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.
Yuli's Competition Law Blog
Wednesday, 15 March 2017
Friday, 11 November 2016
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.
Sunday, 28 February 2016
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
(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.
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
(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
(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).
Monday, 1 February 2016
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]
[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.
Saturday, 2 January 2016
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.
[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).
Monday, 20 July 2015
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!
[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.
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