Highlights from Josh Wright’s Interview in The Antitrust Source

Thom Lambert —  12 August 2014

Anyone interested in antitrust enforcement policy (and what TOTM reader isn’t?) should read FTC Commissioner Josh Wright’s interview in the latest issue of The Antitrust Source.  The extensive (22 page!) interview covers a number of topics and demonstrates the positive influence Commissioner Wright is having on antitrust enforcement and competition policy in general.

Commissioner Wright’s consistent concern with minimizing error costs will come as no surprise to TOTM regulars.  Here are a few related themes emphasized in the interview:

A commitment to evidence-based antitrust.

Asked about his prior writings on the superiority of “evidence-based” antitrust analysis, Commissioner Wright explains the concept as follows:

The central idea is to wherever possible shift away from casual empiricism and intuitions as the basis for decision-making and instead commit seriously to the decision-theoretic framework applied to minimize the costs of erroneous enforcement and policy decisions and powered by the best available theory and evidence.

This means, of course, that discrete enforcement decisions – should we bring a challenge or not? – should be based on the best available empirical evidence about the effects of the practice or transaction at issue. But it also encompasses a commitment to design institutions and structure liability rules on the basis of the best available evidence concerning a practice’s tendency to occasion procompetitive or anticompetitive effects. As Wright explains:

Evidence-based antitrust encompasses a commitment to using the best available economic theory and empirical evidence to make [a discrete enforcement] decision; but it also stands for a much broader commitment to structuring antitrust enforcement and policy decision-making. For example, evidence-based antitrust is a commitment that would require an enforcement agency seeking to design its policy with respect to a particular set of business arrangements – loyalty discounts, for example – to rely upon the existing theory and empirical evidence in calibrating that policy.

Of course, if the FTC is committed to evidence-based antitrust policy, then it will utilize its institutional advantages to enhance the empirical record on practices whose effects are unclear. Thus, Commissioner Wright lauds the FTC’s study of – rather than preemptive action against – patent assertion entities, calling it “precisely the type of activity that the FTC is well-suited to do.”

A commitment to evidence-based antitrust also means that the agency shouldn’t get ahead of itself in restricting conduct with known consumer benefits and only theoretical (i.e., not empirically established) harms. Accordingly, Commissioner Wright says he “divorced [him]self from a number of recommendations” in the FTC’s recent data broker report:

For the majority of these other recommendations [beyond basic disclosure requirements], I simply do not think that we have any evidence that the benefits from Congress adopting those recommendations would exceed the costs. … I would need to have some confidence based on evidence, especially about an area where evidence is scarce. I’m not comfortable relying on my priors about these activities, especially when confronted by something new that could be beneficial. … The danger would be that we recommend actions that either chill some of the beneficial activity the data brokers engage in or just impose compliance costs that we all recognize get passed on to consumers.

Similarly, Commissioner Wright has opposed “fencing-in” relief in consent decrees absent evidence that the practice being restricted threatens more harm than good. As an example, he points to the consent decree in the Graco case, which we discussed here:

Graco employed exclusive dealing contracts, but we did not allege that the exclusive dealing contracts violated the antitrust laws or Section 5. However, as fencing-in relief for the consummated merger, the consent included prohibitions on exclusive dealing and loyalty discounts despite there being no evidence that the firm had employed either of those tactics to anticompetitive ends. When an FTC settlement bans a form of discounting as standard injunctive relief in a merger case without convincing evidence that the discounts themselves were a competitive problem, it raises significant concerns.

A commitment to clear enforcement principles.

At several points throughout the interview, Commissioner Wright emphasizes the value of articulating clear principles that can guide business planners’ behavior. But he’s not calling for a bunch of ex ante liability rules. The old per se rule against minimum resale price maintenance, for example, was clear – and bad! Embracing overly broad liability rules for the sake of clarity is inconsistent with the evidence-based, decision-theoretic approach Commissioner Wright prefers. The clarity he is advocating, then, is clarity on broad principles that will govern enforcement decisions.  He thus reiterates his call for a formal policy statement defining the Commission’s authority to prosecute unfair methods of competition under Section 5 of the FTC Act.  (TOTM hosted a blog symposium on that topic last summer.)  Wright also suggests that the Commission should “synthesize and offer high-level principles that would provide additional guidance” on how the Commission will use its Section 5 authority to address data security matters.

Extension, not extraction, should be the touchstone for Section 2 liability.

When asked about his prior criticism of FTC actions based on alleged violations of licensing commitments to standards development organizations (e.g., N-Data), Commissioner Wright emphasized that there should be no Section 2 liability in such cases, or similar cases involving alleged patent hold-up, absent an extension of monopoly power. In other words, it is not enough to show that the alleged bad act resulted in higher prices; it must also have led to the creation, maintenance, or enhancement of monopoly power.  Wright explains:

The logic is relatively straightforward. The antitrust laws do not apply to all increases of price. The Sherman Act is not a price regulation statute. The antitrust laws govern the competitive process. The Supreme Court said in Trinko that a lawful monopolist is allowed to charge the monopoly price. In NYNEX, the Supreme Court held that even if that monopolist raises its price through bad conduct, so long as that bad conduct does not harm the competitive process, it does not violate the antitrust laws. The bad conduct may violate other laws. It may be a fraud problem, it might violate regulatory rules, it may violate all sorts of other areas of law. In the patent context, it might give rise to doctrines like equitable estoppel. But it is not an antitrust problem; antitrust cannot be the hammer for each and every one of the nails that implicate price changes.

In my view, the appropriate way to deal with patent holdup cases is to require what we require for all Section 2 cases. We do not need special antitrust rules for patent holdup; much less for patent assertion entities. The rule is simply that the plaintiff must demonstrate that the conduct results in the acquisition of market power, not merely the ability to extract existing monopoly rents. … That distinction between extracting lawfully acquired and existing monopoly rents and acquiring by unlawful conduct additional monopoly power is one that has run through Section 2 jurisprudence for quite some time.

In light of these remarks (which remind me of this excellent piece by Dennis Carlton and Ken Heyer), it is not surprising that Commissioner Wright also hopes and believes that the Roberts Court will overrule Jefferson Parish’s quasi-per se rule against tying. As Einer Elhauge has observed, that rule might make sense if the mere extraction of monopoly profits (via metering price discrimination or Loew’s-type bundling) was an “anticompetitive” effect of tying.  If, however, anticompetitive harm requires extension of monopoly power, as Wright contends, then a tie-in cannot be anticompetitive unless it results in substantial foreclosure of the tied product market, a necessary prerequisite for a tie-in to enhance market power in the tied or tying markets.  That means tying should not be evaluated under the quasi-per se rule but should instead be subject to a rule of reason similar to that governing exclusive dealing (i.e., some sort of “qualitative foreclosure” approach).  (I explain this point in great detail here.)

Optimal does not mean perfect.

Commissioner Wright makes this point in response to a question about whether the government should encourage “standards development organizations to provide greater clarity to their intellectual property policies to reduce the likelihood of holdup or other concerns.”  While Wright acknowledges that “more complete, more precise contracts” could limit the problem of patent holdup, he observes that there is a cost to greater precision and completeness and that the parties to these contracts already have an incentive to put the optimal amount of effort into minimizing the cost of holdup. He explains:

[M]inimizing the probability of holdup does not mean that it is zero. Holdup can happen. It will happen. It will be observed in the wild from time to time, and there is again an important question about whether antitrust has any role to play there. My answer to that question is yes in the case of deception that results in market power. Otherwise, we ought to leave the governance of what amount to contracts between SSO and their members to contract law and in some cases to patent doctrines like equitable estoppel that can be helpful in governing holdup.

…[I]t is quite an odd thing for an agency to be going out and giving advice to sophisticated parties on how to design their contracts. Perhaps I would be more comfortable if there were convincing and systematic evidence that the contracts were the result of market failure. But there is not such evidence.

Consumer welfare is the touchstone.

When asked whether “there [are] circumstances where non-competition concerns, such as privacy, should play a role in merger analysis,” Commissioner Wright is unwavering:

No. I think that there is a great danger when we allow competition law to be unmoored from its relatively narrow focus upon consumer welfare. It is the connection between the law and consumer welfare that allows antitrust to harness the power of economic theory and empirical methodologies. All of the gains that antitrust law and policy as a body have earned over the past fifty or sixty years have been from becoming more closely tethered to industrial organization economics, more closely integrating economic thought in the law, and in agency discretion and decision-making. I think that the tight link between the consumer welfare standard and antitrust law is what has allowed such remarkable improvements in what effectively amounts to a body of common law.

Calls to incorporate non-economic concerns into antitrust analysis, I think, threaten to undo some, if not all, of that progress. Antitrust law and enforcement in the United States has some experience with trying to incorporate various non-economic concerns, including the welfare of small dealers and worthy men and so forth. The results of the experiment were not good for consumers and did not generate sound antitrust policy. It is widely understood and recognized why that is the case.

***

Those are just some highlights. There’s lots more in the interview—in particular, some good stuff on the role of efficiencies in FTC investigations, the diverging standards for the FTC and DOJ to obtain injunctions against unconsummated mergers, and the proper way to analyze reverse payment settlements.  Do read the whole thing.  If you’re like me, it may make you feel a little more affinity for Mitch McConnell.

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

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