Archives For regulation

In its February 25 North Carolina Dental v. Federal Trade Commission decision, the U.S. Supreme Court held that a state regulatory board that is controlled by market participants in the industry being regulated cannot invoke “state action” antitrust immunity unless it is “actively supervised” by the state. Will this decision discourage harmful protectionist regulation, such as the prohibition on tooth whitening by non-dentists at issue in this case? Will it also interfere with the ability of states to shape their regulatory programs as they see fit? U.S. Federal Trade Commissioner Maureen Ohlhausen will address this important set of questions in a March 31 luncheon presentation at the Heritage Foundation, with Clark Neily of the Institute for Justice and Misha Tseytlin of the West Virginia State Attorney General’s Office providing expert commentary. (You may view this event online or register to attend it in person here).

Just in time for this event, the Heritage Foundation has released a legal memorandum on “North Carolina Dental Board and the Reform of State-Sponsored Protectionism.”  The  memorandum explains that North Carolina Dental “has far-reaching ramifications for the reform of ill-conceived protectionist state regulations that limit entry into myriad professions and thereby harm consumers. In holding that a state regulatory board controlled by market participants in the industry being regulated cannot cloak its anticompetitive rules in ‘state action’ antitrust immunity unless it is ‘actively supervised’ by the state, the Court struck a significant blow against protectionist rent-seeking legislation and for economic liberty. The states may re-examine their licensing statutes in light of the Court’s decision, but if they decline to revise their regulatory schemes to eliminate their unjustifiable exclusionary effect, there may well be yet another round of challenges to those programs—this time based on the federal Constitution.”

In short, all of this hand-wringing over privacy is largely a tempest in a teapot — especially when one considers the extent to which the White House and other government bodies have studiously ignored the real threat: government misuse of data à la the NSA. It’s almost as if the White House is deliberately shifting the public’s gaze from the reality of extensive government spying by directing it toward a fantasy world of nefarious corporations abusing private information….

The White House’s proposed bill is emblematic of many government “fixes” to largely non-existent privacy issues, and it exhibits the same core defects that undermine both its claims and its proposed solutions. As a result, the proposed bill vastly overemphasizes regulation to the dangerous detriment of the innovative benefits of Big Data for consumers and society at large.

Rate this:

Continue Reading...

In a recent post, I explained how the U.S. Supreme Court’s February 25 opinion in North Carolina Dental Board v. FTC (holding that a state regulatory board controlled by market participants must be “actively supervised” by the state to receive antitrust immunity) struck a significant blow against protectionist rent-seeking and for economic liberty.  Maureen Ohlhausen, who has spoken out against special interest government regulation as an FTC Commissioner (and formerly as Director of the FTC’s Office of Policy Planning), will discuss the ramifications of the Court’s North Carolina Dental decision in a March 31 luncheon speech at the Heritage Foundation.  Senior Attorney Clark Neily of the Institute for Justice and Misha Tseytlin, General Counsel in the West Virginia Attorney General’s Office, will provide expert commentary on the Commissioner’s speech.  You can register for this event here.

Anybody who has spent much time with children knows how squishy a concept “unfairness” can be.  One can hear the exchange, “He’s not being fair!” “No, she’s not!,” only so many times before coming to understand that unfairness is largely in the eye of the beholder.

Perhaps it’s unfortunate, then, that Congress chose a century ago to cast the Federal Trade Commission’s authority in terms of preventing “unfair methods of competition.”  But that’s what it did, and the question now is whether there is some way to mitigate this “eye of the beholder” problem.

There is.

We know that any business practice that violates the substantive antitrust laws (the Sherman and Clayton Acts) is an unfair method of competition, so we can look to Sherman and Clayton Act precedents to assess the “unfairness” of business practices that those laws reach.  But what about the Commission’s so-called “standalone” UMC authority—its power to prevent business practices that seem to impact competition unfairly but are not technically violations of the substantive antitrust laws?

Almost two years ago, Commissioner Josh Wright recognized that if the FTC’s standalone UMC authority is to play a meaningful role in assuring market competition, the Commission should issue guidelines on what constitutes an unfair method of competition. He was right.  The Commission, you see, really has only four options with respect to standalone Section 5 claims:

  1. It could bring standalone actions based on current commissioners’ considered judgments about what constitutes unfairness. Such an approach, though, is really inconsistent with the rule of law. Past commissioners, for example, have gone so far as to suggest that practices causing “resource depletion, energy waste, environmental contamination, worker alienation, [and] the psychological and social consequences of producer-stimulated demands” could be unfair methods of competition. Maybe our current commissioners wouldn’t cast so wide a net, but they’re not always going to be in power. A government of laws and not of men simply can’t mete out state power on the basis of whim.
  2. It could bring standalone actions based on unfairness principles appearing in Section 5’s “common law.” The problem here is that there is no such common law. As Commissioner Wright has observed and I have previously explained, a common law doesn’t just happen. Development of a common law requires vigorously litigated disputes and reasoned, published opinions that resolve those disputes and serve as precedent. Section 5 “litigation,” such as it is, doesn’t involve any of that.
    • First, standalone Section 5 disputes tend not to be vigorously litigated. Because the FTC acts as both prosecutor and judge in such actions, their outcome is nearly a foregone conclusion. When FTC staff win before the administrative law judge, the ALJ’s decision is always affirmed by the full commission; when staff loses with the ALJ, the full Commission always reverses. Couple this stacked deck with the fact that unfairness exists in the eye of the beholder and will therefore change with the composition of the Commission, and we end up with a situation in which accused parties routinely settle. As Commissioner Wright observes, “parties will typically prefer to settle a Section 5 claim rather than go through lengthy and costly litigation in which they are both shooting at a moving target and have the chips stacked against them.”
    • The consent decrees that memorialize settlements, then, offer little prospective guidance. They usually don’t include any detailed explanation of why the practice at issue was an unfair method of competition. Even if they did, it wouldn’t matter much; the Commission doesn’t treat its own enforcement decisions as precedent. In light of the realities of Section 5 litigation, there really is no Section 5 common law.
  3. It could refrain from bringing standalone Section 5 actions and pursue only business practices that violate the substantive antitrust laws. Substantive antitrust violations constitute unfair methods of competition, and the federal courts have established fairly workable principles for determining when business practices violate the Sherman and Clayton Acts. The FTC could therefore avoid the “eye of the beholder” problem by limiting its UMC authority to business conduct that violates the antitrust laws. Such an approach, though, would prevent the FTC from policing conduct that, while not technically an antitrust violation, is anticompetitive and injurious to consumers.
  4. It could bring standalone Section 5 actions based on articulated guidelines establishing what constitutes an unfair method of competition. This is really the only way to use Section 5 to pursue business practices that are not otherwise antitrust violations, without offending the rule of law.

Now, if the FTC is to take this fourth approach—the only one that both allows for standalone Section 5 actions and honors rule of law commitments—it obviously has to settle on a set of guidelines.  Fortunately, it has almost done so!

Since Commissioner Wright called for Section 5 guidelines almost two years ago, much ink has been spilled outlining and critiquing proposed guidelines.  Commissioner Wright got the ball rolling by issuing his own proposal along with his call for the adoption of guidelines.  Commissioner Ohlhausen soon followed suit, proposing a slightly broader set of principles.  Numerous commentators then joined the conversation (a number doing so in a TOTM symposium), and each of the other commissioners has now stated her own views.

A good deal of consensus has emerged.  Each commissioner agrees that Section 5 should be used to prosecute only conduct that is actually anticompetitive (as defined by the federal courts).  There is also apparent consensus on the view that standalone Section 5 authority should not be used to challenge conduct governed by well-forged liability principles under the Sherman and Clayton Acts.  (For example, a practice routinely evaluated under Section 2 of the Sherman Act should not be pursued using standalone Section 5 authority.)  The commissioners, and the vast majority of commentators, also agree that there should be some efficiencies screen in prosecution decisions.  The remaining disagreement centers on the scope of the efficiencies screen—i.e., how much of an efficiency benefit must a business practice confer in order to be insulated from standalone Section 5 liability?

On that narrow issue—the only legitimate point of dispute remaining among the commissioners—three views have emerged:  Commissioner Wright would refrain from prosecuting if the conduct at issue creates any cognizable efficiencies; Commissioner Ohlhausen would do so as long as the efficiencies are not disproportionately outweighed by anticompetitive harms; Chairwoman Ramirez would engage in straightforward balancing (not a “disproportionality” inquiry) and would refrain from prosecution only where efficiencies outweigh anticompetitive harms.

That leaves three potential sets of guidelines.  In each, it would be necessary that a behavior subject to any standalone Section 5 action (1) create actual or likely anticompetitive harm, and (2) not be subject to well-forged case law under the traditional antitrust laws (so that pursuing the action might cause the distinction between lawful and unlawful commercial behavior to become blurred).  Each of the three sets of guidelines would also include an efficiencies screen—either (3a) the conduct lacks cognizable efficiencies, (3b) the harms created by the conduct are disproportionate to the conduct’s cognizable efficiencies, or (3c) the harms created by the conduct are not outweighed by cognizable efficiencies.

As Commissioner Wright has observed any one of these sets of guidelines would be superior to the status quo.  Accordingly, if the commissioners could agree on the acceptability of any of them, they could improve the state of U.S. competition law.

Recognizing as much, Commissioner Wright is wisely calling on the commissioners to vote on the acceptability of each set of guidelines.  If any set is deemed acceptable by a majority of commissioners, it should be promulgated as official FTC Guidance.  (Presumably, if more than one set commands majority support, the set that most restrains FTC enforcement authority would be the one promulgated as FTC Guidance.)

Of course, individual commissioners might just choose not to vote.  That would represent a sad abdication of authority.  Given that there isn’t (and under current practice, there can’t be) a common law of Section 5, failure to vote on a set of guidelines would effectively cast a vote for either option 1 stated above (ignore rule of law values) or option 3 (limit Section 5’s potential to enhance consumer welfare).  Let’s hope our commissioners don’t relegate us to those options.

The debate has occurred.  It’s time to vote.

On February 13 an administrative law judge (ALJ) at the California Public Utility Commission (CPUC) issued a proposed decision regarding the Comcast/Time Warner Cable (TWC) merger. The proposed decision recommends that the CPUC approve the merger with conditions.

It’s laudable that the ALJ acknowledges at least some of the competitive merits of the proposed deal. But the set of conditions that the proposed decision would impose on the combined company in order to complete the merger represents a remarkable set of unauthorized regulations that are both inappropriate for the deal and at odds with California’s legislated approach to regulation of the Internet.

According to the proposed decision, every condition it imposes is aimed at mitigating a presumed harm arising from the merger:

The Applicants must meet the conditions adopted herein in order to provide reasonable assurance that the proposed transaction will be in the public interest in accordance with Pub. Util. Code § 854(a) and (c).… We only adopt conditions which mitigate an effect of the merger in order to satisfy the public interest requirements of § 854.

By any reasonable interpretation, this would mean that the CPUC can adopt only those conditions that address specific public interest concerns arising from the deal itself. But most of the conditions in the proposed decision fail this basic test and seem designed to address broader social policy issues that have nothing to do with the alleged competitive effects of the deal.

Instead, without undertaking an analysis of the merger’s competitive effects, the proposed decision effectively accepts that the merger serves the public interest, while also simply accepting the assertions of the merger’s opponents that it doesn’t. In the name of squaring that circle, the proposed decision seeks to permit the merger to proceed, but then seeks to force the post-merger company to conform to the merger’s critics’ rather arbitrary view of their preferred market structure for the provision of cable broadband services in California.

For something — say, a merger — to be in the public interest, it need not further every conceivable public interest goal. This is a perversion of the standard, and it turns “public interest” into an unconstrained license to impose a regulatory wish-list on particular actors, outside of the scope of usual regulatory processes.

While a few people may have no problem with the proposed decision’s expansive vision of Internet access regulation, California governor Jerry Brown and the overwhelming majority of the California state legislature cannot be counted among the supporters of this approach.

In 2012 the state legislature passed by an overwhelming margin — and Governor Brown signed — SB 1161 (codified as Section 710 of the California Public Utilities Code), which expressly prohibits the CPUC from regulating broadband:

The commission shall not exercise regulatory jurisdiction or control over Voice over Internet Protocol and Internet Protocol enabled services except as required or expressly delegated by federal law or expressly directed to do so by statute or as set forth in [certain enumerated exceptions].”

The message is clear: The CPUC should not try to bypass clear state law and all institutional safeguards by misusing the merger clearance process.

While bipartisan majorities in the state house, supported by a Democratic governor, have stopped the CPUC from imposing new regulations on Internet and VoIP services through SB 1161, the proposed decision seeks to impose regulations through merger conditions that go far beyond anything permitted by this state law.

For instance, the proposed decision seeks to impose arbitrary retail price controls on broadband access:

Comcast shall offer to all customers of the merged companies, for a period of five years following the effective date of the parent company merger, the opportunity to purchase stand-alone broadband Internet service at a price not to exceed the price charged by Time Warner for providing that service to its customers, and at speeds, prices, and terms, at least comparable to that offered by Time Warner prior to the merger’s closing.

And the proposed decision seeks to mandate market structure in other insidious ways, as well, mandating specific broadband speeds, requiring a break-neck geographic expansion of Comcast’s service area, and dictating installation and service times, among other things — all without regard to the actual plausibility (or cost) of implementing such requirements.

But the problem is even more acute. Not only does the proposed decision seek to regulate Internet access issues irrelevant to the merger, it also proposes to impose conditions that would actually undermine competition.

The proposed decision would impose the following conditions on Comcast’s business VoIP and business Internet services:

Comcast shall offer Time Warner’s Business Calling Plan with Stand Alone Internet Access to interested CLECs throughout the combined service territories of the merging companies for a period of five years from the effective date of the parent company merger at existing prices, terms and conditions.

Comcast shall offer Time Warner’s Carrier Ethernet Last Mile Access product to interested CLECs throughout the combined service territories of the merging companies for a period of five years from the effective date of the parent company at the same prices, terms and conditions as offered by Time Warner prior to the merger.

But the proposed decision fails to recognize that Comcast is an also-ran in the business service market. Last year it served a small fraction of the business customers served by AT&T and Verizon, who have long dominated the business services market:

According to a Sept. 2011 ComScore survey, AT&T and Verizon had the largest market shares of all business services ISPs. AT&T held 20% of market share and Verizon held 12%. Comcast ranked 6th, with 5% of market share.

The proposed conditions would hamstring the upstart challenger Comcast by removing both product and pricing flexibility for five years – an eternity in rapidly evolving technology markets. That’s a sure-fire way to minimize competition, not promote it.

The proposed decision reiterates several times its concern that the combined Comcast/Time Warner Cable will serve more than 80% of California households, and “reduce[] the possibilities for content providers to reach the California broadband market.” The alleged concern is that the combined company could exercise anticompetitive market power — imposing artificially high fees for carrying content or degrading service of unaffiliated content and services.

The problem is Comcast and TWC don’t compete anywhere in California today, and they face competition from other providers everywhere they operate. As the decision matter-of-factly states:

Comcast and Time Warner do not compete with one another… [and] Comcast and Time Warner compete with other providers of Internet access services in their respective service territories.

As a result, the merger will actually have no effect on the number of competitive choices in the state; the increase in the statewide market share as a result of the deal is irrelevant. And so these purported competition concerns can’t be the basis for any conditions, let alone the sweeping ones set out in the proposed decision.

The stated concern about content providers finding it difficult to reach Californians is a red herring: the post-merger Comcast geographic footprint will be exactly the same as the combined, pre-merger Comcast/TWC/Charter footprint. Content providers will be able to access just as many Californians (and with greater speeds) as before the merger.

True, content providers that just want to reach some number of random Californians may have to reach more of them through Comcast than they would have before the merger. But what content provider just wants to reach some number of Californians in the first place? Moreover, this fundamentally misstates the way the Internet works: it is users who reach the content they prefer; not the other way around. And, once again, for literally every consumer in the state, the number of available options for doing so won’t change one iota following the merger.

Nothing shows more clearly how the proposed decision has strayed from responding to merger concerns to addressing broader social policy issues than the conditions aimed at expanding low-price broadband offerings for underserved households. Among other things, the proposed conditions dramatically increase the size and scope of Comcast’s Internet Essentials program, converting this laudable effort from a targeted program (that uses a host of tools to connect families where a child is eligible for the National School Lunch Program to the Internet) into one that must serve all low-income adults.

Putting aside the damage this would do to the core Internet Essentials’ mission of connecting school age children by diverting resources from the program’s central purpose, it is manifestly outside the scope of the CPUC’s review. Nothing in the deal affects the number of adults (or children, for that matter) in California without broadband.

It’s possible, of course, that Comcast might implement something like an expanded Internet Essentials program without any prodding; after all, companies implement (and expand) such programs all the time. But why on earth should regulators be able to define such an obligation arbitrarily, and to impose it on whatever ISP happens to be asking for a license transfer? That arbitrariness creates precisely the sort of business uncertainty that SB 1161 was meant to prevent.

The same thing applies to the proposed decision’s requirement regarding school and library broadband connectivity:

Comcast shall connect and/or upgrade Internet infrastructure for K-12 schools and public libraries in unserved and underserved areas in Comcast’s combined California service territory so that it is providing high speed Internet to at least the same proportion of K-12 schools and public libraries in such unserved and underserved areas as it provides to the households in its service territory.

No doubt improving school and library infrastructure is a noble goal — and there’s even a large federal subsidy program (E-Rate) devoted to it. But insisting that Comcast do so — and do so to an extent unsupported by the underlying federal subsidy program already connecting such institutions, and in contravention of existing provider contracts with schools — as a condition of the merger is simple extortion.

The CPUC is treating the proposed merger like a free-for-all, imposing in the name of the “public interest” a set of conditions that it would never be permitted to impose absent the gun-to-the-head of merger approval. Moreover, it seeks to remake California’s broadband access landscape in a fashion that would likely never materialize in the natural course of competition: If the merger doesn’t go through, none of the conditions in the proposed decision and alleged to be necessary to protect the public interest will exist.

Far from trying to ensure that Comcast’s merger with TWC doesn’t erode competitive forces to the detriment of the public, the proposed decision is trying to micromanage the market, simply asserting that the public interest demands imposition of it’s subjective and arbitrary laundry list of preferred items. This isn’t sensible regulation, it isn’t compliant with state law, and it doesn’t serve the people of California.

In its February 25 North Carolina Dental decision, the U.S. Supreme Court, per Justice Anthony Kennedy, held that a state regulatory board that is controlled by market participants in the industry being regulated cannot invoke “state action” antitrust immunity unless it is “actively supervised” by the state.  In so ruling, the Court struck a significant blow against protectionist rent-seeking and for economic liberty.  (As I stated in a recent Heritage Foundation legal memorandum, “[a] Supreme Court decision accepting this [active supervision] principle might help to curb special-interest favoritism conferred through state law.  At the very least, it could complicate the efforts of special interests to protect themselves from competition through regulation.”)

A North Carolina law subjects the licensing of dentistry to a North Carolina State Board of Dental Examiners (Board), six of whose eight members must be licensed dentists.  After dentists complained to the Board that non-dentists were charging lower prices than dentists for teeth whitening, the Board sent cease-and-desist letter to non-dentist teeth whitening providers, warning that the unlicensed practice dentistry is a crime.  This led non-dentists to cease teeth whitening services in North Carolina.  The Federal Trade Commission (FTC) held that the Board’s actions violated Section 5 of the FTC Act, which prohibits unfair methods of competition, the Fourth Circuit agreed, and the Court affirmed the Fourth Circuit’s decision.

In its decision, the Court rejected the claim that state action immunity, which confers immunity on the anticompetitive conduct of states acting in their sovereign capacity, applied to the Board’s actions.  The Court stressed that where a state delegates control over a market to a non-sovereign actor, immunity applies only if the state accepts political accountability by actively supervising that actor’s decisions.  The Court applied its Midcal test, which requires (1) clear state articulation and (2) active state supervision of decisions by non-sovereign actors for immunity to attach.  The Court held that entities designated as state agencies are not exempt from active supervision when they are controlled by market participants, because allowing an exemption in such circumstances would pose the risk of self-dealing that the second prong of Midcal was created to address.

Here, the Board did not contend that the state exercised any (let alone active) supervision over its anticompetitive conduct.  The Court closed by summarizing “a few constant requirements of active supervision,” namely, (1) the supervisor must review the substance of the anticompetitive decision, (2) the supervisor must have the power to veto or modify particular decisions for consistency with state policy, (3) “the mere potential for state supervision is not an adequate substitute for a decision by the State,” and (4) “the state supervisor may not itself be an active market participant.”  The Court cautioned, however, that “the adequacy of supervision otherwise will depend on all the circumstances of a case.”

Justice Samuel Alito, joined by Justices Antonin Scalia and Clarence Thomas, dissented, arguing that the Court ignored precedent that state agencies created by the state legislature (“[t]he Board is not a private or ‘nonsovereign’ entity”) are shielded by the state action doctrine.  “By straying from this simple path” and assessing instead whether individual agencies are subject to regulatory capture, the Court spawned confusion, according to the dissenters.  Midcal was inapposite, because it involved a private trade association.  The dissenters feared that the majority’s decision may require states “to change the composition of medical, dental, and other boards, but it is not clear what sort of changes are needed to satisfy the test that the Court now adopts.”  The dissenters concluded “that determining when regulatory capture has occurred is no simple task.  That answer provides a reason for relieving courts from the obligation to make such determinations at all.  It does not explain why it is appropriate for the Court to adopt the rather crude test for capture that constitutes the holding of today’s decision.”

The Court’s holding in North Carolina Dental helpfully limits the scope of the Court’s infamous Parker v. Brown decision (which shielded from federal antitrust attack a California raisin producers’ cartel overseen by a state body), without excessively interfering in sovereign state prerogatives.  State legislatures may still choose to create self-interested professional regulatory bodies – their sovereignty is not compromised.  Now, however, they will have to (1) make it clearer up front that they intend to allow those bodies to displace competition, and (2) subject those bodies to disinterested third party review.  These changes should make it far easier for competition advocates (including competition agencies) to spot and publicize welfare-inimical regulatory schemes, and weaken the incentive and ability of rent-seekers to undermine competition through state regulatory processes.  All told, the burden these new judicially-imposed constraints will impose on the states appears relatively modest, and should be far outweighed by the substantial welfare benefits they are likely to generate.

The following post was authored by Dan Crane, the Frederick Paul Furth, Sr. Professor of Law at the University of Michigan Law School and an occasional TOTM contributor.

Last week, I released a public interest group open letter in support of Tesla’s right to distribute its cars directly.   The letter attracted quite a bit of media attention because of its “strange bedfellows” coalition.  Signatories included pro-consumer and pro-competition groups (American Antitrust Institute, Consumer Federation of America, Consumer Action, and Consumers for Auto Reliability and Safety), pro-business or free market groups (Americans for Prosperity, Institute for Justice, and Mackinac Center), environmental groups (Sierra Club and Environment America), and a pro-technology group (The Information Technology & Innovation Foundation).  The diversity of this coalition—joining scores of prominent economists and law professors and the staff of the Federal Trade Commission, among others—in supporting direct distribution, is a powerful testament to the fact that the appeal of the right to engage in direct distribution is not, and should not be, a partisan political issue.  It should have broad appeal whatever one’s political inclinations.

Yesterday, the Media and Public Relations Director for the National Automobile Dealers Association (“NADA”) forwarded me a link to a blog post by Glenn Kessler, a Washington Post blogger who runs a “Fact Checker” blog, entitled Key Report in battle over car dealer sales is bizarrely outdated.  The thrust of Mr. Kessler’s blog is that a 2009 paper on direct distribution published by Gerald Bodisch, then of the DOJ’s Economic Analysis Group, contains an inaccuracy.  Mr. Kessler finds it “astonishing” that the report has nonetheless featured “prominently” in much of the public advocacy in favor of direct distribution.  (One of the places that Mr. Kessler identifies it being featured is in a “Cato Institute Report,” which is actually not a Cato Institute Report, but an article I wrote in Regulation Magazine which is published by the Cato Institute. Kessler mentions the article being cited in a news story, although he omits to mention another news story in which the article was favorably cited . . . perhaps because it was in the Washington Post?).

Here’s the inaccuracy that Kessler reports, quoting from the Bodisch paper: “Since 2000, customers in Brazil can order the Celta over the Internet from a site that links them with GM’s assembly plant and 470 dealers nationwide.”  Kessler’s blog points out that the statement was no longer true in 2009 when the Bodisch paper was published, since GM discontinued online sales in Brazil in 2006, six years after launching the program.

Kessler is well within his rights to correct an inaccuracy in the Bodisch paper.  But the emphasis and tone of his blog post are bizarre.  He seems to suggest that any citation of the Bodisch paper on the possible cost savings from direct distribution is inherently flawed.  That’s way off base for two reasons.

First, the Bodisch paper did not make claims solely based on GM’s Brazilian experience.  It also made claims from general economic principles and from other empirical studies, such as a 2000 Goldman Sachs report on the potential cost savings from direct distribution.  The Kessler blog gives the impression that all of the recent citations to the Bodisch paper are repeating specific claims about GM in Brazil, whereas most of them are simply citing the Bodisch paper for the general proposition that direct distribution could result in cost savings to consumers.

Second, Kessler seems to assume that GM’s discontinuation of the Internet sales program in Brazil in 2006, after running it for six years, disproves all of the ostensible virtues of the program identified by GM at the time.  That Bodisch neglected to mention that GM had discontinued the program after six years would hardly be worth featuring in a “fact checking” blog unless the fact of the discontinuation undermined the reason the GM program was discussed in the first place.  So why did GM discontinue the program?  Kessler cites a GM spokesman who identifies two reasons, “federal and state tax changes in the country” and “the infrastructure costs to maintain distribution centers.”  The blog post then goes on to talk about how “wildly complicated” the Brazilian tax code is, including an obligation of paying a VAT based on the location of the merchant rather than the location of the customer.

I’m certainly no expert on GM’s Brazilian distribution strategy or the Brazilian tax code, but I can’t for the life of me understand Kessler’s point here.  If GM launched a direct distribution model that created the efficiencies cited in the article and was successful for six years (involving hundreds of thousands of Internet sales) until Brazil made changes to its tax code that resulted in unfavorable tax treatment for Internet sales, how does that remotely show that direct distribution doesn’t result in consumer benefits?  To the extent that the Brazilian tax changes killed the Internet distribution model, this would be just one more example of poor regulation killing an efficient model, not the model being inefficient.

Given that his own account of what happened seems to defeat his central point, I’m left perplexed by why Kessler decided to run this “fact-checking” story.  I’m not perplexed by NADA’s use of it—they no doubt see this as somehow undermining the recent momentum in favor of direct distribution.  As I’ve explained above, it does little to the basic thrust of the Bodisch paper.  But it’s also important to understand that argument in favor of the right to engage in direct distribution is by no means predicated on any particular claim in the Bodisch paper.

Here’s a quick recap of the debate.  In the many fora in which I’ve advocated in favor of the right to engage in direct distribution, I’ve never argued that direct distribution is in fact preferable to dealer distribution as a general matter.  Rather, the argument has always been that consumers benefit when manufacturers can choose the most efficient distribution method for them given their position in in the market.  The dealers have repeatedly made the absurd argument that laws mandating dealer distribution are necessary to break the manufacturer’s “monopoly” over distribution of their cars and hence lower prices to consumers.  As scores of outstanding economists have explained many times—without rebuttal from a single credible economist—that argument misunderstands that a manufacturer cannot increase its profits by charging a retail mark-up over and above whatever market power premium it embeds in the wholesale price.

Further, proponents of the right to engage in direct distribution have argued that, if anything, direct distribution would lower rather than increase consumer prices.  The core of this argument is that vertical integration eliminates double marginalization.  A second part of this argument is that there could be marginal cost savings to the manufacturer from direct distribution—as suggested in the Goldman Sachs report and elsewhere.  A third point is that the dealers themselves are fully aware—and have conceded—that the general effect of direct distribution is to lower rather than raise market prices.  When the dealers have sued to block Tesla in places like Massachusetts, they have alleged that direct distribution leads to “inequitable pricing.”  What they mean, of course, is that it leads to prices that are too low.  (If inequitable pricing meant prices that were too high, the dealers wouldn’t suffer injury and therefore wouldn’t have standing).

In sum, let me repeat that Mr. Kessler is well within his rights to “fact check” whatever he wants and to point out any inaccuracies that he observes.  The thrust of his blog post, however, is way off base.  It is his blog post, not citation to the Bodisch article, that is bizarre.

On December 11 I published a Heritage Foundation Legal Memorandum on this topic. I concluded that the federal courts have done a fairly good job in harmonizing antitrust with constitutionally-based federalism and First Amendment interests (petitioning, free speech, and religious freedom). Nevertheless, it must be admitted that these “constitutional constraints” somewhat limit the ability of antitrust to promote a procompetitive, pro-efficiency, pro-innovation, pro-consumer welfare agenda. Anticompetitive government action – the most pernicious and long-lasting affront to competition, because it is backed by the coercive power of the state – presents a particularly serious and widespread problem. How can antitrust and other legal principles be applied to further promote economic freedom and combat anticompetitive government action, in a manner consistent with the Constitution?

First, it may be possible to further tweak antitrust to apply a bit more broadly to governmental conduct, without upsetting the constitutional balance.

For instance, in 2013, in Phoebe Putney, the United States Supreme Court commendably held that general grants of corporate powers (such as the power to enter into contracts) to sub-state governmental entities are not in themselves “clear articulations” of a state policy to displace competition. Thus, in that case, a special purpose hospital authority granted general corporate powers by the State of Georgia could not evade federal antitrust scrutiny when it orchestrated a potentially anticompetitive hospital merger. In short, by requiring states to be specific when they authorize regulators to displace competition, Phoebe Putney makes it a bit more difficult to achieve anticompetitive results through routine state governmental processes.

But what about when a subsidiary state entity has been empowered to displace competition? Imposing a greater requirement on states to actively supervise decisions by self-interested state regulatory boards could enhance competition without severely undermining state prerogatives. Specifically, where members of a profession dominate a state-created board that oversees the profession, the risk of self-dealing and consumer harm is particularly high, and therefore the board’s actions should be subject to exacting scrutiny. In its imminent ruling on the Federal Trade Commission’s (FTC) challenge to anticompetitive rules by the dentist-dominated North Carolina Dental Board of Dental Examiners (rules which forestall competition by storefront teeth whitening services), the Supreme Court will have the opportunity to require that states actively supervise the decisions of self-interested regulators as a prerequisite to federal antitrust immunity. At the very least, such a requirement would make states be more cautious before giving a blank check to potentially anticompetitive industry self-regulation. It could also raise the costs of obtaining special government favor, and shed needed light on rent-seekers’ efforts to achieve regulatory capture.

Unfortunately, though, a great deal of anticompetitive governmental activity, both state and federal, is and will remain beyond the bounds of federal antitrust prosecution. What can be done to curb such excesses, given the practical political difficulties in achieving far-reaching pro-competitive legislative and regulatory reforms? My December 11 Heritage Memo highlights a few possibilities rooted in constitutional economic liberties (see also the recent Heritage Foundation special report on economic liberty and the Constitution). One involves putting greater teeth into constitutional equal protection and due process analysis – say, by holding that pure protectionism standing alone does not pass muster as a “rational basis” justification for a facially anticompetitive law. Another approach is to deploy takings law (highlighted in a current challenge to the U.S. Agriculture Department’s raisin cartel) and the negative commerce clause in appropriate circumstances. The utility of these approaches, however, is substantially limited by case law.

Finally, competition advocacy – featuring public statements by competition agencies that describe the anticompetitive effects and welfare harm stemming from specific government regulations or proposed laws – remains a potentially fruitful means for highlighting the costs of anticompetitive government action and building a case for reform. As I have previously explained, the FTC has an established track record of competition advocacy filings, and the International Competition Network is encouraging the utilization of competition advocacy around the world. By shedding light on the specific baleful effects of government actions that undermine normal competitive processes, competition advocacy may over time help build a political case for reform that transcends the inherent limitations of antitrust and constitutional litigation.

Last week, the George Washington University Center for Regulatory Studies convened a Conference (GW Conference) on the Status of Transatlantic Trade and Investment Partnership (TTIP) Negotiations between the European Union (EU) and the United States (U.S.), which were launched in 2013 and will continue for an indefinite period of time. In launching TTIP, the Obama Administration claimed that this pact would raise economic welfare in the U.S. and the EU through stimulating investment and lowering non-tariff barriers between the two jurisdictions, by, among other measures, “significantly cut[ting] the cost of differences in [European Union and United States] regulation and standards by promoting greater compatibility, transparency, and cooperation.

Whether TTIP, if enacted, would actually raise economic welfare in the United States is an open question, however. As a recent Heritage Foundation analysis of TTIP explained, a TTIP focus on “harmonizing” regulations could actually lower economic freedom (and welfare) by “regulating upward” through acceptance of the more intrusive approach, and by precluding future competition among alternative regulatory models that could lead to welfare-enhancing regulatory improvements. Thus, the Heritage study recommended that “[a]ny [TTIP] agreement should be based on mutual recognition, not harmonization, of regulations.”

Unfortunately, discussion at the GW Conference indicated that the welfare-superior mutual recognition approach has been rejected by negotiators – at least as of now. In response to a question I posed on the benefits of mutual recognition, an EU official responded that such an “academic” approach is not “realistic,” while a senior U.S. TTIP negotiator indicated that mutual recognition could prove difficult where regulatory approaches differ. I read those diplomatically couched responses as signaling that both sides opposed the mutual recognition approach. This is a real problem. As part of TTIP, U.S. and EU sector-specific regulators are actively engaged in discussing regulatory particulars. There is the distinct possibility that the regulators may agree on measures that raise regulatory burdens for the sectors covered – particularly given the oft-repeated motto at the GW Conference that TTIP must not reduce existing levels of “protection” for health, safety, and the environment. (Those blandishments eschew any cost-benefit calculus to justify existing protection levels.) This conclusion is further supported by public choice theory, which suggests that regulators may be expected to focus on expanding the size and scope of their regulatory domains, not on contracting them. To make things worse, TTIP raises the possibility that the highly successful U.S. tradition of reliance on private sector-led voluntary consensus standards, as opposed to the EU’s preference for heavy government involvement in standard-setting policies, may be undermined. Any move toward greater direct government influence on U.S. standard setting as part of a TTIP bargain would further undermine the vibrancy, competition, and innovation that have led to the great international success of U.S.-developed technical standards.

As a practical matter, however, is there time for a change in direction in TTIP negotiations regarding regulation and standards? Yes, there is. The TTIP negotiators face no true deadline. Moreover, as a matter of political reality, the eventual U.S. statutory adoption of TTIP measures may require the passage by Congress of “fast-track” trade promotion authority (TPA), which provides for congressional up-or-down votes (without possibility of amendment) on legislation embodying trade deals that have been negotiated by the Executive Branch. Given the political sensitivity of trade deals, they cannot easily be renegotiated if they are altered by congressional amendments. (Indeed, in recent decades all major trade agreements requiring implementing legislation have proceeded under TPA.)

If the Obama Administration decides that it wants to advance TTIP, it must rely on a Republican-controlled Congress to obtain TPA. Before it grants such authority, Congress should conduct hearings and demand that Administration officials testify about key aspects of the Administration’s TTIP negotiating philosophy, and, in particular, on how U.S. TTIP negotiators are approaching regulatory differences between the U.S. and the EU. Congress should make it a prerequisite to the grant of TPA that the final TTIP agreement embody welfare-enhancing mutual recognition of regulations and standards, rather than welfare-reducing harmonization. It should vote down any TTIP negotiated deal that fails to satisfy this requirement.

In March 2014, the U.S. Government’s National Telecommunications and Information Administration (NTIA, the Executive Branch’s telecommunications policy agency) abruptly announced that it did not plan to renew its contract with the Internet Corporation for Assigned Names and Numbers (ICANN) to maintain core functions of the Internet. ICANN oversees the Internet domain name system through its subordinate agency, the Internet Assigned Numbers Authority (IANA). In its March statement, NTIA proposed that ICANN consult with “global stakeholders” to agree on an alternative to the “current role played by NTIA in the coordination of the Internet’s [domain name system].”

In recent months Heritage Foundation scholars have discussed concerns stemming from this vaguely-defined NTIA initiative (see, for example, here, here, here, here, here, and here). These concerns include fears that eliminating the U.S. Government’s role in Internet governance could embolden other nations and international organizations (especially the International Telecommunications Union, an arm of the United Nations) to seek to regulate the Internet and limit speech, and create leeway for ICANN to expand beyond its core activities and trench upon Internet freedoms.

Although NTIA has testified that its transition plan would preclude such undesirable outcomes, the reaction to these assurances should be “trust but verify” (especially given the recent Administration endorsement of burdensome Internet common carrier regulation, which appears to be at odds with the spirit if not the letter of NTIA’s assurances).

Reflecting the “trust but verify” spirit, the just-introduced “Defending Internet Freedom Act of 2014” requires that NTIA maintain its existing Internet oversight functions, unless the NTIA Administrator certifies in writing that certain specified assurances have been met regarding Internet governance. Those assurances include findings that the management of the Internet domain name system will not be exercised by foreign governmental or intergovernmental bodies; that ICANN’s bylaws will be amended to uphold First Amendment-type freedoms of speech, assembly, and association; that a four-fifths supermajority will be required for changes in ICANN’s bylaws or fees for services; that an independent process for resolving disputes between ICANN and third parties be established; and that a host of other requirements aimed at protecting Internet freedoms and ensuring ICANN and IANA accountability be instituted.

Legislative initiatives of this sort, while no panacea, play a valuable role in signaling Congress’s intent to hold the Administration accountable for seeing to it that key Internet freedoms (including the avoidance of onerous regulation and deleterious restrictions on speech and content) are maintained. They merit thoughtful consideration.