[UPDATE: Just a few days after I wrote this post based on the Chrome issue, Google released their biggest change in a decade, the “Search Plus Your World” feature that directly integrates results from Google properties like Google+ and Picasa into standard Google search results. That change — a mixing of search with Google verticals, or church and state, so to speak — raises the antitrust stakes considerably. Twitter has already raised alarms.

The antitrust analysis for “Search Plus Your World” is the same as for the Chrome SEO penalty, because it would also be alleged to be ‘exclusionary conduct.’ Did Google make that change as part of, in the Supreme Court’s words, “the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident?” Interestingly, we can already see Google’s planned response in their description of why Facebook and Twitter — the obvious competitors for this same market — won’t do as well in the new Google search framework:

“Facebook and Twitter and other services, basically, their terms of service don’t allow us to crawl them deeply and store things. Google+ is the only [network] that provides such a persistent service,” [Amit] Singhal told me. “Of course, going forward, if others were willing to change, we’d look at designing things to see how it would work.”

That could indeed protect Google from antitrust liability. They’re saying, in effect, “you don’t show up as highly in our results because our agnostic search crawler can’t access as much from you as it does from Google+.” It’s similar to how, as SEOMoz pointed out, Google+ pages rank so well not because of any specific Google tampering, but because of exceptional optimization to rank for searches of names. That might convince a judge that the new move was intended to improve user results, not to exclude Twitter and Facebook.

It’s an aggressive move, one without considerable risk given the Senate’s concerns outlined below.]

It’s no secret that Google’s biggest fear of late has been the potential for antitrust liability arising from its near-total dominance of the online search market, particularly mobile search. Google has so far prevailed, including in the myTriggers claim that many believe was secretly funded by Microsoft (how else would some little nothing company have the funds to pay for Microsoft’s own chief antitrust lawyer to represent them?), but their biggest challenge is yet to come. Back in September, the United States Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights held somewhat hostile hearings on the issue, and just last month the Chairman and Ranking Member of the Subcommittee sent a bipartisan letter to Federal Trade Commission requesting an investigation. More on that in a moment.

Aaron Wall of SEOBook gets the credit for spotting hundreds of posts ending “this post is sponsored by Google,” many of which included direct, followed links to the download page for Google’s Chrome browser. As any business with a web presence knows, there’s almost no greater sin in Google’s eyes than paying people to write phony drivel accompanied by followed links, so Danny Sullivan of Search Engine Land wondered aloud what the consequences would be:

Paid links drew much attention last year, after Google penalized JC Penney, as well as Forbes and Overstock for using them. Google even banned BeatThatQuote, one of its own companies last year, over the issue. In 2009, Google penalized Google Japan for its own search results for the same issue, not removing it but reducing its ability to rank for 11 months.

Potentially, all this means that Google will have to ban the Google Chrome download page over paid links. That would suck for Google, since it’s busy running ads for Google Chrome, which will in turn prompt people to search for it.

Matt Cutts, head of Google’s webspam team —and increasingly their public face, like in the videos Google prepared as part of a public relations campaign after the Senate’s Antitrust Subcommittee hearing— responded on Google Plus that the campaign violated Google’s quality guidelines, and so “the webspam team has taken manual action to demote www.google.com/chrome for at least 60 days,” after which the Chrome team can submit a reconsideration request. Problem identified, action taken.

So where’s the antitrust problem?

Consider the letter Senator Kohl and Senator Lee, respectively Chairman and Ranking Member of the Senate Antitrust Subcommittee, sent to Federal Trade Commission on December 19, 2011:

[Nextag’s CEO] and others also allege that Google sometimes subjects websites to “search penalties” that drastically lower where links to these websites are found on Google searches. Although there are valid reasons for instituting such penalties-such as for websites that promote illegal activities, or for sites that are fraudulent or pornographic-observers suggest that some sites are penalized only because they compete with Google. According to Mr. Katz, Google informed him that Nextag’s sites in Europe were penalized mainly because they offered links to other sites and search functionality. Of course, websites that link to other sites and allow users to perform searches have an almost identical function as the Google search engine. If these allegations are true, they raise serious questions as to whether Google is penalizing these competing websites simply in order to maintain its dominant market share in Internet search.

In some ways, the letter really is just a letter, because the Senate can’t order an Executive agency to take any particular action, but it’s a largely unprecedented letter. Bipartisan letters are rare, and, as Scott Cleland notes, letters from the Antitrust Subcommittee not prompted by a merger or acquisition are very rare.

Google might be worried, but they’re not too worried to keep aggressively moving forward with whatever business plans they have in mind. Antitrust law in general has been in the doldrums lately, after a string of hostile Supreme Court opinions, ranging from the egregious Twombly decision, in which the Supreme Court ignored the facts alleged by the plaintiffs’ complaint in favor of an alternative reality in which telecommunications is actually a very competitive industry, to the Wal-Mart v. Dukes case, which trashed consumer and employee class actions so badly it will probably have some spillover effects into antitrust law.

Things got so bad the Justice Department under the Bush Administration prepared a report, “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act,” that claimed, in essence, that anti-monopoly law was so dead there was no point in the Justice Department even bothering to enforce it. (I’m only slightly exaggerating.) That horrendous report was rescinded under the Obama Administration, and since the change in administration we’ve seen antitrust law pick up a bit, most notably with the Justice Department moving to block the AT&T / T-Mobile deal and the deal eventually being abandoned. So maybe there’s life in anti-monopoly law after all. I hope so; as John Adams said, “When economic power became concentrated in a few hands, then political power flowed to those possessors and away from the citizens, ultimately resulting in an oligarchy or tyranny.”

Having a monopoly isn’t illegal, which is why Google Chairman Eric Schmidt didn’t deny at the Senate hearing that Google was indeed monopolist in online search. What’s actually illegal under § 2 of the Sherman Act is “the possession of monopoly power in the relevant market and the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Grinnell Corp., 384 U.S. 563, 570­-71 (1966)(emphasis added). Having a monopoly isn’t illegal, but using the monopoly power to maintain it is, and in the case of Google’s search results we’re really talking about “exclusionary conduct.” As the Supreme Court has held, “under certain circumstances, a refusal to cooperate with rivals can constitute anticompetitive conduct and violate § 2 [of the Sherman Act].” Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 US 398, 408 (2004)(citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U. S. 585, 601 (1985).

Beyond general principles that excluding rivals might be illegal, antitrust law is in flux over the right rule to use in evaluating “exclusionary conduct” cases, with spirited debates — one antitrust practitioner told the Senate it was a “holy war” — over the correct rule to apply when a monopolist excludes competitors from a given vertical or horizontal market. Consider these possible standards listed in a mere footnote to the Department of Justice’s Section 2 report:

Einer Elhauge, Defining Better Monopolization Standards, 56 Stan. L. Rev. 253, 330 (2003) (advocating rules of per se legality and illegality based on monopolist’s efficiency); A. Douglas Melamed, Exclusive Dealing Agreements and Other Exclusionary Conduct–Are There Unifying Principles?, 73 Antitrust L.J. 375, 389 (2006) (advocating a “test” under which “conduct is anticompetitive if, but only if, it makes no business sense or is unprofitable for the defendant but for the exclusion of rivals and resulting supra­competitive recoupment”); Mark R. Patterson, The Sacrifice of Profits in Non-Price Predation, Antitrust, Fall 2003, at 37, 43 (stating that “the sacrifice-of-profits test provides a desirable approach both for litigation and business planning”); Steven C. Salop, Exclusionary Conduct, Effect on Consumers, and the Flawed Profit-Sacrifice Standard, 73 Antitrust L.J. 311, 341 (2006) (proposing a standard where “the court would evaluate the likelihood and magnitude of expected consumer benefits or harms based on the information reasonably available at the time that the conduct was undertaken”)

There’s the “effects-balancing test,” the “profit-sacrifice and no-economic-sense tests,” the “equally efficient competitor test,” the “disproportionality test,” and a host of other possibilities, each of which focuses on one thing: whether or not a monopolist is abusing its monopoly power to maintain the monopoly.

Which brings us back to Google’s Chrome penalty. Google only penalized the single URL, www.google.com/chrome. That’s not what they usually do. When Matt Cutts explained penalties in a video in February, he kept referring to “your site,” and all of the prominent penalties in the past year — Overstock, JCPenney, and Forbes — apparently penalized the entire domain. As Vanessa Fox, who helped develop Google’s Webmaster Central, explained at Search Engine Land:

When I worked at Google managing Webmaster Central (where the webmaster guidelines reside), I saw this kind of thing all of the time. And I saw the impact it had first hand. Now that I’m no longer at Google, I regularly field emails and phone calls from companies, large and small, panicked because they’ve lost their major source of revenue due to lost rankings in Google. More than one company has told me they’d have to close down entirely if they weren’t able to get their traffic from Google back (and a site can’t always get its rankings back).

Fox then showed a graph from one such “penalized” website in which traffic across the entire website was cut ten-fold, if not more.

The question is, what are Google’s policies for penalties following violations of their guidelines? It’s only a matter of time before a competitor to one of their many “vertical” products — Local, Offers, Finance, News, YouTube, Maps, Travel, Flight Search, Product Search, and who knows what else they have planned — intentionally tries to boost its rankings through a paid link and blogging campaign, then tells Google that Google can penalize only the target URL of the campaign, and not the whole site.

What happens then? Would Google penalize their rival’s entire site, as they would likely want to do, or just the URL in question, as they did with Chrome? If they used the site-wide penalty, how would they explain to a judge or federal regulator why Chrome received special treatment? If they used the URL-only penalty, how would Google keep its search results clean of link building campaigns?

It’s not an easy choice to make, but such is (and should be) the life of the monopolist. This problem isn’t irreparable, but Google needs to start standardizing its penalty policies — as they’ve repeatedly tried to impress upon Congress and the FTC, make it all about the algorithm — if it wants to avoid yet more scrutiny.