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Did Amazon Trick Customers & Kimmel Returns · Bloomberg Law

0:02
Speaker 1: This is Bloomberg Law with June Grossel from Bloomberg Radio.
0:08
Speaker 2: A federal trial is beginning this week in Amazon's hometown
0:13
Speaker 2: to decide whether the world's largest online retailer tricked its
0:17
Speaker 2: customers into Joining Prime and then made it difficult to
0:21
Speaker 2: cancel the membership. Prime provides subscribers with perks that include
0:26
Speaker 2: faster shipping, video streaming, and discounts at whole Foods for
0:30
Speaker 2: a fee of one hundred and thirty nine dollars annually.
0:33
Speaker 2: It's a key and growing part of Amazon's business, with
0:36
Speaker 2: more than two hundred million members, bringing in more than
0:40
Speaker 2: twelve billion dollars in net revenue in the last quarter,
0:43
Speaker 2: a twelve percent increase from the same period last year.
0:48
Speaker 2: But the Federal Trade Commission says Amazon misled customers into
0:52
Speaker 2: signing up for Prime and then made it very difficult
0:56
Speaker 2: to cancel. Joining me is Matthew Shettenhelm Blue Umberg Intelligence
1:01
Speaker 2: litigation and government analyst. Matt explain why the FTC is
1:06
Speaker 2: suing Amazon.
1:08
Speaker 1: Yeah, so this is a lawsuit, but that the FTC
1:10
Speaker 1: filed two years ago alleging that Amazon Prime cancelation and
1:17
Speaker 1: its subscription process doesn't comply with federal law. There's a
1:22
Speaker 1: twenty ten federal law called the Restoring Online Shoppers Confidence
1:28
Speaker 1: Act that addresses those membership programs that you can kind
1:32
Speaker 1: of sign up for and they can automatically renew, and
1:36
Speaker 1: there are some terms that the federal law requires that
1:39
Speaker 1: the company be very clear about what those terms are,
1:43
Speaker 1: that the customer make informed consent to those terms, and
1:47
Speaker 1: that any ability to cancel that sign up is simple,
1:51
Speaker 1: uses simple mechanisms. And the FTC says that Amazon falls
1:55
Speaker 1: short on all three of those claims, and it's trying
1:59
Speaker 1: to consumer redress and impose civil penalties on the company.
2:04
Speaker 2: Let's start with the FTC's contention that Amazon makes it
2:09
Speaker 2: difficult for consumers to purchase an item without also subscribing
2:15
Speaker 2: to Prime, so it sort of tricks them into subscribing
2:18
Speaker 2: for Prime.
2:19
Speaker 1: Yeah, that's right. This goes back to when Lena Kon
2:22
Speaker 1: was chair of the FTC, and there's a big focus
2:25
Speaker 1: on sort of dark patterns and pushing, nudging consumers to
2:29
Speaker 1: do things that maybe are against their will. And that's
2:32
Speaker 1: the allegation here that as consumers went to maybe buy
2:36
Speaker 1: a product on Amazon, Amazon sort of forced them into
2:41
Speaker 1: this process of also signing up for Prime basically tricked them,
2:46
Speaker 1: is the allegation, and so Amazon says, no, our process
2:50
Speaker 1: was very clear. They tried to move motion to dismiss
2:53
Speaker 1: on this and tried to move for summary judgment, but
2:55
Speaker 1: the judge wouldn't allow it. He said, look, reasonable people
2:58
Speaker 1: could disagree about this. This need to go to a jury.
3:01
Speaker 1: So on that issue and all the others, the jury
3:04
Speaker 1: is about to take that question up.
3:06
Speaker 2: The FTC also claims that getting out of a Prime
3:11
Speaker 2: subscription was too complicated. It required the customer to affirm
3:16
Speaker 2: their desire to cancel membership on three pages, and internally
3:21
Speaker 2: Amazon employees call the process the iliad.
3:25
Speaker 1: Yeah, so the law requires a simple mechanism to cancel
3:30
Speaker 1: these sign ups, and yes, I think it's it's going
3:32
Speaker 1: to be harmful evidence that the FTC will present to
3:36
Speaker 1: the jury that there were some comments made by Amazon
3:39
Speaker 1: employees that describe this process as very difficult, and as
3:43
Speaker 1: you said, even characterizing it as the iliad, I think
3:46
Speaker 1: in a reference to the odyssey and how difficult this
3:50
Speaker 1: can be to get through for consumers. Now, Amazon pushes
3:53
Speaker 1: back on that and says, no, actually, you know, we
3:56
Speaker 1: have data showing that people figure it out, always going
4:00
Speaker 1: to be a couple of exceptions, and these stray comments
4:03
Speaker 1: by employees don't really characterize how the process works. So
4:08
Speaker 1: again here the judge looked at both sides and said,
4:11
Speaker 1: you know what, I can't decide this is a fair
4:13
Speaker 1: question to toss to a jury, and so that's going
4:16
Speaker 1: to be presented to jurors this week and next.
4:19
Speaker 2: I have to say that a lot of companies seem
4:22
Speaker 2: to make it difficult to get out of subscriptions. I mean,
4:26
Speaker 2: sometimes you sign up online, but you have to call
4:29
Speaker 2: in order to get out of the subscription. Does Amazon
4:32
Speaker 2: really stand out from these other companies that seem to
4:36
Speaker 2: do the same thing.
4:38
Speaker 1: Yeah, I mean I think that's a point that Amazon's
4:40
Speaker 1: going to push that. Look, there isn't a lot of
4:43
Speaker 1: clarity about what is a simple cancelation method, and the
4:47
Speaker 1: industry follows pretty similar practices on this sort of thing.
4:52
Speaker 1: This is pretty industry standard, and to me, like one
4:56
Speaker 1: point that Amazon's going to raise, the FTC tried to
4:59
Speaker 1: do a rule mad on this statute to add more
5:02
Speaker 1: clarity to it, and that was over the past couple
5:05
Speaker 1: of years. And when they did that, when they first
5:07
Speaker 1: announced that rulemaking, they said this federal law that requires
5:10
Speaker 1: a simple cancelation process. It isn't very clear. So the industry,
5:15
Speaker 1: I think, is struggling with Okay, what exactly is too much?
5:19
Speaker 1: And Amazon had to make a calculation on that point.
5:22
Speaker 1: It had to look to other industry practices, and Amazon says,
5:26
Speaker 1: look what we have in place. You know, maybe it's
5:29
Speaker 1: not the simplest that you could possibly imagine, but that's
5:32
Speaker 1: not what the law requires. It's pretty simple. You do
5:35
Speaker 1: have to click through a couple things, but that's sufficient
5:38
Speaker 1: to qualify as simple when you consider the industry standard
5:41
Speaker 1: practice in Amazon's view, And did FTC.
5:44
Speaker 2: Give Amazon a chance to correct this before they brought suit.
5:48
Speaker 1: My understanding is that Amazon's already changed its processes in
5:54
Speaker 1: material respects, and so I think at this point the
5:57
Speaker 1: fight is mostly about going after the company for practices
6:02
Speaker 1: in the past that have changed already and potentially seeking
6:07
Speaker 1: what could be significant financial penalties against the company for
6:11
Speaker 1: its past practices. So I don't see it as much
6:14
Speaker 1: about injunctive relief or trying to change Amazon's practices going forward,
6:19
Speaker 1: as much it is trying to penalize Amazon allegedly for
6:22
Speaker 1: not following the law since around twenty fifteen. And going forward.
6:27
Speaker 2: I wondered because I thought, you know, the jurors will
6:29
Speaker 2: probably go online and try to cancel and see what happens.
6:32
Speaker 2: But you're saying, that's not the cancelation process that's there. Now.
6:36
Speaker 1: My understanding is this is focused on a previous version
6:40
Speaker 1: of the cancelation process, and I suspect the judge will
6:44
Speaker 1: discourage the jurors from investigating on their own.
6:48
Speaker 2: I know the judge will, but you know, jurors sometimes
6:52
Speaker 2: he right listen to those things. And the judge has
6:55
Speaker 2: already ruled against Amazon on a few issues pre try well,
7:00
Speaker 2: including limiting the legal defense that Amazon can raise at trial.
7:05
Speaker 1: Yeah, that's right. You know, Amazon has repeatedly had a
7:08
Speaker 1: difficult time with the judge, Judge John Chune. You know,
7:11
Speaker 1: he refused to dismiss the case in May of twenty
7:14
Speaker 1: twenty four when Amazon asked for that. He refused to
7:17
Speaker 1: grant an early appeal of the case in July of
7:21
Speaker 1: this year, and then last week he granted summary judgment
7:25
Speaker 1: in parts to the Federal Trade Commission to sort of
7:28
Speaker 1: narrow a couple of the issues that would go to
7:30
Speaker 1: the jury. He refused to grant summary judgment for Amazon,
7:34
Speaker 1: but He sort of very narrowly said, you know a
7:37
Speaker 1: couple of these issues. Look, there's no way Amazon you're
7:39
Speaker 1: going to win on this point or that point. Still,
7:42
Speaker 1: I think the core of question is going to these jurors,
7:46
Speaker 1: but he did narrow it a little bit. He also
7:48
Speaker 1: said that a couple Amazon officers who worked on these
7:52
Speaker 1: processes could be held personally liable if the jury concludes
7:57
Speaker 1: that Amazon violated the law knowingly.
8:00
Speaker 2: Yeah, and he ruled that the FTC doesn't have to
8:03
Speaker 2: prove every single example of Amazon's sign up and cancellation
8:07
Speaker 2: procedures are deceptive and can focus on a representative sample.
8:13
Speaker 1: Yeah. I think that's right. So sort of narrowed the
8:16
Speaker 1: issues a little bit, narrowed the evidence that will go
8:19
Speaker 1: before the jury. As I said, Amazon's really had a
8:22
Speaker 1: tough time with Judge John June here. And I think
8:25
Speaker 1: the question is if Amazon lets the jury rule on
8:30
Speaker 1: liability on whether Amazon violated the law or not, and
8:33
Speaker 1: whether it did it knowingly, it goes back to the
8:36
Speaker 1: judge then to set the financial penalties. And when Amazon's
8:40
Speaker 1: had such a difficult time with this judge, is that
8:43
Speaker 1: really something that it's going to want to do. That's
8:45
Speaker 1: going to be a real consideration for the company as
8:48
Speaker 1: it thinks about potentially settling this case.
8:51
Speaker 2: Yeah, So in July, the judge admonished Amazon for withholding
8:56
Speaker 2: seventy thousand documents, saying the conduct was tantamount to bad faith.
9:01
Speaker 2: So it doesn't appear that Amazon has earned the judges trust.
9:06
Speaker 1: Right, It's been a tough go throughout this case. And
9:09
Speaker 1: you know, I thought Amazon might have a decent chance
9:12
Speaker 1: at getting some of this case narrowed on its motion
9:14
Speaker 1: to dismiss that a request for early appeal on this
9:18
Speaker 1: stuff might have a small chance. But time after time,
9:21
Speaker 1: this judge has let this case advance, as you said,
9:24
Speaker 1: criticize the company for some of its practices as it's
9:28
Speaker 1: defended this. So I'm not sure that Amazon's going to
9:32
Speaker 1: feel very comfortable letting the judge decide how much it
9:36
Speaker 1: should pay to resolve this.
9:38
Speaker 2: Let's talk about the exposure of the company, because each
9:42
Speaker 2: violation of that Restore Online Shopper's Confidence Act allows for
9:47
Speaker 2: penalties of more than fifty three thousand dollars per violation.
9:51
Speaker 2: So how much money are we talking about it?
9:53
Speaker 3: All?
9:53
Speaker 1: Right? So you get to absurd math really quickly when
9:56
Speaker 1: you deal with numbers like that. If you're talking about
9:59
Speaker 1: tens of million millions of Amazon Prime subscribers, and I
10:02
Speaker 1: think Amazon's expert was talking somewhere in the ballpark of
10:05
Speaker 1: thirty to forty million Amazon users, and you multiply that
10:09
Speaker 1: times fifty thousand, it breaks my calculator. And so the
10:13
Speaker 1: judge ultimately using that number would have to settle on
10:16
Speaker 1: a civil penalty that is meaningful to the company, but
10:20
Speaker 1: not a violation of due process, not so unreasonable. There's
10:23
Speaker 1: also a push from the FTC for consumer redress, not
10:27
Speaker 1: just civil penalties, but the FDC's expert says that when
10:30
Speaker 1: you look at how much consumers paid that they shouldn't
10:33
Speaker 1: have here, he calculates the damages close to one billion
10:37
Speaker 1: dollars just for that, So one billion for consumer redress
10:41
Speaker 1: or nearly that, and then civil penalties that, as we said,
10:45
Speaker 1: could easily reach absurd billions of dollars, but likely would
10:48
Speaker 1: get into the billion dollar range as well. And so
10:51
Speaker 1: even with the company, you know, with the resources like Amazon,
10:54
Speaker 1: it's really hard for any judgment to be disruptive to
10:58
Speaker 1: a company like Amazon that has you know, annual profits
11:01
Speaker 1: in the you know, sixty seventy billion dollar range. It's
11:04
Speaker 1: hard to be material, but this might might get their
11:07
Speaker 1: attention when numbers like that are in place. So I
11:09
Speaker 1: think when you add all of that up, there's going
11:11
Speaker 1: to be considerable pressure for the company to settle this
11:14
Speaker 1: before the judge gets to decide on what is the
11:18
Speaker 1: reasonable penalty.
11:19
Speaker 2: But that's a really difficult calculation for Amazon to make,
11:24
Speaker 2: isn't it So what they'll watch the jurors through the
11:27
Speaker 2: trial and see whether any of them are reacting favorably
11:31
Speaker 2: to their arguments. I mean, it's really hard to read
11:35
Speaker 2: a jury.
11:37
Speaker 1: It's very difficult to predict exactly when these companies will
11:41
Speaker 1: will settle in trial. I've seen cases settle at the
11:43
Speaker 1: beginning of trial. I've seen cases settle at the very end,
11:46
Speaker 1: right before we're about to get a verdict. I think,
11:49
Speaker 1: you know, it's reasonable to see how it's going, you know,
11:52
Speaker 1: get a read on the on the jurors. It's possible
11:55
Speaker 1: they take their chances because one of the things that
11:57
Speaker 1: Amazon has going for it is that for the judge
12:01
Speaker 1: to impose civil penalties here, it's not enough that Amazon
12:05
Speaker 1: violated this federal law we've talked about, but also the
12:09
Speaker 1: FDC has to prove that Amazon did so knowingly, and
12:14
Speaker 1: so I think Amazon's going to have an argument that, Okay, look,
12:18
Speaker 1: even if we did technically not give consumers a simple
12:23
Speaker 1: method to cancel, if if this number of clicks is
12:26
Speaker 1: a couple too many, did we really know that knowingly
12:30
Speaker 1: given the limited FTC guidance that's out there, Given that
12:34
Speaker 1: the FTC itself has said that this isn't simple, So
12:38
Speaker 1: there's actually a chance for the company to be found
12:41
Speaker 1: liable in the sense that it violated the law, but
12:44
Speaker 1: not subject to these serious financial penalties. And so if
12:49
Speaker 1: I'm Amazon, that's the kind of thing I'd be watching
12:51
Speaker 1: out for. But I think, you know, you might want
12:54
Speaker 1: to think about settling. If I'm Amazon, you might want
12:56
Speaker 1: to think about settling, you know, before the returns its verdict,
13:01
Speaker 1: because you have the prospects to win with the jurors,
13:05
Speaker 1: and so that should help your negotiation posture with the
13:08
Speaker 1: FDC in reaching sort of a reasonable settlement. If you
13:11
Speaker 1: lose with the jurors, that argument falls away. You've already lost,
13:15
Speaker 1: and it's all a question of how bad it's going
13:17
Speaker 1: to be.
13:18
Speaker 2: Are there internal documents that talk about that?
13:21
Speaker 1: Ili I like process, I mean, I think there is
13:24
Speaker 1: some internal evidence that won't look great here, and you
13:29
Speaker 1: think about how is a reasonable jur going to think about,
13:32
Speaker 1: you know, Amazon employees talking about their process like you know,
13:36
Speaker 1: some of these allegations claim it might not be a
13:39
Speaker 1: great look to a jur and a jur looking at
13:42
Speaker 1: a company with significant resources like Amazon and thinking maybe
13:46
Speaker 1: about how much they've spent on their own Amazon account,
13:49
Speaker 1: and you know, you can see why why a company
13:52
Speaker 1: could be nervous. Anytime a case like this goes to
13:54
Speaker 1: a jury, it's going to be unpredictable. It's going to
13:57
Speaker 1: be risky for a company. So you know a lot
13:59
Speaker 1: of sure to settle to just make the thing go
14:02
Speaker 1: away for a sum that won't be material for a
14:05
Speaker 1: company like Amazon.
14:07
Speaker 2: Like other companies, Amazon has been attempting to forge friendlier
14:13
Speaker 2: ties with President Trump. Can you tell us a little
14:16
Speaker 2: about that?
14:17
Speaker 1: Yeah, I mean we're seeing that across a number of
14:19
Speaker 1: companies right now. There's often a question, you know, where
14:24
Speaker 1: companies can can fight aggressively against this administration or they
14:29
Speaker 1: can choose to not rock the boat. And I don't
14:33
Speaker 1: know how much this case will will fit into that paradigm.
14:38
Speaker 1: Is a case that came during the Biden administration and
14:41
Speaker 1: it was continued under the Trump administration. But you know,
14:45
Speaker 1: I think that that probably does play into part of
14:48
Speaker 1: the calculation as well, like how aggressive do we really
14:50
Speaker 1: want to be here in fighting and a settlement that
14:54
Speaker 1: that isn't material might be better to make the whole
14:57
Speaker 1: thing go away.
14:58
Speaker 2: The FTC has another antitrust case against Amazon that's going
15:02
Speaker 2: to trial in twenty twenty seven.
15:04
Speaker 1: Yes, that's right. So my colleague Jenrie covers the anti
15:06
Speaker 1: trust side for us on that, and so yeah, that's
15:10
Speaker 1: in many ways a much more significant threat for the
15:14
Speaker 1: company than this which is really focused on, you know,
15:17
Speaker 1: sort of a discrete issue, as we said, a past practice.
15:20
Speaker 1: But Amazon faces you know, much more significant threats on
15:24
Speaker 1: the anti trust front. And I think so that's a
15:27
Speaker 1: good point as well. You look at this stuff in
15:29
Speaker 1: the big picture and do you want to really be
15:32
Speaker 1: resisting this administration? Maybe the anti trust case plays into
15:35
Speaker 1: that calculation.
15:37
Speaker 2: Coming up next on the Bloomberg Lawn Show, I'll continue
15:39
Speaker 2: this conversation with Matthew Shettenhelm of Bloomberg Intelligence. Jimmy Kimmel
15:44
Speaker 2: is returning to the air tonight, but not everywhere. I'm
15:48
Speaker 2: June Grosso and you're listening to Bloomberg. Jimmy Kimmel Live
15:52
Speaker 2: will return to the air tonight, ending a suspension Walt
15:55
Speaker 2: Disney imposed following controversial remarks the late host made about
16:01
Speaker 2: the shooting death of conservative activists Charlie Kirk. Disney's decision
16:07
Speaker 2: to suspend the show followed pressure from both the federal
16:10
Speaker 2: government and independent operators of ABC stations. Brendan Carr, the
16:16
Speaker 2: Republican chairman of the Federal Communications Commission, criticized Kimmel's remarks
16:21
Speaker 2: on a podcast and suggested the company could lose its
16:25
Speaker 2: broadcast licenses.
16:27
Speaker 4: But frankly, when you see stuff like this, I mean, look,
16:30
Speaker 4: we can do this the easy way or the hard way.
16:32
Speaker 4: These companies can find ways to change conduct, to take
16:36
Speaker 4: action frankly on Kimmel, or you know, there's gonna be
16:40
Speaker 4: additional work for the FCC ahead.
16:43
Speaker 2: But two Republican senators Ted Cruz of Texas and Ran
16:47
Speaker 2: Paul of Kentucky attacked the FCC chairman's actions, with Cruz
16:52
Speaker 2: accusing Carr of mafioso tactics.
16:57
Speaker 3: Look look, I like Brendan Carr. He's a good guy.
16:59
Speaker 3: He's the chairman of the FCC. I work closely with it.
17:02
Speaker 3: But what he said there is dangerous as hell. He says,
17:08
Speaker 3: we can do this the easy way, but we can
17:10
Speaker 3: do this the hard way. Yeah, And I got to say,
17:13
Speaker 3: that's right out of good fellows. That that that that
17:15
Speaker 3: that's right out of a mafioso coming into a bar,
17:18
Speaker 3: going nice bar you have here, It'd be a shame
17:21
Speaker 3: of something happened to it.
17:23
Speaker 2: So, Matt Kimmel's coming back on the air tonight, but
17:27
Speaker 2: some stations are not carrying the show.
17:29
Speaker 4: Right.
17:29
Speaker 1: So the FCC rules say that local stations have the
17:35
Speaker 1: right to preempt national network content. And what we're seeing
17:41
Speaker 1: now is that two of those bigger local station owners,
17:45
Speaker 1: next Star and Sinclair, are exercising their right to preempt
17:50
Speaker 1: that network programming. And so I think this is, you know,
17:55
Speaker 1: directly tied to FCC Chair Brendan Carr's push the other
17:59
Speaker 1: day the podcast. He told those companies, Look, you can
18:02
Speaker 1: do this if you don't like, you don't believe that
18:05
Speaker 1: Jimmy Kimmel's content is in the public interest, you, as
18:10
Speaker 1: a local station owner, have this right to preempt it.
18:15
Speaker 1: All these local stations negotiate contracts with the networks that
18:21
Speaker 1: protect this right, and so this is just an exercise
18:24
Speaker 1: under those FCC rules, But maybe because the FCC chairman
18:28
Speaker 1: told them to do this directly, and they have an
18:30
Speaker 1: incentive to follow what the FCC chairman asked them to do.
18:35
Speaker 2: The stations that aren't taking the show tonight, are they
18:39
Speaker 2: ones that are looking to.
18:41
Speaker 1: Merge Next Star. Yes. Nextstar has recently announced a six
18:46
Speaker 1: billion dollar deal to acquire Tegna, another owner of TV stations,
18:53
Speaker 1: and it's really important that the FCC be supportive of
18:57
Speaker 1: that for two reasons. One, the FCC has to approve
19:01
Speaker 1: the transaction because it involves swapping licenses from Tegna to Nextstar.
19:06
Speaker 1: The FCC has to sign off on that. And even
19:09
Speaker 1: more importantly, there's an FCC rule right now that says
19:13
Speaker 1: no broadcast station can reach more than thirty nine percent
19:18
Speaker 1: of US households. This deal would let Nextstar reach something
19:23
Speaker 1: like seventy eighty percent of US households, So they need
19:26
Speaker 1: the SCC to scrap that rule first. And so there's
19:30
Speaker 1: a real incentive when the FCC chairman asks you to
19:34
Speaker 1: do something, or at least strongly encourages you to do
19:37
Speaker 1: something when you need all these steps for a major
19:41
Speaker 1: deal to happen, you have a strong incentive to go
19:44
Speaker 1: along with that. Sinclair doesn't have a pending deal in
19:47
Speaker 1: the same at least not of the same scale right now,
19:51
Speaker 1: but it also is a big supporter of this deregulation
19:54
Speaker 1: that the FCC is working on, the thirty nine percent
19:57
Speaker 1: cap and a couple other rules that the sc is
20:00
Speaker 1: looking at. Easy.
20:01
Speaker 2: Why do you think Disney brought Kimmel back.
20:04
Speaker 1: Well, there was you know, significant pressure, I think public
20:08
Speaker 1: pressure on the company, raising concerns about whether the company
20:13
Speaker 1: was folding to government pressure here. When it was initially announced,
20:18
Speaker 1: they were deliberately I think cautious about not saying how
20:21
Speaker 1: long the suspension of the programming would last. And so
20:26
Speaker 1: I think it's possible that this is a response to
20:29
Speaker 1: that public pressure to bring him back pretty quickly.
20:33
Speaker 2: There was a lot of negative reaction from conservatives about
20:37
Speaker 2: taking Kimmel off the YEIR and the threat to free speech.
20:41
Speaker 2: But is car still standing by his words.
20:44
Speaker 1: Yeah, I think Brendan Carr is saying, look, I wasn't
20:47
Speaker 1: threatening the companies on this. I I was pointing out
20:51
Speaker 1: how the law works. But yeah, it was sort of
20:54
Speaker 1: surprising to see Senator Ted Cruz in particular, haul out
21:00
Speaker 1: Brendan Carr for those comments. And that's when you saw
21:03
Speaker 1: Brendan Carr sort of pulling back a little bit and
21:07
Speaker 1: maybe not using quite the same tone, but still saying, look,
21:11
Speaker 1: here's how FCC processes work. I was just talking about that.
21:15
Speaker 1: It seems like a little bit of a softening in
21:18
Speaker 1: the tone at least from Brendon Carr after a pretty
21:21
Speaker 1: important Senator, Ted Cruz, who runs the Commerce Committee, the
21:25
Speaker 1: Senate Commerce Committee that oversees the SEC, spoke out pretty strongly,
21:30
Speaker 1: and so I think it's possible that his sort of pullback,
21:33
Speaker 1: at least a softening on his comments was in response
21:36
Speaker 1: to that always good.
21:37
Speaker 2: To talk to you, Matt, thanks so much. That's Matthew Schettenheim,
21:40
Speaker 2: Bloomberg Intelligence litigation and government analyst. Coming up next. Google
21:45
Speaker 2: is facing another breakup possibility in court. I'm June Grosso
21:50
Speaker 2: and this is Bloomberg. The Justice Department has opened its
21:55
Speaker 2: offensive in court to force a breakup of Google before
21:59
Speaker 2: the junior federal judge who's already ruled the search giant
22:03
Speaker 2: illegally monopolized advertising technology markets, Judge Leoni Brinkhema is hearing
22:09
Speaker 2: testimony over two weeks from website publishers, advertisers, tech experts,
22:15
Speaker 2: and Google's own employees about whether the company should be
22:19
Speaker 2: forced to divest a key piece of its business the
22:23
Speaker 2: Advertise against Change Addicts Joining me is Bloomberg Intelligence Senior
22:27
Speaker 2: litigation analyst Jenniferree. Jen, can you tell us about the
22:31
Speaker 2: judge's decision that Google illegally monopolized ad tech markets?
22:38
Speaker 5: Well, the viability decision has already been made that at
22:42
Speaker 5: least for some tools that Google has in what's called
22:45
Speaker 5: the ad tech stack, it has a monopoly position and
22:48
Speaker 5: it has undertaken illegal conduct to maintain those monopolies. You know,
22:53
Speaker 5: under the US law, it isn't illegal to have a monopoly,
22:56
Speaker 5: but once you have one, you can't do things that
22:58
Speaker 5: exclude competitions to stay in that monopoly position. There were
23:02
Speaker 5: three products that Google has that the DOJ alleged to
23:05
Speaker 5: be monopolized, and one of those was called a publisher
23:08
Speaker 5: ad server, one was called an ad exchange, and one
23:12
Speaker 5: worked a series of tools on the advertiser side. So
23:15
Speaker 5: if you think about you know, advertisers and digital advertisers
23:18
Speaker 5: and publishers coming together to place an advertisement on a website.
23:22
Speaker 5: The publishers have a tool, the advertisers have a tool,
23:24
Speaker 5: and then there's an exchange in between them to conduct
23:27
Speaker 5: an auction for an advertiser to actually bid on space
23:31
Speaker 5: and win that space and pay for that space and
23:33
Speaker 5: run their ad. The court decided on the advertiser side,
23:37
Speaker 5: Google didn't have a monopoly and that the Department of
23:40
Speaker 5: Justice didn't define the market in a proper way that
23:43
Speaker 5: sort of outlined a specific competitive product and failing to
23:49
Speaker 5: properly identify the exact market they're talking about this monopolized
23:52
Speaker 5: You kind of fail across the board. So that dropped out.
23:55
Speaker 5: But what stayed in the case and where the judge
23:58
Speaker 5: did find liability was with the public publisher ad server
24:01
Speaker 5: and the AD Exchange. So the publisher ad server is
24:04
Speaker 5: a tool that the publishers that have space on their
24:06
Speaker 5: websites that they're selling to an advertiser. It's where they
24:10
Speaker 5: can manage that inventory and where they can then access
24:14
Speaker 5: the ad Exchange, and the AD Exchange is where the
24:16
Speaker 5: auction would take place.
24:18
Speaker 2: This gets very technical. Can you tell us the main
24:22
Speaker 2: thing that the judge found Google did that was anti competitive?
24:26
Speaker 5: You know, the judge found a number of things, but
24:28
Speaker 5: the main conduct of Google that the judge said was
24:32
Speaker 5: anti competitive and harm the competitive process was tying. In antitrust,
24:38
Speaker 5: tying is when a company has a product that's a
24:40
Speaker 5: must have product or where they have market power and
24:43
Speaker 5: consumers want to use that product, but that seller of
24:47
Speaker 5: that product has a second product that's not as desirable,
24:50
Speaker 5: and they leverage the must have products to force customers
24:53
Speaker 5: to buy the second product. So in this case, there
24:57
Speaker 5: was this very valuable inventory that Google had in its
25:00
Speaker 5: own ad exchange. This inventory was really valuable because advertisers
25:04
Speaker 5: were on that exchange through the ad products that Google has,
25:08
Speaker 5: because it also places ads on Google Search, and as
25:11
Speaker 5: we know, Google Search is a monopoly product. It's been
25:14
Speaker 5: seen that by a court most searches are done by Google,
25:17
Speaker 5: and so advertisers want to be able to place ads
25:21
Speaker 5: when a search is conducted and on that search page.
25:23
Speaker 5: So Google has this great inventory of advertiser demand, and
25:28
Speaker 5: that advertiser demand feeds into its ad exchange. And what
25:31
Speaker 5: Google said is, hey, publishers, if you want access to
25:34
Speaker 5: that demand, you have to use our publisher ad server.
25:37
Speaker 5: You can't use any other rival publisher ad server. And
25:41
Speaker 5: in that way Google tide it's AD exchange to its
25:43
Speaker 5: publisher ad server and so what does that do to you?
25:46
Speaker 5: And it blocks all the other competitors out for these products,
25:49
Speaker 5: and it keeps this entire transaction within Google's ads tech stack.
25:53
Speaker 5: And Google's now extracting fees all along the way because
25:56
Speaker 5: at each step of the process there's some feed that's
25:58
Speaker 5: taken by the host of these ad tech tools. When
26:01
Speaker 5: in an auction is one and an added paid for,
26:04
Speaker 5: Google's taking fees for that, and so it manipulated this
26:07
Speaker 5: process by controlling all of these pieces. And that's essentially
26:10
Speaker 5: what the court found. So the primary finding was this
26:13
Speaker 5: tying of the publisher ad server of Google. It's called DSP,
26:16
Speaker 5: that's what Google calls it to its AD exchange, which
26:19
Speaker 5: is called add X.
26:20
Speaker 2: This trial is going to determine the remedy and the
26:24
Speaker 2: Justice Department is asking that Google be required to sell
26:28
Speaker 2: off some of its tech.
26:30
Speaker 5: Yes, that's right. So the judge is looking about what
26:33
Speaker 5: do we do about this monopolistic conduct and what the
26:36
Speaker 5: DOJ has proposed its own set of remedies, and Google
26:39
Speaker 5: has proposed its set of remedies, and the judge is
26:41
Speaker 5: now going to have to decide, and the DOJ basically says, look,
26:44
Speaker 5: the only way to fix this is to force Google
26:47
Speaker 5: to sell the ad exchange that's the add X product
26:50
Speaker 5: to a buyer that's subject to the DOJ approval. Because
26:53
Speaker 5: this is so technical and there's so many things Google
26:56
Speaker 5: could do to manipulate the process. If all we do
26:59
Speaker 5: is impose theavioral remedies and say Google stop doing what's illegal,
27:03
Speaker 5: there's so many other sneaky ways Google could come in there,
27:06
Speaker 5: manipulate the process and pervert the process to benefit itself.
27:09
Speaker 5: And the only way to really prevent that, and a
27:12
Speaker 5: really easy and streamlined and kind of clear concise way
27:15
Speaker 5: of doing that is to force Google to sell the
27:17
Speaker 5: ad exchange. And maybe also by the way DSP it's
27:21
Speaker 5: Publisher ad Server. That's kind of a contingent remedy. The
27:25
Speaker 5: Dot's proposing sort of a strange phased divestiture of that
27:29
Speaker 5: product where it first basically Google has to just make
27:33
Speaker 5: it a little bit more interoperable, provide access to APIs
27:36
Speaker 5: so publishers could migrate their products, their inventory off of
27:40
Speaker 5: that publisher to another one, and make some of this
27:43
Speaker 5: code available to be run by a neutral organization sort
27:46
Speaker 5: of opening it up a little bit, but not fully
27:48
Speaker 5: selling it. But if that all doesn't work to fix competition,
27:51
Speaker 5: then fully divest it. So it's kind of like they're saying,
27:54
Speaker 5: divest the ad exchange and sort of open up the
27:57
Speaker 5: publisher ad server and maybe divest added need it.
28:01
Speaker 2: I mean what would that do to Google? How much
28:03
Speaker 2: of a loss would that be for Google?
28:06
Speaker 5: I mean billions of dollars of ad revenue. Advertising is
28:10
Speaker 5: the main money making products of a lot of websites.
28:13
Speaker 5: Search is free, and YouTube is free, and Google Maps
28:16
Speaker 5: is free, and a lot of these products are free
28:18
Speaker 5: because they make their money via this ad revenue, and
28:21
Speaker 5: they make a lot of money not just placing ads
28:23
Speaker 5: on a search page when somebody does search, but also
28:26
Speaker 5: via this ad tech stack and via the placement of
28:29
Speaker 5: that between other digital publishers and advertisers.
28:32
Speaker 2: And what is Google proposing instead?
28:35
Speaker 5: So what Google's proposing obviously is to not have to
28:38
Speaker 5: sell anything and just what's called a behavioral remedy. We're
28:42
Speaker 5: going to change the way we conduct our business. So
28:45
Speaker 5: they're saying that they would remove that tie, you know,
28:48
Speaker 5: they would allow publishers to have access of this great
28:52
Speaker 5: and unique demand that comes from the ad network products
28:55
Speaker 5: that fits in the AD exchange to make bids, will
28:59
Speaker 5: let you have access that at least demand for open
29:01
Speaker 5: web display ads that's different from an AD that's a
29:04
Speaker 5: search AD will allow you to use other publisher ad
29:08
Speaker 5: networks and still have access to that demand. So we'll
29:12
Speaker 5: just remove that tie. And also they had had imposed
29:15
Speaker 5: some pricing rules on publishers, and they had forced them
29:18
Speaker 5: to set price floors that were unified. They'd say, well,
29:22
Speaker 5: we'll allow publishers to do what they want to. We'll
29:24
Speaker 5: open up some of our rules. If they want to
29:26
Speaker 5: set different price floors for different bidders rather than a
29:29
Speaker 5: unified price floor for everyone, we'll let them do that.
29:32
Speaker 5: And they also had some technical things they'd implemented that
29:36
Speaker 5: advantaged Google's own tools, gave them special priorities, or gave
29:40
Speaker 5: them the ability to sort of see bids and adjust
29:42
Speaker 5: and match bids so that they could win. They say,
29:45
Speaker 5: you know, we'll not use that stuff. We've already fased
29:48
Speaker 5: some of that out. Google says, and we'll phase all
29:50
Speaker 5: the rest of it out. We'll get rid of all
29:52
Speaker 5: these technical things that we've done in this process that
29:55
Speaker 5: advantage us and advantage our tools. So we'll make the
29:57
Speaker 5: whole process more neutral. Generally, will make it a lot easier.
30:01
Speaker 5: All of these products, will make them interoperable, will make
30:04
Speaker 5: it easier for publishers to use Google tools on the
30:07
Speaker 5: ad network side in conjunction with other ad tet providers,
30:11
Speaker 5: some other ad exchange of another company, or some other
30:14
Speaker 5: publisher ad server from some other company. So publishers now
30:18
Speaker 5: can sort of mix and match rather than using the
30:20
Speaker 5: whole Google stack.
30:21
Speaker 2: During a May hearing, did the judge hint that she
30:26
Speaker 2: was considering seriously the government's argument to force a sale.
30:31
Speaker 5: She has to explore all of this, you know, she
30:34
Speaker 5: has to dig into all of this, and she did
30:36
Speaker 5: suggest in a hearing that you know, she's considering that.
30:39
Speaker 5: But bear in mind, in the Google Search case, which
30:42
Speaker 5: is much farther along than this, where we already have
30:45
Speaker 5: the remedies that have been imposed on Google for now
30:47
Speaker 5: pending appeal, that judge also very seriously appeared to consider
30:52
Speaker 5: the prospect of forcing Google to divest Chrome, but didn't
30:56
Speaker 5: ultimately impose that remedy. You know, the judge has to
30:59
Speaker 5: explore all of the possibilities in order to come up
31:02
Speaker 5: with those possibilities that she thinks are going to be
31:04
Speaker 5: the best in this case to basically stop the anti
31:07
Speaker 5: competitive conduct and restore healthy competition in the market.
31:12
Speaker 2: What kind of testimony will there be a trial. She's
31:15
Speaker 2: heard a lot already from the first trial.
31:17
Speaker 5: Right now, A lot of this is going to be
31:19
Speaker 5: very technical. So I think what's already started are some
31:22
Speaker 5: of the entities that have been harmed by Google's conducts.
31:25
Speaker 5: For instance, rival publisher ADS or Verse that can't get
31:29
Speaker 5: business because they don't have access to this desirable demand
31:32
Speaker 5: on ADEK talking about how it's hurt them and supporting
31:35
Speaker 5: the idea that the only thing that would help would
31:38
Speaker 5: be divestitures. So right now, the DOJ putting on witnesses
31:41
Speaker 5: talking about how they've been hurt by the conduct, why
31:44
Speaker 5: they think just behavioral remedies won't work, and why they
31:48
Speaker 5: think divestitures will be needed. Google will very likely put
31:51
Speaker 5: on some very technical people that will talk about how
31:54
Speaker 5: difficult and complicated it would be to force the structural
31:58
Speaker 5: change to force a divestiture, and the fact that it
32:01
Speaker 5: could have all sorts of bad unanticipated consequences.
32:05
Speaker 2: You mentioned Judge Meta backed off on breaking up Google.
32:10
Speaker 2: It's a difficult decision for a judge if she did that,
32:15
Speaker 2: would it be presidential?
32:17
Speaker 5: You know, it really would June because first, there isn't
32:20
Speaker 5: this precedent, right because the Department of Justice and Federal
32:23
Speaker 5: Trade Commission hasn't really brought a lot of monopoly lawsuits
32:28
Speaker 5: in the last thirty years or so forty years. The
32:31
Speaker 5: last really big one was Microsoft. That was by the
32:33
Speaker 5: Department of Justice, and the Department did initially seek a
32:37
Speaker 5: divestiture and they weren't able to win that in court
32:39
Speaker 5: ultimately after there was an appeal, And it would be
32:43
Speaker 5: presidential because where we've seen divestitures has really been in
32:47
Speaker 5: a different context. It's been where a merger took place
32:51
Speaker 5: that in and of itself was illegal, that it was
32:54
Speaker 5: illegal for company A to buy Company B, and now
32:57
Speaker 5: they have to divest company B. It's very different situation
33:00
Speaker 5: than when the initial in this case, Google actually bought
33:04
Speaker 5: the publisher ad server. It was a company called double Click,
33:08
Speaker 5: and they bought the ad exchange. But the judge said
33:10
Speaker 5: that acquisition was not anti competitive. So it's not a
33:14
Speaker 5: situation where you have an anti competitive acquisition. So to
33:17
Speaker 5: require a divestiture for bad conduct would be fairly presidential today.
33:23
Speaker 5: And this judge has a little more leeway than Judge
33:25
Speaker 5: Meta had in the Google Search case, because in that case,
33:28
Speaker 5: Judge Meta was really bound by the precedent from the
33:31
Speaker 5: Microsoft decision, which was an appellate court within his circuit.
33:35
Speaker 5: This case is not in that circuit. It's in the
33:37
Speaker 5: Eastern District of Virginia, and those cases can be persuasive
33:40
Speaker 5: for this judge but not necessarily binding, so she has
33:43
Speaker 5: a little more leeway. I think Judge Meta felt very
33:46
Speaker 5: much constricted by the language in Microsoft which cautioned against
33:50
Speaker 5: using a divestiture remedy in the kind of case that
33:53
Speaker 5: Judge Meta was overseeing where it wasn't extraordinarily clear that
33:58
Speaker 5: Google's monopoly and search wouldn't have occurred if Google hadn't
34:03
Speaker 5: engaged in the conduct that was alleged in that case,
34:05
Speaker 5: which was exclusionary dealing. You have to have a strong
34:08
Speaker 5: causation standard, according to Microsoft case, in order to use
34:12
Speaker 5: divestiture as a remedy, and in that case, Judgment it
34:15
Speaker 5: didn't feel he had that strong causation standard, and because
34:18
Speaker 5: of the Microsoft president, it felt that he couldn't impose
34:20
Speaker 5: the divestiture in that case. This judge isn't necessarily bound
34:24
Speaker 5: by that.
34:24
Speaker 2: Is it just me? Or are there a lot of
34:27
Speaker 2: trials antitrust trials lately? It seems like, you know, there's
34:31
Speaker 2: one after the other.
34:33
Speaker 5: No, there are so many. And you know, it's funny
34:35
Speaker 5: because a lot of people sort of credit a Biden
34:37
Speaker 5: administration for all of the monopoly cases government ones, enforcement
34:41
Speaker 5: ones that are out there now. But these investigations and
34:44
Speaker 5: a couple of the cases actually started during President Trump's
34:47
Speaker 5: first term. So there was a lawsuit STC versus Meta
34:51
Speaker 5: over its acquisitions of Facebook and Instagram. We're still waiting
34:55
Speaker 5: for a liability decision on that case, but that was
34:57
Speaker 5: brought by the Trump administration and then basically acuted during
35:00
Speaker 5: the Biden administration. And you also have this Google Search case,
35:04
Speaker 5: and you have a case against Amazon, and you have
35:07
Speaker 5: a case by the USDJ by Apple. But one of
35:10
Speaker 5: the other things it's done is all of these actions
35:13
Speaker 5: by the government have empowered private entities as well, So
35:17
Speaker 5: you have follow on class actions that are the consumers
35:21
Speaker 5: or in this case, let's say, the publishers and the
35:22
Speaker 5: Google ad Tech case, that have been harmed by the conduct.
35:25
Speaker 5: So when you get a liability decision that it says
35:28
Speaker 5: publishers have been harmed or didn't get let's say the
35:30
Speaker 5: best prices. Well, they're going to turn around and file
35:32
Speaker 5: a class action where they're probably looking for a monetary
35:35
Speaker 5: relief more so than injunctive release by the government. But
35:38
Speaker 5: you know, those then can go on for years and
35:41
Speaker 5: our additional burden on these companies, and you have that
35:43
Speaker 5: in almost every case with Google, with ad Tech, with Google,
35:46
Speaker 5: with Apple, with respect to the DJ's allegations against Apple,
35:50
Speaker 5: against Amazon, with respect to the SEC's allegations against Amazon,
35:54
Speaker 5: and then also with respect to Google's play Store and
35:57
Speaker 5: Apple's App Store by Epic Games not liking the fact
36:01
Speaker 5: that there are closed ecosystems for downloading apps on either
36:04
Speaker 5: Android or iOS. And those cases have been ongoing for
36:07
Speaker 5: a long time as well.
36:08
Speaker 2: And of course, whatever happens, Google will appeal. Thanks so much, Jen.
36:13
Speaker 2: That's Bloomberg Intelligence Senior Litigation Analyst, Jenniferree, And that's it
36:18
Speaker 2: for this edition of The Bloomberg Law Show. Remember you
36:21
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36:23
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Speaker 2: weeknight at ten pm Wall Street Time. I'm June Grosso
36:39
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