New Article on Online Transportation Network in Indonesia and the Challenges for Competition Law and Policy

I just wrote an article on how innovation in the emerging digital market in Indonesia presents new challenges for current competition law and policy as depicted in the development of online transportation networks like those provided by Uber and GrabCar, services similar to those that have been traditionally offered by taxi companies. You can read the full article the Journal of Competition and Regulation in Network Industries (Sage Publishing) here.

IPR and CompLaw Update: New Law on Patent and the Exemption of the Application of Indonesian Competition Law

New Patent Law: Law No. 13 of 2016 on Patent

Last August, Indonesian Parliament approved a new law: Law No. 13 of 2016 on Patent. The Law entered into force on 26 August 2016 and replaces the previous law on patent, Law No. 14 of 2001. With the intention to respond to the need to provide a more solid legal support to promote innovation, the new law has been enacted with the emphasis on (1) improving the role of state in providing legal protection of intellectual property rights, patent in particular, (2) protecting domestic interests to the extent permitted by international law principles, (3)  encouraging invention, and (4) developing a basis for patent protection according to pragmatic legal realism approach. [General Commentary of the Law par. 5]

Among others, the Law attempts to address the following issues which have not been covered in the old Law:

1. simplification of patent protection process for inventors, e.g. SMEs and researchers;

2.responding to a high number of patent application from national non-profit institutions and individuals;

3. patent protection for genetic resources;

4. government responses to the implementation of the patent;

5. responding to the ratification of the Nagoya Protocol on Access and Benefit Sharing (The Nagoya Protocol on Access to Genetic Resources and the Fair and Equitable Sharing of Benefits Arising from their Utilization to the Convention on Biological Diversity), e.g. as regards source of origin, the scheme of profit, and sharing the genetic resources;

6. the use of electronic registration for easier and faster registration processes;

7. improving rules concerning distribution of royalties;

8. more detailed provisions on pharmaceutical patents;

9. exclusion of criminal sanctions and civil claim in cases of parallel import and bollard provision; and 

10. nomenclature changes

Also, the Law clarifies the procedure to settle disputes as regards royalty paid to an inventor in cases where the invention is made under an employment agreement and the patent right is rendered to the employer. In cases of dispute concerning the method to determine the amount of royalty, the parties may submit the claim to the Commercial Court (instead of to the District Court, although the case does not involve the patent right per se).

Compulsory licences are recognized under certain circumstances, both in the old and new Law. However, there are some changes in the new Law, for instance that compulsory licences are granted by the Ministry (i.e. the Ministry of Law and Human Rights), instead of by the Directorate of Patent. According to the new Law, an application for a compulsory licence can be submitted under the following ground:1. the patent holder does not perform the obligation to make the product or use the processin Indonesia within a period of 36 months after the patent has been granted; 2. the patent has been implemented by the patent holder or licensee in the form and withsuch a manner detrimental to the interests of the society; or3. patent(s) resulted from the development of another patent can not be implemented without using the respective patent. [Art. 82 of Law No. 13 of 2016]

Licencing Agreements and Exemption of the Application of Indonesian Competition Law

Compulsory licences might play a significant role in cases of patent abuse under the scrutiny of competition law. Although IPR licence agreements are excluded from the application of Indonesian competition law, Law No. 5 of 1999 on the Prohibition of Monopoly Practices and Unfair Business Practices [Art. 50 lit. b], such exemption does not apply in some cases [KPPU Regulation No. 2 of 2009], namely when a licence agreement does not meet the requirement registration and is anti-competitive in nature or has anti-competitive effects. 
KPPU Regulation No. 2 of 1999 provides for guidelines for competition law analysis in cases of refusal to licence and anti-competitive licence agreements. In the first case, the analysis is based on so-called essential facility doctrine, in which the major inquiry is whether the technology for which the license is required is essential for market entrance. This is for instance in the case covered in Art. 82 of Law No. 13 of 2016 above when a patent resulted from the development of another patent can not be implemented without using the required licence and thus, cannot enter the market.

In cases of anti-competitive licence agreements, while the ex-post approach of competition law implies a case by case analysis, KPPU Regulation in providing guidelines for the analysis underlines certain types of licence agreements that are considered as containing exclusive dealing clauses and require further investigation on whether such clauses are anti-competitive or not. Those types of licence clauses are: pool and cross licensing, tying arrangement, resources limitation, limitation in production and distribution, sale price limitation and resale price maintenance, and grant back licencing. Although anti-competitive by effect becomes the major approach to define an infringement of competition law, the Regulation seems to take a stricter approach for grant back licencing, in which the clause is regarded as per se anti-competitive and thus, by merely including such clause, the licence agreement already qualifies as an abuse and consequently prohibited under competition law.

Over-the-Top (OTT Services) Operating in Indonesia Obliged to Establish Indonesian Permanent Establishment

OTT Services in Indonesia

The use of OTT services in Indonesia has been rapidly growing in less than a decade with the introduction of smartphones in the market that enable the use of mobile internet. Referring to the definition used in Wikipedia, OTT services are understood as ‘delivery of audio, video, and other media over the Internet without the involvement of a multiple-system operator in the control or distribution of the content’. Google, Facebook, WhatsApp, Twitter, YouTube exemplify global OTT players in Indonesia. OTT services have not been specifically regulated under certain Law in Indonesia. However, they are subject to the general obligations under Law No. 11 of 2008 Electronic Information and Transaction. Now, the problem is that most of the OTT service providers are global players with no legal entity established in Indonesia. Thus, despite being subject to Indonesian Law for operating within Indonesian market, the matter of legal enforcement remains questioned. In order to tackle this problem, by the end of March, the Government will issue a new regulation to oblige foreign OTT to establish a permanent establishment (‘Bentuk Usaha Tetap’-BUT) legally recognized in Indonesia. A transition period will be applied to give time for those companies to adjust to the new regulation.

Innovation, Competition, and Consumers

OTT services have become an example of how innovation could make life easier. Telecommunication services that previously majorly relied on the fixed line provided by telecommunication service provider like Telkom, international calls that depended on services provided by Telkom and Indosat, or messaging services that earlier could be done only via SMS, now are available with competitive to free price by using online communication services such as Google Hangouts, Facebook Messenger, Skype, Line, or WhatsApp. Earlier in my post, I discussed about online platform used to offer transportation moda, Uber. Similar services are now also available in the market such as GrabTaxi for cars and GrabBike or GoJek for motorbike ride. Those services run on the internet and while they challenge and become new competitors for conventional service providers, either for telecommunication or transportation, regulators have to keep up with the current development in order to safeguard the interest of different parties in the market, most of all: consumers.

While consumers benefit from low to zero prices in the short term, in the long term, it is necessary to keep the existence of multi players in the market for the following reason. It is important to ensure that market structure will not allow monopolistic behaviours, for instance when one or more player(s) become(s) dominant in the market. Competition authority, thus, shall keep their eyes open when prices in the market are very low to zero in order to hinder from predatory pricing practices prohibited under Art. 20 of Law No. 5 of 1999. However, low or zero prices are not per se illegal. For gaining the right understanding on pricing in online platform services, it is significantly important to keep in mind that the pricing model might subject to the practices of multi-sided-platform (MSP) which allow different pricing for different sides of the of market served by the online platform,[1] which might falsely be suspected as predatory or discriminatory when it comes to the side with the low or zero prices. Having said this, it does not mean that the need to keep multi players in the market should defeat the importance of efficiency. Thus, consumers shall not be forced or left with the option of having inefficient service providers merely in order to keep the existence of those providers. What necessary is keeping the market open by hindering and removing entry barriers.

The New Obligation and the Way Forward

(1) Permanent Establishment and Taxation

The new obligation to establish an Indonesian permanent obligation has been recognized in the field of energy sector[2] and for taxation purposes.[3] However, the new obligation for OTT services like Google, Facebook, Twitter, and others, might be intended to also meet other purposes than taxation.

Permanent establishment in Indonesian law according to Law No. 7 of 1983 as Amended by Law No. 36 of 2008 on Income Tax is understood as ‘an establishment used by an individual who does not reside or stay in Indonesia for 183 days or less within a period of 12 months, or entities that are not established or domiciled in Indonesia, but to run the business or activities in Indonesia’.[4] Law No. 22 of 2001 on Oil and Gas defines a permanent establishment as ‘an entity established and incorporated outside the territory of the Republic of Indonesia which have activities in the territory of the Republic of Indonesia and shall comply with the laws and regulations that applicable in the Republic of Indonesia’.[5] According to Law No. 36 of 2008, a permanent establishment can take form of one of the following: seat of management; branch; representative office; office building; factory; workshop; warehouse; space for promotion and sales; mining and quarrying of natural resources; mining area of oil and gas; fisheries, cattle farms, agriculture, farms or forestry; construction, installation or assembly project; provision of services of any kind by employees or others, all made more than 60 days within a period of 12 months; person or entity acting as a free agent; agent or employee of an insurance company that is not established or domiciled in Indonesia who receives insurance premiums or bears risk in Indonesia; computers, electronic agents, or automated equipment owned, leased, or used by the organizers to perform electronic transactions business activities through the Internet.

In order to establish a permanent establishment, it requires a notarial deed certifying that the company has a legal seat in Indonesia, permanently operates a business in Indonesia, and has a dependence on and clear connection to the headquarter abroad. An individual who does not reside or entity not established and domiciled in Indonesia cannot be deemed to have a permanent establishment in Indonesia if the individual or entity doing business or conducting activities in Indonesia use a free agent, broker or intermediary who in fact acts completely to run its own company.

Certain companies offering OTT services like Facebookand Google already have a representative office in Indonesia. The question is whether they are also subject to the new obligation to create a permanent establishment, because a representative office is already considered as a form of permanent establishment according to the Income Tax Law. A supporting argument for creating a permanent establishment despite the existence of a representative office is that not all representative offices in practice are taxable when they merely play a role as a business connector without real business activities. However, more clarification is needed to avoid ambiguity, especially when an interpretation is made to narrow down the definition provided in a law.

(2) Data Protection

Data protection becomes one of the concerns of the Government. However, the scope of concern seems limited to the protection of customer data and does not extend to the interest of data owners who do not qualify as customer.

The Minister of Communication and Information argued that the setting up of a permanent establishment will provide legal assurance for law enforcement. This would be important in cases where for instance customer data is abused by a data holder, i.e. a foreign company providing OTT services in Indonesia. Although currently Indonesia still does not have a particular data protection law, the protection of customer data can be anchored to the obligation provided for in Law No. 11 of 2008 that unless otherwise provided by laws, any use of information through electronic media concerning personal data is subject to the prior consent of the data owner.[6] Any violation against this obligation is subject to claims for damages.[7] When a data owner has to deal with a foreign company, such claim for damages would be difficult to process without the existence of a permanent establishment of the company in Indonesia. The same argument also applies for the protection of consumers in other aspects, for instance in cases of dispute as regards the provision of services, and for transportation services, typically as regards the compliance with safety and security regulations.

(3) Consumer Responses

Despite the intention to protect the best interest of consumers, concerns raise that the true intention behind the enactment of the new regulation was to monitor and steer the content provided over the internet. At least two cases are referred to in this regard. Since 27 January 2016,Telkom (an internet services provider) has blocked Netflix from using its networkfor video streaming services. While a different issue brought up in this case, such as the issue of pornography content, Telkom argued that the blocking was based on the reason that Netflix has not complied with the existing regulations in Indonesia. It was not clear, which regulations being referred to. However, the Minister of Communication and Information supported the act clarifying that a permanent establishment is required in order to run a business activity in Indonesia. The Minister also referred to the issue of content monitoring and censorship mechanism. Unwilling to take the same measure, Telkom’s competitors: Smartfren and XL choose to keep providing the access for Netflix and allow the American company to offer its services over their network.

In the other case a microblogging platform and social networking site, Tumblr, has been required to adjust its content to comply with Indonesian regulations concerning the obligation to not include pornography content over the internet. Rumours have been around, that the service would be blocked by the Government, i.e. the Ministry of Communication and Information, due to its content issue. Seeing both cases, it seems that consumers concerns are not without ground.

The Government needs to clarify its policy for the interest of providing legal assurance for business players operating in the country. While the Government argues for supporting consumer interests, it seems that consumers are less interested in the way the Government approaches the issue. There are several issues to deal with in order to clear the air: security - when it comes to necessary actions against terrorism and cybercrimes; content – when it comes to protection of the minor, a typical case against pornography; legal enforcement – in cases of procedures for claims for damages and liability according to the applicable law in Indonesia; competition – when local players have to compete with global players, a similar phenomenon with the issue of protecting traditional retailers from the entrance of modern foreign competitors in the market; data protection – in cases of abuses of personal data and other types of data which have been done in many fields, on- and offline; and net neutrality – whether internet service providers have the right to limit access to content providers. Each of those issues requires different approaches and measures which can be done only after the Government is clear with what it wishes to achieve.

[1] J.C. Rochet and J. Tirole, 'Two-Sided Markets: A Progress Report' (2006) 37 The RAND Journal of Economics 645, 645.

[2] The obligation is mandated by Law No. 22 of 2001 on Oil and Gas, see e.g. Art. 6; Ministerial Decree No. 1480 of 2004 on Arrangement and Offering of Working Area for Oil and Gas, see e.g. Art. 2 par. (3).

[3] Law No. 7 of 1983 as Amended by Law No. 36 of 2008 on Income Tax, Art. 2 par. (1).

[4] Law No. 7 of 1983 as Amended by Law No. 36 of 2008, Art. 2 par. (5).

[5] The obligation is mandated by Law No. 22 of 2001 on Oil and Gas, Art. 1 no. 18.

[8] Law No. 11 of 2008 Art. 26 par. (1).

[9] Law No. 11 of 2008 Art. 26 par. (2).

Uber: Ex-Ante Regulation, Innovation, and Challenges to Competition Law (Series III)

Legal Compliance for Market Entrance

Uber might mark the day on 8 December 2015 to celebrate their lawful market entry in Indonesia as the ride-sharing company gained the approval from the Governor of DKI Jakarta to operate in the capital of the country.  The approval was given after Uber met certain requirements to legally operate in Indonesia: establishing a legal entity in Indonesia, providing suitable insurance for both passengers anddrivers, complying with tax and safetymeasures regulations.

To safeguard the work of effective competition in the market, competition law plays its role ex-post to assess on case by case basis whether or not certain behaviour of a firm is anti-competitive or might have anticompetitive impacts. Applying this approach will hinder business players from being limited by too rigid rules that in turn might discourage or impede them from doing business. However, there are cases where regulating a market ex-ante is necessary. Such market regulations can be found for instance in food retail industry and other heavily regulated market such as telecommunication and energy.

In transportation industry, ex-ante regulation could intervene in order to safeguard the interest of consumers, such as safety, and public welfare by means of tax regulation. In some cases, ex-ante regulation in transportation industry may also be applied for the interest of small players.

Innovation and Challenges to Competition Law

Uber was banned in August 2014 from operating in Indonesia (read more discussions in my previous posts about Uber: Manakala Kebijakan Persaingan Diuji oleh Inovasi (Seri I) and Uber: Mendefinisikan Pasar Bersangkutan (Relevant Market), Masihkah Relevan? (Seri II)). While the ban was based on a sound ground to protect the interest of consumers, i.e. by providing clarity about whom they are dealing with when using the service, it was at the same time feared that it could create entry barriers for innovators to enter the existing market or create a new market that has not been known before.

Although Uber responds to the need of transportation in the market, it does not necessarily respond to it in the same way as conventional transportation service providers do. It neither rents out cars nor provides taxi services. Rather, it provides platform to bring together car owners and passengers for the purpose of optimizing the use of cars by sharing them under certain conditions with others. The introduction of the new business model combined with new technology, the online platform, makes it problematic to qualify the services provided by Uber under the same category with the existing services known in the market. Thus, Uber does not only challenge regulators in how to deal with a new market, but also test the existing basis for competition law analysis.

Market Response

It is interesting to see how market responds to the entry of Uber in transportation services albeit taking different business scheme. Apart from gaining more confidence from consumers, it also triggers other transportation service providers to keep up with the make use of mobile phone applications, such as Blue Bird. With the application for mobile taxi reservation, users now can order a taxi nearest to the pick-up location without having to make phone calls. Similar service is also offered by Grabtaxi. It seems that market players tend to respond to innovation brought by the new entrant with further use of the innovation.

Looking at another market: online reservation for transportation services with motorbike, GoJek, Grabbike, and alike almost had to face a different fate when the Minister of Transportation banned its operation on 17 December 2015.[1] The reason for the prohibition was that motorbikes are not recognized as vehicles for public transportation. Thus, the operation of such service was considered as a violation of the current transportation regulations.[2] Strangely enough, the prohibition was not applied for conventional transportation service providers with motorbike, widely known in Indonesia as Ojek. This raised critics that the ban was imposed to favour of the conventional Ojek. However, the ban was removed shortly after it was released. Protests from drivers and passengers, as well as objection addressedby the President have resulted in the removal.

Should Cheap Ride Raise Concern for Competition Law?

Consumers should be the ultimate beneficiary of the work of competition law. Competition should result in low prices, good quality of products, sufficient product choices, and encourages innovation. Competition law authority will usually be alarmed, when prices are rocketing. What if the prices are so low that it is extremely hard for competitors to beat? Uber is resembled by its low prices and this is one major concern for competitors, among other things, although it cannot be automatically qualified as extremely hard to beat. A cost analysis is necessary.

First of all, competition law does not prohibit offering products with low prices. However, selling a product with such a low price that is hard to compete and forces competitors to exit the market might qualify as predatory and under certain circumstances is prohibited. The prohibition of predatory pricing in Article 20 of Law No. 5 of 1999 reads: ‘Business actors shall be prohibited from supplying goods and or services by selling at a loss or by setting extremely low prices with the aim of eliminating or ruining the business of their competitors in the relevant market which may result in monopolistic practices and or unfair business competition.’

Article 20 of Law No. 5/1999 specifies two scenarios of predatory pricing: (1) by performing “selling at a loss” and (2) by “setting extremely low price.” The first scenario refers to actual cost as the benchmark to measure the existence of loss, in which the price is set below the actual cost.[3] While the definition of ‘selling at a loss’ relies on the actual cost, the qualification of ‘setting extremely low price’ relies on the average prices demanded in comparable markets. The problem with this second scenario is first of all there is no measurement to define a comparable market. Defining actual comparable markets is even harder. Moreover, extremely low prices can be resulted from high efficiency and very low cost, which still enables the firm to gain justified profit.

In both cases, the provision requires the element of intention to eliminate competitors and the effect of harm, i.e. potential results of monopolistic practices and unfair competition.  It is also important to note down that predatory pricing is typically enabled by the possession of market dominance or at least market control. Article 20 of Law No. 5/1999 addresses only firms with a significant level of market control. Although the provision does not require the element of market control in its wordings, from the heading ‘market control’ of the Chapter IV Part 3 of the Law under which Article 20 is structured, it is to be interpreted that the provision refers only to firms with the ability to influence the market. Only big firms are able to sustain such a loss from selling either at loss or with extremely low prices until they can recoup the loss by increasing the price after eliminating competitors.

According to KPPU Guidelines for the Implementation of Article 20 of Law No. 5/1999,[4] KPPU applies the following measurement to indicate the occurrence of predatory pricing. The first test is to determine if the price set by a firm is unreasonably low using indicators of market share of 35% and average variable cost (AVC).  Although the market share indicator was not required in Law No. 5/1999, this indicator is used to limit the test only to powerful undertakings (although there is no explanation about the reasoning of adopting the benchmark of 35%). Only if an unreasonably low price exists, a second test is applied to determine whether there is a recoupment after the selling below the AVC by an increase of price. The downside of using the recoupment test is that it is not clear, whether the increase of price per se is sufficient for the test or there should have been a recoupment of the loss. If the second alternative is used, competition law enforcement will be too late to prevent the negative impact of the predatory pricing. This means that there is no legal protection to hinder the anticompetitive conduct in an early stage and the loss resulted by the conduct. To avoid this, another measurement to prove the recoupment intention can be used without relying on a factual recoupment, for instance by assessing whether the selling under AVC is systematically carried out, e.g. on a regular basis.[5]

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[1] Surat Pemberitahuan Nomor UM.3012/1/21/Phb/201.

[2] Law No. 22 of 1999 on Traffic and Transportation; Decision of the Minister of Transportation No. KM. 35 Tahun 2003 on Provision of Human Tranportation with Public Vehicle; Decision of the Minister of Transportation No. KM. 69 Tahun 1993 on Provision of Transportation of Goods.

[3] Heermann, in: Undang-undang Larangan Praktek Monopoli dan Persaingan Usaha Tidak Sehat (Law Concerning Prohibition of Monopolistic Practices and Unfair Business Competition), Hansen, Knud/Heermann, Peter W./Karrte, Wolfgang/Micklitz, Hans-W/Pfletschiner, Wolfgang/Säcker, Franz Jürgen/Sauter,Herbert, Jakarta 2002, Article 20-21, Margin No. 9.

[4] KPPU Regulation No. 6 of 2011 on Guidelines for the Implementation of Article 20 of Law No. 5 of 1999 concerning Selling at A Loss.

[5] Wahyuningtyas, S.Y.; Unilateral Restraints in the Retail Business: A Comparative Study on Competition Law in Germany and Indonesia, Stämpfli, Bern, 2011, p. 125-126.

Online Reputation: Towards Reputation Portability and Break the Silos - Indonesian Competition Law Perspective (Part II)

Silos and Lock-In Problems

Reputation is usually built within a certain environment, beyond which it might have different values. This seems to be true for online reputation. I cannot carry my reputation across different platforms, which means that everytime I start to use a new platform, I have to build my reputation from scratch. To respond to this, a number of scholars have carried out studies and proposed a global reputation system,[1] which I refer to as online reputation portability. But why is it so important to have online reputation portable?

Until today, creating a reputation system in an online platform is like building a silo. Each platform has its own system that is not compatible with any other platform. The way my reputation is computed and valued in a platform is likely different from how it is done in other platforms. Gaining a reputation, on the other hand, is also not a trivial matter. It requires continuous practice in a certain period of time, in which other users upon their experiences in interacting with me may (or may not – it is up to them) give their reviews either negative, positive, or even neutral. Thus, starting from scratch everytime I move to another platform would be time consuming. It also depends on the users in the new platform, if they would give me the same reviews like those in the previous platform or not. If I want to continue building up my reputation, it would be easier if I stay with the previous platform than moving to any other new one. However, it means that it will create and increase my dependence on the platform, where my reputation has been established. The longer I stay, the more I use the platform, the more my reputation is established there, the higher will be my dependence. And since the reputation cannot be used elsewhere, I am practically locked in the platform I am using: the silo. If suddenly the platform applies new terms and conditions that bring disadvantages to me or that I simply would have disagreed, I would not be able to freely refuse and abandon the platform because of my dependence on the platform. Here, I need my reputation to be portable.

Online Reputation Portability and Data Protection Issues

Online reputation involves different types of data that involve different users. Reviewers provide raw data, for instance by posting a review, report, evaluation, recommendation, or giving a rate. In the next step, the raw data is processed and based on the valuation system, it is transformed into reputation (aggregated data). This reputation is attached to the reviewee, not the individual reviewers. Would all those types of data are subject to data protection?

Until today, legal studies have been barely touching upon the issue of online reputation portability. In the EU, for instance, although data portability has started to gain more attention and the right to data portability has been included in the EU General Data Protection Regulation (GDPR) Draft,[2] question remains, whether and in how far online reputation would be tackled under the new regulation later on.

Taking a look at Indonesian ICT Law, Law No. 11 of 2011 Art. 26 par. (1) provides that ‘… use of any information through electronic media that involves personal data of a Person must be made with the consent of the Person concerned.’ The Law does not define the term ‘personal data’, but the Commentary of the Law might shed a light to understand the scope of the term. While it does not mention the definition of ‘personal data’, the Commentary tries to clarify that personal data is part of privacy rights. Further, according to the Commentary, privacy rights cover the following rights:  ‘the right to enjoy private life and be free from any type of disturbances’; ‘the right to be able to communicate with other people without being spied; and ‘the right to monitor access to information about private life and data of a person.’[3] However, the Commentary itself does not help answer the question on how data implicated in online reputation system shall be treated under Art. 26 par. (1) of Law No. 11 of 2008, i.e. whether user reviews and reputation could be qualified as personal data and whether users are entitled to have their online reputation portable if reputation qualifies as personal data which users have the right to. As regards online reputation portability, the Law does not impose any obligation to online providers to enable portability.

In the attempt to understand the nature of data concerned in online reputation system, it is also important to take the viewpoint of seeing user reviews as public information. Because the nature of a review is to provide or publish information to others about a certain object, it makes sense that user reviews are given with the intention to be made public. However, the nature of being public only concerns the right to access, which means that it is a type of information that is publicly accessible. The right to access is a separate entity from other rights such as the right to alter, move, and remove. These issues are still open for further studies.

Why Should Competition Law Bother?

While the discussion on the legal status of the data involved in online reputation system has just started, in the absence of regulations, competition law might intervene and plays a role under certain circumstances. As online reputation gains more importance in digital environment, it is also regarded as an asset. As discussed above, user lock-in might create dependence on the platform being used and while this limits the possibility of the respective user to switch to any other platform or even use multi platforms at the same time, it might also create entry barriers to the market.

Imagine eBay that relies heavily on user reviews to make the auction service work. A new platform that intends to compete with eBay might either build a similar online reputation system to that of eBay or develop a completely new system that has not been recognized before. However, user reputation remains one of the essential elements that makes the auction system work because it contains crucial information based on which other users will decide whether they will take part in the auction processes or not, apart from other elements like the product itself and market demand. Such information includes for instance a seller track record concerning his past performance in providing accurate information on his products, in responding to relevant questions or remarks from buyers, or in delivering the products or otherwise making them easily available for the pick-up. Free movement of reviews from eBay to a new platform would be akin to feeding the new competitor with the most valuable asset.

• ·         Multi-Sided Platform and Network Effect

For the new entrant, it will be difficult to build up user volume because of network effect. Most online platforms like eBay operate as a multi-sided platform which means that one platform serves more than one interdependent group of customers. Online dating such as OKCupid, search engine like Google, social networking sites like Facebook or LinkedIn, AirBnb in the accommodation market, Uber for transportation services, further exemplify such platform. This type of business model has been traditionally used in newspaper business: one side of their business caters the need of the readers and the other side, the advertisers. The more the readers are, the more valuable the newspaper to advertisers. Both the readers and advertisers are interdependent.

Back to the example of eBay, the platform serves at least two groups of customers: sellers and buyers. eBay can attract sellers if it has many buyers and the other way around. It has to develop both sides and cannot boost only one side of the platform. This is known as network effect. Only after it reaches a critical mass, then the platform will start to be profitable. In order to do so, businesses operating as MSP often charge each side of the platform differently. For instance, while they provide the services for zero amount of money for one side, they might charge certain fee to the other side. Buying products via eBay doesn’t cost money, but eBay charges sellers with transaction fee subject to certain terms and conditions. In addition, it gains revenues also for instance form advertisers, which is again another side of the platform.

Jean Charles Rochet and Jean Tirole[4] were the first scholars who identified two-sided platforms (other scholars later on, such as David Evans, use the term multi-sided platform for the reason that such platform often supports more than two interdependent groups of customers[5]). In defining the term, they explain: ‘A market is two-sided if the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount; in other words, the price structure matters, and platforms must design it so as to bring both sides on board.’[6] It is important to take careful consideration of this characteristic in competition law analysis in order to confuse it with discriminatory practices that are under certain circumstances generally considered as anticompetitive (subject to the rule of reason assessment taking account of for instance the effect of harm to competition or to consumers). Because a new entrant has to compete simultaneously in multiple markets with market incumbent(s), especially if the incumbent has strong market power, entering the market is particularly expensive which amounts to entry barrier.

• ·         Silo,  Monopolistic Market, and Consumer Choices

Silo might switch on alarms for competition law enforcers because it has the tendency to create monopolistic market in which consumers will have to deal with only one service provider in the relevant market. This will give the service providers incentives to behave as a monopolist because consumers (the users) cannot or at least cannot easily switch to any other service provider due to the lock-in issue, or because there is simply no competitor in the market.

For consumers, silo will lead to the limited choices of services available for them in the market. In the dynamic competition, price is no longer the most important indicator to assess market performance, i.e. efficiency. Innovation  becomes an essential proxy along with other indicators such as the availability of consumer choices, the introduction of new products, and increase of product quality by means of the adoption of new technologies.[7] This concept is useful to understand market development in cases when services are provided for free of charge as commonly found in multi-sided platforms such as social networking sites where zero prices in term of money cannot be used as a major indicator that competition in the market works. Instead, other factors such as the protection of consumer interests for example the protection of consumer data and privacy and the legal remedy provided for when such interests are impaired and market structure that provides for sufficient players and choices for consumers are important to be taken into account. As online platform market is divided into silos, the market becomes fragmented in smaller markets each with its own monopolist. Since entering the market for potential competitors is expensive enough, consumer choice is limited to services provided by the monopolist or at least the dominant incumbent.

• ·         Reputation As A Tool to Compete

While it might be argued that not all businesses rely strongly on an online reputation system, online reputation undoubtedly becomes more important as user awareness grows about one essential function of reputation to calculate and predict the risks of a certain transaction. Positive reputation is hence a powerul tool for an online platform user to compete depending on what they are offering on the platform. A study on ‘A Trust-Based Consumer Decision-Making in Electronic Commerce: The Role of Trust, Perceived Risk, and Their Antecedents’ discovered that a consumer’s trust positively influences the purchasing intention.[8] This research finding explains why giving a good review could be useful to promote the selling of a certain product. The more good review being obtained, the better reputation the reviewee has. For the online platform like eBay, this means also a better selling of the merchandise offered by the platform and thereby it is of their interest to have good reviews on each product. Thus, online reputation system built by the platform is  also auseful tool for them to compete in the relevant market. The more reliable the reputation system, e.g. no fake rating, the more likely they can attract users.

In general, competition law with its nature to use ex-post approach imposes neither obligation to enable reputation portability nor qualify the close system of online reputation as anti competitive per se. Rather, it decides on case by case basis, whether hindering reputation portability is a violation against competition law or not.

Indonesian Competition Law Perspectives

There is no case law so far as regards online reputation portability. However, under Indonesian Competition Law, Law No. 5 of 1999, the prohibition of market controlling[9] and the prohibition of dominant abuse[10] might come into play in this regard.

• ·         Prohibition of Market Controlling under Article 19 lit. (a) of Law No. 5 of 1999

Under Art. 19 lit. (a) of Law No. 5 of 1999, firms are prohibited to refuse or impede certain firms from conducting the same type of business in the relevant market that can result in monopoly practices and/or unfair business competition.

Hindering users to move or carry their online reputation to any other platform, according to the general prohibition above, is only prohibited when it qualifies as a refusal or impediment for the other platform(s) to conduct the same type of business in the relevant market and when it has the potential to result in monopoly practices and/or unfair business competition. The effect of harm in the prohibition does not require that the harm has occurred. It is sufficient, that the harm is likely to take place when the element of refusal or the obstruction to compete is satisfied.

• ·         Prohibition of Dominant Abuse under Article 25 of law No. 5 of 1999

Art. 25 par. (1) of Law No. 5 of 1999 prohibits firms to take advantage of their dominant position in order to restrict the market and technology development[11] or hinder other firms from having the potential to become their competitors.[12] The benchmark for dominant position are 50% of market share for one firm or firms group and 75% market share for two or three firms or firms groups.[13]

By refusing to enable users to move or carry their reputation to any other online platform, the concerned online platform might hinder other platforms to enter the same market and hold them back from developing technology to make their platforms compatible for the transfer and process of data concerned and the use of the data for a better reputation system provided to users. However, as mentioned above, for the application of the dominance prohibition, the platform in question shall meet the benchmark for the qualification of dominance.

Conclusion

Online reputation portability is a new issue that has not received sufficient attention it deserves. Despite the absence of legal case on this subject, it seems that there are already several key issues that need clarification and further legal studies. As technology and business models are vastly developed, legal clarity is required as an incentive for market players to innovate.

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[1] Such as. Benyoucef, H. Li, & G.v. Bochmann, ‘A System for Centralizing Online Reputation’ (2011) 3(3) Journal of Emerging Technologies in Web Intelligence, 179; H. Li, M. Benyoucef, & G.v. Bochmann, ‘Towards a Global Online Reputation’ (2009) Proceedings, ACM MEDES, Lyon, France, 377; S.S. Kumar, & P. Koster, ‘Portable Reputation: Proving Ownership of Reputations Across Portals‘, Information and System Security Group, Philips Research Laboratories, Eindhoven, The Netherlands; and Aroyo, L., De Meo, P., and Ursion, D., ‘Trust and reputation in Internetworking Systems’.

[2] Article 18 par. (2) of the GDPR draft. In June 2015, the European Council approved the GDPR draft, after the amendment of the draft in March 2014 by the European Parliament. The final approval by the European Commission, European Parliament, and European Council is expected to reach by December 2015. See Marcus Evans’ post in Data Protection Report on 15 June 2015.

[3] Commentary of Law No. 11 of 2011 Art. 26 par. (1). The first category is too broadly formulated. While it does not help to understand what private life means under the Law, the term ‘free from any types of disturbances’ do not have either a clear meaning or a clear purpose why it needs to be included in the context of privacy rights. The last category is also vague and problematic, because it does not explain whose private life and data of a person is concerned, whether it is one’s own private life and data, or of others. If it is about one’s own private life and data, it is also not clear, why it does not cover the right to access information, rather than the right to monitor the access.

[4] J.C. Rochet & J. Tirole, ‘Platform Competition in Two-Sided Markets’ (2003) 1(4) Journal of European Economic Association 990, 990.

[5] D.S. Evans, (Ed.), 'Platform Economics: Essays on Multi-Sided Businesses' (2011) Competition Policy International, vi.

[6] J.C. Rochet and J. Tirole, 'Two-Sided Markets: A Progress Report' (2006) 37 The RAND Journal of Economics 645, 645.

[7] See M.O. Mackenrodt, ‘Assessing the Effects of Intellectual Property Rights in Networks Standards’ in J. Drexl, (Ed.), Research Handbook on Competition Law and Intellectual Property (Edward Elgar, Cheltenham 2008), p. 81-82; M. Bijlsma, P. De Bijl, & V. Kocsis, ‘Competition, Innovation and Intellectual Property Rights in Software Markets’ (2009) 181CPB Document.

[8] D.J. Kim, D.L. Ferrin, D.L., & H.R. Rao, ‘A Trust-Based Consumer Decision-Making in Electronic Commerce: The Role of Trust, Perceived Risk, and Their Antecedents (2008) 44 Decision Support Systems 544, 556.

[9] Law No. 5 of 1999 Art. 19 lit. (a).

[10] Law No. 5 of 1999 Art. 25 par. (1).

[11] Law No. 5 of 1999 Art. 25 par. (1) lit. (b).

[12] Law No. 5 of 1999 Art. 25 par. (1) lit. (c).

[13] Law No. 5 of 1999 Art. 25 par. (2).

Online Reputation: Once Again, when Innovation Might Raise Legal Issues in Indonesia (Part I)

When I wish to buy a new mobile phone from a shop, I would appreciate reviews on the product I want to buy before making a purchase. Buying from an online shop would even increase that need, especially because I do not physically meet the seller and I never know in advance whether he and his product are real, until the transaction is completed, i.e. I receive the product and the seller receives the money. Well, unless I have already had an experience with the same seller before and thereby I could judge his performance in the past and his trustworthy for the next transaction.

While word-of-mouth has been long recognized in bricks and mortar world, the importance of reputation in the digital world has increasingly received attention from both online platforms and users. Let’s think about globally recognized commercial online platforms such as eBay, Amazon, TripAdvisor, or Airbnb, or non- commercial online platforms like LinkedIn, that have been using online reputation systems. Similarly, we can find online reputation system used by Indonesian online platforms like Tokopedia.com - an online shop for different types of merchandise - where users can review product quality, the speed of delivery, product accuracy, and service quality. Apart from giving review for users who already made transactions, the platform also provides a discussion forum, in which potential buyer can pose questions. Not all Indonesian online platforms – actually only very few – uses online reputation system, but at least those very few have started and it is a good start.

Reputation serves a function similar to a certificate of good conduct. The difference is that reputation is given by the community in which certain practices have been constantly performed and valued, instead of being granted by a certain state authority like the ministry of justice or police department or other institution alike in the case of certificate of good conduct. Constant performance and valuation also apply in building reputation in the digital world. The way online reputation system is built would contribute to a better life in the digital world: easy and secure. Bringing reputation online has been, thus, the next innovation after the creation of the digital world itself. Nevertheless, despite the undoubted necessity, in practice, online reputation might be entangled by certain legal issues or even legal uncertainty. And this will be the topic of my article today, taking the viewpoint of Indonesian legal system.

Freedom to Review: Freedom of Speech?

In Indonesia, freedom of expression belongs to the fundamental rights guaranteed in the Indonesian Constitution of 1945.[1] Further, the Constitution also recognizes the fundamental right to “communicate and obtain information in order to develop personal and social environment, and to seek, obtain, possess, store, process, and convey information by using any available channel”. [2]

Freedom to review in the context of this article is part of the freedom to express one’s mind about a certain product, be it goods or service, the transaction process to obtain the product or the personal interaction process, and the party(ies) in the transaction or interaction. The channel that can be used to give a review can take different forms. Even a contact form for users to write their opinion can serve as a channel, albeit less transparent because of its invisibility to other users.  The use of social media to post reviews has also become more popular these days. A single thumb up on Facebook exemplifies a simple form of review without further information of what being liked. An open letter sent to be posted in an e-newspaper containing a complaint on a particular service of a company is another channel to deliver a review, such as that provided by detik.com or kompas. However, an online platform can simplify the reviewing process by creating a mechanism, by which users or consumers can directly review the product on the platform, the review is made visible also to all other users of the same platform, and made easier to read by categorizing the information of the item being reviewed and the value, for instance by means of rating system. This way, it is also easier for the party being reviewed, for instance a seller, to gain reputation over a certain period of time after receiving a number of reviews because users can easily read his track records. This is the online reputation system we are dealing with in this article.

Online Reputation and Consumer Protection

Law No. 8 of 1999 on Consumer Protection recognizes the right of consumer to information of a product[3] and the right to be heard with regard to her opinion and complaint concerning the product being used. [4] The Law also prohibits business actors to provide incorrect or misleading information concerning the products being offered or advertised. [5]

Online reputation system helps to protect the interest of consumers in two ways. First, as discussed above, it provides channel for consumers who directly involve in the transaction, to provide feedbacks or write complaints. Because the review is visible to other users, the reviewee will be encouraged to react positively and thereby, improve or at least keep their reputation. In turn, this will also help the reviewee to improve the quality of their product and their performance in completing transactions in the future.

Second, it protects the interest of other consumers (those who have not made a transaction with the reviewee) to obtain as many information as possible regarding the product, the process, and the party they will deal with, if they decide to make a transaction. Online reputation system also provides information concerning the check on whether the product has met the specifications being promised and advertised.

There is no contradictory concept between the idea behind the building of an online reputation system and the understanding about the rights consumers entitled to according to the Law. Furthermore, online reputation systems help simplify the implementation process of consumer right by providing a mechanism for consumers to give feedbacks and at the same time ensuring the provision of accountable responses by the reviewee through the work of reputation itself. An individual consumer does not have to go through a complaint process without certainty of what could be the result or even if it would be responded at all. To make it extreme, she does not have to go to court for a civil claim only to make sure that her complaint is heard.

“If you are happy with our services, please let others know. If you are unhappy, please let us know.”  We might be familiar with this when we visit a shop or a restaurant. The idea of giving recommendations to others is also used in online reputation system by giving positive reviews. Writing feedbacks to a seller or service provider is also enabled in online reputation system. However, because in online reputation systems not only the seller or service provider can see that a certain customer is unhappy, but also other users of the online platform, the seller  or service provider is encouraged or even under pressure to respond to it in accountable manners. His reputation is put at stake.

Online Reputation under the Purview of Indonesian ICT Law

At least two points from Law No. 11 of 2008 on Electronic Information and Transaction might be relevant to highlight as regards online reputation system. First, the Law requires business actors to provide full and true information about the contractual conditions, procedures, and products being offered.[6] User reviews provides a mechanism to check whether the business actors they deal with, have already complied with such obligation in the past experiences and thereby, help other users to estimate their credibility at present and in the future.

Second, parties in electronic transactions shall interact in good faith. [7] While Law No. 11 of 2008 in the first point above imposes an obligation on business actors, in this point, it addresses all parties in electronic transactions. Although the Law is silent regarding how a review shall be made, it is subject to the obligation to act in good faith. Complaints are to be distinguished from the act of offense in order to express disappointment.[8]

Indonesian ICT Law prohibits distributions, transmissions, and/or making accessible electronic information and/or electronic documents containing affronts and/or defamation.[9] Violations against the prohibition are subject to criminal charges.[10] In addition, civil actions could follow against parties providing electronic system and/or or using information technology to the detriment of the victim.[11] The Law also allows to resolve such civil actions through arbitration or any other alternative dispute resolution.[12]

Challenging the Devil: Bad Review vs. Defamation

Nobody wants to be charged for defamation after writing a customer complaint. True, the criminal charge will be judged by the court and due process of law shall ensure a fair trial. It shall guarantee even the fairness of the procedures prior to the trial. However, in practice, it is not a trivial case. In the case of Prita Mulyasari several years ago, Prita was charged for defamation after sending her complaint concerning a medical treatment she received from a hospital in Tangerang to a newspaper (a common practice to post a complaint in Indonesia as mentioned in the beginning of this post). Instead of receiving a response from the hospital to clarify the points she complained about, she was charged for defamation along with a claim to pay civil damages and under detention for a couple of months until the case was decided in the judicial review procedure by the Supreme Court. [13] In the verdict, the Supreme Court ruled out the charge and accordingly, Prita was released from her detention. [14]

The case illustrates how, despite it being advantageous for consumers, making a review could be daunting if it is not supported by sufficient legal certainty. A bad review in the sense of giving a negative review could backfire when the review itself is considered bad. But the questions remain: when is a review bad or good, what would be the minimum standard to be met, how to delineate a clear border between a negative review and a defamation? The Law is silent when it comes to details, but unfortunately the devil is in the detail. And certainly nobody wants to think about it from jail.

The use of online reputation systems help to reduce that legal risk, while lawyers, legislators and law enforcers including courts shall worry about answering the questions above. By using the system built by the online platform itself, users will have more certainty that what they do in order to give reviews is within the frame of what is allowed by the system. Users will also not need to bother finding other tools for reviewing, if a more straightforward and effective channel is available. A system could be made to filter out certain words that are not accepted for a free-formulated review. Another option is by implementing a rating system and using only keywords to point out major characters of the products, processes, and the parties being dealt with. The options are still open and here, innovation is most welcome. Building an online reputation system could also be daunting for business actors, because it entails a lot of works in order to give accountable responses to each review. But here is the challenge. Maybe it is worth to think that a reputable business actor shall be the most competitive one in the market. And this brings me to the next point.

Online Reputation from the Perspective of Indonesian Competition Law

There is no provision in Law No. 5 of 1999 mentioning online reputation. There is no case law concerning this subject either, not yet at least. So, why should competition law bother? Could it be reasonable to think about an imaginary scenario of a reputation cartel? Would having a good reputation contribute to gaining market power, or market dominance, something that the competition authority should look into?   

Well, let’s think about those questions for now. I will continue the discussion in my next blogpost. Until then!

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[1] Art. 28E par. (3) of Indonesian Constitution of 1945.

[2] Art. 28F of Indonesian Constitution of 1945.

[3] Art. 4 lit. c of Law No. 8 of 1999.

[4] Art. 4 lit. d of Law No. 8 of 1999.

[5] Art. 10 of Law No. 8 of 1999.

[6] Art. 9 of Law No. 11 of 2008.

[7] Art. 17 par. (2) of Law No. 11 of 2008.

[8] This might remind us of a case last year as an unhappy customer of a gas station in Yogyakarta wrote her complaint in a social media, but ended up writing a post considered as an insult against the people of the city.  

[9] Art. 27 par. (3) of Law No. 11 of 2008.

[10] Art. 45 par. (1) of Law No. 11 of 2008.

[11] Art. 38 par. (1) of Law No. 11 of 2008.

[12] Art. 39 par. (2) of Law No. 11 of 2008.

[13] The judicial review procedure was taken after the Supreme Court in the final instance made contradictory decisions on the criminal charge (defamation) and on the civil claim on Prita case. A regards the criminal charge, the Supreme Court in its Decision No. 822 K/Pid.Sus/2010 convicted the applicant of the cessation/the defendant in the criminal charge (Prita) guilty for a violation against Art. 27 par. (3) and 45 par. (1) of Law No. 11 of 2008, while in the civil claim the Supreme Court in its Decision No. 300K/Pdt/2010 dismissed the claim of the plaintiff and thereby, released Prita from all civil charges.

[14] Supreme Court Decision on a Judicial Review No. 22 PK/Pid.Sus/2011.