by Robert H. Lande, Venable Professor of Law, University of Baltimore School of Law

There’s an old saying, “It’s better to light a single bipartisan candle than to curse the darkness caused by your opponents.” This might not be the way most people articulate this proverb, but in Washington D. C. anyone who, like Commissioner Joshua Wright, puts so much effort into finding, developing, and promoting bipartisan agreement is a rarity indeed.

Commissioner Wright’s final accomplishment at the Commission was the agency’s Section 5 Policy Statement. It had been a high priority of his for years. In light of the fact that the Commission had gone a century without issuing anything describing its central competition mission and the wide divergence of views at the Commission on the underlying issues, many of us thought his task impossible. But he succeeded! It wasn’t the statement he wanted, of course, but his preferred statement was opposed by so many (including me) that agreement on a detailed document was not feasible. He nevertheless secured a compromise that perhaps will be the building block for a future, more detailed and even more useful document. By persevering and stressing the areas where the Commissioners agreed, he forged a historic bipartisan consensus.

Another example of Commissioner Wright’s approach is a policy recommendation he and his frequent co-author, Judge Douglas Ginsburg, developed, wrote and are promoting together with two extraordinarily unlikely co-authors: Bert Foer, the founder and past President of the American Antitrust Institute, and me, a Director of this organization. You might wonder what the four of us possibly could agree upon?

Wright & Ginsburg sent a proposed set of recommendations to the US Sentencing Commission calling upon it to make a large number of changes involving criminal antitrust penalties. At the same time Foer & Lande recommended that the Sentencing Commission implement an almost opposite list of policy changes. In fact, the dueling recommendations agreed on only one issue: Both wanted to ban corporations convicted of price fixing from hiring their cartel’s convicted employees after they were released from prison. Stressing their agreement, this unlikely quartet co-authored a piece advocating this policy option. We of course hope and believe that the politically diverse names on the recommendation will cause it to have a much greater impact than separate recommendations by either team would have had.

Because he always pushed as hard as possible for his preferred positions, he of course didn’t get everything he wanted. But he persevered and in this way forged and secured whatever agreements he could. In today’s Washington D.C. these candles are noteworthy accomplishments. Kudos to Commissioner Wright!

Much ink will be spilled at this site lauding Commissioner Joshua (Josh) Wright’s many contributions to the Federal Trade Commission (FTC), and justly so. I will focus narrowly on Josh Wright as a law and economics “provocateur,” who used his writings and speeches to “stir the pot” and subject the FTC’s actions to a law and economics spotlight. In particular, Josh highlighted the importance of decision theory, which teaches that bureaucratic agencies (such as the FTC) are inherently subject to error and high administrative costs, and should adopt procedures and rules of decision accordingly. Thus, to maximize welfare, an agency should adopt “optimal” rules, directed at minimizing the sum of false positives, false negatives, and administrative costs. In that regard, the FTC should pay particular attention to empirical evidence of actual harm, and not bring cases based on mere theoretical models of possible harm – models that are inherently likely to generate substantial false positives (predictions of consumer harm) and thereby run counter to a well-run decision-theoretical regime.

Josh became a Commissioner almost three years ago, so there are many of his writings to comment upon. Nevertheless, he is so prolific that a very good understanding of his law and economics approach may be gleaned merely by a perusal of his 2015 contributions. I will selectively focus upon a few representative examples of wisdom drawn from Josh Wright’s (hereinafter JW) 2015 writings, going in reverse chronological order. (A fuller and more detailed exposition of his approach over the years would warrant a long law review article.)

Earlier this month, in commenting on the importance of granting FTC economists (housed in the FTC’s Bureau of Economics (BE)) a greater public role in the framing of FTC decisions, JW honed in on the misuse of consent decrees to impose constraints on private sector behavior without hard evidence of consumer harm:

One [unfortunate] phenomenon is the so‐called “compromise recommendation,” that is, a BE staff economist might recommend the FTC accept a consent decree rather than litigate or challenge a proposed merger when the underlying economic analysis reveals very little actual economic support for liability. In my experience, it is not uncommon for a BE staff analysis to convincingly demonstrate that competitive harm is possible but unlikely, but for BE staff to recommend against litigation on those grounds, but in favor of a consent order. The problem with this compromise approach is, of course, that a recommendation to enter into a consent order must also require economic evidence sufficient to give the Commission reason to believe that competitive harm is likely. . . . [What, then, is the solution?] Requiring BE to make public its economic rationale for supporting or rejecting a consent decree voted out by the Commission could offer a number of benefits at little cost. First, it offers BE a public avenue to communicate its findings to the public. Second, it reinforces the independent nature of the recommendation that BE offers. Third, it breaks the agency monopoly the FTC lawyers currently enjoy in terms of framing a particular matter to the public. The internal leverage BE gains by the ability to publish such a document may increase conflict between bureaus on the margin in close cases, but it will also provide BE a greater role in the consent process and a mechanism to discipline consents that are not supported by sound economics. I believe this would go a long ways towards minimizing the “compromise” recommendation that is most problematic in matters involving consent decrees.

In various writings, JW has cautioned that the FTC should apply an “evidence-based” approach to adjudication, and not lightly presume that particular conduct is anticompetitive – including in the area of patents. JW’s most recent pronouncement regarding an evidence-based approach is found in his July 2015 statement with fellow Commissioner Maureen Ohlhausen filed with the U.S. International Trade Commission (ITC), recommending that the ITC apply an “evidence-based” approach in deciding (on public interest grounds) whether to exclude imports that infringe “standard essential patents” (SEPs):

There is no empirical evidence to support the theory that patent holdup is a common problem in real world markets. The theory that patent holdup is prevalent predicts that the threat of injunction leads to higher prices, reduced output, and lower rates of innovation. These are all testable implications. Contrary to these predictions, the empirical evidence is not consistent with the theory that patent holdup has resulted in a reduction of competition. . . .  An evidence-based approach to the public interest inquiry, i.e., one that requires proof that holdup actually occurred in a particular case, protects incentives to participate in standard setting by allowing SEP holders to seek and obtain exclusion orders when permitted by the SSO agreement at issue and in the absence of a showing of any improper use. In contrast, any proposal that would require the ITC to presume the existence of holdup and shift the burden of proof to SEP holders to show unwillingness threatens to deter participation in standard setting, particularly if an accused infringer can prove willingness simply by agreeing to be bound by terms determined by neutral adjudication.

In such matters as Cephalon (May 2015) and Cardinal Health (April 2015), JW teamed up with Commissioner Ohlhausen to caution that disgorgement of profits as an FTC remedy in competition cases should not be lightly pursued, and indeed should be subject to a policy statement that limits FTC discretion, in order to reduce costly business uncertainty and enforcement error.

JW also brought to bear decision-theoretic insights on consumer protection matters. For example, in his April 2015 dissent in Nomi Technologies, he castigated the FTC for entering into a consent decree when the evidence of consumer harm was exceedingly weak (suggesting a high probability of a false positive, in decision-theoretic terms):

The Commission’s decision to issue a complaint and accept a consent order for public comment in this matter is problematic for both legal and policy reasons. Section 5(b) of the FTC Act requires us, before issuing any complaint, to establish “reason to believe that [a violation has occurred]” and that an enforcement action would “be to the interest of the public.” While the Act does not set forth a separate standard for accepting a consent decree, I believe that threshold should be at least as high as for bringing the initial complaint. The Commission has not met the relatively low “reason to believe” bar because its complaint does not meet the basic requirements of the Commission’s 1983 Deception Policy Statement. Further, the complaint and proposed settlement risk significant harm to consumers by deterring industry participants from adopting business practices that benefit consumers.

Consistent with public choice insights, JW stated in an April 2015 speech that greater emphasis should be placed on public advocacy efforts aimed at opposing government-imposed restraints of trade, which have a greater potential for harm than purely private restraints. Thus, welfare would be enhanced by a reallocation of agency resources toward greater advocacy and less private enforcement:

[P]ublic restraints are especially pernicious for consumers and an especially worthy target for antitrust agencies. I am quite confident that a significant shift of agency resources away from enforcement efforts aimed at taming private restraints of trade and instead toward fighting public restraints would improve consumer welfare.

In March 2015 congressional testimony, JW explained his opposition to Federal Communications Commission (FCC) net neutrality regulation, honing in on the low likelihood of harm from private conduct (and thus implicitly the high risk of costly error and unwarranted regulatory costs) in this area:

Today I will discuss my belief that the FCC’s newest regulation does not make sense from an economic perspective. By this I mean that the FCC’s decision to regulate broadband providers as common carriers under Title II of the Communications Act of 1934 will make consumers of broadband internet service worse off, rather than better off. Central to my conclusion that the FCC’s attempts to regulate so-called “net neutrality” in the broadband industry will ultimately do more harm than good for consumers is that the FCC and commentators have failed to identify a problem worthy of regulation, much less cumbersome public-utility-style regulation under Title II.

At the same time, JW’s testimony also explained that in the face of hard evidence of actual consumer harm, the FTC could take – and indeed has taken on several instances – case-specific enforcement action.

Also in March 2015, in his dissent in Par Petroleum, JW further developed the theme that the FTC should not enter into a consent decree unless it has hard evidence of competitive harm – a mere theory does not suffice:

Prior to entering into a consent agreement with the merging parties, the Commission must first find reason to believe that a merger likely will substantially lessen competition under Section 7 of the Clayton Act. The fact that the Commission believes the proposed consent order is costless is not relevant to this determination. A plausible theory may be sufficient to establish the mere possibility of competitive harm, but that theory must be supported by record evidence to establish reason to believe its likelihood. Modern economic analysis supplies a variety of tools to assess rigorously the likelihood of competitive harm. These tools are particularly important where, as here, the conduct underlying the theory of harm – that is, vertical integration – is empirically established to be procompetitive more often than not. Here, to the extent those tools were used, they uncovered evidence that, consistent with the record as a whole, is insufficient to support a reason to believe the proposed transaction is likely to harm competition. Thus, I respectfully dissent and believe the Commission should close the investigation and allow the parties to complete the merger without imposing a remedy.

In a February 2015 speech on the need for greater clarity with respect to “unfair methods of competition” under Section 5 of the FTC Act, JW emphasized the problem of uncertainty generated by the FTC’s failure to adequately define unfair methods of competition:

The lack of institutional commitment to a stable definition of what constitutes an “unfair method of competition” leads to two sources of problematic variation in the agency’s interpretation of Section 5. One is that the agency’s interpretation of the statute in different cases need not be consistent even when the individual Commissioners remain constant. Another is that as the members of the Commission change over time, so does the agency’s Section 5 enforcement policy, leading to wide variations in how the Commission prosecutes “unfair methods of competition” over time. In short, the scope of the Commission’s Section 5 authority today is as broad or as narrow as a majority of commissioners believes it is.

Focusing on the empirical record, JW offered a sharp critique of FTC administrative adjudication (and the value of the FTC’s non-adjudicative research function) in another February 2015 speech:

The data show three things with significant implications for those  important questions. The first is that, despite modest but important achievements in administrative adjudication, it can offer in its defense only a mediocre substantive record and a dubious one when it comes to process. The second is that the FTC can and does influence antitrust law and competition policy through its unique research-and-reporting function. The third is, as measured by appeal and reversal rates, generalist courts get a fairly bad wrap relative to the performance of expert agencies like the FTC.

In the same speech, JW endorsed proposed congressional reforms to the FTC’s exercise of jurisdiction over mergers, embodied in the draft “Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act.” Those reforms include harmonizing the FTC and Justice Department’s preliminary injunction standards, and divesting the FTC of its authority to initiate and pursue administrative challenges to unconsummated mergers, thus requiring the agency to challenge those deals in federal court.

Finally, JW dissented from the FTC’s publication of an FTC staff report (based on an FTC workshop) on the “Internet of Things,” in light of the report’s failure to impose a cost-benefit framework on the recommendations it set forth:

[T]he Commission and our staff must actually engage in a rigorous cost-benefit analysis prior to disseminating best practices or legislative recommendations, given the real world consequences for the consumers we are obligated to protect. Acknowledging in passing, as the Workshop Report does, that various courses of actions related to the Internet of Things may well have some potential costs and benefits does not come close to passing muster as cost-benefit analysis. The Workshop Report does not perform any actual analysis whatsoever to ensure that, or even to give a rough sense of the likelihood that the benefits of the staff’s various proposals exceed their attendant costs.  Instead, the Workshop Report merely relies upon its own assertions and various surveys that are not necessarily representative and, in any event, do not shed much light on actual consumer preferences as revealed by conduct in the marketplace. This is simply not good enough; there is too much at stake for consumers as the Digital Revolution begins to transform their homes, vehicles, and other aspects of daily life. Paying lip service to the obvious fact that the various best practices and proposals discussed in the Workshop Report might have both costs and benefits, without in fact performing such an analysis, does nothing to inform the recommendations made in the Workshop Report.

To conclude, FTC Commissioner Josh Wright went beyond merely emphasizing the application of economic theory to individual FTC cases, by explaining the need to focus economic thinking on FTC policy formulation – in other words, viewing FTC administrative processes and decision-making from an economics-based, decision-theoretical perspective, with hard facts (not mere theory) a key consideration. If the FTC is to be true to its goal of advancing consumer welfare, it should fully adopt such a perspective on a going-forward basis. One may only hope that current and future FTC Commissioners will heed this teaching.

by Ajit Pai, Commissioner, Federal Communications Commission

I was saddened to learn that Commissioner Joshua Wright is resigning from the Federal Trade Commission. Commissioner Wright leaves the agency with a tremendous legacy. He brought to the FTC’s decision-making groundbreaking economic analysis, such as his opinion in Ardagh/St. Gobain that the government should evaluate possible merger efficiencies under a standard of proof similar to that applied to predicted anticompetitive effects. He proposed and reached across the aisle to accomplish major reforms, such as the FTC’s recent clarification of its Section 5 authority to police “unfair methods of competition” (something the agency had never done in its century-long existence). And he was gracious enough to collaborate with me on several issues, such as Internet regulation.

Consumers across the country are better off for Commissioner Wright’s efforts. I wish him the best as he returns to George Mason University to teach law and economics.

by Keith N. Hylton, William Fairfield Warren Distinguished Professor, Boston University School of Law

When I first heard that Josh had resigned from the FTC, I wondered if the news would cause a stock market sell-off. I checked later that day, and the Dow closed slightly up, plus .39 percent.

This suggests several possible explanations. One is that the stock market had already priced in Josh’s departure. Another is that the stock market realizes that Josh was just one of five votes, and that his replacement would cast votes similar to Josh’s. A third possible explanation is that the FTC doesn’t really have a great impact on the economy.

I think all three explanations have some merit, though especially the last two. The question is how much weight to allocate among the last two explanations.

As commentators have noted, Josh brought something unusual to the FTC: sophisticated training in economics. He also brought a lot of energy and natural political talent. If anyone could get fellow commissioners to listen to economic reasoning, surely it would be Josh. Even if his replacement votes the same way Josh did, he (or she) is unlikely to match Josh in offering strong arguments grounded in economics. That is a loss for the FTC, and for antitrust enforcement generally in this administration.

One clear achievement for Josh is the FTC policy statement on Section 5. At this stage, it’s too early to tell where that will lead us. One can only hope that it will constrain the FTC to stay within the parameters of rule of reason analysis. But a willful applicant of the rule of reason can spin the analysis to justify economically unsound decisions. This points to one area in which Josh will be missed greatly: keeping the FTC honest in its application of rule of reason analysis.

Of course, I may be self-servingly putting too much weight on the value of being educated in economics. I’ve often joked that on my faculty, using sophisticated economic arguments is one sure way to alienate colleagues. Maybe Josh found the same at the FTC.

And if my third suggested reason Josh’s resignation did not cause a stock market sell-off, that the FTC doesn’t have a big impact on the economy, is correct, then we can take a relaxed view of Josh’s departure. The FTC has lost a source of good judgment and economic expertise – but hey, it may not matter much at all.

With the FTC experience under his belt, Josh will hopefully be in the running for future high-level government appointments. The Supreme Court could certainly benefit from having him on board.

by Thomas W. Hazlett, H.H. Macaulay Endowed Chair in Economics at Clemson University

Josh Wright is a tour de force. He has broken the mold for a Washington regulator — and created a new one. As a scholar, he carefully crafts his analyses of public policy. As a strategic thinker, he tackles the issues that redound to the greatest social benefit. And as a champion of competitive markets, he forcefully advances rules to encourage innovation and consumer welfare. Nearly as important as his diligence within the regulatory process, he is transparent in his objectives and takes every opportunity to enunciate his principles for action. The public knows what he is doing and why it is important. 

As a sample of Commissioner Wright’s dedication to improving regulatory law, I am delighted to suggest the talk he gave April 2, 2015 at Clemson University, hosted by the Information Economy Project. His title: Regulation in High-Tech Markets: Public Choice, Regulatory Capture, and the FTC. He was particularly concerned in describing the harm produced by state and local barriers blocking competitive forces with respect to emerging, disruptive innovations such as Uber and AirBnB, offering remedies available via competition policy. The talk is posted here.

by Jonathan Jacobson, partner & Ryan Maddock, associate, Wilson Sonsini Goodrich & Rosati

Excluding the much talked about Section 5 policy statement, Commissioner Wright’s tenure at the FTC was highlighted by his numerous dissents. If there is one unifying theme in those dissents it is his insistence that rigorous economic analysis be at the very core of all the Commission’s decisions. This theme was perhaps most evident in his decision to dissent in the Ardaugh/Saint-Gobain and Sysco/US Foods mergers, two cases that presented interesting questions about how the Commission and courts should balance a merger’s likely anticompetitive effects with its procompetitive efficiencies.

In April of 2014 the Commission announced that it had accepted a consent decree in Ardaugh/Saint-Gobain that remedied its competitive concerns related to the merger of the second and third largest firms in the market for “glass containers sold to beer and wine distributors in the United States.” The majority, which consisted of Commissioners Ramirez, Ohlhausen, and Brill, argued that the merger would lead to both coordinated and unilateral anticompetitive effects in the market and further stated that “the parties put forward insufficient evidence showing that the level of synergies that could be substantiated and verified would outweigh the clear evidence of consumer harm.” Commissioner Wright, who was the lone dissenter, strongly disagreed with the majority’s conclusions and found that the merger’s cognizable efficiencies were “up to six times greater than any likely unilateral price effect,” and thus the merger should have been approved without requiring a remedy.

Commissioner Wright also used his Ardaugh dissent to discuss whether the merging parties and Commission face asymmetric burdens of proof regarding competitive effects. Specifically, Commissioner Wright asked whether the “merging parties [must] overcome a greater burden of proof on efficiencies in practice than does the FTC to satisfy its prima facie burden of establishing anticompetitive effects?” Commissioner Wright stated that the Commission has acknowledged that in theory the burdens of proof should be uniform; however, he argued that the only way the majority could have found that the Ardaugh/Saint-Gobain merger would generate almost no cognizable efficiencies is by applying asymmetric burdens. He explained that the majority’s approach “embraces probabilistic prediction, estimation, presumption, and simulation of anticompetitive effects on the one hand but requires efficiencies to be proven on the other.”

Commissioner Wright, who was joined by Commissioner Ohlhausen, also dissented from the Commission’s decision to challenge the Sysco/US Foods merger. While the Commissioners did not issue a formal dissent because of the FTC’s then pending litigation, Commissioner Wright tweeted that he had “no reason to believe the proposed Sysco/US Foods transaction violated the Clayton Act.” The lack of a formal dissent makes it challenging to ascertain all of Commissioner Wright’s objections, but a reading of the Commission’s administrative complaint provides insight on his likely positions. For example, Commissioner Wright undoubtedly disagreed with the complaint’s treatment the parties’ proffered efficiencies:

Extraordinary Merger-specific efficiencies are necessary to outweigh the Merger’s likely significant harm to competition in the relevant markets. Respondents cannot demonstrate cognizable efficiencies that would be sufficient to rebut the strong presumption and evidence that the Merger likely would substantially lessen competition in the relevant markets.

Commissioner Wright’s Ardaugh dissent makes it clear that he does not believe that the balancing of anticompetitive effects and efficiencies should be an afterthought to the agency’s merger analysis, which is how the majority’s complaint appears to treat it. This case likely represents another instance where Commissioner Wright believed that the majority of commissioners applied asymmetric burdens of proof when balancing the merger’s competitive effects.

Commissioner Wright is not the first person to ask whether current merger analysis favors anticompetitive effects over efficiencies; however, that does not detract from the question’s importance.  His views reflect a belief shared by others that antitrust policy should be based on an aggregate welfare standard, rather than the consumer welfare standard that the agencies and the courts have for the most applied over the past few decades. In Commissioner Wright’s view, by applying asymmetric burdens–which is functionally the same as discounting efficiencies–antitrust agencies could harm both total welfare and consumers by increasing the chance that a procompetitive merger might be blocked. It stands in contrast to the majority view that a merger that raises prices requires efficiencies, specific to the merger, of a magnitude sufficient to defeat any increase in consumer prices–and that, because the efficiency information is in the hands of the proponents, shifting the burden to them is appropriate.

While his tenure at the FTC has come to an end, expect to continue to see Commissioner Wright at the front and center of this and many other important antitrust issues.

by Richard A. Epstein, Laurence A. Tisch Professor of Law, NYU School of Law

A recent story in the Wall Street Journal described Josh Wright as the “FTC’s most conservative commissioner.” It is a sign of today’s politicized environment that this label is used as a substitute for serious substantive analysis of the particular positions that Wright has taken relative to the other commissioners. The article also noted that he was the Republican commissioner who brokered a deal with the three democratic members to publish a short set of guidelines to deal with the Delphic question of what counts as unlawful methods of competition. Before I had received knowledge that Josh was about to resign, I had posted a piece on Defining Ideas that carried with it the near-oxymoronic title, “When Bureaucrats Do Good.”

I must confess that my initial impression on hearing of the publication of the statement was that it would be more bad news. But I happily I changed course after reading the statement, which is mercifully short, and after having the benefit of the thoughtful dissent of the other Republican Commissioner Maureen Ohlhausen, and of the speech that FTC Chairwoman Edith Ramirez gave in defense of those guidelines at the George Washington Law School.

There are clearly times when short should be regarded as sweet, and this is one of them.  It may well be that there is an iron law that says the longer the document that any government prepares, the worse its content. This short policy statement sets matters in the right direction when it treats unfair methods of competition as a variation on the basic theme of monopoly, and notes that where the antitrust laws do apply, the FTC should be reluctant to exercise its standalone jurisdiction. It is a tribute to Ramirez and Wright that they could come to agree on the statement, so that a set of sound principles has bipartisan support.

It is also welcome that the dissent of Commissioner Ohlhausen does not differ on fundamental orientation but on two questions that I regard as having subordinate importance: do we give public hearings before publishing the statement; and do we provide more illustrations as to how the principle out to be applied. The pressure therefore came from the pro-market side of the political spectrum such that there is now no Commissioner on the FTC who regards Section 5 of the Federal Trade Commission Act as a general warrant to pursue any and all forms of professional mischief.

The contrast of this document with the FCC’s net neutrality principles is too clear to require much comment.

At this point, Josh will return to his position at George Mason University Law School, where he shall resume his distinguished academic career. He regards the publication of this one page statement as the capstone of his career. On that point, I am confident that history will prove him right. Welcome back to the Academy, and thanks for a job well done on the Commission.

Tomorrow (August 24, 2015) marks once and future TOTM’er Josh Wright’s last day as an FTC Commissioner. Starting tomorrow and continuing throughout the week, Truth on the Market will be hosting a symposium —  a collection of commentaries and contributions — honoring Josh’s tenure at the FTC. We’ve invited contributions from a range of luminaries, including academics, practitioners, former FTC officials, and the like. Watch this space for the contributions, and feel free to add your own thoughts in the comments to the posts. Links to the posts will be collected here.

Monday’s posts will commence with contributions from

  • Richard Epstein,
  • Jon Jacobson,
  • Tom Hazlett, and
  • Keith Hylton

— with many more to come!

 

Recently, I discussed at this site the Supreme Court’s imposition of takings liability on the U.S. Department of Agriculture (“USDA”), because USDA fined a small raisin grower for refusing to cooperate with the California Raisins Marketing Order – which, stripped of the fancy verbiage, is little more than a government-supervised output limitation cartel.  The California raisin cartel is far from unique.  There are many other USDA cartels (and analogous regulatory schemes) out there, the bitter fruits of anti-consumer and corporatist New Deal economic policy.  On August 14, in Humane Society of the United States v. Thomas J. Vilsack, the U.S. Court of Appeals for the D.C. Circuit, applying standing doctrine, took the knives to a less obviously anticompetitive, but no less pernicious, USDA agricultural order, the “Pork Order,” promulgated pursuant to the infelicitously named Pork Act (7 U.S.C. §§ 4801-19).

The case was filed in federal court by Harvey Dillenburg (a pork producer) and two organizations whose members include pork producers against the National Pork Board, claiming that it misappropriated millions of dollars from a fund for pork promotion into which all pork producers are required by law to contribute for the benefit of a trade association that is funded and controlled by large pork producers.  The district court dismissed the case for lack of standing, but that decision has now been reversed by the D.C. Circuit.  It is to be hoped that upon remand, the district court will take the next step and slaughter the Pork Order, thereby “bringing home the economic liberties bacon.”  Such an outcome would strike at the abuse of governmental processes by well-organized, powerful businesses, one of the worst aspects of crony capitalism.

The D.C. Circuit’s summary description of the case is instructive:

“The National Pork Board [Board] is a quasi-governmental entity responsible for administering a federal regulatory scheme known as the ‘Pork Order[,]’ [which implements] . . . the Pork Act, . . . the purpose of which is to promote pork in the marketplace. . . .  The Board strengthens, maintains, develops, and expands markets for pork and pork products through research and consumer information campaigns. In exchange for the Board’s efforts on behalf of their industry, pork producers pay the Board a special assessment on each hog they import or sell. . . . 

In 2006, the Board, with the approval of the Secretary of the Department of Agriculture, bought four trademarks associated with the slogan Pork:  The Other White Meat . . . from the National Pork Producers Council [Council], an industry trade group, for $60 million.  [Footnote deleted which explains that the USDA Secretary is charged by statute with reviewing the Pork Board’s actions, but that the reviewing court attributes those actions to the Board.]  The payment terms provide that the Board will pay the Council $3 million annually for twenty years. The Board can terminate the payments at any time with one year’s notice, in which case ownership of the phrase reverts back to the Council. Five years after buying the mark, the Board replaced it with a new motto, Pork:  Be Inspired. Now the Board keeps the initial slogan around as a “heritage brand” that it does not feature in its advertising.

The plaintiffs claim that the Board did not buy the slogan for its value as a marketing tool. They allege that the Board used the purchase of the slogan as a means to cut a sweetheart deal with the Council to keep the Council in business and support its lobbying efforts. They maintain that the Board overpaid for the slogan and that the Board’s shift to the Pork: Be Inspired campaign makes the initial slogan all but worthless.  According to the plaintiffs, the purchase of the mark and continued payment for it was and is arbitrary and capricious.  The plaintiffs also argue that the Board’s purchase of the slogan with the purpose of supporting the Council’s lobbying efforts violates the Pork Act and Order’s prohibitions against the Board spending funds to influence legislation.

The plaintiffs sued the Secretary of the Department of Agriculture under the Administrative Procedure Act seeking an order enjoining the Board’s further payments to the Council and directing the Secretary to claw back what payments he can from the deal.  The district court dismissed the plaintiffs’ suit for lack of Article III standing. . . .  The court held that Dillenburg failed to establish an injury in fact fairly traceable to the Board’s actions that is likely to be redressed by a favorable decision. . . .  It also held that the two plaintiff organizations could not establish standing to sue in their own right or on behalf of their pork-producing members. . . .

[W]e reverse and remand [to the district court].  This case involves a concrete and particularized harm caused by an agency’s failure to confer a direct economic benefit on a statutory beneficiary. We also reject the government’s argument that the plaintiffs have failed to exhaust their administrative remedies.  The statute’s provision for administrative review would not offer the plaintiffs adequate relief, and therefore they were not required to pursue it.”

This case is an example of rent-seeking in action, and, in particular, the abuse of regulatory processes to impose disproportionate costs on less-connected rivals (a phenomenon well-documented in public choice analysis of regulation), as further revealed in the D.C. Circuit’s opinion.  The Council, as a private trade organization, could not require all pork producers to join it and pay dues to support institutional advertising and other pork-related promotional activities.  The Council, however, achieved its goal indirectly by establishing and manipulating government regulation.  It successfully lobbied for passage of the Pork Act, proposed the text that ultimately served as foundation for the Pork Order, and used the Board to exercise regulatory authority over all pork producers.  Part of that exercise of regulatory authority involved the Board’s agreement to pay the Council $60 million for “The Other White Meat” mark.  This fee inevitably would be passed on to all pork industry members (including those that were not members of the Council), which are required by force of law to render payments to the Board.

The Board’s regulatory capture by the Council (the “big industry members’” lobby) is apparent, as further revealed in the Court’s opinion:

“Even though the Board paid for the mark’s development, the Council registered the mark in its own name and as its sole owner. . .  The Board and the Council were so enmeshed that, in 1986 when the Board voted to adopt the campaign [to promote the Other White Meat mark] and so committed itself to spend tens of millions of dollars in assessment funds over two decades on the promotion, it did not execute any licensing agreement or fee contract to formalize that arrangement. . . . [USDA’s] Office of Inspector General concluded in a 1999 audit that the Board ‘had relinquished too much authority to its primary contractor, the [Council], and ha[d] placed the [Council] in a position to exert undue influence over Board budgets and grant proposals.’  That history . . . raises a plausible inference that the Board’s purchase was not the product of arm’s length negotiation.

[Moreover], [b]efore the Board entered the . . . [subsequent formal] licensing agreement [for the Other White Meat mark], the Board’s own economist recommended that the Board pay no more than $375,000 annually to license the mark. . . .  [Furthermore], facts plausibly show[] that, whatever its value when the Board purchased it, the [Other White Meat] mark is no longer worth $3 million per year.”

A more compelling judicial account of the manipulation of government authority to achieve the aims of an organized private lobbying group (namely, using government to foist its promotional and licensing costs on the less-well-connected rivals of the lobbying organization’s members) is hard to imagine.

In conclusion, while the Pork Order in and of itself may have only limited economic impact, it is symptomatic of the more general problem of rent-seeking-induced special interest regulation (both federal and state) that, collectively, imposes enormous costs on the American economy.  It is also emblematic of the existence of countless federal government programs for which there is no principled justification in our republic, based on a federal Constitution that establishes limited enumerated powers and focuses on restricting government incursions into individual liberties.  It is to be hoped that the federal courts will keep this in mind and use their full panoply of constitutional tools in empowering private parties to fight cronyist governmental programs.

On August 10, in Suprema, Inc. v. ITC, the en banc Federal Circuit granted Chevron deference to a U.S. International Trade Commission (“ITC”) statutory interpretation in holding that goods that do not directly infringe a U.S. patent at the time they are imported nevertheless may be excluded from entry by the ITC if they are used, after importation, to directly infringe by the importer at the inducement of the goods’ seller.  Although this decision is good news for believers in strong U.S. patent enforcement against infringing imports, it is problematic as a matter of jurisprudence.  It may face stormy waters if it eventually is subject to U.S. Supreme Court review.  The gist of the case is as follows.

In May 2010, Cross Match Technologies, Inc. (“Cross Match”) filed a complaint with the ITC, alleging infringement of four patents it owned that involved certain fingerprint scanning devices.  The ITC found the scanners were manufactured abroad by a Korean company, Suprema, Inc. (“Suprema”).  An American company, Mentalix, Inc., bought the scanners and imported them into the United States.  Mentalix subsequently combined the scanners with Mentalix software, and used and sold the scanners in the U.S.  The ITC determined that Mentalix directly infringed a Cross Match patent claim by integrating its software with the Suprema scanners.  The ITC also found that Suprema was liable for inducing patent infringement by Mentalix, in that it “willfully blinded” itself to and “actively encouraged” Mentalix’s infringing U.S. activities.  (Furthermore, Suprema “aided and abetted” Mentalix’s infringement by assisting Mentalix in getting Mentalix software to work with the scanners.)  Consequently, the ITC imposed an exclusion order covering the importation of scanners used in the infringement, applying Section 337 of the Tariff Act of 1930 (“Section 337”), which declares unlawful “importing articles that . . . infringe a valid and enforceable United States patent.”  On appeal, a three-judge Federal Circuit panel disagreed and found no Section 337 violation, reasoning that there are no “articles that infringe” at the time of importation when direct infringement does not occur until after importation.  The Federal Circuit granted a rehearing en banc and a six-judge majority vacated the panel decision, with four judges dissenting.

The en banc majority opinion, authored by Judge Jimmie V. Reyna, applied Chevron deference to the ITC’s determination.  (The administrative law principle known as “Chevron deference,” enunciated in 1984 by the U.S. Supreme Court in Chevron U.S.A. Inc. v. NRDC, gives judicial deference to an agency’s construction of federal statutory language if (1) the statutory language is ambiguous and (2) the agency’s interpretation is based on a “permissible” construction of the language.  An agency’s interpretation need not be the “best” or “most likely” statutory construction, it need only be “not unreasonable.”)  The opinion found first that because Section 337 refers to “articles that infringe,” not just to infringement (the subject of the Patent Act), textual uncertainty is introduced.  In other words, applying Chevron Step One, “Congress has not directly answered whether goods qualify as ‘articles that infringe’ when the [ITC] has found that an importer used such goods, after importation, to directly infringe at the inducement of the goods’ seller.”  Applying Chevron Step Two, Judge Reyna deemed reasonable the ITC’s determination that induced infringement was covered by Section 337:  “Induced infringement is one kind of infringement, and when it is accomplished by supplying an article, the article supplied can be an ‘article that infringes’ if the other requirements of inducement are met.”  Furthermore, “[t]he legislative history consistently evidence[d] Congressional intent to vest the ITC with broad enforcement authority to remedy unfair trade acts.”  Accordingly, Judge Reyna held that deference to the ITC’s interpretation of Section 337 was warranted.

A four-judge dissent, authored by Judge Kathleen M. O’Malley, found no ambiguity in the term “articles that infringe,” and stressed that “there is no actual harm to a patentee until an infringing use, and that harm only occurs after importation for method claims such as the ones at issue in this appeal. This is especially true for staple goods like Suprema’s scanners, where a broad assertion of the Commission’s power could prevent noninfringing goods from entering the country on the basis of what a customer may do with that item once it enters U.S. territory. Such considerations are the purview of the district courts, and fall outside the limited statutory jurisdiction of the [ITC].”  Notably, Judge O’Malley also relied heavily on the Supreme Court’s 2014 decision in Limelight Networks v. Akamai Technologies, when the Court held that inducement liability may arise if and only if there is direct patent infringement.  As Judge O’Malley explained, “[b]y permitting indirect infringement liability at the point of importation when there has been no direct infringement, the [Federal Circuit en banc] majority crafts patent policy where it believes there is a loophole ripe for abuse.”  But “[a]s the Supreme Court recently reminded us” in Limelight, “ ‘[t]he courts should not create liability for inducement of non-infringing conduct where Congress has elected not to extend that concept.’ ”

The dissent has the better case.  The fact is, the scanners did not infringe when they were imported, only when they were bundled subsequently with another company’s software in connection with their being marketed in the United States.  Finding ambiguity in the term “articles that infringe” involves an exercise in statutory construction that appears strained to the point of unreasonableness.  It would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference (see, for example, the Court’s very recent summary rejection of such deference in Michigan v. EPA).  Furthermore, the en banc majority’s willingness to find inducement liability at a time when direct patent infringement has not yet occurred (the point of importation) is very hard to square with the teachings of Akamai.  Finally, Federal Circuit decisions have fared poorly before the Supreme Court in recent years, and Judge O’Malley’s thoughtful application of Akamais teachings makes the en banc majority’s opinion a particularly ripe target for Supreme Court reversal, should certiorari be granted. 

As Judge O’Malley pointed out, if U.S. patentees are being seriously harmed by induced infringement after the point of importation, a simple statutory tweak to Section 337 should deal with the problem.  Supporters of strong patent protection would be well advised to have such an amendment “in their back pocket” and ready to go should the Supreme Court elect to review the Suprema decision.