Competing through Keyword Advertising
| DOI | 10.1093/joclec/nhaa011 |
| Date | 11 May 2020 |
| Pages | 306-348 |
| Year | 2020 |
| Published By | Oxford University Press |
Journal of Competition Law & Economics, 16(3), 306–348
doi: 10.1093/joclec/nhaa011
Advance Access publication 11 May 2020
COMPETING THROUGH KEYWORD
ADVERTISING
Giuseppe Colangelo∗
ABSTRACT
The impressive growth of online shopping has had a signicant impact on
rms’ strategies and customer behavior, bringing to the fore new forms of
trademark exploitation that may affect competition. A prominent role is played
by keyword advertising services provided by internet search engines. Keyword
advertising systems have been the subject of several litigations with regard
to the legality of the use of keywords which correspond to trademarks, since
trademark holders complain that the essential functions of trademarks might
be detrimentally affected. However, given the importance of search engines
for attracting customers to the websites of retailers and competitors, online
advertising restrictions also raise anticompetitive concerns on both sides of the
Atlantic. Indeed, the E-commerce Sector Inquiry carried out by the European
Commission reported that some retailers are limited in their ability to use or bid
on the trademarks of certain manufacturers to get a preferential listing on search
engines’ paid referencing service or are only allowed to bid on certain positions.
Furthermore, the UK Competition and Markets Authority encountered brand-
bidding restrictions in the markets for broadband, credit cards, energy, ights,
and home insurance, while the Netherlands Authority for Consumers & Markets
analyzed the hotel sector. Moreover, in the US,the Federal Trade Commission
has ruled that the largest online retailer of contact lenses unlawfully entered into a
web of anticompetitive agreements with rivals, preventing them from bidding for
search engine result advertisements that would inform consumers that identical
products were available at lower prices. The aimof this paper is to shed light on
the economic rationales and legal implications of keyword advertising to strike a
proper balance between trademark protection and freedom of competition.
JEL: K21, L40, L81, L86, M37, O34
∗Jean Monnet Professor of EU Innovation Policy; Associate Professor of Law and
Economics, University of Basilicata; TTLF Fellow, Stanford Law School; https://orcid.
org/0000-0002-0089- 3545; . I would like to thank anonymous referees and participants to the
MaCCI Annual Conference at the University of Mannheim for their valuable comments and
suggestions.The usual disclaimer applies.
© The Author(s) 2020. Published by Oxford University Press. All rights reserved.
For permissions, please e-mail: journals.permission@oup.com. •306
Competing Through Keyword Advertising 307
I. INTRODUCTION
The interface between intellectual property (IP) protection and antitrust
law has, traditionally, been controversial.1To dene the boundary between
competitive markets and IP rights, two opposing views have emerged. Some
call for an intrinsic conict, pointing out unavoidable tension between the
main right granted by IP laws (and the basic reward pursued by authors
and inventors), that is, the right to exclude others, and the natural goal
pursued by antitrust law, that is, fostering free and open competition in the
market. Others, despite these remarkably different basic principles, claim that
they are complementary since, although in different ways, they share the
same nal and long-term goals because they both seek to promote economic
welfare and innovation. Hence, in the light of this nalistic convergence,
the conict is merely apparent or at least oversimplied. Furthermore, IP
rights are limited in terms of duration, scope, and requirements, and thus in
capability and effectiveness, to insulateIP holder s from the exploitation of their
art. Finally, IP laws contain internal rules and statutory limitations expressly
aimed at safeguarding competition, such as the fair use exceptions, the
exhaustion of rights (or rst sale doctrine), and the limitations on functionality
protection.
Nonetheless, the potential conict between IP protection and competition
law has fueled a long debate, fed by antitrust legislation and case law that has
taken different approaches over past decades, swinging back and forth from
the primacy of IP towards antitrust. Indeed, the history of the IP-antitrust
interface has been characterized by cycles of over- and under-enforcement
that have kept the two laws from settling into a healthy balance.2Currently, to
balance competition law and IP rights, both the US and the EU prescribe
relatively limited prohibitions upon IP holders’ rights. However, the two
jurisdictions adopt different policies with regard to specic practices, such
1For a recent overview, see H. Hovenkamp, Intellectual Property and Competition, in Research
Handbook on the Economics of Intellectual Property (P.Menell & B. Depoorter, eds., Edward Elgar
2019), Vol.1, p. 231.
2H. Hovenkamp, M.D. Janis, M.A. Lemley, and C.R. Leslie, IP and Antitrust, Wolters Kluwer,
2013, vol. 1, pp. 1–16.
308 Journal of Competition Law & Economics
as refusal to license (under the essential facility doctrine),3post-expiration
royalties,4and (minimum) resale price maintenance.5
Recently, the discussion about the interaction between IP and antitrust
has been enhanced by an additional layer. Along with the increasing role
played by IP rights, the rationale underlying the very existence of IP came
to the fore. Indeed, due to IP expansionism and the opportunistic use of IP
protection, the link between IP, innovation, and rms’ productivity is being
strongly questioned, and economic literature has so far been unable to provide
clear-cut empirical evidence of the theoretical positive relationship between
industry’s propensity to innovate and its productivity.6As a consequence, a
new and growing strand of literature has even begun to invoke the abolition of
IP rights or at least the reduction of their length and scope.7
Against this background, IP rights are under re. Critics are focused mostly
on the patent system, which has been described as broken and unnecessary
for securing innovation.8In this respect, the emergence of patent assertion
entities (PAEs, often referred to as patent trolls) is considered emblematic
of the potential strategic use of IP rights. Indeed, the PAEs’ business model
focuses primarily on purchasing, licensing, and enforcing patents, rather than
actively developing or commercializing the underlying technolog ies.By acting
as opportunistic litigation mills, PAEs engage in ex post licensing and abuse of
patent remedies to extract unreasonable royalties from practicing rms.
3Whilst in Verizon Communications v. Law Ofces of Curtis V. Trinko, 540 U.S. 398 (2004) the
US Supreme Court has repudiated the essential facility doctrine, the doctrine has gained huge
success in the European scenario, its application having been extended to IP rights (see CJEU,6
April 1995, joined Cases C-241/91 P and 242/91 P,Radio Teles Eireann (RTE) and Independent
TelevisionPublications Ltd (ITP) v.Commission; CJEU, 29 April 2004, Case C-418/01, IMS Health
GmbH & Co.OHG v.NDC Health GmbH & Co. KG.;General Cour t, 17 September 2007, Case
T-201/04, Microsoft Corp. v. Commission).
4In Brulotte v. Thys Co., 379 U.S.29 (1964) and in Kimble v. Marvel Entertainment, LLC, 576 U.S.
__ (2015) the US Supreme Court has stated that an agreement allowing a patent owner to collect
royalty payments after a patent’s expiration is unlawful per se. Instead, in the EU the parties
can normally agree to extend royalty obligations beyond the period of validity of the licensed
intellectual property rights without falling foul of Article 101(1) TFEU, according to paragraph
187 of the Guidelines on the application of Article 101 TFEU to technology transfer agreements
(OJ C 89/03 (2014)).
5Since Leegin Creative Leather Products v. PSKS, 551 U.S. 877 (2007) minimum resale price
maintenance is judged in the US by the rule of reason, whereas in the EU it is considered
a hardcore restriction according to Article 4 of the Regulation No. 330/2010 (Vertical Block
Exemption Regulation, VBER; OJ L 102/1 (2010).
6See, e.g., J. Lerner, The Empirical Impact of Intellectual Property Rights on Innovation: Puzzles and
Clues, 99 American Economic Review 343 (2009).
7See, e.g., M. Boldrin & D.K. Levine, TheCaseAgainstPatents,27 Journal of Economic
Perspectives 3 (2013).
8J.Bessen & M.Meurer, Patent Failure:How Judges,Bureaucrats, and Lawyers Put Innovationat Risk,
Princeton University Press, 2008; A.B. Jaffe & J. Lerner, Innovation and Its Discontents: How Our
Broken Patent System is Endangering Innovation and Progress,And What to Do About It, Princeton
University Press, 2007. See also M.A. Lemley & C. Shapiro, Probabilistic Patents, 19 Journal of
Economic Perspectives 75 (2005).
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