Archives For federalism

My former student and recent George Mason Law graduate (and co-author, here) Angela Diveley has posted Clarifying State Action Immunity Under the Antitrust Laws: FTC v. Phoebe Putney Health System, Inc.  It is a look at the state action doctrine and the Supreme Court’s next chance to grapple with it in Phoebe Putney.  here is the abstract:

The tension between federalism and national competition policy has come to a head. The state action doctrine finds its basis in principles of federalism, permitting states to replace free competition with alternative regulatory regimes they believe better serve the public interest. Public restraints have a unique ability to undermine the regime of free competition that provides the basis of U.S.- and state-commerce policies. Nevertheless, preservation of federalism remains an important rationale for protecting such restraints. The doctrine has elusive contours, however, which have given rise to circuit splits and overbroad application that threatens to subvert the state action doctrine’s dual goals of federalism and competition. The recent Eleventh Circuit decision in FTC v. Phoebe Putney Health System, Inc. epitomizes the concerns associated with misapplication of state action immunity. The U.S. Supreme Court recently granted the FTC’s petition for certiorari and now has the opportunity to more clearly define the contours of the doctrine. In Phoebe Putney, the FTC has challenged a merger it claims is the product of a sham transaction, an allegation certain to test the boundaries of the state action doctrine and implicate the interpretation of a two-pronged test designed to determine whether consumer welfare-reducing conduct taken pursuant to purported state authorization is immune from antitrust challenge. The FTC’s petition for writ of certiorari raises two issues for review. First, it presents the question concerning the appropriate interpretation of foreseeability of anticompetitive conduct. Second, the FTC presents the question whether a passive supervisory role on the state’s part can be construed as state action or whether its approval of the merger was a sham. In this paper, I seek to explicate the areas in which the state action doctrine needs clarification and to predict how the Court will decide the case in light of precedent and the principles underlying the doctrine.

Go read the whole thing.

States can be a wonderful laboratory and platform for jurisdictional competition.  But sometimes the laboratory seems to belong to Dr. Frankenstein and then federal law must step in to bring order.

Biff Campbell thinks Reg D has failed its intended purpose and the reason is state law.  Here’s part of the abstract:

Regulation D * * * offers businesses — especially businesses with relatively small capital requirements — fair and efficient access to vital, external capital.  * * * The data show that Regulation D is not working in the way the Commission intended or in a way that benefits society. The data reveal that companies attempting to raise relatively small amounts of capital under Regulation D overwhelmingly forego the low transaction costs of offerings under Rule 504 and Rule 505 in favor of meeting the more onerous (and more expensive) requirements of Rule 506. Additionally, these companies overwhelmingly limit their relatively small offerings to accredited investors, which dramatically reduces the pool of potential investors. This unintended and bad outcome is the result of the burdens imposed by state blue sky laws and regulations, and this has to a large degree wrecked the sensible and balanced approach of the Commission in Regulation D.  Congress. . . could solve the problem by expanding federal preemption to cover all offerings made under Regulation D.

He has a point.  Permitting the states to regulate national securities transactions enables individual states to impose regulatory costs outside their borders for the benefit of local interest groups.  This can have perverse effects — in this case, by letting individual states impede national capital formation and entrepreneurship .Indeed, a key economic rationale for federal law is to address this problem.  See Easterbrook & Fischel, Mandatory Disclosure for the Protection of Investors, 70 Virginia Law Review 669 (1984).  

But we don’t have to eliminate state securities laws, along with state law’s potential advantages of competition and experimentation, to deal with this problem.  There’s an alternative:  apply state law only to intrastate transactions, or to corporations that have contracted for the securities law of a particular state (e.g., by incorporating in the state).  In other words, apply the same choice-of-law rule to state securities law as to state corporate governance law.  I discuss this approach in Dabit, Preemption and Choice of Law and Preemption and Choice-of-Law Coordination (with O’Connor).

Alison Frankel gripes about a NJ judge’s ruling throwing out a shareholders’ derivative suit seeking to hold the J & J board accountable for problems concerning the company’s Rispardal drug. Frankel thinks the bad faith standard the court applied is not high enough.

Ted Frank responds that the fact that the company had settled criminal allegations doesn’t mean the board was irresponsible given big companies’ exposure to prosecutorial overreaching (here’s my thoughts on the problems with prosecutors).  He notes that given huge potential penalties and legal costs “even a risk-neutral set of executives would refuse to go to trial on criminal charges that they had a 95% chance of winning.”  As Ted says:

The issue is this: first, any corporate law is going to have to balance false negatives (valid suits against directors being thrown out prematurely) and false positives (invalid suits against directors costing tens of millions of dollars in time and money to resolve). Any opening up of the courtroom doors to challenge directors will reduce false negatives at the expense of more false positives; any increase in the burden to bring suit will reduce false positives at the expense of more false negatives.

Anyway, Ted continues, shareholders of NJ corporations can decide to invest in firms incorporated elsewhere if they think NJ law is too lenient on directors, aptly citing my and O’Hara’s The Law Market.

Of course Frankel might argue that the business judgment rule that the court used to decide the case is ubiquitous, leaving plaintiffs with little choice. Indeed, the only significant dissent is Nevada which is, if anything, even easier on directors than NJ.   Frankel might also argue that this indicates state corporation law is rigged for managers and that we would do better under federal law.  Perhaps what we need is a super Dodd-Frank/SOX on steroids that preempts state law and exposes managers to suits like the one NJ dismissed.

I would respond that the universal acceptance of the business judgment rule represents the market’s rejection of Frankel’s position.  If Frankel wants to complain that the market for corporate law is imperfect,  she would need to persuade me that shareholders are better off in the clutches of Congress.

The Airgas decision

Larry Ribstein —  16 February 2011

So Chancellor Chandler, in deciding Airgas, preserved the board’s power to decide when to sell the company.  If a company’s shareholders don’t like it, they need to replace the board.  If shareholders generally don’t like it they need to change the Delaware statute.

In upholding the board’s power, and confirming what most astute observers knew the law likely was, despite very strong facts the other way (no “coercion” or other obvious reason why the pill was needed), the court preserved the stability of Delaware law. Hard facts don’t have to make bad law.  Although the Air Products bid was $70, the shares had been trading around $63.  They fell from $63.73 to $61 after the decision, suggesting clarification of a small residual amount of uncertainty.

The decision illustrates one reason why Subramanian, et al, were wrong to suggest the Delaware anti-takeover statute is preempted by the Williams Act.  If the statute, why not the pill — and other aspects of Delaware law that block takeovers?  Here’s my response along these lines to the Subramanian et al argument.

Of course Congress theoretically could pass a law that explicitly preempts poison pills.  Dodd-Frank’s intrusion into corporate governance makes this plausible.  But such additional federal interference would not be wise.

As I discussed a couple of days ago in my post about the SEC’s moves toward imposing fiduciary duties on brokers, I have a new paper on how Congress and the courts messed up fiduciary duties in another context: Federal Misgovernance of Mutual Funds. The paper is about a Supreme Court case decided last term. The Court’s opinion followed a notable disagreement in the Seventh Circuit between Judge Easterbrook, who would basically trust adviser compensation to the robust mutual fund market, and Judge Posner, who had doubts about how well that market functions. Here’s the abstract:

In Jones v. Harris Associates, the Supreme Court interpreted investment advisers’ fiduciary duty regarding compensation for services under Section 36(b) of the Investment Company Act of 1940. The Court endorsed an open-ended Second Circuit standard over a more determinate Seventh Circuit test calling only for full disclosure and no “tricks.”  This paper shows that Congress created and must solve the fundamental problem the Court faced in Jones. At one level the problem stems from the existence of an investment adviser fiduciary duty as to compensation and the corporate structure from which it springs. At a deeper level lies the more basic problem of federal interference in firm governance, which lacks state corporate law’s safety valve of interstate competition and experimentation.  This discussion is appropriate in light of the increasing federal role evident in the enactment of broad new financial regulation.

Here’s an earlier pre-decision post laying out some of the issues, which I concluded by noting:

I suspect that in this day and age the Supreme Court will side with Posner. Such a decision would be a symptom and signal of our sharp turn toward paternalism in everything from complex finance to corporate governance to the simplest products.

Although the Court’s result was consistent with Posner’s position, as noted here it left the deeper issues to Congress. These include questions not only about markets, but also about the appropriate federal role in structuring investment vehicles. My article suggests that, whatever the flaws in markets and state regulation, federal regulation may be worse.

The Comprehensive Alcohol Regulatory Effectiveness Act — yes, the “CARE Act” — or HR 5034, is a piece of legislation aimed at supporting “State-based alcohol regulation.”  Recall the Supreme Court’s decision in Granholm v. Heald, which held that states could either allow in-state and out-of-state retailers to directly ship wine to consumers or could prohibit it for both, but couldn’t ban direct shipment only for out-of-state sellers while allowing in for in-state sellers.  Most states thus far have opened up direct shipping laws to the benefit of consumers.    While we occasionally criticize the Federal Trade Commission from time to time here at TOTM, its own research demonstrating that state regulation banning direct shipment and e-commerce harmed consumers is an excellent example of the potential for competition research and development impacting regulatory debates.  Indeed, Justice Kennedy’s majority opinion in Granholm cites the FTC study (not to mention co-blogger Mike Sykuta’s work here) a number of times.  But in addition to direct shipment laws, there are a whole host of state laws regulating the sale and distribution of alcohol.  Some of them have obviously pernicious competitive consequences for consumers as well as producers.  The beneficiaries are the wholesalers who have successfully lobbied for the protection of the state.  Fundamentally, the CARE Act aims to place these laws beyond the reach of any challenge under the Commerce Clause as per Granholm, the Sherman Act, or any other federal legislation.  Whether the CARE Act has any ancillary social benefits is an important empirical question — but you can bet that the first-order effect of the law, if it were to go into effect, would be to increase beer, wine and liquor prices.  More on the CARE Act and state regulation of alcoholic beverages below the fold.

Continue Reading…

Last month I noted that the Senate was about to repeat its SOX mistake with another ill-fated foray into regulating corporate governance.  I focused on provisions for mandatory majority voting, separation of the board chair and CEO jobs, risk committees, say-on-pay, and pay-performance disclosures.  

Now Annette Nazareth summarizes (HT Bainbridge) the provisions in the bill that passed the Senate and awaits reconciliation. She notes that the bill “would federalize significant governance and executive compensation matters that have historically been a matter of state law.” Alas, the Senate never voted on an amendment proposed by Delaware’s Carper that would have eliminated (D-Del) that would have eliminated the majority voting provision and a provision for proxy access.

Although none of the provisions Nazareth discusses is individually earth-shaking, they cumulatively touch many major aspects of corporate governance formerly left to contract and state law.  This bill thus clearly adds to the framework for federal takeover of internal governance that SOX established. The overall effect is that it will be increasingly difficult to demark an area left exclusively for state law. This leaves little “firebreak” to protect against judicial incursions in the spaces not yet covered by explicit federal provisions.  This could ultimately profoundly affect the relationship between federal and state law regarding business associations. 

A generation ago the Supreme Court could say that “no principle of corporation law and practice is more firmly established than a State’s authority to regulate domestic corporations, including the authority to define the voting rights of shareholders.” CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 89 (1987). 

Erin O’Hara and I have argued that this separation between federal and state spheres does and should affect the scope of implied preemption of state law by federal statutes.  Thus, when the Court held that state securities actions were preempted by the Securities Litigation Uniform Standards Act, it emphasized “[t]he magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 78 (2006). See also my article on Dabit. However, we noted that “[m]any federal ‘securities’ laws reach deep into the kind of internal governance issues covered by the [internal affairs doctrine].” Thus, corporate internal affairs are only “relatively safe from federal preemption” and internal affairs is not “a constitutional boundary, as shown by the continuing forward march of federal corporation law.”

Under the Dodd bill, the forward march picks up the pace.  

Yet from a policy standpoint the march is very much backward. In my April post I observed that “[a]s financial markets have become far deeper and more competitive since the 30s, it makes little sense for regulators to actually trust them less.” Thus, the Senate has ignored not only the lessons of SOX but the developments in corporate governance and markets that make its governance provisions less necessary than ever.

Judge Frank Easterbrook once opined that observing predatory pricing was a bit like seeing a unicorn —  in the sense that it was a phenomena around which there was much lore but not much empirical evidence.  The debate over the current expansion of Section 5 liability increasingly has become about the search for a different sort of “unicorn” — follow-on actions. The conventional wisdom is that private rights of action in the US, ceteris paribus, militate in favor of less aggressive enforcement of Section 2 relative to other countries.  It follows, some have argued, that an expansive view of Section 5 is appropriate because it avoids the social costs —  and in particular the chilling effects on efficient behavior associated with potential antitrust liability — associated with false positives.

On one side of this debate, Commissioners Rosch and Leibowitz have extolled the virtues of Section 5 as  a zone free of collateral consequences.   Indeed, Chairman Leibowitz and Commissioner Rosch have gone so far as to assert that the logic underlying the Supreme Court’s jurisprudence recognizing the social costs of antitrust error should only apply to private plaintiffs, but not the enforcement agencies because the latter know anticompetitive conduct when they see it while generalist judges and juries do not and thus are more prone to costly errors.

As a preliminary matter, I should note that my view is that the Rosch/ Leibowitz claim that antitrust law has been narrowed exclusively because of concerns about private plaintiffs is dramatically overstated at best, and at worst, blatantly inconsistent with the Supreme Court’s jurisprudence which has been remarkably consistent in focusing on the inherent difficulties associated with identifying anticompetitive conduct when discussing error costs and the role they play in setting antitrust rules.  It is certainly true that courts have expressed concerns about abuse of the antitrust laws by private plaintiffs, but it is impossible to read the Supreme Court’s antitrust jurisprudence (see, e.g. Trinko, Nynex, Credit Suisse, Brooke Group, Linkline) without taking away a much the Court’s much more general fear that the social costs of false positives — stemming both from the burdens of antitrust discovery and chilling of efficient, pro-competitive conduct — warrants a reduction in the scope of the antitrust laws.

Holding that point aside for a moment, the primary argument supporting the controversial expansion of Section 5 has been that it does not have collateral consequences because only Section 2 create follow-on opportunities for private plaintiffs.  Section 5, Chairman Leibowitz and Commissioner Rosch tell us, does not present such problems.  The social costs associated with Section 5 follow-ons do not exist. Here is a recent version of that assertion from Commissioner Rosch:

The problem here, however, is that these Supreme Court decisions adversely impact all cases in which public antitrust enforcers proceed under the same statute as private plaintiffs and state enforcers, including, most significantly Sections 1 and 2 of the Sherman Act. The Commission can avoid implicating both of these concerns if it proceeds under Section 5: first, only the Commission (as divorced from private plaintiffs, for example), can proceed under Section 5 and, second, if the Commission
proceeds under its Part 3 administrative process in a Section 5 proceeding, there is no role for the district courts or federal juries to play.

Here’s another version of the case for Section 5 resting on an empirical claim about the lack of collateral consequences:

This is an especially important consideration when federal court private treble damage litigation involving the same conduct is pending or threatened. But is it important whenever there is a reasonable prospect that such a private claim will be filed. A plaintiff cannot rely on favorable Section 5 case law in a federal treble damage action. Neither can a federal district court rely on such a decision because the FTC alone can avail itself of Section 5 at the federal level. Conversely, the spillover effects on federal law enforcement of Supreme Court substantive law jurisprudence that is the product of concern about such treble damage actions can be reduced if the Commission uses Section 5, instead of traditional antitrust law that is equally applicable to private and public plaintiffs.

Whether an expanded Section 5 would lead to collateral consequences is fundamentally an empirical question.  There are two potential sources of collateral consequences that have been discussed.  The first is private actions using FTC Act settlements or judgments to create claims under state consumer protection acts (CPAs), which are often interpreted in light of the FTC Act and allow for both attorneys’ fees and multiple damages. The second is the possibility of follow-ons in which private plaintiffs rely on the Section 5 settlement or judgment in federal court under a traditional antitrust statute such as Section 1 or 2.

Thus far, the debate has focused on the first source: state CPAs.  Commissioner Kovacic first responded to the aggressive use of Section 5 in his dissent in the N-Data settlement, responding to the majority assertion that Section 5 provides a free lunch:

The Commission overlooks how the proposed settlement could affect the application of state statutes that are modeled on the FTC Act and prohibit unfair methods of competition (“UMC”) or unfair acts or practices (“UAP”). The federal and state UMC and UAP systems do not operate in watertight compartments. As commentators have documented, the federal and state regimes are interdependent. [Citations omitted].  By statute or judicial decision, courts in many states interpret the state UMC and UDP laws in light of FTC decisions, including orders. As a consequence, such states might incorporate the theories of liability in the settlement and order proposed here into their own UMC or UAP jurisprudence. A number of states that employ this incorporation principle have authorized private parties to enforce their UMC and UAP statutes in suits that permit the court to impose treble damages for infringements.

As a matter of theory, because treble damage remedies are not generally available for Section 5 violations, overdeterrence is likely to be less of a problem under Section 5 than Section 2. But make no mistake — the difference is one of degree rather than of kind.  And as a practical matter, the difference virtually disappears when private remedies are available under Little FTC Acts, including those that are construed in harmony with Section 5 and allow for multiple damages and attorneys’ fees.

In response to this argument, the Commissioners favoring expansion of Section 5 have played the unicorn card.  The claim is, quite simply, that such state level follow-ons don’t happen.  Unfortunately, this side of the debate has been a data-free zone thus far.  Well, almost data free.  Much has been made about the fact that the N-Data settlement itself did not give rise to private causes of action under any “Little FTC Acts.”  For example, Chairman Leibowitz has pointed to the fact that no plaintiff in N-Data filed under a state consumer protection act as evidence that “Section 5 violators do not find themselves subject to private antitrust actions under federal law— and probably under state baby FTC acts as well—certainly not for treble damages.”  Well, state consumer protection acts do indeed exist.  And there is, as the Searle Report on Private Litigation under CPAs notes, quite a bit of litigation under them.  A systematic empirical evaluation of state CPA litigation to determine how frequent Section 5 follow-on litigation occurs seems like a superior alternative to the current debate.

As a tangent, I find the theoretical underpinnings of the “it doesn’t happen” response both unpersuasive and a little bit odd without systematic data supporting it.  The argument seems to be that the private plaintiffs bar is insufficiently creative, resourceful, or aggressive enough to make use a perfectly operational statute that allows free-riding on the Commission’s efforts, and access to attorneys’ fees and multiple damages.  Has anybody seen a modern public policy debate in which it has been asserted that the private plaintiffs bar is asleep behind the wheel?  Now I’m the first to say that measuring the extent and magnitude of any collateral effects of Section 5 is an important empirical question that really ought to be addressed in detail with a serious study.  But pointing to a particular case (N-Data) where a particular plaintiff chose not to make use of the statute for any number of reasons as evidence that it “doesn’t happen” despite obvious incentives for private plaintiffs to use state acts doesn’t quite do the trick.  The appropriate default presumption, I’d imagine, should be that the plaintiffs bar makes use of these statutes where it is profitable to do so.

Of course — state courts are not the only source of follow-ons.  One might believe that a Commission action under Section 5 would encourage private plaintiffs to proceed under Section 2 (or some other statute, e.g. Robinson-Patman) as well.  We are told that such a possibility is pure theory and a Chicago School figment of the imagination.  Well … not so fast.

Readers might recall that the Commission recently announced a settlement with Transitions Optical in a Section 5 case involving exclusive dealing contracts.  A private class action suit alleging a violation of Section 2 of the Sherman Act has been filed in the Western District of Washington based on the Commission Section 5 settlement.

The class action suit comes a month after the Federal Trade Commission (FTC) reached a settlement with Transitions Optical that bars Transitions Optical from using allegedly anticompetitive practices to maintain its monopoly and increase prices on photochromic lenses. The settlement was accompanied by a “consent agreement” between the FTC and Transitions Optical that includes restrictions on exclusive or preferred customer relationships. Transitions Optical has denied any wrongdoing in the matter. … A Transitions Optical spokesperson said, “It’s not unusual for lawsuits like this to be attempted after consent agreements like ours are filed with the FTC. We remain confident about our company and our business practices and feel that we have always done what is right for the success of all our customers and partners. The continued support we receive from our customers and partners shows, more than anything, that we are working in the best interest of the optical industry overall.”

Similarly, a class action Section 1 complaint has been filed against Guitar Center and the National Association of Music Merchants in the Northern District of Illinois.  In that complaint, which relies heavily on the FTC Section 5 complaint, consent order and press releases throughout, the plaintiff alleges that defendants’ minimum advertised pricing (MAP) policies resulted in collusion and higher prices.

The fact that Section 5 judgments do not automatically result in liability under Sherman Act Section 1 or 2 in federal court makes these follow-ons different in at least some important ways from the state CPAs, where at least in principle, liability is automatic.  However, the debate over whether Section 5 consents are free of collateral consequences doesn’t turn on automatic liability.  Rather, the debate is over whether and to what extent Section 5 consents and judgments generate collateral consequences in the form of follow-ons that can lead to the same treble damages actions that generate the concerns about socially costly false positives in the Section 2 setting.  All parties apparently agree that the the Supreme Court’s jurisprudence reacting to the problem of false positives is a sound and rational approach.   The two federal court cases revealed by a few Google searches, combined with the possibility of state CPA actions which have the advantage of multiplied damages along with automatic liability, suggests that we are not talking about unicorns here. The ratio of theory to evidence in the policy discussion of error costs and Section 5 is greater than optimal.  But the claim that the Commission’s expanded vision of Section 5 is free of those concerns should be subjected to more rigorous empirical testing before accepted as a sound basis for competition policy.

Repeating claims he made in his statement in Intel, Chairman Leibowitz in a recent interview in the Wall Street Journal has this to say about stepped-up Section 5 enforcement at the FTC:

The courts have pared back plaintiffs’ rights in antitrust cases. They’re concerned about what they believe to be the toxic combination of class actions, treble damages and a very aggressive plaintiffs’ bar. The problem for us as an agency is we come under those restrictions, [too]. So how do we do what we’re supposed to do, which is stopping anticompetitive behavior? One tool in our arsenal is using what’s known as our Section 5 authority to stop unfair methods of competition.

Leibowitz further justifies his approach to Section 5 with an appeal to what he claims to be an important intrinsic limit of Section 5:

The other advantage of this authority is, because it’s not an antitrust statute, it’s going to limit follow-on, private treble-damages law suits. I think in the end, if we use this statute effectively to stop anticompetitive behavior, the business community is going to end up supporting it very, very strongly. Because what they’re most concerned about is follow-on, private, treble-damages litigation. They’re not so much concerned about cease-and-desist [orders], which is the kind of thing we’re often looking at when we use our Section 5 authority. I don’t think big business should be worried. I think they should embrace this trend.

Yes, I’m sure business will eagerly embrace the FTC’s use of this statute, particularly as the agency defends it precisely on the ground that its use is relatively unconstrained by courts and their pesky rule of law.

Leibowitz has been making these claims for some time (see, e.g., these remarks from October 2008 and the N-Data Statement).

But admittedly, if it were true that the FTC’s use of Section 5 did not lead inexorably to costly follow-on litigation, and if it were not the case that the statute were a recipe for unprincipled, uneconomic antitrust enforcement, no doubt there would be some support for it.  But unfortunately for Leibowitz, the claim is NOT true–it is not the case that Section 5 removes the specter of costly private litigation from the equation.

The reality is that many states have “Baby FTC Acts,” modeled on the federal FTC Act and taking enforcement cues–by law–from FTC interpretation of the Act.  And these statutes do provide for private rights of action and treble damages.  So although it is technically true that there is no private right of action under the federal FTC Act, this hardly shields antitrust defendants from follow-on liability.  And even if such actions have been rare up until now (as Leibowitz claims in the remarks linked above), that may well change as the FTC’s precedent-setting enforcement decisions shift toward using the statute as an antitrust enforcement tool and as the Act is used more and more for otherwise-unwinnable Sherman Act cases.

This point isn’t new, and Commissioner Kovacic made this same point in his dissent from the N-Data settlement:

The Commission overlooks how the proposed settlement could affect the application of state statutes that are modeled on the FTC Act and prohibit unfair methods of competition (“UMC”) or unfair acts or practices (“UAP”). The federal and state UMC and UAP systems do not operate in watertight compartments. As commentators have documented, the federal and state regimes are interdependent. [Citations omitted].  By statute or judicial decision, courts in many states interpret the state UMC and UDP laws in light of FTC decisions, including orders. As a consequence, such states might incorporate the theories of liability in the settlement and order proposed here into their own UMC or UAP jurisprudence. A number of states that employ this incorporation principle have authorized private parties to enforce their UMC and UAP statutes in suits that permit the court to impose treble damages for infringements.

If the Commission desires to deny the reasoning of its approach to private treble damage litigants, the proposed settlement does not necessarily do so. If the Commission’s assumption of no spillover effects is important to its decision, a rethink of the proposed settlement and order seems unavoidable.

As far as I can tell, however, Leibowitz and other defenders of this rationale for expanded Section 5 enforcement have not addressed this point, and they continue to rely, disingenuously, in my opinion, on claims that Section 5 enforcement will not lead to follow-on, private actions.

At the same time, as I pointed out here, Leibowitz’ continued claim that courts have reined in Sherman Act jurisprudence only out of concern with the incentives and procedures of private enforcement, and not out of a concern with a more substantive balancing of error costs–errors from which the FTC is not, unfortunately immune–seems ridiculous to me.  To be sure (as I said before), the procedural background matters as do the incentives to bring cases that may prove to be inefficient.

But take, for example, Twombly, mentioned by Leibowitz as one of the cases that has recently reined in Sherman Act enforcement in order to constrain over-zealous private enforcement (and thus not in a way that should apply to government enforcement).  Yes, of course, Twombly was concerned with the private incentives for bringing antitrust strike suits and the costs of such suits.  (And I note in passing that, while the specific monetary incentive at issue in the case might not apply to the government, the government, too, certainly has incentives to bring cases that may be weak–I hardly think the analysis is completely inapposite.  Meanwhile the costs of protracted litigation are just as high if the plaintiff is the government as if it is a private party.)

But the over-zealousness of private plaintiffs is not all it was about, as the Court made clear:

The inadequacy of showing parallel conduct or interdependence, without more, mirrors the ambiguity of the behavior: consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market.  Accordingly, we have previously hedged against false inferences from identical behavior at a number of points in the trial sequence.

* * *

Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action. [Citations omitted].

The Court was appropriately concerned with the ability of decision-makers to separate pro-competitive from anticompetitive conduct.  Even when the FTC brings cases, it and the court deciding the case must make these determinations.  And, while the FTC may bring fewer strike suits, it isn’t limited to challenging conduct that is simple to identify as anticompetitive.  Quite the opposite, in fact–the government has incentives to develop and bring suits proposing novel theories of anticompeitive conduct and of enforcement (as it is doing in the Intel case, for example).

I recognize that Leibowitz may believe that he is not susceptible to mistakes of this sort, or that (as Dan Crane might say), the FTC has a comparative institutional advantage over courts in making these sorts of determinations.  I disagree, but if that is the claim then Leibowitz should make it explicitly rather than suggesting that current Sherman Act jurisprudence is all about treble damages and strike suits.  I’m quite certain, however, that an explicit claim by the FTC that it never gets it wrong and thus shouldn’t be constrained by meddling courts wouldn’t be viewed very favorably by the business community.

Expanding on the themes in this post from the TOTM symposium book review of Professor Carrier’s new book on “Harnessing the Power of Intellectual Property and Antitrust Law” to encourage innovation, I’ve posted an essay co-authored with a very talented former student and research assistant, Aubrey Stuempfle. The essay expands on some of the themes we touched upon in reviewing Carrier’s analysis of standard setting issues, including the potential threat to innovation posed by invoking antitrust remedies to govern the SSO contracting process (whether under Section 2 of the Sherman Act of Section 5 of the FTC Act) in patent holdup cases. The review (along with the others from the symposium on Carrier’s book) will be published in the Alabama Law Review.

Here’s the abstract:

This essay reviews Michael Carrier’s analysis of antitrust and standard setting in his new book: Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law. While Innovation for the 21st Century offers a balanced and informative summary on patent holdup, we find that Carrier’s treatment of antitrust and standard setting avoids too many of the critical policy questions. One critical and emerging issue in this area, and one Professor Carrier largely ignores, is the use of Section 5 of the FTC Act to govern the standard setting process, as in In re N-Data. We explore and highlight some of the critical legal and economic issues associated the use of Section 5 in the patent holdup context, the standard courts should apply to this conduct under Section 2 of the Sherman Act, and the fundamental issue of whether innovation and economic growth would be better served by relying on contract and patent law rather than antitrust. We conclude that it is highly unlikely that optimal regulation of standard setting activity includes the creation of perpetual contractual commitments backed by the threat of antitrust and state consumer protection remedies, without rigorous economic proof of substantial consumer injury that cannot be reasonably avoided. In our view, the current state of affairs described herein presents a critical threat to standard setting activity and innovation.

The essay can be downloaded here.