Archives For UMC

Joshua Wright is a Commissioner at the Federal Trade Commission

I’d like to thank Geoff and Thom for organizing this symposium and creating a forum for an open and frank exchange of ideas about the FTC’s unfair methods of competition authority under Section 5.  In offering my own views in a concrete proposed Policy Statement and speech earlier this summer, I hoped to encourage just such a discussion about how the Commission can define its authority to prosecute unfair methods of competition in a way that both strengthens the agency’s ability to target anticompetitive conduct and provides much needed guidance to the business community.  During the course of this symposium, I have enjoyed reading the many thoughtful posts providing feedback on my specific proposal, as well as offering other views on how guidance and limits can be imposed on the Commission’s unfair methods of competition authority.  Through this marketplace of ideas, I believe the Commission can develop a consensus position and finally accomplish the long overdue task of articulating its views on the application of the agency’s signature competition statute.  As this symposium comes to a close, I’d like to make a couple quick observations and respond to a few specific comments about my proposal.

There Exists a Vast Area of Agreement on Section 5

Although conventional wisdom may suggest it will be impossible to reach any meaningful consensus with respect to Section 5, this symposium demonstrates that there actually already exists a vast area of agreement on the subject.  In fact, it appears safe to draw at least two broad conclusions from the contributions that have been offered as part of this symposium.

First, an overwhelming majority of commentators believe that we need guidance on the scope of the FTC’s unfair methods of competition authority.  This is not surprising.  The absence of meaningful limiting principles distinguishing lawful conduct from unlawful conduct under Section 5 and the breadth of the Commission’s authority to prosecute unfair methods of competition creates significant uncertainty among the business community.  Moreover, without a coherent framework for applying Section 5, the Commission cannot possibly hope to fulfill Congress’s vision that Section 5 would play a key role in helping the FTC leverage its unique research and reporting functions to develop evidence-based competition policy.

Second, there is near unanimity that the FTC should challenge only conduct as an unfair method of competition if it results in “harm to competition” as the phrase is understood under the traditional federal antitrust laws.  Harm to competition is a concept that is readily understandable and has been deeply embedded into antitrust jurisprudence.  Incorporating this concept would require that any conduct challenged under Section 5 must both harm the competitive process and harm consumers.  Under this approach, the FTC should not consider non-economic factors, such as whether the practice harms small business or whether it violates public morals, in deciding whether to prosecute conduct as an unfair method of competition.  This is a simple commitment, but one that is not currently enshrined in the law.  By tethering the definition of unfair methods of competition to modern economics and to the understanding of competitive harm articulated in contemporary antitrust jurisprudence, we would ensure Section 5 enforcement focuses upon conduct that actually is anticompetitive.

While it is not surprising that commentators offering a diverse set of perspectives on the appropriate scope of the FTC’s unfair methods of competition authority would agree on these two points, I think it is important to note that this consensus covers much of the Section 5 debate while leaving some room for debate on the margins as to how the FTC can best use its unfair methods of competition authority to complement its mission of protecting competition.

Some Clarifications Regarding My Proposed Policy Statement

In the spirit of furthering the debate along those margins, I also briefly would like to correct the record, or at least provide some clarification, on a few aspects of my proposed Policy Statement.

First, contrary to David Balto’s suggestion, my proposed Policy Statement acknowledges the fact that Congress envisioned Section 5 to be an incipiency statute.  Indeed, the first element of my proposed definition of unfair methods of competition requires the FTC to show that the act or practice in question “harms or is likely to harm competition significantly.”  In fact, it is by prosecuting practices that have not yet resulted in harm to competition, but are likely to result in anticompetitive effects if allowed to continue, that my definition reaches “invitations to collude.”  Paul Denis raises an interesting question about how the FTC should assess the likelihood of harm to competition, and suggests doing so using an expected value test.  My proposed policy statement does just that by requiring the FTC to assess both the magnitude and probability of the competitive harm when determining whether a practice that has not yet harmed competition, but potentially is likely to, is an unfair method of competition under Section 5.  Where the probability of competitive harm is smaller, the Commission should not find an unfair method of competition without reason to believe the conduct poses a substantial harm.  Moreover, by requiring the FTC to show that the conduct in question results in “harm to competition” as that phrase is understood under the traditional federal antitrust laws, my proposal also incorporates all the temporal elements of harm discussed in the antitrust case law and therefore puts the Commission on the same footing as the courts.

Second, both Dan Crane and Marina Lao have suggested that the efficiencies screen I have proposed results in a null (or very small) set of cases because there is virtually no conduct for which some efficiencies cannot be claimed.  This suggestion stems from an apparent misunderstanding of the efficiencies screen.  What these comments fail to recognize is that the efficiencies screen I offer intentionally leverages the Commission’s considerable expertise in identifying the presence of cognizable efficiencies in the merger context and explicitly ties the analysis to the well-developed framework offered in the Horizontal Merger Guidelines.  As any antitrust practitioner can attest, the Commission does not credit “cognizable efficiencies” lightly and requires a rigorous showing that the claimed efficiencies are merger-specific, verifiable, and not derived from an anticompetitive reduction in output or service.  Fears that the efficiencies screen in the Section 5 context would immunize patently anticompetitive conduct because a firm nakedly asserts cost savings arising from the conduct without evidence supporting its claim are unwarranted.  Under this strict standard, the FTC would almost certainly have no trouble demonstrating no cognizable efficiencies exist in Dan’s “blowing up of the competitor’s factory” example because the very act of sabotage amounts to an anticompetitive reduction in output.

Third, Marina Lao further argues that permitting the FTC to challenge conduct as an unfair method of competition only when there are no cognizable efficiencies is too strict a standard and that it would be better to allow the agency to balance the harms against the efficiencies.  The current formulation of the Commission’s unfair methods of competition enforcement has proven unworkable in large part because it lacks clear boundaries and is both malleable and ambiguous.  In my view, in order to make Section 5 a meaningful statute, and one that can contribute productively to the Commission’s competition enforcement mission as envisioned by Congress, the Commission must first confine its unfair methods of competition authority to those areas where it can leverage its unique institutional capabilities to target the conduct most harmful to consumers.  This in no way requires the Commission to let anticompetitive conduct run rampant.  Where the FTC identifies and wants to challenge conduct with both harms and benefits, it is fully capable of doing so successfully in federal court under the traditional antitrust laws.

I cannot think of a contribution the Commission can make to the FTC’s competition mission that is more important than issuing a Policy Statement articulating the appropriate application of Section 5.  I look forward to continuing to exchange ideas with those both inside and outside the agency regarding how the Commission can provide guidance about its unfair methods of competition authority.  Thank you once again to Truth on the Market for organizing and hosting this symposium and to the many participants for their thoughtful contributions.

*The views expressed here are my own and do not reflect those of the Commission or any other Commissioner.

Tad Lipsky is a partner in the law firm of Latham & Watkins LLP.

The FTC’s struggle to provide guidance for its enforcement of Section 5’s Unfair Methods of Competition (UMC) clause (or not – some oppose the provision of forward guidance by the agency, much as one occasionally heard opposition to the concept of merger guidelines in 1968 and again in 1982) could evoke a much broader long-run issue: is a federal law regulating single-firm conduct worth the trouble?  Antitrust law has its hard spots and its soft spots: I imagine that most antitrust lawyers think they can define “naked” price-fixing and other hard-core cartel conduct, and they would defend having a law that prohibits it.  Similarly with a law that prohibits anticompetitive mergers.  Monopolization perhaps not so much: 123 years of Section 2 enforcement and the best our Supreme Court can do is the Grinnell standard, defining monopolization as the “willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”  Is this Grinnell definition that much better than “unfair methods of competition”?

The Court has created a few specific conduct categories within the Grinnell rubric: sham petitioning (objectively and subjectively baseless appeals for government action), predatory pricing (pricing below cost with a reasonable prospect of recoupment through the exercise of power obtained by achieving monopoly or disciplining competitors), and unlawful tying (using market power over one product to force the purchase of a distinct product – you probably know the rest).  These categories are neither perfectly clear (what measure of cost indicates a predatory price?) nor guaranteed to last (the presumption that a patent bestows market power within the meaning of the tying rule was abandoned in 2005).  At least the more specific categories give some guidance to lower courts, prosecutors, litigants and – most important of all – compliance-inclined businesses.  They provide more useful guidance than Grinnell.

The scope for differences of opinion regarding the definition of monopolization is at an historical zenith.  Some of the least civilized disagreements between the FTC and the Antitrust Division – the Justice Department’s visible contempt for the FTC’s ReaLemon decision in the early 1980’s, or the three-Commissioner vilification of the Justice Department’s 2008 report on unilateral conduct – concern these differences.  The 2009 Justice Department theatrically withdrew the 2008 Justice Department’s report, claiming (against clear objective evidence to the contrary) that the issue was settled in its favor by Lorain Journal, Aspen Skiing, and the D.C. Circuit decision in the main case involving Microsoft.

Although less noted in the copious scholarly output concerning UMC, disputes about the meaning of Section 5 are encouraged by the lack of definitive guidance on monopolization.  For every clarification provided by the Supreme Court, the FTC’s room for maneuver under UMC is reduced.  The FTC could not define sham litigation inconsistently with Professional Real Estate Investors v. Columbia Pictures Industries; it could not read recoupment out of the Brooke Group v. Brown & Williamson Tobacco Co. definition of predatory pricing.

The fact remains that there has been less-than-satisfactory clarification of single-firm conduct standards under either statute.  Grinnell remains the only “guideline” for the vast territory of Section 2 enforcement (aside from the specific mentioned categories), especially since the Supreme Court has shown no enthusiasm for either of the two main appellate-court approaches to a general test for unlawful unilateral conduct under Section 2, the “intent test” and the “essential facilities doctrine.”  (It has not rejected them, either.)  The current differences of opinion – even within the Commission itself, leave aside the appellate courts – are emblematic of a similar failure with regard to UMC.  Failure to clarify rules of such universal applicability has obvious costs and adverse impacts: creative and competitively benign business conduct is deterred (with corresponding losses in innovation, productivity and welfare), and the costs, delays, disruption and other burdens of litigation are amplified.  Are these costs worth bearing?

Years ago I heard it said that a certain old-line law firm had tightened its standards of partner performance: whereas formerly the firm would expel a partner who remained drunk for ten years, the new rule was that a partner could remain drunk only for five years.  The antitrust standards for unilateral conduct have vacillated for over a century.  For a time (as exemplified by United States v. United Shoe Machinery Corp.) any act of self-preservation by a monopolist – even if “honestly industrial” – was presumptively unlawful if not compelled by outside circumstances.  Even Grinnell looks good compared to that, but Grinnell still fails to provide much help in most Section 2 cases; and the debate over UMC says the same about Section 5.  I do not advocate the repeal of either statute, but shouldn’t we expect that someone might want to tighten our standards?  Maybe we can allow a statute a hundred years to be clarified through common-law application.  Section 2 passed that milepost twenty-three years ago, and Section 5 reaches that point next year.  We shouldn’t be surprised if someone wants to pull the plug beyond that point.

Paul Denis is a partner at Dechert LLP and Deputy Chair of the Firm’s Global Litigation Practice.  His views do not necessarily reflect those of his firm or its clients.

Deterrence ought to be an important objective of enforcement policy.  Some might argue it should be THE objective.  But it is difficult to know what is being deterred by a law if the agency enforcing the law cannot or will not explain its boundaries.  Commissioner Wright’s call for a policy statement on the scope of Section 5 enforcement is a welcome step toward Section 5 achieving meaningful deterrence of competitively harmful conduct.

The draft policy statement has considerable breadth.  I will limit myself to three concepts that I see as important to its application, the temporal dimension (applicable to both harm and efficiencies), the concept of harm to competition, and the concept of cognizable efficiencies.

Temporal Dimension

Commissioner Wright offers a compelling framework, but it is missing an important element — the temporal dimension.  Over what time period must likely harm to competition be felt in order to be actionable?  Similarly, over what time period must efficiencies be realized in order to be cognizable?  On page 8 of the draft policy statement he notes that the Commission may challenge “practices that have not yet resulted in harm to competition but are likely to result in anticompetitive effects if allowed to continue.”  When must those effects be felt?  How good is the Commission’s crystal ball for predicting harm to competition when the claim is that the challenged conduct precluded some future competition from coming to market?  Doesn’t that crystal ball get a bit murky when you are looking further into the future?  Doesn’t it get particularly murky when the future effect depends on one more other things happening between now and the time of feared anticompetitive effects?

We often hear from the Commission that arguments about future entry are too remote in time (although the bright line test of 2 years for entry to have an effect was pulled from the Horizontal Merger Guidelines).  Shouldn’t similar considerations be applied to claims of harm to competition?  The Commission has engaged in considerable innovation to try to get around the potential competition doctrine developed by the courts and the Commission under Section 7 of the Clayton Act.  The policy statement should consider whether there can be some temporal limit to Section 5 claims.  Perhaps the concept of likely harm to competition could be interpreted in an expected value sense, considering both probability of harm and timing of harm, but it is not obvious to me how that interpretation, whatever its theoretical appeal, could be made operational.  Bright line tests or presumptive time periods may be crude but may also be more easily applied.

Harm to Competition

On the “harm to competition” element, I was left unclear if this was a unified concept or whether there were two subparts to it.  Commissioner Wright paraphrases Chicago Board of Trade and concludes that “Conduct challenged under Section 5 must harm competition and cause an anticompetitive effect.” (emphasis supplied).  He then quotes Microsoft for the proposition that conduct “must harm the competitive process and thereby harm consumers.” (emphasis supplied).  The indicators referenced at the bottom of page 18 of his speech strike me as indicators of harm to consumers rather than indicators of harm to the competitive process.  Is there anything more to “harm to competition” than “harm to consumers?”  If so, what is it?  I think there probably should be something more than harm to consumers.  If I develop a new product that drives from the market all rivals, the effect may be to increase prices and reduce output.  But absent some bad act – some harm to the competitive process – my development of the new product should not expose me to a Section 5 claim or even the obligation to argue cognizable efficiencies.

On the subject of indicators, the draft policy statement notes that perhaps most relevant are price or output effects.  But Commissioner Wright’s speech goes on to note that increased prices, reduced output, diminished quality, or weakened incentives to innovate are also indicators (Speech at 19).  Shouldn’t this list be limited to output (or quality-adjusted output)?  If price goes up but output rises, isn’t that evidence that consumers have been benefitted?  Why should I have to defend myself by arguing that there are obvious efficiencies (as evidenced by the increased output)?  The reference to innovation is particularly confusing. I don’t believe there is a well developed theoretical or empirical basis for assessing innovation. The structural inferences that we make about price (often dubious themselves) don’t apply to innovation.  We don’t really know what leads to more or less innovation.  How is it that the Commission can see this indicator?  What is it that they are observing?

Cognizable Efficiencies

On cognizable efficiencies, there is a benefit in that the draft policy statement ties this element to the analogous concept used in merger enforcement.  But there is a disadvantage in that the FTC staff usually finds that efficiencies advanced by the parties in mergers are not cognizable for one reason or another.  Perhaps most of what the parties in mergers advance is not cognizable.  But it strikes me as implausible that after so many years of applying this concept that the Commission still rarely sees an efficiencies argument that is cognizable.  Are merging parties and their counsel really that dense?  Or is it that the goal posts keeping moving to ensure that no one ever scores?  Based on the history in mergers, I’m not sure this second element will amount to much.  The respondent will assert cognizable efficiencies, the staff will reject them, and we will be back in the litigation morass that the draft policy statement was trying to avoid, limited only by the Commission’s need to show harm to competition.

Regulating the Regulators: Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority

August 1, 2013

Truthonthemarket.com

We’ve had a great day considering the possibility, and potential contours, of guidelines for implementing the FTC’s “unfair methods of competition” (UMC) authority.  Many thanks to our invited participants and to TOTM readers who took the time to follow today’s posts.  There’s lots of great stuff here, so be sure to read anything you missed.  And please continue to comment on posts.  A great thing about a blog symposium is that the discussion need not end immediately.  We hope to continue the conversation over the next few days.

I’m tempted to make some observations about general themes, points of (near) consensus, open questions, etc., but I won’t do that because we’re not quite finished.  We’re expecting to receive an additional post or two tomorrow, and to hear a response from Commissioner Josh Wright.  We hope you’ll join us tomorrow for final posts and Commissioner Wright’s response.

Here are links to the posts so far:

Geoffrey Manne is Lecturer in Law at Lewis & Clark Law School and Executive Director of the International Center for Law & Economics

Josh and Maureen are to be commended for their important contributions to the discussion over the proper scope of the FTC’s Section 5 enforcement authority. I have commented extensively on UMC and Section 5, Josh’s statement, and particularly the problems if UMC enforcement against the use of injunctions to enforce FRAND-encumbered SEPs before (see, for example, here, here and here). I’d like to highlight here a couple of the most important issues from among these comments along with a couple of additional ones.

First, there is really no sensible disagreement over Josh’s harm to competition prong. And to the extent there is disagreement over the proper role for efficiencies, given the existence of compelling arguments that we don’t need Section 5 at all (see, e.g., Joe Sims and James Cooper), what might have seemed like a radical position in Josh’s statement that the FTC enforce UMC only where no efficiencies exist, Josh’s position is actually something of a middle ground. In any case, the first prong of Josh’s statement (the harm to competition requirement) really should attract unanimity, as it essentially has here today, and all of the FTC’s commissioners should come out and say so, even if debate persists over the second prong. This alone would provide an enormous amount of certainty and sense to the FTC’s UMC enforcement decisions.

Second, sensible, predictable guidance is essential. In her recent speech, echoing the fundamental issue laid out so well in Josh’s statement and elaborated on in his accompanying speech, Maureen notes that:

For many decades, the Commission’s exercise of its UMC authority has launched the agency into a sea of uncertainty, much like the agency weathered when using its unfairness authority in the consumer protection area in the 1970s. In issuing our 1980 statement on the concept of “unfair acts or practices” under our consumer protection authority, the Commission acknowledged the uncertainty that had surrounded the concept of unfairness, admitting that “this uncertainty has been honestly troublesome for some businesses and some members of the legal profession.” This characterization just as aptly describes the state of our UMC authority today.

It seems uncontroversial that some guidance is required, and a pseudo-common law of un-adjudicated settlements lacking any doctrinal analysis simply doesn’t provide sufficient grounds to separate the fair from the unfair. (What follows is drawn from our amicus brief in the Wyndham case).

The FTC’s current approach to UMC enforcement denies companies “a reasonable opportunity to know what is prohibited” and thus follow the law. The FTC has previously suggested that its settlements and Congressional testimony offers all the guidance a company would need—see, e.g., here and here, where Chairwoman Ramirez noted that

Section 5 of the FTC Act has been developed over time, case-by-case, in the manner of common law. These precedents provide the Commission and the business community with important guidance regarding the appropriate scope and use of the FTC’s Section 5 authority.

But settlements (and testimony summarizing them) do not in any way constrain the FTC’s subsequent enforcement decisions; they cannot alone be the basis by which the FTC provides guidance on its UMC authority because, unlike published guidelines, they do not purport to lay out general enforcement principles and are not recognized as doing so by courts and the business community. It is impossible to imagine a court faulting the FTC for failure to adhere to a previous settlement, particularly because settlements are not readily generalizable and bind only the parties who agree to them. As we put it in our Wyndham amicus brief:

Even setting aside this basic legal principle, the gradual accretion of these unadjudicated settlements does not solve the vagueness problem: Where guidelines provide cumulative analysis of previous enforcement decisions to establish general principles, these settlements are devoid of doctrinal analysis and offer little more than an infinite regress of unadjudicated assertions.

Rulemaking is generally preferable to case-by-case adjudication as a way to develop agency-enforced law because rulemaking both reduces vagueness and constrains the mischief that unconstrained agency actions may cause. As the Court noted in SEC v. Chenery Corp.,

The function of filling in the interstices of [a statute] should be performed, as much as possible, through this quasi-legislative promulgation of rules to be applied in the future.

Without Article III court decisions developing binding legal principles ,and with no other meaningful form of guidance from the FTC, the law will remain unconstitutionally vague. And the FTC’s approach to enforcement also allows the FTC to act both arbitrarily and discriminatorily—backed by the costly threat of the CID process and Part III adjudication. This means the company faces two practically certain defeats—before the administrative law judge and then the full Commission, each a public relations disaster. The FTC appears to be perfectly willing to use negative media to encourage settlements: The House Oversight Committee is currently investigating whether a series of leaks by FTC staff to media last year were intended to pressure Google to settle the FTC’s antitrust investigation into the company’s business practices.

Third, if the FTC doesn’t act to constrain itself, the courts or Congress will do so, and may do more damage to the FTC’s authority than any self-imposed constraints would.

The power to determine whether the practices of almost any American business are “unfair” methods of competition (particularly if UMC retains the broad reach Tim Wu outlines in his post) makes the FTC uniquely powerful. This power, if it is to be used sensibly, allows the FTC to protect consumers from truly harmful business practices not covered by the FTC’s general consumer protection authority. But without effective enforcement of clear limiting principles, this power may be stretched beyond what Congress intended.

In 1964, the Commission began using its unfairness power to ban business practices that it determined offended “public policy.” Emboldened by vague Supreme Court dicta from Sperry & Hutchinson comparing the agency to a “court of equity,” the Commission set upon a series of rulemakings and enforcement actions so sweeping that the Washington Post dubbed the agency the “National Nanny.” The FTC’s actions eventually prompted Congress to briefly shut down the agency to reinforce the point that it had not intended the agency to operate with such expansive authority. The FTC survived as an institution only because, in 1980, it (unanimously) issued a Policy Statement on Unfairness laying out basic limiting principles to constrain its power and assuring Congress that these principles would be further developed over time—principles that Congress then codified in Section 5(n) of the FTC Act.

And for a time, the Commission used its unfairness power sparingly and carefully, largely out of fear of reawakening Congressional furor. Back in 1980, the FTC itself declared that

The task of identifying unfair trade practices was therefore assigned to the Commission, subject to judicial review, in the expectation that the underlying criteria would evolve and develop over time.

Yet we know little more today than we did in 1980 about how the FTC analyzes each prong of Section 5.

Moreover, courts may not support enforcement given this ambiguity, and in our Wyndham brief we supported Wyndham’s motion to dismiss for exactly this reason (and that was brought under the Commission’s unfairness authority where it even has some guidelines). As we wrote:

Since the problem is a lack of judicial adjudication, it might seem counter-intuitive that the court should dismiss the FTC’s suit on the pleadings. But this is precisely the form of adjudication required: The FTC needs to be told that its complaints do not meet the minimum standards required to establish a violation of Section 5 because otherwise there is little reason to think that the FTC’s complaints will not continue to be the Commission’s primary means of building law (what amounts to “non-law law”). But even if the FTC re-files its unadjudicated complaint to explain its analysis of the prongs of the Unfairness Doctrine, it will not have solved yet another fundamental problem: its failure to provide Wyndham with sufficient guidance ex ante as to what “reasonable” data security practices would be.

The same could be said of the FTC’s UMC enforcement. Section 5(n) applies to UMC, and states that:

The Commission shall have no authority under this section or section 57a of this title to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

Finally, applying this to FRAND-encumbered SEPs, as I have previously discussed, is problematic. As Kobayashi and Wright note in discussing the N-Data case,

[T]he truth is that there was little chance the FTC could have prevailed under the more rigorous Section 2 standard that anchors the liability rule to a demanding standard requiring proof of both exclusionary conduct and competitive harm. One must either accept the proposition that the FTC sought Section 5 liability precisely because there was no evidence of consumer harm or that the FTC believed there was evidence of consumer harm but elected to file the Complaint based only upon the Section 5 theory to encourage an expansive application of that Section, a position several Commissioners joining the Majority Statement have taken in recent years. Neither of these interpretations offers much evidence that N-Data is sound as a matter of prosecutorial discretion or antitrust policy.

None of the FTC’s SEP cases has offered anything approaching proof of consumer harm, and this is where any sensible limiting principles must begin—as just about everyone here today seems to agree. Moreover, even if they did adduce evidence of harm, the often-ignored problem of reverse holdup raises precisely the concern about over-enforcement that Josh’s “no efficiencies” prong is meant to address. Holdup may raise consumer prices (although the FTC has not presented evidence of this), but reverse holdup may do as much or more damage.

The use of injunctions to enforce SEPs increases innovation, the willingness to license generally and the willingness to enter into FRAND commitments in particular–all to the likely benefit of consumer welfare. If the FTC interprets its UMC authority in a way that constrains the ability of patent holders to effectively police their patent rights, then less innovation would be expected–to the detriment of consumers as well as businesses. An unfettered UMC authority will systematically curtail these benefits, quite possibly without countervailing positive effects.

And as I noted in a post yesterday, these costs are real. Innovative technology companies are responding to the current SEP enforcement environment exactly as we would expect them to: by avoiding the otherwise-consumer-welfare enhancing standardization process entirely—as statements made at a recent event demonstrate:

Because of the current atmosphere, Lukander said, Nokia has stepped back from the standardisation process, electing either not to join certain standard-setting organisations (SSOs) or not to contribute certain technologies to these organisations.

Section 5 is a particularly problematic piece of this, and sensible limits like those Josh proposes would go a long way toward mitigating the problem—without removing enforcement authority in the face of real competitive harm, which remains available under the Sherman Act.

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

In this posting, I sketch out a sensible limitation to the FTC’s Section 5 authority.   This domain should be narrow, focusing only on harmful conduct that but for the application of Section 5 would remain un-remedied.

As a threshold matter, the FTC explicitly should renounce its reliance on early Section 5 case law like S&H and Brown Shoe and write from a clean slate.  No serious antitrust enforcer today would consider challenging the conduct at issue in these cases, yet, in each of its recent standard-setting cases, the Commission dutifully invokes the language in S&H and Brown Shoe like a sacred talisman that will conjure the authority to act beyond the “letter and spirit of the antitrust laws.”   This dicta, however, comes from seriously outmoded cases. For example, S&H upheld the Commission’s challenge to the practice of preventing unauthorized green-stamp exchanges, and cited approvingly a Section 5 decision from 1934 that condemned the practice of selling penny candy to children in “break and take” packs, because “it tempted children to gamble and compelled those who would successful compete with Keppel to abandon their scruples by similarly tempting children.”[1]  Brown Shoe and S&H were decided in the era of Schwinn and Utah Pie.  Sherman Act case law has moved light years in the direction of economic literacy since then, and the Commission should recognize that had the Supreme Court entertained Section 5 case in the past forty years, precedents like S&H and Brown Shoe likely would have met fates similar to these outmoded cases.

Second, the FTC should not use Section 5 when the conduct at issue is reachable under the Sherman or Clayton Acts.  Section 5 should never be used as a trump card to reduce the Commission’s burden to show a practice is harmful to consumers. If the Commission cannot carry its burden under the Sherman Act, then presumably the conduct is not likely to be a threat to competition.

Third, the Commission must explain how consumers would benefit from expansion of the antitrust laws beyond the current Sherman Act limits.  Again, merely because there is old Supreme Court language blessing an expansive Section 5 does not ipso facto convert Section 5 enforcement beyond the Sherman Act into a welfare-enhancing exercise.  Accordingly, demonstrable consumer harm must be a necessary condition for invoking Section 5 against a particular practice.

Further, to mitigate the possibility of errors, and hence the probability that FTC action is welfare enhancing, the practice in question should be one that is unlikely to generate cognizable efficiencies.  Thus the FTC should limit itself to the type of conduct that would be subject to per se or a “quick look” condemnation – the type of conduct that can be assessed without an elaborate inquiry into market characteristics.  It should avoid using Section 5 to challenge conduct that would require complex balancing.

How would such a standard treat the FTC’s portfolio of Section 5 cases?  First, ITCs involving small firms would remain.  This conduct is not reachable under Sherman Act and is likely to generate substantial consumer harm.  At the same time, the risk of deterring beneficial conduct is minimal, although as one moves from private solicitations to engage in price fixing or market allocation towards public communications and unilateral conduct, the calculus changes.  Relatedly, involving information sharing seems sensible to retain as well.  Like ITCs, this conduct is not reachable under the Sherman Act (assuming sufficiently low market shares), poses a significant threat to competition, and it is hard to justify on efficiency grounds. Of course, the Sherman Section 1 can reach agreements among competitors to exchange competitively sensitive information, so this genre of cases should be limited to instances where an agreement cannot be shown.  Further, as in the ITC case, the FTC needs to tread carefully as the conduct moves further from direct and private exchanges of future competitive actions toward unilateral public announcements of current and past price and output decisions.  Bolstering the case for the use of Section 5 in these cases is that both ITCs and information sharing cases fall under the broad rubric of incipient harms.  Legislative history and subsequent Supreme pronouncements suggest that Congress intended Section 5 to concern itself with incipiency – a concern lacking in the Sherman Act.

The FTC should abandon its use of Section 5 to reach breaches of FRAND commitments.  Although policies that encourage participation in standard setting are likely to be beneficial to consumers, it is not evident that Section 5 is the best – or even a good – vehicle to address these issues.  That hold-up may result in a higher end price for consumers is insufficient to justify use of Section 5.  There are a host of institutions arguably better suited than the FTC to handle these policy issues, including Article III courts, the ITC, the Patent & Trademark Office, Congress, and self-regulatory bodies. As Commissioner Ohlhausen remarked in her dissent in Bosch, the FTC appears to lack “regulatory humility when it usurps the resolution of FRAND disputes from these other fora.

Finally, deceptive conduct in business-to-business relationships – such as that alleged in Intel or Dell– should be left out of the portfolio entirely.  To the extent that deception gives rise to, or helps maintain, monopoly power, it is reachable under Sherman Section 2.  Otherwise, deception should be left to the domain of contract law or business torts.  Further, these practices should not be challenged under UDAP, which should be confined to deception that directly involves consumers.


[1] S&H, 405 U.S. at 242-43 (quoting FTC v. R.F. Keppel & Bro., Inc., 291 U.S. 304 (1934)).

Marina Lao is Professor of Law at Seton Hall University School of Law

FTC Commissioner Josh Wright’s recent issuance of a proposed policy statement on Section 5 of the FTC Act has reignited the debate on the appropriate scope of the agency’s authority to prosecute “unfair methods of competition” as standalone Section 5 violations.  While the Supreme Court has held, consistent with clear congressional intent, that the FTC’s authority under Section 5 extends to conduct that is well beyond the reach of the Sherman and Clayton Acts, its last decision on the issue (S&H) is over four decades old.  Given that antitrust jurisprudence has changed dramatically since, and all three subsequent circuit court decisions (Boise Cascade, OAG, Ethyl) have gone against the FTC, it is questionable whether today’s Supreme Court would give as expansive a reading to the Commission’s enforcement discretion.  In any event, it is unlikely that the agency would attempt to exercise its full enforcement authority under the elusive terms in the old case law.  Under the circumstances, if the FTC intends to continue to invoke the section to bring standalone cases—and I believe it should–it would be helpful to the antitrust community for the agency to develop standards and to articulate an analytical framework for its application.  Commissioner Wright’s proposed policy statement, and Commissioner Maureen Ohlhausen’s comments on it, are invaluable in re-starting the discussion, which I hope will result in guidelines from the Commission at some point.

Under Commissioner Wright’s proposal, an act or practice must satisfy a two-prong test before the Commission may challenge it as an unfair method of competition: it must harm or is likely to harm competition, and it must not generate cognizable efficiencies.  I find the second element somewhat troubling.

The Cognizable Efficiency Screen.  Under Commissioner Wright’s proposal, cognizable efficiencies operate as a safe harbor: the FTC would not be able to challenge conduct as an unfair method of competition if any cognizable efficiency exists, no matter how slight the efficiency and how substantial the anticompetitive effects.  There is no balancing of the efficiencies against the anticompetitive harm at all, as is called for in the rule of reason under the Sherman Act.  Under this interpretation, Section 5 will effectively set a higher, rather than a lower, bar than the Sherman Act, which seems contrary to the common understanding of the relative standards of the relevant laws.  Though Commissioner Wright does include some useful limiting principles on what efficiencies would be deemed cognizable (conduct-specific, verifiable, and not derived from anticompetitive reductions in output or service), one can still probably come up with a plausible efficiency for almost any business conduct.  If this prong of the test is adopted, the section may prove to be of limited use to the FTC in bringing pure unfair methods of competition cases.

I would prefer a consideration of efficiencies on a sliding scale, as is done in merger analysis.  The greater the harm (or likely harm) to competition, and the greater the deviation from “normally acceptable business behavior” (Ethyl), the more efficiencies must be generated to offset the harm and avoid an injunction under Section 5.  The lesser the competitive harm, the fewer the efficiencies required.

Commissioner Wright provides three rationales for his bright-line efficiencies screen: it would clearly distinguish between acceptable business behavior and unfair methods of competition thereby providing certainty to businesses; it would allocate the agency’s scarce resources toward targeting conduct that is most likely to harm consumers; and it would avoid deterrence of welfare-enhancing conduct.  In my view, none of the three rationales is entirely persuasive.

Of course, a bright-line safe harbor always provides more certainty to a firm than a standard that requires balancing, but there is nothing in the nature of Section 5 enforcement that calls for this degree of certainty.  Remedies for violations of Section 5 are typically limited to injunctions; the FTC does not recover treble damages.  Moreover, the FTC Act cannot be enforced by private parties.  Even if private plaintiffs attempt to build a class-action under the Sherman Act based on a Section 5 adjudication, a finding for the FTC in the ALJ proceeding is not given prima facie effect in the private lawsuit.  Moreover, when the FTC is relying on Section 5 to prohibit conduct outside of the Sherman Act, its findings on fully litigated issues have no preclusive effect whatsoever on the same issues in any follow-on Sherman Act litigation that private parties may attempt to bring.  Therefore, enforcement of pure Section 5 cases does not inflict the kinds of burdens on defendants that are associated with Department of Justice prosecutions under the Sherman Act, for which a higher degree of certainty for businesses may be justified given the collateral consequences.  In the context of Section 5 enforcement, which results only in an injunction, it is not clear why a firm is entitled to know with absolute certainty that, no matter how harmful its conduct may be to consumers, it would be acceptable if it has any efficiencies at all.

To the extent that an FTC adjudication carries no unusual consequences for the firm, relative to other litigation, requiring a balancing of the conduct’s efficiencies against its anticompetitive harms does not subject a firm to an intolerable amount of uncertainty.  Even in those commercial settings in which businesses are usually governed by very specific rules, generalized standards do exist. For example, though the Uniform Commercial Code (covering a wide variety of commercial transactions) consists primarily of very specific rules, it also includes a number of well-accepted overarching fairness-based provisions, such as the requirements of good faith and fair dealing, the doctrine of unconscionability, and standards based on commercial course of dealing and trade usage.  These benchmarks clearly provide a less predictable standard to distinguish between permissible and impermissible conduct than the “uncertain” standard of a rule-of-reason balancing of efficiencies and harms.

As to the second rationale–that an efficiencies screen would focus the FTC’s resources on conduct most likely to harm consumers–I question the premise that anticompetitive conduct with some efficiencies is necessarily less harmful than conduct with no efficiencies.  Consider the following two examples: First, assume, as in Commissioner Wright’s Example 6, that Firm A makes an ex ante commitment on licensing to an SSO as a condition for the adoption of its IP as part of the standard; Firm A later sells its patent to Firm B which announces that it will no longer license under those terms.  Assume further that Firm B is able to show some efficiency gain from its breach of its predecessor’s commitment, but the consumer harm from the breach may be substantial.  (Reneging on Firm A’s commitment undermines the integrity of the standard-setting process, which could reduce the incentives to participate in the process or to implement the standard because of concerns of patent hold-ups, and ultimately affect consumers who would lose some of the benefits of interoperability which comes from standard setting.)  Under the proposed efficiency screen, the FTC cannot challenge the conduct, regardless of the magnitude and nature of the consumer harm.

Second, assume, as in Commissioner Wright’s Example 2, that Firm A invites Firm B to fix prices, but Firm B declines.  Assume further that Firms A and B operate in an industry that has a competitive culture with no history of collusion.  Thus, while the invitation to collude meets the harm to competition element of the test, the risk of competitive harm may be relatively small.  Though the invitation to collude has no efficiencies, whereas Firm B’s breach in the preceding example is found to have some efficiencies, the conduct in the preceding example is likely to cause more consumer harm than the invitation to collude under my facts.

Rather than set a categorical rule which allows the FTC to only challenge competitively harmful conduct with zero efficiencies, why not allow the FTC to make a judgment based on the evidence of harms and efficiencies, if any, that is available?

As for the third rationale, while the need to avoid false positives in ambiguous situations is an important consideration, so too is the need to avoid false negatives.  As I’ve suggested earlier, the social cost of a false positive is much smaller in a pure Section 5 case than in a Sherman Act action.  There is no threat of treble damages, or of automatic follow-on class action suits (that usually follow a successful Department of Justice antitrust action) for which the liability finding in the DOJ action would have a prima facie effect.  Even if a practice is erroneously identified as an unfair method of competition under Section 5—e.g., a delivered pricing term that, though anticompetitive, had efficiencies that were insufficiently recognized and, thus, wrongly enjoined–the cost of the false positive would be that the market may be deprived of the enjoined practice, and firms may have to look to an alternative practice.  But that is probably not a major social cost as firms are generally adept at finding substitutes.

Conduct Must Harm Competition:

Anticompetitive Effect as Definition of Harm to Competition.   I agree with Commissioner Wright that conduct challenged under Section 5 must have an anticompetitive effect; that is, “it must harm the competitive process and thereby harm consumers,” (Microsoft); harm to competitors alone will not suffice.  One difficulty lies in defining harm to the “competitive process,” which is susceptible to different interpretations.  To me, injury to the competitive process is different than having an effect on price or output, or even diminished quality.  It is less measurable, and the ultimate effect on consumers less obvious.  What would be considered indicia of harm to the competitive process and what would not?  Today, there are many markets with minimal or no price competition, or where firms compete primarily through creativity or product development.  In these types of markets, a price and output measure would be inappropriate; perhaps any forthcoming Guidelines could provide more guidance in this regard.

Anticompetitive Effect/CausationCausation is often intertwined with the concept of anticompetitive effect.  In deciding section 2 cases, courts have sometimes held that there is no anticompetitive effect unless the plaintiff can demonstrate that, absent the defendant’s conduct, the “bad” market situation would not have occurred.  For example, assume that a firm deceptively fails to disclose its patents in technologies to an SSO and the technologies were subsequently included by the SSO in industry standards.  However, there was an insufficient showing that, but for the firm’s deception, the SSO would not have included the technologies or would have imposed limits on the patent owner’s licensing fees as a condition for inclusion.  In that situation, courts have held that anticompetitive effect was not shown under Section 2 of the Sherman Act (Rambus).  Even assuming that this restrictive analysis of effect/causation is required under Section 2, though I don’t believe it is, it would seem appropriate to relax this requirement in a pure Section 5 case for the reasons that I have discussed: the absence of collateral impact of a Section 5 violation and the limited remedies that the FTC may seek.  It should be sufficient in this situation to show that the deceptive failure to disclose to the SSO the patents underlying the technology under consideration undermined and harmed the standard-setting processes.  And it should be unnecessary for the FTC to demonstrate that the firm’s deception enabled it to either acquire a monopoly or to avoid the imposition of patent licensing fee limits by the SSO.

Examples of Conduct that is Likely to Harm Competition.  I like both broad categories of conduct that Commissioner Wright described as likely to harm competition under Section 5: invitations to collude; and incipient Section 2 violations—conduct “to acquire market power that does not yet arise to the level of monopoly power” required under Section 2.

With respect to the category of incipient Section 2 violations, I would prefer a slightly broader reach to cover situations where a firm with monopoly power in one market uses that power in a second (complementary or collateral) market and causes considerable harm in the collateral market; however, the firm is unlikely to attain a monopoly in the second market but merely seeks to raise its rivals’ costs.  This claim would clearly not constitute a Section 2 violation today.  I believe that it could fit under Commissioner Wright’s second broad category of conduct likely to harm competition, provided that there is good evidence that competitive harm in the collateral market is likely.

Parallel exclusion, described by Professors Scott Hemphill and Tim Wu in a recent article, could constitute an additional broad category of conduct that could be appropriately addressed under Section 5.  As Professors Hemphill and Wu have explained, the economic effects of parallel exclusion by oligopolists are quite similar to that of exclusion by a monopolist.  Yet, neither section 1 nor section 2 of the Sherman Act can reach that conduct: the agreement element is absent, precluding a section 1 violation; and each firm does not have the requisite market share to meet the monopoly power requirement of section 2 though they collectively share a monopoly, thus precluding a section 2 violation.

Thom Lambert is Wall Family Foundation Chair in Corporate Law & Governance and Professor of Law at University of Missouri School of Law

In the last few weeks, two members of the FTC—Commissioners Josh Wright and Maureen Ohlhausen—have staked largely consistent positions on guidelines for implementation of the Commission’s “unfair methods of competition” (UMC) authority.  Their statements make two points that are, in my opinion, no-brainers.  Where the statements conflict, they raise an issue worthy of significant contemplation.  I’ll be interested to hear others’ thoughts on that matter.

First, the no-brainers.

No-Brainer #1:  We Need Guidance on the Scope of the FTC’s UMC Authority.

Ours is a government of laws and not of men.  That means, in the words of F. A. Hayek, “that government in all its actions [must be] bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”  According to the classic statement by A.V. Dicey, the “Rule of Law” means “the absolute supremacy or predominance of regular law as opposed to arbitrary power, and excludes the existence of arbitrariness, of prerogative, or even of wide discretionary authority on the part of government.”  As it stands, Section 5’s prohibition of “unfair methods of competition” is so indeterminate and discretionary that it can hardly constitute law.  The text itself is woefully deficient for, as the Second Circuit observed in analyzing the provision, “[t]he term ‘unfair’ is an elusive concept, often depending upon the eye of the beholder.”  Nor has the caselaw on Section 5 developed in way that lets business planners know what they must and must not do to avoid liability.  The sort of guidance Commissioners Wright and Ohlhausen are proposing, then, is badly needed.

No-Brainer #2:  The FTC Should Not Challenge a Practice Under Its UMC Authority Unless Doing So Is Necessary to Avert an Actual or Likely Harm to Competition.

Commissioners Wright and Ohlhausen agree that for the FTC to bring a “stand-alone” Section 5 action (i.e., one not simply alleging behavior that violates the Sherman Act), the challenged practice must result in, or likely result in, significant harm to competition.  Such harm consists of a reduction in overall market output, usually evinced by an increase in price.  It does not result from mere harm to competitors.  Thus, doing a terrible, horrible, no good, very bad thing to your competitor—while perhaps tortious—would not constitute an unfair method of competition if the action did not, and was not likely to, reduce overall market output.

The reason for this requirement, which may sound harsh and extreme to non-antitrusters, is simple:  Business conduct that hurts competitors without reducing overall market output does not usually leave market output unchanged; rather, it usually enhances market output and thereby benefits consumers.  If the FTC seeks to condemn competitor-harming conduct that doesn’t harm competition, it will likely end up hurting consumers.  In the Brown Shoe case, for example, the FTC condemned exclusive dealing by a shoe manufacturer where harm to competition was unrealistic but competitors were injured.  The effect was to shut down more efficient distribution practices and thereby hurt consumers.  If the FTC is to remain a consumer protection agency, it must limit its UMC challenges to acts causing or threatening significant competitive injury.

That brings us to a somewhat difficult policy question.

The Contestable Issue:  How Broad Should the Safe Harbor for Efficiency-Creating Conduct Be?

Commissioner Wright has taken the position that a second prerequisite to a stand-alone UMC challenge should be that the practice at issue lacks any cognizable efficiencies.  Commissioner Ohlhausen, by contrast, would permit a challenge (assuming her other pre-requisites, which are largely subsumed in Commissioner Wright’s first pre-requisite, are satisfied) when the practice at issue either creates no cognizable efficiencies or “results in harm to competition that is disproportionate to its benefits to consumers and to the economic benefits to the defendant, exclusive of the benefits that may accrue from reduced competition.”  Ohlhausen is careful to emphasize that she is not proposing “to balance precisely” procompetitive versus anticompetitive effects.  Instead, the latter prong of her disjunctive pre-requisite is satisfied only if the surplus lost from reduced output significantly outweighs the efficiencies created by the practice.

As a practical matter, the dispute here may reduce to, “What must a firm show to come within a safe harbor from stand-alone UMC liability?”  According to Commissioner Wright, establishing cognizable efficiencies from the practice at issue will keep you safe.  Commissioner Ohlhausen would require a firm to establish such efficiencies and show that they are not significantly outweighed by lost surplus from reduced output.

So whose approach is better?  I’ll confess that I’ve gone back and forth on that question over the last few days.  On the one hand, Commissioner Wright’s position seems awfully pro-defendant: a tiny increase in productive efficiency stemming from a practice could insulate the practice even if it occasioned huge allocative inefficiencies.  Do we really need so expansive a safe harbor here, given that UMC judgments occasion only injunctive relief (cease and desist orders) and cannot give rise to follow-on private treble damages actions?  On the other hand, Commissioner Ohlhausen’s safe harbor seems pretty unreliable—after-the-fact balancing of competitive effects is always tricky—and there are reasons to worry about follow-on private litigation and the chilling effect it may create.  (For example, as Commissioner Kovacic observed in his N-Data dissent, many states have “little FTC Acts,” a number of which are privately enforceable in treble damages actions.)

At this point, I’m inclined to side with Commissioner Wright on the scope of the safe harbor.  There are few practices that occasion genuine harm to competition but are not covered by the Sherman and Clayton Acts, and most of those—e.g., attempts to collude, market power-creating naked acts of exclusion by firms previously lacking market power—occasion no efficiencies and thus would not come within Commissioner Wright’s broader safe harbor.  See Wright’s Examples 2, 3, 4, 5, 7, 8.  I can think of only one obvious category of conduct that (1) harms competition, (2) is not covered by the Sherman or Clayton Act, and (3) would fall within Commissioner Wright’s, but not Commissioner Ohlhausen’s, safe harbor: oligopolistic coordination using facilitating devices that were adopted unilaterally.  Several prominent antitrust scholars have argued that such conduct should be illegal, see, e.g., Richard A. Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562 (1969); Herbert Hovenkamp, The Antitrust Enterprise 32-35, 128-34 (2005), and Professor Hovenkamp has argued that it should be policed under the FTC’s UMC authority.  See Herbert Hovenkamp, The Federal Trade Commission and the Sherman Act, 62 Fla. L. Rev. 871, 879-82 (2010).  In light of the judicial hostility toward that approach as evidenced in cases such as Ethyl and Boise Cascade, however, I would not be inclined to exchange Commissioner Wright’s broader safe harbor for Commissioner Ohlhausen’s narrower one in the hopes of pursuing such facilitating devices.

Of course, I may be overlooking other categories of anticompetitive conduct that are not covered by the Sherman and Clayton Acts and would be condemned under Commissioner Ohlhausen’s, but not Commissioner Wright’s, approach.  If anyone can think of something obvious, please let me know.

Regardless of how we resolve the controversy over the scope of any “efficiencies safe harbor,” Commissioners Wright and Ohlhausen deserve our thanks and admiration for pressing a long overdue issue and working to improve the state of American competition law.  I look forward to hearing others’ thoughts on the commissioners’ proposals.

Regulating the Regulators: Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority

August 1, 2013

Truthonthemarket.com

Welcome!

We’re delighted to kick off our one-day blog symposium on the FTC’s unfair methods of competition (UMC) authority under Section 5 of the FTC Act.

Last month, FTC Commissioner Josh Wright began a much-needed conversation on the FTC’s UMC authority by issuing a proposed policy statement attempting to provide some meaningful guidance and limits to the FTC’s authority. Meanwhile, last week Commissioner Maureen Ohlhausen offered her own take on the issue, echoing many of Josh’s points and further extending the conversation. Considerable commentary—and even congressional attention—has been directed to the absence of UMC authority limits, the proper scope of that authority, and its significance for the businesses regulated by the Commission.

Section 5 of the FTC Act permits the agency to take enforcement actions against companies that use “unfair or deceptive acts or practices” or that employ “unfair methods of competition.” The Act doesn’t specify what these terms mean, instead leaving that determination to the FTC itself.  In the 1980s, under intense pressure from Congress, the Commission established limiting principles for its unfairness and deception authorities. But today, coming up on 100 years since the creation of the FTC, the agency still hasn’t defined the scope of its UMC authority, instead pursuing enforcement actions without any significant judicial, congressional or even self-imposed limits. And in recent years the Commission has seemingly expanded its interpretation of its UMC authority, bringing a string of standalone Section 5 cases (including against Intel, Rambus, N-Data, Google and others), alleging traditional antitrust injury but avoiding the difficulties of pursuing such actions under the Sherman Act (or, in a few cases, bringing separate claims under both Section 5 and Section 2).

We hope this symposium will provide important insights and stand as a useful resource for the ongoing discussion.

We’ve lined up an outstanding and diverse group of scholars and practitioners to participate in the symposium.  They include:

  • David Balto, Law Offices of David Balto [1] [2]
  • Terry Calvani, Freshfields [1]
  • James Cooper, GMU Law & Economics Center [1] [2]
  • Dan Crane, Michigan Law [1]
  • Paul Denis, Dechert [1]
  • Angela Diveley, Freshfields [1]
  • Gus Hurwitz, Nebraska Law [1] [2]
  • Thom Lambert, Missouri Law [1]
  • Marina Lao, Seton Hall Law [1]
  • Tad Lipsky, Latham & Watkins [1]
  • Geoffrey Manne, Lewis & Clark Law/ICLE [1]
  • Joe Sims, Jones Day [1]
  • Josh Wright, FTC [1]
  • Tim Wu, Columbia Law [1]

The first of the participants’ initial posts will appear momentarily, with additional posts appearing throughout the day. We hope to generate a lively discussion, and expect some of the participants to offer follow up posts as well as comments on their fellow participants’ posts—please be sure to check back throughout the day and be sure to check the comments. We hope our readers will join us in the comments, as well.

Once again, welcome!

On July 24, the Federal Trade Commission issued a modified complaint and consent order in the Google/Motorola case. The FTC responded to the 25 comments on the proposed Order by making several amendments, but the Final Order retains the original order’s essential restrictions on injunctions, as the FTC explains in a letter accompanying the changes. With one important exception, the modifications were primarily minor changes to the required process by which Google/Motorola must negotiate and arbitrate with potential licensees. Although an improvement on the original order, the Complaint and Final Order’s continued focus on the use of injunctions to enforce SEPs presents a serious risk of consumer harm, as I discuss below.

The most significant modification in the new Complaint is the removal of the original UDAP claim. As suggested in my comments on the Order, there is no basis in law for such a claim against Google, and it’s a positive step that the FTC seems to have agreed. Instead, the FTC ended up resting its authority solely upon an Unfair Methods of Competition claim, even though the Commission failed to develop any evidence of harm to competition—as both Commissioner Wright and Commissioner Ohlhausen would (sensibly) require.

Unfortunately, the FTC’s letter offers no additional defense of its assertion of authority, stating only that

[t]he Commission disagrees with commenters who argue that the Commission’s actions in this case are outside of its authority to challenge unfair methods of competition under Section 5 and lack a limiting principle. As reflected in the Commission’s recent statements in Bosch and the Commission’s initial Statement in this matter, this action is well within our Section 5 authority, which both Congress and the Supreme Court have expressly deemed to extend beyond the Sherman Act.

Another problem, as noted by Commissioner Ohlhausen in her dissent from the original order, is that

the consent agreement creates doctrinal confusion. The Order contradicts the decisions of federal courts, standard-setting organizations (“SSOs”), and other stakeholders about the availability of injunctive relief on SEPs and the meaning of concepts like willing licensee and FRAND.

The FTC’s statements in Bosch and this case should not be thought of as law on par with actual court decisions unless we want to allow the FTC to determine the scope of its own authority unilaterally.

This is no small issue. On July 30, the FTC used the Google settlement, along with the settlement in Bosch, as examples of the FTC’s authority in the area of policing SEPs during a hearing on the issue. And as FTC Chairwoman Ramirez noted in response to questions for the record in a different hearing earlier in 2013,

Section 5 of the FTC Act has been developed over time, case-by-case, in the manner of common law. These precedents provide the Commission and the business community with important guidance regarding the appropriate scope and use of the FTC’s Section 5 authority.

But because nearly all of these cases have resulted in consent orders with an administrative agency and have not been adjudicated in court, they aren’t, in fact, developed “in the manner of common law.” Moreover, settlements aren’t binding on anyone except the parties to the settlement. Nevertheless, the FTC has pointed to these sorts of settlements (and congressional testimony summarizing them) as sufficient guidance to industry on the scope of its Section 5 authority. But as we noted in our amicus brief in the Wyndham litigation (in which the FTC makes this claim in the context of its “unfair or deceptive acts or practices” authority):

Settlements (and testimony summarizing them) do not in any way constrain the FTC’s subsequent enforcement decisions; they cannot alone be the basis by which the FTC provides guidance on its unfairness authority because, unlike published guidelines, they do not purport to lay out general enforcement principles and are not recognized as doing so by courts and the business community.

Beyond this more general problem, the Google Final Order retains its own, substantive problem: considerable constraints upon injunctions. The problem with these restraints are twofold: (1) Injunctions are very important to an efficient negotiation process, as recognized by the FTC itself; and (2) if patent holders may no longer pursue injunctions consistently with antitrust law, one would expect a reduction in consumer welfare.

In its 2011 Report on the “IP Marketplace,” the FTC acknowledged the important role of injunctions in preserving the value of patents and in encouraging efficient private negotiation.

Second, the credible threat of an injunction deters infringement in the first place. This results from the serious consequences of an injunction for an infringer, including the loss of sunk investment. Third, a predictable injunction threat will promote licensing by the parties. Private contracting is generally preferable to a compulsory licensing regime because the parties will have better information about the appropriate terms of a license than would a court, and more flexibility in fashioning efficient agreements. But denying an injunction every time an infringer’s switching costs exceed the economic value of the invention would dramatically undermine the ability of a patent to deter infringement and encourage innovation. For this reason, courts should grant injunctions in the majority of cases.

Building on insights from Commissioner Wright and Professor Kobayashi, I argued in my comments that injunctions create conditions that

increase innovation, the willingness to license generally and the willingness to enter into FRAND commitments in particular–all to the likely benefit of consumer welfare.

Monopoly power granted by IP law encourages innovation because it incentivizes creativity through expected profits. If the FTC interprets its UMC authority in a way that constrains the ability of patent holders to effectively police their patent rights, then less innovation would be expected–to the detriment of consumers as well as businesses.

And this is precisely what has happened. Innovative technology companies are responding to the current SEP enforcement environment exactly as we would expect them to—by avoiding the otherwise-consumer-welfare enhancing standardization process entirely.

Thus, for example, at a recent event sponsored by Global Competition Review (gated), representatives from Nokia, Ericsson, Siemens and Qualcomm made no bones about the problems they see and where they’re headed if they persist:

[Jenni Lukander, global head of competition law at Nokia] said the problem of “free-riding”, whereby technology companies adopt standard essential patents (SEPs) without complying with fair, reasonable and non-discriminatory (FRAND) licensing terms was a “far bigger problem” than patent holders pursuing injunctive relief. She said this behaviour was “unsustainable”, as it discouraged innovation and jeopardised standardisation.

Because of the current atmosphere, Lukander said, Nokia has stepped back from the standardisation process, electing either not to join certain standard-setting organisations (SSOs) or not to contribute certain technologies to these organisations.

The fact that every licence negotiation takes places “under the threat of injunction litigation” is not a sign of failure, said Lukander, but an indicator of the system working “as it was designed to work”.

This, said [Dan Hermele, director of IP rights and licensing for Qualcomm Europe], amounted to “reverse hold-up”. “The licensor is pressured to accept less than reasonable licensing terms due to the threat of unbalanced regulatory intervention,” he said, adding that the trend was moving to an “infringe and litigate model”, which threatened to harm innovators, particularly small and medium-sized businesses, “for whom IPR is their life blood”.

Beat Weibel, chief IP counsel at Siemens, said…innovation can only be beneficial if it occurs within a “safe and strong IP system,” he said, where a “willing licensee is favoured over a non-willing licensee” and the enforcer is not a “toothless tiger”.

It remains to be seen if the costs to consumers from firms curtailing their investments in R&D or withholding their patents from the standard-setting process will outweigh the costs (yes, some costs do exist; the patent system is not frictionless and it is far from perfect, of course) from the “over”-enforcement of SEPs lamented by critics. But what is clear is that these costs can’t be ignored. Reverse hold-up can’t be wished away, and there is a serious risk that the harm likely to be caused by further eroding the enforceability of SEPs by means of injunctions will significantly outweigh whatever benefits it may also confer.

Meanwhile, stay tuned for tomorrow’s TOTM blog symposium on “Regulating the Regulators–Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority” for much more discussion on this issue.