David Balto on Economic Evidence and Section 5

totmauthor —  1 August 2013

David Balto is a Public Interest Attorney at the Law Offices of David Balto

One must applaud the efforts of Commissioners Ohlhausen and Wright to begin the dialogue about the proper use of Section 5 as a tool of antitrust enforcement. It was 99 years ago that Congress was debating the creation of the Federal Trade Commission and increased guidance on the Commission’s thinking on Section 5 is in order.

One of the most important issues is the type of evidence needed to show a violation. Commissioner Wright has helped fashion the discussion by emphasizing the importance of having strong empirical evidence to support any enforcement action. He emphasizes the risks of relying too heavy on theory when empirical evidence is necessary.

Commissioner Ohlhausen’s speech focuses on the need for an economic basis for enforcement decisions in detail. Using the Clinton-era standards for regulatory action in EO 12866 puts this in even greater perspective. As she notes

E.O. 12866 calls for agencies to base their regulatory decisions on the best reasonably obtainable scientific, technical, economic, and other information concerning the need for, and consequences of, any contemplated regulation. Similarly, any effort to expand UMC beyond the antitrust laws should be grounded in robust economic evidence that the challenged practice is anticompetitive and reduces consumer welfare.

She also notes that

any harm to competition under our UMC authority ought to be substantial.  This substantiality requirement would mirror the one in our Unfairness Statement on the consumer protection side, which states that the consumer injury must be substantial for the agency to pursue an unfair act or practice claim under Section 5 . . . ‘The Commission is not concerned with trivial or merely speculative harm.’

Commissioners Wright and Ohlhausen do not have to wait long to apply their guidance on the need for strong economic evidence.  Their initial challenge will be served up later this month as they consider the appeal of the FTC staff’s challenge to certain distribution practices and alleged collusion by a small industrial firm, McWane.

McWane, a U.S. supplier of ductile iron pipe fittings (DIPF) used in municipal and regional water distribution systems, was alleged to have illegally conspired with its competitors to raise and stabilize DIPF prices and illegally excluded one of its foreign competitors.  After a several month trial the ALJ in a 476 page decision found no illegal conspiracy but found illegal exclusion.  Both decisions are on appeal. The case is on appeal to the full Commission with oral argument on August 22.

  • the staff’s  expert conceded he did not empirically test any of the critical allegations in the case:  i.e.,  the alleged market definition, the alleged exclusion, or the alleged consumer injury.
  • the staff failed to offer any economic test of exclusion or any other type of monopoly conduct.
  • the staff also failed to offer any economic test demonstrating any actual or likely injury to consumers from McWane’s alleged exclusionary conduct (basically providing rebates).
  • the ALJ found exclusion even though the alleged excluded firm, Star Pipe, was able to “clearly” and successfully enter the market, and in any event, was “less efficient” than McWane and thus its prices were always higher.
  • the staff failed to define the market by an economic test.
  • the staff  did not submit any economic evidence supporting the DIFF market.  Its expert performed no SSNIP test, elasticity test or any other economic test using any actual data to find a separate DIFF market.  Instead the staff simply relied on the hypothetical monopolist analysis from the Horizontal Merger Guidelines that the Commission has never previously used in a non-merger case.

Somehow this does not sound like robust economic evidence.

If perhaps the Commissioners fall prey to the weaker natures of enforcers and try to substitute theory for solid economic evidence, I have a cautionary note from one of the most important FTC cases in the 1990s – California Dental Association.  (At the time I was attorney advisor to Chairman Pitofsky).  The staff chose to litigate the case without an economist.  The Commission’s opinion tried to overcome the deficiency by substituting theory and antitrust law for economic evidence.  That effort ultimately failed at the steps of the Supreme Court.

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