsoft II, para.12.

• Microsoft II, para.18.

• ROWLES, D. (2001), “Is It a Tie-in or an Integration? U.S. v. Microsoft Weighs In”, Boston University School of Law, http://www.bu.edu/law/central/jd/organizations/journals/scitech/ volume6/rowles.pdf, Date Accessed: 20.12.2012, p.4.

• Microsoft II, para.56 (emphasis original). Based on its definition, the Court laid down the two limbs of the test by requiring the integrated product to be “different from what the purchaser could create from the separate products on his own” and “better in some respect.” ibid at para.59. This case illustrates that the cases where integration of products offers some non-trivial gain to consumers above what they could achieve on their own by combining the different products were

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Windows 95 and IE package was a “genuine integration” and § IV(E)(i) of the consent decree did not bar Microsoft from offering it as one product.¹¹⁸ In doing so, the Court of Appeals rightly focused on the technological aspect of the case, from which the case actually sprang, rather than dealing with Microsoft’s contractual arrangements with OEMs regarding their purchase of IE Version 4.0 as a condition of licensing Windows 95. Consequently, the case was remanded to the District Court. This was, according to some authors, a major victory for Microsoft.¹¹⁹

2.3. Microsoft III

Compared to the aforementioned earlier cases, Microsoft III judgment was the most important challenge against Microsoft’s abusive practices in the US.¹²⁰ In 1998, the DOJ and the Attorneys General of twenty states brought antitrust lawsuits against Microsoft. The DOJ asserted that Microsoft violated Section 1 and Section 2 of the Sherman Act 1890: by tying IE to Windows and other exclusionary practices, Microsoft monopolized the operating system market to maintain its market power (unlawful maintenance of monopoly power) and it attempted to monopolize the web browser market (attempted monopolization).¹²¹ The case was settled in 2002.¹²²

then exempt from the tying prohibition. HYLTON, K. N. and SALINGER, M. (2001), “Tying Law and Policy: A Decision-Theoretic Approach”, 69 Antitrust Law Journal 469, p.484.

• Microsoft II, para.68. The Court’s reasoning was not shared by some commentators. Stating that the combination of Windows and IE did not confer advantages unobtainable by their combination by buyers because Microsoft actually had its buyers combine the separate disks, Elhauge argues that Windows and IE should not have been deemed a single integrated product. ELHAUGE, E. (1998), “The Court Failed My Test”, The Washington Times 10 July 1998, http://www.law.harvard.edu/ faculty/elhauge/pdf/court_failed_test.pdf, Date Accessed: 20.12.2012.
• Langer 2007, p.78.

• United States v Microsoft Corp., 87 F.Supp. 2d 30 (D.D.C. 2000) affirmed in part, reversed in part in United States v Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) cert. denied, 534 U.S. 952 (2001) (“Microsoft III”) (all references are made to the judgment of the US Court of Appeals).

• Section 2 of the Sherman Act 1890 establishes three offences, namely “monopolization,”, “attempted monopolization” and “conspiracy to monopolize”. Monopolization occurs when the firm in question possesses monopoly power and has willfully acquired or maintained that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. Whereas, elements of attempted monopolization comprise predatory or anti-competitive conduct, a specific intent to monopolize and a dangerous probability of achieving monopoly power. The mere possession or exercise of monopoly power is not an offence; the law addresses only the anti-competitive acquisition or maintenance of such power and certain related attempts. For more information, see US DOJ 2008.
• Final Judgment, Civil Action No. 98-1232 and 98-1233.

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As discussed above, in Microsoft II, the Court of Appeals held that the bundle of IE with Windows was an integrated product and thus legal under the 1995 consent decree. To overcome this interpretation of the law, the DOJ argued that Microsoft’s bundling of IE with Windows and its attempt to eliminate one of its major competitors in the browser market, Netscape, went beyond simply adding functionality to Windows and resulted in a series of add-on software manufacturers being driven out of the market.¹²³ According to the DOJ, Netscape had become a significant threat to Microsoft’s operating system by developing a web browser, Navigator. Netscape would pose a threat to Microsoft if it allowed application programmes to run on all the operating systems that work with Netscape because that would erode the advantage that Windows had of having more application programmes than other operating systems.¹²⁴

Understanding of the capabilities of Navigator is crucial in understanding the background of the DOJ’s case against Microsoft. As a browser, Navigator was naturally designed to allow users to visit web sites. However, the bottom line is that it offered more than mere web browsing. As Hovenkamp expresses, Netscape offered “a kind of software-generated “shadow” operating system sitting on top of the computer’s existing operating system.”¹²⁵ Microsoft feared that Netscape’s new technology would tilt the operating system market by lessening dependence to Windows and sooner or later pose a great threat to its quasi-monopoly position. At first, Microsoft tried to convince Netscape not to release a version of its browser that would act as an applications platform.¹²⁶ Upon the refusal of Netscape, Microsoft decided to stifle this technology by adopting an exclusionary strategy involving a wide range of practices.

In its defence, Microsoft first pointed out to the ruling of the Court of Appeals in Microsoft I and argued that the bundle of IE and Windows was legal under the 1995 consent decree with a view to refuting the anti-competitive tying allegation. Second, it challenged its alleged monopoly power in the market for operating systems. Third, it argued that consumers have benefited from its free IE and affordable Windows, and its innovations were thus welfare-enhancing. Lastly, it contended that it was competing vigorously against Netscape in a way that was legal under the Sherman Act.¹²⁷

• Economides 2001, p.7.

• CARLTON, D. W. and J. M. PERLOFF (2005), Modern Industrial Organization, Pearson Addison Wesley Press, Fourth Edition, USA, p.374.
• Hovenkamp 2008, p.294-295.

• Langer 2007, p.79.

• Microsoft III, paras. 51, 58, 61, 67 and 98.

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The District Court first found that Microsoft enjoyed a large and stable market share of more than 95 percent in the market for operating systems for Intel-compatible computers which showed “application barriers to entry” due to the abundance of applications running on Windows.¹²⁸ Such a vast array of applications for Windows made it appealing for users to choose Windows and a greater number of users choosing Windows eventually spurred developers to write programmes for that operating system.¹²⁹ Netscape attempted to lower those application barriers to entry and Microsoft engaged in a series of conduct.

Starting with the allegation of unlawful monopolization, the District Court condemned a number of provisions in Microsoft’s licence agreements with OEMs as Microsoft’s imposition of those provisions served to reduce the usage share of Navigator and thus to protect its monopoly in the operating systems market. In particular, it condemned the provisions prohibiting OEMs from:

1. Removing IE’s desktop icons, folders, or “Start” menu entries,

1. Modifying the initial boot sequence,

• Otherwise altering the appearance of the Windows desktop.¹³⁰

The District Court observed that Microsoft believed those contractual restrictions on OEMs were not sufficient; therefore, it set out to bind IE more tightly to Windows as a technical matter. It centred upon three specific practices in this respect:

• Microsoft III, paras.54-56. The application barriers to entry to the market for operating systems created by the vast number of applications running on Windows appear to have played an important role in this case. During Microsoft II, an expert opined that “[b]ecause of the nature of the barriers to entry created by network effects, the most likely long-term threat to Microsoft’s monopoly power does not come directly from other operating systems, but rather from the spread of cross-platform technologies, that can serve (like Microsoft’s operating system) as a platform to which application developers write… [A]lthough browsers may never develop into full-fledged operating systems, browsers can serve as a platform to which application developers write.” In a clear and consistent manner, he explained that “[s]hould application vendors use a browser platform other than the Windows platform, the applications barrier to entry that protects Microsoft’s monopoly could be diminished, and competition in the PC operating system market created.” SIDAK, G. J. (2001), “An Antitrust Rule for Software Integration”, 18 Yale Journal on Regulation 1, p.13-14 (emphasis original). His testament clearly explains the whole story behind Microsoft III.

• PAGE, W. H. and S. J. CHILDERS (2012), “Antitrust, Innovation and Product Design in Platform Markets: Microsoft and Intel”, 78 Antitrust Law Journal 363, p.369.

• Microsoft III, para.60. The Court of Appeals upheld those contractual restrictions as unlawful maintenance of monopoly power with just one exception concerning the restriction prohibiting automatically launched alternative interfaces. ibid at para.64.

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1. Excluding IE from the “Add/Remove Programs” utility in Windows 98 with a view to discouraging the use of competing browsers,

1. Designing of Windows in a way that in some circumstances overrides the user’s choice of a default browser other than IE,

• Commingling browser and operating system codes so that any attempt to

delete the files containing IE would concurrently deteriorate the operating system.¹³¹

Microsoft’s agreements and dealings with internet service providers (ISP) with regard to the distribution of IE were also condemned by the District Court. Microsoft monopolized the operating system by:

1. Offering IE free of charge to ISPs,

1. Offering ISPs a bounty for each customer the ISP signs up for service using the IE browser,

• Developing the IE Access Kit and offering it free of charge to ISPs,

1. Providing easy access to ISPs’ services from the Windows desktop in

return for their agreement to promote IE exclusively and to keep shipments of internet access software using Navigator under a specific percentage.¹³²

The District Court further condemned Microsoft for its agreements with independent software vendors (ISV) and Apple. According to the court, by granting ISVs free licences to bundle IE with their offerings, and by exchanging other valuable inducements for their agreement to distribute, promote and rely on IE rather than Navigator, Microsoft directly induced developers to focus on IE rather than Navigator so that web-based applications would rely on the

• Microsoft III, para.65. The Court of Appeals upheld two of those three actions as unlawful maintenance of monopoly power with the exception of Microsoft designing of Windows in a way that overrides the user’s choice of a browser other than IE as the default browser. ibid at paras.66-

• Microsoft III, para.68. The District Court did not, however, assign liability for offering IE free of charge (predatory pricing). The Court of Appeals held that neither Microsoft’s predatory pricing, nor development of products was unlawful, but affirmed the district court’s judgment holding that Microsoft’s exclusive contracts with ISPs violated Section 2. The Court of Appeals agreed with the reasoning of the district court that Microsoft did not completely excluded Netscape, but it substantially excluded Netscape from the most efficient distribution channels, namely the pre-installation by OEMs and promotion by ISPs. By doing so, Microsoft relegated Netscape to more costly and less effective methods such as mass mail ing its browser on a disk or offering it for download over the internet. ibid at para.70.

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technology of Windows.¹³³ Microsoft also pressured Apple by threatening to withdraw support for Mac Office, a programme which was vital for Apple to stay in the market amid the then steep decline of its business. Microsoft and Apple consequently reached an agreement under which Microsoft would continue to release up-to-date versions of “Mac Office” and in return Apple would bundle IE with Apple’s operating system, “Mac OS”, and make IE the default browser.¹³⁴

One of the key points of the judgment centres on the manipulation of a particular technology, Java. Java was itself “middleware”¹³⁵ and included a programming language, but the bottom line was that it allowed cross-platform uses between different operating systems meaning that users would be less dependent to Windows as their operating system since Java compatible applications could run directly on a browser installed in any supported operating system. This technology was developed by Sun Microsystems Inc. (Sun) and Netscape agreed to distribute a copy of Java with Navigator. Microsoft also agreed to promote Java technologies, but at the same time it developed its own Java Virtual Machine (JVM) which was incompatible with the one Sun had already developed for Windows. The District Court found that Microsoft took the following four steps to prevent Java from being developed as a viable cross-platform:

1. Designing a JVM which run faster but was incompatible with the one developed by Sun,

1. Entering into contracts with major ISVs inducing them to promote Microsoft’s JVM exclusively,

• Deceiving Java developers about the Windows-specific nature of the tools it distributed to them by causing them to produce Windows-dependent Java applications that they believed would be cross-platform,
• Microsoft III, para.72. By way of illustration, a 2002 Evans Data Corporation report covering both client PCs and servers found that 75 percent of ISVs wrote applications for the Windows platform, the next popular operating system being Linux and Solaris with 6.7 percent and 5.2 percent respectively. KORAH, V. (2006), Cases and Materials on EC Competition Law, 3^rd Edition, Hart Publishing, Great Britain, p.158.

• Microsoft III, para.73. The Court of Appeals upheld those findings of the District Court.

• Middleware is a term used for programmes which have their own operating system capabilities and therefore offer their users more than a mere application programme. “If the same middleware applications are provided on different operating systems, then applications that interact with that middleware can also run those different operating systems. If middleware, and programs that run on it, become widespread that makes it easier for users to move to competing operating systems.” COATES, K. (2011), Competition Law and Regulation of Technology Markets, Oxford University Press, Great Britain, p.248.

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1. Coercing Intel to stop aiding Sun in improving the Java technologies.¹³⁶

In addition to condemning Microsoft for unlawful maintenance of monopoly power in the market for operating systems for the abovementioned practices, the District Court also held that Microsoft attempted to monopolize the browser market. The Court of Appeals reversed this part of the judgment on the grounds that the plaintiffs simply relied upon Microsoft’s liability for monopolization of the market for operating systems as a presumptive indicator of attempted monopolization of an entirely different market.¹³⁷ Likewise, some commentators have been sceptical about the DOJ’s theory of harm with regard to the attempted monopolization in the browser market.¹³⁸

As for the tying allegation,¹³⁹ the District Court held that Microsoft’s contractual and technological tying of Windows 95 and Windows 98 with IE was per se unlawful.¹⁴⁰ The Court of Appeals, however, stressed that the rule of reason, rather than per se analysis, should govern the legality of tying arrangements involving “platform software products”. Therefore, it overturned the District Court’s finding and remanded the case for an evaluation under the rule of reason.¹⁴¹ As discussed in Part I, the Court came to the conclusion that “[t]here being no close parallel in prior antitrust cases, simplistic application of per se tying rules carries a serious risk of harm.”¹⁴²

• Microsoft III, para.74. The Court of Appeals reversed the imposition of liability for Microsoft’s development and promotion of its JVM, but upheld Microsoft’s exclusive dealings with ISVs, deception of Java developers and threat to Intel as unlawful exclusionary practices.
• Microsoft III, paras.80-81.

• “The Antitrust Division effectively made a prediction in the Microsoft suit: if Microsoft is allowed to bundle Internet Explorer and undermine Netscape, it will obtain a monopoly and be able to raise prices in the future. That prediction has been falsified... despite Microsoft’s continued zero pricing of IE, other browsers have been able to enter and achieve substantial usage shares… Websites have not become locked in to any proprietary aspects of Microsoft’s browser standards.” PAGE, W. H. (2010), “Microsoft and the Limits of Antitrust”, Journal of Competition Law and Economics, No:6(1), p.48.

• For a good critical analysis of the tying allegation in this case, see CHIN, A. (2005), “Decoding Microsoft: A First Principles Approach”, Wake Forest Law Review, No:40(1), p.1-157.

• The facts underlying the tying allegation under Section 1 of the Sherman Act substantially overlapped with those discussed above in the context of Microsoft’s exclusive dealings with OEMs as the basis for unlawful maintenance of monopoly power under Section 2 of the Sherman Act.

• On the meaning of and difference between per se and rule of reason rules, see BLACK, O. (1997), “Per Se Rules and Rules of Reason: What Are They?”, European Competition Law Review, No:18(3), p.145-161.

• Microsoft III, para.84.

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Microsoft disputed and the court doubted whether the “separate product” element in (contractual) tying test¹⁴³ was properly applicable to technological tying cases, when two products are technologically integrated, but also available separately. The court took the view that that the facts of the case poorly fit with the separate product element¹⁴⁴ and eventually opposed to the test being per se applied as it may not give newly integrated products a fair shake.¹⁴⁵ The court came to the conclusion that “wooden application of per se rules in this litigation may cast a cloud over platform innovation in the market for PCs, network computers and information appliances.”¹⁴⁶ The DOJ dropped the tying claim and since the case was settled, this issue was not thoroughly discussed.

The last issue in Microsoft III was the remedy that the District Court adopted: among other things, Microsoft shall be divested into two companies, with one continuing Microsoft’s operating system business and the other undertaking application and software operations. During the trial, Microsoft’s CEO emphasised that Microsoft was not the result of mergers or acquisitions and thus always had been a unified company without free-standing business unit. The Court of Appeals remanded the case to the District Court for the determination of the specific remedy for the limited ground of liability which it upheld.¹⁴⁷ When the case was settled, Microsoft undertook to provide OEMs and consumers the choice of using rival middleware in addition to or instead of its own products.

• The constituent elements of the modified tying test were laid down by the US Supreme Court as (1) the tying and tied goods are two separate products; (2) the defendant has market power in the tying product market; (3) the defendant affords consumers no choice but to purchase the tied product from it; and (4) the tying arrangement forecloses a substantial volume of commerce.

Jefferson Parish Hospital Distict No 2 v Hyde, 466 U.S. 2 (1984). See also Eastman Kodak Co. v Image Technical Servs., Inc., 504 U.S. 451 (1992). For a detailed analysis of the development of tying and tying cases in US and EU law, see AHLBORN, C., D. EVANS and J. PADILLA (2004), “The Antitrust Economics of Tying: A Farewell to Per Se Illegality”, 49 Antitrust Bulletin 287, and EKD‹, B. (2011), “Ürün Ba¤lama ve Paket Sat›fllar Yoluyla Hakim Durumun Kötüye Kullan›lmas›”, K.C. Sanl› (ed.), in Hakim Durumun Kötüye Kullan›lmas›: Sorunlar ve Çözüm Önerileri Sempozyumu, p.460-480.

• ?…the separate-products test is a poor proxy for net efficiency from newly integrated products.”

Microsoft III, para.92.

• “…judicial “experience” provides little basis for believing that, “because of their pernicious effect on competition and lack of any redeeming virtue,” a software firm’s decisions to sell multiple functionalities as a package should be “conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” Microsoft III, paras.90-91 (citations omitted).
• Microsoft III, para.95.

• Microsoft III, para.107.

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2.4. Microsoft WMP

The case against on the other side of the Atlantic began in 1998 when Sun filed a complaint with the Commission claiming that Microsoft had refused to licence information that Sun deemed necessary for its server software to work with Microsoft’s client PC operating system in order to compete in the work group server operating system market. The complaint was based on Microsoft’s refusal of interoperability information, but the Commission later extended the scope of its investigation on its own initiative to the integrated media functionality of Windows. This time Microsoft was accused of unlawful tying of WMP to Windows, quite similar to the tying of IE with Windows in the US.¹⁴⁸ The decision was adopted in 2004 after 6 years and largely upheld by the General Court in 2007.¹⁴⁹ A fine of 497 million Euros was imposed on Microsoft.¹⁵⁰

The Commission found that Microsoft’s market share in the market for client PC operating systems was over 90 percent and it enjoyed stable and continuous market power in the relevant market.¹⁵¹ The market share of Microsoft in the market for work group server operating systems was at least 60 percent and Microsoft competed against three competing products, namely Novell, Linux and UNIX. Close commercial and technological associative links between those two markets were found.

The first abusive conduct in which Microsoft is found to have engaged was the refusal to supply interoperability information¹⁵² (communication protocols)

• On the similarities and differences between Microsoft III and Microsoft WMP, see APON, J. (2007), “Cases against Microsoft: Similar Cases, Different Remedies”, European Competition Law Review, No:28(6), p.327-336.

• Case COMP/C-3/37.792 — Microsoft [2004] OJ L 32/23, upheld in Case T-201/04 Microsoft v Commission [2007] ECR II-3601 (“Microsoft WMP”) (all references are made to the judgment of the General Court). See also Press Release, “Commission Concludes on Microsoft Investigation, Imposes Conduct Remedies and a Fine”, IP/04/382, 24 March 2004.

• This was a huge sum in absolute terms, but actually it roughly equaled to only two weeks of Microsoft’s profits by then. Coates 2011, p.219. In the aftermath of the Commission’s decision, there have been several disagreements between Microsoft and the Commission in relation to the accuracy of the interoperability information and its pricing, which in 2008 led to a further fine of

• million Euros imposed on Microsoft for the period between 21 June 2006 and 21 October 2007.

• Microsoft WMP, para.31.

• “Interoperability generally arises in high-tech markets where software producers may be dependent on interface information concerning the operation of other software (such as platform operating systems) in order to produce products (such as applications) which are compatible”. HOWARTH, D. and K. MCMAHON (2008), “”Windows has performed an illegal operation”: the Court of First Instance’s Judgment in Microsoft v Commission”, European Competition Law Review, No:29(2), p.117 (emphasis original).

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to its competitors in the work group server operating systems market. Microsoft defended that the interoperability information, which it was required to disclose to its competitors, was protected by intellectual property rights (IPR). A requirement that it disclose such information would interfere with the free exercise of its IPRs and with its incentive to innovate.¹⁵³ Furthermore, it argued the relevant criteria established in the case law which determine when a dominant firm could be required to grant a licence to a third party were not satisfied in this case.¹⁵⁴

According to the Commission, by refusing to disclose interoperability information, Microsoft aimed to leverage its quasi-monopoly position from the client PC operating system market to the adjacent work group server operating system market. The Commission contended, among other things, that it was essential that Microsoft’s competitors have access to indispensable information relating to interoperability with the Windows domain architecture in order for them to be able to remain viably on the market and to develop work group server operating systems capable of achieving a required degree of interoperability when the servers on which they are installed are added to a Windows work group server.¹⁵⁵ If Microsoft’s competitors had access to the interoperability information that Microsoft refuses to supply, they could use the disclosures to make the advanced features of their own products available for consumers.¹⁵⁶

The Commission went on to state that even though the interoperability information was not “indispensable”, Microsoft retained a “significant competitive importance” in terms of interoperability by its refusal which discouraged its competitors from developing and marketing work group server operating systems with innovative features, to the prejudice of consumers.¹⁵⁷ As the Commission argued, Microsoft’s refusal created a risk of stifling competition on the work group server operating system market and led to restriction of consumer choice. Although the refusal did not prevent the appearance of a “new product”, it did hamper innovation and for this reason, an increasing number of consumers were locked into Windows at the level of work group server operating

• This plea was overturned by the Commission through an incentive balance test: “[A] detailed examination of the scope of the disclosure at stake leads to the conclusion that, on balance, the possible negative impact of an order to supply on Microsoft’s incentives to innovate is outweighed by its positive impact on the level of innovation of the whole industry (including Microsoft)”. Microsoft WMP, para.706 (emphasis original).
• Microsoft WMP, paras.108-112 and 312.

• Microsoft WMP, para.106.

• Microsoft WMP, para.654.

• Microsoft WMP, paras.381 and 653.

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systems.¹⁵⁸ UNIX, for example, offered more functions such as reliability, availability and security, compared to Microsoft’s server operating system. The Commission’s decision has been widely debated.¹⁵⁹

The second abusive conduct, which is more relevant for the purposes of our study, was Microsoft’s tying its WMP to Windows. The Commission decided that Microsoft’s conduct in making the availability of Windows conditional on the simultaneous acquisition of WMP constituted an abusive tied sale.¹⁶⁰ The Commission considered that Microsoft’s conduct satisfied the conditions for a finding of an unlawful tying for the purposes of Article 102 TFEU:¹⁶¹ (1)

• Microsoft WMP, para.650. Geradin insists that the Commission seemed to have overlooked or at least insufficiently examined the issue of emergence of a new product for which there is an unsatisfied consumer demand (Magill), but also adds that the new product element is itself “absurd” and leads to “undesirable consequences”. GERADIN, D. (2005), “Limiting the Scope of Article 82 of the Treaty: What Can EU Learn from the US Supreme Court’s Judgment in Trinko in the Wake of Microsoft, IMS and Deutsche Telekom?”, Common Market Law Review, No:41, p.1537. Pardolesi and Renda argue that contrary to other EU cases on refusal to license intellectual property rights, Microsoft’s refusal to supply interoperability operation did not prevent the emergence of a new product, or a new market for which there was sufficient consumer demand. Consequently, Microsoft’s competitors enjoyed costless and perfect interoperability. Pardolesi and Renda 2004, p.50. Analysing the case law, Komninos and Czapracka observe that although the ECJ had confirmed in IMS Health the principles in its earlier judgments, including Magill and Bronner, in Microsoft the General Court significantly relaxed the IMS Health test and lowered the threshold for antitrust intervention. KOMNINOS, A. P. and K. A. CZAPRACKA (2010), “IP Rights in the EU Microsoft Saga”, F. Etro and I. Kokkoris (eds.), in Competition Law and the Enforcement of Article 102, p.92.

• Czapracka notes that the Commission imposed a duty to disclose interoperability information which was more than access to an essential facility, since it required disclosing as to create “full interoperability”, a level playing field between the dominant firm and its competitors. CZAPRACKA, K. A. (2008), “Antitrust and Trade Secrets: The U.S. and the EU Approach”, 24 Santa Clara Computer & High Tech. Law Journal 207, p.269. Andreangelli claims that the General Court showed a ‘benevolent’ attitude in favour of Microsoft’s competitors. ANDREANGELLI, A. (2009), “Interoperability as an “Essential Facility” in the Microsoft Case: Encouraging Competition or Stifling Innovation?”, European Law Review, No:34(4), p.597. Larouche suggests that the European authorities simply assumed that “competition on the market” was preferable to “competition for the market” and breakthrough innovation. LAROUCHE, P. (2008), “The European Microsoft Case at the Crossroads of Competition Policy and Innovation”, 75 Antitrust Law Journal 601, p.610.

• Microsoft WMP, para.814. Unlike the web browsers in Microsoft III, media players were not regarded as cross-platform applications posing a threat to Microsoft’s dominance in operating systems market in Microsoft WMP.

• The constituent elements of the tying analysis were listed by the Commission as (1) the tying and tied goods are two separate products; (2) the undertaking concerned is dominant in the market for the tying product; (3) the undertaking concerned does not give customers a choice to obtain the

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Microsoft had a dominant position on the client PC operating systems market; (2) media players and client PC operating systems were two separate products; (3) Microsoft did not give consumers the choice of obtaining Windows without WMP; and (4) the tying foreclosed competition in the market for media players. The Commission added that Microsoft failed to demonstrate that its conduct was objectively justified.¹⁶² The General Court held that the Commission’s analysis of the constituent elements of tying abuse was correct and consistent both with Article 102 TFEU and with the case law.

Most of the analysis of the Commission was devoted to the second and fourth elements. The first condition, the finding of dominance, was quite easily satisfied and was not very much disputed by Microsoft. On the second condition, the separate products issue, the Commission observed that there were independent manufacturers of media players and thus there was a distinct market for the tied product.¹⁶³ Second, a significant number of users chose to obtain media players separately from operating systems. Third, by contrast, some users did not need or want a media player meaning that there was material demand for operating systems without media players. Lastly, Microsoft itself developed and distributed versions of WMP for other operating systems, and engaged in promotions of WMP independent of Windows.¹⁶⁴ According to Microsoft, the Commission

tying product without the tied product; and (4) the tying in question forecloses competition. Microsoft WMP, para.842. These elements are almost a carbon copy of the four conditions of the modified per se tying test in Jefferson Parish Hospital, which was not found applicable to “platform software products” in Microsoft III.

• Microsoft WMP, paras.853-858.

• Albeit controversial in the context of high-tech markets, in Microsoft WMP the Commission seems to have remained faithful to its earlier assessment of tying in the Guidelines on Vertical Restraints [2000] OJ C 291/1, which was then in force. According to para.216 of that Guidelines, “[t]wo products are distinct if, in the absence of tying from the buyers’ perspective, the products are purchased by them on two different markets.” As an example, the Commission states that “the sale of shoes with laces is not a tying practice’ since customers want to buy shoes with laces, it has become commercial usage for shoe manufacturers to supply shoes with laces” (emphasis added). This analysis, together with the example, has been carried through into the new Guidelines on Vertical Restraints [2010] OJ C 130/1 as well (para.215). In our view, there is no reason that prevents the very same analysis to apply to WMP and Windows; it has become commercial usage for operating system manufacturers to supply operating systems with media players as this is the case with Apple, Linux and IBM, and consumers want to buy Windows with WMP. There is no meaningful demand on the part of consumers for an operating system without a media player even if there is a separate and additional demand for different media players. Therefore, the Commission’s analysis of separate products in Microsoft WMP seems to be flawed and in particular, does not fit to the nature of competition in high-tech markets.

• Microsoft WMP, paras.873-882. The General Court found that (1) the operating system and

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tended to punish dominant firms which improve their products by integrating new features in them, when it required that such features be made removable whenever a firm markets a standalone product that provides the same or similar functionalities.¹⁶⁵

With regard to the third condition, the coercion of users, Microsoft contended that the fact that it integrated WMP in Windows did not entail any coercion or supplementary obligation on users and emphasised they paid nothing extra for the media functionality of Windows.¹⁶⁶ Users were neither obliged to use that functionality, nor prevented from installing and using other media players. In fact, users had strong incentives to use more than a single media player: as more formats were flourishing each day, this would necessitate users to install other media players at some point in the future. The Commission found that the coercion was applied primarily to OEMs as it was impossible for OEMs to obtain a licence on Windows without WMP, and it then passed on to consumers. Uninstalling WMP was not found technically possible either. The Court endorsed that OEMs were deterred from pre-installing a second media player and consumers had an incentive to use WMP at the expense of competing media players.¹⁶⁷

As for the fourth condition, foreclosure of competition, the Commission observed that Windows was pre-installed on more than 90 percent of client PCs shipped worldwide, so that, by bundling WMP with Windows, Microsoft ensured that its media player was as ubiquitous as Windows on client PCs. Neither the Internet, nor other distribution channels could thus offset the ubiquity of WMP. Such a ubiquity in turn incentivised the vast majority of software developers and content providers to choose the WMP format, and this gave Microsoft a competitive advantage unrelated to the intrinsic qualities or merits of its product.¹⁶⁸ Implying its speculative nature, Microsoft responded that the Commission’s theory was based on a presumption that competition might be

media player clearly differed in terms of functionalities; (2) there were other manufacturers who supply media players independently of operating systems; (3) Microsoft itself developed and marketed versions of WMP for other operating systems; (4) WMP was downloadable over the Internet independently of Windows; and (5) a significant number of users were acquiring media players from Microsoft’s competitors. Microsoft WMP, paras.926-932.

• Microsoft WMP, para.888.

• Microsoft WMP, para.960.

• Microsoft WMP, para.971.

• Microsoft WMP, paras.980-988.

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foreclosed at some unidentified point in the future as a result of the future conduct of third parties over which Microsoft had no control.¹⁶⁹

The General Court noted that OEMs who pre-install WMP were a key distribution channel, as the great majority of sales of Windows client PC operating systems (approximately 75 percent) are made through OEMs.¹⁷⁰ For this reason, no other media player could achieve such a level of market penetration without having the advantage in terms of distribution that WMP enjoyed.¹⁷¹ According to the Court, OEMs were reluctant to pre-install another media player(s) as this would occupy additional hard-disk capacity, create a risk of confusion on the part of users and increase their customer support and testing costs of each additional player, since they generally operated on thin profit margins.¹⁷² Therefore, the option of entering into agreements with OEMs was a less efficient and a less effective way for other media player manufacturers to obtain media player distribution in the face of Microsoft’s tying.

As the Commission identified, there were various channels through which media players may be distributed to users. First of all, media players may be pre-installed on computers by OEMs under agreements between OEMs and software developers. Second, users may download them to their computers over the Internet. Third, they may be sold in retail outlets or distributed with other software products. However, the tying of WMP to Windows allowed Microsoft to obtain an unparalleled advantage with respect to the distribution of WMP, ensured the ubiquity of WMP on client PCs throughout the world, and thus provided a disincentive for users to make use of other media players and for OEMs to pre-install such players on client PCs.¹⁷³ The widespread distribution of WMP was also found liable to compel content providers to encode their content in WMP format, which would have the effect of excluding competing media players from the market and would then indirectly compel consumers to use only WMP.¹⁷⁴

• Microsoft WMP, para.1022. However, the Commission furthered submitted that the industry data which it used invariably revealed a tendency for the market to tip in favour of the use of WMP and WMP formats to the detriment of the main competing media players, namely RealNetworks and Apple.
• Microsoft WMP, para.1038.

• Microsoft WMP, para.1039.

• Microsoft WMP, paras.1044-1045.

• Microsoft WMP, para.1054.

• Microsoft WMP, 1067-1069.

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As for the most controversial part of the case, the appropriate remedy,¹⁷⁵ the Commission decided that the best remedy would be technological unbundling.¹⁷⁶ Despite Microsoft’s argument that the removal of media functionality from Windows would harm the integrity of other functionalities and result in degrading Windows, the Commission required Microsoft to redesign its Windows by removing the code-commingling of WMP from Windows, and offer an unbundled version which ought to be well-functioning and of quality.¹⁷⁷ However, Microsoft retained the right to continue offering a version of Windows bundled with WMP. The remedy applied to Windows licensed directly to end users (home users via retail and corporate customers) and licensed to OEMs for sale in the European Economic Area (EEA).

2.5. Microsoft IE

Following the complaint by Opera, the Norwegian Internet browser maker, in December 2007, the Commission initiated investigations and sent a Statement of Objection to Microsoft in January 2009, for an alleged violation of Article 102 TFEU by unlawfully bundling its web browser IE to its dominant client PC operating system Windows.¹⁷⁸ Not even a decade later Microsoft WMP, the Commission again alleged that Microsoft’s conduct harmed competition between web browsers, undermined product innovation and eventually reduced consumer choice.¹⁷⁹

• For a critique of the remedy in this case, see infra “4. Comments and Conclusion”.

• During the discussions between the Commission and Microsoft with regard to the remedy, Microsoft first offered “mandatory versioning” as an alternative to bundling in that it would include rival media players in a CD to be supplied when buying a new PC. This remedy was overturned by the Commission on the grounds that less-informed users would simply ignore such CDs and even knowledgeable ones might not want to spend time on installation. Later, Microsoft and the Commission discussed the option of pre-installing rival players in addition to WMP, but this remedy suffered some disadvantages too (such as taking too much hard drive size). It would not also solve the underlying problem that WMP was to be distributed with Windows. Finally, Microsoft and the Commission agreed on the removal of software codes for the media playback functionality. Langer 2007, p.167-168.

• Microsoft WMP, 1137. Microsoft maintained that the remedy was internally inconsistent and impossible for it to comply with, because it was required to remove important functionality from Windows and at the same time ensure that the degraded version of Windows was not less performing than the version with WMP. There was also no discussion on the cost to Microsoft of developing the unbundled version.

• Press Release, “Antitrust: Commission confirms sending a Statement of Objections to Microsoft on the tying of Internet Explorer to Windows”, MEMO/09/15, 17 January 2009.

• Press Release, “Antitrust: Commission statement on Microsoft Internet Explorer announcement”, MEMO/09/272, 12 June 2009.

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Citing Microsoft WMP, the Commission took the preliminary view that the criteria for illegal tying were fulfilled: (i) Microsoft did not contest that it holds a dominant position on the client PC operating system market with its Windows operating system; (ii) IE and Windows were provisionally considered as separate products; (iii) before Windows 7 was released, computer manufacturers and end users could not technically and legally obtain Windows without IE. Neither for OEMs, nor for end users was it technically possible to remove IE from Windows, and licensing agreements prevented OEMs from selling Windows without IE; and (iv) the tying was provisionally found as liable to foreclose competition on the merits between web browsers.¹⁸⁰

Quite similar to WMP in Windows WMP, IE was provisionally found to have enjoyed “an artificial distribution advantage” that other web browsers were unable to match and downloading web browsers from the Internet did not “offset the artificial distribution advantage” of IE resulting from the alleged tying.¹⁸¹ The Commission also preliminarily considered that, in addition to reinforcing Microsoft’s position on the market for client PC operating systems, the tying of IE to Windows created “artificial incentives” for web developers and software designers to optimise their products primarily for IE.¹⁸² This is because in practice, many content providers, as well as software developers write first and foremost for the web browser which has the highest usage share with the hoping of obtaining the most cost-effective exposure of their products.¹⁸³

The case does not provide a detailed analysis of whether Microsoft’s tying of IE to Windows could be objectively justified by distribution or technical efficiencies. However, Microsoft argued at the time of Microsoft WMP that it should be allowed to pre-install separate software products with Windows because the operating system and its applications constituted a uniform platform, an argument that was subsequently rejected by the General Court.¹⁸⁴ The Commission only preliminarily concluded that as a result of the tying, IE’s market share remained much higher than that of competing browsers, “although

• Case COMP/39.530 — Microsoft (Tying) [2009] (unpublished) (“Microsoft IE”), para.36.

• Microsoft IE, paras.39 and 45.

• Microsoft IE, para.37.

• DOLMANS, M., T. GRAF and D. R. LITTLE (2010), “Microsoft’s Browser Choice Commitments and Public Interoperability Undertaking”, European Competition Law Review, No:31(7), p.270.

• ibid at p.271.

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it could not be considered as a superior product compared to its main competitors.”¹⁸⁵

Microsoft undertook not to bundle IE with Windows 7 (code removal) in the system to be sold in Europe. However, this proposal was not seen sufficient by the Commission. As a remedy, Microsoft proposed a ballot screen (browser choice screen)¹⁸⁶ to provide users in the EEA with links to download rival web browsers. In addition, OEMs would be free to pre-install any web browser(s) of their choice on computers they ship and set it as default web browser and Microsoft would not circumvent the commitments by any means and shall not retaliate against OEMs for installing competing web browsers.¹⁸⁷

The case was settled in December 2009, roughly within a year after Microsoft first received the Commission’s Statement of Objections, in accordance with Article 9 of the Regulation 1/2003.¹⁸⁸ Microsoft’s proposal was approved by the Commission, which concluded that there were no grounds for further action, but required legally binding commitments by Microsoft to report at six-month intervals in its conformity with the commitments.¹⁸⁹ The implementation of the ballot screen started in March 2010¹⁹⁰ and the ballot screen will be available in the EEA for five years.¹⁹¹ It should be noted that the Commission recently announced that Microsoft has acted contrary to Microsoft IE and failed to comply with its commitments to offer users the browser choice screen.¹⁹²

• Microsoft IE, para.54.

• The full text of the commitments offered by Microsoft including the ballot screen proposal is available at microsoft.com/presspass/presskits/eu-msft/docs/07-24-09Commitment.doc, Date Accessed: 20.12.2012.
• Microsoft IE, para.60.

• Council Regulation (EC) No 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty OJ L 1/1.

• Microsoft IE, para.111. See also Press Release, “Antitrust: Commission welcomes Microsoft’s roll-out of web browser choice”, IP/10/216, 2 March 2010.

• According to this proposal, within the EEA users who receive automatic updates for Windows and have Microsoft’s browser set as default are being invited to choose from several rival web browsers, namely Apple Safari, Google Chrome, Mozilla Firefox and Opera which will be prominently displayed alongside with IE; Avant Browser, Flock, Green Browser, K-Meleon, Maxthon, Sleipnir and Slim Browser will be displayed if the user scrolls sideways.
• Microsoft IE, para.112.

• The Commission took the preliminary view that Microsoft has failed to roll out the browser choice screen with its Windows 7 Service Pack 1, which was released in February 2011. According to the Commission, from February 2011 until July 2012, millions of Windows users in the EU may not have seen the choice screen. See Press Release, “Antitrust: Commission sends Statement of

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2.6. Summary

As a result of the aforementioned Microsoft cases on both sides of the Atlantic, competition law interacted with the realm of technology, and the way Microsoft designed and commercialised its products was subject to antitrust scrutiny. The analysis of product designs under the light of competition law was far from being straightforward and the courts showed obvious hesitation as to whether the product designs in question amounted to anti-competitive tying, whether they could or should be handled differently from contractual tying arrangements, which had been known as the only form of tying arrangements for more than half a century, and lastly whether they were ties at all if they in fact constituted integrated products.

The Microsoft Saga began with Microsoft I which, though not directly, dealt with Microsoft’s design of its web browser and operating system as “integrated products”. The case was settled with a consent decree in 1995, pursuant to which Microsoft’s sale of products on condition to the sale of its other products was prohibited, but the design of integrated products in a way that consumers only obtain one product together with another was left outside of the scope of the consent decree. Design of products as “integrated products”, albeit not specially defined and elaborated, was held legal under the 1995 consent decree, as it was not explicitly prohibited in contrast to the situation where Microsoft designs and ties two different and separate products contractually. It can be argued that an integrated product was then thought to be better than the sum of the previously separated products.

The “integrated product” exemption of the 1995 consent decree was analysed in more detail few years later in Microsoft II. For the first time, the Court of Appeals set out a definition of “integrated products”¹⁹³ and came to the conclusion that Microsoft’s product design was in line with the consent decree. The Court appeared to have favoured a permissive approach into technological tying, but it left open the question whether its interpretation was the appropriate test in general. Some authors have argued that the Court even created a rule of per se legality for products characterised as an “integrated product”,¹⁹⁴ after it held

Objections to Microsoft on non-compliance with browser choice commitments”, IP/12/1149, 24 October 2012. See also Press Release, “Antitrust: Commission opens proceedings against Microsoft to investigate possible non-compliance with browser choice commitments”, IP/12/800, 17 July 2012.

• See Microsoft II, para.56.

• Rowles 2001, p.5. The Court referred to the views of some commentators against the intervention of competition law to technologically integrated products and product designs by

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that courts were “ill equipped to evaluate the benefits of high-tech product design”.¹⁹⁵ The Court in fact refrained from the dangerous task of judging the justifiability of technological integration. The Court’s permissive approach did not, however, last for long and in the same year (in fact one month before

Microsoft II), Microsoft III was filed by the DOJ.

Up until Microsoft III, the courts had not gotten too much embroiled in analysing technological tying practices, but with Microsoft III those practices somehow lost their “antitrust immunity”.¹⁹⁶ Microsoft III judgment was the most important challenge against Microsoft’s abusive practices in the US. Among other things, the Court of Appeals examined the design of Microsoft’s product, and held that excluding IE from the “Add/Remove Programs” utility in Windows with a view to discouraging the use of competing browsers and commingling the browser code with the operating system code so that any attempt to delete the files containing IE would eventually deteriorate Windows were anti-competitive, while the design of Windows in a way that in some circumstances overrides the user’s choice of a default browser other than IE was not.¹⁹⁷ On the prohibition of technological tying, it held the view that the separate products test was a poor proxy for integrated products¹⁹⁸ and remanded the case to the District Court for an evaluation under the rule of reason.

In fact, Microsoft III is not all about the product design of Microsoft. It illustrates that Microsoft almost undertook an anti-competitive campaign with a view to protecting its quasi-monopoly position in the operating system market against the threat posed by Netscape. Technological tying was like “the tip of the iceberg” compared to Microsoft’s other exclusionary tactics; Microsoft entered into a variety of exclusive dealing agreements, pressurised OEMs, forced Intel, threatened Apple and finally suppressed a computer language with a view to protecting its quasi-monopoly in the operating system market. Had the only practice been technological tying, the outcome might have been different. Lacking any redeeming virtue and pro-competitive justification, majority of those

stressing that “scholars have long recognized the undesirability of having courts oversee product design, and any dampening of technological innovation would be at cross-purposes with antitrust law”. Microsoft II, para.55.

• Microsoft II, para.70.

• Ekdi 2011, p.465-468. See also Hylton and Salinger 2001, p.473 (“The splintering of legal rules created by the Microsoft III decision casts a cloud of uncertainty over technological integration.”).
• Microsoft III, paras.66-67.

• Microsoft III, para.92.

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practices led to the condemnation of Microsoft without elaborate discussions on technological tying. After all, many efficiency claims could have been put forward for technological tying, but obviously not for threat or economic force.¹⁹⁹ Those practices reinforced the suppression of Netscape which was no longer an alternative to IE when the case was settled.²⁰⁰

On the other side of the Atlantic, the Commission issued one infringement decision (Microsoft WMP) and settled one case (Microsoft IE), both of which dealt with, inter alia, how Microsoft designed its products. Even though Microsoft WMP was the first decision on technological tying in the EU considering the fact that 1984 IBM case was a settlement, it actually failed to provide satisfactory guidance as to the features of anti-competitive technological tying. It has been argued that the General Court’s reluctance to offer guidance on weighing up the benefits of technical integration against its exclusionary effects is highly unsatisfactory and all the more disappointing given the dearth of precedent on technical integration as an abuse of dominance.²⁰¹ The lack of consumer harm, protection of competitors and the ineffective remedy were the highlights of this case. The case should have been a fortiori dismissed, considering the fact that there was no threat of middleware in the context of media players unlike browsers in Microsoft III and Microsoft did not resort to any other exclusionary practices (Microsoft’s refusal to supply interoperability information was not related to the tying claim) unlike the ones in Microsoft III. It should be borne in mind that the US Court of Appeals did not directly regard technological tying as unlawful notwithstanding those two findings.

The last action taken against Microsoft to date ended with a settlement in Microsoft IE. The issue was similar to that in Microsoft III: the tying of IE to Windows. It was not a prohibition decision; however, the preliminary findings of the Commission, and especially how the Commission assessed them, indicated a

¹⁹⁹ See infra “Figure 1 – The Spectrum of Different Types of Anti-Competitive Unilateral Conduct”.

• Statics show a sharp decline in the user demand for Netscape. The usage share of Netscape was at around 80 percent in 1996. It dropped down to around 60 percent when the lawsuit was filed in 1998 and was less than 5 percent when the case was settled in 2002. Netscape subsequently exited the market in 2004. See DUNHAM, W. R. (2006), “The Determination of Antitrust Liability in United States v. Microsoft: The Empirical Evidence the Department of Justice Used to Prove Its Case”, Journal of Competition Law and Economics, No:2(4), p.549-671.

• BATCHELOR, B. (2008), “The Fallout from Microsoft: the Court of First Instance Leaves Critical IT Industry Issues Unanswered”, Computer and Telecommunications Law Review, No:14(1), p.21.

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likely prohibition decision had the case was not settled. The Commission followed a similar line of analysis that it employed in Microsoft WMP, and came to the preliminary conclusion that the design of IE in a way that is technologically tied to IE generated anti-competitive effects. The decision was not much of a surprise after the Commission’s restrictive approach to the technological tying of WMP to Windows in Microsoft WMP and in Microsoft IE, IE simply replaced WMP. In contrast to the Microsoft IE settlement (which is approximately 40 pages long), the Microsoft WMP judgment (which is approximately 160 pages long) seems to offer more analysis and findings for the existing case law on technological tying, as well as more predictability for other stakeholders in the long run. However, Microsoft’s browser choice screen commitment in Microsoft IE was much more effective and consumer-friendly compared to the unbundling remedy in Microsoft WMP.

3. THE GOOGLE DILEMMA

Search engines are crucial for locating and accessing the vast amount of digital content and they have been subject to close scrutiny by the media, governments and scholars.²⁰² As the leading search engine provider, Google has recently been at the centre of a great deal of controversy particularly in the field of the trademark, privacy and competition law. Part 3 addresses the competition law aspects of the issue. It explores whether Google has market power in online search or online advertising, and examines the ongoing antitrust investigations in both the EU and the US by focusing on the allegations against Google. The main argument of this part is that Google’s alleged anti-competitive practices in fact serve consumer welfare in the long run notwithstanding the harm to competitors.

3.1. Is Google a Dominant Player in Online Search?

While no definitive findings have been made as to the relevant product market in relation to the market that Google operates in, there are strong indications in the

²⁰² A fast growing number of scholars have written and are writing about the regulation of search engines and other legal issues in relation to search engines. See VAN EJIK, N. (2009), “Search Engines, the New Bottleneck for Content Access”, B. Preissl, J. Haucap and P. Curwen (eds.), in

Telecommunication Markets: Drivers and Impediments, Springer, p.141-156; GRIMMELMAN, J. (2007), “The Structure of Search Engine Law”, New York Law School Legal Studies Research Paper No.06/07-23, http://ssrn.com/abstract=979568, Date Accessed: 20.12.2012; PASQUALE, F. A. and O. BRACHA (2008), “Federal Search Commission? Access, Fairness and Accountability in the Law of Search”, 93 Cornell Law Review 1149, and GASSER, U. (2006), “Regulating Search Engines: Taking Stock and Looking Ahead”, 9 Yale Journal of Law & Technology 124.

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Commission’s Microsoft/Yahoo Search Business concentration²⁰³ which suggest that Google can be perceived as a dominant company on several product markets including online search and search advertising.²⁰⁴ Furthermore, as pointed out by Cave and Williams, decision in relation to the relevant product market in the case of Google seems to be moving in the direction of a market for online search advertising.²⁰⁵

In its investigation in relation to the Microsoft/Yahoo Search Business concentration, the Commission cited data showing that Google has more than 90 percent market share in online search in Europe.²⁰⁶ According to a February 2011 study by comScore,²⁰⁷ nine out of ten Europeans use Google for online search, making it an undisputed dominant player in online search in Europe.²⁰⁸ In the past, the Commission and the European courts have relied on market shares as a good indication of market power and based on its market shares, Google can be perceived as a dominant player in the market for online search. However, relying solely on market share as a proxy for market power may not be an appropriate way of dealing with online search as the main product in online search is information. Furthermore, in information markets, rivals may be able to respond quickly and easily, and dominant positions may be highly transitory as evidenced in the case of Yahoo losing its dominant position to Google in online search.

Prior to investigating whether Google has abused alleged its dominance one should assess whether Google has market power. In other words, in the context of online search advertising, can Google act independently of its customers,

• Case COMP/M.5727 — Microsoft/Yahoo! Search Business [2010] OJ C 20/32.

• WOOD, D. (2011), “EU Competition Law and the Internet: Present and Past Cases”,

Competition Law International, No:7(1), p 44.

• CAVE, M. and H. WILLIAMS (2011), “The Perils of Dominance: Exploring the Economics of Search in the Information Society”, Initiative for a Competitive Online Marketplace, http://www.i-comp.org/en_us/resources/resources/download/1043, Date Accessed: 20.12.2012, p.15.

• Case COMP/M.5727 — Microsoft/Yahoo! Search Business [2010] OJ C 20/32. According to this decision, the probability that users run a search on a search engine within a month in the EU is 90-100 percent for Google, 20-30 percent for Microsoft’s Bing and 10-20 percent for Yahoo.

²⁰⁷comScore is an independent digital marketing service. With approximately 2 million worldwide consumers under continuous measurement, the comScore panel is designed to accurately measure people and their behaviour in the digital environment. Source: http://www.comscore.com/ About_comScore, Date Accessed: 20.12.2012.

²⁰⁸ comScore Report: Europe Digital Year in Review 2010, February 2011, available upon registration at http://www.comscore.com/layout/set/popup/Request/Presentations/2011/2010_ European_Digital_Year_in_Review_PDF_Request, Date Accessed: 20.12.2012.

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competitors and ultimately of consumers? Hence to determine whether Google has market power in online advertising and online search markets, it is suggested that competitive restraints exerted on Google and switching costs at both sides of the platform ought to be considered. As noted by Van Loon, Google is under constant threat of other general search engines that are trying to catch up with Google as recently evidenced in the Microsoft/Yahoo Search Business concentration, as well as of other companies, such as Apple, that operate in different but related markets.²⁰⁹ Therefore, it might be argued that Google is subject to competitive restraints and under the threat of potential new entry.

Concerning switching costs, as often argued by Google, competition from other search providers is only one click away.²¹⁰ However, as noted by Patterson,²¹¹ the ease of clicking another online search provider does not necessarily demonstrate that Google has no market power. Considering the fact that Google is a two-sided platform, one should examine both sides of the platform, namely the internet users and the advertisers. In order to switch to another search provider, internet users must be convinced that the other search engine in question offers the same quality as Google. Furthermore, in order to switch from one provider to another, consumers must also be well informed and know what to expect from their search query. Even if they run the search on a different search engine provider, such as Bing or Yandex, and obtain very different results, they may not be able to assess the quality of the search.

As an example, if a consumer runs a straightforward search for “Oxford University”, he/she knows more or less what to expect from the search result. But if the search is conducted on an academic subject such as “essential facilities

• VAN LOON, S. (2012), “The Power of Google: First Mover Advantage or Abuse of a Dominant Position”, A. Lopez-Tarruella (ed.), in Google and the Law: Empirical Approaches to Legal Aspects of Knowledge-Economy Business Models, p.2-27.

• See Testimony of Eric Schmidt, Executive Chairman, Google Inc., Hearing on “The Power of Google: Serving Consumers or Threatening Competition?” Subcommittee on Antitrust, Competition Policy and Consumer Rights, Committee on the Judiciary, U.S. Senate, September 21, 2011, http://searchengineland.com/figz/wp-content/seloads/2011/09/Eric-Schmidt-Testimony.pdf, Date Accessed: 20/12/2012, p.7. (“[I]f consumers don’t like what one website is providing them, they can switch to another website with just one click. Using Google is a choice (and a free one), and there are no barriers to consumers navigating to www.kayak.com, www.nextag.com, www.bing.com, www.yelp.com, www.expedia.com, or any other website.”) (emphasis original).

• PATTERSON, M. (2012), “Google and Search Engine Market Power”, Fordham Law Legal Studies Research Paper No. 2047047, http://papers.ssrn.com/sol3/papers.cfm?abstract_ id=2047047, Date Accessed: 20.12.2012, p.2.

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doctrine” and if the user has no background information on the subject matter, he/she may not be able to determine the quality of results in different search engine providers. Arguably, with regard to advertisers, switching costs are remarkably higher as a result of the network effects. Advertisers need to attract as many Internet users as possible and given the prominent market share of Google in Europe and elsewhere, it seems to be the best online platform to target online users. The more online users use Google’s online search engine, the more crucial it becomes for advertisers.

To sum up, in our view, although market shares in themselves are not enough to infer that a company holds a dominant position in a relevant market; market shares coupled with high switching costs particularly on the advertisement side of the platform suggest that Google has market power and thus can be perceived as a dominant player in several online markets including online search and online advertising.

3.2. The European Investigation into Google²¹²

On November 30, 2010, the Commission launched a formal antitrust investigation into Google based on the allegations that Google has abused a dominant position in online search in violation of Article 102 TFEU.²¹³ The investigation itself does not necessarily mean that Google has abused its alleged dominance in online search and online advertising markets, but it certainly exhibits an image change that Google has undergone.²¹⁴ Rather than being regarded as an innovative new start-up company, Google is currently being perceived as “a new Microsoft” with the potential to abuse its dominance in online search and online advertising markets.

As pointed out by the European Competition Commissioner Almunia, “understanding the dynamics of web based services is a complex task due to innovative business models that change persistently”²¹⁵ and Google sets a good

• This part borrows extensively from the following article that one of the authors published elsewhere: D‹KER VANBERG, A. (2012), “From Archie to Google-Search Engine Providers and Emergent Challenges in Relation to EU Competition Law”, European Journal for Law and Technology, No:3(1), p.1-18.

• Press Release, “Antitrust: Commission probes allegations of antitrust violations by Google”, IP/10/1624, 30 November 2010.
• Van Loon 2012, p.9.

• ALMUNIA, J. (2010), “Competition in Digital Media and the Internet”, UCL Jevons Lecture, London 7 July 2010, http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/10/365, Date Accessed: 20.12.2012.

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example as it shows that “timely intervention is crucial in fast-moving high-tech markets, which often feature network and lock-in effects.”²¹⁶

3.3. The Highlights of the European Investigation

In February 2010, Foundem (a UK price comparison website), Ciao (a German shopping site owned by Microsoft) and ejustice.fr (a French legal search engine) filed a complaint before the Commission. These three complaints focused on abuse of dominance: that Google used its dominant search engine and its “Universal Search Service”²¹⁷ to promote its own services, whilst discriminating as well as demoting the search rankings of competing websites and other specialised (vertical) search engines²¹⁸ among its unpaid and paid search results.²¹⁹

In addition to the first complaint in relation to the manipulation of search rankings, in the scope of its investigation the Commission is also investigating;²²⁰

• ALMUNIA, J. (2011), “New Challenges in Mergers and Antitrust”, IBA Annual Competition Conference, Florence 16 September 2011, http://europa.eu/rapid/pressReleasesAction.do? reference=SPEECH/11/581&format=HTML&aged=0&language=EN&guiLanguage=en, Date Accessed: 20.12.2012.

• Universal Search Service was introduced by Google in 2007. When one uses Google, Universal Search returns more than just the traditional text results. As an example, when one searches for Micheal Jackson, it not only brings information about Micheal Jackson, but also brings images, news, local listings, shopping, video, blog posts and so on. Google calls this service as blending, whilst others call it bundling as Universal Search places Google’s own services such as YouTube results and Google News at prominent positions in search results. See Google’s own blog on Universal Search http://googleblog.blogspot.co.uk/2007/05/universal-search-best-answer-is-still.html, Date Accessed: 20.12.2012.

• According to PC Magazine Encylopedia, specialised search engines, also known as vertical search engines, are web-based search engines that classify content specialised by location (local venues and activities), by subject, typically for consumers, or by industry. Instead of returning thousands of links from a query, as is common on a general purpose search engine such as Google and Bing, vertical search engines deliver more relevant and specific search results to the user. A typical example of a specialised search engine is Expedia that only returns results on travel deals such as flights, hotels and holidays. Source: http://www.pcmag.com/encyclopedia/, Date Accessed: 20.12.2012.

• Google’s search engine provides two types of results; the first one is “unpaid” search results which are sometimes also referred to as “natural”, “organic” or “algorithmic” search results, and the second one is “paid third party advertisements” shown at the top and/or at the right hand side of Google’s search results page often referred to as “paid” search results or “sponsored links”.

• Press Release, “Antitrust: Commission probes allegations of antitrust violations by Google”, IP/10/1624, 30 November 2010.

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1. Whether Google has imposed exclusivity obligations on advertising partners, hindering them from placing certain types of competing adverts on their web sites, as well as on computer and software vendors with the aim of foreclosing competition for competing search tools,

1. Whether Google has restricted the portability of online advertising data to competing online advertising platforms, and

• Whether Google uses third party content, mainly competing websites content on its offerings, whilst reducing competitors’ incentives to invest in creating original content to the detriment of consumers.

The investigation was broadened in December 2010, when complaints by three additional companies were added to the file as the Bundeskartellamt, the German Competition Authority, transferred to the Commission a part of its investigation that overlapped with that of the Commission. The complaints to the Bundeskartellamt were made by BDVZ and VDZ, two newspaper and magazine publisher associations, and the online mapping company Euro-cities. Among other things, these complaints were mainly centred on the preferential treatment of Google’s own services.²²¹

On March 30, 2011, Microsoft issued a formal complaint with the Commission.²²² In its complaint, Microsoft alleged that:

1. Google uses technical measures to stop Microsoft’s search engine from indexing content on YouTube, which is owned by Google,

1. Google blocks Microsoft smart phones from operating with YouTube,

• Through Google Books, Google controls access to online copies of out of copyright books,

1. Google limits the ability of advertisers to move their own advertising data to competing advertising platforms, and

1. Google contractually hinders leading websites in Europe from distributing competing search boxes.

In April 2012, online travel sites Expedia and TripAdvisor joined the

• ——, “Verleger schalten Kartellamt gegen Google ein”, Spiegel Online 16 January 2010, http://www.spiegel.de/netzwelt/netzpolitik/0,1518,672343,00.html, Date Accessed: 20.12.2012.

• Microsoft’s allegations in relation to Commission’s investigation can be found at: http://blogs.technet.com/b/microsoft_on_the_issues/archive/2011/03/30/adding-our-voice-to-concerns-about-search-in-europe.aspx, Date Accessed: 20.12.2012.

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bandwagon of complainants claiming that Google’s preferential treatment of its own services places rival competing travel websites at a competitive disadvantage and forecloses competition in the online travel market.²²³

On May 21, 2012, the European Competition Commissioner Almunia stated that the Commission has reached preliminary conclusions in its Google investigation and identified four main areas of concern in relation to the alleged anti-competitive practices:²²⁴

1. The first concern of the Commission is unsurprisingly in relation to manipulation of search results and whether Google favours its own vertical services differently than it does for its rivals’ links,

1. The second concern is in relation to Google copying content from third party websites, mainly competing vertical services, using this content in its own offerings. The Commission is of the view that by copying material from the rivals’ websites, Google undermines the benefits of its competitors, and thus reduces their incentives to invest in creating original content to the detriment of consumers,

• The third concern is in relation to the exclusivity deals between Google and partners, on the websites of which Google delivers search advertisements. Those exclusivity deals contain provisions that force Google’s partners to obtain all or most of their advertisement from Google, thereby foreclosing competing providers of search advertising intermediation services, and

iv.The fourth concern is in relation to data portability and the restrictions that Google placed in relation to the advertising campaigns from its platform

AdWords.²²⁵

²²³ WHITE, A. (2012), “TripAdvisor Files Antitrust Complaint against Google with EU”, Bloomberg 3 April 2012, http://www.bloomberg.com/news/2012-04-03/tripadvisor-files-antitrust-complaint-against-google-with-eu.html, Date Accessed: 20.12.2012.

• ALMUNIA, J. (2012), “Statement of VP Almunia on the Google Antitrust Investigation”, Brussels 21 May 2012, http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/12/372, Date Accessed: 20.12.2012.

• AdWords is Google’s keyword advertising platform, in which an advertiser bids for several keywords related to their business and chooses a short line text ad which is shown on Google’s search results when the keywords match up with the search enquiry of the internet user. It should be noted that with AdWords advertisers undertake to pay only if someone clicks on their ad and lands on their website, not when their ad is displayed. For more information, see Google’s website http://adwords.google.com, Date Accessed: 20.12.2012. See also RATLIFF, J. D. and D. L. RUBINFELD (2010), “Online Advertising: Defining Relevant Markets”, Journal of Competition Law and Economics, No:6(3), p.658-659.

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• Harming Downstream Rivals by Manipulating Search and by Giving Preferential Treatment to its Own Services

This is the most commonly heard and arguably the most intricate complaint brought against Google. A group of complainants, including specialised search engines such as Foundem, claim that Google downgrades them both on its organic and paid results as it gives preferential treatment to its own products and services.²²⁶ Put in a different way, they claim that due to Google’s downgrading of their companies and products, some online markets are foreclosed to rivals and new entrants, as consumers hardly look beyond the first few pages of search results, and this ultimately leads to less choice for consumers in other online markets.

Foundem gave concrete examples from two different markets where it was allegedly adversely affected by Google’s preferential treatment to its own services. The first market is the online map market: within two years after the Google’s introduction of Universal Search, Map Quest, a leading US based online mapping service provider, lost its leading position in this market as the traffic to its website significantly diminished, whilst the traffic to Google Maps increased significantly.²²⁷ The second market is the product comparison market: again after the introduction of Universal Search, Google’s market comparison product, which had been largely unsuccessful up to that time, started to grow rapidly.²²⁸ At the same time, visitors to UK’s leading product comparison websites decreased dramatically as well.²²⁹ Foundem submits that Google’s conduct in relation to those markets is anti-competitive as it has a foreclosure effect on rivals, and reduces consumer choice and welfare.

In relation to the above complaint, there are two central issues that have to be discussed. The first issue is whether Google’s practices can be perceived as anti-competitive tying. The second issue is whether appearing in Google’s first result page is crucial for a website. It can be argued that as Microsoft bundled WMP

• SWENEY, M. (2010), “EU to Launch Google Search Investigation”, The Guardian 30 November 2010, http://www.guardian.co.uk/technology/2010/nov/30/google-search-eu-investigation, Date Accessed: 20.12.2012.

• See comments of Foundem before the Federal Communications Commission, which outlines the adverse of effects of Google’s preferential treatment to its own services, http://regmedia.co.uk/2010/02/24/universal_search_submission_to_fcc.pdf, Date Accessed: 20.12.2012, p. 5-9.

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with and tied IE to its dominant Windows operating system to monopolize other related markets, Google is also tying its own products and services to its dominant search engine to extend its existing dominance to other online markets.²³⁰ As stated by Adam Raff from Foundem, Google can leverage its “search engine monopoly” into virtually any market of its choosing, such as mapping, video, price comparison, travel search, financial search, property search, music downloads, and books.²³¹

Some prominent examples of potentially anti-competitive tying in the context of online search are;

1. Google Maps. If a user searches for an address in Google, the result will be shown in Google Maps which seems to have been set as default.
2. Google Chrome. The search feature “Instant Pages” is tied directly to the Google’s own web browser, Google Chrome.²³²

• Google+. Google’s “Search Plus Your World” blends information such as photos, comments and news posted on Google’s own social network, Google+, into users’ search results.²³³

According to the Guidance Paper, the Commission will consider tying as an enforcement priority, if the following three conditions are present:²³⁴

1. The undertaking should hold a dominant position in the market for the tying product,

1. The tying and the tied products should be two distinct products,

• METZ, C. (2010a), “We Probe the Google Anti-trust Probe: Vigorously Schmidt’s Mighty Tool Can Penetrate Any Market He Likes”, The Register 1 December 2010, http://www.theregister.co.uk/2010/12/01/google_eu_investigation_comment/, Date Accessed: 20.12.2012.

• Source: http://regmedia.co.uk/2010/02/24/universal_search_submission_to_fcc.pdf, Date Accessed: 20.12.2012, p.3.

• See WILCOX, J. (2011), “Google’s Antitrust Defense Sounds like Microsoft’s”, Betanews (date not specified), http://betanews.com/2011/06/25/google-s-antitrust-defense-sounds-like-microsoft-s/, Date Accessed: 20.12.2012. In his blog, Wilcox argues that this could be seen as a product improvement but might as well be perceived as attempt to leverage monopoly from one market into another.

• GUYNN, J. (2012), “Google Likely to Face FTC Complaint over Search Plus Your World”, Los Angeles Times 11 January 2012, http://latimesblogs.latimes.com/technology/2012/01/google-likely-to-face-ftc-complaint-over-search-plus-your-world.html, Date Accessed: 20.12.2012. According to this article; Rotenberg, a Google critic, stated that “Google is an entrenched player trying to fight off its challenger Facebook by using its market dominance in a separate sector.” ibid.
• Guidance Paper, para.50.

170

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iii. The tying practice is likely to lead to anti-competitive foreclosure.

Within this context, the abovementioned three conditions could be deemed to be satisfied in the case of Google;

1. As Google is dominant in online search market (the tying product market),

1. As online search and Google’s other products such as Goople Maps, Google Chrome and Google+ can be regarded as distinct products, and

• As argued by Google’s competitors, Google’s practice can lead to anti-competitive foreclosure in other online markets.

However, as noted earlier, the General Court confirmed in Microsoft WMP that the additional criterion to be satisfied for anti-competitive tying is whether the dominant undertaking gives consumers the choice to obtain the tying product without the tied product (coercion).²³⁵ Arguably, this does not seem to be the case with Google, since Google’s main product is its online search engine and the usage of this engine has not been made conditional on using Google’s other online products or services, and vice versa.

Search engines claim that they strive to provide the most relevant search results without any bias or manipulation. They often maintain that there is no human intervention to their algorithms as they have an automated algorithm. However, it is well established that search results can be manipulated by search engines themselves as well as by information providers.²³⁶ In the context of search results, one must bear in mind that even the most automated search engine is a result of human work and beyond every algorithm, there is a programmer giving specific instructions to the computer.²³⁷

It seems straightforward to establish whether a search engine favours its own services. For example, if Google shows only the results from YouTube, which is owned by Google, when a user types a search term such as “video”, he/she may conclude that Google is favouring its own (its affiliates’) results. However, given the secrecy surrounding algorithms, it may be difficult to establish whether such ranking is unfairly favouring a search engine’s own websites or is entirely fair -

• Microsoft WMP, paras.864 and 962.

• INTRONA, L. D. and H. NISSENBAUM (2000), “Shaping the Web: Why the Politics of Search Engines Matters”, The Information Society, 16(3), p.141. See generally GOLDMAN, E. (2006), “Search Engine Bias and the Demise of Search Engine Utopianism”, 8 Yale Journal of Law & Technology 188, p.188-200.

• GRIMMELMANN, J. (2009), “The Google Dilemma”, 53 New York Law School Law Review 939, p. 944.

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one website could simply be of a higher quality or better promoted. Some scholars suggest that just like retailers that allocate their shelves to their own-brand products, search engines should be able to favour their own products and services, as this is a part of the normal competitive process until proven otherwise.²³⁸ Furthermore, as recently argued by Bork and Sidak, appearing in the top results of a search engine is not an “essential facility”, as there are several ways for websites to obtain traffic, through other general search engines, vertical search engines, consumers and even through offline advertising.²³⁹ However, as Marsden points out, this is a problem if such preferential treatment (favouritism) is not done transparently.²⁴⁰ If search results are based on anything but quality, then this should be clearly communicated to the user, as it is with paid search results and own-brand products of retailers in the real world.²⁴¹

Arguably, there are two significant complexities in relation to the manipulation of search results in the antitrust context. First, given the secrecy around algorithms, it seems very difficult to establish with clarity whether such manipulation has taken place with the aim of discriminating rivals. Secondly, even if the existence of such bias could be proven, finding an adequate remedy that does not affect the competitive structure of the industry seems challenging. A commitment by search engines to provide more objective results will maintain the status quo, whilst more interventionist measures such as regulating and monitoring search results with a view to ensuring objectivity may well reduce their quality. Furthermore, even if it is decided that regulating and monitoring search results is a viable option, the scope and objectives of such regulation and monitoring, as well as the determination of the authority that will be in charge of this job, seem to be highly contestable.

• Harming Other Search Engines by Denying Access to Content and Data

Other allegations against Google focus on denying or limiting rivals access to its own content, thereby adversely affecting rival search engines’ ability to provide

• See WRIGHT, J. D. (2011b), “From: Truth on the Market, Antitrust Remedies”, http://journaloflaw.us/5%20The%20Post/1-1/JoL1-2,%20TP1-1,%20Wright.pdf, Date Accessed: 20.12.2012, p.432.

• See BORK, R. H. and G. J. SIDAK (2012), “What Does the Chicago School Teach About Internet Search and the Antitrust Treatment of Google?”, Journal of Competition Law and Economics, 8(4), p.679-682.

• MARSDEN, P. (2011), “Online Search: “Antitrust””, Competition Law Insight, July, p.18.

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the quality of results that Google can provide. Unlike its early days, today Google is not only a search engine provider; it owns a considerable amount of content as diverse as online books, video, music, travel and social media. It can be problematic, if other search engines cannot access or receive limited access to this content. In this respect, Microsoft’s general counsel Brad Smith alleges that Google is restricting competitors from accessing search inputs, in particular video content in YouTube and scanned books in Google Books,²⁴² and goes on to claim that this is “preventing competing search engines from returning relevant results”, as well as “raising [their] costs and hampering their ability to offer competitive services.”²⁴³

The following analogy can be drawn between Microsoft WMP and the Google investigation: Microsoft’s refusal to provide communication protocols that would have enabled rival server operating systems to interoperate with Windows client and server operating systems was found as an abuse of dominance.²⁴⁴ In the same vein, despite not being dominant in the online content market, it can be argued that the walling of access to content and data by Google can be perceived as an abuse of dominance, if such conduct is likely to hinder Google’s rivals from providing quality search results, and consequently from competing with Google on an equal footing. However, in our view, such argument is a bit far-fetched as it is not sufficiently clear how critical Google’s content is for rival search engines to compete with Google and ultimately it must be noted that competition law is not concerned with the protection of rivals.

If Google is to be found to abuse its dominance in the content market, a key challenge again will then be the finding of the appropriate remedy. If it is established that Google’s denial to grant access to its own content has a substantial effect on rivals’ offerings, thereby eliminating consumer choice, the Commission may decide to intervene and mandate access in favour of rivals, as evidenced in its past decisions in a number of industries such as telecommunications, transport and financial services.²⁴⁵ However, if such a

• Source: http://blogs.technet.com/b/microsoft_on_the_issues/archive/2011/03/30/adding-our-voice-to-concerns-about-search-in-europe.aspx, Date Accessed: 20.12.2012. Brad Smith also alleges that Google has “put in place a growing number of technical measures to restrict competing search engines from properly accessing [YouTube] for their search results”.

• See supra “2.4. Microsoft WMP”.

• For a discussion of cases in transport and financial services sector which may provide some guidance in relation to Google investigation, see Wood 2011, p.44-49.

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remedy is foreseen by the Commission, the viability and scope of such mandatory access will be highly disputed, since such access to Google’s content and platform might give its rivals access to strategic assets (such as social network member data), insights in relation to its inner workings and even to its protected algorithms. After all, if a dominant firm has engaged in high risk investment and come up with product(s) as a result of its success, superior skill and entrepreneurship, mandatory access claims should be treated with caution.²⁴⁶

3.3.3. Harming Competition through Exclusivity Deals

One of the allegations against Google is the fact that it has imposed exclusivity agreements on its contracting partners in the online advertising market which restrict them from placing their advertisements to different providers at the same time.²⁴⁷ By entering into such exclusivity contracts, Google is alleged to have denied its competitors the scale which is necessary for them to compete with Google on an equal footing.²⁴⁸ As demonstrated by the established case law in the EU, exclusivity contracts that ties customers – even if they do so at their request – to obtain only the dominant company’s products, as well as loyalty contracts (rebates) requiring customers to buy its all or most of supply exclusively from the dominant undertaking are generally ruled as an abuse of dominance.²⁴⁹ To this end, hindering its partners from advertising with other companies that also provide online advertising services can be deemed as abusive, if Google is to be perceived as an unavoidable trading partner in the relevant market.²⁵⁰

In this regard, it seems straightforward to establish whether Google places exclusivity obligations on its partners. However, it must be noted that exclusivity in itself may not necessarily generate anti-competitive effects. Exclusivity agreements can be tolerated as long as they enhance efficiency and their exclusionary effects do not deny rivals market access for too long.²⁵¹ Hence in

• OFT 2002a, p.98.

• Press Release, “Antitrust: Commission probes allegations of antitrust violations by Google”, IP/10/1624, 30 November 2010.

• Scale enables a search engine to deliver the most relevant results to a user query; the more users use a search engine in relation to a search query, the better results that search engine provides.

• See in particular Case 85/76 Hoffmann-La Roche & Co. AG v Commission [1979] ECR 461, Case C-497/99 Irish Sugar plc v Commission [2001] ECR I-5333, Case T-203/01 Manufacture française des pneumatiques Michelin v Commission [2003] ECR II-4071 and Case T-65/98 Van den Bergh Foods Ltd v Commission [2003] ECR II-4653.
• Van Loon 2012, p.32.

• Marsden 2011, p.18. For a good assessment of exclusive dealing agreements under competition law, see MELAMED, D. (2006), “Exclusive Dealing Agreements and Other Exclusionary Conduct: Are There Unifying Principles?”, 73 Antitrust Law Journal 375, p.375-412.

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this context, critical questions that need to be addressed are whether such exclusivity deals have a substantial effect on competition and consumer welfare, and whether there are efficiencies brought about by such exclusivity agreements which could outweigh their potential foreclosure effects. The Commission’s approach towards efficiencies, its definition of what constitutes foreclosure in online advertisement market, and its determination as to the length of tolerating such foreclosure will obviously determine the answers to these questions. In this respect, without assessing the term and conditions and effects of the alleged exclusivity contracts on consumer welfare, it is hard to predict the outcome of the Commission’s assessment.

3.3.4. Harming Competitors by Copying Third Party Content for Free

The complaint made by the German publisher associations relates to the use of third party content by Google in order to generate advertising revenue, without paying any remuneration to third parties. According to several media reports, this relates to Google’s display of “snippets”²⁵² third party content in Google News.²⁵³ Google News shows hyperlinks to news messages from third parties websites, along with the first two or three lines of the messages concerned. The content publishers are concerned that by copying their content for free, Google earns money from their offerings without offering them any share of the remedy.

Arguably this complaint is more related to infringement of IPRs than possible abuse of dominance. If Google has the right to show the third party content under the relevant intellectual property laws, the lack of payment to the publishers should not be perceived as an abuse of dominance.²⁵⁴ As pointed out by several scholars if the content is in the public domain, every user can view it for free, hence it is not sufficiently clear why Google, can be obliged to share its advertising revenue with the third parties for using it for free.²⁵⁵

3.4. The Developments in Relation to the EU Investigation

In the preliminary decision, in May 2012, the Commission gave a strict deadline

• A snippet means a small piece of something. In the context of search results, Google provides a few short “snippets” of the texts of articles and copyrighted books in a way that responds the searched keyword(s).
• PFANNER, E. (2010), “An Antitrust Complaint for Google in Germany”, The New York Times

• January 2010, http://www.nytimes.com/2010/01/19/technology/19antitrust.html?adxnnl= 1&adxnnlx=1347963350-qBl/rnbjsB/WqXBDAj0uAA, Date Accessed: 20.12.2012.
• Van Loon 2012, p.34.

• See eg

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to Google to propose remedies addressing the concerns in a short time frame.²⁵⁶ In July 2012, Google proposed remedies to address the abovementioned four areas of concern.²⁵⁷ Terms and conditions of Google’s proposals have not been made public, but commentators suggest that if a settlement is to be reached between Google and the Commission, Google’s search results and its ranking decisions would be subject to important changes globally which would affect both desktop computers as well as the fast growing mobile platforms.²⁵⁸

According to Nicolas Petit, an EU competition law professor at the University of Liege in Belgium, the willingness of the Commission to settle the case without sending the formal statement of objections demonstrates that the Commission did not have a strong case against Google in the first place,²⁵⁹ whilst other commentators suggest that Google’s willingness to settle the case as quickly as possible can also be seen as an admission of quilt.²⁶⁰ Arguably, the willingness of Google to settle the case should not be seen as admission of any wrongdoing. As a technology company Google has surely learned lessons from the Microsoft saga and will probably do everything to avoid the cost of a long battle which might cost it up to 10 percent of its worldwide total turnover, if the case was to be resolved in its disadvantage. Furthermore, such a negative decision is very likely to have an adverse affect in other jurisdictions where Google is operating and facing antitrust complaints.²⁶¹

At the time of writing no settlement has been reached between Google and the Commission, but the increasing reliance of the Commission on settlement procedures and several news reports²⁶² stating that Google and the Commission

• ALMUNIA, J. (2012), “Statement of VP Almunia on the Google Antitrust Investigation”, Brussels 21 May 2012, http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/12/372, Date Accessed: 20.12.2012.

• ARTHUR, C. (2012), “Google Offers to Settle EU Antitrust Case”, The Guardian 2 July 2012, http://www.guardian.co.uk/technology/2012/jul/02/google-eu-antitrust-case, Date Accessed: 20.12.2012. See also KANTER, J. (2012), “Google Moves to Head off E.U. Antitrust Charges”, International Herald Tribune 3 July 2012, p.17.
• Arthur (2012).

• PUZZANGHERA, J. (2012), “Europe’s Antitrust Chief Urges Google to Settle Allegations”, Los Angeles Times 22 May 2012, http://articles.latimes.com/2012/may/22/business/la-fi-google-europe-20120522, Date Accessed: 20.12.2012.
• Arthur 2012.

• See supra “1.3. Public Awarenesss”.

• See GEITNER, P. (2012), “Google Moves toward Settlement of European Antitrust Investigation”, New York Times 24 July 2012, http://www.nytimes.com/2012/07/25/technology/ eu-nears-settlement-of-google-antitrust-investigation.html, Date Accessed: 20.12.2012.

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has reached a level of understanding in relation to the four areas of concern mentioned above, suggest that the European investigation in relation to Google’s alleged anti-competitive practices will most probably not proceed to an infringement decision.

The European probe in relation to Google’s anti-competitive practices is not the only one. It has been reported that South Korean, Argentinean,²⁶³ Indian²⁶⁴ and Brazilian competition authorities,²⁶⁵ as well as the US Federal Trade Commission (FTC), have also started investigations in relation to the alleged anti-competitive practices of Google. The investigations in the US will be discussed briefly below.

3.5. The Investigation in the United States

In June 2011, the FTC launched an investigation in relation to Google.²⁶⁶ Similar to the EU investigation, the FTC’s investigation mainly focuses on whether Google unfairly ranks search results to favour its own services and increases advertising rates for competitors to place them at a competitive disadvantage.²⁶⁷ The FTC is also examining whether Google is using its control of the Android mobile operating system to discourage smart phone makers from using rivals’

• FOSSUM, M. (2012), “South Korean, Argentinian Google Antitrust Probes Nothing New”, WebProNews 1 May 2012, http://www.webpronews.com/south-korean-argentinian-google-antitrust-probes-nothing-new-2012-05, Date Accessed: 20.12.2012.

• LARDINOIS, F. (2012), “India Launches Antitrust Investigation Against Google”, TechCrunch 13 August 2012, http://techcrunch.com/2012/08/13/google-antitrust-india/, Date Accessed: 20.12.2012.

• A case (Case No 583.00.2012.131958-7) was brought against Google by the parent of the Brazilian shopping comparison site Buscapé. The case was very similar to the cases and claims against Google around the world and centred on the argument that Google favours it own services at the expense of its rivals. The 18^th Civil Court of the State of Sao Paulo decided in favour of Google. The Court first declared that Google is not a monopoly as there were several search engine providers at the disposal of websites and advertisers. Secondly, the Court decided that Google is allowed present search results in whatever order or manner it deems appropriate. An English version of the decision on the merits is available at:

http://www.scribd.com/doc/105502055/BUSCAPE%CC%81-vs-Google-Summary-Judgment-ruling, Date Accessed: 20.12.2012.

²⁶⁶ See Google’s public policy blog confirming the FTC’s investigation, available at: http://googleblog.blogspot.co.uk/2011/06/supporting-choice-ensuring-economic.html, Date Accessed: 20.12.2012.

²⁶⁷ GARSIDE, J. (2011), “Google confirms FTC’s antitrust probe”, The Guardian 24 June 2011,

http://www.guardian.co.uk/technology/2011/jun/24/google-confirms-ftc-antitrust-probe, Date Accessed: 20.12.2012.

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applications, such as Windows operating systems by foreclosing competition in the mobile market.²⁶⁸ This has not been a central discussion in the EU, however in our opinion it is likely to be addressed in the potential settlement between the EU and Google.

According to various sources, the FTC also expanded its antitrust probe to deal with competition issues raised by Google+.²⁶⁹ In December 2011, Google announced a new search feature entitled “Search Plus Your World” which allows Google to pull data from users’ connections in Google+. Accordingly, for Google+ users, search results will now be customised to their particular interests and will include photos and comments from their Google+ connections. Google markets its new search feature as an improved search method that will provide tailored results for each individual.

In January 2012, the Electronic Privacy Information Center (EPIC) issued a letter of complaint with the FTC raising concerns about privacy and adverse effects of the new features on rival web services.²⁷⁰ In addition to EPIC, social media websites including Twitter voiced their concerns regarding Google’s practice stating that as a result of Google’s changes finding information on the web would be harder which will have an adverse affect on people, publishers, news organisations and Twitter users.²⁷¹ However, Google responded to these claims stating that there are technical limitations that hinder it from including competitors’ content in “Search Plus Your World”.²⁷² Google in the past had an alliance with Twitter that allowed it to feature tweets in its search results which

²⁶⁸ FORDEN, S. (2012), “FTC Said Poised to Finish Google Antitrust Probe in Weeks”, Bloomberg 30 August 2012, http://www.bloomberg.com/news/2012-08-30/ftc-said-poised-to-finish-google-antitrust-probe-in-weeks.html, Date Accessed: 20.12.2012.

• FORDEN, S. and B. WOMACK (2012), “FTC Said to Expand Antitrust Probe of Google to Social Networking Service”, Bloomberg 13 January 2012, http://www.bloomberg.com/news/2012-01-13/google-s-social-networking-service-said-to-be-added-to-ftc-antitrust-probe.html, Date Accessed: 20.12.2012.

• The letter of EPIC can be found at: https://epic.org/privacy/EPIC-FTC-Google-Search-letter.pdf, Date Accessed: 20.12.2012.

• MCGEE, M. (2012), “Twitter: Google+ Integration In Google Search Is “Bad” For Everyone”, MarketingLand 10 January 2012, http://marketingland.com/twitter-google-integration-in-google-search-is-bad-for-everyone-3091, Date Accessed: 20.12.2012.

• Google’s response to Twitter’s claims is available at Google+’s own blog: https://plus.google.com/+google/posts/24uqWqvALud#+google/posts/24uqWqvALud, Date Accessed: 20.12.2012.

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ended in July 2012²⁷³ and for this reason it cannot crawl the said specific content from Twitter.

In September 2011, Google’s Executive Chairman, Eric Schmidt, was invited to testify before the US Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, in relation to the potential anti-competitive conduct claims.²⁷⁴ In his testimony, he mainly focused on the innovative and extremely competitive nature of online search and asserted that consumers have a variety of options to access information. He maintained that if Google fails to deliver the best results, they can readily switch to other search providers while dismissing the fact that Google favours its own services at the expense of its rivals.²⁷⁵

On Dec 19, 2011, the bipartisan leadership of the US Senate Antitrust Committee Chairman Herb Kohl and Ranking Member Mike Lee wrote a letter expressing support for the FTC’s ongoing investigation into Google’s business practices.²⁷⁶ They argued that in order to preserve the openness, competitiveness and innovative nature of the Internet, it is crucial for the FTC to determine whether Google’s actions violate antitrust law or substantially harm consumers and competition in the online environment.

It has been reported by several commentators that the FTC has recently hired an experienced outside prosecutor to potentially bring a solid antitrust case against Google.²⁷⁷ In addition to the concerns raised by the Commission, the US investigation also deals with Google’s potential to lock down its search and other

• FIVEASH, K. (2011), “Google shutters Realtime Search after Twitter deal expires Tweet firehose still spraying into Bing, Yahoo”, The Register 5 July 2011, http://www.theregister.co.uk/2011/07/05/google_realtime_search_twitter/, accessed 20/12/2012.

• Source: http://searchengineland.com/figz/wp-content/seloads/2011/09/Eric-Schmidt-Testimony.pdf, Date Accessed: 20.12.2012.

• The letter addressed to the US Senate Comittee on the Judiary written by Herb Kohl and Mike Lee can be found at http://www.fairsearch.org/wp-content/uploads/2011/12/Google-FTC-Letter-12-19-11.pdf, Date Accessed: 20.12.2012.

• STREITFELD, D. and E. WYATT (2012), “U.S. Escalates Google Case by Hiring Noted outside Lawyer”, New York Times 26 April 2012, http://www.nytimes.com/ 2012/04/27/technology/google-antitrust-inquiry-advances.html?_r=4, Date Accessed: 20.12.2012. See also STERLING, G. (2012), “US FTC Hires Formidable Outside Litigator For Possible Antitrust Case Against Google”, Marketing Land 27 April 2012, http://marketingland.com/us-ftc-hires-formidable-outside-litigator-for-possible-antitrust-case-against-google-10860, Date Accessed: 20.12.2012.

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applications on smart phones that run its operating system, Android.²⁷⁸ At the federal level, several states also started full scale investigations in relation to Google’s alleged anti-competitive practices. Texas was the first state in this respect. The investigation started in 2010 is still ongoing at the time of writing.²⁷⁹ Subsequently, the Attorneys General in New York, California, Ohio, Mississippi and Oklahoma also initiated investigations. The antitrust investigation against Google in Ohio was dismissed in September 2011 as the District Court stated that the complainant had only proved harm to itself and failed to show harm to competition.²⁸⁰

At the time of writing, the FTC and the remaining federal states have not reached any conclusion in relation to the alleged anti-competitive practices of Google. Due to the similarities between the EU and the US investigations, it is expected that there will be some parallels in relation to the outcome of the investigations. Despite the divergent approaches in the area of unilateral conduct in the EU and US,²⁸¹ it is likely that the FTC investigation will also result in a settlement, requiring Google to address competition concerns particularly in relation to its search algorithms which allegedly favour its own services at the expense of its rivals.

3.6. Summary

Irrespective of the outcome, the Google investigation highlights the tension between high-tech firms and competition authorities and courts, as well as the rapidly changing nature of the competition landscape in relation to high-tech markets. The case shows that innovative and successful companies are more likely to be subject to antitrust intervention. The lengthy and controversial nature of the Microsoft cases and the ongoing Google cases clearly demonstrate the need

• KANG, C. (2012), “Pity Google? Patent Case Loss to Apple Could Spell Relief in Antitrust Probe, Analyst Says”, The Washington Post 28 August 2012, http://www.washingtonpost.com/ blogs/post-tech/post/pity-google-patent-case-loss-to-apple-could-spell-relief-in-antitrust-probe-analyst-says/2012/08/28/c608f58e-f0fb-11e1-adc6-87dfa8eff430_blog.html, Date Accessed: 20.12.2012.

• METZ, C. (2010b), “Google Faces Antitrust Investigation in Texas: EU Complaint Echoed in US”, The Register 3 September 2010, http://www.theregister.co.uk/2010/09/03/ google_antitrust_investigation_in_texas/, Date Accessed: 20.12.2012.

• The claimant com, an Ohio-based shopping comparison search website, accused Google of giving preferential treatment in its search results to Google’s own service and thereby placing its competitors at a competitive disadvantage.

• See supra “1.4. Global Markets and Jurisdictional Problems”.

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for antitrust policies adequately to address challenges in such dynamic industries, particularly in the area of unilateral conduct. In this respect, particular attention should be given to product design which also includes tying, as the potential benefits of such conduct may outweigh its potential anti-competitive effects and the condemnation of such conduct might result in aiding less efficient rival firms rather than enhancing consumer welfare.

In our view allegations in relation to Google involving exclusivity agreements and copying third party content are less controversial in nature and not to the same degree unique to high tech markets. However, for the purposes of this article, Google’s alleged tying practice or product design choices are very relevant. The approach of antitrust agencies and courts will be the ultimate test for them in assessing product designs with a particular focus on consumer welfare in high tech industries. The outcome of the cases on both sides of the Atlantic will be highly dependent on whether they regard Google’s vertically integrated services as a major innovation and as such beneficial for consumers or whether they perceive such product as another abusive conduct that limits consumer choice. As noted by Edelman and Wright, “Google is not merely a URL finder. Consumers demand more than that and competition forces search engines to deliver.”²⁸² So at the end of the day, the question remains what serves consumers welfare in the long run? If consumers demand more vertically integrated products such as Google’s online search engine, such conduct should not be condemned as anti-competitive merely for causing harm to some competitors.

4. COMMENTS AND CONCLUSION

Today we live in a world in which innovation and advances in technology are at the centre of economic activities. Compared to traditional markets at the implementation of competition law, high-tech markets show some unique characteristics. Technological products are mostly available all over the world and their producer high-tech firms are most of the time dominant, if not monopolist, in the relevant market. Firms operating in traditional markets, such as a cheese producer, operate either locally or even if they operate globally, they hardly hold a dominant position in the relevant market. Because of this global market phenomenon, high-tech firms are often subject to different competition law systems, whose economic development may be very different from one another. Inevitably, a competition law system, which is more concerned with the

²⁸² EDELMAN, B. G. and J. D. WRIGHT (2012), “Debate on Antitrust Scrutiny of Google”, h t t p : / / j o u r n a l o f l a w . u s / 5 % 2 0 T h e % 2 0 P o s t / 2 - 1 / J o L 2 - 2 , % 2 0 T P 2 - 1,%20Edelman%20and%20Wright.pdf, Date Accessed: 20.12.2012, p.459.

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protection of competitors, especially small- or middle-sized local firms, is inclined to intervene in the market rather than to leave the alleged anti-competitive conduct to be corrected by market dynamics. After all, in a competitive environment where competition is primarily innovation driven, it is not surprising that most of the allegations about anti-competitive conduct relate to practices that threaten to tilt the playing field in favour of the dominant firm.²⁸³ Active competition in high-tech markets may look like anti-competitive conduct in other markets; a dominant software or hardware platform owner’s efforts to enhance its platform by design choices, such as integration of new functionalities, may harm firms producing complementary products for that platform by reducing the price of those functionalities or by partially excluding their products from the platform.²⁸⁴

There appears to be hardly any problem in high-tech markets with prohibiting hard-core violations, such as a high-tech firm forming a cartel with its competitors to fix prices or share markets, or restrictive mergers such as a merger to monopoly between the only two high-tech firms in the relevant market. However, the same cannot be said in the area of unilateral conduct where there seems to be some degree of divergence between different competition law regimes pursuing different objectives. Even among the types of anti-competitive unilateral conduct, some potentially anti-competitive practices raise no or little controversy, such as predatory pricing, exclusive dealing and conditional rebates. When Intel, inter alia, granted rebates to OEMs on the condition that they buy all or virtually all of their CPUs from Intel but not from Advanced Micro Devices (AMD), this was found anti-competitive by the Commission.²⁸⁵ The outcome would have still been the same if a dominant tyre manufacturer had engaged in the same anti-competitive conduct vis-à-vis automobile manufacturers, except perhaps with less discussion on cost structure in high-tech markets which tend to have high initial investment costs and low marginal production costs in contrast to most traditional markets.

• OFT 2002a, p.42. See also Ahlborn et al., p.167 (“In new economy industries, where corporate success often means failure for rivals, innovators who succeed in the marketplace will often face all sorts of complaints for anti-competitive behaviour. Hopefully, the competition authorities will analyse these complaints keeping in mind that competition policy is about protecting competition and not competitors.”) On this point, it can be argued that competition authorities and courts should be more concerned with false positives. The bulk of cases and allegations against high-tech firms are brought and made by their competitors who seemed to have (ab)used competition law rules to provide a shelter to them against aggressive competition on the part of the dominant firm.
• Page and Childers 2012, p.376.

• Case COMP/C-3 /37.990 — Intel [2009] OJ C 227/13.

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In the area of unilateral conduct, a more pressing concern arises when the conduct in question relates to how dominant high-tech firms design their products, and especially when some anti-competitive effects are generated as a result of their product designs.²⁸⁶ Product designs often manifest themselves in the form of tying; however, an equally ubiquitous example of a potentially anti-competitive product design can be the introduction of brand-new or improved products to the market. One of the key issues the IBM and Microsoft cases on both sides of the Atlantic was their allegedly anti-competitive product designs. Currently Google is being accused of, among other things, designing its search algorithms in a way that manipulates search results and favours its own vertical services at the expense of those of its rivals. At some point in the future, Apple may be accused of designing the way how iTunes works with its own iPods and portable music players of other companies, as a result of which Apple might leverage its significant market position in the portable music player market into the market for the sale of digital music.²⁸⁷

• Even though this article limits itself to product design in the context of unilateral conduct of firms with market power, competitive concerns with regard to how firms design their products may also arise in the context of merger control. One good and recent example of this is the acquisition of McAfee by Intel. Although it can be prima facie preceived as a conglomerate merger as the CPU producer Intel proposed to acquire the antivirus software developer McAfee, theories of harm with regard to Intel’s post-merger product designs were not speculative. There were concerns as to whether Intel could develop algorithms for its CPUs that optimise the use of McAfee and hold this critical information back from rivals, or only share it selectively with some of them. NELSON, D. (2010), “EC’s Intel, McAfee Probe Finely Balanced as Complex Third-party Concerns Emerge”, MLex 17 December 2010, http://www.mlex.com/Content.aspx?ID=124195, Date Accessed: 20.12.2012.Furthermore, another concern was that Intel could differentiate its CPUs by designing chips that speed up the security scans typically performed by McAfee or creating technology that makes gadgets less vulnerable to attacks by hackers. FINKLE, J. and FELIX, B. (2011), “Intel Offers Concessions to EU on McAfee”, Reuters 6 January 2011, http://www.reuters.com/article/ idUSTRE7053DD20110106, Date Accessed: 20.12.2012. Alternatively, it was believed that Intel could use its CPUs to launch advertisement, pop-ups or even discounts promoting the use of McAfee; however, this was not likely to result in consumer harm. Notwithstanding those concerns, the Commission cleared the operation after Intel offered several commitments to alleviate the concerns on potentially anti-competitive product design (Case COMP/M.5984 — Intel/McAfee [2011] OJ C 98/1). See Press Release, “Mergers: Commission clears Intel’s proposed acquisition of McAfee subject to conditions”, IP/11/70, 26 January 2011. This case shows that concerns over product designs come to the fore even in the context of conglomerate mergers, which do not normally lead to any competition concerns at all in the majority of circumstances.

• Apple’s commercial strategy was the creation of a virtual tie-in which required the users of iPods to purchase digital music from Apple’s online digital music store, iTunes. Although users had the option of using and uploading to their iPods unprotected music, usually in MP3 format; if they wanted to download digital songs form iTunes, those were used to be DRM-protected (digital rights

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Figure 1 – The Spectrum of Different Types of Anti-Competitive Unilateral Conduct

Figure 1 shows the spectrum of different types of anti-competitive unilateral (exclusionary) conduct ranging from the least to the most anti-competitive according to which product design is the closest to a genuine pro-competitive practice; whereas deception, threat and force are nakedly anti-competitive and have no redeeming features or efficiency gains.²⁸⁸ Different standards apply to

management), usually in AAC format, and thus not playable on other portable music players apart from iPods. There was no requirement on the part of users to purchase any digital music at all, but the only digital music had to come from only iTunes. LIEBOWITZ, S. F. and S. E. MARGOLIS (2008), “Bundles of Joy: The Ubiquity and Efficiency of Bundles in New Technology Markets”, Journal of Competition Law and Economics, No:5(1), p.30. Considering the fact that Apple had 83 percent market share in the market for the sale of digital music (see Hays 2006, p.39), it could be thought that the company might have been the next target of competition authorities or courts, in particular in the EU, as the competing digital music retailers, such as Amazon.com, eMusic and Rhapsody, would be practically placed at a competitive disadvantage. In this case, iTunes seems to be integrated into iPods by way of software and it can be only used by the users of iPods. Such a product design initially attracted attention and in March 2006, the French Senate passed a law requiring Apple to disclose its DRM-protection method in an attempt to liberalise the online digital music retail market. KIRK, E. (2006), “Apple’s iTunes Digital Rights Management: “Fairplay” under the Essential Facilities Doctrine”, Communications Law, No:11(5), p.161. However, since January 2009, Apple has stopped selling tightly DRM-protected digital music, which means that users now have the option of playing the DRM-free digital music they have bought from iTunes on other portable music players as well. Source: http://www.apple.com/pr/library/2009/01/06Changes-Coming-to-the-iTunes-Store.html, Date Accessed: 20.12.2012. Nevertheless, as DRM-free availability does not apply to video clips and films available on iTunes, it remains to be seen whether a competition investigation will still be launched into the company on the basis a lack of interoperability as abuse of market power.

²⁸⁸ It has been contended that if conduct harms the competitive opportunities of rivals, has no cognisable efficiencies, is reasonably capable of harming competition and implemented with the sole or overwhelmingly predominant intent of causing competitive harm, then “no more should be required to establish a prima facie abuse”. NAZZINI, R. (2011), The Foundations of European Union Competition Law: The Objective and Principles of Article 102, Oxford University Press, Great Britain, p.60. The author gives the example of a dominant firm obtaining a patent by perpetrating fraud on the relevant patent office or inducing the government to erect or maintain barriers to entry by bribery or deception. Similarly, Melamed states that some practices can be “unambiguously anticompetitive” and gives the example of a dominant firm destroying its rival’s factory or paying its suppliers of inputs not to do business with its rivals who also need the same

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each category of practice depending on the risks false positives and over-deterrence. Generally speaking, the standards become more lenient towards the left end of the spectrum and more restrictive towards the right end.²⁸⁹ Even though the order at the middle of the spectrum can be disputed and there may be divergence on both sides of the Atlantic in this respect, the opposite ends of the spectrum remain largely free from controversy and tend to exhibit profound differences. In our view, product design (which also includes technological tying) denotes the least anti-competitive (but not per se lawful) unilateral conduct among a spectrum of different types of conduct in the enforcement of the prohibition of unlawful unilateral conduct. Product design represents the most controversial type of unilateral conduct to be challenged under competition law and to attach competition law liability to dominant high-tech firms.²⁹⁰

Some commentators have argued in favour of a per se legality for product designs in the form of introduction of brand-new products. Manne and Wright propose “a rule of per se legality for new product introductions”. The authors insist that even the rule of reason analysis does not survive a cost-benefit analysis that incorporates the potential for error costs of wrongful condemnation.²⁹¹ In our view, a rule of per se legality may arguably be appropriate for competition law systems that do not employ sound economic analysis in distinguishing between

input. Melamed 2006, p.377. The author actually implies that such conduct is rare and not worth commenting on in detail, since according to the author “most conduct that excludes rivals, however, provides some efficiency benefits that must be taken into account to determine whether the conduct, on balance, is anticompetitive.” ibid.

• “As the risks and costs of false convictions and over-deterrence increase, the [standard] becomes more lenient for the dominant undertaking and a competition authority or claimant is required to meet a higher threshold to make out a prima facie case.” Nazzini 2011, p.164.

• “Certainly, it is not always the case that an exclusionary innovation is necessarily anticompetitive and even an innovation that might be anticompetitive sometimes will be unlikely to be anticompetitive all the time. Thus, a key critique of the modern industrial organization literature and its possibility theorems involving anticompetitive behavior has been that it fails to consistently produce testable implications.” Manne and Wright 2010, p.172 (emphasis original).

• Manne and Wright 2010, p.196. Similarly, Temple Lang contends that “[w]holly new products are procompetitive”, and therefore dominant firms “should not be discouraged from introducing them”. Also product innovations or improvements by dominant firms in markets where there is no significant effect on complementary products “should be legal”. However, he goes on to state that the situation where the conduct has effects on complementary products (this should also include related markets) is “more complicated”. TEMPLE LANG, J. (2008), “The Requirements for a Commission Notice on the Concept of Abuse under Article 82 EC”, Centre for European Policy Studies Special Report, http://www.ceps.eu/ceps/dld/1588/pdf, Date Accessed: 20.12.2012, p.33 (emphasis added).

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legitimate competitive conduct and unlawful exclusionary conduct. The analysis could be flawed in such a system, due to a possible lack of a clear, consistent, sound and administrable rule. Nevertheless accepting such a rule, and thus an absolute antitrust immunity, in other jurisdictions which are instead grounded on sound economic analysis may raise concerns about under-inclusiveness and false negatives. As the US Court of Appeals pointed out in Microsoft III that as a general rule, courts should be sceptical about claims that competition has been harmed by a dominant firm’s product designs; however, judicial deference to product innovation does not mean that a dominant firm’s product design decisions are per se lawful.²⁹²

In high-tech markets, the rules on the prohibition of unlawful exclusionary conduct, especially with regard to product designs, should be implemented in a way that is unlikely to “punish” high-tech firms that often work so hard to innovate.²⁹³ In other words, competition authorities and courts should if/when possible refrain from discouraging future incentives to innovate. In our view, competition authorities and courts should not lose sight of the presence of actual (not likely) consumer harm when deciding whether the product design in question is anti-competitive; the focus should remain upon consumers and thus consumer harm should not be assumed from harm to the structure of the market or to competitors. Much has been written emphasising the analysis of consumer harm and even the titles of some articles or books themselves explicitly ask whether there was consumer harm in the relevant case.²⁹⁴ Strict and formalistic implementation of competition law rules on the prohibition of genuinely competitive product design raises concerns as to the objective of competition law and may lead to confusion about what it aims to protect in general: competition or competitors. Microsoft WMP was criticised on the fact that the Commission had focused on preserving rivalry rather than on efficiency and wanted to keep competitors in the game, even if it made Windows a less reliable and versatile

• Microsoft III, 65.

• “Antitrust law enforcement would have undesired consequences if major actors were penalized merely for successful innovation and superior efficiency. For legal instruments to benefit consumers in the long run, they must get the balance right…” GLADER, M. (2006), Innovation Markets and Competition Analysis: EU Competition Law and US Antitrust Law, Edward Elgar Publishing, USA, 170.

• See EVANS, D., A.L. NICHOLS and R. SCHMALENSEE (2005), “United States v. Microsoft: Did Consumers Win?”, Journal of Competition Law and Economics, No:1(3), p.497–539, and EVANS, D., F. M. FISHER, D. L RUBINFIELD and R. SCHMALENSEE (2000), Did Microsoft Harm Consumers? Two Opposing Views, Aei Press, USA.

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platform.²⁹⁵ On the very same day that the General Court issued Microsoft WMP, the former Assistant Attorney General for the Antitrust Division of the DOJ, Barnett, stated in a press release that “[i]n the United States, the antitrust laws are enforced to protect consumers by protecting competition, not competitors.”²⁹⁶ His message could hardly be clearer.

On the other hand, if one is to understand how markets work in the real world, one must look at all aspects. Such a thorough analysis can provide insights for the determination of consumer harm. In some cases, the relevant market may show the characteristics of two- or multi-sided markets, which will then have a bearing on the competitive assessment. The Commission considered the effect of Microsoft’s tying WMP to Windows not only in the market for media players, but also in adjacent markets.²⁹⁷ It has been argued that since understanding the pro-and anti-competitive effects of any conduct requires an assessment of effects on multiple markets and an observation of long term impact of those effects, static analysis of individual markets will eventually generate misleading results.²⁹⁸ Within this context, by giving away WMP, Microsoft sought to generate new

²⁹⁵ Apon 2007, p.8. See also ART, J. Y. and G. S. McCURDY (2004), “The European Commission’s Media Player Remedy in Its Microsoft Decision: Compulsory Code Removal Despite the Absence of Tying or Foreclosure”, European Competition Law Review, No:25(11), p.707 (“Unfortunately, the Commission has lost sight of its mission to protect consumers and competition and instead has focused on how to improve the already significant the distribution channels of particular competitors by attempting to reengineer complex technical products and determine particular market outcomes.”); McMahon 2009, p.137 (“[The General Court in Microsoft WMP] too readily found a breach of Article [102] by conduct which distorted structure, rather than undertaking a more focused examination of the effect on [competion] and consumer welfare... [The Court] seemed to equate consumer detriment with disadvantage to competitors.”) and ETRO, F. and I. KOKKORIS (2010), “Toward an Economic Approach to Article 102 TFEU”, F. Etro and I. Kokkoris (eds.), in Competition Law and the Enforcement of Article 102, p.32 (“[T]here seemed to be no actual consumer harm or predatory purpose from bundling from bundling the Media Player with Windows.”). Cf. KELLEZI, P. (2009), “Rhetoric or Reform: Does the Law of Tying and Bundling Reflect the Economic Theory?”, A. Ezrachi (ed.), in Article 82 EC: Reflections on Its Recent Evolution, p.161 (“[Microsoft WMP is] a very welcome development in EC competition law and suggests that not only is the Commission fully committed to the move to a more economic approach, but also that it has begun to develop the tools to implement it.”).

• Press Release, “Assistant Attorney General for Antitrust, Thomas O. Barnett, Issues Statement on European Microsoft Decision”, 07-725, Washington 17 September 2007.

• The Commission found that Microsoft enjoyed ubiquity by virtue of the bundle of WMP and Windows, which had effects on adjacent markets, such as media players on wireless information devices, set-top boxes, DRM solutions and on-line music delivery. Microsoft WMP, para.1076. Accordingly, WMP was a gateway to a range of those adjacent markets.
• Coates 2011, p.247.

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revenue streams from web content providers who wished to provide streaming audio and video services, and therefore deliberately altered their commerical choice by installing WMP in every copy of Windows and thereby making it an ubiquitious programme requiring no additional downloads on the part of users.²⁹⁹

Indeed, the market for media players, like the market for online search, is a two-sided market benefiting from “network effects”³⁰⁰ in that as more users begin to use a certain media player, more benefits are provided to content providers who develop their content compatible with the format of that media player, and as more content providers begin to develop contents for a certain media player, more benefits are provided to users in return. This ultimately tips the market in favour of that media player. Therefore, when analysing Microsoft’s product design and giving away of WMP in the light of the theory of two-sided markets, a mere lack of consumer harm no longer appears to be the only decisive factor. However, this raises a very significant question as to whether the market tips in favour of WMP because of Microsoft’s business acumen, foresight and efficiency, or because of Microsoft’s tying of WMP with Windows. It depends on how one interprets the concept of network effects; the Commission and the General Court affirming on appeal³⁰¹ appear to have regarded it as a barrier to entry rather than the reward of Microsoft’s efficiency and successful business acumen.³⁰² Even if the perception of a risk of tipping were supported by the facts, this does not necessarily mean that a beneficiary of tipping should be penalised

• ibid at p.249.

• Network effects are a demand side phenomenon associated with the value to the customer in that customer’s valuation of particular product is enhanced when it is employed in a system: the more users on a system, the valuable it is. Teece and Coleman 1998, p.814. It has been argued that an overall assessment of the effects of high tech product integration is not complete without a careful examination of the role of network effects. GRIMES, W. S. (2002), “The Antitrust Tying Law Schism: A Critique of Microsoft III and A Response to Hylton and Salinger”, 70 Antitrust Law Journal 199, p.224.

• According to the reasoning of the Commission, Windows provided Microsoft with a more efficient distribution system for WMP than was available to its rivals. Such an advantage led content providers and software designers to adopt the WMP format. Due to strong network effects, this ultimately led the market to tip towards WMP and eliminate competing media players. Microsoft WMP, paras.1049-1090. Grimes argues that on the relation of network effects with efficiency, the US Court in Microsoft III cited disagreements in the literature, but drew no definitive conclusions. Grimes 2002, 224.

• This, however, has led to a significant number of views expressed in favour of Microsoft in the literature: (“[T]he European Commission saw the existence of network effects as signs of a malfunctioning market.”) GIFFORD, D. J. and R. T.KUDRLE (2011), “Antitrust Approaches to Dynamically Competitive Industries in the United States and the European Union”, Journal of Competition Law and Economics, No:7(3), p.719; (“[T]he Commission… appeared to consider

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under competition law.³⁰³ It is true that competitors need to offer a number of applications upon entry to match the high quality of the Windows package and create their own network effects, but the cost of offering these applications is unlikely to be prohibitive compared to the global size of this market.³⁰⁴

In the assessment of consumer harm, there is one concept that has to be taken into account before coming to a conclusion: that is, the right remedy. Designing an appropriate remedy for an innovative market is like “trying to shoe a galloping horse”.³⁰⁵ If an allegedly anti-competitive practice generates long-term detrimental effects, but benefits consumer in the short term, then there is a risk that the remedy may preclude short term consumer benefits for the sake of future benefits, the occurrence of which may not be certain.³⁰⁶ Despite the WMP and Windows bundle, competitors may still enter the market with superior technology and replace WMP. Trying not to make the same mistake twice, the Commission is now, in a way, asking Google about what could be the best remedy to address the allegations made against the company. In Microsoft WMP, the Commission’s remedy was the unbundling of the media streaming function of Windows and Microsoft was therefore ordered to release a version of Windows without WMP, in addition to the version with WMP. However, the version of Windows without WMP (also known as “Windows XP-N”, where “N” is the abbreviation for “naked”)³⁰⁷ sold virtually no copies.³⁰⁸ Demand for this product has been

network effects mainly as a barrier to entry, thus failing to recognise that they constitute a major source of consumer value.”) Ahlborn et al 2001, 166; (“[T]he Commission’s decision misinterprets the role of the network effects.”) O’Donoghue and Padilla 2006, p.498; (“If the Commission seriously believes that network effects are pervasive and pernicious, it confronts the paradox that monopoly is achieved by increasing consumer welfare – better products at lower prices.”) Veljanovski 2001, p.117 and (“The decline in market shares of competitors... could be attributed to a number of other sources... including the superior efficiency of Microsoft products...”) McMahon 2009, p.137.

• Art and McCurdy 2004, p.699-700.

• ETRO, F. (2007), Competition, Innovation and Antitrust: A Theory of Market Leaders and Its Policy Implications, Springer, Germany, p.224.

• New York v Microsoft Corp., 224 F.Supp. 2d 76, (D.D.C. 2002).

• EKLÖF, D. (2009), “The Microsoft Case – at the Heart of the IP/Antitrust Intersection”, A. Ezrachi (ed.), in Article 82 EC: Reflections on Its Recent Evolution, p.105 (“The crucial welfare issue is not short-term product involvement, but rather what preserved rivalry or credible threat of entry means for the medium- and long-term rate of innovation in a sector.”)

• There was even a dispute over the name of this version between Microsoft and the Commission: Microsoft wanted to name it “Windows XP Reduced Media Edition”, but the Commission objected to this as such a title would discourage sales and mislead users. Langer 2007, p.168.
• Retailers bought 1,787 copies which amounted to less than 0.005 percent of the copies of all

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virtually zero in the EU, a likely sign that Microsoft’s bundling strategy was at least not hurting consumers.³⁰⁹ The product was doomed right from the start: it was placed on the market alongside with the bundled version and sold at the same price.³¹⁰ The remedy was in reality “a failure”.³¹¹

In fact, bundling WMP with Windows arguably did not foreclose the market to competing media player manufacturers or drive them out of the market. Even if WMP was there on the Windows desktop, nothing forced consumers to use it. In other words, there was no physical or even technical coercion. Without prejudice to WMP, they still had the option of installing other available media players, some of which were free of charge as well. Even though the Commission and the General Court did not share this view,³¹² but there was no evidence that integrated software packages in any way prevented access to other, free standing applications available for purchase or for free over the Internet.³¹³ In today’s world, almost every software is available online and just one click away from users with a broadband connection. For instance, Microsoft does not produce separate CDs for its Windows service packs or updates; Windows notifies them to users so that they can download directly and install immediately. Unlike the years in which the Commission’s investigation took place, broadband connection

sales of Windows XP sold at retail level in Europe. AHLBORN, C. and D. EVANS (2009), “The Microsoft Judgment and Its Implications for Competition Policy towards Dominant Firms in Europe”, 75 Antitrust Law Journal 887, p.922. Consumers do not seem to be pleased with the version without WMP and in this respect one consumer expressed his/her dissatisfaction as follows: “they forced Microsoft to release a version of Windows without a media player and guess what, Europeans didn’t WANT IT! They bought the full-blown version of Windows instead!” Koman 2009.

• Etro 2007, p.235.

• Larouche 2008, p.625.

• Coates 2011, p.273. See also Etro and Kokkoris 2010, p.33 (“...Microsoft was forced to commercialize a new operating system without its WMP, which, by the way, no one purchased.”)

• The Commission dismissed the argument other distribution methods, especially the internet, was as efficient as pre-installing WMP on Windows: “First, while it is true that downloading via the Internet enables suppliers to reach a large number of users, it is less effective than pre-installation by OEMs… Second, downloading, unlike using a pre-installed product, is seen as complicated by a significant number of users. Third… a significant number of download attempts… are not successfully concluded… Fourth, users will probably tend to consider that a media player integrated in the client PC which they have bought will work better than a product which they install themselves... Fifth and last, in most undertakings employees cannot download software from the Internet as that complicates the work of the network administrators…” Microsoft WMP, para.1050.

• EVANS, D., J. PADILLA and M. POLO (2002), “Tying in Platform Software: Reasons for a Rule-of-Reason Standard in European Competition Law”, World Competition, No:25(4), p.514.

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is widely available today. It used to take more than an hour to download WMP through a dial-up connection before, but now the same only lasts for a couple of minutes with a broadband connection. This is a clear sign of the would-be correction of allegedly anti-competitive conduct by the market dynamics.³¹⁴ It is doubtful whether the mandatory release of Windows without WMP was worth the prohibition decision and the imposition of the then record fine of 497 million Euros.

Furthermore, the Commission’s vision of consumers was equally unconvincing. The Commission treated consumers as if they were keen on using or even addicted to WMP and Microsoft exploited this by bundling it with Windows. It is worth noting that consumers might find WMP unsatisfactory or even “good-for-nothing”. One of the authors has observed elsewhere that a user attempting to watch a DVD film on a DVD-ROM by using WMP is affected by the region code restrictions, in that if the region code of that DVD does not match with the region code of that DVD-ROM, the user encounters with an error message and consequently cannot play that DVD in that DVD-ROM, even if he/she bought it completely legally. Whereas if the same user attempts to watch the same DVD on the same DVD-ROM by using “VLC Media Player”, he/she remains totally unaffected by the region code restrictions and can therefore play any DVDs regardless of whether their region codes match with the region code of his/her DVD-ROM.³¹⁵ Being aware of this crucial difference and attaching importance thereto, that user is thus highly likely to use the “VLC Media Player” irrespective of whether WMP comes pre-installed with Windows. This then refutes the General Court’s cursory observation that consumers had an incentive to use WMP at the expense of competing media players even if they were of

• This view was again not shared by the Commission in Microsoft IE. Even if it was issued 5 years after Microsoft WMP, the Commission appears to have relied on and in a way “recycled” the same findings of Microsoft WMP regardless of advances in the use of Internet and growing availability of broadband connection. For instance, only one in six households in Europe with Internet access had broadband connection in 2002. Microsoft WMP, para.1050. Now this rate is almost 100 percent. However, according to the Commission: “[d]ue to the development of broadband access, it has become easier over recent years to download software products, including web browsers. However, for various reasons, the Commission reached the preliminary conclusion that the downloading of web browsers from the internet does not provide a sufficiently effective distribution alternative.” Microsoft IE, para.46 (emphasis added). Some commentators disagree with the Commission that IE could have been substituted with another browser in a few seconds and freely even before the introduction of the choice screen with Microsoft IE. Etro and Kokkoris 2010, p.34.

• Özkan 2011, p.181-182, fn.19.

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better quality.³¹⁶ Indeed, studies show that consumers frequently install and use multiple media players due to the diversity of features they offer and formats they support.³¹⁷

The same can be said for IE as well; IE may not be superior in the eyes of consumers. Other web browsers may offer new add-ons, a higher compatibility with web pages, berrer security or faster downloads. To illustrate this, in 2011 Microsoft issued a critical security alert which could affect about 900 million users of Windows operating system. Although the problem was with the operating system, it affected the way IE handles some web pages in that users could be fooled into downloading malicious scripts which might collect user information.³¹⁸ Other web browsers such as Firefox, Chrome and Safari remained unaffected by this threat, since they did not support “MHTML” files.³¹⁹ Consumers whose first expectation is enhanced security may thus opt for other web browsers as they may be safer compared to IE. Within this respect, Google’s Chrome has a unique feature called “sandboxing” which is said to isolate web browser commands from the operating system, and other applications and data; therefore, this makes it harder for hackers to infect users with suggested malware and spyware.³²⁰ These two examples thus show that neither in Microsoft WMP, nor in Microsoft IE was there a coherent theory on consumer harm. The fact that the most efficient distribution channel was foreclosed cannot be necessarily equated with consumer harm as long as all distributions channels are not foreclosed.

The Commission’s analysis is also flawed from a different point of view. A Windows with WMP was found to have amounted to a technological tie. The same should then be true for a Windows with IE. Despite the same type of “infringement”, the Commission’s remedies in Microsoft WMP and Microsoft IE were quite different. In the former, the Commission ordered Microsoft to

• Microsoft WMP, para.971.

• Art and McCurdy 2004, p.699.

• FOSTER, A. (2011), “Security Flaw Opens Windows to Data Thieves”, London Evening Standard 1 February 2011, p.13.

• From a different perspective, the appearance of Firefox, Chrome and Safari shows that even though the Windows and IE bundle (this is also true for Windows and WMP) reduced the average prices of browsers and media players, this did not lead to any entry deterrence. Etro 2007, p.232.

• PERT, J. (2010), “Internet Explorer vs Google Chrome: 3 Reasons to Choose Chrome”, Product Reviews 5 May 2010, http://www.product-reviews.net/2010/05/05/internet-explorer-vs-google-chrome-3-reasons-to-choose-chrome/, Date Accessed: 20.12.2012.

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unbundle WMP from Windows and release an unbundled version of Windows. Whereas, in the latter Microsoft agreed to include a browser select screen, under which users could download the browser they want to use. The same remedy could have been imposed in Microsoft III, but the unbundling of IE from Windows was not a viable option in Microsoft IE; users could not download a different browser without using IE first. WMP and IE were both functionalities of Windows, but because of the nature of the market their unbundling brought about different outcomes. The unbundling of these functionalities severely interfered with the design of Windows and provided hardly any consumer benefit.³²¹ When a few US states which objected to the settlement in the aftermath Microsoft III applied for a stricter remedy of code removal of IE from Windows, the District Court rightly found that “the forced removal of software code from the Windows operating system will disrupt the industry, harming both ISVs and consumers.”³²² The Commission’s unbundling remedy can thus be regarded as “mistakenly wielding the antitrust hammer”³²³ against an innovative firm; it fails to appreciate the benefits of bundling in high-tech markets.³²⁴

The tying of IE to Windows was not, however, found unlawful in itself in the US; the Court of Appeals remanded that claim to the District Court for reconsideration. Microsoft was mainly condemned for carrying out a systematic anti-competitive campaign, under which the tying of IE to Windows had only a small part. As Hovenkamp summarises well, the history of Microsoft III shows far more; including efforts to pressure OEMs to deny access to alternative operating systems, to force Intel not to develop chips that would process Java multiplatform language effectively, to quash Internet access technology that

• “Adding new functions to existing products will inevitably lead to exclusion of vendors of products providing only the standalone function. But generally such additional functions are pro-competitive innovations that benefit consumers, notwithstanding short-term harm to standalone vendors.” Batchelor 2008, p.21.
• New York v Microsoft Corp., 224 F.Supp. 2d 76 (D.D.C. 2002), para.184 (V\B).

• Manne and Wright 2010, p.155.

• “Consider Nokia’s integration of music players, games, and most recently cameras into their handsets… Consider IBM’s integration of storage memory into its mainframe computers. Consider Intel’s progressive integration of the functionality of previously stand alone products like math coprocessors and multimedia chips into its core CPU chips for PCs. Consider PC OEMs integration of modems, CD and DVD burners, graphics accelerators, and similar components into the off-the-shelf PC. Should they be regarded as tying simply because such functionality can also be supplied by stand-alone products? Clearly not… It is both in the nature and the commercial usage of these products to be integrated to the great benefit of providing consumers increasingly useful and innovative products.” Art and McCurdy 2004, p.698 and 706.

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would have served to link multiple operating systems together, and to suppress a computer language that would have permitted developers to write software that would run on multiple operating systems.³²⁵ Had the only practice been the tying of IE to Windows, the outcome might have been different.³²⁶ Whereas Microsoft also resorted to deceptions and threats, which constitute the most anti-competitive practices as shown in Figure 1 above. The Court seems to have revealed its reluctance to condemn the technological tying of IE to Windows when it held that “not all ties are bad”.³²⁷ It is worth reminding at this stage that in none of the lawsuits filed against IBM during the 1970s and 1980s in the United States on the ground of IBM’s allegedly unlawful tying of certain features to its certain products was there any ruling that IBM had engaged in unlawful tying.³²⁸

If the attitude of competition authorities or courts towards product designs remains the same regardless of any of these criticisms, more cases will highly likely be brought against high-tech firms. It should be noted that applications running on Windows do not confine to IE and WMP. There are actual and potential competitors in the markets for many other applications that come up with Windows such as Messenger, Photo Viewer, Fax and Scan, Notepad, Paint and Calculator. Microsoft risks facing potential worldwide tying allegations concerning those products, if it continues to offer those products pre-installed on Windows.³²⁹ It has been observed that because of competition law concerns, Microsoft’s latest operating system, Windows 7, does not include a number of applications that consumers have come to expect from a full-featured operating system: “out of fear of antitrust headaches, Microsoft has stripped Windows 7 of

• Hovenkamp 2008, p.296.

• It has been suggested that the various activities challenged in Microsoft III might appear legal under a clear rule, but that when all of the multiple exclusionary practices are put together, it can be seen why the conduct (tying of IE to Windows) was really problematic. ADKINSON, W. F., K. L. GRIMM and C. N. BRYAN (2008), “Enforcement of Section 2 of the Sherman Act: Theory and Practice”, Staff Working Papers on Section 2, US Federal Trade Commission, http://www.ftc.gov/os/sectiontwohearings/docs/section2overview.pdf, Date Accessed: 20.12.2012, p.30, fn.166.
• Microsoft III, 87.

• “Courts refused to apply the tying prohibition, generally on the ground that innovation is too important to the competitive process to subject to judicial second-guessing.” Hylton and Salinger 2001, p.480.

• As discussed above, the Korean Fair Trading Commission decided that Microsoft abused its “significant market dominant position” by tying, among other things, Windows Messenger with its client operating system, thereby excluding competitors and also harming consumers. See supra102. Those two products have not been addressed by the Commission in the EU so far.

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some important accessory programs. Believe it or not, software for managing photos, editing videos, reading PDF documents, maintaining a calendar, managing addresses, chatting online or writing e-mail doesn’t come with Windows 7.”³³⁰ This massively important observation suggests that in a way, consumers might be using an inferior operating system because of historical competition law action. But is it what consumers could want? Google’s search algorithms are now at stake; up to now Google “has zealously guarded those formulas in much the same manner as Coca-Cola Co. protects the recipe for its signature drink or KFC guards the ingredient mix for its chicken.”³³¹ Interference with its product design in a way that may adversely increase the ranking of websites which are low-value add for users or have no original content would unlikely to offer benefits to consumers.³³² Therefore, efforts to base competition law liability on product design involve a high risk of interfering with ordinary, and often efficiency-enhancing, practices of high-tech firms.

All in all, competition law rules condemning product designs and technological ties present a particularly serious threat of chilling innovation and, moreover, raise severe remedial difficulties.³³³ Remedying anti-competitive product designs and technological ties appropriately can often be difficult, requiring courts to make judgments about unusually complicated, forward-looking business issues and thereby heightening the risk that a remedy will hurt, rather than help, consumers.³³⁴ Competition authorities and courts are likely to

• POGUE, D. (2009), “State of the Art - Windows 7 Keeps the Good, Tries to Fix Flaws”, The New York Times 21 October 2009, http://www.nytimes.com/2009/10/22/technology/personaltech/ html?_r=5&, Date Accessed: 20.12.2012. See also Adkinson et al 2008, p.26, fn.147 (“...concerns about potential liability under section 2 have led Microsoft not to include new product features and to raise prices.”)

• Source: ——, “EU probe delves into heart of Google’s business”, Associated Press 30 November 2010, http://www.cleveland.com/business/index.ssf/2010/11/eu_probe_delves_into_heart_of.html, Date Accessed: 20.12.2012.

• Under pressure to improve the quality of its search results from smaller rivals, Google has changed its formula to penalise “low-quality” content. The company announced without giving details that it was trying to reduce the rankings in websites which are low-value add for users, copy content from other websites or websites that are just not very useful. MENN, J. (2011), “Google Changes its Search Formula”, Financial Times 26 February 2011, http://www.ft.com/cms/s/ 2/69bb5514-413a-11e0-bf62-00144feabdc0.html#axzz1GXf8Uew6, Date Accessed: 20.12.2012.
• US DOJ 2008, p.87.

• ibid at p.88. The Commission, however, did not seem to share this when it stated in a press release that as a result of the unbundling remedy in Microsoft WMP, the configuration of a bundle of an operating system and a media player by OEMs would “reflect what consumers want, and not

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make serious errors if they endeavour to second-guess design decisions of innovators in regimes of rapid technological change and/or product redefinition.³³⁵ Compared to traditional markets, the nature of competition in high-tech is different, particularly when it is related to product designs. It should be borne in mind that dynamic innovative markets often compete by adding desirable functions into new versions of existing products³³⁶ and the margin of innovation in many high-tech products is the addition of new functionalities.³³⁷ For this reason; economists, lawyers, competition authorities and courts must approach product designs in high-tech markets with caution, and reassess their methods and tests in determining both market power and abuse of market power.

what Microsoft imposes.” Press Release, “Commission Concludes on Microsoft Investigation, Imposes Conduct Remedies and a Fine”, IP/04/382, 24 March 2004. It appears that the Commission itself imposed Microsoft the requirement to offer an unbundled version for which there has been no apparent consumer demand.

• Teece and Coleman 1998, p.842. The authors rightly observe that “[d]etermining the right answer likely requires significant technological detail, and understanding of consumer preferences are inherently uncertain. Enforcement agency personnel are not likely to be capable of making the technical distinctions and would have to rely on industry personnel who may have divergent views and special agendas. This indicates the need for extreme caution.” ibid at p.845-846. See also Etro 2007, p.235 (“…attempts of antitrust authorities to stop or delay the evolution of OS through additional features, as browsers and media players, appear quite dangerous: while it is difficult to verify in which moment it would be optimal to bundle secondary products in an evolving primary product, it is not clear why antitrust authorities should have a better guess than market driven firms.”)
• Batchelor 2008, p.19.

• Liebowitz and Margolis 2008, p.22. See also Etro 2007, p.234 (“If supply of media player functionalities was inefficient through bundling a few years ago, and it was mostly left to specific add-ons; improvements in hardware processing power, in the cost of hard disk storage and random access memory, and in the streaming technology made it simple and efficient to bundle media player functionality within current OSs… while a few years ago an OS and a media player could be regarded as separate goods whose union could be associated with a bundling strategy, nowadays an OS must incorporate media player functionalities (as it must incorporate a browser) so that we cannot even talk of a traditional form of bundling.”) (emphasis original).

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PUZZANGHERA, J. (2012), “Europe’s Antitrust Chief Urges Google to Settle Allegations”, Los Angeles Times 22 May 2012, http://articles.latimes.com/ 2012/may/22/business/la-fi-google-europe-20120522, Date Accessed: 20.12.2012.

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SHAPIRO, C. (1999), “Exclusivity in Network Industries”, 7 George Mason Law Review 673.

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VAN EJIK, N. (2009), “Search Engines, the New Bottleneck for Content Access”, B. Preissl, J. Haucap and P. Curwen (eds.), in Telecommunication Markets: Drivers and Impediments, p.141-156.

VAN LOON, S. (2012), “The Power of Google: First Mover Advantage or Abuse of a Dominant Position”, A. Lopez-Tarruella (ed.), in Google and the Law: Empirical Approaches to Legal Aspects of Knowledge-Economy Business Models, p.9-36.

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WATERS, R. and M. WATKINS (2011), “Microsoft Turns to Brussels in Google Complaint”, Financial Times 31 March 2011, http://www.ft.com/cms/s/2/7dd1c7a4-5b61-11e0-b965-00144feab49a.html#axzz1ImHCovvS, Date Accessed: 20.12.2012.

WHISH, R. and D. BAILEY (2012), Competition Law, Seventh Edition, Oxford University Press, Great Britain.

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WOOD, D. (2011), “EU Competition Law and the Internet: Present and Past Cases”,

Competition Law International, No:7(1), p.44-49.

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Decisions and Judgments (in alphabetical order)

US District Court

Caldera, Inc. v Microsoft Corp., 72 F.Supp. 2d 1295 (D.Utah 1999)

ILC Peripherals Leasing Corp. v IBM Corp., 448 F.Supp. 228 (N.D. Cal 1978) Innovation Data Processing, Inc. v IBM Corp., 585 F.Supp. 1470 (D.N.J. 1984)

New York v Microsoft Corp., 224 F.Supp. 2d 76 (D.D.C. 2002) Telex Corp. v IBM Corp., 367 F.Supp. 258 (N.D. Okla. 1973)

United States v Microsoft Corp., 87 F.Supp. 2d 30 (D.D.C. 2000) United States v Microsoft Corp., 980 F.Supp. 537 (D.D.C. 1997)

US Court of Appeals

California Computer Products Inc. v IBM Corp., 613 F.2d 727 (9^th Cir. 1979)

Memorex Corp. v IBM Corp., 636 F.2d 1188 (9^th Cir. 1980) Rambus Inc. v FTC, 522 F.3d 456 (D.C.Cir 2008)

Telex Corp. v IBM Corp., 510 F.2d 894 (10^th Cir. 1975)

Transamerica Computer Co. v IBM Corp., 698 F.2d 1377 (9^th Cir. 1983) United States v Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995)

United States v Microsoft Corp., 147 F.3d 935 (D.C. Cir 1998) United States v Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001)

US Supreme Court

Eastman Kodak Co. v Image Technical Servs., Inc., 504 U.S. 451 (1992) Jefferson Parish Hospital Distict No 2 v Hyde, 466 U.S. 2 (1984) Standard Oil Co v United States, 337 U.S. 293 (1949)

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European Commission

Case IV/30.787 Eurofix-Bauco v Hilti [1988] OJ L 65/19 Case IV/30.849 IBM Personal Computers [1984] OJ L 118/24 Case COMP/C-3 /37.990 — Intel [2009] OJ C 227/13

Case COMP/M.5984 — Intel/McAfee [2011] OJ C 98/1

Case COMP/C-3/37.792 — Microsoft [2004] OJ L 32/23

Case COMP/39.530 — Microsoft (Tying) [2009] (unpublished)

Case COMP/M.5727 — Microsoft/Yahoo! Search Business [2010] OJ C 20/32 Case COMP/38.636 — Rambus [2010] OJ C 30/17

Case IV/31.043 Tetra Pak II [1992] OJ L 72/1

General Court

Case T-340/03 France Telecom SA v Commission [2007] ECR II-207 Case T-30/89 Hilti AG v Commission [1990] ECR II-163

Case T-203/01 Manufacture française des pneumatiques Michelin v Commission

[2003] ECR II-4071

Case T-201/04 Microsoft v Commission [2007] ECR II-3601

Case T-83/91 Tetra Pak II v Commission [1994] ECR II-755

Case T-65/98 Van den Bergh Foods Ltd v Commission [2003] ECR II-4653

Court of Justice of the European Union

Case C-53/92P Hilti AG v Commission [1994] ECR I-666

Case 85/76 Hoffmann-La Roche & Co. AG v Commission [1979] ECR 461 Case C-497/99 Irish Sugar plc v Commission [2001] ECR I-5333

Case 322/81 NV Nederlandsche Banden Industrie Michelin v Commission [1983] ECR 3461

Case C-333/94 P Tetra Pak v Commission [1996] ECR I-5951

Case 27/76 United Brands Co. v Commission [1978] ECR 207

Press Releases (in chronological order)

Press Release, “Commission Concludes on Microsoft Investigation, Imposes Conduct Remedies and a Fine”, IP/04/382, 24 March 2004

Press Release, “Assistant Attorney General for Antitrust, Thomas O. Barnett, Issues

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Statement on European Microsoft Decision”, 07-725, Washington 17 September 2007

Press Release, “Antitrust: Commission confirms sending a Statement of Objections to Microsoft on the tying of Internet Explorer to Windows”, MEMO/09/15, 17 January 2009

Press Release, “Antitrust: Commission statement on Microsoft Internet Explorer announcement”, MEMO/09/272, 12 June 2009

Press Release, “Antitrust: Commission welcomes Microsoft’s roll-out of web browser choice”, IP/10/216, 2 March 2010

Press Release, “Antitrust: Commission probes allegations of antitrust violations by Google”, IP/10/1624, 30 November 2010

Press Release, “Mergers: Commission clears Intel’s proposed acquisition of McAfee subject to conditions”, IP/11/70, 26 January 2011

Press Release, “Antitrust: Commission opens proceedings against Microsoft to investigate possible non-compliance with browser choice commitments”, IP/12/800, 17 July 2012

Press Release, “Antitrust: Commission sends Statement of Objections to Microsoft on non-compliance with browser choice commitments”, IP/12/1149, 24 October 2012

Article by Attorney Aysem DIKER VANBERG

From Archie to Google - Search engine providers and emergent challenges in relation to EU competition law

Aysem Diker Vanberg [1]

Cite as: Diker Vanberg, A, ‘From Archie to Google -Search engine providers and emergent challenges in relation to EU competition law’, European Journal for Law and Technology, Vol. 3, No. 1, 2012

Abstract

Search engines are crucial for locating and accessing the vast amount of digital content. Hence they are subject to close scrutiny by the media, governments and scholars. On November 30, 2010, the European Commission opened an antitrust investigation into allegations that Google Inc. has abused a dominant position in online search in violation of Article 102 of the Treaty on the Functioning of the European Union (Article 102 TFEU). The investigation sparked an ongoing debate in relation to the potential for anti-competitive conduct by search engines, in particular the potential for abuse of dominance. Through an analysis of the history and development of the search industry, search engine business models and the characteristics of the online search market, this paper investigates whether the characteristics of the free internet search and search advertising market may encourage anti competitive behaviour. Furthermore, the Article briefly analyses whether the European competition framework, in particular Article 102 TFEU, is well equipped to deal with challenges in relation to search.

The paper advocates that due to the commercialisation of search coupled with innovative business models that change persistently, there is a growing potential for search engines to engage in anticompetitive practice. Hence, there is a vital need to reassess current EU competition law and policy.

1. Introduction

Search engines are crucial for locating and accessing the vast amount of digital content. Hence they are subject to close scrutiny by the media, governments and scholars. [2] On November 30, 2010, the European Commission opened an antitrust investigation into allegations that Google Inc. has abused a dominant position in online search in violation of Article 102 of the Treaty on the Functioning of the European Union (Article 102 TFEU). [3] The investigation sparked an ongoing debate in relation to the potential for anti-competitive conduct by search engines, in particular the potential for abuse of dominance. According to a February 2011 study by comScore, [4] 9 out of 10 Europeans use Google for online search, making it an undisputed dominant player in online search in Europe. [5] Given the significant importance of search engines for European consumers and businesses, the purpose of this paper is to analyse the suitability of the European competition framework, specifically Art. 102 TFEU, in relation to search engines.

This paper takes as a starting point that as pointed out by the competition commissioner, Joaquín Almunia, understanding the dynamics of web based services is a complex task due to innovative business models that change persistently. [6] The markets that search engines operate in are complex and different from traditional markets as they are fast paced, two-sided platforms [7] (matching paying advertisers and internet users looking for relevant information) characterised by economies of scale, high concentration levels, and network effects. [8] It investigates whether these characteristics of the free internet search and search advertising market may encourage anti competitive behaviour, and in the light of the above characteristics, whether Article 102 TFEU is well equipped to deal with challenges in relation to search. The paper first examines the development and characteristics of the search market. It then briefly explores the European

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Commission’s 2010 investigation into Google, the modernisation attempts in relation to Art. 102 TFEU and discusses whether Art. 102 TFEU in its current form is sufficient to deal with challenges posed by high tech industries, in particular search engines. Finally conclusions are drawn and an agenda for further research is laid out.

2. Development and commercialisation of search

Web search and the technology surrounding it have grown rapidly over the past decade. Wikipedia lists a wide range of search engines including ‘general’ search engines (Google, Bing and Yahoo Search), geographically limited search engines (Naver-Korea, Baidu-China), enterprise search engines (AskMeNow), legal search engines (Westlaw, LexisNexis) and so on. [9] Although there is a significant number of locally and globally operating search engines, this research will primarily focus on Google, due its dominance in the global and European consumer search market. [10] In two decades the online search industry has seen the rise and fall of many players.

Early days and development

The first search engine, Archie, [11] was created in 1990 by Alan Emtage, a computer science student at McGill University. [12] Compared to current search technology, Archie was rather primitive. Its search capacity and user interface was very limited and only used by academics. [13] Since Archie, a lot has changed in the landscape of search engines. In 1991, the World Wide Web became publicly

available. [14] This development coupled with the constant innovation and technological advancement in search technology enabled search engines to reach ever larger audiences as opposed to limited academic audiences. As the World Wide Web grew in popularity and the number of websites increased, the need for a better search engine arose. [15]

In June 1993, Matthew Gray from Massachusetts Institute of Technology created the first web based search engine, the World Wide Web Wanderer. [16] The Wanderer sent out a robot txt file that collected information from websites and indexed it. [17] The web's second search engine, Aliweb was launched in November 1993 as a response to the World Wide Web Wanderer. [18] Aliweb did not use a web robot but rather depended on being notified by the webmasters in relation to the existence of each site as well information provided by them for the webpage to be listed. [19]

One of the most remarkable milestones in the history of search engines was the introduction of WebCrawler, by Brian Pinkerton, a researcher from the University of Washington, in 1994. WebCrawler was the first ‘full text’ crawler-based search engine. [20]Unlike its predecessors, it was the first search engine to index the full text of documents, and due to its user friendly interface, it extended the usage of search engines from tech geeks and academics to the general public. [21] Infoseek was based on existing technologies, but introduced a complex system of search modifiers and offered a few add-ons. Their success followed their strategic partnership with browser developer Netscape. [22]

AltaVista’s search engine was developed by Digital Equipment Corp in 1994. [23] As described by Batelle, it was the ‘first truly good search engine’ as it brought many innovations and features. [24] Alta Vista indexed a larger number of web pages than their rivals and allowed natural language queries in addition to having advanced search options. [25] By the time Inktomi and Google became prominent players in the market, Alta Vista started losing its popularity due to management disputes and portal clutter. [26] On February 2003, Altavista was acquired by Overture Services Inc., which in July 2003, was bought by Yahoo. [27] [28]

Lycos was the next major development in search. It was launched at Carnegie Mellon University by Dr. Micheal Mauldin in 1994 [29] and like Altavista, it sent a crawler to index the web. Lycos, however, used more advanced mathematical algorithms in responding to search queries. [30]. To assess the relevance of a webpage it analysed the outbound links on a Web page. [31] But Lycos' main advantage over its rivals was mainly the size of its catalogue. [32] Excite was launched by a number of Stanford alumni in 1995. With both a web directory and a search engine it was the first search engine ‘to transcend classic keyword based searching with technology that grouped web pages by their underlying concepts’. [33]

As rival search engines were creating variable results, meta search engines entered the scene in

5. [34] Meta search engines such as Metacrawler and Sawy sent search queries to all leading search engines and indexed and ranked them. Hotbot developed by Inktomi Corporation came about in 1996 and

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was a milestone in the history of search through the introduction of personalised search. It used cookies to store personal search preferences in order to offer customised search results. [35] Furthermore, they were the pioneers of the pay per click model, but as their business model lacked in efficiency it was not profitable. [36] By 2000 the majority of leading search engines, including AltaVista, the prominent search engine of its time, launched customised search. Customised search enabled search engines to collect vast amount of data from their users which could be used for behavioural targeting for advertisers.

Yahoo! was created by two Stanford graduate students, David Filo and Jerry Yang, during their PhD studies. [37] Unlike other search engines, Yahoo began as a web directory. The yahoo.com domain was registered on January 18, 1995. [38] On April 5, 1995, Yahoo raised $ 2 million from Sequia Capital’s Michael Moritz, who later provided finance for Google. [39] Understanding the critical importance of search for internet users, in 1995, Yahoo! included search to its directory through its partner Open Text and later that year switched to Altavista. [40] Yahoo! later started using Inktomi technologies and finally moved on to Google as search partner. [41] To create its in-house technology, starting from 1997, Yahoo! acquired a variety of search companies including Netcontrol, hotjobs.com, Inktomi, Overture and SearchFox. [42] After having bought Inktomi in December 2002 and Overture in July 2003, Yahoo! combined these technologies with various other companies it acquired and started using its own in house search technology February 2004. [43]

Yahoo! eventually diversified into a web portal offering a wide range of services in a bid to increase traffic and time on site. Currently the Yahoo! portal offers a variety of services, including but not limited to e-mail, shopping, dating, services as well as content such as news, entertainment, and sports information. [44] In 2008, Microsoft offered to buy Yahoo!'s search business for over $40 billion, a deal which was refused by the Yahoo Board of Directors. [45] Yahoo and Google tried to join forces in 2008, but the US Department of Justice (DOJ) informed the companies that it would file an antitrust suit in order to block the deal due to its anticompetitive implications. [46]

Commercialisation of search

From the early days, search companies tried to commercialise search through the use of banner ads, however commercialisation of the internet and search as we know it today started after 1995. [47]

Overture

Overture, formerly known under the name GoTo launched by Bill Gross in late 1997, was the first company that truly succeeded in commercialising search. [48] Unlike traditional search engines in Overture, when users searched for information on products and services by key word the results were organised not based on an impartial crawler algorithm but rather on the amount that that an advertiser of the product was willing to pay for the keyword. [49] Unlike the business models of rivals GoTo’s model secured that the advertisers only pay when somebody clicks on their ads, which now the standard in search advertising market. [50]

Gross was criticised for not being ethical but he debuted these arguments by stating that Overture was similar to commercial telephone directories and due to its transparency consumers clicking his website will be well aware that it is a commercial search engine and they would be informed of which advertisers are paying for which keyword, consequently visiting Overture with the intent of purchasing. [51] A syndication deal with AOL was a breakthrough for Overture. Under the agreement Overture was going to pay AOL a significant amount to syndicate Overture’s search listings on AOL’s website and would make its profit from the traffic that AOL sent through the Overture listings. [52]

Although it was a major success in paid search, Overture would never enjoy the leading position in the search market Google eventually did. The largest underlying reason was that due to their fear of losing advertisement partners, they avoided growing in to a pure search destination and lacked their own traffic, making them very reliant on their partners. [53]

Trying to win some power as a pure search destination, in 2003 Overture bought Altavista and AlltheWeb, a European search company with notable technology. [54] However these moves were not enough to help the company compete with its rivals. On July 14th 2003, Overture was acquired by Yahoo for $1.63 billion. [55]

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Google

Google was incorporated by Sergey Brin and Larry Page in 1998. It was rather a late entrant to the search engine market. However, it became a major success and a leading search engine due to its unique algorithm - PageRank [56], that relied upon the reputation of websites to produce better results than existing search engines. Existing search engines ranked results according to the number of appearance of a search query on a certain web page, which affected the quality of search results. [57] Google’s better and user friendly organic (non paid) results increased its popularity and by 1999, Google was processing seven million searches per day. [58]

When they founded the company in 1998, Brin and Page were against the model of advertising funded search engines as they believed a search engine funded by advertisers would be biased towards the advertisers rather than addressing the needs of their users.[59] They hoped their main revenue would come from licensing their search technology, however in their early days no one was interested in paying for a license. [60] As they needed a source of income, in 1999, Google compromised and started placing text ads labelled ‘sponsored links’ alongside organic search results. [61] In October 2000, Google launched AdWords, its text-based ad placement product. AdWords allowed advertisers to select the key words they wanted to be associated with. [62] Google then altered AdWords to operate on an auction based pay per-click model which was adapted from a model introduced by GoTo (1997) [63], an earlier and truly commercial search engine. In addition to GoTo’s model, Google introduced a new concept, Quality Score, which determines the relevance of the keyword to the ads in its ad group based on historical click through rates on ads. [64] In other words, The Quality Score determines whether an ad is to be displayed by Google and the ranking of

1. [65] When two advertisers are using the same key words, the site which has a lower Quality Score will have to offer a higher price to rank at the same place. [66] Google‘s main revenue is now generated by advertising. Google's total revenue was USD$ 29,321 billion in 2010, of which total advertising revenues was USD$ 28,236 billion. This demonstrates the critical importance of advertising in search. [67] Google also generates revenue through ‘AdSense’. Website owners enroll in this program to enable text, image, and video advertisements on their websites which is managed by Google, they get a share of advertising revenues for ads clicked when triggered based on relevance to their content.

Microsoft

Microsoft was founded by Bill Gates in 1975 and due to its aggressive marketing of MS-DOS it quickly became a leading software seller in the home computer industry. [68] In 1985, the first version of Microsoft Windows was released, which was followed by the release of Microsoft Office in 1989, the business operating system Windows NT in 1999, and a web browser, Internet explorer, in 1995. [69] Despite being a prominent player as an operating system for personal computers, it took Microsoft a relatively long time to see how profitable the search business is. Microsoft launched MSN Search in 1998, however they did not develop their own search technology until 2004 and depended on partners such as Overture, Looksmart and Inktomi and Yahoo. [70] In 2005, MSN officially switched from Yahoo organic results to using their own technology. [71] On September 11, 2006 Microsoft released Live, which offered a simpler user interface as well as Microsoft’s own image search technology, which was previously offered by a third party,

PicSearch. [72] In July 2009, Microsoft launched Bing, a new search engine that they advertised as a ‘decision engine’. [73] The most significant feature of Bing was organising search results into categories. As an example, in a search on Obama, one can see the information categorized as content types such as images, speeches, videos or biographies of Obama. [74]

In order to have better chances in competing with Google, Microsoft and Yahoo decided to join forces. [75] In July 2009 Microsoft and Yahoo announced that they had made a 10 year deal, in which the Yahoo search engine will start using Bing’s technology while in exchange Microsoft will receive 12% percent of revenues on search related revenues. [76] The deal was cleared the same day by the DOJ and after a phase one review by the Commission. [77] The agreement between Yahoo and Microsoft can be seen as a genuine alternative to Google, but it may fail as even their joint effort may not be adequate to effectively compete with Google given the characteristics of search. The success and survival of search engines have been heavily based on the relevance of search results and their advertising model. Google initially came to dominance due to its relevant search results that attracted consumers to its platform combined with their innovative ad serving technology. This position was then further strengthened due to characteristics unique to the search industry, and it is likely to remain the case for the near future.

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3. Characteristics of the search market

The term ‘the new economy’ is generally used to describe the manufacture of computer software, internet-based businesses (internet access providers, internet service providers, Internet content providers) and communications services and equipment designed to support the first two. [78] Doubtlessly, search engines operate in the ‘new economy’.

As noted by Posner;

‘New economies are characterized ... by falling average costs ...over a broad range of output, modest capital requirements relative to what is available for new enterprises from the modern capital market, very high rates of innovation, quick and frequent entry and exit, and economies of scale in consumption (also known as ‘network externalities’), the realization of which may require either monopoly or interfirm cooperation in standards setting.’ [79]

Most of the above characteristics, such as high rates of innovation, economies of scale and network effects are applicable to the search industry. Arguably some of the above such as the modest capital requirement as well as quick and frequent entry are no longer relevant in the context of search.

An innovation-driven industry

Search engines operate in innovative markets, in which a certain level of innovation is required to enter and survive in the market. In order to set up a search engine that could be a real substitute to state of the art search technology that Google has, a new entrant would need to demonstrate and sustain a level of innovation which is higher than current industry standards, a standard that can arguably only be achieved with the brightest minds in the industry, using scarcely available resources.The pace of the industry demands existing search engines to constantly invest in the improvement of their technology.

Fast moving markets

The fast rise and fall of search engines such as AltaVista in a relatively short time frame demonstrates the need for fast legal processes. The life cycle of AltaVista alongside the duration of the Microsoft cases shows that investigations in relation to anti competitive conduct in high tech industries may drag out for so long that the outcome may be irrelevant for the involved parties by the time a conclusion is reached.

Economies of scale

Developing and operating new search engine like Google requires significant capital investments as well as extensive research and development. In 2007, Gartner Group reported that Google has more than 1 million servers and spends 200 to 250 million US dollars a year only on IT equipment. [80] This alone demonstrates the magnitude of the investment and the economies of scale that Google enjoys which are very difficult to match for a new entrant. Furthermore, new entrants to the market need the distribution and marketing channels to penetrate the market. [81] Hence, in high tech industries, such as the online search market, significant market power is deemed necessary to compensate for the high fixed costs and high risk associated with the investment. [82] For this reason, the search market and related markets such as the search advertising market tend to be highly concentrated.

High concentration levels

As stated in the 2010 OECD Report on the Economic and Social Role of Internet Intermediaries, the global search engine market is a market with high concentration levels with only top five companies accounting for over 90% of the market. [83] According to comScore data as of December 2009, these five players include Google with 64% market share, Yahoo with 14% market share, (Chinese) Baidu with 13% market share, Microsoft 4% percent and finally (South Korean) Naver with 2%. [84] In the EEA Google is by far the dominant actor in internet search and online advertising. As acknowledged in the European Commission’s 2010 clearance decision on Microsoft's proposed acquisition of the Yahoo search business, Microsoft's and

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Yahoo's activities in internet search and online search advertising are very limited with combined market shares generally below 10%, whilst Google generally enjoys market shares above 90% in the EEA.’ [85]

Multisided platform with strong network effects

As David Evans [86] puts it, multi sided platforms are not a new phenomenon, however they have only been analyzed as a specific type of business in the 2000’s starting with the work of Rochet and Tirole. [87] A multi sided platform is an intermediary that brings together two or more different groups of customers on the same platform. [88] These platforms present a value to one group of customer if the other group of customers exist. The two distinct groups of customers using these platforms are customers who need or rely on each other in some way. [89] Dating sites and social networking websites are classical examples of multisided platforms. As the number of their customers increase, more customers will consider to sign up for their services.

Through the progress of information technologies the occurrence and significance of multisided platforms have grown. [90] The first wave of development in this area was in 1980s where due to the cost reductions in micro processors and the mass production of computer software, various software platforms bringing application developers and hardware makers together emerged. [91] The second wave came after 1995 by the commercialisation of the internet; examples are advertising platforms (Google, Yahoo), transaction platforms (eBay and Amazon), social networking platforms (Facebook and Myspace) as well as various other players. [92]

Evans and Schmalensee [93] argue that the common and basic functions of multi-sided platforms are as follows:

• They serve as matchmakers by facilitating exchange between different group members;

• They build audiences making it easier for people looking for a suitable match,

• They offer efficiency and reduce costs as they provide shared sources.

Most of the multi- sided platforms concentrate on either one or all of these functions. [94] One of the biggest problems of such platforms is to solve the chicken and egg problem; if they do not have enough customers on side A, they cannot attract the customers from side B. [95] It can rather be observed that there is always one side, which is deemed to be more crucial to the platform that gets a better deal. The service offered may be offered for a small fee or without any fee. [96] It has been demonstrated by economists that to maximise their profits multi sided platforms can charge a customer group less than the incremental price or even less than zero. [97] In the case of Google search, consumers who search for results do not pay Google, [98] as it is the advertisers who pay to appear in the search results. [99] Maximising profits in a multisided platform is more complicated than a traditional business as the platform must find a balance between different demands and interest groups. [100]

Multi sided platforms often rely on indirect network effects. [101] Network effects, also known as network externalities, is an economic theory which is increasingly becoming important in legal

arguments. [102] According to Katz and Shapiro, network effects can be observed when consumers of a product experience increased value when other consumers also use that product. As a classical example, the more people have a fax machine, the more value it has as each fax owner can communicate with more users.[103] Markets with network effects are also often prone to convergence, as when an industry standard is developed and more and more people use it, the others cannot afford to not be left out. [104] Needless to say, network effects may contribute to a firm to rising to dominance and keeping this position. The Microsoft case is a noteworthy example which demonstrates the link between network effects and market dominance. [105]

Internet based businesses, in particular social media, networking websites and search engines are also generally characterised by network effects. If we take the example of Google, Google’s early success was due to its novel and unique search technique that produced highly relevant results to search queries; however Google’s popularity increased as more and more searches were conducted. [106] The more people use Google search, the more data the company obtains and as the data is its raw material, the more data the company has, and the better search results it can deliver. Better search results will doubtlessly mean more search users and more scale for Google, which further improves its search results, creating a self- boosting feedback loop. [107] As the number of users that use Google for search increase, the number of advertisers

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on the other end increases as they can reach a greater audience, which again reinforces the value of the multi sided- platform. [108]

High switching costs

Search engines often claim that their business model is transparent, that entry barriers are rather low as one can easily set up a new service and that customers can easily switch to new providers. As Google often puts it competition is one click away. [109]Doubtlessly, there is more competition for consumers when they can switch from one provider to another or use both of them at the same time. [110] As there are no technological barriers to switch from one search engine provider to another switching may seem relatively easy. Nevertheless this argument may have some weaknesses. First of all it is a well known feature of multi-sided platform to lock in customers. They can do it by offering exclusivity agreements as well as bundling and tying their services. With the advent of cloud computing, search engines have become more than mere search tools as they have started offering a plethora of online tools and became online platforms integrating search as functionality. Hence it may well be argued that for a customer who uses not only Google search, but a bundle of other services offered by the search engine platform, (such as Google chrome, Gmail, Google documents) switching to another search engine is harder. Doubtlessly, customers who opt out from using Google search can still have access to their G-mail account but due to practical reasons such as habit and familiarity, it is more convenient for a consumer to use all the services offered by the same platform. Data portability is indeed another important consideration in this respect as it may hinder customers from switching platforms. Customers may easily switch between search engines but if they abandon a platform they may risk losing important private data such as bookmarks, email communication or photos stored in the platform.

Furthermore, informed consumers will know that Google may produce better results based on its intimate knowledge of their search history as well as behavioural data. Hence consumers may choose to stay with their current search provider as they would benefit from a more personalised search experience with their existing provider.In the light of above characteristics it might be argued that unless a disruptively innovative company, with high investment capital that emerges, the search market is likely to be dominated by Google.

Challenges to competition policy

Due to the characteristics of the search market specified above, search engines may engage in anticompetitive conduct. The ongoing 2010 Commission investigation into Google affirms this position.Search engines may try to lock in customers and advertisers as well as engage in tying and bundling practices which might have the effect of foreclosing the online search market to new entrants, hence having anti competitive effects. Network effects and economies of scale further acts as entry barriers for new search firms and solidify Google’s dominance. Standard competition rules tailored to the needs of a traditional economy may not suit the dynamic fast paced and multisided nature of the high tech industry [111] in particular online search industry. Hence, the rules applied to the assessment of competition in high tech markets may have to be adapted to reflect the dynamic nature of competition and the significance of innovation in these industries. [112]

The 2010 Commission investigation in to Google

In February 2010, Foundem (a UK price comparison website), Ciao (a German shopping site owned by Microsoft) and ejustice.fr (a French legal search engine) filed a complaint before the Commission. These three complaints focused on abuse of dominance: that Google used its dominant search engine and its Universal Search Service [113] to promote its own services whilst discriminating as well as demoting the search ranking of competing websites and other specialised (vertical) search engines in its organic and paid search results. After having investigated the preliminary submissions by the parties, on the 30th November 2010, the Commission decided to open a formal investigation into the allegations that Google has abused its dominant position in online search. [114]

In the scope of this investigation the Commission investigates;

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• whether Google has imposed exclusivity obligations on advertising partners, hindering them from placing certain types of competing adverts on their web sites, as well as on computer and software vendors with the aim of foreclosing competition for competing search tools,
• whether Google has restricted the portability of online advertising data to competing online advertising platforms.

The investigation was broadened in December 2010, when complaints by three additional companies were added to the file as Bundeskartellamt, the German competition authority, transferred to the Commission a part of its investigation that overlapped with that of the European Commission. The complaints to the Bundeskartellamt were made by BDVZ and VDZ, two newspaper and magazine associations, and the online mapping company Euro-cities. These complaints were about the preferential treatment of Google’s own services. [115]

On March 30 2011, Microsoft also issued a formal complaint with the European Commission. [116] In their complaint Microsoft alleged that:

• Google is using technical measures to stop Microsoft’s search engine from indexing content on You Tube, which is owned by Google,
• Google is blocking Microsoft smart phones from operating with YouTube,

• Through Google books it is controlling access to online copies of out of copyright books,

• Google limits the ability of advertisers to move their own advertising data to competing advertising platforms,
• Finally, Google contractually hinders leading Web sites in Europe from distributing competing search boxes.

According to Reuters, Google face nine formal complaints at the time of writing. [117] The increased number of complaints does not necessarily mean Google is abusing its dominance however it means that the scope of the investigation may be broadened further. The European probe in relation to Google’s anticompetitive conduct is not the only one. In June 2011, the U.S. Federal Trade Commission (FTC) opened an antitrust inquiry into Google's search and advertising activities. [118] The Attorney General of Texas opened an investigation in 2010, which is still ongoing [119], whilst a similar antitrust complaint against Google in Ohio was dismissed in September 2011 as the Court stated that the complainant has only proved harm to itself and failed to show harm to competition. [120]

While no definitive findings have been made as to whether Google is dominant or not, there are a strong number of indications in the Microsoft/Yahoo Search Business decision [121], suggesting that Google is very likely to be found to have a dominant position on several markets including online search and search advertising. [122] Hence, the question as to whether Google is dominant in certain markets is not dealt with in this article.In the light of the above allegations, the potential harm to competition can be broadly grouped into the three categories discussed below.

Harming downstream rivals by manipulating search and by giving preferential treatment to its own services

This is the most commonly heard and arguably the most intricate complaint brought against Google. Complainants including specialised search engines and website owners claim that users of Google’s search engine rarely look beyond the first few page of search results and that a lower placement on Google’s organic result due to preferential treatment given by Google to its own products, or not appearing at all due to being banned by Google, has a significant impact on the level of traffic to the listed site. Hence they claim that due to manipulation of search results and Google’s preferential treatment the online markets are foreclosed to rivals and new entrants ultimately leading to less choice for consumers.

Foundem, one of the complainants to the Commission, gave concrete examples from two different markets where it alleged to be adversely affected by Google’s preferential treatment to its own services. Their first example is in relation to the online map market; within two years after the introduction of Universal Search, Map Quest, a leading US based online mapping service provider, lost its leading position in the market as the traffic to its website diminished, whilst the traffic to Google Maps increased significantly. Their second example is in relation to the product comparison market. After the inception of Universal Search, Google’s market comparison product which had been largely unsuccessful, started to grow rapidly. At the same time

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visitors to UK’s leading product comparison websites decreased dramatically. Foundem submits that Google’s conduct in relation to those markets is anticompetitive as it has a foreclosure effect for rivals thereby reducing consumer choice and welfare.

Search engines claim that they strive to provide the most relevant search results without bias or manipulation. They often maintain that there is no human intervention to their algorithms as they have an automated algorithm. However it is a well known fact that search results can be manipulated by search engines themselves as well as by information providers. [123] In the context of search results one must bear in mind that even the most automated search engine is a result of human work and beyond every algorithm there is a programmer giving specific instructions to the computer. [124]

It seems straightforward to establish whether a search engine favours its own services. For example if Google shows only YouTube (owned by Google) results when you enter a search term such as ‘video’, you may arrive at the conclusion that it favours its own results. However given the secrecy surrounding algorithms, it is difficult to establish whether such ranking is unfairly favouring its own site or is entirely fair - one site could simply be of a higher quality or better promoted. Some suggest that just like retailers that give their shelves to their own-brand products; search engines should be able to favour their own products and services and this does not raise any competition issues. However as Marsden points out, this is a problem, if such preferential treatment is not done transparently. [125] If search results are based on anything but quality, then this should be clearly communicated to the user, as it is with paid results and own-brand products of retailers. [126]

Arguably, there are two significant complexities in relation to the manipulation of search results in the antitrust context. First, given the secrecy around algorithms it seems very difficult to establish with clarity whether such manipulation has taken place with the aim of discriminating rivals. Secondly, even if the existence of such bias could be proven, finding an adequate remedy that does not affect the competitive structure of the industry seems challenging. A commitment by search engines to provide more objective results will maintain the status quo, whilst more interventionist measures such as regulating and monitoring search results with a view to ensure objectivity may well reduce their quality. Furthermore, even if it’s decided that regulating and monitoring search results is a viable option, the scope and objectives of such regulation and monitoring, as well as determining the authority that will be in charge of this seems to be highly contestable issues.

Harming other search engines by denying access to content

Other allegations against Google focuses on denying or limiting rivals access to its own content, thereby adversely affecting rival search engines’ ability to provide the quality of results Google can provide. Unlike its early days, Google today is not only a search engine provider. Google owns a considerable amount of content as diverse as online books, video, music, travel and social media. It can be problematic if other search engines cannot access or receive limited access to this content.

Without delving into the details of the landmark Microsoft case (Case COMP/C-3/37.792 Microsoft), [127] the following analogy can be drawn between the Microsoft case and the Google investigation. When Microsoft refused to provide computer protocols that would have enabled rival operating systems to interoperate with Microsoft’s Windows personal and server operating systems, it was found as an abuse of

dominance. [128] In the same vein, it can be argued that the walling of access to content and data can be perceived as abuse of dominance, as such conduct potentially hinders competitors from providing quality search results, and consequently from competing with Google on an equal footing. Similar to manipulation of search results, in relation to denial of access to content claims, a key challenge lies is finding the appropriate remedy. If it is established that Google’s denial to grant access to its own content have a substantial effect on rivals offerings, thereby eliminating consumer choice, the Commission may decide to intervene and mandate access for rivals, as evidenced in its past decisions in a number of industries such as telecommunications, transport and financial services. [129] However, if such a remedy is foreseen by the Commission, the viability and scope of such mandatory access will be highly disputed as such access to Google’s content and platform might give its rivals access to strategic assets (such as social network member data), insights in relation to its inner workings and even to its protected algorithm.

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Harming competition through exclusivity deals

As discussed above search is characterised by economies of scale. Search engines can obtain scale by buying user data through exclusivity deals with other operations such as websites with a large number of followers, social media, other forms of content and even popular search engines in other markets. [130] The acquiring service runs searches on, or for the service, and ultimately benefits from the resulting user

data. [131] As discussed earlier, this data, combined with the data obtained from its own search operations, allows search engines to provide better search results through greater scale. The crucial question is whether acquisition of such scale has a foreclosure effect for rivals.

It seems straightforward to establish whether Google places exclusivity obligations on its partners. However, exclusivity in itself may not necessarily lead to anticompetitive conduct. Exclusivity agreements can be tolerated as long they enhance efficiency and their exclusionary effects do not deny rivals market access for too long. [132] Hence in this context, critical questions that need to be addressed are whether such exclusivity deals have a substantial effect on competition and consumer welfare and whether there are any efficiencies derived from such exclusivity agreements that could override potential foreclosure effects. The Commission’s approach towards efficiencies, its definition of what constitutes foreclosure in online search, and its determination as to the length of tolerating such foreclosure will determine the answers to these questions.

A brief comment on the investigation

The European investigation is ongoing at the time of writing and as acknowledged by the competition commissioner, Almunia, in September 2011, the two-sided and complex nature of search business is forcing the Commission to take special care when conducting relevant product and geographic markets

analysis. [133] Due to its complexity and resemblance to the Microsoft cases, it is expected that the investigation will keep academics and the Commission busy for a while yet. The increasing reliance on settlement procedures suggests that the investigation will most probably not proceed to an infringement decision.

The key challenges for the Commission in their investigation will be to assess whether the alleged conducts by Google has any foreclosure effects, whether such foreclosure can be justified by efficiencies and whether such conduct has any actual or potential effect on consumer welfare. As discussed above, if the case is settled by commitments or if the Commission finds that Google has abused its dominance, designing effective remedies that strike a balance between addressing the competition problems whilst not harming and intervening excessively with the innovative nature of search, is a challenging task. Independent of its outcome, the investigation affirms the position that there is at the least a potential for search engines to abuse their dominance in online search, search advertising and other relevant markets. This opens the debate in relation to the applicability of Art. 102 TFEU to deal with anti-competitive conduct by search engine providers.

4. Is Article 102 TFEU sufficient to deal with challenges posed by search engines?

Article 102 TFEU prohibits undertakings from committing an abuse of a dominant position held within a substantial part of the internal market. The current application of Article 102 TFEU may however not be ideally suited for dealing with dynamic industries like search engines.It has been criticised for not being based on sound economic analysis, economic effects, being inefficient and for protecting competitors instead of the competition. [134] The Commission’s 2005 Discussion Paper [135] and the long awaited 2008 Guidance on enforcement priorities [136] have aspired to move Art 102 TFEU towards a more effects based approach, relying on the actual effects of allegedly abusive behaviour rather than the form of behaviour. However such reform was rather ambiguous and inadequate for incorporating efficiencies. [137] As noted by Damien Geradin, the practical impact of the Guidance is questionable. [138] Although the Guidance Paper provided dominant firms a series of principles enabling them to better self assess the legality of their practices which might fall under Art. 102, the exceptions and caveats it contains limited its scope to a great extent. [139] Unlike Art. 101, Art 102 still lacks safe harbours, [140] and does not sufficiently allow efficiency claims which are crucial in dealing with innovative industries such as search. [141] Furthermore, it still

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remains to be seen to what extent the Commission and the community courts will be applying the effects based approach in future competition analysis. [142] Due to the high investment costs associated with search, a search engine provider needs legal certainty and assurance that if certain conditions are fulfilled they are exempt from antitrust interference.

The innovative and fast paced nature of the search industry calls for speedy, and if possible ex ante solutions to competition problems. However as pointed out by Posner an antitrust case involving high tech industries might take so long that given the fast paced nature of the industry the decision itself may become irrelevant and ineffectual. [143] By the time the Commission and the courts finalise the case, the company in question may already have lost its dominant position, or the complainant may no longer exist. Furthermore, due to the complex nature of the search industry from both a technological perspective, the Commission may need the expertise of industry specialists, contributing further to the length and costs of proceedings. The length and controversial nature of the Microsoft cases in the USA and in the EU affirms these positions and open the debate for alternative approaches in dealing with competition problems in high tech markets.

5. Conclusion

The analysis of the development and characteristics of the search industry demonstrates that the search industry, including online search and search advertising markets, is a highly concentrated market with only a few players enjoying significant market power. Furthermore, due to the commercialisation of search coupled with the characteristics of the search industry, there is a growing potential for search engines to engage in anticompetitive conduct within the context of Article 102 TFEU. Google initially came to dominance due to relevant search results that attracted consumers to its platform and due to their innovative ad serving technology. This position was further strengthened by network effects and other characteristics specific to the search industry. Arguably, Google is likely to remain dominant unless a disruptively innovative player with significant financial strength emerges.

Consequently it is a pressing concern to determine whether Google abuses its dominance in online search and other relevant markets, whether there is a potential or incentive for it to do so in the future, and if that is the case how this should be addressed. Given the characteristics of the online search market, Article 102 TFEU and its traditional application as evidenced in the Microsoft cases may not be ideally suited to deal with problems posed by search. Criticisms such as ambiguous guidance, lack of sound economic analysis, the length of the proceedings and the questionable effectiveness of remedies still prevail. Due to the nature of the search industry there is a need to ascertain if and how Article 102 TFEU should be revised or applied to more effectively to address competition problems posed by search.In this respect, there is a need for further research and discourse to determine the types of anticompetitive conduct that search engines may exhibit in the scope of Article 102 TFEU and what remedies would be effective if such abuse was to take place. Further research is suggested to establish whether alternative approaches such as sector specific regulation, co-regulation or a specialised agency dealing with internet based businesses could more effectively deal with anti competitive conduct in online search.

• Aysem Diker Vanberg is a PhD candidate at the School of Law, University of Essex, England.

• A fast growing number of scholars have written and are writing about the regulation of search engines. See e.g., van Ejik, Nico 'Search engines, the new bottleneck for content access', in Telecommunication Markets, Drivers and Impediments, (eds.) B. Preissl, J. Haucap & P. Curwen, Springer, London, 2009; Grimmelman, James Taylor Lewis 'The Structure of Search Engine Law', New York Law School Public Law and Legal Theory Research Paper Series No. 06/07-23, 2007; Pasquale, Frank A. and Bracha, Oren 'Federal Search Commission? Access, fairness and accountability in the law of search', 93 Cornell Law Review, 2008; Gasser, Urs ‘Regulating Search Engines: Taking Stock and Looking Ahead', Yale Journal of Law & Technology, Vol. 9, 2006.

• See European Commission Press Release, Antitrust Commission probes allegations of antitrust violations by Google IP/10/1624 dated 30/11/2010. Availablefrom:http://europa.eu/rapid/pressReleasesAction.do? reference=IP/10/1624&format=HTML&aged=0&language=EN&guiLanguage=en.

• comScore is an independent digital marketing service. With approximately 2 million worldwide consumers under continuous measurement, the comScore panel is designed to accurately measure people and their

European Journal of Law and Technology, Vol. 3, No. 1, 2012

behaviour in the digital environment, Comscore report is available from: http://www.comscore.com/About_comScore/Methodology.

[5] See comScore Report: Europe Digital Year in Review 2010, dated February 2011, available

from: http://www.comscore.com/layout/set/popup/request/Presentations/2011/2010_European_Digital_Year_i n_Review_PDF_Request?req=slides&pre=The+2010+Europe+Digital+Year+in+Review.

• Speech 10/365, Joaquín Almunia, 'Competition in Digital Media and the Internet', UCL Jevons Lecture London, 7 July 2010, available from: http://europa.eu/rapid/pressReleasesAction.do? reference=SPEECH/10/365.

• See generally Economides, Nicholas , 'Competition Policy in Network Industries: An Introduction' NET Institute Working Paper No. 04-24, NYU, Ctr for Law and Business Research Paper No. 03-10, 2004, pp.1-27. Available fromhttp://ssrn.com/abstract=386626 or doi:10.2139/ssrn.386626.

• See generally Lemley, Mark A. and McGowan, David, 'Legal Implications of Network Economic Effects'. 86 Cal. L. Rev. 479, 1998, pp.1-200 Available from : http://ssrn.com/abstract=32212 or doi:10.2139/ssrn.32212.

• See Wikipedia at http://en.wikipedia.org/wiki/List_of_search_engines (Last visited October 11, 2010)

• According to data generated from Hitwise as of June 2011 , Google’s global market share in online search is 82.80% available from: http://marketshare.hitslink.com/search-engine-market-share.aspx?qprid=4. In the EEA, Google enjoys more than 90% market share in online searches. See comScore Report: Europe Digital Year in Review 2010, dated February 2011, Available from:http://www.comscore.com/layout/set/popup/request/Presentations/2011/2010_European_Digital_Year_i n_Review_PDF_Request?req=slides&pre=The+2010+Europe+Digital+Year+in+Review.

• See Battelle, John, ' The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed our Culture, ' Nicholas Brealey Publishing, London,2008, pp. 39-40; see also Waelde, Charlotte, ' Search Engines and Copyright: Shaping Information Markets, in Law and the Internet', (eds.) Edwards, Lilian and Waelde, Charlotte ,3rd edition, Hart Publishing Limited, Oxford, 2009, p. 229.

• For comprehensive information on the history of search engines see generally Battelle,John' The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed our Culture, ' see also History of Search Engines: From 1945 to Google Today, available from http://www.searchenginehistory.com.

• Devine, Kristine Laudadio, 'Preserving Competition in Multi-Sided Innovative Markets: How Do You Solve a Problem Like Google?' North Carolina Journal of Law & Technology, Vol. 10, Issue 1: No. 59, 2008, 67.

• The history of World Wide Web is available from: http://en.wikipedia.org/wiki/World_Wide_Web.

• According to Battelle from 1993 to 1996 the web grew from 130 sites to more than 600,0000. See Battelle,John 'The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed our Culture', p.40.

• See Battelle, John 'The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed our Culture', p.40.

• See Battelle, John, F.11 at p.40.

• See http://www.searchenginehistory.com (Last visited October 11, 2010)

• See Urs Gasser, 'Regulating Search Engines: Taking Stock and Looking Ahead', Yale Journal of Law & Technology, Vol. 9, 2006, p.127.

• See Urs Gasser, , F.125 at pp..41-42.

• See Urs Gasser, F.19 at p. 42.

• Sonnenreich, Wes 'A History of Search Engines', (1997), available

from http://www.searchenginehistory.com/

[23] Battelle,John 'The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed our Culture',pp.42-43.

European Journal of Law and Technology, Vol. 3, No. 1, 2012

• Battelle,John F. 11 at p.45

• Sonnenreich, Wes 'A History of Search Engines', (1997), Available from: http://www.searchenginehistory.com.

• Sonnenreich, Wes 'A History of Search Engines', (1997), Available

from: http://www.searchenginehistory.com. 27 Hansell, Saul (2003-02-19), "Overture Services to Buy AltaVista for $140 Million", The New York Times.

• See Yahoo Media Relations Press release at http://docs.yahoo.com/docs/pr/release1102.html.

• See Batelle, John, p.53.

• See Batelle, John, F. 11 at p.53.

• See Batelle, John, F. 11 at p.53.

• By August 1994, Lycos had 394,000 documents; by January 1995, the catalogue had indexed 1.5 million documents; and by November 1996, Lycos had categorised over 60 million documents -- more than any other Web search engine. See Micheal Mauldin, Lycos: design Choices in an Internet Searh Service, IEEE Expert, Jan-Feb, 1997 at 8, available at http://www.lazytoad.com/lti/pub/ieee97.html. Available

from; http://www.searchenginehistory.com

• By August 1994, Lycos had 394,000 documents; by January 1995, the catalogue had indexed 1.5 million documents; and by November 1996, Lycos had categorised over 60 million documents -- more than any other Web search engine. See Mauldin, Micheal, Lycos: design Choices in an Internet Search Service, IEEE Expert, Jan-Feb, 1997 at 8, available at http://www.lazytoad.com/lti/pub/ieee97.html. Available

from: http://www.searchenginehistory.com.

• See Gasser, Urs 'Regulating Search Engines: Taking Stock and Looking Ahead', Yale Journal of Law & Technology, Vol. 9, 2006, p.128.

• See Gasser, Urs, ‘Regulating Search Engines: Taking Stock and Looking Ahead', p.128.

• See History of Search Engines: From 1945 to Google Today, available

from: http://www.searchenginehistory.com.

• See Batelle, John, 'The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed our Culture', pp. 57-59 .For further information on the history of yahoo see also Yahoo!s website available from:http://docs.yahoo.com/info/misc/history.html.

• See http:/www.computerhope.com/history/1995.htm

• See Batelle, John, F. 11 at p. 60.

• See Batelle, John, F. 11 at p.61.

• See Batelle, John, . F. 11 at p. 63.

• For a list of Yahoo’s acquisitions see http://en.wikipedia.org/wiki/List_of_acquisitions_by_Yahoo!.

• See http://www.searchenginehistory.com.

• See Yahoo’s website for a range of services available from:http://everything.yahoo.com/us/index.php#t0

• See Zuehlke, Susanne, 'Commission clears Microsoft-Yahoo Search Business Deal', ecommerce law and policy, April 2010, pp. 8-9.

• Hof, Rob, Google Ends Search Advertising Deal with Yahoo, Business Week, November 5, 2008, available

from: http://www.businessweek.com/the_thread/techbeat/archives/2008/11/google_ends_search_advertising _deal_with_yahoo.html.

• Devine, 'Preserving Competition in Multi-Sided Innovative Markets: How Do You Solve a Problem Like Google?' pp. 69-76; see also Evans, David S., 'Competition and Regulatory Policy for Multi-Sided Platforms with Applications to the Web Economy' Concurrences, No. 2, 2008, pp. 57-62, 2008, also available

from http://ssrn.com/abstract=1090368. pp. 1-31.

• The name was changed to Overture in September 2001. See Batelle, p.115.

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• See Batelle, John, F. 11 at p.111.

• See Batelle, John, F. 11 at p.109.

• See Batelle, John, F. 11 at p.112.

• See Batelle, John, F. 11 at p.114.

• See Batelle, John, F. 11 at pp.115-117.

• See Batelle, John, F. 11 at p.118.

• See Batelle, John, F. 11 at p. 120.

• PageRank is the core of Google’s search engine it takes in to account the number of links to a certain website as well as number of links in to each of linking sites. See Battelle, John p. 75.

• See Page, Lawrence; Brin, Sergey; Motwani, Rajeev; Winograd, Terry. 'The PageRank Citation Ranking: Bringing Order to the Web' November 11, 1999, available from http://ilpubs.stanford.edu:8090/422/1/1999-pdf.

• See Vise, David A. and Malseed, Mark, 'The Google Story',Pan Macmillan Ltd, Oxford, 2005, p.85.

• See Brin, Sergey and Page, Lawrence 'The Anatomy of a Large scale Hypertextual Web Search

Engine', at Appendix A: Advertising and Mixed Motives, available from http://ilpubs.stanford.edu:8090/361/1/1998-8.pdf.

• See Vise and Malseed, 'The Google Story',p. 84 . (With the exception of two companies Red Hat and Net Scape, nobody was willing to pay for the rights to license the Google search engine).

• See Vise and Malseed, 'T The Google Story ', pp. 88-89.

• See Google Milestones, available from http://www.google.com/corporate/history.html.

• For the history and development of GoTo see Battelle,John ,pp. 111-117.

• See Batelle, John, F. 11 at pp. 142-143.

• See European Commission Press Release, Antitrust Commission probes allegations of antitrust violations by Google IP/10/1624 dated 30/11/2010. Available from:http://europa.eu/rapid/pressReleasesAction.do? reference=IP/10/1624&format=HTML&aged=0&language=EN&guiLanguage=en.

• See European Commission Press Release, Antitrust Commission probes allegations of antitrust violations by Google IP/10/1624 dated 30/11/2010. Available from:http://europa.eu/rapid/pressReleasesAction.do? reference=IP/10/1624&format=HTML&aged=0&language=EN&guiLanguage=en.

• See Google investor Relations: 2010 Financial Tables, available

from: http://investor.google.com/financial/tables.html.

• See Microsoft’s website, Facts about Microsoft, http://www.microsoft.com/presspass/inside_ms.mspx.

• See Microsoft’s website, Facts about Microsoft, http://www.microsoft.com/presspass/inside_ms.mspx.

• See the history of search engines ,available from: http://www.searchenginehistory.com/

• See the history of search engines ,available from: http://www.searchenginehistory.com/

• See the history of search engines ,available from: http://www.searchenginehistory.com/

• See Search Engine Land, Microsoft Upgrades Live Search Offerings available

from: http://searchenginewatch.com/3623401.

[73] See Greg R. Notess, Microsoft’s New Bing-The ‘Decision Engine’ dated June 8, 2009 available

at http://newsbreaks.infotoday.com/NewsBreaks/Microsofts-New-BingThe-Decision-Engine-54514.asp.

[74] For more information on Microsoft’s search engine Bing see Danny Sullivan, Meet Bing, Microsoft’s New Search Engine, May 28, 2009 available at http://searchengineland.com/meet-bing-microsofts-new-search-engine-20093.

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• For details about the Microsoft Yahoo deal see Case no comp/m.5727 - Microsoft/ Yahoo Search Business available from:http://ec.europa.eu/competition/mergers/cases/decisions/M5727_20100218_20310_261202_EN.pdf,

• See Case no comp/m.5727 -Microsoft/ Yahoo Search Business available

from:http://ec.europa.eu/competition/mergers/cases/decisions/M5727_20100218_20310_261202_EN.pdf; see also Zuehlke, Susanne , Commission clears Microsoft-Yahoo search business deal ecommerce law and policy, April 2010, pp. 8-9.

• See Zuehlke, Susanne , Commission clears Microsoft-Yahoo search business deal ecommerce law and policy, April 2010, pp. 8-9.

• See Monti, Giorgio 'Article 82 and the New Economy Markets' in Competition, Regulation and the New Economy, (eds.) Graham, Cosmo and Smith, Fiona, Hart Publishing, Oxford, 2004 pp.19; see also Posner, Richard A. 'Antitrust in the New Economy', John M. Olin Law & Economics Working Paper, No. 106(2nd series), 2000, p. 2.

• See Posner, Richard A. 'Antitrust in the New Economy', p.2.

• Google: One million servers and counting, Pandia Search News, dated 2 July 2007, available

from http://www.pandia.com/sew/481-gartner.html.

• See Geradin, Damien, Ahlborn, Christian, Denicolò, Vincenzo and Padilla, A. Jorge, 'DG Comp's Discussion Paper on Article 82: Implications of the Proposed Framework and Antitrust Rules for Dynamically Competitive Industries', 2006, p.13, available from: SSRN: http://ssrn.com/abstract=894466 13.

• See Geradin, Damien, Ahlborn, Christian, Denicolò, Vincenzo and Padilla, A. Jorge, 'DG Comp's Discussion Paper on Article 82: Implications of the Proposed Framework and Antitrust Rules for Dynamically Competitive Industries', 2006, p.13, available from: SSRN: http://ssrn.com/abstract=894466 13.

• See OECD Report, 'The Economic and Social Role of Internet Intermediaries', DSTI/ICCP(2009)9/FINAL April 2010, p. 28, available from: http://www.oecd.org/dataoecd/49/4/44949023.pdf.

• See OECD Report, 'The Economic and Social Role of Internet Intermediaries', DSTI/ICCP(2009)9/FINAL April 2010, p. 29, available from: http://www.oecd.org/dataoecd/49/4/44949023.pdf.

• See Press Release, Mergers: Commission clears Microsoft’s proposed acquisition of the Yahoo search business, IIP/10/167 dated 18/02/2010 , available from: http://europa.eu/rapid/pressReleasesAction.do? reference=IP/10/167&format=HTML&aged=0&language=EN&guiLanguage=en.

• See David S Evans, 'Competition and Regulatory Policy for Multi- Sided Platforms with Applications to the Web Economy', p.2.

• Rochet, Jean- Charles and Tirole, Jean, 'Platform Competition in Two Sided Markets', 1. J EUR. ECON. ASS’ N2003, pp. 990-1029.

• See Evans, David S. and Noel, Michael D., 'The Analysis of Mergers that Involve Multisided Platform Businesses ‘,Journal of Competition Law and Economics, Vol. 4, Issue 3, 2008,pp. 663-665, available from http://ssrn.com/abstract=1277776 or doi:nhn017; see also Devine, 'Preserving Competition in Multi-Sided Innovative Markets: How Do You Solve a Problem Like Google?' p. 78.

• See Evans, David S 'Competition and Regulatory Policy for Multi- Sided Platforms with Applications to the Web Economy', p.3.

• See Evans, David S , F47 at p.2.

• See Evans, David S, F. 47 at p.2.

• See Evans, David S, F. 47 at p.2.

• See generally Evans and Schmalensee, 'The Industrial Organisation of Markets with two sided

platforms ‘, 3(1) COMPETITION POL ‘ Y INTER’L ,Spring 2007; Evans and Schmalensee, 'Catalyst Code : The Strategies Behind the World’s Most Dynamic Companies’‘ ,Harvard Business School Law Press, 2007.

• See Evans, David S , F. 47 at p.5.

• See Evans, David S , F. 47 at p.6.

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• See Evans, David S , F. 47 at p.7.

• Rochet, Jean- Charles and Tirole, Jean, 'Platform Competition in Two Sided Markets', 1. J EUR. ECON. ASS’ N2003, pp. 990-1029.

• Arguably consumers trade off their privacy for this free search service.

• See Evans, David S 'Competition and Regulatory Policy for Multi- Sided Platforms with Applications to the Web Economy', p.7.

• See Evans, David S , F. 47 at p.6.

• See Evans, David S , F. 47 at p.10.

• See e.g., Lemley, Mark A. and McGowan, David, 'Legal Implications of Network Economic Effects', 86 Cal. L. Rev. 479, 1998, pp. 1. Available from: http://ssrn.com/abstract=32212 or doi:10.2139/ssrn.32212.

• See Katz, Micheal L. and Shapiro, Carl, 'Network Externalities, Competition and Compatibility', The American Economic Review, Vol 75, No 3, June 1985, p.424; Monti, Giorgio, 'Article 82 and the New Economy Markets' p. 19.

• See Katz, Micheal L. and Shapiro, Carl, 'Network Externalities, Competition and Compatibility', The American Economic Review, Vol 75, No 3, June 1985, p.424; Monti, Giorgio, 'Article 82 and the New Economy Markets' p. 19.

• Harbour, Pamela J. and Koslov, Tara, 'Section 2 in a Web 2.0 World' Antitrust Law Journal 2010 , p.

778.

• Harbour, Pamela J. and Koslov, Tara, F. 105 at pp. 776-777.

• Harbour, Pamela J. and Koslov, Tara, F. 105 at p.776.

• Devine, 'Preserving Competition in Multi-Sided Innovative Markets: How Do You Solve a Problem Like Google?' p. 80.

• See Cecilia Kang, 'Google search guru in Washington to lobby against Internet search engine rules', The Washington Post, dated January 13, 2011 available from:http://voices.washingtonpost.com/posttech/2011/01/google_search_engine_guru_matt.html

• See Evans, David S 'Competition and Regulatory Policy for Multi- Sided Platforms with Applications to the Web Economy', p.10.

• See Geradin, Damien, Ahlborn, Christian, Denicolò, Vincenzo and Padilla, A. Jorge, 'DG Comp's Discussion Paper on Article 82: Implications of the Proposed Framework and Antitrust Rules for Dynamically Competitive Industries' , p.21.

• See Pons, Jean Francois 'European Competition Policy in the New Economy', International Competition Policy Conference 2001 Regulatory Policy Institute, Oxford, 2001 , p.10 available from:http://ec.europa.eu/competition/speeches/text/sp2001_012_en.pdf.

• Universal Search was introduced by Google in 2007. When one uses Google, Universal Search, returns more than the just the traditional text results. As an example when one searches for Micheal Jackson it brings back images, news, local listings, shopping, video, blog posts, etc. See Google’s own blog on Universal Search http://googleblog.blogspot.com/2007/05/universal-search-best-answer-is-still.html. Google calls this service as blending, whilst others call it as bundling as Universal Search places Google’s own services such as YouTube results and Google News at prominent positions.

• See European Commission Press Release, Antitrust Commission probes allegations of antitrust violations by Google IP/10/1624 dated 30/11/2010 available from:http://europa.eu/rapid/pressReleasesAction.do? reference=IP/10/1624&format=HTML&aged=0&language=EN&guiLanguage=en.

• Spiegel Online Edition, 'Verleger schalten Kartellamt gegen Google ein',dated January 16, 2010, available from: http://www.spiegel.de/netzwelt/netzpolitik/0,1518,672343,00.html (only German version is available).

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[116] Microsoft’s allegations in relation to Commission’s investigation are available from:http://blogs.technet.com/b/microsoft_on_the_issues/archive/2011/03/30/adding-our-voice-to-concerns-about-search-in-europe.aspx.

• See Chee, Fo Yun, 'Exclusive: Nine Google complainants in the EU probe' Reuters, dated August 2, 2011 available from: http://www.reuters.com/article/2011/08/02/us-eu-google-idUSTRE77131I20110802.

• See Google’s public policy blog confirming the FTC’s investigation, available

from http://googleblog.blogspot.com/2011/06/supporting-choice-ensuring-economic.html.

• See Cade, Metz, 'Google faces antitrust investigation in Texas EU complaint echoed in US' dated September 3, 2010 available

:from http://www.theregister.co.uk/2010/09/03/google_antitrust_investigation_in_texas/

• The claimant MyTriggers.com, an Ohio-based shopping comparison search Website, accused Google of giving preferential treatment in its search results to Google's own service and thereby putting competitors at a disadvantage.

• See Case no comp/m.5727 -Microsoft/ Yahoo Search Business available

from:http://ec.europa.eu/competition/mergers/cases/decisions/M5727_20100218_20310_261202_EN.pdf.

• See Wood, David, 'EU Competition Law and the Internet: Present and Past Cases’ Competition Law International, April 2011, p. 44.

• See Introna & Nisenbaum, 'Shaping the Web: Why the politics of search engines matters' The Information Society, 16 , 2000 , p. 141; see generally Goldman, Eric, 'Search Engine Bias and the Demise of Search Engine Utopianism' Yale Journal of Law & Technology 2005-2006 , Santa Clara Univ. Legal Studies Research Paper No. 06-08; Marquette University Law School Legal Research Paper No. 06-20, p.122. Available from SSRN: http://ssrn.com/abstract=893892.

• See Grimmelman, James 'The Google Dilemma' 53 New York Law School Law Review, 2009 p. 944.

• See Marsden, Philip, 'Online search: Antitrust', Competition Law Insight, July 2011 p. 18.

• See Marsden, Philip, F.125 at p. 18.

• Commission Decision of 24 May 2004 relating to a proceeding pursuant to Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792 - Microsoft), summary available from : http://eur-lex.europa.eu/LexUriServ/LexUriServ.do? uri=OJ:l:2007:032:0023:0028:en:PDF.

• Commission Decision of 24 May 2004 relating to a proceeding pursuant to Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792 - Microsoft), para. 18-23 .

• For a discussion of cases in both the transport and financial services sector which might provide some guidance in relation to Google investigation see Wood, David, 'EU Competition Law and the Internet: Present and Past Cases' Competition Law International, April 2011, pp. 44-49.

• See Marsden, Philip, F.125 at p. 18.

• See Marsden, Philip, , F.125 at , p. 18.

• See Marsden, Philip, , F.125 at p. 18.

• Joaquín Almunia, Vice President of the European Commission responsible for Competition Policy, New challenges in mergers and antitrust IBA annual competition conference Florence, 16 September, 2011 available from:http://europa.eu/rapid/pressReleasesAction.do? reference=SPEECH/11/581&format=HTML&aged=0&language=EN&guiLanguage=en.

• For various criticism see amongst others Kallaugher and Sher, 'Rebates Revisited : Anti- Competitive Effects and Exclusionary Abuse under Article 82', 25 European Competition Law Review, 2004, pp. 263-285; P Jebsen and R Stevens, 'Assumptions, Goals and Dominant Undertakings: The Regulation of Competition under Article 86 of the European Union' 64 Antitrust LJ, 1996 pp.443-51; B Sher, 'The Last of Steam Powered Trains: Modernising Article 82' 25 European Competition Law Review, 2004 p.243 ;See Fox, Eleanor M, 'Monopolization and Dominance in the United States and the European Community: Efficiency, Opportunity, and Fairness', 61 Notre Dame L Rev, 1986, p. 1004.

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• DG Competition Discussion Paper on the Application of Art 82 of the Treaty to Exclusionary Abuses( December 2005) available at http://ec.europa.eu/competition/antitrust/art82/discpaper2005.pdf.

• DG Competition, Communication from Commission, Guidance on the Commission’s Enforcement Priorities in Applying Article 82 Treaty to Abusive Exclusionary Conduct by Dominant Undertakings Brussels 3 December 2008.

• See Kavanagh, James, Marshall, Neill and Niels, Gunnar 'Reform of Article 82- Can the Law and the Economics be Reconciled?' in Article 82 EC: Reflections on its Recent Evolution, (ed.) Ariel Ezrachi, Hart Publishing, Oxford, 2009, pp. 1-19; see also Bellis, Jean- Francois and Kasten, Tim, 'Will Efficiencies Play an Increasing Important Role in the Assessment of Conduct under Article 102 TFEU' in Competition Law and The Enforcement of Article 102(eds.) Federico Etro, Ioannis Kokkoris, Oxford University Press, 2011, pp. 135-137.

• Damien Geradin, 'Is the Guidance Paper on the Commission’s Enforcement Priorities in Enforcing Article 102 TFEU Useful? ‘in Competition Law and The Enforcement of Article 102(eds.) Federico Etro, Ioannis Kokkoris, Oxford University Press, 2011,pp. 51-52.

• Damien Geradin, F.138 at pp. 51-52.

• Under Article 101(3) if certain conditions are met an automatic exemption from the effect of Article 101(1) is granted, which allows efficiencies and an economics based approach.

• Damien Geradin, F.138 at pp. 51-52.

• Damien Geradin, F.138 at pp. 51-52.

• See Posner, Richard A. 'Antitrust in the New Economy', p.9.

 Article by Attorney Aysem DIKER VANBERG

Legal Responsibilities Of A Limited Liability Company’s Manager(s)

Att. Dilara Naz GULUM

A) IN GENERAL

The most preferred type of company established in Turkey is Limited Liability Company (“LLC”), and two compulsory bodies are foreseen in Section two of Part six of Turkish Commercial Code[1] numbered 6102 for this type of company. One of them is general assembly (“GA”) as a decision and administration body of LLC and the other is manager(s) as a management and representation body. Therefore, LLC’s manager(s) has the characteristics of a body like the Board of Directors in Joint Stock Companies (“JSC”). In this regard, an important question emerges: Under which conditions do responsibility of manager(s) arise?

The responsibility of managers is not specifically regulated in Turkish Commercial Code numbered 6102, and the provisions for Joint Stock Companies are referred only. The following is stipulated in Article 644/1/a of TCC:

“Article 644-(1): The following provisions regarding joint stock companies shall also be applied to limited liability companies:

1. a) Article 549 regarding documents and declarations being in contradiction with law; Article 550 regarding false declarations concerning capital and awareness of payment deficiency; Article 551 regarding corruption in valuation; Article 553 defining the responsibility of founders, board members, managers and liquidation officer; Articles 554 to 561 regarding the responsibility of auditors and operational auditors.”

Accordingly, the provisions that are regulated in Articles 555 to 561 as common provisions regarding loss, joint liability, release of debt, time limitation and court of competent jurisdiction may also have an execution area in LLC.
B) GENERAL LEGAL RESPONSIBILITIES OF MANAGER(S)

In principle, company’s legal entity is responsible in LLC. Hence, irresponsibility of managers is taken as a basis in Article 632 of TCC, stipulating the following: “The company shall be liable for torts committed by the person authorized to manage and represent the company while performing his/her duties regarding company business.”

In addition, it is stipulated that Article 553 of TCC shall be applied to LLCs. Accordingly, the following is stipulated in Article 553/1 of TCC: “In the event that founders, board members, managers and liquidation officers breach their liabilities defined by the law and articles of association due to their fault, they shall be deemed responsible for the loss they cause against the company, shareholders and liquidation officers.”

TCC numbered 6102 does not require vote of partners, who represent at least one-tenth of company’s capital, in order to bring an action against company manager(s), which was stipulated in the old Turkish Commercial Code. Thus, the partners may directly bring an action for liability against managers without necessity of general assembly decision therefor. Furthermore, company’s articles of association foresees that managers shall submit certain decisions or individual problems to the approval of general assembly in accordance with Article 625/2 of TCC, and responsibility of managers shall not vanish, even if general assembly approves them; therefore manager(s) can be held responsible.
C) TERMS AND CONDITION OF RESPONSIBILITY

There are 4 conditions that should be met for holding LLC’s manager(s) responsible: (1) breach of the liabilities defined by the law and articles of association; (2) the breach is based on fault; (3) emergent of a loss; and (4) a compatible causal connection between breach due to fault and loss.

The liability of Manager(s) is compulsory performance and nonperformance of actions that are foreseen as a duty or an authority/power in the law and articles of association. The following is stipulated in Article 623 of TCC on management and representative authority of manager(s): " The managers shall be authorized to adopt and to execute resolutions on all management issues which are not reserved to the authority of the general assembly by law or the articles of association.”

Within this framework, their duties and their authority, such as registry of articles of association to trade registry office, recording share transfers to share register, application to trade registry office for registering principal capital share, granting at least 15 days to partners for using their right of preference in capital increase, informing court about capital loss and being deeply in debt on time and etc., are considered as liability.

Legal responsibility of manager(s) can only arise in the event of objective fault. According to objectified fault, a person who is responsible should exercise due care for the same situation, where a conscious and reasonable person is required to exercise due care under same conditions. Therefore, such person cannot seek relief from his/her responsibility asserting lack of experience or of inspection. The percentage of fault has no significance in emergence of responsibility, and it is not taken into account during determination of compensation.[2] The principle of “differentiated joint and several liability” is applied according to TCC numbered 6102, and responsibility is allocated among managers based on their fault.

Occurrence of a loss is another condition for emergence of legal responsibility of manager(s). If there is no loss, manager(s) shall not legally be held responsible, even if there is a breach due to their fault. The last condition is that there should be a compatible causal connection between breaching action due to fault and loss.
D) SPECIAL RESPONSIBILITY CIRCUMSTANCES[3]

Even though it is regulated within the framework of Article 553/1 of TCC that manager(s) shall be held responsible because of their actions/behaviors contrary to liabilities, which arise from the law and articles of association, in general without bringing a special arrangement on legal responsibilities of manager(s), special arrangements are made on other issues that are stated in Article 644/1, which is a reference article, and involve responsibility, and a penal sanction is also foreseen for some of them.

1) Documents and Declarations Contradicting the Law

The following is stipulated in Article 549 of TCC: “If documents, prospectuses, circulars, representations and warranties regarding company transactions such as incorporation, capital increase and decrease, merger, division and conversion and issuance of securities and etc. are found to be false, incorrect, fraudulent, deceptive or misleading, those who are responsible for issuing or providing such documents shall be held liable for damages as a result of this and as a result of contradicting the law.”

2) False Declarations Concerning Capital and Knowing Insolvency

Responsibility regulated under Article 550 of TCC is complementary of special responsibility for documents and declarations contradicting the law. Accordingly:

“Those who show as if the capital is fully subscribed or paid although the case is on the contrary, as well as the authorized persons of the company, if they are faulty, shall be assumed to have undertaken these shares and are severally and jointly held liable for payment of the consideration and damage, plus the incurred interest.

Those who cast affirmative vote being aware of incapacity of the subscribers to pay consideration shall be responsible for the damage caused by failure in payment of this debt.”

3) Fraud involving False Capital Valuation

According to this special responsibility regulated under Article 551 of TCC: “Those who appraise exorbitant price during appraisal of capital in kind, transfer of enterprises and revaluation of assets when compared with the precedents, or reflect the condition of the enterprise or property differently, or involve in a corruption in some other way, shall be responsible for damages encountered thereof.”

4) Becoming a Single-Partner Company and Nonperformance of Necessary Actions

Pursuant to TCC numbered 6102, the opportunity of establishing a single-partner limited liability company is provided, and the practice of registering people, who are not actually company partners, as company partners, which is called “straw man”, is prevented. While the old TCC stipulated that legal entity of the company became null and void after company had become a single-partner company, the new TCC numbered 6102 stipulates that the company can subsist as a single-partner company by taking certain actions.

According to Article 574/2 of TCC: “If the number of partners is down to one, the situation shall be reported to managers within seven days as of the date of the transaction that caused this result. The managers shall, until the end of seven days following notification, register and announce that the company is a single-member company with limited liability, and name, surname, nationality and domicile of the single partner; otherwise, the managers shall be responsible for damages to be incurred. The managers shall fulfill the same obligation where the company is incorporated with a single partner.”

In such a case, the managers shall be responsible if their nonperformance of this obligation causes any damages.

5) Bringing Nullity and Annulment Actions against General Assembly Resolutions with Malicious Intentions

The following is stipulated in Article 622 of TCC: “The provisions regarding the nullity and cancellation of joint stock companies’ GA resolutions in the New Law shall apply comparably to companies with limited liability.” Accordingly, Article 451 of TCC titled “Responsibility of the ones who bring Nullity and Annulment Actions with Malicious Intentions” will find an execution area in terms of limited liability companies. The following is stipulated in Article 451: “The malicious plaintiffs bringing nullity or annulment actions against general assembly resolutions will be jointly and severally responsible for the losses of the company.” Therefore, the managers can also be held liable for losses of the company in cases where they are proven to act as malicious plaintiffs.

6) Damages as a result of Structural Changes

According to Article 193/1 of TCC: “All persons who have in some way participated in the merger, division or conversion transactions shall be responsible for the damage to the companies, partners and creditors resulting from any negligence on their part.” In such a case, the managers, who participate in transactions that result with structural change, may be held liable.

7) Abuse of Dominance Between a Parent Company and its Subsidiary

Pursuant to Article 202 of TCC, a parent company cannot abuse its dominance in a way that will damage its subsidiary. However, if such loss is de facto balanced in the same activity year, or if a right to request related to such loss is granted to the subsidiary at least until the end of that activity year, provided that it is specified when and how the balancing transaction will be performed, parent company will not be held liable. Otherwise, each shareholder of such subsidiary may claim for those damages from such parent company and its members of board of directors.
E) CONDITIONS UNDER WHICH RESPONSIBILITY VANISHES

1) General Conditions

As there is no restriction related to the number of LLC managers in TCC numbered 6102, at least one manager or a management board composed of more than one manager can be appointed with a provision recorded in articles of association. LLC manager(s) may be exonerated from liability when they breach their liabilities that arise from the law and articles of association, provided that they prove their faultlessness.

While there was an explicit provision on irresponsibleness of managers when they use a negative vote in a decision in the old Turkish Commercial Code, there is no provision in this regard in the new TCC numbered 6102. In the doctrine, however, this is advocated by many authors.[4]. According to the doctrine, opposing opinion should be recorded and undersigned in corporate minutes for negative vote to prevent liability.

In the abolished TCC, there is also a provision stating that a manager, who does not participate in a meeting that the decision, which arise liability, is taken by providing an excuse, or a manager, who does not sign a decision without meeting, shall not be held liable. TCC numbered 6102 does not include this provision. In the doctrine, however, it is advocated that a manager, who has an acceptable and legitimate excuse and can prove this, cannot be held liable.[5] Otherwise, a manager can be held liable even if a decision is taken in his/her absence without an acceptable excuse. In fact, it is both a right and a liability for LLC managers to participate in meetings.

Responsibility of managers will also vanish upon release of the Board of Directors by General Assembly.

2) Responsibility in Duty and Authority Delegation

Pursuant to a special regulation in Paragraph 2 of Article 553 of TCC numbered 6102, which constitutes the basis of responsibilities of LCC managers, the opportunity of exoneration of liability is provided if duties and authorities are delegated to another people.

Accordingly: “People or bodies, whose duties or authorities that arise from the law or articles of association are delegated on a legal basis to other persons, may not be held liable as a result of delegatee’s actions and decisions, unless it is proven that the delegator did not exercise reasonable care when choosing the delegate.”

It is allowed to delegate duties and authorities that fall outside of “non-delegable duties and authorities” of a LLC, as in Joint Stock Companies, which is regulated under Article 625 of TCC. At the same time, based on the reference in Article 329 of TCC to Article 370 of TCC, the authority of representation can be left to Managing Directors.[6] In principle, delegator will not be responsible for delegatee’s actions and decisions. However, as it is understood from Article 633/2, delegator can be held liable if he/she did not exercise reasonable care when choosing the delegate.

3) Responsibility in Contradictions and Violations beyond Control

The following is stipulated in Article 553/3 of TCC: “no one may be held liable due to contradictions to or violations of the law or the articles of association that are out of his control; nor the circumstance of not being liable may be declared null and void on the grounds of the duties of observation and due care”.

This provision is not stipulated in Swiss Code of Obligations, and therefore, led to many discussions in the doctrine. According to the opinion that we also share, if a manager delegates his/her authorities, it does not necessarily mean that this is beyond his/her control, and the manager should prove that contradiction with the law could not be detected in spite of his/her due care.[7]
F) Action for Liability

1) Plaintiff

If there is a “direct” loss of partners and creditors that is exposed independently of the company, the have the right to litigate against managers and the compensation that is obtained as a result of litigation will be given to the partners and creditors.

If a company has a loss, the partners have the right to litigate, provided that they claim compensation to be paid to the company (Article 555 of TCC). At the same time, LLC may seek for holding the managers liable. On the other hand, if the creditors litigate and claim payment to be made to the company, it is limited in Article 556 of TCC with the condition that the company went bankrupt. In addition, it is required that the administration of bankruptcy has not yet brought an action for liability.

2) Defendant

The defendant is a company manager. If the manager or one manager of the management board is a legal entity, then the action should directly be brought against the legal entity, instead of the real person representing the legal entity.[8]

3) Court of Competent Jurisdiction

The court of competent jurisdiction in action for liability of LLC managers is the Commercial Court of First Instance located at the same place of company headquarters. If there is no Commercial Court of First Instance located at the same place of company headquarters, the Civil Court of First Instance is the competent jurisdiction.

4) Time Limitation

The following is stipulated in Article 560 of TCC: “The plaintiff is entitled to claim for compensation within a period of 2 (two) years starting from learning of the loss and the responsible manager(s), and under any circumstances, the lapse of time expires after 5 years’ period starting from the action that caused the loss. This action requires punishment, and the same time limitation is also applied on action for damages, if it is subject to a longer time limitation pursuant to Turkish Criminal Code.’’

[1] Hereafter shall be referred to as “TCC”.

[2] YILDIZ, Sükrü: “Limited Ortaklıklarda Müdürlerin Sorumlulugu” (“Responsibility of Managers in Limited Liability Partnerships”), Istanbul Ticaret Üniversitesi Sosyal Bilimler Dergisi (Istanbul Commerce University Journal of Social Studies), p. 24, Istanbul 2013, p. 67.

[3] YAVUZ, Mustafa: “Limited Sirketlerde Müdürlerin Hukuki Sorumlulugu” (Legal Responsibilities of Managers in Limited Liability Companies), Mali Çözüm Dergisi (Journal of Financial Solution), January-February 2013, p. 185 and etc.

[4] PULAÅžLI, Hasan: “Türk Ticaret Kanunu Tasarısı'na Göre Anonim Sirket Yönetim Kurulu Üyelerinin Özen Yükümlülügü ve Müteselsil Sorumlulugu” (“Liability of Care and Joint and Several Liability of JSC’s Members of BoD pursuant to Draft TCC”), BATIDER C. XXV, S. 1, Ankara 2009, p. 37; TEKINALP, Ünal: Yeni Anonim ve Limited Ortaklıklar ile Tek Kisilik Ortaklıgın Esasları (Principles of New JSC and LLC and Single-Partnership), 2^nd Edition, Istanbul 2012, p. 271.

[5] GÜNEY, Necla Akdag: Anonim Sirket Yönetim Kurulu Üyelerinin Hukuki Sorumlulugu (“Legal Responsibility of JSC’s Members of BoD”), Istanbul 2008, p. 77; PULAÅžLI, p. 37; TEKINALP, p. 284, YILDIZ, p. 72.

[6] YILDIZ, p. 73.

[7] YILDIZ, p. 76.

[8] PULAÅžLI, Hasan: Türk Ticaret Kanunu Tasarısına Göre Anonim Sirketlerde Yöneticilerin Hukuki Sorumlulukları (Legal Liabilities of Managers in JSCs pursuant to Draft TCC), Prof. Dr. Ali Naim Inan’a Armagan, Ankara 2009, p. 584.