Background

Recently, an increasing amount of scholarship has focused on the excessive costs of occupational licensing, which too frequently serves merely as a protectionist state-created barrier to entry that arbitrarily prevents individuals (and, in particular, low-income individuals) from earning a living in their chosen field.  A 2015 White House report explains that occupational licensing restrictions have rapidly proliferated over the last six decades.  It notes that, while carefully crafted licensing schemes “can benefit consumers through higher quality services and improved health and safety standards”, too often licensing has been imposed without regard to its economic costs, in a manner that harms both workers and consumers:

Over the past several decades, the share of U.S. workers holding an occupational license has grown sharply.  When designed and implemented carefully, licensing can offer important health and safety protections to consumers, as well as benefits to workers. However, the current licensing regime in the United States also creates substantial costs, and often the requirements for obtaining a license are not in sync with the skills needed for the job. There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across State lines. Too often, policymakers do not carefully weigh these costs and benefits when making decisions about whether or how to regulate a profession through licensing. In some cases, alternative forms of occupational regulation, such as State certification, may offer a better balance between consumer protections and flexibility for workers. . . .

[What’s worse,] [m]ore than one-quarter of U.S. workers now require a license to do their jobs, with most of these workers licensed by the States. The share of workers licensed at the State level has risen five-fold since the 1950s.  About two-thirds of this change stems from an increase in the number of professions that require a license, with the remaining growth coming from changing composition of the workforce. . . .

Research shows that by imposing additional requirements on people seeking to enter licensed professions, licensing can reduce total employment in the licensed professions.  Estimates find that unlicensed workers earn 10 to 15 percent lower wages than licensed workers with similar levels of education, training, and experience.  Licensing laws also lead to higher prices for goods and services, with research showing effects on prices of between 3 and 16 percent. Moreover, in a number of other studies, licensing did not increase the quality of goods and services, suggesting that consumers are sometimes paying higher prices without getting improved goods or services.

Articles by Heritage Foundation scholars have explored the public choice explanations for licensing schemes (see here for a fulsome treatment of this topic by Paul Larkin) and discussed possible constitutional (equal protection) and antitrust theories that might be deployed to challenge blatantly protectionist licensing schemes (for example, see here for a Legal Memorandum by Paul Larkin and me and see here for a law review commentary by me).

Lawsuits challenging purely protectionist occupational licensing restraints certainly merit being pursued.   Realistically, however, such suits can at best only slightly constrain harmful occupational licensing, given the costly, case-by-case nature of litigation and doctrinal limitations on the application of antitrust and constitutional theories.  The widespread repeal (or substantial reform) of harmful state occupational licensing laws is the ideal long-term solution to the problem, but political constraints (the self-interested coalitions representing occupational cartels may be expected to oppose such change) suggest that state legislative reform will move slowly in the near term.

There are, however, two very recent legislative developments that give cause for hope – the public release of the Allow Act and the Model Occupational Board Reform Act.  Properly publicized, they may become the focus of reform discussions and prove to be harbingers of future legislative initiatives aimed at reining in excessive licensing restraints.

The Allow Act

The Allow Act, co-sponsored by Senators Mike Lee (R-UT) and Ben Sasse (R-Neb) and introduced in the Senate on July 12 (they also participated in a program at Heritage that day discussing the issue), “would make it easier for many Americans to begin work in their chosen field by reducing unnecessary licensing burdens.”  The Allow Act has three principal features, summarized by Senator Lee:

The Alternatives to Licensing that Lower Obstacles to Work (ALLOW) Act reduces the anticompetitive impact of unjustifiable licensing requirements by making targeted changes to licensure policies.  The Act:

Serves as a model for reform in the states by limiting the creation of occupational license requirements in the District [of Columbia] only to those circumstances in which it is the least restrictive means of protecting the public health, safety or welfare, and makes it District policy to limit the enforcement of a license requirement only to the sale of those goods and services expressly listed in the statute or regulations defining an occupation’s “scope of practice.”  Promotes less restrictive requirements, such as public and private certification.  Provides for the creation of a dedicated office in the District Attorney General’s Office, or within each relevant District agency, responsible for the active supervision of occupational boards.  Provides for legislative oversight, with a “sunrise review” when considering new proposed licensing requirements to evaluate the possible negative impacts on workers and economic growth, along with possible less restrictive regulations. And provides legislative “sunset review,” which applies the same analysis of net benefits and possible alternatives to existing occupational licensing laws in the District, with the goal of reviewing all such laws and proposing appropriate modifications over a five year period.

Harmonizes occupational entry requirements by providing endorsement on military bases of occupational licenses and public certifications issued in any state in order to promote workforce attachment for military spouses who are disproportionately affected by the patchwork of state licensing laws as they move with their enlisted spouse from post-to-post.  This approach will increase workforce mobility and labor market efficiency.

Emphasizes certification as an alternative approach to licensure by eliminating the need to obtain prior government approvals to speak about our Nation’s military, political and cultural history while offering tour guide services for a fee within National Military Parks and Battlefields, or the National Mall and Memorial Parks.

The Model Occupational Board Reform Act

The Model Occupational Board Reform Act (Model Act), developed by the American Legislative Exchange Council, has four key features:

The State will use the least restrictive regulation necessary to protect consumers from present, significant and substantiated harms that threaten public health and safety.

An occupational regulation may be enforced against an individual only to the extent the individual sells goods and services that are included explicitly in the statute that defines the occupation’s scope of practice.

The attorney general will establish an office of supervision of occupational boards. The office is responsible for actively supervising state occupational boards.

The legislature will establish a position in its nonpartisan research staff to analyze occupational regulations. The position is responsible for reviewing legislation and laws related to occupational regulations.

In short, the Model Act enlists state attorney generals’ offices (which typically also enforce state antitrust laws and have some familiarity with justifications for promoting competition) in actively supervising state occupation licensing boards.  This is in harmony with the Supreme Court’s 2015 North Carolina Dental Board decision, which upheld antitrust scrutiny of boards that are not actively supervised.  The Model Act also places an onus on state regulators to curb the breadth of the application of licensing rules, and to specially scrutinize new laws that affect occupational licensing.  Overall, then, the Model Act takes constructive steps to limit the scope of harmful occupational licensing restrictions, in a manner that may prove politically more feasible than wholesale statutory repeal.  (Another hopeful sign is the recent introduction of various types of occupational reform proposals in various states.)

Conclusion

Although the plague of proliferating harmful protectionist occupational licensing restrictions is still with us, we may be approaching a turning point.  Recent scholarship on the substantial harm of such restraints, and, in particular, their burden on lower income Americans seeking employment, has come to the attention of policymakers.  As a result, legislative efforts to curb the overregulation of occupational licensing are being developed and are receiving public attention.  Although we are far from winning the war on welfare-inimical occupational licensing, perhaps this is “the end of the beginning” of the public policy struggle.

In recent years much ink has been spilled on the problem of online privacy breaches, involving the unauthorized use of personal information transmitted over the Internet.  Internet privacy concerns are warranted.  According to a 2016 National Telecommunications and Information Administration survey of Internet-using households, 19 percent of such households (representing nearly 19 million households) reported that they had been affected by an online security breach, identity theft, or similar malicious activity during the 12 months prior to the July 2015 survey.  Security breaches appear to be more common among the most intensive Internet-using households – 31 percent of those using at least five different types of online devices suffered such breaches.  Security breach statistics, of course, do not directly measure the consumer welfare losses attributable to the unauthorized use of personal data that consumers supply to Internet service providers and to the websites which they visit.

What is the correct overall approach government should take in dealing with Internet privacy problems?  In addressing this question, it is important to focus substantial attention on the effects of online privacy regulation on economic welfare.  In particular, policies should aim at addressing Internet privacy problems in a manner that does not unduly harm the private sector or deny opportunities to consumers who are not being harmed.  The U.S. Federal Trade Commission (FTC), the federal government’s primary consumer protection agency, has been the principal federal regulator of online privacy practices.  Very recently, however, the U.S. Federal Communications Commission (FCC) has asserted the authority to regulate the privacy practices of broadband Internet service providers, and is proposing an extremely burdensome approach to such regulation that would, if implemented, have harmful economic consequences.

In March 2016, FTC Commissioner Maureen Ohlhausen succinctly summarized the FTC’s general approach to online privacy-related enforcement under Section 5 of the FTC Act, which proscribes unfair or deceptive acts or practices:

[U]nfairness establishes a baseline prohibition on practices that the overwhelming majority of consumers would never knowingly approve. Above that baseline, consumers remain free to find providers that match their preferences, and our deception authority governs those arrangements. . . .  The FTC’s case-by-case enforcement of our unfairness authority shapes our baseline privacy practices.  Like the common law, this incremental approach has proven both relatively predictable and adaptable as new technologies and business models emerge.

In November 2015, Professor (and former FTC Commissioner) Joshua Wright argued the FTC’s approach is insufficiently attuned to economic analysis, in particular, the “tradeoffs between the value to consumers and society of the free flow and exchange of data and the creation of new products and services on the one hand, against the value lost by consumers from any associated reduction in privacy.”  Nevertheless, on balance, FTC enforcement in this area generally is restrained and somewhat attentive to cost-benefit considerations.  (This undoubtedly reflects the fact (see my Heritage Legal Memorandum, here) that the statutory definition of “unfairness” in Section 5(n) of the FTC Act embodies cost-benefit analysis, and that the FTC’s Policy Statement on Deception requires detriment to consumers acting reasonably in the circumstances.)  In other words, federal enforcement policy with respect to online privacy, although it could be improved, is in generally good shape.

Or it was in good shape.  Unfortunately, on April 1, 2016, the Federal Communications Commission (FCC) decided to inject itself into “privacy space” by issuing a Notice of Proposed Rulemaking entitled “Protecting the Privacy of Customers of Broadband and Other Telecommunications Services.”  This “Privacy NPRM” sets forth detailed rules that, if adopted, would impose onerous privacy obligations on “Broadband Internet Access Service” (BIAS) Providers, the firms that provide the cables, wires, and telecommunications equipment through which Internet traffic flows – primarily cable (Comcast, for example) and telephone (Verizon, for example) companies.   The Privacy NPRM reclassifies BIAS provision as a “common carrier” service, thereby totally precluding the FTC from regulating BIAS Providers’ privacy practices (since the FTC is barred by law from regulating common carriers, under 15 U.S. Code § 45(a)(2)).  Put simply, the NPRM required BIAS Providers “to obtain express consent in advance of practically every use of a customer[s] data”, without regard to the effects of such a requirement on economic welfare.  All other purveyors of Internet services, however – in particular, the large numbers of “edge providers” that generate Internet content and services (Google, Amazon, and Facebook, for example) – are exempt from the new FCC regulatory requirements.  In short, the Privacy NPRM establishes a two-tier privacy regulatory system, with BIAS Providers subject to tight FCC privacy rules, while all other Internet service firms are subject to more nuanced, case-by-case, effects-based evaluation of their privacy practices by the FTC.  This disparate regulatory approach is peculiar (if not wholly illogical), since edge providers in general have greater access than BIAS Providers to consumers’ non-public information, and thus may appear to pose a greater threat to consumers’ interest in privacy.

The FCC’s proposal to regulate BIAS Providers’ privacy practices represents bad law and horrible economic policy.  First, it undermines the rule of law by extending the FCC’s authority beyond its congressional mandate.  It does this by basing its regulation of a huge universe of information exchanges on Section 222 of the Telecommunications Act of 1996, a narrow provision aimed at a very limited type of customer-related data obtained in connection with old-style voice telephony transmissions.  This is egregious regulatory overreach.  Second, if implemented, it will harm consumers, producers, and the overall economic by imposing a set of sweeping opt-in consent requirements on BIAS Providers, without regard to private sector burdens or actual consumer welfare (see here); by reducing BIAS Provider revenues and thereby dampening investment that is vital to the continued growth of and innovation in Internet-related industries (see here); by reducing the ability of BIAS Providers to provide welfare-enhancing competitive pressure on providers on Internet edge providers (see here); and by raising consumer prices for Internet services and deny discount programs desired by consumers (see here).

What’s worse, the FCC’s proposed involvement in online privacy oversight comes at a time of increased Internet privacy regulation by foreign countries, much of it highly intrusive and lacking in economic sophistication.  A particularly noteworthy effort to clarify cross-national legal standards is the Privacy Shield, a 2016 United States – European Union agreement that establishes regulatory online privacy protection norms, backed by FTC enforcement, that U.S. companies transmitting data into Europe may choose to accept on a voluntary basis.  (If they do not accede to the Shield, they may be subject to uncertain and heavy-handed European sanctions.)  The Privacy NPRM, if implemented, will create an additional concern for BIAS Providers, since they will have to evaluate the implications of new FCC regulation (rather than simply rely on FTC oversight) in deciding whether to opt in to the Shield’s standards and obligations.

In sum, the FCC’s Privacy NPRM would, if implemented, harm consumers and producers, slow innovation, and offend the rule of law.  This prompts four recommendations.

  • The FCC should withdraw the NPRM and leave it to the FTC to oversee all online privacy practices, under its Section 5 unfairness and deception authority. The adoption of the Privacy Shield, which designates the FTC as the responsible American privacy oversight agency, further strengthens the case against FCC regulation in this area. 
  • In overseeing online privacy practices, the FTC should employ a very light touch that stresses economic analysis and cost-benefit considerations. Moreover, it should avoid requiring that rigid privacy policy conditions be kept in place for long periods of time through consent decree conditions, in order to allow changing market conditions to shape and improve business privacy policies. 
  • Moreover, the FTC should borrow a page from former FTC Commissioner Joshua Wright by implementing an “economic approach” to privacy. Under such an approach:  

o             FTC economists would help make the Commission a privacy “thought leader” by developing a rigorous academic research agenda on the economics of privacy, featuring the economic evaluation of industry sectors and practices; 

o             the FTC would bear the burden of proof of showing that violations of a company’s privacy policy are material to consumer decision-making;

o             FTC economists would report independently to the FTC about proposed privacy-related enforcement initiatives; and

o             the FTC would publish the views of its Bureau of Economics in all privacy-related consent decrees that are placed on the public record.   

  • The FTC should encourage the European Commission and other foreign regulators to take into account the economics of privacy in developing their privacy regulatory policies. In so doing, it should emphasize that innovation is harmed, the beneficial development of the Internet is slowed, and consumer welfare and rights are undermined through highly prescriptive regulation in this area (well-intentioned though it may be).  Relatedly, the FTC and other U.S. Government negotiators should argue against adoption of a “one-size-fits-all” global privacy regulation framework.   Such a global framework could harmfully freeze into place over-regulatory policies and preclude beneficial experimentation in alternative forms of “lighter-touch” regulation and enforcement. 

While no panacea, these recommendations would help deter (or, at least, constrain) the economically harmful government micromanagement of businesses’ privacy practices, in the United States and abroad.

Since the European Commission (EC) announced its first inquiry into Google’s business practices in 2010, the company has been the subject of lengthy investigations by courts and competition agencies around the globe. Regulatory authorities in the United States, France, the United Kingdom, Canada, Brazil, and South Korea have all opened and rejected similar antitrust claims.

And yet the EC marches on, bolstered by Google’s myriad competitors, who continue to agitate for further investigations and enforcement actions, even as we — companies and consumers alike — enjoy the benefits of an increasingly dynamic online marketplace.

Indeed, while the EC has spent more than half a decade casting about for some plausible antitrust claim, the online economy has thundered ahead. Since 2010, Facebook has tripled its active users and multiplied its revenue ninefold; the number of apps available in the Amazon app store has grown from less than 4000 to over 400,000 today; and there are almost 1.5 billion more Internet users globally than there were in 2010. And consumers are increasingly using new and different ways to search for information: Amazon’s Alexa, Apple’s Siri, Microsoft’s Cortana, and Facebook’s Messenger are a few of the many new innovations challenging traditional search engines.

Advertisers have adapted to this evolution, moving increasingly online, and from search to display ads as mobile adoption has skyrocketedSocial networks like Twitter and Snapchat have come into their own, competing for the same (and ever-increasing) advertising dollars. For marketers, advertising on social networks is now just as important as advertising in search. No wonder e-commerce sales have more than doubled, to almost $2 trillion worldwide; for the first time, consumers purchased more online than in stores this past year.

To paraphrase Louis C.K.: Everything is amazing — and no one at the European Commission is happy.

The EC’s market definition is fatally flawed

Like its previous claims, the Commission’s most recent charges are rooted in the assertion that Google abuses its alleged dominance in “general search” advertising to unfairly benefit itself and to monopolize other markets. But European regulators continue to miss the critical paradigm shift among online advertisers and consumers that has upended this stale view of competition on the Internet. The reality is that Google’s competition may not, and need not, look exactly like Google itself, but it is competition nonetheless. And it’s happening in spades.

The key to understanding why the European Commission’s case is fundamentally flawed lies in an examination of how it defines the relevant market. Through a series of economically and factually unjustified assumptions, the Commission defines search as a distinct market in which Google faces limited competition and enjoys an 80% market share. In other words, for the EC, “general search” apparently means only nominal search providers like Google and Bing; it doesn’t mean companies like Amazon, Facebook and Twitter — Google’s biggest competitors.  

But the reality is that “general search” is just one technology among many for serving information and ads to consumers online. Defining the relevant market or limiting the definition of competition in terms of the particular mechanism that Google happens to use to match consumers and advertisers doesn’t reflect the substitutability of other mechanisms that do the same thing — merely because these mechanisms aren’t called “search.”

Properly defined, the market in which Google competes online is not search, but something more like online “matchmaking” between advertisers, retailers and consumers. And this market is enormously competitive.

Consumers today are increasingly using platforms like Amazon and Facebook as substitutes for the searches they might have run on Google or Bing. “Closed” platforms like the iTunes store and innumerable apps handle copious search traffic but also don’t figure in the EC’s market calculations. And so-called “dark social” interactions like email, text messages, and IMs, drive huge amounts of some of the most valuable traffic on the Internet. This, in turn, has led to a competitive scramble to roll out completely new technologies like chatbots to meet consumers’ informational (and merchants’ advertising) needs.

Properly construed, Google’s market position is precarious

Like Facebook and Twitter (and practically every other Internet platform), advertising is Google’s primary source of revenue. Instead of charging for fancy hardware or offering services to users for a fee, Google offers search, the Android operating system, and a near-endless array of other valuable services for free to users. The company’s very existence relies on attracting Internet users and consumers to its properties in order to effectively connect them with advertisers.

But being an online matchmaker is a difficult and competitive enterprise. Among other things, the ability to generate revenue turns crucially on the quality of the match: All else equal, an advertiser interested in selling widgets will pay more for an ad viewed by a user who can be reliably identified as being interested in buying widgets.

Google’s primary mechanism for attracting users to match with advertisers — general search — is substantially about information, not commerce, and the distinction between product and informational searches is crucially important to understanding Google’s market and the surprisingly limited and tenuous market power it possesses.

General informational queries aren’t nearly as valuable to advertisers: Significantly, only about 30 percent of Google’s searches even trigger any advertising at all. Meanwhile, as of 2012, one-third of product searches started on Amazon while only 13% started on a general search engine.

As economist Hal Singer aptly noted in 2012,

[the data] suggest that Google lacks market power in a critical segment of search — namely, product searches. Even though searches for items such as power tools or designer jeans account for only 10 to 20 percent of all searches, they are clearly some of the most important queries for search engines from a business perspective, as they are far easier to monetize than informational queries like “Kate Middleton.”

While Google Search clearly offers substantial value to advertisers, its ability to continue to do so is precarious when confronted with the diverse array of competitors that, like Facebook, offer a level of granularity in audience targeting that general search can’t match, or that, like Amazon, systematically offer up the most valuable searchers.

In order to compete in this market — one properly defined to include actual competitors — Google has had to constantly innovate to maintain its position. Unlike a complacent monopolist, it has evolved to meet changing consumer demand, shifting technology and inventive competitors. Thus, Google’s search algorithm has changed substantially over the years to make more effective use of the information available to ensure relevance; search results have evolved to give consumers answers to queries rather than just links, and to provide more-direct access to products and services; and, as users have shifted more and more of their time and attention to mobile devices, search has incorporated more-localized results.

Competitors want a free lunch

Critics complain, nevertheless, that these developments have made it harder, in one way or another, for rivals to compete. And the EC has provided a willing ear. According to Commissioner Vestager last week:

Google has come up with many innovative products that have made a difference to our lives. But that doesn’t give Google the right to deny other companies the chance to compete and innovate. Today, we have further strengthened our case that Google has unduly favoured its own comparison shopping service in its general search result pages…. (Emphasis added).

Implicit in this statement is the remarkable assertion that by favoring its own comparison shopping services, Google “den[ies] other companies the chance to compete and innovate.” Even assuming Google does “favor” its own results, this is an astounding claim.

First, it is not a violation of competition law simply to treat competitors’ offerings differently than one’s own, even for a dominant firm. Instead, conduct must actually exclude competitors from the market, without offering countervailing advantages to consumers. But Google’s conduct is not exclusionary, and there are many benefits to consumers.

As it has from the start of its investigations of Google, the EC begins with a flawed assumption: that Google’s competitors both require, and may be entitled to, unfettered access to Google’s property in order to compete. But this is patently absurd. Google is not an essential facility: Billions of users reach millions of companies everyday through direct browser navigation, apps, email links, review sites and blogs, and countless other means — all without once touching Google.com.

Google Search results do not exclude competitors, whether comparison shopping sites or others. For example, 72% of TripAdvisor’s U.S. traffic comes from search, and almost all of that from organic results; other specialized search sites see similar traffic volumes.

More important, however, in addition to continuing to reach rival sites through Google Search, billions of consumers access rival services directly through their mobile apps. In fact, for Yelp,

Approximately 21 million unique devices accessed Yelp via the mobile app on a monthly average basis in the first quarter of 2016, an increase of 32% compared to the same period in 2015. App users viewed approximately 70% of page views in the first quarter and were more than 10 times as engaged as website users, as measured by number of pages viewed. (Emphasis added).

And a staggering 40 percent of mobile browsing is now happening inside the Facebook app, competing with the browsers and search engines pre-loaded on smartphones.

Millions of consumers also directly navigate to Google’s rivals via their browser by simply typing, for example, “Yelp.com” in their address bar. And as noted above, consumers are increasingly using Google rivals’ new disruptive information engines like Alexa and Siri for their search needs. Even the traditional search engine space is competitive — in fact, according to Wired, as of July 2016:

Microsoft has now captured more than one-third of Internet searches. Microsoft’s transformation from a company that sells boxed software to one that sells services in the cloud is well underway. (Emphasis added).

With such numbers, it’s difficult to see how rivals are being foreclosed from reaching consumers in any meaningful way.

Meanwhile, the benefits to consumers are obvious: Google is directly answering questions for consumers rather than giving them a set of possible links to click through and further search. In some cases its results present entirely new and valuable forms of information (e.g., search trends and structured data); in others they serve to hone searches by suggesting further queries, or to help users determine which organic results (including those of its competitors) may be most useful. And, of course, consumers aren’t forced to endure these innovations if they don’t find them useful, as they can quickly switch to other providers.  

Nostalgia makes for bad regulatory policy

Google is not the unstoppable monopolist of the EU competition regulators’ imagining. Rather, it is a continual innovator, forced to adapt to shifting consumer demand, changing technology, and competitive industry dynamics. And, instead of trying to hamstring Google, if they are to survive, Google’s competitors (and complainants) must innovate as well.

Dominance in technology markets — especially online — has always been ephemeral. Once upon a time, MySpace, AOL, and Yahoo were the dominant Internet platforms. Kodak, once practically synonymous with “instant camera” let the digital revolution pass it by. The invincible Sony Walkman was upended by mp3s and the iPod. Staid, keyboard-operated Blackberries and Nokias simply couldn’t compete with app-driven, graphical platforms from Apple and Samsung. Even today, startups like Snapchat, Slack, and Spotify gain massive scale and upend entire industries with innovative new technology that can leave less-nimble incumbents in the dustbin of tech history.

Put differently, companies that innovate are able to thrive, while those that remain dependent on yesterday’s technology and outdated business models usually fail — and deservedly so. It should never be up to regulators to pick winners and losers in a highly dynamic and competitive market, particularly if doing so constrains the market’s very dynamism. As Alfonso Lamadrid has pointed out:

It is companies and not competition enforcers which will strive or fail in the adoption of their business models, and it is therefore companies and not competition enforcers who are to decide on what business models to use. Some will prove successful and others will not; some companies will thrive and some will disappear, but with experimentation with business models, success and failure are and have always been part of the game.

In other words, we should not forget that competition law is, or should be, business-model agnostic, and that regulators are – like anyone else – far from omniscient.

Like every other technology company before them, Google and its competitors must be willing and able to adapt in order to keep up with evolving markets — just as for Lewis Carroll’s Red Queen, “it takes all the running you can do, to keep in the same place.” Google confronts a near-constantly evolving marketplace and fierce competition from unanticipated quarters; companies that build their businesses around Google face a near-constantly evolving Google. In the face of such relentless market dynamism, neither consumers nor firms are well served by regulatory policy rooted in nostalgia.  

The Global Antitrust Institute (GAI) at George Mason University Law School (officially the “Antonin Scalia Law School at George Mason University” as of July 1st) is doing an outstanding job at providing sound law and economics-centered advice to foreign governments regarding their proposed antitrust laws and guidelines.

The GAI’s latest inspired filing, released on July 9 (July 9 Comment), concerns guidelines on the disgorgement of illegal gains and punitive fines for antitrust violations proposed by China’s National Development and Reform Commission (NDRC) – a powerful agency that has broad planning and administrative authority over the Chinese economy.  With respect to antitrust, the NDRC is charged with investigating price-related anticompetitive behavior and abuses of dominance.  (China has two other antitrust agencies, the State Administration of Industry and Commerce (SAIC) that investigates non-price-related monopolistic behavior, and the Ministry of Foreign Commerce (MOFCOM) that reviews mergers.)  The July 9 Comment stresses that the NDRC’s proposed Guidelines call for Chinese antitrust enforcers to impose punitive financial sanctions on conduct that is not necessarily anticompetitive and may be efficiency-enhancing – an approach that is contrary to sound economics.  In so doing, the July 9 Comment summarizes the economics of penalties, recommends that the NDRD employ economic analysis in considering sanctions, and provides specific suggested changes to the NDRC’s draft.  The July 9 Comment provides a helpful summary of its analysis:

We respectfully recommend that the Draft Guidelines be revised to limit the application of disgorgement (or the confiscating of illegal gain) and punitive fines to matters in which: (1) the antitrust violation is clear (i.e., if measured at the time the conduct is undertaken, and based on existing laws, rules, and regulations, a reasonable party should expect that the conduct at issue would likely be found to be illegal) and without any plausible efficiency justifications; (2) it is feasible to articulate and calculate the harm caused by the violation; (3) the measure of harm calculated is the basis for any fines or penalties imposed; and (4) there are no alternative remedies that would adequately deter future violations of the law.  In the alternative, and at the very least, we strongly urge the NDRC to expand the circumstances under which the Anti-Monopoly Enforcement Agencies (AMEAs) will not seek punitive sanctions such as disgorgement or fines to include two conduct categories that are widely recognized as having efficiency justifications: unilateral conduct such as refusals to deal and discriminatory dealing and vertical restraints such as exclusive dealing, tying and bundling, and resale price maintenance.

We also urge the NDRC to clarify how the total penalty, including disgorgement and fines, relate to the specific harm at issue and the theoretical optimal penalty.  As explained below, the economic analysis determines the total optimal penalties, which includes any disgorgement and fines.  When fines are calculated consistent with the optimal penalty framework, disgorgement should be a component of the total fine as opposed to an additional penalty on top of an optimal fine.  If disgorgement is an additional penalty, then any fines should be reduced relative to the optimal penalty.

Lastly, we respectfully recommend that the AMEAs rely on economic analysis to determine the harm caused by any violation.  When using proxies for the harm caused by the violation, such as using the illegal gains from the violations as the basis for fines or disgorgement, such calculations should be limited to those costs and revenues that are directly attributable to a clear violation.  This should be done in order to ensure that the resulting fines or disgorgement track the harms caused by the violation.  To that end, we recommend that the Draft Guidelines explicitly state that the AMEAs will use economic analysis to determine the but-for world, and will rely wherever possible on relevant market data.  When the calculation of illegal gain is unclear due to a lack of relevant information, we strongly recommend that the AMEAs refrain from seeking disgorgement.

The lack of careful economic analysis of the implications of disgorgement (which is really a financial penalty, viewed through an economic lens) is not confined to Chinese antitrust enforcers.  In recent years, the U.S. Federal Trade Commission (FTC) has shown an interest in more broadly employing disgorgement as an antitrust remedy, without fully weighing considerations of error costs and the deterrence of efficient business practices (see, for example, here and here).  Relatedly, the U.S. Department of Justice’s Antitrust Division has determined that disgorgement may be invoked as a remedy for a Sherman Antitrust Act violation, a position confirmed by a lower court (see, for example, here).  The general principles informing the thoughtful analysis delineated in the July 9 Comment could profitably be consulted by FTC and DOJ policy officials should they choose to reexamine their approach to disgorgement and other financial penalties.

More broadly, emphasizing the importantance of optimal sanctions and the economic analysis of business conduct, the July 9 Comment is in line with a cost-benefit framework for antitrust enforcement policy, rooted in decision theory – an approach that all antitrust agencies (including United States enforcers) should seek to adopt (see also here for an evaluation of the implicit decision-theoretic approach to antitrust employed by the U.S. Supreme Court under Chief Justice John Roberts).  Let us hope that DOJ, the FTC, and other government antitrust authorities around the world take to heart the benefits of decision-theoretic antitrust policy in evaluating (and, as appropriate, reforming) their enforcement norms.  Doing so would promote beneficial international convergence toward better enforcement policy and redound to the economic benefit of both producers and consumers.

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Yesterday, the International Center for Law & Economics filed reply comments in the docket of the FCC’s Broadband Privacy NPRM. ICLE was joined in its comments by the following scholars of law & economics:

  • Babette E. Boliek, Associate Professor of Law, Pepperdine School of Law
  • Adam Candeub, Professor of Law, Michigan State University College of Law
  • Justin (Gus) Hurwitz, Assistant Professor of Law, Nebraska College of Law
  • Daniel Lyons, Associate Professor, Boston College Law School
  • Geoffrey A. Manne, Executive Director, International Center for Law & Economics
  • Paul H. Rubin, Samuel Candler Dobbs Professor of Economics, Emory University Department of Economics

As in our initial comments, we drew on the economic scholarship of multi-sided platforms to argue that the FCC failed to consider the ways in which asymmetric regulation will ultimately have negative competitive effects and harm consumers. The FCC and some critics claimed that ISPs are gatekeepers deserving of special regulation — a case that both the FCC and the critics failed to make.

The NPRM fails adequately to address these issues, to make out an adequate case for the proposed regulation, or to justify treating ISPs differently than other companies that collect and use data.

Perhaps most important, the NPRM also fails to acknowledge or adequately assess the actual market in which the use of consumer data arises: the advertising market. Whether intentionally or not, this NPRM is not primarily about regulating consumer privacy; it is about keeping ISPs out of the advertising business. But in this market, ISPs are upstarts challenging the dominant position of firms like Google and Facebook.

Placing onerous restrictions upon ISPs alone results in either under-regulation of edge providers or over-regulation of ISPs within the advertising market, without any clear justification as to why consumer privacy takes on different qualities for each type of advertising platform. But the proper method of regulating privacy is, in fact, the course that both the FTC and the FCC have historically taken, and which has yielded a stable, evenly administered regime: case-by-case examination of actual privacy harms and a minimalist approach to ex ante, proscriptive regulations.

We also responded to particular claims made by New America’s Open Technology Institute about the expectations of consumers regarding data collection online, the level of competitiveness in the marketplace, and the technical realities that differentiate ISPs from edge providers.

OTI attempts to substitute its own judgment of what consumers (should) believe about their data for that of consumers themselves. And in the process it posits a “context” that can and will never shift as new technology and new opportunities emerge. Such a view of consumer expectations is flatly anti-innovation and decidedly anti-consumer, consigning broadband users to yesterday’s technology and business models. The rule OTI supports could effectively forbid broadband providers from offering consumers the option to trade data for lower prices.

Our reply comments went on to point out that much of the basis upon which the NPRM relies — and alleged lack of adequate competition among ISPs — was actually a “manufactured scarcity” based upon the Commission’s failure to properly analyze the relevant markets.

The Commission’s claim that ISPs, uniquely among companies in the modern data economy, face insufficient competition in the broadband market is… insufficiently supported. The flawed manner in which the Commission has defined the purported relevant market for broadband distorts the analysis upon which the proposed rules are based, and manufactures a false scarcity in order to justify unduly burdensome privacy regulations for ISPs. Even the Commission’s own data suggest that consumer choice is alive and well in broadband… The reality is that there is in fact enough competition in the broadband market to offer privacy-sensitive consumers options if they are ever faced with what they view as overly invasive broadband business practices. According to the Commission, as of December 2014, 74% of American homes had a choice of two or more wired ISPs delivering download speeds of at least 10 Mbps, and 88% had a choice of at least two providers of 3 Mbps service. Meanwhile, 93% of consumers have access to at least three mobile broadband providers. Looking forward, consumer choice at all download speeds is increasing at rapid rates due to extensive network upgrades and new entry in a highly dynamic market.

Finally, we rebutted the contention that predictive analytics was a magical tool that would enable ISPs to dominate information gathering and would, consequently, lead to consumer harms — even where ISPs had access only to seemingly trivial data about users.

Some comments in support of the proposed rules attempt to cast ISPs as all powerful by virtue of their access to apparently trivial data — IP addresses, access timing, computer ports, etc. — because of the power of predictive analytics. These commenters assert that the possibility of predictive analytics coupled with a large data set undermines research that demonstrates that ISPs, thanks to increasing encryption, do not have access to any better quality data, and probably less quality data, than edge providers themselves have.

But this is a curious bit of reasoning. It essentially amounts to the idea that, not only should consumers be permitted to control with whom their data is shared, but that all other parties online should be proscribed from making their own independent observations about consumers. Such a rule would be akin to telling supermarkets that they are not entitled to observe traffic patterns in their stores in order to place particular products in relatively more advantageous places, for example. But the reality is that most data is noise; simply having more of it is not necessarily a boon, and predictive analytics is far from a panacea. In fact, the insights gained from extensive data collection are frequently useless when examining very large data sets, and are better employed by single firms answering particular questions about their users and products.

Our full reply comments are available here.

About a month ago, I was asked by some friends about the shift from the first-to-invent patent system to a first-to-file patent system in the America Invents Act of 2011 (AIA). I was involved briefly in the policy debates in the spring of 2011 leading up to the enactment of the AIA, and so this query prompted me to share a short essay I wrote in May 2011 on this issue. In this essay, I summarized my historical scholarship I had published up to that point in law journals on the legal definition and protection of patents in the Founding Era and in the early American Republic. I concluded that a shift to a first-to-file patent system contradicted both the constitutional text and the early judicial interpretations of the patent statutes that secured patent rights to first inventors.

This legal issue will likely reach the courts one day. A constitutional challenge a couple years ago was rightly dismissed as not being justiciable, but there may yet be an appropriate case in which an inventor is denied a patent given that he or she lost the race to file first in the Patent Office. So, after sharing my essay with my friends, I thought it valuable to post it again on the Internet, because the website on which it was first published (www.noonHR1249.com) slipped into digital oblivion long ago.

I was asked to write this essay in May 2011 by the U.S. Business & Industry Council (USBIC)[1] The USBIC requested my scholarly analysis of the first-to-file provision of the AIA, which was being debated as H.R. 1249 on Capitol Hill at the time, because I had been publishing articles in law journals on the legal definition and protection of patents as property rights in the Founding Era and in the early American Republic (see here and here for two examples). In my essay, I identified the relevant text in the Constitution, which authorizes Congress to secure an exclusive right to “Inventors” in their “Discoveries” (Article 1, Section 8, Clause 8). Based on my academic research, I summarized in my essay the historical Supreme Court and lower federal court decisions, which secured patents to inventors according to the same policy justifications used in common-law cases to justify property rights to first possessors of land. Thus, I concluded that the first-to-file provision in the American Invents Act was unconstitutional, based on well-recognized arguments concerning textual analysis of the Constitution and inferences from original public meaning as reflected in the historical judicial record.

There’s more to my essay, though, than just the substantive legal argument. It also provides an insight into the nature of the legal academic debates going back many years, because at the time Professor Mark Lemley of Stanford Law School compared me to an “Obama-birther” and he called this constitutional and legal argument “fringe science.” Given concerns expressed last year in an open letter co-authored by Professor Lemley and others about inappropriate rhetoric used by academics, among other issues (see here for a news report on this letter), it bears noting for the record that this is a concern that goes back many years.

Here’s the basic story: My essay was published by the USBIC in May 2011 and I was invited to speak in congressional staffer briefings and in other venues in Capitol Hill against the AIA on this issue. At this time, I was the only legal academic writing and speaking on Capitol Hill on this issue in the AIA. In late May, the 21st Century Coalition for Patent Reform, which supported enactment of the AIA, distributed on Capitol Hill a response that it had solicited from Professor Lemley. I no longer possess this response statement that was sent out via email by the 21st Century Coalition, but I do have the response I was asked to write on June 1, 2011 in which I explicitly refer to Professor Lemley’s argument against the first-to-invent position. In response to a law professors’ letter to Congress defending the first-to-file provision in the AIA that was circulated on an IP professors listserv (IPProfs), I sent out on IPProfs on June 11 a draft letter to Congress, calling for signatures from other law professors in support of my argument first presented in my essay (the final version is here). The next day, on June 12, Professor Lemley wrote on Facebook that my constitutional and legal argument made me the same as an “Obama-birther.”[2] Although he didn’t refer directly to me, it was clear that it was directed at me given that this posting by Lemley followed the day after my email to all IP professors asking them to join my letter to Congress, and I also was the only law professor actively writing on this issue and speaking on it on Capitol Hill up until then.

The following year, in a New York Times article on the court challenge to the first-to-file provision, Professor Lemley further characterized this constitutional argument as “the legal equivalent of fringe science.”

Before the spring of 2011, my writings on legal doctrine and policy were published only in law journals, and I had never participated in a policy debate over patent legislation. In my academic articles before this time, I had critiqued Professor Lemley’s incorrect historical claims about whether U.S. patents were considered monopolies or property rights, and they reflected a purely academic tone that one should expect in a law journal article (see here). Before spring 2011, I had never addressed Professor Lemley, nor had he addressed me, about the AIA, other legislation or court cases.

Professor Lemley’s “Obama-birther” attack on me was surprising, and when I replied in the comments to his Facebook post solely on the substantive merits of the issue of policy versus law, Professor Lemley defended his accusation against me. (This is evidenced in the screen shot.)[2] At the time, I was still a relatively junior academic, and this was an object lesson about what a senior academic at a top-five-ranked law school considers acceptable in addressing a much-more junior academic with whom he disagrees. This remark in 2011 was not an outlier either, as Professor Lemley has used similar rhetoric in the ensuing years in addressing academics with whom he disagrees; for instance, a couple years ago, Professor Lemley publicly referred to an academic conference that I and other patent scholars participated in as a “Tea Party convention.”

Of course, legal and constitutional disputes consist of opposing arguments. In court cases and legislative debates, there are colorable legal and policy arguments on both sides of a dispute. Few issues are so irrational that they are not even cognizable as having a supporting argument, such as astrology and conspiracy theories like the birthers or 9-11 truthers. So, I will simply let my essay speak for itself as to whether it makes me the same as an “Obama-birther” and if my argument represents “fringe science.”

More important, if or when a good case arises in which an inventor can rightly claim an identifiable and specific harm as a result of the statutory change created by the AIA, I hope my essay will be of some value.

[1] Full disclosure: The U.S. Business & Industry Council paid me for my time in writing the essay, which I disclosed in the essay itself. Unfortunately, as recently reported by IAM Magazine, other legal academics are not always so forthcoming about their financial and legal connections to companies when publicly commenting on court cases or advocating for enactment of legislation.

[2] This is a link to a screen shot I took last year only because the Facebook post by Professor Lemley recently disappeared after I only quoted the language from it about a month ago when I shared on Facebook my essay with my friends and colleagues.

UPDATE on June 7: I added some more supporting links and some additional information after this was initially published on June 6, 2016.

In the wake of the recent OIO decision, separation of powers issues should be at the forefront of everyone’s mind. In reaching its decision, the DC Circuit relied upon Chevron to justify its extreme deference to the FCC. The court held, for instance, that

Our job is to ensure that an agency has acted “within the limits of [Congress’s] delegation” of authority… and that its action is not “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”… Critically, we do not “inquire as to whether the agency’s decision is wise as a policy matter; indeed, we are forbidden from substituting our judgment for that of the agency.”… Nor do we inquire whether “some or many economists would disapprove of the [agency’s] approach” because “we do not sit as a panel of referees on a professional economics journal, but as a panel of generalist judges obliged to defer to a reasonable judgment by an agency acting pursuant to congressionally delegated authority.

The DC Circuit’s decision takes a broad view of Chevron deference and, in so doing, ignores or dismisses some of the limits placed upon the doctrine by cases like Michigan v. EPA and UARG v. EPA (though Judge Williams does bring up UARG in dissent).

Whatever one thinks of the validity of the FCC’s approach to regulating the Internet, there is no question that it has, at best, a weak statutory foothold. Without prejudging the merits of the OIO, or the question of deference to agencies that find “[regulatory] elephants in [statutory] mouseholes,”  such broad claims of authority, based on such limited statutory language, should give one pause. That the court upheld the FCC’s interpretation of the Act without expressing reservations, suggesting any limits, or admitting of any concrete basis for challenging the agency’s authority beyond circular references to “abuse of discretion” is deeply troubling.

Separation of powers is a fundamental feature of our democracy, and one that has undoubtedly contributed to the longevity of our system of self-governance. Not least among the important features of separation of powers is the ability of courts to review the lawfulness of legislation and executive action.

The founders presciently realized the dangers of allowing one part of the government to centralize power in itself. In Federalist 47, James Madison observed that

The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny. Were the federal Constitution, therefore, really chargeable with the accumulation of power, or with a mixture of powers, having a dangerous tendency to such an accumulation, no further arguments would be necessary to inspire a universal reprobation of the system. (emphasis added)

The modern administrative apparatus has become the sort of governmental body that the founders feared and that we have somehow grown to accept. The FCC is not alone in this: any member of the alphabet soup that constitutes our administrative state, whether “independent” or otherwise, is typically vested with great, essentially unreviewable authority over the economy and our daily lives.

As Justice Thomas so aptly put it in his must-read concurrence in Michigan v. EPA:

Perhaps there is some unique historical justification for deferring to federal agencies, but these cases reveal how paltry an effort we have made to understand it or to confine ourselves to its boundaries. Although we hold today that EPA exceeded even the extremely permissive limits on agency power set by our precedents, we should be alarmed that it felt sufficiently emboldened by those precedents to make the bid for deference that it did here. As in other areas of our jurisprudence concerning administrative agencies, we seem to be straying further and further from the Constitution without so much as pausing to ask why. We should stop to consider that document before blithely giving the force of law to any other agency “interpretations” of federal statutes.

Administrative discretion is fantastic — until it isn’t. If your party is the one in power, unlimited discretion gives your side the ability to run down a wish list, checking off controversial items that could never make it past a deliberative body like Congress. That same discretion, however, becomes a nightmare under extreme deference as political opponents, newly in power, roll back preferred policies. In the end, regulation tends toward the extremes, on both sides, and ultimately consumers and companies pay the price in the form of excessive regulatory burdens and extreme uncertainty.

In theory, it is (or should be) left to the courts to rein in agency overreach. Unfortunately, courts have been relatively unwilling to push back on the administrative state, leaving the task up to Congress. And Congress, too, has, over the years, found too much it likes in agency power to seriously take on the structural problems that give agencies effectively free reign. At least, until recently.

In March of this year, Representative Ratcliffe (R-TX) proposed HR 4768: the Separation of Powers Restoration Act (“SOPRA”). Arguably this is first real effort to fix the underlying problem since the 1995 “Comprehensive Regulatory Reform Act” (although, it should be noted, SOPRA is far more targeted than was the CRRA). Under SOPRA, 5 U.S.C. § 706 — the enacted portion of the APA that deals with judicial review of agency actions —  would be amended to read as follows (with the new language highlighted):

(a) To the extent necessary to decision and when presented, the reviewing court shall determine the meaning or applicability of the terms of an agency action and decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by agencies. Notwithstanding any other provision of law, this subsection shall apply in any action for judicial review of agency action authorized under any provision of law. No law may exempt any such civil action from the application of this section except by specific reference to this section.

These changes to the scope of review would operate as a much-needed check on the unlimited discretion that agencies currently enjoy. They give courts the ability to review “de novo all relevant questions of law,” which includes agencies’ interpretations of their own rules.

The status quo has created a negative feedback cycle. The Chevron doctrine, as it has played out, gives outsized incentives to both the federal agencies, as well as courts, to essentially disregard Congress’s intended meaning for particular statutes. Today an agency can write rules and make decisions safe in the knowledge that Chevron will likely insulate it from any truly serious probing by a district court with regards to how well the agency’s action actually matches up with congressional intent or with even rudimentary cost-benefit analysis.

Defenders of the administrative state may balk at changing this state of affairs, of course. But defending an institution that is almost entirely immune from judicial and legal review seems to be a particularly hard row to hoe.

Public Knowledge, for instance, claims that

Judicial deference to agency decision-making is critical in instances where Congress’ intent is unclear because it balances each branch of government’s appropriate role and acknowledges the realities of the modern regulatory state.

To quote Justice Scalia, an unfortunate champion of the Chevron doctrine, this is “pure applesauce.”

The very core of the problem that SOPRA addresses is that the administrative state is not a proper branch of government — it’s a shadow system of quasi-legislation and quasi-legal review. Congress can be chastened by popular vote. Judges who abuse discretion can be overturned (or impeached). The administrative agencies, on the other hand, are insulated through doctrines like Chevron and Auer, and their personnel subject more or less to the political whims of the executive branch.

Even agencies directly under the control of the executive branch  — let alone independent agencies — become petrified caricatures of their original design as layers of bureaucratic rule and custom accrue over years, eventually turning the organization into an entity that serves, more or less, to perpetuate its own existence.

Other supporters of the status quo actually identify the unreviewable see-saw of agency discretion as a feature, not a bug:

Even people who agree with the anti-government premises of the sponsors [of SOPRA] should recognize that a change in the APA standard of review is an inapt tool for advancing that agenda. It is shortsighted, because it ignores the fact that, over time, political administrations change. Sometimes the administration in office will generally be in favor of deregulation, and in these circumstances a more intrusive standard of judicial review would tend to undercut that administration’s policies just as surely as it may tend to undercut a more progressive administration’s policies when the latter holds power. The APA applies equally to affirmative regulation and to deregulation.

But presidential elections — far from justifying this extreme administrative deference — actually make the case for trimming the sails of the administrative state. Presidential elections have become an important part about how candidates will wield the immense regulatory power vested in the executive branch.

Thus, for example, as part of his presidential bid, Jeb Bush indicated he would use the EPA to roll back every policy that Obama had put into place. One of Donald Trump’s allies suggested that Trump “should turn off [CNN’s] FCC license” in order to punish the news agency. And VP hopeful Elizabeth Warren has suggested using the FDIC to limit the growth of financial institutions, and using the FCC and FTC to tilt the markets to make it easier for the small companies to get an advantage over the “big guys.”

Far from being neutral, technocratic administrators of complex social and economic matters, administrative agencies have become one more political weapon of majority parties as they make the case for how their candidates will use all the power at their disposal — and more — to work their will.

As Justice Thomas, again, noted in Michigan v. EPA:

In reality…, agencies “interpreting” ambiguous statutes typically are not engaged in acts of interpretation at all. Instead, as Chevron itself acknowledged, they are engaged in the “formulation of policy.” Statutory ambiguity thus becomes an implicit delegation of rulemaking authority, and that authority is used not to find the best meaning of the text, but to formulate legally binding rules to fill in gaps based on policy judgments made by the agency rather than Congress.

And this is just the thing: SOPRA would bring far-more-valuable predictability and longevity to our legal system by imposing a system of accountability on the agencies. Currently, commissions often believe they can act with impunity (until the next election at least), and even the intended constraints of the APA frequently won’t do much to tether their whims to statute or law if they’re intent on deviating. Having a known constraint (or, at least, a reliable process by which judicial constraint may be imposed) on their behavior will make them think twice about exactly how legally and economically sound proposed rules and other actions are.

The administrative state isn’t going away, even if SOPRA were passed; it will continue to be the source of the majority of the rules under which our economy operates. We have long believed that a benefit of our judicial system is its consistency and relative lack of politicization. If this is a benefit for interpreting laws when agencies aren’t involved, it should also be a benefit when they are involved. Particularly as more and more law emanates from agencies rather than Congress, the oversight of largely neutral judicial arbiters is an essential check on the administrative apparatus’ “accumulation of all powers.”

The interest of judges tends to include a respect for the development of precedent that yields consistent and transparent rules for all future litigants and, more broadly, for economic actors and consumers making decisions in the shadow of the law. This is markedly distinct from agencies which, more often than not, promote the particular, shifting, and often-narrow political sentiments of the day.

Whether a Republican- or a Democrat— appointed district judge reviews an agency action, that judge will be bound (more or less) by the precedent that came before, regardless of the judge’s individual political preferences. Contrast this with the FCC’s decision to reclassify broadband as a Title II service, for example, where previously it had been committed to the idea that broadband was an information service, subject to an entirely different — and far less onerous — regulatory regime.  Of course, the next FCC Chairman may feel differently, and nothing would stop another regulatory shift back to the pre-OIO status quo. Perhaps more troublingly, the enormous discretion afforded by courts under current standards of review would permit the agency to endlessly tweak its rules — forbearing from some regulations but not others, un-forbearing, re-interpreting, etc., with precious few judicial standards available to bring certainty to the rules or to ensure their fealty to the statute or the sound economics that is supposed to undergird administrative decisionmaking.

SOPRA, or a bill like it, would have required the Commission to actually be accountable for its historical regulations, and would force it to undergo at least rudimentary economic analysis to justify its actions. This form of accountability can only be to the good.

The genius of our system is its (potential) respect for the rule of law. This is an issue that both sides of the aisle should be able to get behind: minority status is always just one election cycle away. We should all hope to see SOPRA — or some bill like it — gain traction, rooted in long-overdue reflection on just how comfortable we are as a polity with a bureaucratic system increasingly driven by unaccountable discretion.

As regulatory review of the merger between Aetna and Humana hits the homestretch, merger critics have become increasingly vocal in their opposition to the deal. This is particularly true of a subset of healthcare providers concerned about losing bargaining power over insurers.

Fortunately for consumers, the merger appears to be well on its way to approval. California recently became the 16th of 20 state insurance commissions that will eventually review the merger to approve it. The U.S. Department of Justice is currently reviewing the merger and may issue its determination as early as July.

Only Missouri has issued a preliminary opinion that the merger might lead to competitive harm. But Missouri is almost certain to remain an outlier, and its analysis simply doesn’t hold up to scrutiny.

The Missouri opinion echoed the Missouri Hospital Association’s (MHA) concerns about the effect of the merger on Medicare Advantage (MA) plans. It’s important to remember, however, that hospital associations like the MHA are not consumer advocacy groups. They are trade organizations whose primary function is to protect the interests of their member hospitals.

In fact, the American Hospital Association (AHA) has mounted continuous opposition to the deal. This is itself a good indication that the merger will benefit consumers, in part by reducing hospital reimbursement costs under MA plans.

More generally, critics have argued that history proves that health insurance mergers lead to higher premiums, without any countervailing benefits. Merger opponents place great stock in a study by economist Leemore Dafny and co-authors that purports to show that insurance mergers have historically led to seven percent higher premiums.

But that study, which looked at a pre-Affordable Care Act (ACA) deal and assessed its effects only on premiums for traditional employer-provided plans, has little relevance today.

The Dafny study first performed a straightforward statistical analysis of overall changes in concentration (that is, the number of insurers in a given market) and price, and concluded that “there is no significant association between concentration levels and premium growth.” Critics never mention this finding.

The study’s secondary, more speculative, analysis took the observed effects of a single merger — the 1999 merger between Prudential and Aetna — and extrapolated for all changes in concentration (i.e., the number of insurers in a given market) and price over an eight-year period. It concluded that, on average, seven percent of the cumulative increase in premium prices between 1998 and 2006 was the result of a reduction in the number of insurers.

But what critics fail to mention is that when the authors looked at the actual consequences of the 1999 Prudential/Aetna merger, they found effects lasting only two years — and an average price increase of only one half of one percent. And these negligible effects were restricted to premiums paid under plans purchased by large employers, a critical limitation of the studies’ relevance to today’s proposed mergers.

Moreover, as the study notes in passing, over the same eight-year period, average premium prices increased in total by 54 percent. Yet the study offers no insights into what was driving the vast bulk of premium price increases — or whether those factors are still present today.  

Few sectors of the economy have changed more radically in the past few decades than healthcare has. While extrapolated effects drawn from 17-year-old data may grab headlines, they really don’t tell us much of anything about the likely effects of a particular merger today.

Indeed, the ACA and current trends in healthcare policy have dramatically altered the way health insurance markets work. Among other things, the advent of new technologies and the move to “value-based” care are redefining the relationship between insurers and healthcare providers. Nowhere is this more evident than in the Medicare and Medicare Advantage market at the heart of the Aetna/Humana merger.

In an effort to stop the merger on antitrust grounds, critics claim that Medicare and MA are distinct products, in distinct markets. But it is simply incorrect to claim that Medicare Advantage and traditional Medicare aren’t “genuine alternatives.”

In fact, as the Office of Insurance Regulation in Florida — a bellwether state for healthcare policy — concluded in approving the merger: “Medicare Advantage, the private market product, competes directly with Traditional Medicare.”

Consumers who search for plans at Medicare.gov are presented with a direct comparison between traditional Medicare and available MA plans. And the evidence suggests that they regularly switch between the two. Today, almost a third of eligible Medicare recipients choose MA plans, and the majority of current MA enrollees switched to MA from traditional Medicare.

True, Medicare and MA plans are not identical. But for antitrust purposes, substitutes need not be perfect to exert pricing discipline on each other. Take HMOs and PPOs, for example. No one disputes that they are substitutes, and that prices for one constrain prices for the other. But as anyone who has considered switching between an HMO and a PPO knows, price is not the only variable that influences consumers’ decisions.

The same is true for MA and traditional Medicare. For many consumers, Medicare’s standard benefits, more-expensive supplemental benefits, plus a wider range of provider options present a viable alternative to MA’s lower-cost expanded benefits and narrower, managed provider network.

The move away from a traditional fee-for-service model changes how insurers do business. It requires larger investments in technology, better tracking of preventive care and health outcomes, and more-holistic supervision of patient care by insurers. Arguably, all of this may be accomplished most efficiently by larger insurers with more resources and a greater ability to work with larger, more integrated providers.

This is exactly why many hospitals, which continue to profit from traditional, fee-for-service systems, are opposed to a merger that promises to expand these value-based plans. Significantly, healthcare providers like Encompass Medical Group, which have done the most to transition their services to the value-based care model, have offered letters of support for the merger.

Regardless of their rhetoric — whether about market definition or historic precedent — the most vocal merger critics are opposed to the deal for a very simple reason: They stand to lose money if the merger is approved. That may be a good reason for some hospitals to wish the merger would go away, but it is a terrible reason to actually stop it.

[This post was first published on June 27, 2016 in The Hill as “Don’t believe the critics, Aetna-Humana merger a good deal for consumers“]

An interesting thing happened on June 21st.  Scott Skavdahl, a federal district court judge appointed by President Barack Obama, invalidated the “Fracking Rule” adopted by the Interior Department’s Bureau of Land Management (BLM).  Even more interesting, however, was the fact that, in so holding, the judge relied heavily on a rather dusty, moth-eaten eighteenth century political doctrine, the separation of powers.  What was behind this quaint decision?  See the slip opinion in State of Wyoming, State of North Dakota, State of Utah, and Ute Indian Tribe v. U.S. Department of the Interior to find out.

The facts are straightforward.  As the court explained, fracking – the procedure by which oil and gas producers inject water, sand, and certain chemicals into tight-rock formations (typically shale) to create fissures in the rock and allow oil and gas for collection in a well – is primarily responsible for the steady increase in domestic oil and natural gas production over the last decade.  Purportedly in response to “public concern about whether fracturing can lead to or cause the contamination of underground water sources,” the BLM in 2012 initiated a rulemaking to implement “additional regulatory effort and oversight” of this practice on federal and Indian lands, over which it exercises jurisdiction.  Three years later, on March 26, 2015, the BLM issued a final Fracking Rule.  Several states, an Indian tribe, and representatives of affected industries challenged the Rule under the Administrative Procedure Act as arbitrary, not in accordance with law, and in excess of the BLM’s statutory jurisdiction and authority.

In its review, the court rejected the Government’s argument that various statutes authorized BLM to promulgate the Rule.  Moreover, the court noted, significantly, that “the BLM has previously taken the position, up until promulgation of the Fracking Rule, that it lacked the authority or jurisdiction to regulate hydraulic fracking.”  Furthermore, under the Safe Drinking Water Act of 1974, “Congress vested the EPA [Environmental Protection Agency] with the authority and duty to regulate hydraulic fracturing on all lands, federal, state and tribal.”  Subsequently, in enacting the Energy Policy Act of 2005 (EP Act), Congress sought “to expedite oil and gas development within the United States.”  Employing standard methods of statutory construction, the court then determined that “the 2005 EP Act’s explicit removal of the EPA’s regulatory authority over non-diesel hydraulic fracturing likewise precludes the BLM from regulating that activity, thereby removing fracking from the realm of federal regulation.”  It therefore concluded, as a matter of logic, that the BLM’s effort to regulate fracking on federal and Indian lands “through the Fracking Rule is in excess of its statutory authority and contrary to law.”

The court, however, did far more than rely on traditional tools of statutory construction in reaching its holding.  In a jurisprudential flourish, Judge Skavdahl explained that the logic of his decision was compelled by the separation of powers [citations and internal quotation marks omitted]:

As this Court has previously noted, our system of government operates based upon the principle of limited and enumerated powers assigned to the three branches of government. In its simplest form, the legislative branch enacts laws, the executive branch enforces those laws, and the judicial branch ensures that the laws passed and enforced are Constitutional. See Marbury v. Madison, 5 U.S. 137, 176 (1803). A federal agency is a creature of statute and derives its existence, authority and powers from Congress alone. It has no constitutional or common law existence or authority outside that expressly conveyed to it by Congress. . . . In the absence of a statute conferring authority, then, an administrative agency has none. . . .  This Court must be guided to a degree by common sense as to the manner in which Congress would likely delegate a policy decision of such economic and political magnitude to an administrative agency.  Given Congress’ enactment of the EP Act of 2005, to nonetheless conclude that Congress implicitly delegated BLM authority to regulate hydraulic fracturing lacks common sense.  Congress’ inability or unwillingness to pass a law desired by the executive branch does not default authority to the executive branch to act independently, regardless of whether hydraulic fracturing is good or bad for the environment or the Citizens of the United States.  [The Supreme] Court consistently has given voice to, and has reaffirmed, the central judgment of the Framers of the Constitution that, within our political scheme, the separation of governmental powers into three coordinate Branches is essential to the preservation of liberty.

The quaint notion that the separation of powers “is essential to the preservation of liberty” comports with the understanding of the Framers of the Constitution.  As James Madison pithily stated in The Federalist Number 47, “[t]he accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny.”  To avoid such a tyrannical outcome, Madison emphasized, in The Federalist Number 51, the need for structural checks and balances whereby each of the three branches of the federal government could check the others.  It is good to know that at least some recently minted federal judges remain attuned to the separation of powers’ significance.

Economic constitutionalists” also underscore the potential economic case for a robust separation of powers.   For example, Professor Jonathan Macey’s take on economic constitutionalism presents a particularly compelling defense of constitutionally separated powers as an economic welfare prescription that promotes efficiency.  In particular:

Self-interested groups or individuals will lobby to political powers for their goals, possibly leading to injustice or inefficiency. In Macey’s interpretation of Madison, the separation of powers channels lobbyists into the competitive, more efficient market by raising transaction costs so much that private market means are less expensive than appealing to the various separate powers of government.

In short, in addition to promoting respect for the rule of law, attention to the separation of powers advances economic welfare and efficiency, as a normative matter.

Ultimately, of course, the future appointment of judges (like Judge Skavdahl) who are attentive to constitutional constraints requires the election of legislators and Presidents who are faithful to constitutionally-mandated limitations on government power.  The latter, in turn, requires that the general public be made aware of – and support – those foundational constitutional restrictions.  As Madison aptly put it in The Federalist Number 51, “[a] dependence on the people is, no doubt, the primary control on the government”.  Let us hope that the American public will prove capable of fulfilling its Madisonian responsibility in this regard.