Archives For law and economics

U.S. antitrust law focuses primarily on private anticompetitive restraints, leaving the most serious impediments to a vibrant competitive process – government-initiated restraints – relatively free to flourish.  Thus the Federal Trade Commission (FTC) should be commended for its July 16 congressional testimony that spotlights a fast-growing and particularly pernicious species of (largely state) government restriction on competition – occupational licensing requirements.  Today such disciplines (to name just a few) as cat groomers, flower arrangers, music therapists, tree trimmers, frozen dessert retailers, eyebrow threaders, massage therapists (human and equine), and “shampoo specialists,” in addition to the traditional categories of doctors, lawyers, and accountants, are subject to professional licensure.  Indeed, since the 1950s, the coverage of such rules has risen dramatically, as the percentage of Americans requiring government authorization to do their jobs has risen from less than five percent to roughly 30 percent.

Even though some degree of licensing responds to legitimate health and safety concerns (i.e., no fly-by-night heart surgeons), much occupational regulation creates unnecessary barriers to entry into a host of jobs.  Excessive licensing confers unwarranted benefits on fortunate incumbents, while effectively barring large numbers of capable individuals from the workforce.  (For example, many individuals skilled in natural hair braiding simply cannot afford the 2,100 hours required to obtain a license in Iowa, Nebraska, and South Dakota.)  It also imposes additional economic harms, as the FTC’s testimony explains:  “[Occupational licensure] regulations may lead to higher prices, lower quality services and products, and less convenience for consumers.  In the long term, they can cause lasting damage to competition and the competitive process by rendering markets less responsive to consumer demand and by dampening incentives for innovation in products, services, and business models.”  Licensing requirements are often enacted in tandem with other occupational regulations that unjustifiably limit the scope of beneficial services particular professionals can supply – for instance, a ban on tooth cleaning by dental hygienists not acting under a dentist’s supervision that boosts dentists’ income but denies treatment to poor children who have no access to dentists.

What legal and policy tools are available to chip away at these pernicious and costly laws and regulations, which largely are the fruit of successful special interest lobbying?  The FTC’s competition advocacy program, which responds to requests from legislators and regulators to assess the economic merits of proposed laws and regulations, has focused on unwarranted regulatory restrictions in such licensed professions as real estate brokers, electricians, accountants, lawyers, dentists, dental hygienists, nurses, eye doctors, opticians, and veterinarians.  Retrospective reviews of FTC advocacy efforts suggest it may have helped achieve some notable reforms (for example, 74% of requestors, regulators, and bill sponsors surveyed responded that FTC advocacy initiatives influenced outcomes).  Nevertheless, advocacy’s reach and effectiveness inherently are limited by FTC resource constraints, by the need to obtain “invitations” to submit comments, and by the incentive and ability of licensing scheme beneficiaries to oppose regulatory and legislative reforms.

Former FTC Chairman Kovacic and James Cooper (currently at George Mason University’s Law and Economics Center) have suggested that federal and state antitrust experts could be authorized to have ex ante input into regulatory policy making.  As the authors recognize, however, several factors sharply limit the effectiveness of such an initiative.  In particular, “the political feasibility of this approach at the legislative level is slight”, federal mandates requiring ex ante reviews would raise serious federalism concerns, and resource constraints would loom large.

Antitrust law challenges to anticompetitive licensing schemes likewise offer little solace.  They are limited by the antitrust “state action” doctrine, which shields conduct undertaken pursuant to “clearly articulated” state legislative language that displaces competition – a category that generally will cover anticompetitive licensing requirements.  Even a Supreme Court decision next term (in North Carolina Dental v. FTC) that state regulatory boards dominated by self-interested market participants must be actively supervised to enjoy state action immunity would have relatively little bite.  It would not limit states from issuing simple statutory commands that create unwarranted occupational barriers, nor would it prevent states from implementing “adequate” supervisory schemes that are designed to approve anticompetitive state board rules.

What then is to be done?

Constitutional challenges to unjustifiable licensing strictures may offer the best long-term solution to curbing this regulatory epidemic.  As Clark Neily points out in Terms of Engagement, there is a venerable constitutional tradition of protecting the liberty interest to earn a living, reflected in well-reasoned late 19th and early 20th century “Lochner-era” Supreme Court opinions.  Even if Lochner is not rehabilitated, however, there are a few recent jurisprudential “straws in the wind” that support efforts to rein in “irrational” occupational licensure barriers.  Perhaps acting under divine inspiration, the Fifth Circuit in St. Joseph Abbey (2013) ruled that Louisiana statutes that required all casket manufacturers to be licensed funeral directors – laws that prevented monks from earning a living by making simple wooden caskets – served no other purpose than to protect the funeral industry, and, as such, violated the 14th Amendment’s Equal Protection and Due Process Clauses.  In particular, the Fifth Circuit held that protectionism, standing alone, is not a legitimate state interest sufficient to establish a “rational basis” for a state statute, and that absent other legitimate state interests, the law must fall.  Since the Sixth and Ninth Circuits also have held that intrastate protectionism standing alone is not a legitimate purpose for rational basis review, but the Tenth Circuit has held to the contrary, the time may soon be ripe for the Supreme Court to review this issue and, hopefully, delegitimize pure economic protectionism.  Such a development would place added pressure on defenders of protectionist occupational licensing schemes.  Other possible avenues for constitutional challenges to protectionist licensing regimes (perhaps, for example, under the Dormant Commerce Clause) also merit being explored, of course.  The Institute of Justice already is performing yeoman’s work in litigating numerous cases involving unjustified licensing and other encroachments on economic liberty; perhaps their example can prove an inspiration for pro bono efforts by others.

Eliminating anticompetitive occupational licensing rules – and, more generally, vindicating economic liberties that too long have been neglected – is obviously a long-term project, and far-reaching reform will not happen in the near term.  Nevertheless, while we the currently living may in the long run be dead (pace Keynes), our posterity will be alive, and we owe it to them to pursue the vindication of economic liberties under the Constitution.

With Berin Szoka.

TechFreedom and the International Center for Law & Economics will shortly file two joint comments with the FCC, explaining why the FCC has no sound legal basis for micromanaging the Internet—now called “net neutrality regulation”—and why such regulation would be counter-productive as a policy matter. The following summarizes some of the key points from both sets of comments.

No one’s against an open Internet. The notion that anyone can put up a virtual shingle—and that the good ideas will rise to the top—is a bedrock principle with broad support; it has made the Internet essential to modern life. Key to Internet openness is the freedom to innovate. An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive. If the Internet really is “open,” shouldn’t all companies be free to experiment with new technologies, business models and partnerships? Shouldn’t the FCC allow companies to experiment in building the unknown—and unknowable—Internet of the future?

The best approach would be to maintain the “Hands off the Net” approach that has otherwise prevailed for 20 years. That means a general presumption that innovative business models and other forms of “prioritization” are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears. And they should start with existing legal tools—like antitrust and consumer protection laws—before imposing prior restraints on innovation.

But net neutrality regulation hurts more than it helps. Counterintuitively, a blanket rule that ISPs treat data equally could actually harm consumers. Consider the innovative business models ISPs are introducing. T-Mobile’s unRadio lets users listen to all the on-demand music and radio they want without taking a hit against their monthly data plan. Yet so-called consumer advocates insist that’s a bad thing because it favors some content providers over others. In fact, “prioritizing” one service when there is congestion frees up data for subscribers to consume even more content—from whatever source. You know regulation may be out of control when a company is demonized for offering its users a freebie.

Treating each bit of data neutrally ignores the reality of how the Internet is designed, and how consumers use it.  Net neutrality proponents insist that all Internet content must be available to consumers neutrally, whether those consumers (or content providers) want it or not. They also argue against usage-based pricing. Together, these restrictions force all users to bear the costs of access for other users’ requests, regardless of who actually consumes the content, as the FCC itself has recognized:

[P]rohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.

The rules that net neutrality advocates want would hurt startups as well as consumers. Imagine a new entrant, clamoring for market share. Without the budget for a major advertising blitz, the archetypical “next Netflix” might never get the exposure it needs to thrive. But for a relatively small fee, the startup could sign up to participate in a sponsored data program, with its content featured and its customers’ data usage exempted from their data plans. This common business strategy could mean the difference between success and failure for a startup. Yet it would be prohibited by net neutrality rules banning paid prioritization.

The FCC lacks sound legal authority. The FCC is essentially proposing to do what can only properly be done by Congress: invent a new legal regime for broadband. Each of the options the FCC proposes to justify this—Section 706 of the Telecommunications Act and common carrier classification—is deeply problematic.

First, Section 706 isn’t sustainable. Until 2010, the FCC understood Section 706 as a directive to use its other grants of authority to promote broadband deployment. But in its zeal to regulate net neutrality, the FCC reversed itself in 2010, claiming Section 706 as an independent grant of authority. This would allow the FCC to regulate any form of “communications” in any way not directly barred by the Act — not just broadband but “edge” companies like Google and Facebook. This might mean going beyond neutrality to regulate copyright, cybersecurity and more. The FCC need only assert that regulation would somehow promote broadband.

If Section 706 is a grant of authority, it’s almost certainly a power to deregulate. But even if its power is as broad as the FCC claims, the FCC still hasn’t made the case that, on balance, its proposed regulations would actually do what it asserts: promote broadband. The FCC has stubbornly refused to conduct serious economic analysis on the net effects of its neutrality rules.

And Title II would be a disaster. The FCC has asked whether Title II of the Act, which governs “common carriers” like the old monopoly telephone system, is a workable option. It isn’t.

In the first place, regulations that impose design limitations meant for single-function networks simply aren’t appropriate for the constantly evolving Internet. Moreover, if the FCC re-interprets the Communications Act to classify broadband ISPs as common carriers, it risks catching other Internet services in the cross-fire, inadvertently making them common carriers, too. Surely net neutrality proponents can appreciate the harmful effects of treating Skype as a common carrier.

Forbearance can’t clean up the Title II mess. In theory the FCC could “forbear” from Title II’s most onerous rules, promising not to apply them when it determines there’s enough competition in a market to make the rules unnecessary. But the agency has set a high bar for justifying forbearance.

Most recently, in 2012, the Commission refused to grant Qwest forbearance even in the highly competitive telephony market, disregarding competition from wireless providers, and concluding that a cable-telco “duopoly” is inadequate to protect consumers. It’s unclear how the FCC could justify reaching the opposite conclusion about the broadband market—simultaneously finding it competitive enough to forbear, yet fragile enough to require net neutrality rules. Such contradictions would be difficult to explain, even if the FCC generally gets discretion on changing its approach.

But there is another path forward. If the FCC can really make the case for regulation, it should go to Congress, armed with the kind of independent economic and technical expert studies Commissioner Pai has urged, and ask for new authority. A new Communications Act is long overdue anyway. In the meantime, the FCC could convene the kind of multistakeholder process generally endorsed by the White House to produce a code enforceable by the Federal Trade Commission. A consensus is possible — just not inside the FCC, where the policy questions can’t be separated from the intractable legal questions.

Meanwhile, the FCC should focus on doing what Section 706 actually demands: clearing barriers to broadband deployment and competition. The 2010 National Broadband Plan laid out an ambitious pro-deployment agenda. It’s just too bad the FCC was so obsessed with net neutrality that it didn’t focus on the plan. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.

[Cross-posted at TechFreedom.]

Last Monday, a group of nineteen scholars of antitrust law and economics, including yours truly, urged the U.S. Court of Appeals for the Eleventh Circuit to reverse the Federal Trade Commission’s recent McWane ruling.

McWane, the largest seller of domestically produced iron pipe fittings (DIPF), would sell its products only to distributors that “fully supported” its fittings by carrying them exclusively.  There were two exceptions: where McWane products were not readily available, and where the distributor purchased a McWane rival’s pipe along with its fittings.  A majority of the FTC ruled that McWane’s policy constituted illegal exclusive dealing.

Commissioner Josh Wright agreed that the policy amounted to exclusive dealing, but he concluded that complaint counsel had failed to prove that the exclusive dealing constituted unreasonably exclusionary conduct in violation of Sherman Act Section 2.  Commissioner Wright emphasized that complaint counsel had produced no direct evidence of anticompetitive harm (i.e., an actual increase in prices or decrease in output), even though McWane’s conduct had already run its course.  Indeed, the direct evidence suggested an absence of anticompetitive effect, as McWane’s chief rival, Star, grew in market share at exactly the same rate during and after the time of McWane’s exclusive dealing.

Instead of focusing on direct evidence of competitive effect, complaint counsel pointed to a theoretical anticompetitive harm: that McWane’s exclusive dealing may have usurped so many sales from Star that Star could not achieve minimum efficient scale.  The only evidence as to what constitutes minimum efficient scale in the industry, though, was Star’s self-serving statement that it would have had lower average costs had it operated at a scale sufficient to warrant ownership of its own foundry.  As Commissioner Wright observed, evidence in the record showed that other pipe fitting producers had successfully entered the market and grown market share substantially without owning their own foundry.  Thus, actual market experience seemed to undermine Star’s self-serving testimony.

Commissioner Wright also observed that complaint counsel produced no evidence showing what percentage of McWane’s sales of DIPF might have gone to other sellers absent McWane’s exclusive dealing policy.  Only those “contestable” sales – not all of McWane’s sales to distributors subject to the full support policy – should be deemed foreclosed by McWane’s exclusive dealing.  Complaint counsel also failed to quantify sales made to McWane’s rivals under the generous exceptions to its policy.  These deficiencies prevented complaint counsel from adequately establishing the degree of market foreclosure caused by McWane’s policy – the first (but not last!) step in establishing the alleged anticompetitive harm.

In our amicus brief, we antitrust scholars take Commissioner Wright’s side on these matters.  We also observe that the Commission failed to account for an important procompetitive benefit of McWane’s policy:  it prevented rival DIPF sellers from “cherry-picking” the most popular, highest margin fittings and selling only those at prices that could be lower than McWane’s because the cherry-pickers didn’t bear the costs of producing the full line of fittings.  Such cherry-picking is a form of free-riding because every producer’s fittings are more highly valued if a full line is available.  McWane’s policy prevented the sort of free-riding that would have made its production of a full line uneconomical.

In short, the FTC’s decision made it far too easy to successfully challenge exclusive dealing arrangements, which are usually procompetitive, and calls into question all sorts of procompetitive full-line forcing arrangements.  Hopefully, the Eleventh Circuit will correct the Commission’s mistake.

Other professors signing the brief include:

  • Tom Arthur, Emory Law
  • Roger Blair, Florida Business
  • Don Boudreaux, George Mason Economics (and Café Hayek)
  • Henry Butler, George Mason Law
  • Dan Crane, Michigan Law (and occasional TOTM contributor)
  • Richard Epstein, NYU and Chicago Law
  • Ken Elzinga, Virginia Economics
  • Damien Geradin, George Mason Law
  • Gus Hurwitz, Nebraska Law (and TOTM)
  • Keith Hylton, Boston University Law
  • Geoff Manne, International Center for Law and Economics (and TOTM)
  • Fred McChesney, Miami Law
  • Tom Morgan, George Washington Law
  • Barack Orbach, Arizona Law
  • Bill Page, Florida Law
  • Paul Rubin, Emory Economics (and TOTM)
  • Mike Sykuta, Missouri Economics (and TOTM)
  • Todd Zywicki, George Mason Law (and Volokh Conspiracy)

The brief’s “Summary of Argument” follows the jump. Continue Reading…

Whereas the antitrust rules on a number of once-condemned business practices (e.g., vertical non-price restraints, resale price maintenanceprice squeezes) have become more economically sensible in the last few decades, the law on tying remains an embarrassment.  The sad state of the doctrine is evident in a federal district court’s recent denial of Viacom’s motion to dismiss a tying action by Cablevision.

According to Cablevision’s complaint, Viacom threatened to impose a substantial financial “penalty” (probably by denying a discount) unless Cablevision licensed Viacom’s less popular television programming (the “Suite Networks”) along with its popular “Core Networks” of Nickelodeon, Comedy Central, BET, and MTV.  This arrangement, Cablevision insisted, amounted to a per se illegal tie-in of the Suite Networks to the Core Networks.

Similar tying actions based on cable bundling have failed, and I have previously explained why cable bundling like this is, in fact, efficient.  But putting aside whether  the tie-in at issue here was efficient, the district court’s order is troubling because it illustrates how very unconcerned with efficiency tying doctrine is.

First, the district court rejected–correctly, under ill-founded precedents–Viacom’s argument that Cablevision was required to plead an anticompetitive effect.  It concluded that Cablevision had to allege only four elements: separate tying and tied products, coercion by the seller to force purchase of the tied product along with the tying product, the seller’s possession of market power in the tying product market, and the involvement of a “not insubstantial” dollar volume of commerce in the tied product market.  Once these elements are alleged, the court said,

plaintiffs need not allege, let alone prove, facts addressed to the anticompetitive effects element.  If a plaintiff succeeds in establishing the existence of sufficient market power to create a per se violation, the plaintiff is also relieved of the burden of rebutting any justification the defendant may offer for the tie.

In other words, if a tying plaintiff establishes the four elements listed above, the efficiency of the challenged tie-in is completely irrelevant.  And if a plaintiff merely pleads those four elements, it is entitled to proceed to discovery, which can be crippling for antitrust defendants and often causes them to settle even non-meritorious cases. Given that a great many tie-ins involving the four elements listed above are, in fact, efficient, this is a terrible rule.  It is, however, the law as established in the Supreme Court’s Jefferson Parish decision.  The blame for this silliness therefore rests on that Court, not the district court here.

But the Cablevision order includes a second unfortunate feature for which the district court and the Supreme Court share responsibility.  Having concluded that Cablevision was not required to plead anticompetitive effect, the court went on to say that Cablevision “ha[d], in any event, pleaded facts sufficient to support plausibly an inference of anticompetitive effect.”  Those alleged facts were that Cablevision would have bought content from another seller but for the tie-in:

Cablevision alleges that if it were not forced to carry the Suite Networks, it “would carry other networks on the numerous channel slots that Viacom’s Suite Networks currently occupy.”  (Compl. par. 10.)  Cablevision also alleges that Cablevision would buy other “general programming networks” from Viacom’s competitors absent the tying arrangement.  (Id.)

In other words, the district court reasoned, Cablevision alleged anticompetitive harm merely by pleading that Viacom’s conduct reduced some sales opportunities for its rivals.

But harm to a competitor, standing alone, is not harm to competition.  To establish true anticompetitive harm, Cablevision would have to show that Viacom’s tie-in reduced its rivals’ sales by so much that they lost scale efficiencies so that their average per-unit costs rose.  To make that showing, Cablevision would have to show (or allege, at the motion to dismiss stage) that Viacom’s tying occasioned substantial foreclosure of sales opportunities in the tied product market. “Some” reduction in sales to rivals–while perhaps anticompetitor–is simply not sufficient to show anticompetitive harm.

Because the Supreme Court has emphasized time and again that mere harm to a competitor is not harm to competition, the gaffe here is primarily the district court’s fault.  But at least a little blame should fall on the Supreme Court.  That Court has never precisely specified the potential anticompetitive harm from tying: that a tie-in may enhance market power in the tied or tying product markets if, but only if, it results in substantial foreclosure of sales opportunities in the tied product market.

If the Court were to do so, and were to jettison the silly quasi-per se rule of Jefferson Parish, tying doctrine would be far more defensible.

[NOTE: For a more detailed explanation of why substantial tied market foreclosure is a prerequisite to anticompetitive harm from tie-ins, see my article, Appropriate Liability Rules for Tying and Bundled Discounting, 72 Ohio St. L. J. 909 (2011).]

In recent years, antitrust enforcers in Europe and the United States have made public pronouncements and pursued enforcement initiatives that undermine the ability of patentees to earn maximum profits through the unilateral exercise of rights within the scope of their patents, as discussed in separate recent articles by me and by Professor Nicolas Petit of the University of Liege. (Similar sorts of concerns have been raised by Federal Trade Commissioner Joshua Wright.) This represents a change in emphasis away from restraints on competition among purveyors of rival patented technologies and toward the alleged “exploitation” of a patentee’s particular patented technology. It is manifested, for example, in enforcers’ rising enthusiasm for limiting patent royalties (based on hypothetical ex ante comparisons to “next best” technologies, or the existence of standards on which patents “read”), for imposing compulsory licensing remedies, and for constraining the terms of private patent litigation settlements involving a single patented technology. (Not surprisingly, given its broader legal mandate to attack abuses of dominant positions, the European Commission has been more aggressive than United States antitrust agencies.) This development has troubling implications for long-term economic welfare and innovation, and merits far greater attention than it has received thus far.

What explains this phenomenon? Public enforcers are motivated by research that purports to demonstrate fundamental flaws in the workings of the patent system (including patent litigation) and the poor quality of many patents, as described, for example, in 2003 and 2011 U.S. Federal Trade Commission (FTC) Reports. Central to this scholarship is the notion that patents are “highly uncertain” and merely “probabilistic” (read “second class”) property rights that should be deemed to convey only a right to try to exclude. This type of thinking justifies a greater role for prosecutors to “look inside” the patent “black box” and use antitrust to “correct” perceived patent “abuses,” including supposed litigation excesses.

This perspective is problematic, to say the least. Government patent agencies, not antitrust enforcers, are best positioned to (and have taken steps to) rein in litigation excesses and improve patent quality, and the Supreme Court continues to issue rulings clarifying patent coverage. More fundamentally, as Professor Petit and I explain, this new patent-specific interventionist trend ignores a robust and growing law and economics literature that highlights the benefits of the patent system in enabling technology commercialization, signaling value to capital markets and innovators, and reducing information and transaction costs. It also fails to confront empirical studies that by and large suggest stronger patent regimes are associated with faster economic growth and innovation. Furthermore, decision theory and error cost considerations indicate that antitrust agencies are ill-equipped to second guess unilateral exercises of property rights that fall within the scope of a patent. Finally, other antitrust jurisdictions, such as China, are all too likely to cite new United States and European constraints on unilateral patent right assertions as justifications for even more intrusive limitations on patent rights.

What, then, should the U.S. antitrust enforcement agencies do? Ideally, they should announce that they are redirecting their emphasis to prosecuting inefficient competitive restraints involving rival patented technologies, the central thrust of the 1995 FTC-U.S. Justice Department Patent-Antitrust Licensing Guidelines. In so doing, they should state publicly that an individual patentee should be entitled to the full legitimate returns flowing from the legal scope of its patent, free from antitrust threat. (The creation of patent-specific market power through deception or fraud is not a legitimate return on patent rights, of course, and should be subject to antitrust prosecution when found.) One would hope that eventually the European Commission (and, dare we suggest, other antitrust authorities as well) would be inspired to adopt a similar program. Additional empirical research documenting the economy-wide benefits of encouraging robust unilateral patent assertions could prove helpful in this regard.

I share Alden’s disappointment that the Supreme Court did not overrule Basic v. Levinson in Monday’s Halliburton decision.  I’m also surprised by the Court’s ruling.  As I explained in this lengthy post, I expected the Court to alter Basic to require Rule 10b-5 plaintiffs to prove that the complained of misrepresentation occasioned a price effect.  Instead, the Court maintained Basic’s rule that price impact is presumed if the plaintiff proves that the misinformation was public and material and that “the stock traded in an efficient market.”

An upshot of Monday’s decision is that courts adjudicating Rule 10b-5 class actions will continue to face at the outset not the fairly simple question of whether the misstatement at issue moved the relevant stock’s price but instead whether that stock was traded in an “efficient market.”  Focusing on market efficiency—rather than on price impact, ultimately the key question—raises practical difficulties and creates a bit of a paradox.

First, the practical difficulties.  How is a court to know whether the market in which a security is traded is “efficient” (or, given that market efficiency is not a binary matter, “efficient enough”)?  Chief Justice Roberts’ majority opinion suggested this is a simple inquiry, but it’s not.  Courts typically consider a number of factors to assess market efficiency.  According to one famous district court decision (Cammer), the relevant factors are: “(1) the stock’s average weekly trading volume; (2) the number of securities analysts that followed and reported on the stock; (3) the presence of market makers and arbitrageurs; (4) the company’s eligibility to file a Form S-3 Registration Statement; and (5) a cause-and-effect relationship, over time, between unexpected corporate events or financial releases and an immediate response in stock price.”  In re Xcelera.com Securities Litig., 430 F.3d 503 (2005).  Other courts have supplemented these Cammer factors with a few others: market capitalization, the bid/ask spread, float, and analyses of autocorrelation.  No one can say, though, how each factor should be assessed (e.g., How many securities analysts must follow the stock? How much autocorrelation is permissible?  How large may the bid-ask spread be?).  Nor is there guidance on how to balance factors when some weigh in favor of efficiency and others don’t.  It’s a crapshoot.

In addition, focusing at the outset on whether the market at issue is efficient creates a market definition paradox in Rule 10b-5 actions.  When courts assess whether the market for a company’s stock is efficient, they assume that “the market” consists of trades in that company’s stock.  This is apparent from the Cammer (and supplementary) factors, all of which are company-specific.  It’s also implicit in portions of the Halliburton majority opinion, such as the observation that the plaintiff “submitted an event study of vari­ous episodes that might have been expected to affect the price of Halliburton’s stock, in order to demonstrate that the market for that stock takes account of material, public information about the company.”  (Emphasis added.)

But the semi-strong version of the Efficient Capital Markets Hypothesis (ECMH), the economic theorem upon which Basic rests, rejects the notion that there is a “market” for a single company’s stock.  Both the semi-strong ECMH and Basic reason that public misinformation is quickly incorporated into the price of securities traded on public exchanges.  Private misinformation, by contrast, usually is not – even when such misinformation results in large trades that significantly alter the quantity demanded or quantity supplied of the relevant stock.  The reason private misinformation is not taken to affect a security’s price, even when it results in substantial changes in quantities demanded or supplied, is because the relevant market is not the stock of that particular company but is instead the universe of stocks offering a similar package of risk and reward.  Because a private misinformation-induced increase in demand for a single company’s stock – even if large relative to the  number of shares outstanding – is likely to be tiny compared to the number of available shares of close substitutes for that company’s stock, private misinformation about a company is unlikely to be reflected in the price of the company’s stock.  Public misinformation, by contrast, affects a stock’s price because it not only changes quantities demanded and supplied but also causes investors to adjust their willingness-to-pay or willingness-to-accept.  Accordingly, both the semi-strong ECMH and Basic assume that only public misinformation can be assured to affect stock prices.  That’s why, as the Halliburton majority observes, there is a presumption of price effect only if the plaintiff proves public misinformation, materiality, and an efficient market.  (For a nice explanation of this idea in the context of a real case, see Judge Easterbrook’s opinion in West v. Prudential Securities.)

The paradox, then, is that Basic and the semi-strong ECMH, in requiring public misinformation, assume that the relevant market is not company specific.  But for purposes of determining whether the “market” is efficient, the market is assumed to consist of trades of a single company’s stock.

The Supreme Court could have avoided both the practical difficulties in assessing market efficiency and the theoretical paradox identified herein had it altered Basic to require plaintiffs to establish not an efficient market but an actual price impact. Alas.

Earlier this week the New Jersey Assembly unanimously passed a bill to allow direct sales of Tesla cars in New Jersey. (H/T Marina Lao). The bill

Allows a manufacturer (“franchisor,” as defined in P.L.1985, c.361 (C.56:10-26 et seq.)) to directly buy from or sell to consumers a zero emission vehicle (ZEV) at a maximum of four locations in New Jersey.  In addition, the bill requires a manufacturer to own or operate at least one retail facility in New Jersey for the servicing of its vehicles. The manufacturer’s direct sale locations are not required to also serve as a retail service facility.

The bill amends current law to allow any ZEV manufacturer to directly or indirectly buy from and directly sell, offer to sell, or deal to a consumer a ZEV if the manufacturer was licensed by the New Jersey Motor Vehicle Commission (MVC) on or prior to January 1, 2014.  This bill provides that ZEVs may be directly sold by certain manufacturers, like Tesla Motors, and preempts any rule or regulation that restricts sales exclusively to franchised dealerships.  The provisions of the bill would not prevent a licensed franchisor from operating under an existing license issued by the MVC.

At first cut, it seems good that the legislature is responding to the lunacy of the Christie administration’s previous decision to enforce a rule prohibiting direct sales of automobiles in New Jersey. We have previously discussed that decision at length in previous posts here, here, here and here. And Thom and Mike have taken on a similar rule in their home state of Missouri here and here.

In response to New Jersey’s decision to prohibit direct sales, the International Center for Law & Economics organized an open letter to Governor Christie based in large part on Dan Crane’s writings on the topic here at TOTM and discussing the faulty economics of such a ban. The letter was signed by more than 70 law professors and economists.

But it turns out that the legislative response is nearly as bad as the underlying ban itself.

First, a quick recap.

In our letter we noted that

The Motor Vehicle Commission’s regulation was aimed specifically at stopping one company, Tesla Motors, from directly distributing its electric cars. But the regulation would apply equally to any other innovative manufacturer trying to bring a new automobile to market, as well. There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of its auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple.

While enforcement of the New Jersey ban was clearly aimed directly at Tesla, it has broader effects. And, of course, its underlying logic is simply indefensible, regardless of which particular manufacturer it affects. The letter explains at length the economics of retail distribution and the misguided, anti-consumer logic of the regulation, and concludes by noting that

In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies. It is discouraging to see this ban being used to block a company that is bringing dynamic and environmentally friendly products to market. We strongly encourage you to repeal it, by new legislation if necessary.

Thus it seems heartening that the legislature did, indeed, take up our challenge to repeal the ban.

Except that, in doing so, the legislature managed to write a bill that reflects no understanding whatever of the underlying economic issues at stake. Instead, the legislative response appears largely to be the product of rent seeking,pure and simple, offering only a limited response to Tesla’s squeaky wheel (no pun intended) and leaving the core defects of the ban completely undisturbed.

Instead of acknowledging the underlying absurdity of the limit on direct sales, the bill keeps the ban in place and simply offers a limited exception for Tesla (or other zero emission cars). While the innovative and beneficial nature of Tesla’s cars was an additional reason to oppose banning their direct sale, the specific characteristics of the cars is a minor and ancillary reason to oppose the ban. But the New Jersey legislative response is all about the cars’ emissions characteristics, and in no way does it reflect an appreciation for the fundamental economic defects of the underlying rule.

Moreover, the bill permits direct sales at only four locations (why four? No good reason whatever — presumably it was a political compromise, never the stuff of economic reason) and requires Tesla to operate a service center for its cars in the state. In other words, the regulators are still arbitrarily dictating aspects of car manufacturers’ business organization from on high.

Even worse, however, the bill is constructed to be nothing more than a payoff for a specific firm’s lobbying efforts, thus ensuring that the next (non-zero-emission) Tesla to come along will have to undertake the same efforts to pander to the state.

Far from addressing the serious concerns with the direct sales ban, the bill just perpetuates the culture of political rent seeking such regulations create.

Perhaps it’s better than nothing. Certainly it’s better than nothing for Tesla. But overall, I’d say it’s about the worst possible sort of response, short of nothing.

Mike Sykuta and I, both proud Missourians, recently took to the opinion section of the Kansas City Star to discuss pending state legislation that would bar automobile manufacturers from operating their own retail outlets in the Show Me state.  The immediate target of the bill is Tesla, but the bigger concern of the auto dealers, who drafted the statutory language we criticize, is that the big carmakers will bypass independent dealers and start running their own retail outlets.

The arguments in our op-ed will be familiar to TOTM readers.  We begin with three fundamental points:  (1) Distribution is an “input” for carmakers.  (2) Producers, if left to their own devices, will choose the more efficient option when deciding whether to “buy” the distribution input (i.e., to sell through independent dealers, who pay a discounted wholesale price) or “make” it (i.e., to operate their own retail outlets and charge the higher retail price).  (3) Consumers — who ultimately pay all input costs, including the cost of distribution – will benefit if the most efficient option is selected.  In short, the interests of carmakers and consumers are aligned here: both benefit from implementation of the most efficient distribution scheme.

We then rebut the arguments that a direct distribution ban is needed to break up monopoly power, to assure adequate aftermarket servicing of vehicles, or to encourage appropriate safety recalls.  (On these points, we draw heavily from International Center for Law & Economics’ letter to Gov. Chris Christie regarding New Jersey’s proposed anti-Tesla legislation.)

Go read the whole thing.

Interested observers on all sides of the contentious debate over Aereo have focused a great deal on the implications for cloud computing if the Supreme Court rules against Aereo. The Court hears oral argument next week, and the cloud computing issue is sure to make an appearance.

Several parties that filed amicus briefs in the case weighed in on the issue. The Center for Democracy & Technology, for example, filed abrief arguing that a ruling against Aereo would hinder the development of cloud computing. Thirty-six Intellectual Property and Copyright Law Professors also filed a brief arguing this point. On the other hand, the United States—represented by the Solicitor General—devoted a section of its amicus brief in support of copyright owners’ argument that the Court could rule against Aereo without undermining cloud computing.

Our organizations, the International Center for Law and Economics and the Competitive Enterprise Institute, filed an amicus brief in the case in support of the Petitioners (as did many other policy groups, academics, and trade associations). In our brief we applied the consumer welfare framework to the question whether allowing Aereo’s business practice would increase the societal benefits that copyright law seeks to advance. We argued that holding Aereo liable for copyright infringement was well within the letter and spirit of the Copyright Act of 1976. In particular, we argued that Aereo’s model is less a disruptive innovation than a technical work-around taking advantage of the Second Circuit’s overbroad reading of the law in the Cablevision case.

Although our brief didn’t directly address cloud computing writ large, we did articulate a crucial distinction between Aereo and other cloud computing providers. Under our reasoning, the Court could rule against Aereo—as it should—without destroying cloud computing—as it should not.

Background

By way of background, at the center of the legal debate is what it means to “perform [a] copyrighted work publicly.” Aereo argues that because only one individual subscriber is “capable of receiving” each transmission its service delivers, its performances are private, not public. The Copyright Act gives copyright owners the exclusive right to publicly perform their works, but not the right to perform them privately. Therefore, Aereo contends, its service doesn’t infringe upon copyright owners’ exclusive rights.

We disagree. As our brief explains, Aereo’s argument ignores Congress’ decision in the Copyright Act of 1976 to expressly define the transmission of a television broadcast “by means of any device or process” to the public as a public performance, “whether the members of the public capable of receiving the performance … receive it in the same place or in separate places and at the same time or at different times.” Aereo has built an elaborate system for distributing live high-def broadcast television content to subscribers for a monthly fee—without obtaining permission from, or paying royalties to, the copyright owners in the audiovisual works aired by broadcasters.

Although the Copyright Act’s text is less than artful, Congress plainly wrote it so as to encompass businesses that sell consumers access to live television broadcasts, whether using traditional means—such as coaxial cable lines—or some high-tech system that lawmakers couldn’t foresee in 1976.

What does this case mean for cloud computing? To answer this question, it’s worth dividing the discussion into two parts: one addressing cloud providers that don’t sell their users licenses to copyrighted works, and the other addressing cloud providers that do. Dropbox and Mozy fit in the first category; Amazon and iTunes fit in the second.

A Ruling Against Aereo Won’t Destroy Cloud Computing Services like Dropbox

According to the 36 Intellectual Property and Copyright Law Professors, a loss for Aereo would be bad news for cloud storage providers such as Dropbox:

If any service making multiple transmissions of the same underlying copyrighted audiovisual work is publicly performing that work, then the distinction between video-on-demand services and online storage services would vanish, and all such services would henceforth face infringement liability. Thus, if two Dropbox users independently streamed “We, the Juries,” then under Petitioners’ theory, those two transmissions would be aggregated together, making them collectively “to the public.” Under Petitioners’ theory of this case—direct infringement by public performance—that would be game, set, and match against Dropbox.

This sounds like bad news for the cloud. Fortunately, however, Dropbox has little to fear from an Aereo defeat, even if the professors are right to worry about an overbroad public performance right (more on this below). The Digital Millenium Copyright Act (DMCA) grants online service providers—including cloud hosting services such as Dropbox—a safe harbor from copyright infringement liability for unwittingly storing infringing files uploaded by their users. In exchange for this immunity, service providers must comply with the DMCA’snotice and takedown system and adopt a policy to terminate repeat-infringing users, among other duties.

Although 17 U.S.C. § 512(c) refers only to infringement “by reason of … storage” directed by a user, courts have consistently interpreted this language to “encompass[] the access-facilitating processes that automatically occur when a user uploads” a file to a cloud hosting service. Whether YouTube streams an infringing video once or 1,000,000 times, therefore, it retains its DMCA immunity so long as it complies with the safe harbor’s requirements. So even if Aereo loses, and every DropBox user who streams “We, the Juries” is receiving a public performance, DropBox will still be safe from copyright infringement liability in the same way as YouTube, Vimeo, DailyMotion, and countless other services are safe today.

An Aereo Defeat Won’t Kill Cloud Computing Services like Amazon and Google

As for cloud computing providers that provide copyrighted content, the legal analysis is admittedly trickier. These providers, such as Google and Amazon, contract with copyright holders to sell their users licenses to copyrighted works. Some providers offer a subscription to streaming content, for which the provider has typically secured public performance licenses from the copyright owners. Cloud providers also sell digital copies of copyrighted works—that is, non-transferable lifetime licenses—for which the provider has generally obtained reproduction and distribution licenses, but not public performance rights.

But, as copyright law guru Devlin Hartline argues, determining if a performance is public or private turns on whether the cloud provider’s “volitional conduct [is] sufficient such that it directly causes the transmission.” When a user streams her own licensed content from a cloud service, it remains a private performance because the cloud service took no willful steps to facilitate the playback of copyrighted material. (The same is true for Dropbox-like services, as well.) Aereo, conversely, “crosse[s] the line from being a passive conduit to being an active participant because it supplies the very content that is available using its service.”

Neither Google’s nor Amazon’s business models much resemble Aereo’s, which entails transmitting content for which the company has secured no copyright licenses—either for itself or for its users. And to the extent that these services do supply the content being transmitted (as Spotify or Google Play All Access do, for example), they secure the appropriate public performance right to do so. Indeed, critics who have focused on cloud computing fail to appreciate how the Copyright Act distinguishes between infringing technologies such as Aereo and lawful uses of the cloud to store, share, and transmit copyrighted works.

For instance, as CDT notes:

[S]everal companies (including Google and Amazon) have launched personal music locker services, allowing individuals to upload their personal music collections “to the cloud” and enabling them to transmit that music back to their own computers, phones, and tablets when, where, and how they find most convenient.

And other critics of broadcasters’ legal position have made similar arguments, claiming that the Court cannot reach a holding that simultaneously bars Aereo while allowing cloud storage:

[I]f Aereo is publicly performing when you store a unique copy of the nightly news online and watch it later, then why aren’t cloud services publicly performing if they host your (lawful) unique mp3 of the latest hit single and stream it to you later?… The problem with this rationale is that it applies with equal force to cloud storage like Dropbox, SkyDrive, iCloud, and Google Drive. If multiple people store their own, unique, lawfully acquired copy of the latest hit single in the cloud, and then play it to themselves over the Internet, that too sounds like the broadcasters’ version of a public performance. The anti-Aereo rationale doesn’t distinguish between Aereo and the cloud.

The Ability to Contract is Key

These arguments miss the important concept of privity. A copyright holder who does not wish to license the exclusive rights in her content cannot be forced to do so (unless the content is subject to a compulsory license). If a copyright holder prefers its users not upload their licensed videos to the cloud and later stream them for personal use, the owner can include such a prohibition in its licenses. This may affect users’ willingness to pay for such encumbered content—but this is private ordering in action, with copyright holders and licensees bargaining over control over copyrighted works, a core purpose of the Copyright Act.

When a copyright holder wishes to license content to a cloud provider or user, the parties can bargain over whether users may stream their content from the cloud. These deals can evolve over time in response to new technology and changing consumer demand. This happens all the time—as in therecent deal between Dish and Disney over the Hopper DVR, wherein Dish agreed that Hopper would automatically excise the commercials accompanying ABC content only after three days elapse after each show airs.

But Aereo forecloses the possibility of such negotiation, making all over-the-air content available online to subscribers absent any agreement with the underlying copyright owners of such programs. Aereo is thus distinct from other cloud services that supply content to their users, as the latter have permission to license their content.

Of course, broadcasters make their programming freely available over the airwaves, without any express agreement with viewers. But this doesn’t mean broadcasters lose their legal right to restrict how third parties distribute and monetize their content. While consumers can record and watch such broadcasts at their leisure, they can’t record programs and then sell the rights to the content, for example, simply replicating the broadcast. The fact that copyright holders have entered into licenses to “cloud-ify” content with dedicated over-the-top apps and Hulu clearly suggests that the over-the-air “license” is limited. And because Aereo refuses to deal with the broadcasters, there’s no possibility of a negotiated agreement between Aereo and the content owners, either. The unique combination of broadcast content and an unlicensed distributor differentiates the situation in Aereo from typical cloud computing.

If broadcasters can’t rely on copyright law to protect them from companies like Aereo that simply repackage over-the-air content, they may well shift all of their content to cable subscriptions instead of giving a free option to consumers. That’s bad news for folks who access free television—regardless of the efficiency of traditional broadcasting, or lack thereof.

The Cablevision Decision Doesn’t Require a Holding for Aereo

Commentators argue that overruling the Second Circuit in Aereo necessarily entails overruling the Second Circuit’s Cablevision holding—and with it that ruling’s fair use protections for DVRs and other cloud computing functionality. We disagree, however. Rather, regardless of whether Cablevision was correctly decided, its application to Aereo is improper.

In Cablevision, the individual cable subscribers to whom Cablevision transmitted copies of plaintiff Cartoon Network’s television programming were already paying for lawful access to it. Cartoon Network voluntarily agreed to license its copyrighted works to Cablevision and, in turn, to each Cablevision subscriber whose cable package included the Cartoon Network channel.

The dispute in Cablevision thus involved a copyright holder and a licensee with a preexisting contractual relationship; the parties simply disagreed on the terms by which Cablevision was permitted to transmit Cartoon Network’s content. But even after the decision, Cartoon Network remained (and remains) free to terminate or renegotiate its licensing agreement with Cablevision.

Again, this dynamic of voluntary exchange mitigates Cablevision’s impact on the market for television programming, as copyright holders and cable companies settle on a new equilibrium. But unlike the cable company in Cablevision, Aereo has neither sought nor received permission from any holders of copyrights in broadcast television programming before retransmitting their works to paying subscribers.

Even if it is correct that Aereo itself isn’t engaging in public performance of copyrighted work, it remains the case that its subscribers haven’t obtained the right to use Aereo’s services, either. But one party or the other must obtain this right or else establish that it’s a fair use.

Fair Use Won’t Save Aereo

The only way legitimately to rule in Aereo’s favor would be to decide that Aereo’s retransmission of broadcast content is a fair use. But as Cablevision’s own amicus brief in Aereo (supporting Aereo) argues, fair use rights don’t cover Aereo’s non-transformative retransmission of broadcast content. Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content:

Aereo is functionally identical to a cable system. It captures over-the-air broadcast signals and retransmits them for subscribers to watch. Aereo thus is not meaningfully different from services that have long been required to pay royalties. That fact sharply distinguishes Aereo from cloud technologies like remote-storage services and remote DVRs.

* * *

Aereo is not in the business of transmitting recorded content from individual hard-drive copies to subscribers. Rather, it is in the business of retransmitting broadcast television to subscribers.

* * *

Aereo…is not relying on its separate hard-drive copies merely to justify the lawfulness of its pause, rewind, and record functions. It is relying on those copies to justify the entire television retransmission service. It is doing so even in the many cases where subscribers are not even using the pause, rewind, or record functions but are merely watching television live.

It may be that the DVR-like functions that Aereo provides are protected, but that doesn’t mean that it can retransmit copyrighted content without a license. If, like cable companies, it obtained such a license, it might be able to justify its other functionality (and negotiate license terms with broadcasters to reflect the value to each of such functionality). But that is a fundamentally different case. Similarly, if users were able to purchase licenses to broadcast content, Aereo’s additional functionality might also be protected (with the license terms between users and broadcasters reflecting the value to each). But, again, that is a fundamentally different case. Cloud computing services don’t create these problems, and thus need not be implicated by a proper reading of the Copyright Act and a ruling against Aereo.

Conclusion

One of the main purposes of copyright law is to secure for content creators the right to market their work. To allow services like Aereo undermines that ability and the incentives to create content in the first place. But, as we have shown, there is no reason to think a ruling against Aereo will destroy cloud computing.

FTC Commissioner Josh Wright is on a roll. A couple of days before his excellent Ardagh/Saint Gobain dissent addressing merger efficiencies, Wright delivered a terrific speech on minimum resale price maintenance (RPM). The speech, delivered in London to the British Institute of International and Comparative Law, signaled that Wright will seek to correct the FTC’s early post-Leegin mistakes on RPM and will push for the sort of structured rule of reason that is most likely to benefit consumers.

Wright began by acknowledging that minimum RPM is, from a competitive standpoint, a mixed bag. Under certain (rarely existent) circumstances, RPM may occasion anticompetitive harm by facilitating dealer or manufacturer collusion or by acting as an exclusionary device for a dominant manufacturer or retailer. Under more commonly existing sets of circumstances, however, RPM may enhance interbrand competition by reducing dealer free-riding, facilitating the entry of new brands, or encouraging optimal production of output-enhancing dealer services that are not susceptible to free-riding.

Because instances of minimum RPM may be good or bad, liability rules may err in two directions. Overly lenient rules may fail to condemn output-reducing instances of RPM, but overly strict rules will prevent uses of RPM that would benefit consumers by enhancing distributional efficiency. Efforts to tailor a liability rule so that it makes fewer errors (i.e., produces fewer false acquittals or false convictions) will create complexity that makes the rule more difficult for business planners and courts to apply. An optimal liability rule, then, should minimize the sum of “error costs” (social losses from expected false acquittals and false convictions) and “decision costs” (costs of applying the rule).

Crafting such a rule requires judgments about (1) whether RPM is more likely to occasion harmful or beneficial effects, and (2) the magnitude of expected harms or benefits. If most instances of RPM are likely to be harmful, the harm resulting from an instance of RPM is likely to be great, and the foregone efficiencies from false convictions are likely to be minor, then the liability rule should tend toward condemnation – i.e., should be “plaintiff-friendly.” On the other hand, if most instances of RPM are likely to be beneficial, the magnitude of expected benefit is significant, and the social losses from false acquittals are likely small, then a “defendant-friendly” rule is more likely to minimize error costs.

As Commissioner Wright observed, economic theory and empirical evidence about minimum RPM’s competitive effects, as well as intuitions about the magnitude of those various effects, suggest that minimum RPM ought to be subject to a defendant-friendly liability rule that puts the burden on plaintiffs to establish actual or likely competitive harm. With respect to economic theory, procompetitive benefit from RPM is more likely because the necessary conditions for RPM’s anticompetitive effects are rarely satisfied, while the prerequisites to procompetitive benefit often exist. Not surprisingly, then, most studies of minimum RPM have concluded that it is more frequently used to enhance rather than reduce market output. (As I have elsewhere observed and Commissioner Wright acknowledged, the one recent outlier study is methodologically flawed.) In terms of the magnitude of harms from wrongly condemning or wrongly approving instances of RPM, there are good reasons to believe greater harm will result from the former sort of error. The social harm from a false acquittal – enhanced market power – is self-correcting; market power invites entry. A false condemnation, by contrast, can be corrected only by a subsequent judicial, regulatory, or legislative overruling.  Moreover, an improper conviction thwarts not just the challenged instance of RPM but also instances contemplated by business planners who would seek to avoid antitrust liability. Taken together, these considerations about the probability and magnitude of various competitive effects argue in favor of a fairly lenient liability rule for minimum RPM – certainly not per se illegality or a “quick look” approach that deems RPM to be inherently suspect and places the burden on the defendant to rebut a presumption of anticompetitive harm.

Commissioner Wright’s call for a more probing rule of reason for minimum RPM represents a substantial improvement on the approach the FTC took in the wake of the U.S. Supreme Court’s 2007 Leegin decision. Shortly after Leegin abrogated the rule of per se illegality for minimum RPM, women’s shoe manufacturer Nine West petitioned the Commission to modify a pre-Leegin consent decree constraining Nine West’s use of RPM arrangements. In agreeing to modify (but not eliminate) the restrictions, the Commission endorsed a liability rule that would deem RPM to be inherently suspect (and thus presumptively illegal) unless the defendant could establish an absence of the so-called “Leegin factors” – i.e., that there was no dealer or manufacturer market power, that RPM was not widely used in the relevant market, and that the RPM at issue was not dealer-initiated.

The FTC’s fairly pro-plaintiff approach was deficient in that it simply lifted a few words from Leegin without paying close attention to the economics of RPM. As Commissioner Wright explained,

[C]ritical to any decision to structure the rule of reason for minimum RPM is that the relevant analytical factors correctly match the economic evidence. For instance, some of the factors identified by the Leegin Court as relevant for identifying whether a particular minimum RPM agreement might be anticompetitive actually shed little light on competitive effects. For example, the Leegin Court noted that “the source of the constraint might also be an important consideration” and observed that retailer-initiated restraints are more likely to be anticompetitive than manufacturer-initiated restraints. But economic evidence recognizes that because retailers in effect sell promotional services to manufacturers and benefit from such contracts, it is equally as possible that retailers will initiate minimum RPM agreements as manufacturers. Imposing a structured rule of reason standard that treats retailer-initiated minimum RPM more restrictively would thus undermine the benefits of the rule of reason.

Commissioner Wright’s remarks give me hope that the FTC will eventually embrace an economically sensible liability rule for RPM. Now, if we could only get those pesky state policy makers to modernize their outdated RPM thinking.  As Commissioner Wright recently observed, policy advocacy “is a weapon the FTC has wielded effectively and consistently over time.” Perhaps the Commission, spurred by Wright, will exercise its policy advocacy prowess on the backward states that continue to demonize minimum RPM arrangements.