Archives For Sherman Act

James Cooper is Director, Research and Policy at the Law & Economics Center at George Mason University School of Law

The FTC has long been on a quest to find the elusive species of conduct that Section 5 alone can tackle.  A series of early Supreme Court cases interpreting the FTC Act – the most recent and widely cited of which is more than forty years old (FTC v. Sperry & Hutchinson Co., 405 U.S. 233 (1972)) –appeared to grant the FTC wide ranging powers to condemn methods of competition as “unfair.”[1]  A series of judicial setbacks in the 1980s and early 1990s, however, scaled back Section 5’s domain.[2]

Since 1992, the FTC has continued to define Section 5’s reach internally – through settlements primarily involving two classes of conduct: so-called “invitations to collude” (ITC);[3] and breaches of agreements to disclose or to license standard-essential patents (SEPs).[4] Similar in spirit to ITCs, the Commission has also alleged pure Section 5 violations in cases involving sharing of competitively sensitive information.[5]

In addition to these lines of cases, the FTC has used Section 5 in two additional matters: the “CD MAP” cases, involving the parallel adoption by major record companies of “minimum advertised price” restrictions; and the suit against Intel for engaging in exclusionary conduct, including deception and certain pricing practices.

Absent external appellate review, however, it remains unclear whether Congress intended for these classes of conduct to be illegal as “unfair methods of competition.”  Because settlement with the FTC will be preferable to litigation in a wide array of circumstances, what is considered illegal under Section 5 largely has become whatever at least three Commissioners can agree on.  Accordingly, there is still a relatively large zone in which the FTC can develop this quasi Section 5 common law with little fear of triggering litigation, and the concomitant specter of judicial scrutiny.

The recent Google investigation provides some evidence as to just how large this zone of discretion may be.  Although the Commission eventually decided to close its investigation into Google’s search practices – and was able to extract informal concessions from Google related to “scraping” and failures to facilitate “multihoming” – that the Commission would entertain a case premised on such conduct hints at a willingness to make arguments that clear Sherman Act precedent involving duties to aid rivals does not apply to the Section 5 actions, or that misappropriation can serve as the basis for a Section 5 theory.  The Commission’s settlement with Google concerning breaches of commitments to license SEPs on FRAND terms, moreover, continued its application of antitrust and consumer protection law to contractual disputes between sophisticated businesses.

Parsing the statements in Google suggest at least four directions in which at least one commissioner was willing to expand Section 5 beyond the Sherman Act:  duties to aid rivals, misappropriation, failure to disclose the relationship between data collection and market power, and breach of an agreement to license SEPs on FRAND terms.  Further, in two instances, at least one commissioner additionally was willing to declare the same conduct an unfair act or practice.  This is far from a coherent framework for Section 5.

The FTC’s discretion under Section 5 potentially comes at a steep price.  First, it creates uncertainty.  If businesses are unsure about where the line between legal an illegal behavior is drawn, they rationally will take too much care to avoid violating the law, which in antitrust can mean competing less aggressively.  Second, the more discretion the FTC enjoys to condemn a practice as an unfair method of competition, the more competition will be channeled from the marketplace to 600 Pennsylvania Avenue.  Although this may be a good development for economists and attorneys, it is bad for consumers.

The FTC could go a long way toward solving this problem if it were to take a cue from the history of its consumer protection program.  The FTC’s overreach in the 1970s earned it the moniker “national nanny,” nearly shut the agency down.  As part of a program to instill public – and more importantly Congressional – trust, the FTC adopted a series of binding policy statements that made consumer harm the touchstone of its authority to challenge “unfair or deceptive acts or practices” (UDAP authority).

A similar effort at self-restraint that limits the FTC’s UMC authority could help reduce uncertainty and rent seeking.  Both Commissioners Ohlhausen and Wright should be commended on their impressive efforts to start this discussion.  In my first post, however, I’d like to discuss a more dramatic path that neither has addressed: confining Section 5 to the Sherman Act.

In many ways the search for Section 5’s domain beyond the Sherman Act is a solution in search of a problem.  There is certainly no consensus that the Sherman Act – even after some recent limitations imposed by cases like Twombly, Trinko, and Credit Suisse – is no longer fit for the task of policing anticompetitive conduct.  It may well be that the FTC is trying to sell a product that nobody needs.  Consequently, the costs of abandoning an expansive Section 5 may be small; with the exceptions of ITCs and information sharing involving small firms, the rest of the FTC’s Section 5 portfolio also can be reached under existing Sherman Act theories (albeit with more difficulty), or handled through other bodies of law or self-regulation.

For example, under the D.C. Circuit’s decision in Rambus, Section 2 is available for cases involving deception at the time of the standard adoption that materially affected the choice of standard.[6] Accordingly, a Section 2 case could be made out if the Commission could show that the defendant either concealed an SEP or if a FRAND commitment was made in bad faith and affected the choice of standard.  Even if deception cannot be show, breaches of FRAND commitments involving SEPs that result in hold-up necessarily involve legal review; the court (or ITC) must decide whether to grant the SEP holder’s request for an injunction (or an exclusion order), and the alleged infringer has opportunities to raise a variety of contract and patent law objections.  Likewise, bundling, predatory pricing, and deception claims like those in Intel are clearly cognizable under Sherman Section 2 (which is why Intel was pled both ways).

Confining Section 5 to the Sherman Act would also have the advantage reduce arbitrage opportunities between the FTC and the Antitrust Division.  As Commissioner Ohlhausen has noted, if the same conduct results in different legal treatment depending on which agency wins clearance – as it arguably would have in the Google investigation – these routine bureaucratic procedures could have substantial influence on ultimate liability.

Although this conduct is reachable under the Sherman Act, many of the cases would be difficult to win.  To the extent that these Sherman Act rules reasonably sort anticompetitive from procompetitive or benign conduct, however, forcing the Commission to satisfy Sherman Act standards would assure that its actions promote consumer welfare.

The only types of conduct that clearly slip out of the FTC’s reach when Section 5 is confined to the Sherman Act are ITCs and information sharing involving firms with low market shares.  The costs of letting this conduct go, however, are likely minimal.  Although most would agree that this conduct is  worth stopping, the FTC has pursued less than ten of these cases in the past 20 years.  Even including deterrence effects, removing ITCs and information sharing cases from the FTC portfolio is unlikely to cause a great deal of consumer harm.  Most managers are probably aware that price fixing is illegal, and it is doubtful that anybody proposes a cartel or shares information without hoping that the other party will get on board.  At the same time, these Section 5 cases are obscure – lurking in a series of consent orders on the FTC’s web site.  The sophisticated antitrust bar likely is familiar with this strain of Section 5 activity, but outside of the clients counseled by top tier law firms, it is not obvious that many businesses are aware of there existence.  Without awareness, there can be no deterrence.  Further, if either of these acts leads to a conspiracy or significant market power, it will be reachable under the Sherman Act.

Finally, removing the FTC’s Section 5 authority will not diminish its role as an antitrust norm creator.  Indeed, over its near 100-year history, however, the FTC has not used Section 5 to implement any important antitrust norms.[7]  That is not to say that the FTC has lacked influence over the development of antitrust jurisprudence – to the contrary, it clearly has, but within the confines of the Sherman Act.  For example, the FTC has made major positive contribution in the fields of joint conduct,[8] state action,[9] Noerr-Pennington,[10] the treatment of professional regulation,[11] and most recently in the context of pharmaceutical reverse settlements.[12]

Of course, if Section 5 is to offer nothing beyond the Sherman Act, that begs the question of whether the FTC is needed at all? In this manner, the quest for a species of harmful conduct that is reachable only through Section 5 is an existential one.  Does it make sense to have two agencies enforcing the same law?[13]  Probably not.  The FTC’s comparative advantage over DOJ lays in its research capability, and of course its consumer protection mission.  Accordingly, stripped of a unique antirust enforcement authority, one possible reorganization would be to house enforcement in DOJ, with the FTC providing competition and consumer protection policy R&D that would feed into case selection designed to improve these bodies of law.

However attractive it may be from a policy standpoint, jettisoning Section 5 beyond the Sherman Act is a political non-starter; Congress would never permit the FTC to abrogate its UMC power.  Indeed, recall the nasty fight that erupted when the FTC and DOJ attempted to reach a clearance agreement in 2002.  Accordingly, a more realistic path for the Commission to take would be to spell out the circumstances under which it would consider a stand alone Section 5 case.[14]  I will turn to this in my next posting.


[1] See, e.g., FTC v. Sperry & Hutchinson Co., 405 U.S. 233 (1972); William E. Kovacic & Marc Winerman, Competition Policy and the Application of Section 5 of the Federal Trade Commission Act, 76 Antitrust L.J. 929, 930-31 (2010).

[2] FTC v. Boise Cascade, 637 F.2d 573, 581 (9th Cir. 1980); Official Airline Guides, Inc. v. FTC, 630 F.2d 920 (2d. Cir. 1980); E.I DuPont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984).  The FTC’s last judicially decided Section 5 action was in 1992. FTC v. Abbott Labs, 853 F. Supp. 526 (D.D.C. 1992).

[3] In re U-Haul Int’l, Inc. (June 9, 2010); In re Valassis Communications, Inc. (April 19, 2006); In re Stone Container Corp. (June 3, 1998); In re Precision Moulding Co. (Sept. 3, 1996); In re YKK(USA) (July 1, 1993); In re A.E. Clevite, Inc. (June 8, 1993); In re Quality Trailer Prods. Corp. (Nov. 5, 1992).

[4] In re Dell Computer (1996); In re Negotiated Data Systems, Inc. (2008); In re Robert Bosch GmbH (2012); In re Google, Inc. (2013).

[5] In re Bosely (2013); In re Nat’l Ass’n of Music Merchants (2009).

[6] Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008); see also Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3rd Cir. 2007); Microsoft, 253 F.3d 3, 76 (D.C. Cir. 2001); Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2002).

[7] See Kovaic & Winerman, supra note__, at 941 (“The FTC’s record of appellate litigation involving applications of Section 5 that go beyond prevailing antitrust norms is uninspiring.”).

[8] See Polygram Holding, Ltd. v. FTC, 416 F.3d 29 (D.C. Cir. 2005).

[9] See FTC v. Ticor Ins. Co, 504 U.S. 621 (1992); North Carolina Board of Dental Examiners v. FTC, No. 12-1172 (4th Cir. May 31, 2013).

[10] See FTC v. Phoebe Putney Healthcare System, Inc. (Feb. 13, 2013); FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411 (1990).

[11] See FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986); FTC v. California Dental Association, 526 U.S. 756 (1999).

[12] FTC v. Actavis, Inc., Slip Op. No. 12-416 (June 16, 2013).

[13] See Kovacic & Winerman

[14] Commissioners Ohlhausen and Wright have recently begun this discussion.  See __.

I will be speaking at a lunch debate in DC hosted by TechFreedom on Friday, September 28, 2012, to discuss the FTC’s antitrust investigation of Google. Details below.

TechFreedom will host a livestreamed, parliamentary-style lunch debate on Friday September 28, 2012, to discuss the FTC’s antitrust investigation of Google.   As the company has evolved, expanding outward from its core search engine product, it has come into competition with a range of other firms and established business models. This has, in turn, caused antitrust regulators to investigate Google’s conduct, essentially questioning whether the company’s success obligates it to treat competitors neutrally. James Cooper, Director of Research and Policy for the Law and Economics Center at George Mason University School of Law, will moderate a panel of four distinguished commenters to discuss the question, “Should the FTC Sue Google Over Search?”  

Arguing “Yes” will be:

Arguing “No” will be:

When:
Friday, September 28, 2012
12:00 p.m. – 2:00 p.m.

Where:
The Monocle Restaurant
107 D Street Northeast
Washington, DC 20002

RSVP here. The event will be livestreamed here and you can follow the conversation on Twitter at #GoogleFTC.

For those viewing by livestream, we will watch for questions posted to Twitter at the #GoogleFTC hashtag and endeavor, as possible, to incorporate them into the debate.

Questions?
Email contact@techfreedom.org

In the past weeks, the chatter surrounding a possible FTC antitrust case against Google has risen in volume, thanks largely to the FTC’s hiring of litigator Beth Wilkinson.  The question remains, however, what this aggressive move portends and, more importantly, why the FTC is taking it.

It is worth noting at the outset that, as far as I know, Wilkinson has no antitrust experience; she is a litigator.  Now, there’s nothing wrong with an agency enlisting a hired gun to help litigate its cases, but when the hired gun is not hired for her substantive expertise but rather her ability to persuade, it perhaps suggests something about the strength of the agency’s case.

It’s reading tea leaves (a time-honored, if flawed, DC practice), but Wilkinson’s hiring suggests to me that the FTC views its case as one that will require some serious rhetorical handling in order to win.  While on its Sherman Act Section 2 merits that would be true anyway, it also suggests to me that the FTC intends to use the case as an opportunity to push – and seek court approval for – the ambitious plans of some of the Commissioners to expand the agency’s powers under Section 5 of the FTC Act.  This would be a costly mistake for consumers.

Last year, in an interview with Global Competition Review, FTC Chairman Leibowitz was asked whether the agency was “investigating the online search market.”  He declined to answer directly but instead offered this suggestive comment:

What I can say is that one of the commission’s priorities is to find a pure Section Five case under unfair methods of competition.  Everyone acknowledges that Congress gave us much more jurisdiction than just antitrust.  And I go back to this because at some point if and when, say, a large technology company acknowledges an investigation by the FTC, we can use both our unfair or deceptive acts or practice authority and our unfair methods of competition authority to investigate the same or similar unfair competitive behavior . . . .

Commissioner Rosch has likewise suggested that Section 5 could and should be expanded, precisely to reach activity that would be unreachable under current Section 2 standards.  The effort to expand the FTC’s antitrust enforcement under Section 5, and to write out the jurisprudential standards of Section 2, is a troubling one.

Following Sherman Act jurisprudence, traditionally the FTC has understood (and courts have demanded) that antitrust enforcement under Section 5 (as a technical matter, the FTC does not directly enforce Section 2 of the Sherman Act but instead enforces the Act via its Section 5 authority) requires demonstrable consumer harm to apply.  But this latest effort reveals an agency pursuing an interpretation of Section 5 that would give it unprecedented and largely-unchecked authority.  In particular, the definition of “unfair” competition wouldn’t be confined to the traditional antitrust measures—reduction in output or an output-reducing increase in price—but could expand to, well, just about whatever the agency deems improper.

Most problematically, Commissioner Rosch has suggested that Section Five could address conduct that has the effect of “reducing consumer choice” without requiring any evidence that conduct actually reduces consumer welfare—a theory that only a vanishingly few commentators (essentially one law professor and one FTC lawyer have written the entire body of scholarship on this topic) support.  Troublingly, “reducing consumer choice” seems to be a euphemism for “harm to competitors, not competition,” where the reduction in choice is the reduction of choice of competitors who may be put out of business by a competitor’s conduct.

Under Section 2 standards, the FTC would have a tough time winning its case.  This is because the agency doesn’t seem to have a theory of harm that reaches consumers—and none of Google’s competitors that have been stoking the flames has offered one.  Instead, all of the propounded theories turn on harm to competitors.  But the U.S. has a long tradition of resisting enforcement based on harm to competitors without a showing of harm to consumers.  If all that were required were harm to competitors, then all pro-competitive conduct would be actionable under the antitrust laws; for what is the aim and effect of competition if not the besting of one’s competitors?  The competitive process is by definition one that can “reduce consumer choice.”  This is why the great economist Joseph Schumpeter famously called the competitive process one of “creative destruction.”

In fact, the theoretical case against Google depends entirely on the ways it may have harmed certain competitors rather than on any evidence of harm to consumer welfare.  For example, Google’s implementation and placement within its organic search results of its own shopping results is alleged to make it difficult for competing product-specific search sites (like Nextag or Amazon, for example) to reach Google’s users.  Leaving aside the weakness of the factual allegation (I challenge you to perform a search for a product on Google that doesn’t offer up a mix of retailers, manufacturers, review sites and multiple product search engine results on the first page), it is hard to see how consumers are harmed here.

On the one hand, users have easy access to competing sites directly from their browser’s address bar and, increasingly importantly, to more persuasive product reviews from friends and colleagues via social media.  In this way even the basic factual predicate is faulty, and it’s not even clear that consumer choice itself is reduced if Nextag is absent from Google searches, as the site can be reached by, among other things, links from reviews, links from friends on social media, other general search engines, and every browser address bar.

On the other hand, users are by no means foreclosed from access to actual products (and there is no evidence that I know of that consumer prices or supply are in any way affected) if any particular product search engine doesn’t appear in the top results.  Placement of Google’s own product search results in fact streamlines consumers’ access, and Google’s comprehensive and effective search engine ensures that its shopping results are probably better than anyone else’s anyway.  The same is true for travel searches, maps, and the range of other complained-of results.  Flight information and reservations, location information and maps are widely available online and off through myriad sources other than Google.

The bottom line is that harm to competitors is at least as consistent with pro-competitive as with anti-competitive conduct, and simply counting the number of firms offering competing choices to consumers that happen to appear in the top few Google search results is no way to infer actual consumer harm.

One of the most important shifts in antitrust over the past 30 years has been the move away from indirect and unreliable proxies of consumer harm toward a more direct, effects-based analysis.  Like the now archaic focus on market concentration in the structure-conduct-performance framework at the core of “old” merger analysis, the consumer choice framework substitutes an indirect and deeply flawed proxy for consumer welfare for assessment of economically relevant economic effects.  By focusing on the number of choices, the analysis shifts attention to the wrong question.

The fundamental question from an antitrust perspective is whether consumer choice is a better predictor of consumer outcomes than current tools allow.   There doesn’t appear to be anything in economic theory to suggest that it would be.  Instead, it reduces competitive analysis to a single attribute of market structure and appears susceptible to interpretations that would sacrifice a meaningful measure of consumer welfare (incorporating assessment of price, quality, variety, innovation and other amenities) on economically unsound grounds.  It is also not the law.

Commissioner Rosch has suggested that the Supreme Court in its 2007 Leegin decision provided a green light for consumer-choice-reducing antitrust theories without a showing of traditional (output-reducing) harm.  But as Josh pointed out, the Ninth Circuit has held (in last year’s Brantley v. NBC Universal decision, which Thom has also blogged about here and here) that Leegin more accurately holds precisely the opposite, and coupled with the Court’s 2006 Independent Ink decision, seems clearly to restrict, rather than authorize, a consumer choice claim:

The Supreme Court has noted that both [reduced choice and increased prices] are “fully consistent with a free, competitive market,” [citing Independent Ink] and are therefore insufficient to establish an injury to competition. Thus even vertical agreements that prohibit retail price reductions and result in higher consumer prices . . . are not unlawful absent a further showing of anticompetitive conduct [citing Leegin].

Modern antitrust analysis, both in scholarship and in the courts, quite properly rejects the reductive and unsupported sort of theories that would undergird a Section 5 case against Google.  That the FTC might have a better chance of winning a Section 5 case, unmoored from the economically sound limitations of Section 2 jurisprudence, is no reason for it to pursue such a case.  Quite the opposite:  When consumer welfare is disregarded for the sake of the agency’s power, it ceases to further its mandate.  No doubt Beth Wilkinson could help make the rhetorical argument for a Section 5 case against Google based on a tenuous consumer choice theory.  But economic substance, not self-aggrandizement by rhetoric, should guide the agency.  Competition and consumers are dramatically ill-served by the latter.

Full disclosure: I worked briefly with Beth Wilkinson at Latham and Watkins.  Further full disclosure: The International Center for Law and Economics, of which I am the Executive Director, has received support to make research grants from Google, among many other companies and individuals.

[Cross-posted at Forbes]