Google, one of the most closely watched companies on the planet, somehow managed to surprise investors and the media when it disclosed in a May 10 regulatory filing that it was setting aside $500 million to cover potential settlement costs related to a Justice Department investigation.
The Wall Street Journal reported three days later that the settlement would resolve a criminal investigation into allegations Google made hundreds of millions of dollars accepting ads from illegal online pharmacies.
No one may have been more surprised than Victoria A. Espinel, the U.S. intellectual-property enforcement coordinator. Just six months earlier, Espinel, who's leading the Obama administration's efforts to thwart rogue pharmacies, commended Google's help in the battle at a White House meeting. And in June, Espinel's office released a plan (PDF) to address intellectual-property enforcement that praised Google, along with Yahoo and Microsoft's Bing, for voluntarily updating protocols to prevent the sale of ads to rogue pharmacies.
"The U.S. Government applauds these efforts by the private sector and will continue to work with these companies and other search engine operators, advertising brokers, and payment processors to explore methods to prohibit paid advertising for online illegal pharmaceutical vendors," the document, with a signed introduction by Espinel, reads.
A representative at the Office of Management and Budget, of which Espinel's office is a part, referred questions regarding Espinel's knowledge of the criminal investigation of Google to the Justice Department. Jessica Smith, a spokeswoman there, declined to confirm or deny the existence of an investigation, citing agency policy. Google also said it wouldn't comment because it was a legal matter.
While neither Google nor the Justice Department would discuss the issue, a former Google partner, which the company hired to verify pharmacy legitimacy, acknowledged being questioned by regulators about Google's selling ads to illegal Internet pharmacies. "We were subpoenaed by the U.S. Attorney based in Rhode Island in the summer of 2009," said Gabriel Levitt, vice president of PharmacyChecker.com.
The Justice Department's Smith said, as a general matter, the agency rarely shares details with other agencies in the administration. "There is somewhat of a firewall here between what the Justice Department investigates and the White House," Smith said.
That said, it's at least awkward that the Obama administration was praising Google for its help in thwarting rogue online pharmacies while at the very same time investigating the company for enabling those pharmacies to reach millions of Web customers. And the praise is even more curious given the eye-popping $500 million sum for a potential settlement.
"It's remarkable," said Ben Edelman, an assistant professor at the Harvard Business School, who has written about the growing market concentration in Internet search and resulting risks for advertisers. "The irony is obviously severe."
There are plenty of others surprised by the news. At that same December meeting at the White House, Google was joined by Microsoft, Yahoo, Go Daddy, and a few other companies in announcing the creation of a nonprofit organization called the Center for Safe Internet Pharmacies. The purpose of the group is to share information about illegitimate online pharmacies in order to root them out and shut them down.
"It was a surprise to me because I didn't know the investigation was going on and because a half a billion dollars is a big number, even for Google," said Christine Jones, general counsel, executive vice president, and corporate secretary at Go Daddy, the giant domain registration and Web hosting company that spearheaded the Center for Safe Internet Pharmacies effort.
The magnitude of the potential settlement illustrates how pernicious the problem of illegal pharmacy drug sales are, Jones said. "If Google was making hundreds of millions of dollars on search advertising, how much money were these sites making?" Jones said.
In helping establish the industry group, Hilary Ware, Google's managing counsel for litigation and regulatory affairs, said the problems with illegal online pharmacies are bigger than any one company can resolve. "As the administration has made clear, no one company can solve this problem, so this new cross-industry group is a welcome step forward that we are pleased to support," Ware said in a statement, according to a Bloomberg story at the time.
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She made the statement while Google was under a criminal investigation. By joining forces with other companies, Google wrapped itself in an industrywide effort to combat illegal Internet pharmacies apparently without disclosing to at least some of its new partners its past potential transgressions.
Jones doesn't fault Google for not disclosing the investigation to Go Daddy, nor does she believe Google's participation in the group sullies its efforts. Settlement discussions suggest that Google accepts responsibility for its actions and is taking steps to lead industry efforts to fight the problem, she said.
"Subsequent remedial acts should never be held against corporations," Jones said. "We ought to encourage corporations to do the right thing."
With Google negotiating a settlement, there clearly was a period when the company wasn't doing the right thing. Though regulators won't discuss the allegations, it's likely they believe Google was selling online advertising to pharmacies that offer drugs that are counterfeit, medications that have expired, or drugs without prescriptions. Those drugs can be both addictive and lethal. Counterfeit drugs have also raised the ire of drug makers, who've invested billions of dollars in research, and are concerned about the threat to their intellectual property.
It's not a new issue for the industry. In 2008, lawmakers passed the Ryan Haight Online Pharmacy Consumer Protection Act, which bans the sale or distribution of prescription drugs over the Internet without a valid prescription. And Microsoft's Bing, too, has been called to task by industry watchdogs for allowing illegal Internet pharmacies to buy ads.
The challenge for Google, Bing, and other sellers of Internet advertising is distinguishing legitimate online pharmacies from illegitimate ones. But Harvard's Edelman said Google specializes in creating algorithms that should be able to detect rogue operators. There are obvious keywords and phrases that advertisers buy--such as "no prescription required"--that should help ferret out ne'er-do-wells, he said.
"No one is better at figuring this out than Google," Edelman said.
Google took steps in February 2010 to curtail advertising by illegal online pharmacies. The company updated the policy on AdWords, its online advertising tool. Google restricted ads in the United States to pharmacies that have received accreditation from a National Association of Boards of Pharmacy program, and in Canada to pharmacies accredited by the Canadian International Pharmacy Association. It also required pharmacies to advertise only to users in the country in which the pharmacies are accredited.
And last September, Google went on the offensive, suing pharmacy advertisers that violated Google's rules for online advertising.
"In recent years, we have noticed a marked increase in the number of rogue pharmacies, as well an increasing sophistication in their methods," Google lawyer Michael Zwibelman wrote on the company blog at the time. "This has meant that despite our best efforts--from extensive verification procedures, to automated keyword blocking, to changing our ads policies--a small percentage of pharma ads from these rogue companies is still appearing on Google."
There's still another step Google will likely take to address illegal Internet pharmacies. And that one may cost it as much as $500 million.