Antitrust, DRM & Coffee: Is It Illegal For Keurig To Lock Down Its Brewers?

from the the-k-cup-dilemma dept

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reposted from the Disruptive Competition Project

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Companies: green mountain coffee, treehouse foods

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Comments on “Antitrust, DRM & Coffee: Is It Illegal For Keurig To Lock Down Its Brewers?”

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Ninja (profile) says:

If memory serves the coffee capsules DRM is easily broken since it relies on printed code on the surface of the thing. So basically it’s much like any other DRM (easily bypassed the second it comes live). The only way companies managed to keep it somewhat alive is by doing what Sony did which is going after the ones tinkering with their DRM which is the worrisome part because even if breaking DRM for educational purposes may be seen as ok they simply destroy the persons behind such initiatives with lawsuits.

In any case I’ll just treat my physical goods with DRM the same way I treat online ones nowadays: I’ll stay away. The moment the amount of people realizing how damaging such DRM can be start voting with their wallets we’ll see DRM going belly up.

Anonymous Coward says:

Re: Re:

I agree but the problem can arise when there are (broad) patents involved that prevent competitors from making similar products hence forcing you to go to that specific manufacturer for the product. But that’s a different issue altogether.

“Yet a black-letter rule of “per se lawfulness” that necessarily prohibited competitors from challenging product re-designs based on facial claims of technological innovation would, in this author’s judgment, go too far in the other direction.”

Provided there are no laws (ie: no stupid patents) preventing competitors from making similar products then the solution would be for the market to simply find another product.

“antitrust case, competition law was a bit schizophrenic when it came to the question of interoperability.”

For something simple like coffee makers a manufacturer can even advertise the interoperable nature of their product. Consumers can then choose those that do.

These anti-competitive issues over coffee makers really divert from the big picture. I don’t really see coffee makers as a huge problem when it comes to monopolists. There are much bigger problems like cable/phone/internet companies (ie:TWC buying exclusivity to the Dodgers) and taxi cab monopolists (ie: limited medallions), among many other issues that the legal system needs to address. All this coffee maker DRM thing is simply a way the legal system can grandstand the alleged usefulness of anti-competitive/antitrust laws while really making little real use of them.

TheMattRay (profile) says:

Re: Re: Re:

Definitely agree that the scope of this is rather unique in what is normally discussed (coffee brewers versus cable/phone/internet monopolization). Thanks for noting that this particular case has some interesting (and non-interesting) ties to the larger anti-competitive arena; I tried to make it clear that I was spotlighting the specific instance of THIS and appreciate your ability to pick up on that (not too common out here “in the wild”).

Jake says:

I’ve never seen the point to those things anyway. They generate a bunch of extra waste packaging, which you can’t recycle in a lot of places without emptying out the used grounds anyway, and who in their right mind buys a US$70 coffee maker that can only use pre-ground?

(Yes, I am a bit of a coffee snob. However did you guess?)

John Fenderson (profile) says:

Re: Re:

I agree. Although, as the AC above points out, there is a good use case in commercial or office settings. In the offices where I work, there are a couple of these machines and they produce acceptable (but not wonderful) coffee.

I don’t understand the appeal of these machine in the home at all, though. I’m not seeing how they are better or more convenient than other, cheaper and lockout-free methods.

John Fenderson (profile) says:

Re: Re: Re: Re:

That’s not the alternative at all.

There are several other ways of getting the same level of convenience (single cup brewing, no mess, quick and easy, etc.) aside from the Keurig machines. All of the alternatives let you use any coffee you wish, and almost all of them are much less expensive than the Keurig machines.

If you just go into any decent coffee house and ask them about alternatives, they’ll probably be happy to show them to you. My personal favorite is the Aeropress (about $20), but there are others that people swear by as well.

Paul Renault (profile) says:

Not quite the same but.. Québec, the Consumer Protection Act, states that:

52. The merchant or the manufacturer shall not make the validity of a conventional warranty conditional upon the consumer using a product which is identified by brand name, unless at least one of the three following conditions is fulfilled:
(a) the product is supplied to him free of charge;
(b) the warranted goods will not function properly unless that product is used;
(c) the conventional warranty forms the object of a separate contract entered into for valuable consideration.
1978, c. 9, s. 52.

As it has been shown over and over, Keurig DRMed coffee makers work just fine with non-Keurig coffee pods. So…is Keurig supplying pods for free in Québec? Or providing some other ‘valuable consideration’?

John Fenderson (profile) says:

Re: Re: Re: Not quite the same but..

“In the ‘States, you’re not allowed to bypass DRM/software”

This probably doesn’t apply to what Keurig’s doing here. You can’t bypass access controls (it’s doesn’t have to be DRM software specifically) that are preventing access to copyright materials, but that’s not what the K-Cup’s DRM is doing. The DMCA doesn’t apply.

Quiet Lurcker says:

Flimsy Excuse

The claim that the DRM scheme is a means of identifying the pod to the brewer seems a flimsy excuse, perhaps even a straw-man argument.

The way I read it, the fact that the new brewer design will simply not work without the markings, where it would be a trivial exercise to design the brewer to behave in some default manner that will brew an acceptable cup irrespective of the pod in use, is the tell. That tells me it’s anticompetitive, not ‘improved user experience’ or whatever else Green Mountain cares to call it.

Anonymous Coward says:


Some inventive person will probably figure out how to jailbreak the Keurig, but then anyone who dares to release this to the public can expect to get clobbered by the DMCA’s anti-circumvention ban, which as we’ve seen in the deCSS case and the ongoing game console wars, basically trumps the First Amendment’s guarantee of free speech.

Avatar28 (profile) says:

It will be telling if Green Mountain files a DMCA lawsuit

I wonder if Green Mountain will file a DMCA lawsuit against TreeHouse since bypassing the DRM is technically a violation of the DMCA. My guess is that their lawyers will be smart enough not to do that facing the threat of monopoly lawsuit. If they file a DMCA lawsuit then they’re effectively admitting that the purpose of the markings IS DRM and not just to make a better cup. It could get interesting if they do though.

Anonymous Coward says:

Re: It will be telling if Green Mountain files a DMCA lawsuit

It’s rather telling that before the DMCA, US automakers have on multiple occasions lost court battles with aftermarket manufacturers who claimed the automakers were breaking anti-monopoly statutes by locking them out of the market.

So then automakers were forced to offer cars without a stereo (and not charge customers full price) and to stop telling people that the use of non-OEM oil filters would void the warrantee.

Lurker Keith says:

Re: But DRM Leads To Innovation!

Thinking leads to ideas. Ideas lead to inventions. Inventions lead to patents. Patents lead to the Dark Side.

Someone had to.

Patents are supposed to lead to Innovation, but, more often than not, are written vaguely, which was done to lock out competition.

I wonder if Ken’s quote on vagueness & thuggery applies to patents, too? Patents are supposed to be uber-detailed, so that when they expire than can act as blueprints, but that’s no longer enforced.

Adam (profile) says:

Seriously? So I cut up a DRM’d pod removing the foil top and the bottom plastic. I stick my offbrand pod inside and stick the whole assembly in the keurig. Unless this thing is tracking individual serial #s on each pod how would it know the difference? I’m merely making an adapter using their own product and as the consumer I’m free to do so. That being said. When I no longer have a choice then I shall just remove my need to choose. I’ll but a competitor device.

ltlw0lf (profile) says:

Re: Re: Re: Re:

I assume the heat from the water is what destroys the label??? If so, could that not be shielded?

My greatest concern (haven’t really heard anything about the technology used except here,) would be how the label is destroyed? In the pre-2.0 versions, the foil is punctured (which has bothered me in the past considering the paint they use on the foil, and how much if any of the paint gets carried into the coffee. If they are destroying the label, what is the likelihood that the paint could end up in the coffee and what sort of a health concern would that introduce to the coffee (not that coffee isn’t already a potential health concern.)

javier says:

Re: Re:

Or, you could buy the locked-in unit, try the non-complaint pods in it and when it won’t work, return the unit. If Bed Bath and Beyond, Costco, and other really high volume chains start to see an excessive number of “return to vendor” returns or have to open box discount, they’ll contact the manufacturer and demand a redesign. And, what manufacturer wouldn’t listen to a retailer that pushes tons of their product. Or, worse – carry a competitor’s line. Return with great displeasure and outrage (faked of course) is my strategy if needed.

Chris says:

I was at Costco a few weeks ago with my parents, and when my mom went to buy the new Keurig 2.0 (their old Keurig broke recently and they liked it for the most part), i warned them about the DRM not allowing you to use other brands of K cups. Not really knowing what i was talking about, they went ahead and purchased it. Well, not only is it a worse unit than the old ones (regular complaints from my parents about how slow it is compared TO AN OLDER DESIGN is the one i hear the most), but wouldn’t you know it, when my dad popped in a 3rd party k cup they had from earlier, it blazed an “OOPS! I DONT KNOW WHAT THIS IS! SORRY!” message. Because of the nature of the machine and how it opens K cups when you close the lid, it also meant that they had to ruin a perfectly good K cup to find out that it wont accept them.

Long story short: not only does the DRM make it a worse product than their earlier design, their are a number of other qualities that are worse. Talk about making your company irrelevant in the market.

John85851 (profile) says:

Why not license the technology?

I know the boat has already sailed on this idea, but why didn’t Keurig offer to license their cups technology to other companies like Green Mountain? If Keurig is worried about losing sales of cup refills, then wouldn’t it be better to get some money from licensing than nothing? And then both Keurig and their licensees could go after anyone who made non-licensed cups.

But, instead, we get the usual case of a company wanting complete control to the point of locking everyone else out rather than compromising.

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