Archives For consumer protection

Today the FTC filed its complaint in federal district court in Washington against Amazon, alleging that the company’s in-app purchasing system permits children to make in-app purchases without parental “informed consent” constituting an “unfair practice” under Section 5 of the FTC Act.

As I noted in my previous post on the case, in bringing this case the Commission is doubling down on the rule it introduced in Apple that effectively converts the balancing of harms and benefits required under Section 5 of the FTC Act to a per se rule that deems certain practices to be unfair regardless of countervailing benefits. Similarly, it is attempting to extend the informed consent standard it created in Apple that essentially maintains that only specific, identified practices (essentially, distinct notification at the time of purchase or opening of purchase window, requiring entry of a password to proceed) are permissible under the Act.

Such a standard is inconsistent with the statute, however. The FTC’s approach forecloses the ability of companies like Amazon to engage in meaningful design decisions and disregards their judgment about which user interface designs will, on balance, benefit consumers. The FTC Act does not empower the Commission to disregard the consumer benefits of practices that simply fail to mimic the FTC’s preconceived design preferences. While that sort of approach might be defensible in the face of manifestly harmful practices like cramming, it is wholly inappropriate in the context of app stores like Amazon’s that spend considerable resources to design every aspect of their interaction with consumers—and that seek to attract, not to defraud, consumers.

Today’s complaint occasions a few more observations:

  1. Amazon has a very strong case. Under Section 5 of the FTC Act, the Commission will have to prevail on all three elements required to prove unfairness under Section 5: that there is substantial injury, that consumers can’t reasonably avoid the injury and that any countervailing benefits don’t outweigh the injury. But, consistent with its complaint and consent order in Apple, the Amazon complaint focuses almost entirely on only the first of these. While that may have been enough to induce Apple to settle out of court, the FTC will actually have to make out a case on reasonable avoidance and countervailing benefits at trial. It’s not at all clear that the agency will be able to do so on the facts alleged here.
  2. On reasonable avoidance, over and above Amazon’s general procedures that limit unwanted in-app purchases, the FTC will have a tough time showing that Amazon’s Kindle Free Time doesn’t provide parents with more than enough ability to avoid injury. In fact, the complaint doesn’t mention Free Time at all.
  3. Among other things, the complaint asserts that Amazon knew about issues with in-app purchasing by December of 2011 and claims that “[n]ot until June 2014 did Amazon change its in-app charge framework to obtain account holders’ informed consent for in-app charges on its newer mobile devices.” But Kindle Free Time was introduced in September of 2012. While four FTC Commissioners may believe that Free Time isn’t a sufficient response to the alleged problem, it is clearly a readily available, free and effective (read: reasonable) mechanism for parents to avoid the alleged harms. It may not be what the design mavens at the FTC would have chosen to do, but it seems certain that avoiding unauthorized in-app purchases by children was part of what motivated Amazon’s decision to create and offer Free Time.
  4. On countervailing benefits, as Commissioner Wright discussed in detail in his dissent from the Apple consent order, the Commission seems to think that it can simply assert that there are no countervailing benefits to Amazon’s design choices around in-app purchases. Here the complaint doesn’t mention 1-Click at all, which is core to Amazon’s user interface design and essential to evaluating the balance of harms and benefits required by the statute.
  5. Even if it can show that Amazon’s in-app purchase practices caused harm, the Commission will still have to demonstrate that Amazon’s conscious efforts to minimize the steps required to make purchases doesn’t benefit consumers on balance. In Apple, the FTC majority essentially (and improperly) valued these sorts of user-interface benefits at zero. It implicitly does so again here, but a court will require more than such an assertion.
  6. Given these lapses, there is even a chance that the complaint will be thrown out on a motion to dismiss. It’s a high bar, but if the court agrees that there are insufficient facts in the complaint to make out a plausible case on all three elements, Amazon could well prevail on a motion to dismiss. The FTC’s approach in the Apple consent order effectively maintains that the agency can disregard reasonable avoidance and countervailing benefits in contravention of the statute. By following the same approach here in actual litigation, the FTC may well meet resistance from the courts, which have not yet so cavalierly dispensed with the statute’s requirements.

The Wall Street Journal reports this morning that Amazon is getting — and fighting – the “Apple treatment” from the FTC for its design of its in-app purchases:

Amazon.com Inc. is bucking a request from the Federal Trade Commission that it tighten its policies for purchases made by children while using mobile applications.

In a letter to the FTC Tuesday, Amazon said it was prepared to “defend our approach in court,” rather than agree to fines and additional record keeping and disclosure requirements over the next 20 years, according to documents reviewed by The Wall Street Journal.

According to the documents, Amazon is facing a potential lawsuit by the FTC, which wants the Seattle retailer to accept terms similar to those that Apple Inc. agreed to earlier this year regarding so-called in-app purchases.

From what I can tell, the Commission has voted to issue a complaint, and Amazon has informed the Commission that it will not accept its proposed settlement.

I am thrilled that Amazon seems to have decided to fight the latest effort by a majority of the FTC to bring every large tech company under 20-year consent decree. I should say: I’m disappointed in the FTC, sorry for Amazon, but thrilled for consumers and the free marketplace that Amazon is choosing to fight rather than acquiesce.

As I wrote earlier this year about the FTC’s case against Apple in testimony before the House Commerce Committee:

What’s particularly notable about the Apple case – and presumably will be in future technology enforcement actions predicated on unfairness – is the unique relevance of the attributes of the conduct at issue to its product. Unlike past, allegedly similar, cases, Apple’s conduct was not aimed at deceiving consumers, nor was it incidental to its product offering. But by challenging the practice, particularly without the balancing of harms required by Section 5, the FTC majority failed to act with restraint and substituted its own judgment, not about some manifestly despicable conduct, but about the very design of Apple’s products. This is the sort of area where regulatory humility is more — not less — important.

In failing to observe common sense limits in Apple, the FTC set a dangerous precedent that, given the agency’s enormous regulatory scope and the nature of technologically advanced products, could cause significant harm to consumers.

Here that failure is even more egregious. Amazon has built its entire business around the “1-click” concept — which consumers love — and implemented a host of notification and security processes hewing as much as possible to that design choice, but nevertheless taking account of the sorts of issues raised by in-app purchases. Moreover — and perhaps most significantly — it has implemented an innovative and comprehensive parental control regime (including the ability to turn off all in-app purchases) — Kindle Free Time — that arguably goes well beyond anything the FTC required in its Apple consent order. I use Kindle Free Time with my kids and have repeatedly claimed to anyone who will listen that it is the greatest thing since sliced bread. Other consumers must feel similarly. Finally, regardless of all of that, Amazon has nevertheless voluntarily implemented additional notification procedures intended to comply with the Apple settlement, even though it didn’t apply to Amazon.

If the FTC asserts, in the face of all of that, that it’s own vision of what “appropriate” in-app purchase protections must look like is the only one that suffices to meet the standard required by Section 5′s Unfairness language, it is either being egregiously disingenuous, horrifically vain, just plain obtuse, or some combination of the three.

As I wrote in my testimony:

The application of Section 5’s “unfair acts and practices” prong (the statute at issue in Apple) is circumscribed by Section 45(n) of the FTC Act, which, among other things, proscribes enforcement where injury is “not outweighed by countervailing benefits to consumers or to competition.”

And as Commissioner Wright noted in his dissent in the Apple case,

[T]he Commission effectively rejects an analysis of tradeoffs between the benefits of additional guidance and potential harm to some consumers or to competition from mandating guidance…. I respectfully disagree. These assumptions adopt too cramped a view of consumer benefits under the Unfairness Statement and, without more rigorous analysis to justify their application, are insufficient to establish the Commission’s burden.

We won’t know until we see the complaint whether the FTC has failed to undertake the balancing it neglected to perform in Apple and that it is required to perform under the statute. But it’s hard to believe that it could mount a case against Amazon in light of the facts if it did perform such a balancing. There’s no question that Amazon has implemented conscious and consumer-welfare-enhancing design choices here. The FTC’s effort to nevertheless mandate a different design (and put Amazon under a 20 year consent decree) based on a claim that Amazon’s choices impose greater harms than benefits on consumers seems manifestly unsupportable.

Such a claim almost certainly represents an abuse of the agency’s discretion, and I expect Amazon to trounce the FTC if this case goes to trial.

As it begins its hundredth year, the FTC is increasingly becoming the Federal Technology Commission. The agency’s role in regulating data security, privacy, the Internet of Things, high-tech antitrust and patents, among other things, has once again brought to the forefront the question of the agency’s discretion and the sources of the limits on its power.Please join us this Monday, December 16th, for a half-day conference launching the year-long “FTC: Technology & Reform Project,” which will assess both process and substance at the FTC and recommend concrete reforms to help ensure that the FTC continues to make consumers better off.

FTC Commissioner Josh Wright will give a keynote luncheon address titled, “The Need for Limits on Agency Discretion and the Case for Section 5 UMC Guidelines.” Project members will discuss the themes raised in our inaugural report and how they might inform some of the most pressing issues of FTC process and substance confronting the FTC, Congress and the courts. The afternoon will conclude with a Fireside Chat with former FTC Chairmen Tim Muris and Bill Kovacic, followed by a cocktail reception.

Full Agenda:

  • Lunch and Keynote Address (12:00-1:00)
    • FTC Commissioner Joshua Wright
  • Introduction to the Project and the “Questions & Frameworks” Report (1:00-1:15)
    • Gus Hurwitz, Geoffrey Manne and Berin Szoka
  • Panel 1: Limits on FTC Discretion: Institutional Structure & Economics (1:15-2:30)
    • Jeffrey Eisenach (AEI | Former Economist, BE)
    • Todd Zywicki (GMU Law | Former Director, OPP)
    • Tad Lipsky (Latham & Watkins)
    • Geoffrey Manne (ICLE) (moderator)
  • Panel 2: Section 5 and the Future of the FTC (2:45-4:00)
    • Paul Rubin (Emory University Law and Economics | Former Director of Advertising Economics, BE)
    • James Cooper (GMU Law | Former Acting Director, OPP)
    • Gus Hurwitz (University of Nebraska Law)
    • Berin Szoka (TechFreedom) (moderator)
  • A Fireside Chat with Former FTC Chairmen (4:15-5:30)
    • Tim Muris (Former FTC Chairman | George Mason University) & Bill Kovacic (Former FTC Chairman | George Washington University)
  • Reception (5:30-6:30)
Our conference is a “widely-attended event.” Registration is $75 but free for nonprofit, media and government attendees. Space is limited, so RSVP today!

Working Group Members:
Howard Beales
Terry Calvani
James Cooper
Jeffrey Eisenach
Gus Hurwitz
Thom Lambert
Tad Lipsky
Geoffrey Manne
Timothy Muris
Paul Rubin
Joanna Shepherd-Bailey
Joe Sims
Berin Szoka
Sasha Volokh
Todd Zywicki

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Please join us at the Willard Hotel in Washington, DC on December 16th for a conference launching the year-long project, “FTC: Technology and Reform.” With complex technological issues increasingly on the FTC’s docket, we will consider what it means that the FTC is fast becoming the Federal Technology Commission.

The FTC: Technology & Reform Project brings together a unique collection of experts on the law, economics, and technology of competition and consumer protection to consider challenges facing the FTC in general, and especially regarding its regulation of technology.

For many, new technologies represent “challenges” to the agency, a continuous stream of complex threats to consumers that can be mitigated only by ongoing regulatory vigilance. We view technology differently, as an overwhelmingly positive force for consumers. To us, the FTC’s role is to promote the consumer benefits of new technology — not to “tame the beast” but to intervene only with caution, when the likely consumer benefits of regulation outweigh the risk of regulatory error. This conference is the start of a year-long project that will recommend concrete reforms to ensure that the FTC’s treatment of technology works to make consumers better off. Continue Reading…

Mike Sykuta and I recently co-authored a short article discussing the latest evidence on, and proper legal treatment of, minimum resale price maintenance (RPM). Following is a bit about the article (which is available here).

Despite the U.S. Supreme Court’s Leegin decision holding that minimum RPM must be evaluated under antitrust’s Rule of Reason, the battle over the proper legal treatment of the practice continues to rage at both the federal and state levels.

At the federal level, courts, commentators, and regulators have split over what sort of Rule of Reason should apply.  Some, like yours truly, have argued that because RPM is usually pro- rather than anticompetitive, challengers should bear the burden of proving likely anticompetitive effect (at a minimum, the structural prerequisites to such an effect) under a full-blown Rule of Reason.  Others contend that RPM should be assessed using some version of “quick look” Rule of Reason, under which a challenged instance of RPM is presumed anticompetitive if the plaintiff makes some fairly narrow showing (e.g., that consumer prices have risen, or that the RPM was dealer-initiated, or that the RPM is imposed on homogeneous products that are not sold with dealer services that are susceptible to free-riding).

At the state level, a number of states have simply decided not to follow Leegin and to retain, under state antitrust law, the per se rule of Dr. Miles (the 1911 decision overruled by Leegin).  At least nine states have taken this tack.

We advocates of a full-blown Rule of Reason for minimum RPM have generally emphasized two things.  First, we have observed that while the structural prerequisites to RPM’s potentially anticompetitive harms (facilitation of dealer-level or manufacturer-level cartels, or exclusion by a dominant dealer or manufacturer) are rarely satisfied, the necessary conditions for RPM’s procompetitive benefits (avoidance of free-riding, facilitating entry, encouraging non-free-rideable dealer services) are frequently met.  Second, we have shown that the pre-Leegin empirical evidence on RPM’s effects generally confirmed what theory would predict: Most instances of RPM that have been examined closely have proven output-enhancing.

In recent months, advocates of stricter RPM rules have pointed to an ambitious new study that they say supports their position.  The study authors, University of Chicago economics PhD candidates Alexander MacKay and David Aron Smith, purported to conduct “a natural experiment to estimate the effects of Leegin on product prices and quantity.”  In particular, MacKay & Smith compared post-Leegin changes in price and output levels in states retaining a rule of per se illegality with those in states likely to assess RPM under the Rule of Reason.  Utilizing Nielsen consumer product data for 1,083 “product modules” (i.e., narrowly defined product categories such as “vegetables-broccoli-frozen”), the authors assessed price and output changes between the six month period immediately preceding Leegin (January-June 2007) and the last six months of 2009.

With respect to price changes, MacKay & Smith found that 15% of the product modules exhibited price increases that were higher, by a statistically significant margin, in Rule of Reason states than in per se states.  In only 6.9% of modules were price increases higher, to a statistically significant degree, in per se states than in Rule of Reason states.  With respect to quantity changes, 14.7% of modules saw a statistically significant decrease in quantity in Rule of Reason states versus per se states, whereas only 3% of modules exhibited a statistically significant quantity increase in Rule of Reason states over per se states.  MacKay & Smith thus conclude that greater leniency on minimum RPM is associated with higher prices and lower output levels, a conclusion that, they say, supports the view that RPM is more frequently anticompetitive than procompetitive.

Mike and I contend that the MacKay & Smith study is flawed and does not justify restrictive RPM policies.  First, the study provides very little support for the view that RPM has caused anticompetitive harm within the group of product markets examined.  As an initial matter (and as the authors admit), the study does not demonstrate that actual RPM agreements have caused anticompetitive harm in the post-Leegin era.  To make such a showing, one would have to demonstrate that (1) minimum RPM was actually imposed on a product after the Leegin decision, (2) the RPM policy raised the price of that product from what it otherwise would have been, and (3) the quantity of the product sold fell from what it otherwise would have been.  The authors present no evidence that RPM policies were actually implemented on any of the product categories for which they identified statistically significant price increases and quantity decreases.  As they concede, their study could show only that legal environments treating RPM leniently (not RPM agreements themselves) are conducive to anticompetitive outcomes.

But the authors’ data provide little support for even that claim.  To prove anticompetitive harm stemming from an “RPM-permissive” legal environment, one would have to show that the transition from per se illegality to rule of reason treatment occasioned, for a substantial number of products, both a statistically significant price increase and a statistically significant output reduction on the same product.  An output reduction not accompanied by an increase in price suggests that something besides minimum RPM (or even a “permissive attitude” toward RPM) caused output to fall.  A price increase without a reduction in output is consistent with the view that RPM induced demand-enhancing dealer activities that mitigated the effect of the price increase, albeit by not as much as the producer may have hoped.  (A price increase without an output decrease could also indicate that demand for the product at issue was inelastic, but MacKay & Smith presented no evidence suggesting that demand for any of the product categories exhibiting price increases but not quantity decreases was particularly inelastic.)

According to the authors’ list of “modules with significant price or quantity changes” (Appendix A of their study), only 17 of the 1,083 product categories examined—a mere 1.6%—exhibited both a price increase and a quantity decrease.  And those effects were for categories of products (e.g., barbecue sauces as a whole), not necessarily particular brands of a product (e.g., KC Masterpiece or Sweet Baby Ray’s).  It could well be that within the 1.6% of categories exhibiting both an average price increase and an average output decrease, there were no individual brands exhibiting both effects at once.  Indeed, most of the seventeen product categories involve dealer and manufacturer markets that are neither cartelizable (so neither the dealer nor manufacturer collusion theory of anticompetitive harm could apply) nor dominated by a powerful manufacturer or dealer (so neither the dominant manufacturer nor dominant dealer theory could apply).  To the extent MacKay & Smith’s findings provide any evidence that RPM-permissiveness occasions anticompetitive harm in household consumer products markets, that evidence is awfully thin.

Moreover, in limiting their examination to the product categories included in the Nielsen Consumer Panel Data, MacKay & Smith excluded most products for which one of the procompetitive rationales for minimum RPM—the “avoidance of free-riding” rationale—would apply.  As the authors observe, only about “30% of household consumption is accounted for by the categories in the data.”  That 30% is comprised mainly of groceries, other consumable household products, and small appliances.  The study thus excludes data related to purchases of large appliances, complicated electronics projects, and other relatively expensive products that are frequently sold along with “free-rideable” amenities such as product demonstrations, consumer education, and set-up or repair services.  Because the MacKay & Smith study systematically disregards information on transactions likely to reflect a procompetitive use of minimum RPM, it fails to establish the authors’ conclusion that “the harm to consumers resulting from rule-of-reason treatment of minimum RPM seems to outweigh its benefits.”

In the end, then, Mike and I conclude that the new RPM evidence provides no reason to reject the persuasive theory- and evidence-based arguments in favor of lenient, full-blown Rule of Reason treatment of minimum RPM.  Of course, we welcome comments on our article.

The Children’s Online Privacy Protection Act (COPPA) continues to be a hot button issue for many online businesses and privacy advocates. On November 14, Senator Markey, along with Senator Kirk and Representatives Barton and Rush introduced the Do Not Track Kids Act of 2013 to amend the statute to include children from 13-15 and add new requirements, like an eraser button. The current COPPA Rule, since the FTC’s recent update went into effect this past summer, requires parental consent before businesses can collect information about children online, including relatively de-identified information like IP addresses and device numbers that allow for targeted advertising.

Often, the debate about COPPA is framed in a way that makes it very difficult to discuss as a policy matter. With the stated purpose of “enhanc[ing] parental involvement in children’s online activities in order to protect children’s privacy,” who can really object? While there is recognition that there are substantial costs to COPPA compliance (including foregone innovation and investment in children’s media), it’s generally taken for granted by all that the Rule is necessary to protect children online. But it has never been clear what COPPA is supposed to help us protect our children from.

Then-Representative Markey’s original speech suggested one possible answer in “protect[ing] children’s safety when they visit and post information on public chat rooms and message boards.” If COPPA is to be understood in this light, the newest COPPA revision from the FTC and the proposed Do Not Track Kids Act of 2013 largely miss the mark. It seems unlikely that proponents worry about children or teens posting their IP address or device numbers online, allowing online predators to look at this information and track them down. Rather, the clear goal animating the updates to COPPA is to “protect” children from online behavioral advertising. Here’s now-Senator Markey’s press statement:

“The speed with which Facebook is pushing teens to share their sensitive, personal information widely and publicly online must spur Congress to act commensurately to put strong privacy protections on the books for teens and parents,” said Senator Markey. “Now is the time to pass the bipartisan Do Not Track Kids Act so that children and teens don’t have their information collected and sold to the highest bidder. Corporations like Facebook should not be profiting from the personal and sensitive information of children and teens, and parents and teens should have the right to control their personal information online.”

The concern about online behavioral advertising could probably be understood in at least three ways, but each of them is flawed.

  1. Creepiness. Some people believe there is something just “creepy” about companies collecting data on consumers, especially when it comes to children and teens. While nearly everyone would agree that surreptitiously collecting data like email addresses or physical addresses without consent is wrong, many would probably prefer to trade data like IP addresses and device numbers for free content (as nearly everyone does every day on the Internet). It is also unclear that COPPA is the answer to this type of problem, even if it could be defined. As Adam Thierer has pointed out, parents are in a much better position than government regulators or even companies to protect their children from privacy practices they don’t like.
  2. Exploitation. Another way to understand the concern is that companies are exploiting consumers by making money off their data without consumers getting any value. But this fundamentally ignores the multi-sided market at play here. Users trade information for a free service, whether it be Facebook, Google, or Twitter. These services then monetize that information by creating profiles and selling that to advertisers. Advertisers then place ads based on that information with the hopes of increasing sales. In the end, though, companies make money only when consumers buy their products. Free content funded by such advertising is likely a win-win-win for everyone involved.
  3. False Consciousness. A third way to understand the concern over behavioral advertising is that corporations can convince consumers to buy things they don’t need or really want through advertising. Much of this is driven by what Jack Calfee called The Fear of Persuasion: many people don’t understand the beneficial effects of advertising in increasing the information available to consumers and, as a result, misdiagnose the role of advertising. Even accepting this false consciousness theory, the difficulty for COPPA is that no one has ever explained why advertising is a harm to children or teens. If anything, online behavioral advertising is less of a harm to teens and children than adults for one simple reason: Children and teens can’t (usually) buy anything! Kids and teens need their parents’ credit cards in order to buy stuff online. This means that parental involvement is already necessary, and has little need of further empowerment by government regulation.

COPPA may have benefits in preserving children’s safety — as Markey once put it — beyond what underlying laws, industry self-regulation and parental involvement can offer. But as we work to update the law, we shouldn’t allow the Rule to be a solution in search of a problem. It is incumbent upon Markey and other supporters of the latest amendment to demonstrate that the amendment will serve to actually protect kids from something they need protecting from. Absent that, the costs very likely outweigh the benefits.

In yesterday’s hearings on the disastrous launch of the federal health insurance exchanges, contractors insisted that part of the problem was a last-minute specification from the government:  the feds didn’t want people to be able to “window shop” for health insurance until they had created a profile and entered all sorts of personal information.

That’s understandable.  For this massive social experiment to succeed — or, at least, to fail less badly – young, healthy people need to buy health insurance.  Policy prices for those folks, though, are going to be really high because (1) the ACA requires all sorts of costly coverages people used to be able to decline, and (2) the Act’s “community rating” and “guaranteed issue” provisions prevent insurers from charging older and sicker people an actuarily appropriate rate and therefore require their subsidization by the young and healthy.  To prevent the sort of sticker shock that might cause young invincibles to forego purchasing insurance, Obamacare advocates didn’t want them seeing unsubsidized insurance rates.  Determining a person’s subsidy, though, requires submisison of all sorts of personal information.  Thus, the original requirement that website visitors create a profile and provide gobs of information before seeing insurance rates.

Given the website’s glitches and the difficulty of actually creating a working profile, the feds have now reversed course and are permitting window shopping.  An applicant can enter his or her state and county, family size, and age range (<50 or >50) and receive a selection of premium estimates.  To avoid dissuading people from applying for coverage in light of high premiums, the website takes great pains to emphasize that the estimated premiums do not account for the available subsidies to which most people will be entitled.  For example, to get my own quote, I had to answer a handful of questions and click “Next” a few times, and in the process of doing so, the website announced seven times that the estimated prices I was about to see would not include the generous subsdies to which I would probably be entitled.  The Obamacare folks, you see, want us consumers to know what we’re really going to have to pay.

Or do they?

According to the website, I could buy a Coventry Bronze $15 co-pay plan for $218.03 per month (unsubsidized).  An Anthem Blue Cross Blue Shield Direct Access Plan would cost me $213.39 per month (unsubsidized).  When I went to a private exchange and conducted the same inquiry, however, I learned that the price for the former policy would be $278.66 and, for the latter, between $270.17.  So the private exchange tells me the price for my insurance would be 27% percent higher than the amount Healthcare.gov estimates in its window shopping feature.  What gives?

As it turns out, the federal exchange assumes (without admitting it) that anyone under age 49 is 27 years old.  The private website, by contrast, based quotes on my real age (42).  Obviously, the older a person is, the higher the premium will be.  Since the ACA mandates that individuals up to age 26 be allowed to stay on their parents’ insurance policies, the age the federal website assumes is the very youngest age at which most people would be required to buy health insurance or pay a penalty.  In other words, the federal website picks the rosiest assumption in estimating insurance premiums and never once tells users it’s doing so.  It does, however, awkwardly remind them seven times in fewer than seven consecutive screens that their actual premiums will probably be lower than the figure quoted.

Can you imagine if a private firm pulled this sort of stunt?  Elizabeth Warren’s friends at the CFPB would be on it like white on rice!

Look, the website problems are a red herring.  Sure, they’re shockingly severe, and they do illustrate the limits of government to run things effectively, limits the ACA architects resolutely disregarded.  But they’ll get fixed eventually.  The main reason they’re a long-term problem is that they exacerbate the Act’s most fundamental flaw: its tendency to create a death spiral of adverse selection in which older and sicker people, beneficiaries under the ACA, purchase health insurance, while young, healthy folks, losers under the Act, forego it.  Once this happens, insurance premiums will skyrocket, encouraging even more young and healthy people to drop out of the pool of insureds and thereby making things even worse.  The most significant problem stemming from the website “glitches” (my, how that term has been stretched!) is that they have made it so hard to apply for insurance that only those most desperate for it — the old and sick, the ones we least need in the pool of insureds — will go through the rigmarole of signing up.  On this point, see Holman Jenkins and George Will.

But who knows.  Maybe Zeke Emanuel can fix the problem by getting the Red Sox to sell Obamacare to young invincibles.  (I’m not kidding.  That was his plan for avoiding adverse selection.)

Go Cards!

Commissioner Wright makes a powerful and important case in dissenting from the FTC’s 2-1 (Commissioner Ohlhausen was recused from the matter) decision imposing conditions on Nielsen’s acquisition of Arbitron.

Essential to Josh’s dissent is the absence of any actual existing market supporting the Commission’s challenge:

Nielsen and Arbitron do not currently compete in the sale of national syndicated cross-platform audience measurement services. In fact, there is no commercially available national syndicated cross-platform audience measurement service today. The Commission thus challenges the proposed transaction based upon what must be acknowledged as a novel theory—that is, that the merger will substantially lessen competition in a market that does not today exist.

* * *

[W]e…do not know how the market will evolve, what other potential competitors might exist, and whether and to what extent these competitors might impose competitive constraints upon the parties.

* * *

To be clear, I do not base my disagreement with the Commission today on the possibility that the potential efficiencies arising from the transaction would offset any anticompetitive effect. As discussed above, I find no reason to believe the transaction is likely to substantially lessen competition because the evidence does not support the conclusion that it is likely to generate anticompetitive effects in the alleged relevant market.

This is the kind of theory that seriously threatens innovation. Regulators in Washington are singularly ill-positioned to predict the course of technological evolution — that’s why they’re regulators and not billionaire innovators. To impose antitrust-based constraints on economic activity that hasn’t even yet occurred is the height of folly. As Virginia Postrel discusses in The Future and Its Enemies, this is the technocratic mindset, in all its stasist glory:

Technocrats are “for the future,” but only if someone is in charge of making it turn out according to plan. They greet every new idea with a “yes, but,” followed by legislation, regulation, and litigation.

* * *

By design, technocrats pick winners, establish standards, and impose a single set of values on the future.

* * *

For technocrats, a kaleidoscope of trial-and-error innovation is not enough; decentralized experiments lack coherence. “Today, we have an opportunity to shape technology,” wrote [Newt] Gingrich in classic technocratic style. His message was that computer technology is too important to be left to hackers, hobbyists, entrepreneurs, venture capitalists, and computer buyers. “We” must shape it into a “coherent picture.” That is the technocratic notion of progress: Decide on the one best way, make a plan, and stick to it.

It should go without saying that this is the antithesis of the environment most conducive to economic advance. Whatever antitrust’s role in regulating technology markets, it must be evidence-based, grounded in economics and aware of its own limitations.

As Josh notes:

A future market case, such as the one alleged by the Commission today, presents a number of unique challenges not confronted in a typical merger review or even in “actual potential competition” cases. For instance, it is inherently more difficult in future market cases to define properly the relevant product market, to identify likely buyers and sellers, to estimate cross-elasticities of demand or understand on a more qualitative level potential product substitutability, and to ascertain the set of potential entrants and their likely incentives. Although all merger review necessarily is forward looking, it is an exceedingly difficult task to predict the competitive effects of a transaction where there is insufficient evidence to reliably answer these basic questions upon which proper merger analysis is based.

* * *

When the Commission’s antitrust analysis comes unmoored from such fact-based inquiry, tethered tightly to robust economic theory, there is a more significant risk that non-economic considerations, intuition, and policy preferences influence the outcome of cases.

Josh’s dissent also contains an important, related criticism of the FTC’s problematic reliance on consent agreements. It’s so good, in fact, I will quote it almost in its entirety:

Whether parties to a transaction are willing to enter into a consent agreement will often have little to do with whether the agreed upon remedy actually promotes consumer welfare. The Commission’s ability to obtain concessions instead reflects the weighing by the parties of the private costs and private benefits of delaying the transaction and potentially litigating the merger against the private costs and private benefits of acquiescing to the proposed terms. Indeed, one can imagine that where, as here, the alleged relevant product market is small relative to the overall deal size, the parties would be happy to agree to concessions that cost very little and finally permit the deal to close. Put simply, where there is no reason to believe a transaction violates the antitrust laws, a sincerely held view that a consent decree will improve upon the post-merger competitive outcome or have other beneficial effects does not justify imposing those conditions. Instead, entering into such agreements subtly, and in my view harmfully, shifts the Commission’s mission from that of antitrust enforcer to a much broader mandate of “fixing” a variety of perceived economic welfare-reducing arrangements.

Consents can and do play an important and productive role in the Commission’s competition enforcement mission. Consents can efficiently address competitive concerns arising from a merger by allowing the Commission to reach a resolution more quickly and at less expense than would be possible through litigation. However, consents potentially also can have a detrimental impact upon consumers. The Commission’s consents serve as important guidance and inform practitioners and the business community about how the agency is likely to view and remedy certain mergers. Where the Commission has endorsed by way of consent a willingness to challenge transactions where it might not be able to meet its burden of proving harm to competition, and which therefore at best are competitively innocuous, the Commission’s actions may alter private parties’ behavior in a manner that does not enhance consumer welfare. Because there is no judicial approval of Commission settlements, it is especially important that the Commission take care to ensure its consents are in the public interest.

This issue of the significance of the FTC’s tendency to, effectively, legislate by consent decree is of great importance, particularly in its Section 5 practice (as we discuss in our amicus brief in the Wyndham case).

As the FTC begins its 100th year next week, we need more voices like those of Commissioners Wright and Ohlhausen challenging the FTC’s harmful, technocratic mindset.

With thanks to Geoff and everyone else, it’s great to join the cast here at TOTM. Geoff gave a nice introduction, so I won’t use this first post to further that purpose – especially when I have substance to discuss. The only prefatory words I’ll offer are that my work lies at the intersection of law and technology, with a focus on telecommunications and the regulation of technology. Most of my posts here will likely relate to those subjects. But I may occasionally use this forum to write briefly on topics further afield of my research agenda (and to which I therefore cannot dedicate more than blog-post-length musings to develop).

But one paragraph of navel-grazing is enough; on to substance:

The WSJ had a nice piece the other day about the Consumer Product Safety Commission’s (CPSC) ongoing persecution of Craig Zucker. Several years ago, Zucker founded a company that sold small, strong, rare-earth magnets that are a ton of fun to play with. He called them BuckyBalls. In 2011, the CPSC determined that BuckBalls are inherently unsafe because children may swallow them, which can result in serious injury. The CPSC effectively forced the company to shut down in 2012. Unsatisfied with forcing a profitable small firm out of the market, the CPSC is now going after Zucker individually to, at his own expense, recall and refund the purchase price of all BuckyBalls the company sold.

BuckyBalls(Full disclosure: I own a bunch of BuckyBalls. In fact, they’re all over my office. To date, they have not harmed anyone. The photo to the left is of the “BuckyBall decapode” that I have behind my chair. Note: the CPSC is not concerned about BuckyBall decapodes, which could pose a legitimate danger if they became sentient, but about the individual magnets.)

The CPSC’s action is a case study in bad judgment, arguably abusive and vindictive government conduct, and a basic lack of common sense. But I don’t want to focus on common sense here – I want to focus on the common law. My question is why in the world do we need the CPSC protecting consumers from these magnets when the common law clearly offers sufficient protection?

These cases almost always follow a similar pattern. Adults buy BuckyBalls. Adults either give children BuckyBalls or leave BuckyBalls where children can get them. Children, acting as children are wont to act, somehow swallow BuckyBalls.

The CPSC’s complaint identifies 5 specific cases of children ingesting BuckyBalls and notes that “over one dozen” reports have been received. The complaint doesn’t discuss in detail any injuries that resulted, beyond noting that in some cases surgery was required (and in one case, treatment included “monitoring for infection and internal damage”). It doesn’t say whether any of these cases resulted in permanent injury or disability (presumably not, or that would surely be mentioned). There have been no reported deaths or, that I have seen reported, debilitating injuries.

On the flipside, over the few years that Zucker was in business (roughly 2009, when the product became popular, through 2012, when the company closed down), he sold about $75 million worth of BuckyBalls (per the WSJ piece, “’Two and a half million adults spent $30’”). This product wasn’t a mere novelty, but something created substantial economic value for consumers.

So, what do we have? A relatively small number of injuries, with very few disputable facts, and readily identifiable harm. These would be some of the easiest possible cases to bring to court, and would occur in small enough numbers that they wouldn’t burden the court system. After the first of these cases was decided, most of the others – given the similarity of facts – would likely settle. If the harms caused by BuckyBalls were sufficient to outweigh the economic value created by this product, Zucker could have responded by altering the product, seeking insurance, or shutting down. This is exactly the sort of case we have the courts for!

That penultimate sentence should be dwelt upon: the incremental approach of the common law would allow the firm to alter and improve its product, to avoid or reduce future harm. In this way, the law develops along with new products and technologies, supporting a dynamic market. Compare this to the CPSC approach, which was to demand that Zucker comply with the agency’s demands in a short period of time (which he did), and then, the very next day, to bring the administrative suit that forced Zucker to shut the company down. The CPSC could not have reviewed his response to its demands in that timeframe; even if it did and found the response lacking, its next step should have been to engage him to address any problems, with the twain objectives of both remedying any problems but also preserving the business. Rather, the CPSC’s purpose seems to have been from the outset to shut Zucker down. It seems that in its fervor to protect the children from negligent adults, it is willing to harm the consumers who enjoy these products — perhaps we should rechristen it the Children’s Product Safety Commission.

Others have written about the CPSC’s lack of common sense in this matter. My contribution to that discussion would be to say that the CPSC has become the FTC’s successor as the “National Nanny” (not to say the FTC does not deserve the title, as demonstrated by the POM Wonderful case – but today CPSC may be even more deserving of the title).

But the BuckyBalls case raises a more fundamental concern. The CPSC surely should be lambasted for its decision to pursue this matter at all; and even more for persecuting Mr. Zucker. But beyond that, this case raises fundamental questions about the need for, and the basic legitimacy of, the CPSC.

Co-authored with Berin Szoka

FTC Commissioner Wright issued today his Policy Statement on enforcement of Section 5 of the FTC Act against Unfair Methods of Competition (UMC)—the one he promised in April. Wright introduced the Statement in an important policy speech this morning before the Executive Committee Meeting of the New York State Bar Association’s Antitrust Section. Both the Statement and the speech are essential reading, and, collectively, they present a compelling and comprehensive vision for Section 5 UMC reform at the Commission.

As we’ve been saying for some time, and as Wright notes at the outset of his Statement:

In order for enforcement of its unfair methods of competition authority to promote consistently the Commission’s mission of protecting competition, the Commission must articulate a clear framework for its application.

Significantly, in addition to offering important certainty to guide business actions, Wright bases his proposed Policy Statement on the error cost framework:

The Commission must formulate a standard that distinguishes between acceptable business practices and business practices that constitute an unfair method of competition in order to provide firms with adequate guidance as to what conduct may be unlawful.  Articulating a clear and predictable standard for what constitutes an unfair method of competition is important because the Commission’s authority to condemn unfair methods of competition allows it to break new ground and challenge conduct based upon theories not previously enshrined in Sherman Act or Clayton Act jurisprudence.

As far as we know, this Statement is the most significant effort yet to cabin FTC enforcement decisions within a coherent error-cost framework, and it is especially welcome.

Ironically, this is former Chairman Jon Leibowitz’s true legacy: His efforts to expand Section 5 to challenge conduct under novel theories, devoid of economic grounding and without proof of anticompetitive harm (in cases like Intel, N-Data and Google, among others) brought into stark relief the potential risks of an unfettered, active Section 5. Commissioner Wright’s Statement can be seen as the unintended culmination of—and backlash against—Leibowitz’s Section 5 campaign.

Particularly given the novelty of circumstances that might come within Section 5’s ambit, the error-cost minimizing structure of Commissioner Wright’s proposed Statement is enormously important. As one of us (Manne) notes in the paper, Innovation and the Limits of Antitrust (co-authored with then-Professor Wright),

Both product and business innovations involve novel practices, and such practices generally result in monopoly explanations from the economics profession followed by hostility from the courts (though sometimes in reverse order) and then a subsequent, more nuanced economic understanding of the business practice usually recognizing its procompetitive virtues.

And as Wright’s Statement notes,

This is particularly true if business conduct is novel or takes place within an emerging or rapidly changing industry, and thus where there is little empirical evidence about the conduct’s potential competitive effects.

The high cost and substantial risk of over-enforcement arising from unbounded Section 5 authority counsel strongly in favor of Wright’s Statement restricting Section 5 to minimize these error costs.

Thus, while the specifics matter, of course, the real import of Commissioner Wright’s Statement is in some ways structural: If adopted, it would both bring much needed, basic guidance to the scope of the FTC’s Section 5 authority; just as important, it would constrain (an important aspect of) the FTC’s enforcement discretion within the error cost framework, bringing the sound economic grounding of antitrust law and economics to Section 5, benefiting consumers as well as commerce generally:

This Policy Statement benefits both consumers and the business community by relying on modern economics and antitrust jurisprudence to strengthen the agency’s ability to target anticompetitive conduct and provide clear guidance about the contours of the Commission’s Section 5 authority.

For Wright, this is about saving Section 5 from its ill-defined and improperly deployed history. As he noted in his speech this morning,

In undertaking this task, I think it is important to recall why the Commission’s use of Section 5 has failed to date. In my view, this failure is principally because the Commission has sought to do too much with Section 5, and in so doing, called into serious question whether it has any limits whatsoever. In order to save Section 5, and to fulfill the vision Congress had for this important statute, the Commission must recast its unfair methods of competition authority with an eye toward regulatory humility in order to effectively target plainly anticompetitive conduct….. I believe that doing anything less would betray our obligation as responsible stewards of the Commission and its competition mission, and may ultimately result in the Commission having its Section 5 authority defined for it by the courts, or worse, having that authority completely revoked by Congress.

This means circumscribing the FTC’s Section 5 authority to limit enforcement to cases where the Commission shows both actual harm to competition and the absence of cognizable efficiencies.

The Status Quo

Both together and separately, we’ve discussed the problems with the Section 5 status quo in numerous places, including:

To summarize: The problem is that Section 5 enforcement standards in the unfairness context are non-existent. Former Chairman Jon Leibowitz and former Commissioner Tom Rosch, in particular, have, in several places, argued for expanded use of Section 5, both as a way around judicial limits on the scope of Sherman Act enforcement, as well as as an affirmative tool to enforce the FTC’s mandate. As the Commission’s statement in the N-Data case concluded:

We recognize that some may criticize the Commission for broadly (but appropriately) applying our unfairness authority to stop the conduct alleged in this Complaint. But the cost of ignoring this particularly pernicious problem is too high. Using our statutory authority to its fullest extent is not only consistent with the Commission’s obligations, but also essential to preserving a free and dynamic marketplace.

The problem is that neither the Commission, the courts nor Congress has defined what, exactly, the “fullest extent” of the FTC’s statutory authority is. As Commissioner Wright noted in this morning’s speech,

In practice, however, the scope of the Commission’s Section 5 authority today is as broad or as narrow as a majority of the commissioners believes that it is.

The Commission’s claim that it applied its authority “broadly (but appropriately)” in N-Data is unsupported and unsupportable. As Commissioner Ohlhausen put it in her dissent in In re Bosch,

I simply do not see any meaningful limiting principles in the enforcement policy laid out in these cases. The Commission statement emphasizes the context here (i.e. standard setting); however, it is not clear why the type of conduct that is targeted here (i.e. a breach of an allegedly implied contract term with no allegation of deception) would not be targeted by the Commission in any other context where the Commission believes consumer harm may result. If the Commission continues on the path begun in N-Data and extended here, we will be policing garden variety breach-of-contract and other business disputes between private parties….

It is important that government strive for transparency and predictability. Before invoking Section 5 to address business conduct not already covered by the antitrust laws (other than perhaps invitations to collude), the Commission should fully articulate its views about what constitutes an unfair method of competition, including the general parameters of unfair conduct and where Section 5 overlaps and does not overlap with the antitrust laws, and how the Commission will exercise its enforcement discretion under Section 5. Otherwise, the Commission runs a serious risk of failure in the courts and a possible hostile legislative reaction, both of which have accompanied previous FTC attempts to use Section 5 more expansively.

This consent does nothing either to legitimize the creative, yet questionable application of Section 5 to these types of cases or to provide guidance to standard-setting participants or the business community at large as to what does and does not constitute a Section 5 violation. Rather, it raises more questions about what limits the majority of the Commission would place on its expansive use of Section 5 authority.

Commissioner Wright’s proposed Policy Statement attempts to remedy these defects, and, in the process, explains why the Commission’s previous, broad applications of the statute are not, in fact, appropriate.

Requirement #1: Harm to Competition

It should go without saying that anticompetitive harm is a basic prerequisite of the FTC’s UMC enforcement. Sadly, however, this has not been the case. As the FTC has, in recent years, undertaken enforcement actions intended to expand its antitrust authority, it has interpreted far too expansively the Supreme Court’s statement in FTC v. Indiana Federation of Dentists that Section 5 contemplates

not only practices that violate the Sherman Act and the other antitrust laws, but also practices that the Commission determines are against public policy for other reasons.

But “against public policy for other reasons” does not mean “without economic basis,” and there is no indication that Congress intended to give the FTC unfettered authority unbounded by economically sensible limits on what constitutes a cognizable harm. As one of us (Manne) has written,

Following Sherman Act jurisprudence, traditionally the FTC has understood (and courts have demanded) that antitrust enforcement . . . requires demonstrable consumer harm to apply. But this latest effort reveals an agency pursuing an interpretation of Section 5 that would give it unprecedented and largely-unchecked authority. In particular, the definition of “unfair” competition wouldn’t be confined to the traditional antitrust measures — reduction in output or an output-reducing increase in price — but could expand to, well, just about whatever the agency deems improper.

Commissioner Wright’s Statement and its reasoning are consistent with Congressional intent on the limits of the “public policy” rationale in Section 5’s “other” unfairness authority, now enshrined in Section 45(n) of the FTC Act:

The Commission shall have no authority under this section or section 57a of this title to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.

While not entirely foreclosing the possibility of other indicia of harm to competition, Wright provides a clear statement of what would constitute Section 5 UMC harm under his standard:

Conduct that results in harm to competition, and in turn, in harm to consumer welfare, typically does so through increased prices, reduced output, diminished quality, or weakened incentives to innovate.

This means is that, among other things, “reduction in consumer choice” is not, by itself, a cognizable harm under Section 5, just as it is not under the antitrust laws. As one of us (Manne) has discussed previously:

Most problematically, Commissioner Rosch has suggested that Section Five could address conduct that has the effect of “reducing consumer choice” without requiring any evidence that conduct actually reduces consumer welfare…. Troublingly, “reducing consumer choice” seems to be a euphemism for “harm to competitors, not competition,” where the reduction in choice is the reduction of choice of competitors who may be put out of business by a competitor’s conduct.

The clear limit on “consumer choice” claims contemplated by Wright’s Statement is another of its important benefits.

But Wright emphatically rejects proposals to limit Section 5 to mean only what the antitrust laws themselves mean. Section 5 does extend beyond the limits of the antitrust laws in encompassing conduct that is likely to result in harm to competition, although it hasn’t yet.

Because prospective enforcement of Section 5 against allegedly anticompetitive practices that may turn out not to be harmful imposes significant costs, Wright very nicely here also incorporates an error cost approach, requiring a showing of greater harm where the risk of harm is lower:

When the act or practice has not yet harmed competition, the Commission’s assessment must include both the magnitude and probability of competitive harm.  Where the probability of competitive harm is smaller, the Commission will not find an unfair method of competition without reason to believe the act or practice poses a risk of substantial harm.

In this category are the uncontroversial “invitation to collude” cases long agreed by just about everyone to be within the ambit of Section 5. But Commissioner Wright also suggests Section 5 is appropriate to prevent

the use by a firm of unfair methods of competition to acquire market power that does not yet rise to the level of monopoly power necessary for a violation of the Sherman Act.

This is somewhat more controversial as it contemplates (as the Statement’s illustrative examples make clear) deception that results in the acquisition of market power.

But most important to note is that, while deception was the basis for the Commission’s enforcement action in Rambus (later reversed by the D.C. Circuit), Commissioner Wright’s Statement would codify the important limitation (partly developed in Wright’s own work) on such cases that the deception must be the cause of an acquisition of market power.

Requirement #2: Absence of Cognizable Efficiencies

The real work in Wright’s Statement is done by the limitation on UMC enforcement in cases where the complained-of practice produces cognizable efficiencies. This is not a balancing test or a rule of reason. It is a safe harbor for cases where conduct is efficient, regardless of its effect on competition otherwise:

The Commission therefore creates a clear safe harbor that provides firms with certainty that their conduct can be challenged as an unfair method of competition only in the absence of efficiencies.

As noted at the outset, this is the most important and ambitious effort we know of to incorporate the error cost framework into FTC antitrust enforcement policy. This aspect of the Statement takes seriously the harm that can arise from the agency’s discretion, uncertainty over competitive effects (especially in “likely to cause” cases) and the imbalance of power and costs inherent in the FTC’s Part III adjudication to tip the scale back toward avoidance of erroneous over-enforcement.

Importantly, Commissioner Wright called out the last of these in his speech this morning, describing the fundamental imbalance that his Statement seeks to address:

The uncertainty surrounding the scope of Section 5 is exacerbated by the administrative procedures available to the Commission for litigating unfair methods claims. This combination gives the Commission the ability to, in some cases, take advantage of the uncertainty surrounding Section 5 by challenging conduct as an unfair method of competition and eliciting a settlement even though the conduct in question very likely would not violate the traditional federal antitrust laws. This is because firms typically will prefer to settle a Section 5 claim rather than going through lengthy and costly administrative litigation in which they are both shooting at a moving target and have the chips stacked against them. Such settlements only perpetuate the uncertainty that exists as a result of ambiguity associated with the Commission’s Section 5 authority by encouraging a process by which the contours of the Commission’s unfair methods of competition authority are drawn without any meaningful adversarial proceeding or substantive analysis of the Commission’s authority.

In essence, by removing the threat of Section 5 enforcement where efficiencies are cognizable, Wright’s Statement avoids the risk of Type I error, prioritizing the possible realization of efficiencies over possible anticompetitive harm with a bright line rule that avoids attempting to balance the one against the other:

The Commission employs an efficiencies screen to establish a test with clear and predictable results that prevents arbitrary enforcement of the agency’s unfair methods of competition authority, to focus the agency’s resources on conduct most likely to harm consumers, and to avoid deterring consumer welfare-enhancing business practices.

Moreover, the FTC bears the burden of demonstrating that its enforcement meets the efficiencies test, ensuring that the screen doesn’t become simply a rule of reason balancing:

The Commission bears the ultimate burden in establishing that the act or practice lacks cognizable efficiencies. Once a firm has offered initial evidence to substantiate its efficiency claims, the Commission must demonstrate why the efficiencies are not cognizable.

Fundamentally, as Commissioner Wright explained in his speech,

Anticompetitive conduct that lacks cognizable efficiencies is the most likely to harm consumers because it is without any redeeming consumer benefits. The efficiency screen also works to ensure that welfare-enhancing conduct is not inadvertently deterred…. The Supreme Court has long recognized that erroneous condemnation of procompetitive conduct significantly reduces consumer welfare by deterring investment in efficiency-enhancing business practices. To avoid deterring consumer welfare-enhancing conduct, my proposed Policy Statement limits the use of Section 5 to conduct that lacks cognizable efficiencies.

The Big Picture

Wright’s proposed Policy Statement is well thought out and much needed. It offers clear guidance for companies navigating the FTC’s murky Section 5 waters, and it offers clear, economically grounded limits on the FTC’s UMC enforcement authority. While preserving a scope of enforcement authority for Section 5 beyond the antitrust statutes (including against deceptive conduct that harms competition without any corresponding efficiency justification), it nevertheless reins in the most troubling abuses of that authority by clearly prohibiting the agency’s unprincipled enforcement actions in cases like N-Data, Google and Rambus, all of which failed to establish a connection between the complained-of conduct and harm to competition or else ignored clear efficiencies (particularly Google).

No doubt some agency watchers will criticize the Statement, labeling it reflexively deregulatory. But remember this isn’t being proposed in a vacuum. Commissioner Wright’s Statement defines only what should be a fairly narrow set of cases beyond the antitrust statutes’ reach. The Sherman Act doesn’t disappear because Section 5 is circumscribed, and the most recent controversial Section 5 cases could all theoretically have been plead solely as Section 2 cases (although they may well have failed).

What does change is the possibility of recourse to Section 5 as a means of avoiding the standards established by the courts in enforcing and interpreting the Sherman Act.

The Statement does not represent a restriction of antitrust enforcement authority unless you take as your starting point the agency’s recent unsupported and expansive interpretation of Section 5—a version of Section 5 that was never intended to, and doesn’t, exist. Wright’s Statement is, rather, a bulwark against unprincipled regulatory expansion: a sensible grounding of a statute with a checkered past and a penchant for mischief.

Chairman Leibowitz and Commissioner Rosch, in defending the use and expansion of Section 5, argued in Intel that it was necessary to circumvent judicial limitations on the enforcement of Section 2 aimed only at private plaintiffs (like, you know, demonstration of anticompetitive harm, basic pleading standards…)—basically the FTC’s “get out of Trinko free” card. According to Leibowitz, the Court’s economically rigorous, error-cost jurisprudence in cases like linkline, Trinko, Leegin, Twombly, and Brook Group were aimed at private plaintiffs, not agency actions:

But I also believe that the result, at least in the aggregate, is that some anticompetitive behavior is not being stopped—in part because the FTC and DOJ are saddled with court-based restrictions that are designed to circumscribe private litigation. Simply put, consumers can still suffer plenty of harm for reasons not encompassed by the Sherman Act as it is currently enforced in the federal courts.

The claim is meritless (as one of us (Manne) discussed here, for example). But it helps to make clear what the problem with current Section 5 standards are: There are no standards, only post hoc rationalizations to justify pursuing Section 2 cases without the cumbersome baggage of its jurisprudential limits.

The recent Supreme Court cases mentioned above are only the most recent examples of a decades-long jurisprudential trend incorporating modern economic thinking into antitrust law and recognizing the error-cost tradeoff. These cases have served to remove certain conduct (at least without appropriate evidence and analysis) from the reach of Section 2 in a measured, accretive fashion over the last 40 years or so. They have by no means made antitrust irrelevant, and the agencies and private plaintiffs alike bring and win cases all the time—and this doesn’t even measure the conduct that is deterred by the threat of enforcement.  The limits on Section 5 suggested by Commissioner Wright’s Statement are marginal limits on the scope of antitrust beyond the Sherman Act, Clayton Act and other statutes. There is nothing in the legislative history or plain language of Section 5 to suggest adopting a more expansive approach, in effect using it to undo what the courts have methodically done.

It is also worth noting that not only the antitrust laws, but also the the Unfair and Deceptive Acts and Practices (UDAP) prong of Section 5 exerts a regulatory constraint on business conduct, proscribing deception, for example, as a consumer protection matter—without having to prove the existence of market power or its abuse. This also forms a piece of the institutional backdrop against which Wright’s proposed Policy Statement must be adjudged.

Wright was a leading critic of the agency’s expansive use of Section 5 before he joined the Commission, both at Truth on the Market as well as in longer writing.  He has, correctly, seen it as a serious problem in need of remedying for quite some time. It is gratifying that Wright is continuing this work now that he is on the Commission, where he is no longer relegated merely to critiquing the agency but is in a position to try to transform it himself.

What remains needed is the political will to move this draft Policy Statement to adoption by the full Commission—something Chairman Ramirez is not likely to embrace without considerable pressure from Congress and/or the antitrust community. In the modest service of fulfilling this need, ICLE and TechFreedom intend to host later this year the first of what we hope will be several workshops on Commissioner Wright’s Statement and the broader topic of Section 5 enforcement reform. If the Commission won’t do it, the private sector will have to step in. For a taste of our perspective, check out the amicus brief we recently filed with FTC law scholars (Todd Zywicki, Paul Rubin and Gus Hurwitz) in the case of FTC v. Wyndham, which may be the first case to really test how the FTC uses is unfairness authority in consumer protection cases.