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K-Cups, Innovation and Interoperability

· October 16, 2014

Even before the landmark United States v. Microsoft Corp. antitrust case, competition law was a bit schizophrenic when it came to the question of interoperability. Monopolists have no general duty to make their products work with those of competitors, but what about the situation where a dominant firm deliberately re-designs products to render them incompatible with others? That is the provocative question raised by several pending antitrust lawsuits filed against Green Mountain Coffee, manufacturer of the Keurig line of single-serve coffee makers and coffee “pod” products.

TreeHouse Foods alleged in a complaint last winter that after its patent on “K-Cups” expired in 2012, Green Mountain:

abused its dominance in the brewer market by coercing business partners at every level of the K-Cup distribution system to enter into anticompetitive agreements intended to unlawfully maintain Green Mountain’s monopoly over the markets in which K-Cups are sold. Even in the face of these exclusionary agreements that have unreasonably restrained competition, some companies, such as TreeHouse, have fought hard to win market share away from Green Mountain on the merits by offering innovative, quality products at substantially lower prices. In response, Green Mountain has announced a new anticompetitive plan to maintain its monopoly by redesigning its brewers to lock out competitors’ products. Such lock-out technology cannot be justified based on any purported consumer benefit, and Green Mountain itself has admitted that the lock-out technology is not essential for the new brewers’ function.

In the consolidated multi-district litigation that ensued, Green Mountain is specifically charged with designing a so-called “Keurig 2.0” brewer which features technology that allows it to detect whether a coffee cartridge is one of Keurig’s K-Cups or is made by a third party that does not have a licensing agreement with the company. The machine will not brew unlicensed coffee pods.

The federal court overseeing the MDL cases denied the plaintiffs’ motion for an injunction on procedural grounds in September, issuing an opinion which reasoned that commercial success of the “2.0” brewers was uncertain and that coffee competitors would still have open access to some 26 million Keurig “1.0” machines for several years. In other words, the court did not reach the merits of the monopolization claim against Green Mountain.

keurig_2color_corporate_logo-copy

So where does that leave Keurig? As Ali Sternburg observed before revelations of its new 2.0 technology, Green Mountain’s prior 20 years of patent protection allowed the company to build a competitive advantage by “cultivating its brand (which likely involves trademark protection), honing its supply chain efficiencies, and generally maintaining its dominance due to having the first-mover advantage.” More than ten years before those patents first issued, moreover, the federal courts had ruled that new product introductions by monopoly firms — in one well-known instance, Kodak — would not be considered an antitrust violation because “a firm that pioneers new technology will often introduce the first of a new product type along with related, ancillary products that can only be utilized effectively with the newly developed technology.”

So-called technological ties exist all over the tech world, from smartphone apps that work only with a single website, to PC printers that only accept chip-enabled ink cartridges from the printer manufacturer, to proprietary media DRM protocols such as Apple’s AAC format for music, to Sony’s failed attempts at proprietary flash-memory stick technology. Yet there’s a profound difference between designing a new photographic system like the then-revolutionary Instamatic II in 1978 (subject of the Foremost Pro Color decision quoted above) and re-designing an existing product line to disable competitive substitutes.

The Verge called Green Mountain’s tactics “locking down its coffee makers to keep out cheap refills.” And despite world-class defense counsel, little that Keurig has said so far connotes serious efficiency or product quality advantages to its pseudo-DRM approach to coffee pods. If those are the facts, the courts will be forced to face the competitive merits of the MDL plaintiffs’ claims in circumstances in which innovation, the keystone of the doctrine permitting technological tying, is notably absent. Conversely, the first antitrust competitor, TreeHouse, announced in August that it had successfully reverse-engineered the Keurig 2.0 system so that its coffee pod products “will work in both existing and next generation coffee makers manufactured by the leading supplier of personal at-home brewing systems in the United States.”

Which is it, innovation or predation? Certainly it is impossible to judge from afar or to make generalizations. Under the burden-shifting legal approach to monopolization claims laid out by the Microsoft courts, proof of exclusionary effects require a Section 2 defendant to come forward with a procompetitve rationale for the challenged practices. Keurig claims its pod-detection interactive technology allows 2.0 coffee makers to determine which type of package (including Vue-packs, an earlier Green Mountain technology for larger brew sizes and more intense flavors that never achieved commercial success) has been inserted and offer up the appropriate user interface. “Keurig 2.0’s interactive technology is Keurig’s platform for future innovation,” write the company’s antitrust lawyers.

As the law stands today in the U.S., antitrust courts recognize that whether any particular act of a monopolist is exclusionary, rather than a form of vigorous competition, can be difficult to discern: “the means of illicit exclusion, like the means of legitimate competition, are myriad.” Faced with conflicting evidence and a non-pretextual claim of efficiencies, the MDL court will therefore be required to balance good versus bad — that is, determine whether “the anticompetitive harm of the conduct outweighs the procompetitive benefit.” That’s a tall challenge in the case of Keurig.

Yet it is also one at the cutting-edge of competition law that presents serious ramifications for disruptive innovation. Could Uber be required as an antitrust matter to open its system to Hailo drivers? Is Twitter liable to TwitPic for integrating its own photo-posting function into the 140-character tweet service, thus effectively putting some third-party companies out of business? Are Microsoft, or Google, or Apple required to open their APIs to competitors or, once opened, legally prevented from reverting to a closed ecosystem? Those are competition questions that cannot, and should not, be answered based on either a 30-year old case involving Instamatic cameras and film or a 15-year old case involving Windows ’95 and Internet Explorer 1.0.

In another context, American courts have long held that First Amendment protection for the free exercise of religion means the judiciary cannot assess whether a belief system that claims to be a religion really is one, because courts lack the basic competence to make such judgments reliably. One could often say the same thing about competition analysis, since differentiating innovation from exclusion is fraught with dangers. One court of appeals has held, as a consequence, that

[t]here is no room in [antitrust law] for balancing the benefits or worth of a product improvement against its anticompetitive effects… There are no criteria that courts can use to calculate the ‘right’ amount of innovation, which would maximize social gains and minimize competitive injury. A seemingly minor technological improvement today can lead to much greater advances in the future.

Indeed, the leading U.S. antitrust treatise concludes that “[b]ecause courts and juries are generally incapable of addressing the technical merits or anticompetitive effects of innovation, they quickly make the relevant question turn on intent. We believe this is the worst way of handling claims that innovation violates the antitrust laws.”

Yet a black-letter rule of “per se lawfulness” that necessarily prohibited competitors from challenging product re-designs based on facial claims of technological innovation would, in this author’s judgment, go too far in the other direction. Hopefully, the Keurig 2.0 antitrust lawsuits will not end as a re-affirmation of the old legal adage that hard cases make bad law.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.