U.S. FTC: Unpacking Technology Companies Acquisition of AI-related Technologies

The U.S. Federal Trade Commission is gathering information from major technology companies regarding their acquisition of technology from other companies concerning artificial intelligence.  The FTC press release states:

The Federal Trade Commission announced today that it issued orders to five companies requiring them to provide information regarding recent investments and partnerships involving generative AI companies and major cloud service providers.

The agency’s 6(b) inquiry will scrutinize corporate partnerships and investments with AI providers to build a better internal understanding of these relationships and their impact on the competitive landscape.  The compulsory orders were sent to Alphabet, Inc., Amazon.com, Inc., Anthropic PBC, Microsoft Corp., and OpenAI, Inc.

“History shows that new technologies can create new markets and healthy competition. As companies race to develop and monetize AI, we must guard against tactics that foreclose this opportunity, “said FTC Chair Lina M. Khan. “Our study will shed light on whether investments and partnerships pursued by dominant companies risk distorting innovation and undermining fair competition."

The FTC issued its orders under Section 6(b) of the FTC Act, which authorizes the Commission to conduct studies that allow enforcers to gain a deeper understanding of market trends and business practices. Findings stemming from such orders can help inform future Commission actions.

Companies are deploying a range of strategies in developing and using AI, including pursuing partnerships and direct investments with AI developers to get access to key technologies and inputs needed for AI development. The orders issued today were sent to companies involved in three separate multi-billion-dollar investments: Microsoft and OpenAI, Amazon and Anthropic, and Google and Anthropic. The FTC’s inquiry will help the agency deepen enforcers understanding of the investments and partnerships formed between generative AI developers and cloud service providers.

The FTC is seeking information specifically related to:

• Information regarding a specific investment or partnership, including agreements and the strategic rationale of an investment/partnership.
• The practical implications of a specific partnership or investment, including decisions around new product releases, governance or oversight rights, and the topic of regular meetings.
• Analysis of the transactions’ competitive impact, including information related to market share, competition, competitors, markets, potential for sales growth, or expansion into product or geographic markets.
• Competition for AI inputs and resources, including the competitive dynamics regarding key products and services needed for generative AI.  
• Information provided to any other government entity, including foreign government entities, in connection with any investigation, request for information, or other inquiry related to these topics.

The companies will have 45 days from the date they receive the order to respond.

The Commission voted 3-0 to issue the Section 6(b) orders and conduct the study of AI investments and partnerships.

Reinvigorating Competition Law in the United States: A Path Forward?

In late 2018, Professor Timothy Wu at Columbia University Law School published a short, readable and nicely priced book at about 140 pages titled, “The Curse of Bigness: Antitrust in the Gilded Age.”  This ambitious and accessible book lays out and defends the general thesis that American antitrust law (competition law) has gone astray.  He essentially attacks the narrow focus on the consumer welfare theory of antitrust law as failing to completely encompass other values, particularly related to the protection of democracy from influence by a concentrated private sector relying on the work of U.S. Supreme Court Justice Lewis Brandeis.  He traces the history of antitrust enforcement in the United States from the “Gilded Age” and notes that the remedy of breakup of concentration has historically led to more innovation, and an important harm of the narrow Chicago/Harvard School approach to antitrust is a failure to find actionable concentration enough and that “bigness” in and of itself is harmful.  Indeed, concentration leads to those benefiting from it doing whatever necessary to preserve their position, which includes suppression of innovation through raising rival costs, mergers and cloning, and exercising control over government.  Cloning is essentially copying of the features of smaller rivals, particularly in the technology/internet industry.  It seems that intellectual property protection may provide some cover for small firms from abuse.  He points to the lack of enforcement by the George W. Bush administration (and also points the finger at the Obama Administration, but gives them the excuse of the background of a judiciary that has adopted the Chicago/Harvard School approach--perhaps the W Bush Administration may benefit a bit from the same excuse) that led to a significant amount of concentration across several industries.  Interestingly, the Trump administration recently approved the Sprint/T-Mobile merger. 


Professor Wu is particularly concerned about the technology sector and specifically critiques the behavior of Google, Facebook and Amazon.  Professor Wu points to several policy prescriptions: 1) reinvigorate merger review, including “a simple but per se ban on mergers that reduce the number of major firms to less than four”; 2) "democratization of the merger process"; 3) taking on big cases (he lauds the EU's approach); 4) using the breakup remedy; 5) adopting a “market investigation” practice similar to the United Kingdom; and 6) essentially “abandoning ‘consumer welfare’ as the lodestone of antitrust law” and adopting a standard based on the “protection of competition” that is process oriented in nature.  Notably, other additional values worth protecting could include individual privacy and even more difficult to cabin in today's age--national security.  Professor Wu’s book lays out a strategy for approaching antitrust issues in the Internet Age and perhaps he will be the one to lead the next Democratic administration’s antitrust enforcement.  The book is available for purchase, here, for around $12 new and $8 used. 

Gaming Amazon Using Fake IP Claims for Competitive Advantage

CNBC has published an interesting article about fake IP claims on Amazon titled, "Amazon was Tricked by Fake Law Firm Into Removing a Hot Product, Costing This Seller $200,000."  The article alleges that competitors of sellers on Amazon are filing fake intellectual property complaints against sellers resulting in Amazon's immediate take-down of their product or service.  These claims appear to be timed before big sales days and at very profitable products.  Interestingly, part of the problem is that Amazon is overwhelmed with complaints and apparently doesn't have the time to review the claims carefully.  My guess is that the software Amazon uses to police and handle claims is not able to discern fake and legitimate complaints well.  Perhaps better software is the answer.  I am hopeful that some Internet companies that rely on software will hire more people instead to handle these complaints.  Because Amazon controls the platform and sellers make so much money using it, I doubt many sellers will push Amazon too hard.  Although continued complaints and lost sales may open the door for a competitor to Amazon, which may be a good thing.  

US Treasury Department Issues White Paper Critiquing EU State Aid Investigations of Transfer Pricing Rulings

On August 24, 2016, the U.S. Department of Treasury issued a White Paper titled, “The European Union’s Recent State Aid Investigations of Transfer Pricing Rulings,” explaining United States transfer pricing concerns with the EU Commission.  The state aid investigations of note, include Apple, Starbucks, Fiat/Chrysler and Amazon.  There are indications that there may be more investigations launched.  Notably, the EU Commission’s positions, apparently, mostly involve transfer pricing concerning intellectual property. 

In February of 2016, Treasury Secretary Lew authored an open letter to the President of the Commission, Jean-Claude Juncker, stating:

that the Commission’s “sweeping interpretation” of State aid doctrine “threatens to undermine” the progress made by the international community “to curtail the erosion of our respective corporate tax bases” and described four principal concerns.  First, the Commission has “sought to impose penalties retroactively based on a new and expansive interpretation of state aid rules.”  Second, the investigations appear “to be targeting U.S. companies disproportionately.”  Third, the new enforcement theory “appears to target, in at least several of its investigations, income that Member States have no right to tax under well established international tax standards.”  Fourth, the Commission’s investigations “could undermine U.S. tax treaties with EU Member States."

The White Paper further explains the concerns and in the Executive Summary states:

The Commission’s Approach Is New and Departs from Prior EU Case Law and Commission Decisions.  The Commission has advanced several previously unarticulated theories as to why its Member States’ generally available tax rulings may constitute impermissible State aid in particular cases.  Such a change in course, which has required the Commission to second-guess Member State income tax determinations, was an unforeseeable departure from the status quo.

The Commission Should Not Seek Retroactive Recoveries Under Its New Approach.  The Commission is seeking to recover amounts related to tax years prior to the announcement of this new approach—in effect seeking retroactive recoveries.  Because the Commission’s approach departs from prior practice, it should not be applied retroactively.  Indeed, it would be inconsistent with EU legal principles to do so.  Moreover, imposing retroactive recoveries would undermine the G20’s efforts to improve tax certainty and set an undesirable precedent for tax authorities in other countries. 

The Commission’s New Approach Is Inconsistent with International Norms and Undermines the International Tax System.  The OECD Transfer Pricing Guidelines (“OECD TP Guidelines”) are widely used by tax authorities to ensure consistent application of the “arm’s length principle,” which generally governs transfer pricing determinations.  Rather than adhere to the OECD TP Guidelines, the Commission asserts it is employing a different arm’s length principle that is derived from EU treaty law.  The Commission’s actions undermine the international consensus on transfer pricing standards, call into question the ability of Member States to honor their bilateral tax treaties, and undermine the progress made under the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) project.

[Hat tip to Pepperdine University School of Law Professor Paul Caron's TaxProfBlog]

Amazon, Kindle and book pricing in France

IP Finance is pleased to welcome the following guest post from Catherine Pocock (Research Assistant, Queen Mary University of London and Assistant Editor, Queen Mary Journal of Intellectual Property) on the repercussions in France of the launch last year of Kindle Unlimited, particularly with regard to its Loi sur le prix unique -- 'law of one price'):

Amazon’s ‘Kindle Unlimited’ found incompatible with French Law 

Following the launch of Amazon’s ‘Kindle Unlimited’ service in the summer of 2014, Fleur Pellerin, the French Minister for Culture commissioned a Report on the compatibility of subscription services which allow unlimited access to books with the Loi sur le prix unique.  The mandate for the Report was to determine the status of subscription services by answering two key questions:

• Does the 2011 Law of one price apply to subscription services?
• If yes, are subscriptions offering unlimited access to books compatible with the Law?

The expert Report by Laurence Engel was handed to the Minister on 9 February 2015 and published here on 19 February 2015. It found that such services were indeed within the remit of the 2011 Law, and that they were incompatible with its requirements.

In her press release (here) and in an exclusive (and extensive) interview to Le Figaro (here), Ms Pellerin called for Amazon and similar service providers to ensure the compliance of their services with the Law.

The Law; What Law? 

Law n. 81-766 of 10 August 1981 concerning the price of books was extended in 2011 by Law n. 2011-590 of 26 May 2011 concerning the price of digital books and its implementing Decree n. 2011-1499 of 10 November 2011 (see here for more details).

This Law was designed to enhance market diversity and growth by maintaining a stable economic environment. Article 2 of the 2011 Law gives the publisher control over the price of digital books within his repertoire. 

The appearance of subscription services allowing unlimited access to books has raised concerns over the publisher’s enshrined ability to determine the price of books, and its consequences over the remuneration of authors and valuation of books. 

Subscription Services 

In her Report to the Minister, Ms Engel heard evidence from over 30 organizations (all listed in Annexe 2 of the Report) and compared subscription services available in France to those available internationally. Annexe 3 sets out an interesting overview of these subscriptions worldwide, including those in the Germany, the UK and the USA.

As mentioned above, the Report concludes that service providers such as Amazon, Youboox, Izneo, Youscribe are not compliant with the 2011 Law. Further, the Report points out that subscriptions neither provide for digital market growth, nor do they fight piracy as they do not enhance cultural diversity, and completely ignore the question of fair and equitable remuneration of authors. 

Having said that, the Report notes that in principle streaming and subscriptions services are not incompatible with the Law. Indeed it highlights three types of subscription which would be legal provided the publisher can determine the price:

• A collection from a single publisher’s repertoire: this would be a subscription where a single publisher offers a subscription for works from his own repertoire, and where he would determine the price of the subscription and consequently the price of books; e.g.: subscription by genre from a single repertoire.
•  A credit system: a monthly subscription where the credit would entitle the user to a certain number of books. The publisher would be in control of quantifying the credit to book ratio and consequently the price of books.
•  The bundle system where the user would select one of a number of bundles. The publisher would determine the grouping of books for each bundle (e.g.: by theme) and again remain in control of the price.

Next Steps 

Ms Engel, now Mediator, will set up a mediation group within the next month where government experts will consult with the service providers to assist them in the remodelling of their services in view of achieving legal compliance. Following this mediation, service providers (including Amazon) will have a maximum of three months to comply with their legal obligations (see here). 

The Bigger Picture 

In its conclusions, the Report praises the strong market regulation which prevails in the French publishing industry and is intended to preserve – not stifle – innovation. Indeed France is so far the only European country to have taken any formal steps with regards to such subscriptions. Significantly, Le Monde sets such statements in the European context where Brussels has already issued warnings to France regarding its overly protective market rules (see here).

So as well as asking WWAD (What Will Amazon Do), I wonder: WWBD (What Will Brussels Do)?