Infederation Ltd v Google Inc & Ors [2013] EWHC 2295 (Ch)

[2013] EWHC 2295 (Ch)

Case No HC12A02489

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 26/07/2013

Before

MR JUSTICE ROTH

Between

INFEDERATION LTDClaimant

(1) GOOGLE INCDefendants

(2) GOOGLE IRELAND LTDDefendant

(3) GOOGLE UK LTDDefendant

Nicholas Green QC and Maya Lester (instructed by Sidley Austin LLP) for Claimant

Jon Turner QC and Robert O’Donoghue (instructed by Bristows LLP) for Defendants

Hearing Hearing date: 28 June 2013

Judgment

Mr Justice Roth :

Introduction

[1]This action is a claim for damages for alleged breach of EU and UK competition law. At the first CMC, the defendants sought a stay of the proceedings pending further progress of the investigation into at least some of the same matters by the European Commission, whereas the claimant sought an order for standard disclosure. I informed the parties at the conclusion of the hearing that I considered that this case is more appropriately dealt with by way of close case management and targeted disclosure by reference to particular issues rather than general standard disclosure, and that I would not order a stay of such disclosure by the defendants save as regards one issue. This judgment sets out my reasons for that decision.

Background

[2]The claimant is a start-up internet company which trades under the name “Foundem”. I shall refer to it by that name. The first defendant is the operator of the very well-known search engine “Google” and the second and third defendants are, respectively, its Irish and UK subsidiaries. It is unnecessary for present purposes to distinguish between the defendants and I shall refer to them together as “Google”.

[3]Foundem operates a so-called “vertical” search engine which allows users to find and compare prices and other characteristics of a product or service from information on third party websites. Typically, this is used with reference to a category of product or service, eg flights, insurance, properties for sale, consumer products, and jobs. Vertical search engines generally earn revenue by charging merchants when consumers click on, or click on and purchase, one of the items listed in the search results. Foundem launched its website in January 2006. Foundem is an English company and the majority of the visitors to its website is based in the UK.

[4]The Google search engine found at www.google.com is the most widely used search engine in the world. It is generally described as a “horizontal” search engine. Although Google by its Defence contends that the use of the terms “vertical” and “horizontal” as applied to search engines are not precise, they are widely used and provide a convenient summary for present purposes. In general, a horizontal search engine provides a list of web pages that it considers to be most relevant to a user’s search terms, by examining a database of web pages that it has retrieved and analysed from the world-wide web. For this purpose Google, like competitor websites, uses its own search algorithms.

[5]It is common ground that Google derives almost all of its revenue from online search advertising. It earns revenue when a user clicks on a search advertisement (sponsored link) that appears at the top of or beside search results. Google sells online search advertising space by means of its “AdWords” service that allows advertisers to associate one or several keywords with their advertisements. The price paid by an advertiser depends on a number of factors, including the keywords next to which the advertiser would like its advertisement to appear, the “click through rate”, and an automated “Quality Score” that Google assigns to the pages to which the advertisement will direct a user.

[6]It is also common ground that whether a website appears among the first few results of a user’s search or lower down in the list makes a very significant difference to whether a user clicks on that website: the lower down in the list of results that the link to a webpage is ranked, the less likely is a user to click on that link. Moreover, a website appearing on the later pages of results will be largely ineffective.

[7]Foundem contends that, like most internet-based businesses or vertical search services, it is dependent “to a significant degree” on users being directed to its website by accessing the hyperlinks that appear on the search results pages of a horizontal search engine like Google’s.

[8]Since around 2002, Google has itself provided vertical search services which compare the characteristics of particular products and services, including “Google Product Search”.

The claim

[9]By this claim, Foundem contends that Google is in a dominant position in:(a) the market for the provision of internet search services for users of the world-wide web in the United Kingdom; and/or

(b) the market for the provision of online search advertising services for advertisers on the world-wide web in the UK.

[10]Foundem contends that Google has abused its dominant position contrary to Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) and section 18 of the Competition Act 1998 in a number of distinct respects:(i) between June 2006 and December 2009, lowering the position of the Foundem website in the list of Google’s search results by the application of a particular algorithmic criterion, which discriminated against Foundem as compared to Google’s own vertical search engine and Foundem’s competitors;

(ii) between August 2006 and September 2007, lowering the “Quality Scores” accorded to Foundem’s website pages, thereby increasing the cost for Foundem of advertising its website via Google’s AdWords service to a level far above that applicable to Foundem’s competitors;

(iii) failing to deal with Foundem’s complaints about these various matters according to a fair and transparent procedure, or to publish transparent rationale and/or criteria to determine when such unfavourable treatment would be applied and, conversely, removed by the process referred to as “whitelisting”;

(iv) since December 2007, using its “Universal Search” mechanism which determines the placement of Google’s own services, so as to position its own price comparison search product more favourably than Foundem’s and other companies’ vertical search services; and

(v) since about April 2011, applying its “Panda” update to its algorithms in the United Kingdom thereby significantly lowering the position of Foundem and other vertical search services in Google’s search rankings.

[11]Foundem’s claim in this action is for a declaration and damages. Although the last two heads of alleged abuse are ongoing, Foundem does not seek an injunction.

The Commission’s investigation

[12]In November 2009, Foundem lodged a complaint with the European Commission that Google had abused a dominant position contrary to Article 102 TFEU, which complaint has subsequently been amended. The complaint apparently covers all the matters contained in Foundem’s claim in the present action. I was told that some 16 other enterprises had also made complaints against Google to the Commission along the same lines, although there is no doubt some variation as between the substance of the different complaints. Foundem states in para 9 of its Particulars of Claim that its case and evidence “have remained central to the European Commission’s investigation”.

[13]On 30 November 2010, the Commission announced that it had opened an antitrust investigation into allegations that Google had infringed Article 102. The Commission’s press release stated:

“The Commission will investigate whether Google has abused a dominant market position in online search by allegedly lowering the ranking of unpaid search results of competing services which are specialised in providing users with specific online content such as price comparisons (so-called vertical search services) and by according preferential placement to the results of its own vertical search services in order to shut out competing services. The Commission will also look into allegations that Google lowered the 'Quality Score' for sponsored links of competing vertical search services. The Quality Score is one of the factors that determine the price paid to Google by advertisers.”

[14]On 21 May 2012, the Commission stated that it had reached the preliminary conclusion that one of Google’s business practices that may be considered to be an abuse of dominance is that Google may give preferential treatment to its own vertical search services compared with competing vertical search services. The Commission gave Google a period of time to submit written proposals to address the Commission’s concern.

[15]Google proceeded to offer certain commitments to the Commission, and on 25 April 2013 the Commission issued a memorandum stating that it was seeking feedback on those proposed commitments. The memorandum set out the Commission’s “preliminary view” that Google is dominant in the EEA both in the market for website search and in the market for search advertising. The memorandum noted that the Commission had outlined four competition concerns about Google’s business practices in Europe. Only one of those four concerns relates to the subject-matter of this action. This was the way Google displays links to its own specialised search services which, the Commission stated, may constitute more favourable treatment of Google’s own services than potentially competing specialised search services. In other words, this relates to Foundem’s complaint (iv) about Google’s “Universal Search”.

[16]The memorandum took the form of questions and answers, and included the following:

“Is the Commission not concerned with the demotion of certain services in Google search results, in particular as a result of the way Google’s algorithm works? The Commission has concerns with the promotion of Google's own specialised search services within general web search results. The Commission is concerned that this practice unduly diverts traffic away from Google's competitors in specialised search towards Google's own specialised search services, in particular because competing services may be less visible to users as a result. It appears that the implementation of certain algorithms by Google may lead to both downward and upward movements in the ranking of specialised search services in Google's web search services. The Commission's objective is to make sure that competition in the entire market is preserved so that incentives to innovate remain and users can benefit from a real choice between competing alternatives.”

[17]I accept the submission of Mr Turner QC, appearing for Google, that this discussion appears to relate to the first and fifth complaints made by Foundem in this action, and makes clear that the Commission does not have particular concerns that those matters in themselves constitute an abuse.

[18]The deadline for comments to the Commission on Google’s proposed commitments expired on 27 June 2013, the day before the hearing of this matter. That day, Vice-President Almunia, the Commissioner for Competition, noted that in the light of the comments received Google has to decide whether it will improve on the solutions it presented and, depending on Google’s response, the Commission has to determine whether to reach an agreement (i.e. to accept commitments under Article 9 of Regulation 1/2003). He said that on the assumption that it is possible to reach a deal, it would probably be reached by the end of the year. However, without an agreement, the process would probably extend into 2014.

The position under EU law

[19]This is accordingly a “stand-alone” action, not a “follow-on” action that proceeds on the basis of a decision by the Commission finding an infringement. However, there is clearly the possibility of a Commission decision being issued in the future. In that regard, Article 16(1) of Regulation 1/2003 provides:

“When national courts rule on agreements, decisions or practices under Article [101] or Article [102] of the Treaty which are already the subject of a Commission decision, they cannot take decisions running counter to the decision adopted by the Commission. They must also avoid giving decisions which would conflict with a decision contemplated by the Commission in proceedings it has initiated. To that effect, the national court may assess whether it is necessary to stay its proceedings. …”

[20]The Commission not only has power, under Article 7 of Regulation 1/2003, to adopt a decision finding an infringement. The Commission may in the alternative adopt a decision rejecting the complaint under Article 7 of Regulation 773/2004, and/or issue a finding of inapplicability under Article 10, which provides:

“Where the Community public interest relating to the application of Articles [101] and [102] of the Treaty so requires, the Commission, acting on its own initiative, may by decision find that Article [101] of the Treaty is not applicable to an agreement, a decision by an association of undertakings or a concerted practice, either because the conditions of Article [101(1)] of the Treaty are not fulfilled, or because the conditions of Article [101(3)] of the Treaty are satisfied. The Commission may likewise make such a finding with reference to Article [102] of the Treaty.”

[21]Further, if a Commission decision is under appeal before the EU courts, the power of the national court is governed by the ruling of the European Court of Justice (“ECJ”) in

Case C-344/98

Masterfoods Ltd v HB Icecream Ltd

[2000] ECR I-11369

where the ECJ held (at para 57):

“When the outcome of the dispute before the national court depends on the validity of the Commission decision, it follows from the obligation of sincere cooperation that the national court should, in order to avoid reaching a decision that runs counter to that of the Commission, stay its proceedings pending final judgment in the action for annulment by the Community Courts, unless it considers that, in the circumstances of the case, a reference to the Court of Justice for a preliminary ruling on the validity of the Commission decision is warranted.”

[22]By contrast, if the Commission closes its investigation on the basis of commitments accepted from the undertaking pursuant to Article 9 of Regulation 1/2003, although those commitments are binding on the undertaking that does not constitute a concluded decision that there has been an infringement and does not bind the courts of the Member States which therefore remain free to make appropriate findings and decide upon the case: see Recital (13) to Regulation 1/2003.

Submissions

[23]For Google, Mr Jon Turner QC, appearing with Mr O’Donoghue, submitted that on the basis of its public announcements the Commission’s position should be clarified in the very near future. The memorandum of April 2013, as quoted above, suggests that the Commission does not consider that any of the matters other than the Universal Search complaint raised by Foundem could possibly constitute an infringement of Article 102, and it therefore might issue a decision to that effect covering those other allegations. The disclosure report submitted by Google’s solicitors estimated the costs of its giving standard disclosure at over £2 million. In the light of that, it would be disproportionate to embark on the very substantial costs of standard disclosure. Since the court would be bound by a Commission decision (subject to any appeal), those costs could be entirely wasted. Where the delay involved was relatively short, the approach of staying further steps in the proceedings therefore accorded with the overriding objective.

[24]For Foundem, Mr Nicholas Green QC, appearing with Ms Lester, submitted that it was most unlikely that the Commission would take a formal, negative decision declaring that Article 102 was inapplicable. He argued that it was wrong to read too much into the somewhat unclear response to the question set out in the memorandum. In any event, if the Commission did not wish to take up the other complaints, it was much more likely that it would reject them as not being a matter of Community priority and close the file on that basis, which would not prejudice the position of complainants before the national courts. There was no guarantee that the Commission will determine the position by the end of the year and it would be wrong to delay progress in the action on the basis of speculation as to what the Commission may or may not do.

Discussion

[25]There have now been a number of cases before the English courts considering how far it is appropriate to allow the action to progress when there are proceedings concerning the same issue before the European institutions: MTV Europe v BMG Records (UK) Ltd

[1997] 1 CMLR 867

; Morgan Stanley Dean Witter Bank Ltd v Visa International Services Association

[2001] All ER (D) 18

(May); Both MTV Europe and Morgan Stanley Dean Witter Bank were decided at a time when the Commission had exclusive jurisdiction to determine the applicability of what is now Art 101(3) TFEU, i.e. prior to the regime introduced by Reg 1/2003 which also enabled the Commission to conclude cases by formal commitment decisions. National Grid Electricity Transmission Plc v ABB Ltd

[2009] EWHC 1326 (Ch)

; Secretary of State for Health v Servier Laboratories Ltd

[2012] EWHC 2761 (Ch)

; and WM Morrison Supermarkets plc v MasterCard Inc

[2013] EWHC 1071 (Comm)

. As a result, I think that it is possible to summarise the principles which should govern the court’s approach: i) There is no objection as a matter of EU law for the national proceedings to continue to a point short of an actual decision or judgment: MTV Records, per Bingham MR at [29]. ii) It is therefore in the discretion of the court to determine what steps short of trial should be taken in the proceedings: Morgan Stanley,per Toulson J. iii) That discretion is to be exercised having regard to the overriding objective and the requirement to avoid a decision that is counter to that of the Commission or the EU courts: NationalGrid,per Sir Andrew Morritt C at [32]. iv) It will normally be appropriate to require the defendants to plead a defence: National Grid and Morrisons. v) Whether further steps should be taken thereafter will depend on all the circumstances, including: a) whether the proceedings are a follow-on action subsequent to a Commission decision or an action brought in parallel to a Commission investigation; b) whether it is possible to reach a view from the status of the EU proceedings as to the likelihood of the English action progressing to trial (e.g. if the Commission has reached a decision finding an infringement and the appeals are only as to the duration of the infringement or as regards the liability of the parent company for the conduct of its subsidiaries); c) what stage the proceedings at EU level have reached and thus how long the delay until a trial of the action in England is likely to be; d) how much time has elapsed since the occurrence or commencement of the events covered by the allegations, and thus how far such further delay may affect the availability and credibility of evidence; e) whether it will be unduly burdensome to the defendants to take such steps at the same time as they are contesting the EU proceedings; f) whether it is practicable to control the burden and costs of those steps by effective case management.

[26]Thus in National Grid, where the Commission had issued a decision finding infringement that was under appeal to the then Court of First Instance, but the claim issued in November 2008 concerned a cartel stretching back to 1988, the Chancellor refused a general stay and ordered the action to proceed to close of pleadings, and that the parties should meet to consider the scope of disclosure which could be reconsidered at a CMC later in the year. Subsequently, disclosure in the first instance of pre-existing documents supplied to the Commission was agreed between the parties, and further issues of disclosure were dealt with by the court: see National Grid

[2011] EWHC 1717 (Ch)

. A similar approach was adopted in Morrisons, where the relevant defendants’ appeals to the General Court had been unsuccessful but there were further appeals pending to the ECJ. In Servier, the Commission had issued a Statement of Objections (“SO”) and the court ordered a stay until shortly after the oral hearing before the Commission on the basis that it would not be fair to require Servier to fight the English proceedings at the same time as its team of lawyers will be heavily engaged in responding within a tight timetable to the SO.

[27]In the present case, Google has not sought a stay before pleading its defence. The issue of a stay is raised after close of pleadings at the stage of disclosure.

[28]I bear in mind that the allegations do not go back as far in time as in National Grid or Morrisons. That is a factor in favour of a stay.

[29]I also recognise that the stay now sought by Google is for only a short period and that there is likely to be, at the least, clarification of the Commission’s position by the end of the year.

[30]However, this is not a follow-on action. If the Commission announces in December 2013 that it is accepting commitments, that will be no bar to this action going forward; indeed, to the extent that the commitments cover one (or more) of the allegations in the action, Foundem may feel reinforced in its view that that (or those) allegation(s) is (or are) well-founded. On the other hand, if the Commission does not reach agreement with Google but issues a SO, Google, in reliance on Servier, would have the grounds to seek a further stay for at least another six months while it responded to the SO. Postponing disclosure thereafter until an eventual Commission decision, and potential appeals, would cause several years’ delay. At the very least, Foundem’s complaint (iv) concerning “Universal Search” appears likely to be affected by these considerations.

[31]As for the prospect of a negative decision (ie of inapplicability) by the Commission, which was urged by Mr Turner, it is relevant to note that only rarely does the Commission issue a decision of that kind: see recital (14) to Regulation 1/2003 which states:

“In exceptional cases where the public interest of the Community so requires, it may also be expedient for the Commission to adopt a decision of a declaratory nature finding that the prohibition in Article [101] or Article [102] of the Treaty does not apply, with a view to clarifying the law and ensuring its consistent application throughout the Community, in particular with regard to new types of agreements or practices that have not been settled in the existing case-law and administrative practice.”

[32]On that basis, it seems most unlikely that the Commission would take a negative decision of that kind regarding Foundem’s complaints (i) - (iii) above. While it would be wrong to speculate on what course of action the Commission may adopt, I think there is at least a possibility that it may take a negative decision regarding complaint (v) concerning the “Panda” algorithm that allegedly adversely affects vertical search services. I was informed that “Panda” has been rolled out across Europe and it represents the current mechanism employed by Google: it is therefore of continuing relevance for the future on an EU-wide basis.

[33]Effective case management by the court is important in all major litigation. However, intensive case management is particularly appropriate in competition litigation where the range and complexity of issues can notoriously give rise to very substantial costs. Moreover, in an abuse of dominance claim the allegedly dominant defendant is usually significantly larger than the claimant, creating a real issue of inequality of arms as regards their respective financial positions to fund the litigation: see CPR rule 1.1(2)(c)(iv).

[34]Although Google has denied that it is dominant in either of the respects alleged by Foundem, it seems to me that in this case the issue of abuse is likely to be the real focus of the dispute. It is notable that the Commission in its April 2013 memorandum expresses its opinion, albeit as a “preliminary view”, that Google is dominant in both these markets, noting that Google has been holding market shares well above 90% in most European countries for several years. Therefore I invited the parties to agree that the case should proceed to trial on the assumption that Google is dominant as alleged. If the court then finds for Google on the allegations of abuse, that would be an end of the case. If the court found against Google, then of course Google could proceed to fight the case on dominance at a further trial. But I consider that this approach has every prospect of saving the parties substantial time and costs and of reducing the court time required. Cp. Purple Parking Ltd v Heathrow Airport Ltd

[2011] EWHC 987 (Ch)

, [2011] UKCLR 492, where an analogous approach was adopted and following a judgment finding abuse, the defendant company that operated Heathrow Airport did not proceed to require a further trial on its pleaded contention that it was not in a dominant position but accepted that a final order should be made against it.

[35]I have no doubt that the court could direct a trial limited to certain issues in such a way irrespective of the views of the parties, but in the present case both sides agreed that this was a sensible approach. It follows that there need be no disclosure regarding the potentially wide-ranging issues that go to dominance and the definition of the relevant upstream markets. It means also that the parties need not incur the expense of expert evidence directed to those issues at this stage.

[36]The question of whether the trial should also exclude issues of quantum can be held over since Foundem agreed to provide disclosure relating to the damages they have claimed.

[37]On the question of abuse, I do not think it is appropriate to order blanket, standard disclosure. I approach the matter by reference to the distinct allegations. Mr Turner realistically accepted that in the light of the Commission’s pronouncements, as discussed above, the argument in favour of a stay of issue (iv) concerning “Universal Search” is less powerful. In my judgment, the proportionate approach is for disclosure to be targeted at allegations (i) - (iv) of Foundem’s claim since, as I have explained, I consider that the Commission is unlikely to adopt a decision determining allegations (i) – (iii). I will not require disclosure at this stage on allegation (v). That is principally because of the uncertainty over the Commission’s position: see para 32 above; but I also bear in mind that while Google asserted that much of the disclosure required of it involved commercially sensitive material, disclosure is likely to be particular sensitivity where it represents Google’s current algorithms on which its website mechanism operates. The position can be reviewed once the Commission further clarifies its position.

[38]Moreover, as mentioned above, all the allegations made in these proceedings were apparently contained in Foundem’s complaint to the Commission. I am told that Google disclosed over 35,000 documents to the Commission as part of its investigation. In the first instance, therefore, I direct that disclosure by Google should be limited, save for some narrow specified categories, to the material documents within the disclosure already made to the Commission. Although Mr Green protested that such disclosure might not be adequate, I consider that restricting it to the material which Google’s advisers have already gathered together should serve to contain the costs and will give Foundem’s advisers significant material on which to work. If after considering this material Foundem wishes to obtain further disclosure, then if that is not agreed by Google it will be open to Foundem to apply to the court making its case for the scope of disclosure to be extended.

[39]The disclosure to Foundem will be restricted to a confidentiality ring. There was discussion at the hearing as to the scope of this ring but it is unnecessary to elaborate on that in this judgment.