The NonMaterial Android in the Henhouse: Can the EC Trust Google to Actually Implement a Settlement?
Rumor has it that the antitrust chief for the European Union is about to reach a settlement with Google for a variety of horribles. That’s the good news. There is bad news, but it’s unclear who the bad news is for: Google is not treating its problems with the EU as what’s called “material” in the world of public companies. How do we know this? Because in Google’s most recent filing with the Securities and Exchange Commission (a Form 10Q) Google did not tell its stockholders that its potential settlement was an important financial event. Not only did Google not disclose the settlement as “material,” it also did not reserve any liability fund for paying fines or settlement costs. So the Fat Cat Signal is not getting lit up.
So what does that mean? Let’s compare it to the last major legal hurdle that Google couldn’t blow past–the $500,000,000 fine it paid to the US government for promoting the sale of illegal drugs in violation of the Controlled Substances Act. That was a very similar situation. The investigation–in that case a grand jury investigating crimes–went on for years. Google produced 4.2 million documents. But if you were a Google stockholder relying on Google’s public disclosure, you would never know it happened. Then mysteriously Google reserved $500,000,000 all in one quarter.
Here’s the relevant language from Google’s current 10Q:
On June 23, 2011, we received a Civil Investigative Demand (CID) from the U.S. Federal Trade Commission’s (FTC) Bureau of Competition and a subpoena from FTC’s Bureau of Consumer Protection relating to a review by the FTC of our business practices, including search and advertising. State attorneys general from the states of Texas, Ohio, and Mississippi have issued similar CIDs. We are cooperating with the FTC and the state attorneys general and are responding to their information requests.
The European Commission’s (EC) Directorate General for Competition has also opened an investigation into various antitrust related complaints against us. On February 10, 2010, we received notification from the EC about three antitrust complaints filed by Ciao, Ejustice, and Foundem, respectively. On November 30, 2010, the EC formally opened proceedings against us. Since November 2010, 1plusV, parent company of Ejustice, and VfT, an association of business listings providers in Germany, have filed similar complaints against us. On March 31, 2011, Microsoft Corporation submitted a similar complaint to the EC against us. On the same day, the EC notified us of additional complaints filed by Elfvoetbal, Hotmaps, Interactive Lab, and nnpt.it, and on August 30, 2011 of a complaint by dealdujour.pro. In addition, in December 2011, the Spanish Association of Daily Newspaper Publishers also submitted a complaint to the EC against us. In January 2012, Twenga brought a complaint against us and, in February 2012, the German newspaper associations, Bundesverband Deutscher Zeitungsverleger (BDZV) and Verband Deutscher Zeitschriftenverleger (VDZ), also brought a complaint against us with the EC. In March and April of 2012, the EC asked us to comment on Expedia’s, Tripadvisor’s, Odigeo’s and Streetmap’s complaints against us. We believe we have adequately responded to all of the allegations made against us. We are cooperating with the EC and responding to its information requests.
We are also regularly subject to claims, suits, government investigations, and other proceedings involving competition and antitrust (such as the pending investigations by the FTC and the EC described above), intellectual property, privacy, tax, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using our platforms, personal injury and other matters. Such claims, suits, government investigations, and other proceedings could result in fines, civil or criminal penalties, or other adverse consequences.
Certain of our outstanding legal matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability when we believe that it is both probable that a loss has been incurred, and the amount can be reasonably estimated. We evaluate, on a monthly basis, developments in our legal matters that could affect the amount of liability that has been previously accrued, and make adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters.
With respect to our outstanding legal matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.
So which is it? Does anyone really think that a major antitrust settlement with the European Union will not have a “material adverse effect on [their] business”? Using the $500,000,000 illegal drug fine as a benchmark, can we conclude that Google believes that a settlement will result in a cost of less than half a billion dollars?
But there is another possible explanation: Given Google’s recent history with government regulators, is the EU settlement non-material because Google has no intention of complying with the terms? Or complying enough to have a long running dispute that never quite boils over into a regulatory hammer? That is–the typical Google “make me” delaying action?
How far back do you want to go for evidence of the total disregard that Google has for regulators? Even after paying a $500,000,000 fine to keep their executive team from being indicted, you could still find ads and Autocomplete for “buy oxycontin online no prescription.”
And then there’s the human trafficking ads, obstructing the FCC’s investigation into the Street View spying and data slurping, Google Buzz, various union-busting efforts, the reopening of the ICO investigation and violating the FTC consent decree.
Let me sum it up for Mr. Almunia: They obfuscate, they shade, they equivocate and they pretty much do as they damn well please.
And there is something else, perhaps a simpler explanation.
At the time that Google bought their way out of a drug indictment, the prescient Professor Eric Goldman of the Santa Clara School of Law, was quoted in the New York Times as follows:
“Web companies can be held liable for advertising on their sites that breaks federal criminal law, and Google and other search engines have faced similar issues over ads for illegal online gambling sites [see, e.g., "Poker Money and the Ethics Professor"]. Eric Goldman, director of the High Tech Law Institute at Santa Clara University, said the latest investigation raised questions about Google’s dependence on such sources. ’How much of Google’s overall revenues are tied to product lines that are questionable?’ he said. ‘For investors, I think they just got a little bit of a jolt [after Google reserved $500,000,000 to pay its forfeiture in the drugs case] that maybe Google’s profits are due to things they can’t ultimately stand behind.’” (emphasis mine)
This is how the Google stock behaved around the announcement of that $500,000,000 fine on April 15 last year:
So which do you think will have a greater impact on the stock price, the $500,000,000 fine that Google managed to keep from being reported too widely (and got the DOJ to apologize for), or the antitrust settlement with the EU that the entire financial world knows about? I tend to agree with Professor Goldman that “maybe Google’s profits are due to things they can’t ultimately stand behind.”
Except I don’t think there’s any “maybe” about it.