Jesse's "Fractionally Yours" Legal Newsletter v5: The (Sorry) State of Internet Search and DEI & ESG and the Law.
Welcome to the fifth edition of my legal newsletter. A special welcome to all my new Substack readers!
Today is Leap Day! Practicing law is my passion, and something I’ve been doing with relative success for over 20 years. I’m new to "content creation," but I’m taking the leap, and it's a lot of fun. So, thank you for reading. Leap with me!
To all the Substack readers: The first 4 editions of the Fractionally Yours newsletter are on LinkedIn. Going forward, I’m going to post on LinkedIn and Substack, bi-weekly.
In this edition of Fractionally Yours, I’ll take a look at the shifting regulatory and business environment around internet search and give some thoughts on DEI (Diversity, Equity, and Inclusion) and ESG (Environmental, Social, and Governance) in law and business.
As the Web Turns: The Shifting Legalities of Internet Search
With all the news this week focused on social media and the Supreme Court, which is really just another front in the culture wars that SCOTUS has gingerly waded into, I’d like to address what I find far more legally interesting and more relevant to my clients: The monopolization of internet search.
The dismal state of internet search is pretty obvious to any user. When you run a search on your phone, your browser, your smart speaker, your car, etc., you’re either seeing (or hearing) results paid for by Google’s advertisers or generated by Google itself. The rest of the web – the open web, regardless of the quality of the results – seems to be an afterthought. We’ve all just sort of gotten used to that.
But legally, there is a problem. According to the U.S. government, Google is abusing its dominant position in the internet search market. According to the original complaint, in October 2020, Google maintains its market dominance by entering into exclusionary agreements with companies that make the devices that people use to access to the web – most notably Apple, because of their dominance in the hardware market – to ensure that Google is the favored search provider, leaving few ways to avoid Google-curated web results. The government alleges that in the absence of competition, Google does not need to deliver the best search experience because consumers don’t have the choice to use a competing search product. In December 2020, thirty-eight states filed a separate suit alleging essentially that Google dominates the search market and crowds out "organic" (not paid) results, especially from so-called "specialized vertical providers" (SVPs) like Yelp, Expedia, Amazon, etc. There are similar cases pending in Europe but European antitrust laws are beyond the scope of this note.
In August 2023, after years of discovery and legal wrangling, the Court allowed the claims that Google’s exclusive agreements were anti-competitive to go to trial but dismissed the claims about SVPs and other anti-competitive behaviors. The trial concluded in November. A decision is expected in May and there will be years of appeals after that.
In my opinion, the outcome of the trial is somewhat of a snooze fest. If Google loses, then consumers will likely be able to choose their search provider, and most will choose Google anyway. There is a possibility of a more extreme remedy, like barring Google from the search market, but I wouldn’t bet on that. More likely, an appellate court, or even the Supreme Court, will eventually provide more guidance on what constitutes “legal” exclusive contracts in the tech space. General counsels like me, fractional and otherwise, are going to be very interested in that. The consumer, not so much.
The most interesting aspect of these enforcement actions is how we conceptualize the market for internet search. It’s important because, as a matter of law, you can’t be a monopolist unless you dominate a market, and that always comes down to defining the market you're talking about. According to the government, the market is just search-based advertising, and Google has 90% of that (which, frankly, seems conservative), so it's dominating. Google argues the market is essentially the entire internet (including Instagram, TikTok, and the like) and, when you include all ads served there, Google’s market share drops to 29%, arguing it's not dominant. For the government to win, the Court will have to agree that Google is dominant in the smaller ad search market.
Tech moves rapidly, and the market that existed in late 2020 when these suits were launched differs from today's market. Currently, the hot topic is artificial intelligence search, like Perplexity. Google is far less dominant than it wishes to be in the market for AI-aided search, which didn't even exist as a consumer product when the Google trial started in September 2023. If AI proponents are to be believed, AI search delivers a superior experience because Large Language Models (LLMs) simply read and summarize content to find the result you want, bypassing the whole linking process, which is central to the internet/Google search experience. While the truth of this claim is up for debate, from a competition standpoint, the consumer now has an alternative. Google is appearing less like a monopolist in the internet search market.
And that's likely to be the case until Google either organically invents a better AI search experience or, more likely, buys its way into the AI search market by gobbling up one of the AI search startups or the associated technology. How this market develops will indicate whether consumers will have real choices in the future and whether entrepreneurs will have a genuine opportunity to build the next Google. If there's any area of antitrust law to watch, this is it.
As a side note, I have high hopes for non-advertising based AI search, at least in the legal space, through GPTGC.ai. Keep an eye out for that in the coming weeks...
DEI and ESG: A Means to an End, or the End Itself?
I’m generally a fan of Diversity, Equity, and Inclusion (“DEI”) and Environmental, Social, and Governance (“ESG”). Policies and businesses infused with DEI and ESG goals are examples of “doing well by doing good.” Done correctly, ESG and DEI should enhance shareholder value. Think about the electric vehicle industry’s overall goal of electrifying the world’s automotive fleet as a way to reduce tailpipe emissions, while also creating a whole new and very valuable electric charging infrastructure. Or consider a large corporation giving preference to women-owned and minority contractors as a way to provide opportunities to historically underrepresented entrepreneurs, while also expanding the labor force and thereby holding labor costs down. DEI and ESG can, and should be, a win-win. It's easy to justify and defend these policies when retrograde shareholders attack them, which happens every so often, or as was recently the case when ExxonMobil sued activist shareholders who sought to force the company to be more environmentally sensitive. Nasty stuff. I’m always happy to be on the right side of the law and history, and to bring, or defend, ESG and DEI initiatives.
But then there are some DEI & ESG policies that seem to be an end unto themselves, and not just means to create better policies or achieve business goals. And that is where we should be wary. We don’t see this terribly often in the business world because any company that explicitly states that DEI & ESG are the actual business goals are pretty unwise. Shareholders would either sue or flee. I’m not even certain that would be subject to a business judgment rule defense.
Where we do see ESG and DEI as explicit goals, as opposed to a means to an end, is in government policies which businesses are then obliged to live with. And the challenges to those are not based on business law (the rights of shareholders) but on constitutional law - namely a whole complex jurisprudence around Due Process, the Equal Protection Clause, Takings, and the Privileges and Immunities. Fascinating stuff.
A few laws come to mind. California decided that women and certain “underrepresented communities” were, well, underrepresented on public company boards and required companies to have a certain number of female board members, and members from “underrepresented communities.” Those laws were struck down as being unconstitutionally discriminatory and are on appeal. In the meantime, hundreds of California-headquartered public companies (among them the largest companies in the country and, on the other side of the size scale, some of my clients) are wondering whether they need to expand their boards or rearrange them to make room for new directors. Everyone agrees that board diversity is likely good for the bottom line, but the California laws are not aimed at creating value but are rather explicit and blunt attempts to dictate who gets to run a public company. A better approach might be to find ways to incentivize board diversity through greater access to government contracts or tax breaks. Another law is New York’s cannabis legalization law, which gave preference to licensees who had prior cannabis-related convictions on the theory that legalization should serve as a form of reparations for people that suffered under criminalization. While that's noble, the actual goal of legalization, remember, is to create a regulated, taxable market for legal cannabis products that's widely accessible. Because the law was so poorly conceived, conviction-free veterans (backed by large cannabis companies) sued, saying that the law discriminated against them. That and general bureaucratic dysfunction delayed a legal market from being set up and, in the absence of legal shops, New York City now has illegal weed bodegas on almost every block. Oops. Perhaps a better system would have been to give licenses to the most qualified operators, which would have allowed a legal market to thrive quickly, with programs and incentives to help the formerly incarcerated set up their cannabis businesses, in time. The list of poorly conceived ESG and DEI laws and policies goes on and on and is just getting longer.
I don’t really know the solution here, but as a fractional general counsel, I’m often asked to advise clients on these high-profile ESG and DEI laws. My advice: follow the law and let the courts work out its constitutionality.
Keep building, keep thinking,
Jesse
I'm Jesse Strauss, Your Fractional General Counsel. I'm a lawyer with a private practice based in New York City, assisting clients both in the United States and globally with their U.S. legal needs. My expertise covers various areas, including raising funding rounds, addressing employment issues, negotiating master service agreements, managing intellectual property, ensuring compliance, overseeing legal process management, and facilitating dispute resolution. My focus is on founding and nurturing great companies from seed to exit. Discover more at www.yourfractionalgc.com and book a complimentary 30-minute consultation at https://www.yourfractionalgc.com/contact-yourfractionalgc.