Twitter v. Taamneh: Intermediary Liability, The First Amendment, and Section 230

Ben Sperry —  24 May 2023 — Leave a comment

After the oral arguments in Twitter v. Taamneh, Geoffrey Manne, Kristian Stout, and I spilled a lot of ink thinking through the law & economics of intermediary liability and how to draw lines when it comes to social-media companies’ responsibility to prevent online harms stemming from illegal conduct on their platforms. With the Supreme Court’s recent decision in Twitter v. Taamneh, it is worth revisiting that post to see what we got right, as well as what the opinion could mean for future First Amendment cases—particularly those concerning Texas and Florida’s common-carriage laws and other challenges to the bounds of Section 230 more generally.

What We Got Right: Necessary Limitations on Secondary Liability Mean the Case Against Twitter Must be Dismissed

In our earlier post, which built on our previous work on the law & economics of intermediary liability, we argued that the law sometimes does and should allow enforcement against intermediaries when they are the least-cost avoider. This is especially true on social-media sites like Twitter, where information costs may be sufficiently low that effective monitoring and control of end users is possible and pseudonymity makes bringing remedies against end users ineffective. We note, however, that there are also costs to intermediary liability. These manifest particularly in “collateral censorship,” which occurs when social-media companies remove user-generated content in order to avoid liability. Thus, a balance must be struck:

From an economic perspective, liability should be imposed on the party or parties best positioned to deter the harms in question, so long as the social costs incurred by, and as a result of, enforcement do not exceed the social gains realized. In other words, there is a delicate balance that must be struck to determine when intermediary liability makes sense in a given case. On the one hand, we want illicit content to be deterred, and on the other, we want to preserve the open nature of the Internet. The costs generated from the over-deterrence of legal, beneficial speech is why intermediary liability for user-generated content can’t be applied on a strict-liability basis, and why some bad content will always exist in the system.

In particular, we noted the need for limiting principles to intermediary liability. As we put it in our Fleites amicus:

In theory, any sufficiently large firm with a role in the commerce at issue could be deemed liable if all that is required is that its services “allow[]” the alleged principal actors to continue to do business. FedEx, for example, would be liable for continuing to deliver packages to MindGeek’s address. The local waste management company would be liable for continuing to service the building in which MindGeek’s offices are located. And every online search provider and Internet service provider would be liable for continuing to provide service to anyone searching for or viewing legal content on MindGeek’s sites.

The Court struck very similar notes in its Taamneh opinion regarding the need to limit what they call “secondary liability” under the aiding-and-abetting statute. They note that a person may be responsible at common law for a crime or tort if he helps another complete its commission, but that such liability has never been “boundless.” If it were otherwise, Justice Clarence Thomas wrote for a unanimous Court, “aiding-and-abetting liability could sweep in innocent bystanders as well as those who gave only tangential assistance.” Offering the example of a robbery, Thomas argued that if “any assistance of any kind were sufficient to create liability… then anyone who passively watched a robbery could be said to commit aiding and abetting by failing to call the police.” 

Here, the Court found important the common law’s distinction between acts of commission and omission:

[O]ur legal system generally does not impose liability for mere omissions, inactions, or nonfeasance; although inaction can be culpable in the face of some independent duty to act, the law does not impose a generalized duty to rescue… both criminal and tort law typically sanction only “wrongful conduct,” bad acts, and misfeasance… Some level of blameworthiness is therefore ordinarily required. 

If omissions could be held liable in the absence of an independent duty to act, then there would be no limiting principle to prevent the application of liability far beyond what anyone (except for the cop in the final episode of Seinfeld) would believe reasonable: 

[I]f aiding-and-abetting liability were taken too far, then ordinary merchants could become liable for any misuse of their goods and services, no matter how attenuated their relationship with the wrongdoer. And those who merely deliver mail or transmit emails could be liable for the tortious messages contained therein. For these reasons, courts have long recognized the need to cabin aiding-and-abetting liability to cases of truly culpable conduct.

Applying this to Twitter, the Court first outlined the theories of how Twitter “helped” ISIS:

First, ISIS was active on defendants social-media platforms, which are generally available to the internet-using public with little to no front-end screening by defendants. In other words, ISIS was able to upload content to the platforms and connect with third parties, just like everyone else. Second, defendants’ recommendation algorithms matched ISIS-related content to users most likely to be interested in that content—again, just like any other content. And, third, defendants allegedly knew that ISIS was uploading this content to such effect, but took insufficient steps to ensure that ISIS supporters and ISIS-related content were removed from their platforms. Notably, plaintiffs never allege that ISIS used defendants’ platforms to plan or coordinate the Reina attack; in fact, they do not allege that Masharipov himself ever used Facebook, YouTube, or Twitter. 

The Court rejected each of these allegations as insufficient to establish Twitter’s liability in the absence of an independent duty to act, pointing back to the distinction between an act that affirmatively helped to cause harm and an omission:

[T]he only affirmative “conduct” defendants allegedly undertook was creating their platforms and setting up their algorithms to display content relevant to user inputs and user history. Plaintiffs never allege that, after defendants established their platforms, they gave ISIS any special treatment or words of encouragement. Nor is there reason to think that defendants selected or took any action at all with respect to ISIS’ content (except, perhaps, blocking some of it).

In our earlier post on Taamneh, we argued that the plaintiff’s “theory of liability would contain no viable limiting principle” and asked “what in principle would separate a search engine from Twitter, if the search engine linked to an alleged terrorist’s account?” The Court made a similar argument, positing that, while “bad actors like ISIS are able to use platforms like defendants’ for illegal—and sometimes terrible—ends,” the same “could be said of cell phones, email, or the internet generally.” Despite this, “internet or cell service providers [can’t] incur culpability merely for providing their services to the public writ large. Nor do we think that such providers would normally be described as aiding and abetting, for example, illegal drug deals brokered over cell phones—even if the provider’s conference-call or video-call features made the sale easier.” 

The Court concluded:

At bottom, then, the claim here rests less on affirmative misconduct and more on an alleged failure to stop ISIS from using these platforms. But, as noted above, both tort and criminal law have long been leery of imposing aiding-and-abetting liability for mere passive nonfeasance.

In sum, since there was no independent duty to act to be found in statute, Twitter could not be found liable under these allegations.

The First Amendment and Common Carriage

It’s notable that the opinion was written by Justice Thomas, who previously invited states to create common-carriage laws that he believed would be consistent with the First Amendment. In his concurrence to the Court’s dismissal (as moot) of the petition for certification in Biden v. First Amendment Institute, Thomas wrote of the market power allegedly held by social-media companies like Twitter, Facebook, and YouTube that:

If part of the problem is private, concentrated control over online content and platforms available to the public, then part of the solution may be found in doctrines that limit the right of a private company to exclude. Historically, at least two legal doctrines limited a company’s right to exclude.

He proceeded to outline how common-carriage and public-accommodation laws can be used to limit companies from excluding users, suggesting that they would be subject to a lower standard of First Amendment scrutiny under Turner and its progeny.

Among the reasons for imposing common-carriage requirements on social-media companies, Justice Thomas found it important that they are like conduits that carry speech of others:

Though digital instead of physical, they are at bottom communications networks, and they “carry” information from one user to another. A traditional telephone company laid physical wires to create a network connecting people. Digital platforms lay information infrastructure that can be controlled in much the same way. And unlike newspapers, digital platforms hold themselves out as organizations that focus on distributing the speech of the broader public. Federal law dictates that companies cannot “be treated as the publisher or speaker” of information that they merely distribute. 110 Stat. 137, 47 U. S. C. §230(c). 

Thomas also noted the relationship between certain benefits bestowed upon common carriers in exchange for universal service: 

In exchange for regulating transportation and communication industries, governments—both State and Federal— have sometimes given common carriers special government favors. For example, governments have tied restrictions on a carrier’s ability to reject clients to “immunity from certain types of suits” or to regulations that make it more difficult for other companies to compete with the carrier (such as franchise licenses). (internal citations omitted)

While Taamneh is not about the First Amendment, some of the language in Thomas’ opinion would suggest that social-media companies are the types of businesses that may receive conduit liability for third-party conduct in exchange for common-carriage requirements. 

As noted above, the Court found it important for its holding that there was no aiding-and-abetting by Twitter that “there is not even reason to think that defendants carefully screened any content before allowing users to upload it onto their platforms. If anything, the opposite is true: By plaintiffs’ own allegations, these platforms appear to transmit most content without inspecting it.” The Court then compared social-media platforms to “cell phones, email, or the internet generally,” which are classic examples of conduits. In particular, phone service was a common carrier that largely received immunity from liability for its users’ conduct.

Thus, while Taamneh wouldn’t be directly binding in the First Amendment context, this language will likely be cited in the briefs by those supporting the Texas and Florida common-carriage laws when the Supreme Court reviews them.

Section 230 and Neutral Tools

On the other hand—and despite the views Thomas expressed about Section 230 immunity in his Malwarebytes statement—there is much in the Court’s reasoning in Taamneh that would lead one to believe the justices sees algorithmic recommendations as neutral tools that would not, in and of themselves, restrict a finding of immunity for online platforms.

While the Court’s decision in Gonzalez v. Google basically said it didn’t need to reach the Section 230 question because the allegations failed to state a claim under Taamneh’s reasoning, it appears highly likely that a majority would have found the platforms immune under Section 230 despite their use of algorithmic recommendations. For instance, in Taamneh, the Court disagreed with the assertion that recommendation algorithms amounted to substantial assistance, reasoning that:

By plaintiffs’ own telling, their claim is based on defendants’ “provision of the infrastructure which provides material support to ISIS.” Viewed properly, defendants’ “recommendation” algorithms are merely part of that infrastructure. All the content on their platforms is filtered through these algorithms, which allegedly sort the content by information and inputs provided by users and found in the content itself. As presented here, the algorithms appear agnostic as to the nature of the content, matching any content (including ISIS’ content) with any user who is more likely to view that content. The fact that these algorithms matched some ISIS content with some users thus does not convert defendants’ passive assistance into active abetting. Once the platform and sorting-tool algorithms were up and running, defendants at most allegedly stood back and watched; they are not alleged to have taken any further action with respect to ISIS. 

On the other hand, the Court thought it important to its finding that there were no allegations establishing a nexus (due to unusual provision or conscious and selective promotion) between Twitter’s provision of a communications platform and the terrorist activity:

To be sure, we cannot rule out the possibility that some set of allegations involving aid to a known terrorist group would justify holding a secondary defendant liable for all of the group’s actions or perhaps some definable subset of terrorist acts. There may be, for example, situations where the provider of routine services does so in an unusual way or provides such dangerous wares that selling those goods to a terrorist group could constitute aiding and abetting a foreseeable terror attack. Cf. Direct Sales Co. v. United States, 319 U. S. 703, 707, 711–712, 714–715 (1943) (registered morphine distributor could be liable as a coconspirator of an illicit operation to which it mailed morphine far in excess of normal amounts). Or, if a platform consciously and selectively chose to promote content provided by a particular terrorist group, perhaps it could be said to have culpably assisted the terrorist group. Cf. Passaic Daily News v. Blair, 63 N. J. 474, 487–488, 308 A. 2d 649, 656 (1973) (publishing employment advertisements that discriminate on the basis of sex could aid and abet the discrimination).

In other words, this language could suggest that, as long as the algorithms are essentially “neutral tools” (to use the language of Roommates.com and its progeny), social-media platforms are immune for third-party speech that they incidentally promote. But if they design their algorithmic recommendations in such a way that suggests the platforms “consciously and selectively” promote illegal content, then they could lose immunity.

Unless other justices share Thomas’ appetite to limit Section 230 immunity substantially in a future case, this language from Taamneh would likely be used to expand the law’s protections to algorithmic recommendations under a Roommates.com/”neutral tools” analysis.

Conclusion

While the Court did not end up issuing the huge Section 230 decision that some expected, the Taamneh decision will be a big deal going forward for the interconnected issues of online intermediary liability, the First Amendment, and Section 230. Language from Justice Thomas’ opinion will likely be cited in the litigation over the Texas and Florida common-carrier laws, as well as future Section 230 cases.

In Constitutional Law, Exclusionary Conduct, First Amendment, Platforms, Supreme Court , ,
permalink

How Much Information Do Markets Require?

Brian Albrecht —  23 May 2023 — Leave a comment

One of the biggest names in economics, Daron Acemoglu, recently joined the mess that is Twitter. He wasted no time in throwing out big ideas for discussion and immediately getting tons of, let us say, spirited replies. 

One of Acemoglu’s threads involved a discussion of F.A. Hayek’s famous essay “The Use of Knowledge in Society,” wherein Hayek questions central planners’ ability to acquire and utilize such knowledge. Echoing many other commentators, Acemoglu asks: can supercomputers and artificial intelligence get around Hayek’s concerns? 

Coming back to Hayek’s argument, there was another aspect of it that has always bothered me. What if computational power of central planners improved tremendously? Would Hayek then be happy with central planning?

While there are a few different layers to Hayek’s argument, at least one key aspect does not rest at all on computational power. Hayek argues that markets do not require users to have much information in order to make their decisions. 

To use Hayek’s example, when the price of tin increases: “All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere.” Knowing whether demand or supply shifted to cause the price increase would be redundant information for the tin user; the price provides all the information about market conditions that the user needs. 

To Hayek, this informational role of prices is what makes markets unique (compared to central planning):

The most significant fact about this [market] system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to take the right action.

Good computers, bad computers—it doesn’t matter. Markets just require less information from their individual participants. This was made precise in the 1970s and 1980s in a series of papers on the “informational efficiency” of competitive markets.

This post will give an explanation of what the formal results say. From there, we can go back to debating the relevance for Acemoglu’s argument and the future of central planning with AI.

From Hayek to Hurwicz

First, let’s run through an oversimplified history of economic thought. Hayek developed his argument about information and markets during the socialist-calculation debate between Hayek and Ludwig von Mises on one side and Oskar Lange and Abba Lerner on the other. Lange and Lerner argued that a planned socialist economy could replicate a market economy. Mises and Hayek argued that it could not, because the socialist planner would not have the relevant information.

In response to the socialist-calculation debate, Leonid Hurwicz—who studied with Hayek at the London School of Economics, overlapped with Mises in Geneva, and would ultimately be awarded the Nobel Memorial Prize in 2007—developed the formal language in the 1960s and 1970s that became what we now call “mechanism design.”

Specifically, Hurwicz developed an abstract way to measure how much information a system needed. What does it mean for a system to require little information? What is the “efficient” (i.e., minimal) amount of information? Two later papers (Mount and Reiter (1974) and Jordan (1982)) used Hurwicz’s framework to prove that competitive markets are informationally efficient.

Understanding the Meaning of Informational Efficiency

How much information do people need to achieve a competitive outcome? This is where Hurwicz’s theory comes in. He gave us a formal way to discuss more and less information: the size of the message space. 

To understand the message space’s size, consider an economy with six people: three buyers and three sellers. Some buyers—call them type B3—are willing to pay $3. Type B2 is willing to pay $2. Sellers of type S0 are willing to sell for $0. S1 for $1, and so on. Each buyer knows their valuation for the good, and each seller knows their cost.

Here’s the weird exercise. Along comes an oracle who knows everything. The oracle decides to figure out a competitive price that will clear the market, so he draws out the supply curve (in orange), and the demand curve (in blue) and picks an equilibrium point where they cross (in red). 

So the oracle knows a price of $1.50 and a quantity of 2 is an equilibrium.

Now, we, the ignorant outsiders, come along and want to verify that the oracle is telling the truth and knows that it is an equilibrium. But we shouldn’t take the oracle’s word for it.

How can the oracle convince us that this is an equilibrium? We don’t know anyone’s valuation.

The oracle puts forward a game to the six players. The oracle says:

  • The price is $1.50, meaning that if you buy 1, you pay $1.50; if you sell 1, you receive $1.50.
  • If you say you’re B3 (which means you value the good at $3), you must buy 1.
  • If you say you’re B2, you must buy 1.
  • If you say you’re B1, you must buy 0.
  • If you say you’re S0, you must sell 1.
  • If you say you’re S1, you must sell 1.
  • If you say you’re S2, you must sell 0.

The oracle then asks everyone: do you accept the terms of this mechanism? Everyone says yes, because only the buyers who value it more than $1.50 buy and only the sellers with a cost less than $1.50 sell. By everyone agreeing, we (the ignorant outsiders) can verify that the oracle did, in fact, know people’s valuations.

Now, let’s count how much information the oracle needed to communicate. He needed to send a message that included the price and the trades for each type. Technically, he didn’t need to say S2 sells zero, because it is implied by the fact that the quantity bought must equal the quantity sold. In total, he needs to send six messages.

The formal exercise amounts to counting each message that needs to be sent. With a formally specified way of measuring how much information is required in competitive markets, we can now ask whether this is a lot. 

If you don’t care about efficiency, you can always save on information and not say anything, don’t have anyone trade, and have a message space of size 0. That saves on information; just do nothing.

But in the context of the socialist-calculation debate, the argument was over how much information was needed to achieve “good” outcomes. Lange and Lerner argued that market socialism could be efficient, not that it would result in zero trade, so efficiency is the welfare benchmark we are aiming for.

If you restrict your attention to efficient outcomes, Mount and Reiter (1974) showed you cannot use less information than competitive markets. In a later paper, Jordan (1982) showed that there is no way to match the competitive mechanism in terms of information. The competitive mechanism is the unique mechanism with this dimension. 

Acemoglu reads Hayek as saying “central planning wouldn’t work because it would be impossible to collect and compute the right allocation of resources.” But the Jordan and Mount & Reiter papers don’t claim that computation is impossible for central planners. Take whatever computational abilities exist, from the first computer to the newest AI—competitive markets always require the least information possible. Supercomputers or AI do not, and cannot, change that relative comparison. 

Beyond Computational Issues

In terms of information costs, the best a central planner could hope for is to mimic exactly the market mechanism. But then, of what use is the planner? She’s just one more actor who could divert the system toward her own interest. As Acemoglu points out, “if the planner could collect all of that information, she could do lots of bad things with it.” 

The incentive problem is a separate problem, which is why Hayek tried to focus solely on information. Think about building a road. There is a concern that markets will not provide roads because people would be unwilling to pay for them without being coerced through taxes. You cannot simply ask people how much they are willing to pay for the road and charge them that price. People will lie and say they do not care about roads. No amount of computing power fixes incentives. Again, computing power is tangential to the question of markets versus planning. Superior computational power doesn’t help. 

There’s a lot buried in Hayek and all of those ideas are important and worth considering. They are just further complications with which we should grapple. A handful of theory papers will never solve all of our questions about the nature of markets and central planning. Instead, the formal papers tell us, in a very stylized setting, what it would even mean to quantify the “amount of information.” And once we quantify it, we have an explicit way to ask: do markets use minimal information?

For several decades, we have known that the answer is yes. In recent work, Rafael Guthmann and I show that informational efficiency can extend to big platforms coordinating buyers and sellers—what we call market-makers.

The bigger problem with Acemoglu’s suggestion that computational abilities can solve Hayek’s challenge is that Hayek wasn’t merely thinking about computation and the communication of information. Instead, Hayek was concerned about our ability to even articulate our desires. In the example above, the buyers know exactly how much they are willing to pay and sellers know exactly how much they are willing to sell for. But in the real world, people have tacit knowledge that they cannot communicate to third parties. This is especially true when we think about a dynamic world of innovation. How do you communicate to a central planner a new product? 

The real issue is the market dynamics require entrepreneurs who are imagining new futures with new products like the iPhone. Major innovations will never be able to be articulated and communicated to a central planner. All of these readings of Hayek and the market’s ability to communicate information—from formal informational efficiency to tacit knowledge—are independent of computational capabilities. 

In Economic Theory , , ,
permalink

Antitrust at the Agencies Roundup: The Orphan’s Hypothetical Competitor Edition

Daniel J. Gilman —  19 May 2023 — Leave a comment

Some may refer to this as the Roundup Formerly Known as the FTC Roundup. If you recorded yourself while reading out loud, and your name is Dove, that is what it sounds like when doves sigh. 

Maybe He Never Said ‘Never’

The U.S. Justice Department’s (DOJ) Antitrust Division recently agreed to settle its challenge of Swedish conglomerate Assa Abloy’s proposed acquisition of the hardware and home-improvement division of Spectrum Brands.Assa Abloy will divest certain assets as a condition of settling the case and consummating the merger.

That’s of interest to those following residential-door-hardware markets—about which I know very little, although I have purchased such hardware on occasion—but it’s also of interest because Assistant Attorney General Jonathan Kanter, who heads the division, has (like Federal Trade Commission Chair Lina Khan) repeatedly decried settling merger cases. He has said he is “concerned that merger remedies short of blocking a transaction too often miss the mark” and that he believes “[o]ur goal is simple: we must be prepared to try cases to a verdict when we think a violation has taken place.”

More colorfully: “I’m here to declare that we’re not part of the chickenshit club.” À la Groucho Marx, he doesn’t want to belong to any club that will accept him as a member. 

There has, at least sometimes, been a caveat: “[o]ur duty is to litigate, not settle, unless a remedy fully prevents or restrains the violation.” So maybe it was a line in the sand, but not cast in stone. Or maybe it wasn’t exactly a line.

And while I never really followed the “losing is winning” rhetoric (never uttered by a high school coach in any sport anywhere), I do understand that a tie is often preferable to a loss, and that settling can even be a win-win. Perhaps even when you (say, the DOJ, for example) basically agree to the settlement proposed by the other side. 

Of Orphans and Potential Competition

All this reminds me of the “open offer” in the Illumina/Grail matter over at the FTC, which was puzzled over here, there, and nearly everywhere. More recently, the FTC has filed suit to block Amgen’s acquisition of Horizon Therapeutics, which the commission announced with a press release bearing the headline: “FTC Sues to Block Biopharmaceutical Giant Amgen from Acquisition that Would Entrench Monopoly Drugs Used to Treat Two Serious Illnesses.”

Or, as others might call it, “if you think the complaint in Illumina/Grail was speculative, take a look at this.” 

At stake are Horizon’s drugs Tepezza (used to treat thyroid eye disease) and Krystexxa (used to treat chronic refractory gout). Both are designated as “orphan drugs,” which means they treat rare conditions and enjoy various tax and regulatory benefits as a result. And as the FTC correctly notes: “[n]either of these treatments have any competition in the pharmaceutical marketplace.” That is, the patient population for each drug is fairly small, but for those who have thyroid eye disease or chronic refractory gout, there are no substitutes. Patients might well benefit from greater competition.

Given that these are currently monopoly products, the FTC cannot worry about future harm to an otherwise competitive market. Amgen has no drugs in head-to-head competition with either Tepezza or Krystexxa, and neither does any other biologics or pharmaceutical firm. And there’s no allegation of unearned market power—Tepezza and Krystexxa are approved products, and there’s no allegation that their approval or marketing has been anything other than lawful. Market power is not supposed to change with the acquisition. Certainly not on day one, or on any day soon.

Rather, there’s a concern that Amgen will (allegedly) be likely to engage in conduct that harms competition that’s expected to develop, at some time or other. The complaint alleges that Amgen will be likely to leverage its other products in such a way as to “raise… [their] rivals’ barriers to entry or dissuade them from competing as aggressively if and when they gain FDA approval.” The most likely route to this, according to the FTC complaint, would be to exploit bargaining leverage with pharmacy benefit managers (PBMs) to secure favorable placement in the formularies that PBMs design for various health plans.  

Perhaps. The evidence suggests that most vertical mergers are procompetitive, but a vertically integrated firm can have an incentive to foreclose rivals, which may or may not lead to a net loss to competition and consumers, depending on the facts and circumstances.

But then there’s the “if and when” part. We don’t really know what the relevant facts and circumstances are—not from the public documents, at any rate. We are told that the Tepezza and Krystexxa monopolies will “not last forever,” but we’re not told who will enter when. There’s also no clear suggestion as to how a combined Amgen/Horizon could foreclose the development of a would-be competitor. Neither firm controls a critical input, would-be rivals’ clinical trials, or the Food and Drug Administration’s (FDA) approval process.

As for potential future competition, the large PBMs are not unsophisticated bargainers or lacking in leverage of their own. Hence, the FTC’s much-ballyhooed PBM investigations. 
On the one hand, there’s typically some forward-looking aspect to merger analysis: what would competition look like, but for the merger? On the other hand, as Niels Bohr and Yogi Berra have variously observed: “It is hard to make predictions, especially about the future.” Some predictions are harder than others, and some are just shots in the dark. As former FTC Commissioner Joshua Wright observed in his dissent in Nielsen Holdings, grounded…

…predictions about the evolution of a market [are] based upon a fact-intensive analysis …. when assessing whether future entry would counteract a proposed transaction’s competitive concerns, the agencies evaluate a number of facts—such as the history of entry in the relevant market and the costs a future entrant would need to incur to be able to compete effectively—to determine whether entry is “timely, likely, and sufficient.”

That was hard to do in Nielsen. It was hard to do (and the commission failed to do it) in the Meta/Within case. And it’s hard to do when we’re dealing with complex molecule products, when entry must clear significant regulatory hurdles, and when we have no clinical data establishing (or even, based on which, we might estimate) the approval and entry of any particular competing product in some specified timeframe. 

Drugs in late-stage development may be far enough along in the approval process that one can reasonably predict approval and entry in a year or two. Not with any certainty, of course. Things happen. But predictions can be made with some confidence, at least when it comes to simple molecule pharmaceutical drugs (as opposed to biologics) and perhaps with drugs already approved by foreign regulators based on substantial clinical trials. But this is not that. There are potential rivals in the developmental pathway, but there seem to be zero reported results. None. That is, none reported by the FDA, where it reports such things and none mentioned in the FTC’s complaint. So we seem to lack the sort of data that might facilitate a reasonable prediction about the particulars of future entry, should it occur. 

Nobody is poised to enter the market and there is no clear near-term entrant, but for one. As the complaint explains:

Horizon is currently developing a subcutaneously administered version of Tepezza, which it estimates will receive FDA approval. … The planned introduction of this subcutaneous Tepezza formulation promises to further lower Amgen’s logistical and economic barriers to establishing multi-product contracts between its pharmacy benefit products, like Enbrel, and Tepezza. 

Perhaps, but surely that’s a double-edged sword for the FTC’s complaint, at best. Amgen’s stock of blockbusters—the alleged source of their leverage, should push come to shove—would not be affected. And there’s no reason to think (and no allegation) that Amgen would not continue the development of a new form of delivery for Tepezza.

The complaint maintains that “[t]here are no countervailing factors sufficient to offset the likelihood of competitive harm from the Proposed Acquisition.” But we have no idea how to estimate the risk that’s supposed to be offset. Certainly, the complaint doesn’t tell us and the complaint itself hinted at potentially offsetting factors in the very same paragraph: research, development, and marketing efficiencies, as well as the possibility of lower regulatory costs, courtesy of Amgen’s pockets, sophistication, and experience. If the subcutaneous Tepezza product could be brought to market sooner, and/or marketed more effectively, consumers wouldn’t be harmed. They would benefit. 

It seems we really have no idea what future competition might or might not look like two or three years down the road, or four or five. Indeed, it’s not clear when or whether a rival to either drug will be approved for marketing in the United States, whether Amgen (or Horizon) attempts to erect barriers to entry or not. Moreover, there’s no obvious route by which Amgen can impede the development of rival products. Is the FTC estimating a risk of harm to competition or guessing?

Statisticians (and economists) distinguish between Type 1 and Type 2 errors, false positives and false negatives respectively. There’s ongoing debate over the question whether the current state of the law pays too much attention to the risk of false positives, and not enough to the risk of false negatives. Be that as it may, there are very real costs when procompetitive mergers are wrongly identified as anticompetitive and blocked accordingly.

The perfect no-false-negatives strategy of “block all mergers” (or all where there’s a non-zero risk of competitive harm) cannot be adopted for free. That ought to be plain in the case of drug development (and, say, the type of cancer tests at issue in Illumina/Grail). The population of consumers comprises patients and payers; delay the benefits of efficient mergers, and patients are harmed. A complaint is just that, but does the FTC’s complaint show that harm is likely on any particular time frame, or simply possible at some point?

Looking back at the past 25 years, one might view the FTC’s attention to mergers in the health-care sector as a model of research-based enforcement, with important contributions from the Bureau of Economics and the policy shop, in addition to those of enforcers in the Bureau of Competition. That was a nice view; I miss it.

More later, but there was this, too.

In Antitrust & Competition, Antitrust at the Agencies Roundup, Federal Trade Commission, Justice Department, Mergers & Acquisitions, Section 5 , , , , , , , , , , , , ,
permalink

If the UK Wants to Remain a Tech Leader, It Needs Less Regulation, Not More 

Dirk Auer —  19 May 2023 — Leave a comment

Brexit was supposed to free the United Kingdom from Brussels’ heavy-handed regulation and red tape. But dreams of a Singapore-on-the-Thames are slowly giving way to ill-considered regulation that threatens to erode Britain’s position as one of the world’s leading tech hubs. 

The UK Competition and Markets Authority’s recent decision to block the merger of Microsoft and game-maker Activision-Blizzard offers a case in point. Less than a month after the CMA formally announced its opposition to the deal, the European Commission has thrown a spanner in the works. Looking at the same facts, the commission—no paragon of free-market thinking—concluded the merger would benefit competition and consumers, paving the way for it to move ahead in the Old Continent.

The two regulators disagree on the likely effects of Microsoft’s acquisition. The European Commission surmised that bringing Activision-Blizzard titles to Microsoft’s Xbox will create tougher competition for Sony, leading to lower prices and better games (conditional on several remedies). This makes sense. Sony’s PlayStation 5 is by far the market leader, currently outselling the Xbox four to one. Closing the content gap between these consoles will make the industry more competitive.

In contrast, the CMA’s refusal hinged on hypothetical concerns about the embryonic cloud-gaming market, which is estimated to be worth £2 billion worldwide, compared to £40 billion for console gaming. The CMA feared that, despite proposed temporary remedies, Microsoft would overthrow rivals by eventually making Activision-Blizzard titles exclusive to its cloud platform. 

Unfortunately, this narrow focus on cloud gaming at the expense of the console market essentially amounts to choosing a bird in the bush instead of two in the hand. Worse, it highlights the shortcomings of the UK’s current approach to economic regulation.

Even if the CMA was correct on the substance of the case—and there are strong reasons to believe it is not—its decision would still be harmful to the UK economy. For one thing, this tough stance may cause two of the world’s leading tech firms to move thousands of jobs away from the UK. More fundamentally, foreign companies and startup founders will not want to tie themselves to a jurisdiction whose regulatory authorities show such disdain for the firms they host. 

Given what we have already seen from the CMA, it would appear ill-advised to further increase the authority’s powers and reduce judicial oversight of its decisions. Yet that is precisely what the pending Digital Markets, Competition and Consumers Bill would do. 

The bill would give the CMA vast authority to shape firms operating in “digital markets” according to its whims. It would cover almost any digital service offered by a firm whose turnover exceeds certain thresholds. And just like the CMA’s merger-review powers, these new rules would be subject to only limited judiciary oversight—judicial review rather than merits-based appeals.

The power to shape the internet in the UK (and, indirectly, abroad) would thus be entrusted to a regulator that fails to grasp that hypothetical and remediable concerns in one tiny market (cloud gaming) are no reason to block a transaction that has vast countervailing benefits in another (console gaming). 

In turn, this threatens to deter startup creation in the UK. Firms will invest abroad if choosing the UK makes them vulnerable to the whims of an overzealous regulator, which would be the case under the digital markets bill. This could mean fewer tech jobs in the UK, as well as the erosion of London’s status as one of the world’s leading tech hubs. 

The UK is arguably at the forefront of technologies like artificial intelligence and nuclear fusion. A tough merger-control policy that signals to startup founders that they will be barred from selling their companies to larger firms could have a disastrous impact on the UK’s competitiveness in those fields. 

The upshot is that, when it comes to economic regulation, the United Kingdom is not an island. It cannot stand alone in a globalized world, where tech firms, startup founders, and VCs choose the jurisdictions that are most accommodating and that maximize the chance their businesses will thrive. 

With Brexit now complete, the UK is free to replace legacy Brussels red tape with light-touch rules that attract foreign firms and venture capital investments. Yet the UK seems to be replicating many of Brussels’ shortcomings. Fortunately, there is still time for Parliament to change course on the digital markets bill.

In Antitrust & Competition, European Union, Mergers & Acquisitions, United Kingdom , , ,
permalink

UK Poised to Begin Realizing Brexit’s Regulatory-Reform Potential

Alden Abbott and Shanker Singham —  16 May 2023 — Leave a comment

The United Kingdom’s 2016 “Brexit” decision to leave the European Union created the opportunity for the elimination of unwarranted and excessive EU regulations that had constrained UK economic growth and efficiency.

Recognizing that fact, former Prime Minister Boris Johnson launched the Task Force on Innovation, Growth, and Regulatory Reform, whose May 2021 report recommended “a new regulatory vision for the UK.” That vision emphasized “[p]romot[ing] productivity, competition and innovation through a new framework of proportionate, agile and less bureaucratic regulation.”

Despite it containing numerous specific reform proposals, relatively little happened in the immediate wake of the report. Last week, however, the UK Department for Business and Trade announced an initial package of regulatory reforms intended to “reduce unnecessary regulation for businesses, cutting costs and allowing them to compete.” The initial package is focused on:

  • “reducing the business burden”;
  • “[e]nsuring regulation is, by default, the last rather than first response of Government”;
  • “[i]mproving regulators’ focus on economic growth by ensuring regulatory action is taken only when it is needed”;
  • “[p]romoting competition and productivity in the workplace”; and
  • “[s]timulating innovation, investment and growth by announcing two strategic policy statements to steer our regulators.”

As we explain in a May 15 piece published by CapX, while this latest development holds some real promise, a bit of caution is in order:

For too long the UK’s approach to regulation has been warped by a strange kind of numbers game: how many laws can be removed? What percentage of EU laws on the UK rule book can be dispensed with? how many quangos can go on the bonfire?

It’s the kind of misguided approach that has led to headline-grabbing projects like the revival of imperial measures – a purely symbolic gesture that did nothing to improve competition, liberalise the economy or raise people’s living standards.

Rather than this rather performative approach, our new book Trade, Competition and Domestic Regulatory Policy suggests a very different approach to regulatory reform.

First, does the proposed reform establish a framework that can be used to ensure that future regulation is as pro-competitive as possible. Are actual mechanisms established or are the principles merely hortatory?

Second, how does the reform impact the stock of existing regulation? How precisely will those regulations be made more proportionate, subject to the test of necessity, and generate pro-competitive and open trade outcomes?

Third, is there a moral philosophical choice embedded in the approach? This will be vital to ensuring that reform is not some random hotch-potch of ideas, designed more for a tabloid front page than as a real, sustainable and concrete reform.

Encouragingly, if we look through these lenses in turn, we find that the beginnings of a framework are emerging here in the UK.

The Government’s recent package of regulatory reform has much to commend it. It establishes an overall set of governing principles for future regulation, and also requires the review of our existing stock of regulation, including the body of EU rules that are still part of UK law. The focus on necessity, proportionality and competition is particularly welcome, as is the consideration of how regulation affects economic growth.

It’s not perfect – we do think, for instance, that the framework could go farther and actually embed the Competition and Markets Authority into the regulatory promulgation process more concretely. This should not be controversial. The OECD itself made these recommendations in its Regulatory Toolkit and Competition Assessment some 20 years ago, which was coincidentally the time when the spread of regulatory distortions seemed to accelerate. The International Competition Network (ICN), comprised of most national competition agencies, has also recommended that those agencies advocate for competition in the regulatory promulgation process.

The UK has indicated that they would apply this approach to the stock of regulation, much of which is retained EU law. This represents an opportunity for the UK, as most countries do not have a readily identifiable corpus of regulation to start with. Certainly it is helpful to ensure that common law approaches are applied to the entire UK rule book (including any retained EU law), and that UK interpretation (by judges, and the executive branch) trumps any interpretation of the Court of Justice of the European Union. Of course, it would have been better to have undertaken this task six years ago, when we knew it would be necessary.         

Where there is less clarity, it is around the philosophic underpinnings of this regulatory approach, which is regrettable. Back in the early 2000s, the OECD recognised the long-held view that pro-competitive regulation does indeed stimulate an increase in GDP per capita. Separately, this has also been recognised for open trading systems and property rights protection.

None of this should be remotely controversial in the UK, or indeed anywhere else. It is unfortunate that it has become so, largely because of an approach based on a Manichaean view that all EU regulations are bad, and all UK regulations are good, and that success is to be judged on the number of EU rules removed.

More generally, all other nations would also benefit from systematic regulatory reform that aims to ferret out the many anticompetitive market distortions that severely limit economic growth and welfare enhancement. We discuss this topic at length in our recent book on Trade, Competition, and Domestic Regulatory Policy.

In Antitrust & Competition, European Union, United Kingdom
permalink

The Law & Economics of Children’s Online Safety: The First Amendment and Online Intermediary Liability

Ben Sperry —  12 May 2023 — Leave a comment

Legislation to secure children’s safety online is all the rage right now, not only on Capitol Hill, but in state legislatures across the country. One of the favored approaches is to impose on platforms a duty of care to protect teen users.

For example, Sens. Richard Blumenthal (D-Conn.) and Marsha Blackburn (R-Tenn.) have reintroduced the Kid’s Online Safety Act (KOSA), which would require that social-media platforms “prevent or mitigate” a variety of potential harms, including mental-health harms; addiction; online bullying and harassment; sexual exploitation and abuse; promotion of narcotics, tobacco, gambling, or alcohol; and predatory, unfair, or deceptive business practices.

But while bills of this sort would define legal responsibilities that online platforms have to their minor users, this statutory duty of care is more likely to result in the exclusion of teens from online spaces than to promote better care of teens who use them.

Drawing on the previous research that I and my International Center for Law & Economics (ICLE) colleagues have done on the economics of intermediary liability and First Amendment jurisprudence, I will in this post consider the potential costs and benefits of imposing a statutory duty of care similar to that proposed by KOSA.

The Law & Economics of Online Intermediary Liability and the First Amendment (Kids Edition)

Previously (in a law review article, an amicus brief, and a blog post), we at ICLE have argued that there are times when the law rightfully places responsibility on intermediaries to monitor and control what happens on their platforms. From an economic point of view, it makes sense to impose liability on intermediaries when they are the least-cost avoider: i.e., the party that is best positioned to limit harm, even if they aren’t the party committing the harm.

On the other hand, as we have also noted, there are costs to imposing intermediary liability. This is especially true for online platforms with user-generated content. Specifically, there is a risk of “collateral censorship” wherein online platforms remove more speech than is necessary in order to avoid potential liability. For example, imposing a duty of care to “protect” minors, in particular, could result in online platforms limiting teens’ access.

If the social costs that arise from the imposition of intermediary liability are greater than the benefits accrued, then such an arrangement would be welfare-destroying, on net. While we want to deter harmful (illegal) content, we don’t want to do so if we end up deterring access to too much beneficial (legal) content as a result.

The First Amendment often limits otherwise generally applicable laws, on grounds that they impose burdens on speech. From an economic point of view, this could be seen as an implicit subsidy. That subsidy may be justifiable, because information is a public good that would otherwise be underproduced. As Daniel A. Farber put it in 1991:

[B]ecause information is a public good, it is likely to be undervalued by both the market and the political system. Individuals have an incentive to ‘free ride’ because they can enjoy the benefits of public goods without helping to produce those goods. Consequently, neither market demand nor political incentives fully capture the social value of public goods such as information. Our polity responds to this undervaluation of information by providing special constitutional protection for information-related activities. This simple insight explains a surprising amount of First Amendment doctrine.

In particular, the First Amendment provides important limits on how far the law can go in imposing intermediary liability that would chill speech, including when dealing with potential harms to teenage users. These limitations seek the same balance that the economics of intermediary liability would suggest: how to hold online platforms liable for legally cognizable harms without restricting access to too much beneficial content. Below is a summary of some of those relevant limitations.

Speech vs. Conduct

The First Amendment differentiates between speech and conduct. While the line between the two can be messy (and “expressive conduct” has its own standard under the O’Brien test), governmental regulation of some speech acts is permissible. Thus, harassment, terroristic threats, fighting words, and even incitement to violence can be punished by law. On the other hand, the First Amendment does not generally allow the government to regulate “hate speech” or “bullying.” As the 3rd U.S. Circuit Court of Appeals explained it in the context of a school’s anti-harassment policy:

There is of course no question that non-expressive, physically harassing conduct is entirely outside the ambit of the free speech clause. But there is also no question that the free speech clause protects a wide variety of speech that listeners may consider deeply offensive, including statements that impugn another’s race or national origin or that denigrate religious beliefs… When laws against harassment attempt to regulate oral or written expression on such topics, however detestable the views expressed may be, we cannot turn a blind eye to the First Amendment implications.

In other words, while a duty of care could reach harrassing conduct, it is unclear how it could reach pure expression on online platforms without implicating the First Amendment.

Impermissibly Vague

The First Amendment also disallows rules sufficiently vague that they would preclude a person of ordinary intelligence from having fair notice of what is prohibited. For instance, in an order handed down earlier this year in Høeg v. Newsom, the federal district court granted the plaintiffs’ motion to enjoin a California law that would charge medical doctors with sanctionable “unprofessional conduct” if, as part of treatment or advice, they shared with patients “false information that is contradicted by contemporaneous scientific consensus contrary to the standard of care.”

The court found that “contemporary scientific consensus” was so “ill-defined [that] physician plaintiffs are unable to determine if their intended conduct contradicts [it].” The court asked a series of questions relevant to trying to define the phrase:

[W]ho determines whether a consensus exists to begin with? If a consensus does exist, among whom must the consensus exist (for example practicing physicians, or professional organizations, or medical researchers, or public health officials, or perhaps a combination)? In which geographic area must the consensus exist (California, or the United States, or the world)? What level of agreement constitutes a consensus (perhaps a plurality, or a majority, or a supermajority)? How recently in time must the consensus have been established to be considered “contemporary”? And what source or sources should physicians consult to determine what the consensus is at any given time (perhaps peer-reviewed scientific articles, or clinical guidelines from professional organizations, or public health recommendations)?

Thus, any duty of care to limit access to potentially harmful online content must not be defined in a way that is too vague for a person of ordinary intelligence to know what is prohibited.

Liability for Third-Party Speech

The First Amendment limits intermediary liability when dealing with third-party speech. For the purposes of defamation law, the traditional continuum of liability was from publishers to distributors (or secondary publishers) to conduits. Publishers—such as newspapers, book publishers, and television producers—exercised significant editorial control over content. As a result, they could be held liable for defamatory material, because it was seen as their own speech. Conduits—like the telephone company—were on the other end of the spectrum, and could not be held liable for the speech of those who used their services.

As the Court of Appeals of the State of New York put in a 1974 opinion:

In order to be deemed to have published a libel a defendant must have had a direct hand in disseminating the material whether authored by another, or not. We would limit [liability] to media of communications involving the editorial or at least participatory function (newspapers, magazines, radio, television and telegraph)… The telephone company is not part of the “media” which puts forth information after processing it in one way or another. The telephone company is a public utility which is bound to make its equipment available to the public for any legal use to which it can be put…

Distributors—which included booksellers and libraries—were in the middle of this continuum. They had to have some notice that content they distributed was defamatory before they could be held liable.

Courts have long explored the tradeoffs between liability and carriage of third-party speech in this context. For instance, in Smith v. California, the U.S. Supreme Court found that a statute establishing strict liability for selling obscene materials violated the First Amendment because:

By dispensing with any requirement of knowledge of the contents of the book on the part of the seller, the ordinance tends to impose a severe limitation on the public’s access to constitutionally protected matter. For if the bookseller is criminally liable without knowledge of the contents, and the ordinance fulfills its purpose, he will tend to restrict the books he sells to those he has inspected; and thus the State will have imposed a restriction upon the distribution of constitutionally protected as well as obscene literature. It has been well observed of a statute construed as dispensing with any requirement of scienter that: “Every bookseller would be placed under an obligation to make himself aware of the contents of every book in his shop. It would be altogether unreasonable to demand so near an approach to omniscience.” (internal citations omitted)

It’s also worth noting that traditional publisher liability was limited in the case of republication, such as when newspapers republished stories from wire services like the Associated Press. Courts observed the economic costs that would attend imposing a strict-liability standard in such cases:

No newspaper could afford to warrant the absolute authenticity of every item of its news’, nor assume in advance the burden of specially verifying every item of news reported to it by established news gathering agencies, and continue to discharge with efficiency and promptness the demands of modern necessity for prompt publication, if publication is to be had at all.

Over time, the rule was extended, either by common law or statute, from newspapers to radio and television broadcasts, with the treatment of republication of third-party speech eventually resembling conduit liability even more than distributor liability. See Brent Skorup and Jennifer Huddleston’s “The Erosion of Publisher Liability in American Law, Section 230, and the Future of Online Curation” for a more thoroughgoing treatment of the topic.

The thing that pushed the law toward conduit liability when entities carried third-party speech was the implicit economic reasoning. For example, in 1959’s Farmers Educational & Cooperative Union v. WDAY, Inc., the Supreme Court held that a broadcaster could not be found liable for defamation made by a political candidate on the air, arguing that:

The decision a broadcasting station would have to make in censoring libelous discussion by a candidate is far from easy. Whether a statement is defamatory is rarely clear. Whether such a statement is actionably libelous is an even more complex question, involving as it does, consideration of various legal defenses such as “truth” and the privilege of fair comment. Such issues have always troubled courts… if a station were held responsible for the broadcast of libelous material, all remarks evenly faintly objectionable would be excluded out of an excess of caution. Moreover, if any censorship were permissible, a station so inclined could intentionally inhibit a candidate’s legitimate presentation under the guise of lawful censorship of libelous matter. Because of the time limitation inherent in a political campaign, erroneous decisions by a station could not be corrected by the courts promptly enough to permit the candidate to bring improperly excluded matter before the public. It follows from all this that allowing censorship, even of the attenuated type advocated here, would almost inevitably force a candidate to avoid controversial issues during political debates over radio and television, and hence restrict the coverage of consideration relevant to intelligent political decision.

It is clear from the foregoing that imposing duty of care on online platforms to limit speech in ways that would make them strictly liable would be inconsistent with distributor liability. But even a duty of care that more resembled a negligence-based standard could implicate speech interests if online platforms are seen to be akin to newspapers, or to radio and television broadcasters, when they act as republishers of third-party speech. Such cases would appear to require conduit liability.

The First Amendment Applies to Children

The First Amendment has been found to limit what governments can do in the name of protecting children from encountering potentially harmful speech. For example, California in 2005 passed a law prohibiting the sale or rental of “violent video games” to minors. In Brown v. Entertainment Merchants Ass’n, the Supreme Court found the law unconstitutional, finding that:

No doubt [the government] possesses legitimate power to protect children from harm, but that does not include a free-floating power to restrict the ideas to which children may be exposed. “Speech that is neither obscene as to youths nor subject to some other legitimate proscription cannot be suppressed solely to protect the young from ideas or images that a legislative body thinks unsuitable for them.” (internal citations omitted)

The Court did not find it persuasive that the video games were violent (noting that children’s books often depict violence) or that they were interactive (as some children’s books offer choose-your-own-adventure options). In other words, there was nothing special about violent video games that would subject them to a lower level of constitutional protection, even for minors that wished to play them.

The Court also did not find persuasive California’s appeal that the law aided parents in making decisions about what their children could access, stating:

California claims that the Act is justified in aid of parental authority: By requiring that the purchase of violent video games can be made only by adults, the Act ensures that parents can decide what games are appropriate. At the outset, we note our doubts that punishing third parties for conveying protected speech to children just in case their parents disapprove of that speech is a proper governmental means of aiding parental authority.

Justice Samuel Alito’s concurrence in Brown would have found the California law unconstitutionally vague, arguing that constitutional speech would be chilled as a result of the law’s enforcement. The fact its intent was to protect minors didn’t change that analysis.

Limiting the availability of speech to minors in the online world is subject to the same analysis as in the offline world. In Reno v. ACLU, the Supreme Court made clear that the First Amendment applies with equal effect online, stating that “our cases provide no basis for qualifying the level of First Amendment scrutiny that should be applied to this medium.” In Packingham v. North Carolina, the Court went so far as to call social-media platforms “the modern public square.”

Restricting minors’ access to online platforms through age-verification requirements already have been found to violate the First Amendment. In Ashcroft v. ACLU (II), the Supreme Court reviewed provisions of the Children Online Protection Act’s (COPA) that would restrict posting content “harmful to minors” for “commercial purposes.” COPA allowed an affirmative defense if the online platform restricted access by minors through various age-verification devices. The Court found that “[b]locking and filtering software is an alternative that is less restrictive than COPA, and, in addition, likely more effective as a means of restricting children’s access to materials harmful to them” and upheld a preliminary injunction against the law, pending further review of its constitutionality.

On remand, the 3rd Circuit found that “[t]he Supreme Court has disapproved of content-based restrictions that require recipients to identify themselves affirmatively before being granted access to disfavored speech, because such restrictions can have an impermissible chilling effect on those would-be recipients.” The circuit court would eventually uphold the district court’s finding of unconstitutionality and permanently enjoin the statute’s provisions, noting that the age-verification requirements “would deter users from visiting implicated Web sites” and therefore “would chill protected speech.”

A duty of care to protect minors could be unconstitutional if it ends up limiting access to speech that is not illegal for them to access. Age-verification requirements that would likely accompany such a duty could also result in a statute being found unconstitutional.

In sum:

  • A duty of care to prevent or mitigate harassment and bullying has First Amendment implications if it regulates pure expression, such as speech on online platforms.
  • A duty of care to limit access to potentially harmful online speech can’t be defined so vaguely that a person of ordinary intelligence can’t know what is prohibited.
  • A duty of care that establishes a strict-liability standard on online speech platforms would likely be unconstitutional for its chilling effects on legal speech. A duty of care that establishes a negligence standard could similarly lead to “collateral censorship” of third-party speech.
  • A duty of care to protect minors could be unconstitutional if it limits access to legal speech. De facto age-verification requirements could also be found unconstitutional.

The Problems with KOSA: The First Amendment and Limiting Kids’ Access to Online Speech

KOSA would establish a duty of care for covered online platforms to “act in the best interests of a user that the platform knows or reasonably should know is a minor by taking reasonable measures in its design and operation of products and services to prevent and mitigate” a variety of potential harms, including:

  1. Consistent with evidence-informed medical information, the following mental health disorders: anxiety, depression, eating disorders, substance use disorders, and suicidal behaviors.
  2. Patterns of use that indicate or encourage addiction-like behaviors.
  3. Physical violence, online bullying, and harassment of the minor.
  4. Sexual exploitation and abuse.
  5. Promotion and marketing of narcotic drugs (as defined in section 102 of the Controlled Substances Act (21 U.S.C. 802)), tobacco products, gambling, or alcohol.
  6. Predatory, unfair, or deceptive marketing practices, or other financial harms.

There are also a variety of tools and notices that must be made available to users under age 17, as well as to their parents.

Reno and Age Verification

KOSA could be found unconstitutional under the Reno and COPA-line of cases for creating a de facto age-verification requirement. The bill’s drafters appear to be aware of the legal problems that an age-verification requirement would entail. KOSA therefore states that:

Nothing in this Act shall be construed to require—(1) the affirmative collection of any personal data with respect to the age of users that a covered platform is not already collecting in the normal course of business; or (2) a covered platform to implement an age gating or age verification functionality.

But this doesn’t change the fact that, in order to effectuate KOSA’s requirements, online platforms would have to know their users’ ages. KOSA’s duty of care incorporates a constructive-knowledge requirement (i.e., “reasonably should know is a minor”). A duty of care combined with the mandated notices and tools that must be made available to minors makes it “reasonable” that platforms would have to verify the age of each user.

If a court were to agree that KOSA doesn’t require age gating or age verification, this would likely render the act ineffective. As it stands, most of the online platforms that would be covered by KOSA only ask users their age (or birthdate) upon creation of a profile, which is easily evaded by simple lying. While those under age 17 (but at least age 13) at the time of the act’s passage who have already created profiles would be implicated, it would appear the act wouldn’t require platforms to vet whether users who said they were at least 17 when they created new profiles were actually telling the truth.

Vagueness and Protected Speech

Even if KOSA were not found unconstitutional for creating an explicit age-verification scheme, it still likely would lead to kids under 17 being restricted from accessing protected speech. Several of the types of speech the duty of care covers could include legal speech. Moreover, the prohibited speech is defined so vaguely that it likely would lead to chilling effects on access to legal speech.

For example, pictures of photoshopped models are protected speech. If teenage girls want to see such content on their feeds, it isn’t clear that the law can constitutionally stop them, even if it’s done by creating a duty of care to prevent and mitigate harms associated with “anxiety, depression, or eating disorders.”

Moreover, access to content that kids really like to see or hear is still speech, even if they like it so much that an outside observer may think they are addicted to it. Much as the Court said in Brown, the government does not have “a free-floating power to restrict [speech] to which children may be exposed.”

KOSA’s Section 3(A)(1) and 3(A)(2) would also run into problems, as they are so vague that a person of ordinary intelligence would not know what they prohibit. As a result, there would likely be chilling effects on legal speech.

Much like in Høeg, the phrase “consistent with evidence-informed medical information” leads to various questions regarding how an online platform could comply with the law. For instance, it isn’t clear what content or design issue would be implicated by this subsection. Would a platform need to hire mental-health professionals to consult with them on every product-design and content-moderation decision?

Even worse is the requirement to prevent and mitigate “patterns of use that indicate or encourage addiction-like behaviors,” which isn’t defined by reference to “evidence-informed medical information” or to anything else.

Even Bullying May Be Protected Speech

Even KOSA’s duty to prevent and mitigate “physical violence, online bullying, and harassment of the minor” in Section 3(3) could implicate the First Amendment. While physical violence would clearly be outside of the First Amendment’s protections (although it’s unclear how an online platform could prevent or mitigate such violence), online bullying and harassing speech are, nonetheless, speech. As a result, this duty of care could receive constitutional scrutiny regarding whether it effectively limits lawful (though awful) speech directed at minors.

Locking Children Out of Online Spaces

KOSA’s duty of care appears to be based on negligence, in that it requires platforms to take “reasonable measures.” This probably makes it more likely to survive First Amendment scrutiny than a strict-liability regime would.

It could, however, still result in real (and costly) product-design and moderation challenges for online platforms. As a result, there would be significant incentives for those platforms to exclude those they know or reasonably believe are under age 17 from the platforms altogether.

While this is not strictly a First Amendment problem, per se, it nonetheless  illustrates how laws intended to “protect” children’s safety while online can actually lead to their being restricted from using online speech platforms altogether.

Conclusion

Despite its being christened the “Kid’s Online Safety Act,” KOSA will result in real harm for kids if enacted into law. Its likely result would be considerable “collateral censorship,” as online platforms restrict teens’ access in order to avoid liability.

The bill’s duty of care would also either require likely unconstitutional age-verification, or it will be rendered ineffective, as teen users lie about their age in order to access desired content.

Congress shall make no law abridging the freedom of speech, even if it is done in the name of children.

In Constitutional Law, Economic Theory, First Amendment, Law & Economics, Platforms , , , , ,
permalink

FTC Returns to Section 18 Rulemaking with Impersonation Fraud Hearing

Neil Chilson —  11 May 2023 — Leave a comment

[The following is a guest post from Neil Chilson, a senior research fellow with the Center for Growth and Opportunity at Utah State University and former chief technologist of the Federal Trade Commission.]

The Federal Trade Commission (FTC) last week held its first informal hearing in 20 years on Section 18 rulemaking. The hearing itself had a technical delay, which to us participants felt like another 20 years, but was a mere two hours or so.

At issue is a proposed rule intended to target impersonation fraud. Impersonation fraudsters hold themselves out as government officials or company representatives in order to defraud unsuspecting consumers.

I was one of 13 individuals who requested to speak at the informal hearing. My interest is as a consumer with a stake in efficient and effective fraud enforcement and as a former FTC employee proud of the anti-fraud work I contributed to. What follows is adapted from my remarks.

Imposter Fraud Deserves a Good Rule

As the record clearly shows, imposter fraud is a too-common occurrence and costs consumers and businesses millions of dollars a year. We need a good rule here—one that effectively targets fraud with minimal impact on lawful behavior and that it is legally sustainable.  

To that end, two points. First, the rule as written, unlike every other Section 18 rule, is broader than Section 5 and ought to be narrowed. Second, the FTC caselaw is indefinite on the contours of means and instrumentalities. The record shows that this provision is already being misunderstood. The FTC should correct this misperception.

Together, these issues mean that this proceeding has likely failed to put potentially affected parties on notice, leaving a factual gap in the record and in the agency’s regulatory impact analysis.

The Text of the Rule Is Overly Broad

This proceeding is targeted at addressing impersonation frauds and scams in commerce—acts that clearly violate Section 5.   

Yet the rule as written declares unlawful activities that would not violate Section 5’s prohibition on deceptive acts or practices. The rule does not reference “unfairness” or “deception” or note that prohibited activities must be in commerce.

On its face, the draft rule would prohibit a comedian from impersonating Elon Musk; John Ratzenberger from portraying a mailman; or a kid from dressing up as Abraham Lincoln. With the means and instrumentalities provision, it would appear to be “unlawful” to even provide an Abraham Lincoln costume to said child.

Of course, courts would not permit such overbroad applications of the rule. And it seems unlikely that this FTC would spend its resources pursuing cases that the courts would reject out of hand. But rules should be written assuming that some future leadership might seek to abuse them, perhaps to chill unflattering portrayals of national politicians.

The notice of proposed rulemaking (NPRM) states that Section 5 hems in the broad language of the rule. But that gets the purpose of FTC rulemaking backward. The text of the rule should clearly delimit a subset of practices prohibited by Section 5, not the other way around. Indeed, every one of the six past rules created through Section 18 has been written as a subset of Section 5. Every one of them specifies in text that the prohibited conduct is “in commerce.” Each one also describes the prohibited conduct as either an “unfair act or practice” or a “deceptive act or practice” or both.

For example, the Used Motor Vehicle Trade Regulation Rule states:

It is a deceptive act or practice for any used vehicle dealer, when that dealer sells or offers for sale a used vehicle in or affecting commerce as commerce is defined in the Federal Trade Commission Act … to misrepresent the mechanical condition of a used vehicle…

Adding similar language to the draft impersonation rule would be simple and would still achieve the goals of the proceeding. And it would better match the text of the rule to the NPRM’s description of the rule’s scope, helping to cure some of the notice concerns.

Means and Instrumentalities

The second matter is the “means and instrumentalities” provision. I echo the value of having a knowledge requirement. As former FTC Bureau of Consumer Protection (BCP) Director Jessica Rich has noted, there has been debate over the years about the contours of means and instrumentalities, with some commissioners saying that others are using it as a substitute for “aiding and abetting,” a form of secondary liability not within Section 5.

Indeed, some parties in this record have made this mistake. The FTC must clearly articulate the proper scope of the rule, potentially by putting the standard for means and instrumentalities in the rule itself.

To the extent the standard for applying means and instrumentalities liability under Section 5 is itself unclear, it is not a good candidate for rulemaking.

In Antitrust & Competition, Federal Trade Commission, Section 5 , , , ,
permalink

Whatcha Gonna Do When the Well Runs Dry?

Eric Fruits —  10 May 2023 — Leave a comment

As the U.S. House Energy and Commerce Subcommittee on Oversight and Investigations convenes this morning for a hearing on overseeing federal funds for broadband deployment, it bears mention that one of the largest U.S. broadband-subsidy programs is actually likely run out of money within the next year. Writing in Forbes, Roslyn Layton observes of the Affordable Connectivity Program (ACP) that it has enrolled more than 14 million households, concluding that it “may be the most effective broadband benefit program to date with its direct to consumer model.”

This may be true, but how should we measure effectiveness? One seemingly simple measure would be the number of households with at-home internet access who would not have it but for the ACP’s subsidies. Those households can be broadly divided into two groups:

  1. Households that signed up for ACP and got at-home internet; and
  2. Households that have at-home internet, but wouldn’t if they didn’t receive the ACP subsidies.

Conceptually, evaluating the first group is straightforward. We can survey ACP subscribers and determine whether they had internet access before receiving the ACP subsidies. The second group is much more difficult, if not impossible, to measure with the available information. We can only guess as to how many households would unsubscribe if the subsidies went away.

To give a bit of background on the program we now call the ACP: broadband has been included since 2016 as a supported service under the Federal Communication Commission’s (FCC) Lifeline program. Among the Lifeline program’s goals are to ensure the availability of broadband for low-income households (to close the so-called “digital divide”) and to minimize the Universal Service Fund contribution burden levied on consumers and businesses.

As part of the appropriations act enacted in 2021 in response to the COVID-19 pandemic, Congress created a temporary $3.2 billion Emergency Broadband Benefit (EBB) program within the Lifeline program. EBB provided eligible households with a $50 monthly discount on qualifying broadband service or bundled voice-broadband packages purchased from participating providers, as well as a one-time discount of up to $100 for the purchase of a device (computer or tablet). The EBB program was originally set to expire when the funds were depleted, or six months after the U.S. Department of Health and Human Services (HHS) declared an end to the pandemic.

With passage of the Infrastructure Investment and Jobs Act (IIJA) in November 2021, the EBB’s temporary subsidy was extended indefinitely and renamed the Affordable Connectivity Program, or ACP. The IIJA allocated an additional $14 billion to provide subsidies of $30 a month to eligible households. Without additional appropriations, the ACP is expected to run out of funding by early 2024.

The Case of the Nonadopters

According to Information Technology & Innovation Foundation (ITIF), 97.6% of the U.S. population has access to a fixed connection of at least 25/3 Mbps through asymmetric digital subscriber line (ADSL), cable, fiber, or fixed wireless. Pew Research reports that 93% of its survey respondents indicated they have a broadband connection at home.

Pew’s results are in-line with U.S. Census estimates from the American Community Survey. The figure below, summarizing information from 2021, shows that 92.6% of households had a broadband subscription or had access without having to pay for a subscription. Assuming ITIF’s estimates of broadband availability are accurate, then among households without broadband, approximately two-thirds of them—6.4 million—have access to broadband.

On the one hand, price is obviously a major factor driving adoption. For example, among the 7.4% of households who do not use the internet at home, Census surveys show about one-third indicate that price is one reason for not having an at-home connection, responding that they “can’t afford it” or that it’s “not worth the cost.” On the other hand, more than half of respondents said they “don’t need it” or are “not interested.”

But George Ford argues that these responses to the Census surveys are unhelpful in evaluating the importance of price relative to other factors. For example, if a consumer says broadband is “not worth the cost,” it’s not clear whether the “worth” is too low or the “cost” is too high. Consumers who are “not interested” in subscribing to an internet service are implicitly saying that they are not interested at current prices. In other words, there may be a price that is sufficiently low that uninterested consumers become interested.

But in some cases, that price may be zero—or even negative.

A 2022 National Telecommunications and Information Administration (NTIA) survey of internet use found that about 75% of offline households said they wanted to pay nothing for internet access. In addition, as shown in the figure above, about a quarter of households without a broadband or smartphone subscription claim that they can access the internet at home without paying for a subscription. Thus, there may be a substantial share of nonadopters who would not adopt even if the service were free to the consumer.

Aside from surveys, another way to evaluate the importance of price in internet-adoption decisions is with empirical estimates of demand elasticity. The price elasticity of demand is the percent change in the quantity demanded for a good, divided by the percent change in price. A demand curve with an elasticity between 0 and –1 is said to be inelastic, meaning the change in the quantity demanded is relatively less responsive to changes in price. An elasticity of less than –1 is said to be elastic, meaning the change in the quantity demanded is relatively more responsive to changes in price.

Michael Williams and Wei Zao’s survey of the research on the price elasticity of demand concludes that demand for internet services has traditionally been inelastic and has “become increasingly so over time.” They report a 2019 elasticity of –0.05 (down from –0.69 in 2008). George Ford’s 2021 study estimates an elasticity ranging from –0.58 to –0.33.  These results indicate that a subsidy program that reduced the price of internet services by 10% would increase adoption by anywhere from 0.5% (i.e., one-half of one percent) to 5.8%. In other words, a range from approximately zero to a small but significant increase.

It is unsurprising that the demand for internet services is so inelastic, especially among those who do not subscribe to broadband or smartphone service. One reason is the nature of demand curves. Generally speaking, as quantity demanded increases (i.e., moves downward along the demand curve), the demand curve becomes less elastic, as shown in the figure below (which is an illustration of a hypothetical demand curve). With adoption currently at more than 90% of households, the remaining nonadopters are much less likely to adopt at any price.

Thus, there is a possibility that the ACP may be so successful that the program has hit a point of significant diminishing marginal returns. Now that nearly 95% of U.S. households with access to at-home internet use at-home Internet, it may be very difficult and costly to convert the remaining 5% of nonadopters. For example, if Williams & Zao’s estimate of a price elasticity of –0.05 is correct, then even a subsidy that provided “free” Internet would convert only half of the 5% of nonadopters.

Keeping the Country Connected

With all of this in mind, it’s important to recognize that the primary metric for success should not be solely based on adoption rates.

The ACP is not an attempt to create a perfect government program, but rather to address the imperfect realities we face. Some individuals may never adopt internet services, just as some never installed home-telephone services. Even at the peak of landline use in 1998, only 96.2% of households had one.

On the other hand, those who value broadband access may be forced to discontinue service if faced with financial difficulties. Therefore, the program’s objective should encompass both connecting new users and ensuring that economically vulnerable individuals maintain access.

Instead of pursuing an ideal regulatory or subsidy program, we should focus on making the most informed decisions in a context where information is limited. We know there is general demand for internet access and that a significant number of households might discontinue services during economic downturns. And we also know that, in light of these realities, numerous stakeholders advocate for invasive interventions in the broadband market, potentially jeopardizing private investment incentives.

Thus, even if the ACP program is not perfect in itself, it goes a long way toward satisfying the need to make sure the least well-off stay connected, while also allowing private providers to continue their track record of providing high-speed, affordable broadband.

And although we do not have data at the moment demonstrating exactly how many households would discontinue internet service in the absence of subsidies, if Congress does not appropriate additional ACP funds, we may soon have an unfortunate natural experiment that helps us to find out.

In Broadband, Economic Theory, Federal Communications Commission, Telecommunications , , ,
permalink

Biweekly FTC Roundup: Bureau of Let’s-Sue-Meta Edition

Daniel J. Gilman —  5 May 2023 — Leave a comment

The Federal Trade Commission (FTC) might soon be charging rent to Meta Inc. The commission earlier this week issued (bear with me) an “Order to Show Cause why the Commission should not modify its Decision and Order, In the Matter of Facebook, Inc., Docket No. C-4365 (July 27, 2012), as modified by Order Modifying Prior Decision and Order, In the Matter of Facebook, Inc., Docket No. C-4365 (Apr. 27, 2020).”

It’s an odd one (I’ll get to that) and the third distinct Meta matter for the FTC in 2023.

Recall that the FTC and Meta faced off in federal court earlier this year, as the commission sought a preliminary injunction to block the company’s acquisition of virtual-reality studio Within Unlimited. As I wrote in a prior post, U.S. District Court Judge Edward J. Davila denied the FTC’s request in late January. Davila’s order was about more than just the injunction: it was predicated on the finding that the FTC was not likely to prevail in its antitrust case. That was not entirely surprising outside FTC HQ (perhaps not inside either), as I was but one in a long line of observers who had found the FTC’s case to be weak.

No matter for the not-yet-proposed FTC Bureau of Let’s-Sue-Meta, as there’s another FTC antitrust matter pending: the commission also seeks to unwind Facebook’s 2012 acquisition of Instagram and its 2014 acquisition of WhatsApp, even though the FTC reviewed both mergers at the time and allowed them to proceed. Apparently, antitrust apples are never too old for another bite. The FTC’s initial case seeking to unwind the earlier deals was dismissed, but its amended complaint has survived, and the case remains to be heard.

Back to the modification of the 2020 consent order, which famously set a record for privacy remedies: $5 billion, plus substantial behavioral remedies to run for 20 years (with the monetary penalty exceeding the EU’s highest by an order of magnitude). Then-Chair Joe Simons and then-Commissioners Noah Phillips and Christine Wilson accurately claimed that the settlement was “unprecedented, both in terms of the magnitude of the civil penalty and the scope of the conduct relief.” Two commissioners—Rebecca Slaughter and Rohit Chopra—dissented: they thought the unprecedented remedies inadequate.

I commend Chopra’s dissent, if only as an oddity. He rightly pointed out that the commissioners’ analysis of the penalty was “not empirically well grounded.” At no time did the commission produce an estimate of the magnitude of consumer harm, if any, underlying the record-breaking penalty. It never claimed to.

That’s odd enough. But then Chopra opined that “a rigorous analysis of unjust enrichment alone—which, notably, the Commission can seek without the assistance of the Attorney General—would likely yield a figure well above $5 billion.” That subjective likelihood also seemed to lack an empirical basis; certainly, Chopra provided none.

By all accounts, then, the remedies appeared to be wholly untethered from the magnitude of consumer harm wrought by the alleged violations. To be clear, I’m not disputing that Facebook violated the 2012 order, such that a 2019 complaint was warranted, even if I wonder now, as I wondered then, how a remedy that had nothing to do with the magnitude of harm could be an efficient one. 

Now, Commissioner Alvaro Bedoya has issued a statement correctly acknowledging that “[t]here are limits to the Commission’s order modification authority.” Specifically, the commission must “identify a nexus between the original order, the intervening violations, and the modified order.” Bedoya wrote that he has “concerns about whether such a nexus exists” for one of the proposed modifications. He still voted to go ahead with the proposal, as did Slaughter and Chair Lina Khan, voicing no concerns at all.

It’s odder, still. In its heavily redacted order, the commission appears to ground its proposal in conduct alleged to have occurred before the 2020 order that it now seeks to modify. There are no intervening violations there. For example:

From December 2017 to July 2019, Respondent also made misrepresentations relating to its Messenger Kids (“MK”) product, a free messaging and video calling application “specifically intended for users under the age of 13.”

. . . [Facebook] represented that MK users could communicate in MK with only parent-approved contacts. However, [Facebook] made coding errors that resulted in children participating in group text chats and group video calls with unapproved contacts under certain circumstances.

Perhaps, but what circumstances? According to Meta (and the FTC), Meta discovered, corrected, and reported the coding errors to the FTC in 2019. Of course, Meta is bound to comply with the 2020 Consent Order. But were they bound to do so in 2019? They’ve always been subject to the FTC’s “unfair and deceptive acts and practices” (UDAP) authority, but why allege 2019 violations now?

What harm is being remedied? On the one hand, there seems to have been an inaccurate statement about something parents might care about: a representation that users could communicate in Messenger Kids only with parent-approved contacts. On the other hand, there’s no allegation that such communications (with approved contacts of the approved contacts) led to any harm to the kids themselves.

Given all of that, why does the commission seek to impose substantial new requirements on Meta? For example, the commission now seeks restrictions on Meta:

…collecting, using, selling, licensing, transferring, sharing, disclosing, or otherwise benefitting from Covered Information collected from Youth Users for the purposes of developing, training, refining, improving, or otherwise benefitting Algorithms or models; serving targeted advertising, or enriching Respondent’s data on Youth users.

There’s more, but that’s enough to have “concerns about” the existence of a nexus between the since-remedied coding errors and the proposed “modification.” Or to put it another way, I wonder what one has to do with the other.

The only violation alleged to have occurred after the 2020 consent order was finalized has to do with the initial 2021 report of the assessor—an FTC-approved independent monitor of Facebook/Meta’s compliance—covering the period from October 25, 2020 to April 22, 2021. There, the assessor reported that:

 …the key foundational elements necessary for an effective [privacy] program are in place . . . [but] substantial additional work is required, and investments must be made, in order for the program to mature.

We don’t know what this amounts to. The initial assessment reported that the basic elements of the firm’s “comprehensive privacy program” were in place, but that substantial work remained. Did progress lag expectations? What were the failings? Were consumers harmed? Did Facebook/Meta fail to address deficiencies identified in the report? If so, for how long? We’re not told a thing. 

Again, what’s the nexus? And why the requirement that Meta “delete Covered Information collected from a User as a Youth unless [Meta] obtains Affirmative Express Consent from the User within a reasonable time period, not to exceed six (6) months after the User’s eighteenth birthday”? That’s a worry, not because there’s nothing there, but because substantial additional costs are being imposed without any account of their nexus to consumer harm, supposing there is one.

Some might prefer such an opt-in policy—one of two that would be required under the proposed modification—but it’s not part of the 2020 consent agreement and it’s not otherwise part of U.S. law. It does resemble a requirement under the EU’s General Data Protection Regulation. But the GDPR is not U.S. law and there are good reasons for that— see, for example, here, here, here, and here.

For one thing, a required opt-in for all such information, in all the ways that it may live on in the firm’s data and models—can be onerous for users and not just the firm. Will young adults be spared concrete harms because of the requirement? It’s highly likely that they’ll have less access to information (and to less information), but highly unlikely that the reduction will be confined to that to which they (and their parents) would not consent. What will be the net effect?

Requirements “[p]rior to … introducing any new or modified products, services, or features” raise a question about the level of grain anticipated, given that limitations on the use of covered information apply to the training, refining, or improving of any algorithm or model, and that products, services, or features might be modified in various ways daily, or even in real time. Any such modifications require that the most recent independent assessment report find that all the many requirements of the mandated privacy program have been met. If not, then nothing new—including no modifications—is permitted until the assessor provides written confirmation that all material gaps and weaknesses have been “fully” remediated.

Is this supposed to entail independent oversight of every design decision involving information from youth users? Automated modifications? Or that everything come to a halt if any issues are reported? I gather that nobody—not even Meta—proposes to give the company carte blanche with youth information. But carte blanque?

As we’ve been discussing extensively at today’s International Center for Law & Economics event on congressional oversight of the commission, the FTC has a dual competition and consumer-protection enforcement mission. Efficient enforcement of the antitrust laws requires, among other things, that the costs of violations (including remedies) reflect the magnitude of consumer harm. That’s true for privacy, too. There’s no route to coherent—much less complementary—FTC-enforcement programs if consumer protection imposes costs that are wholly untethered from the harms it is supposed to address. 

In Antitrust & Competition, Antitrust at the Agencies Roundup, Data Privacy & Security, Facebook, Federal Trade Commission, Mergers & Acquisitions, Monopolization, Platforms, Truth on the Market , , , , , , , , ,
permalink

UK Blocking of Microsoft-Activision Merger Is Anticompetitive and Anti-Innovation

Alden Abbott —  4 May 2023 — Leave a comment

The United Kingdom’s Competition and Markets Authority (CMA) late last month moved to block Microsoft’s proposed vertical acquisition of Activision Blizzard, a video-game developer that creates and publishes games such as Call of Duty, World of Warcraft, Diablo, and Overwatch. Microsoft summarized this transaction’s substantial benefits to video game players in its January 2022 press release announcing the proposed merger.

The CMA based its decision on speculative future harm in UK cloud-based gaming, neglecting the dramatic and far more likely dynamic competitive benefits the transaction would produce in gaming markets. The FTC announced its own challenge to the merger in December and has scheduled administrative hearings into the matter later in 2023.

If not overturned on appeal, the CMA’s decision is likely to reduce future consumer welfare and innovation in the gaming sector, to the detriment of producers and consumers.

Discussion

In its press release, the CMA stressed harm to future UK consumers of remote-server-based “cloud gaming” services as the basis for opposing the merger:

Microsoft has a strong position in cloud gaming services and the evidence available to the CMA showed that Microsoft would find it commercially beneficial to make Activision’s games exclusive to its own cloud gaming service.

Microsoft already accounts for an estimated 60-70% of global cloud gaming services and has other important strengths in cloud gaming from owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming).

The deal would reinforce Microsoft’s advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch, and World of Warcraft. The evidence available to the CMA indicates that, absent the merger, Activision would start providing games via cloud platforms in the foreseeable future.

The CMA’s discussion ignores a number of salient facts regarding cloud gaming. Cloud gaming has not yet arrived as a major competitor to device-based gaming, as Dirk Auer points out (see also here regarding problems that have constrained the rapid emergence of cloud gaming). Google, for example, discontinued its Stadia cloud-gaming service just over three months ago, “after having failed to gain the traction that the company was expecting” (see here). Although cloud gaming does not require the purchase of specific gaming devices, it does require substantial bandwidth, stable internet connections, and subscriptions to particular services.

What’s more, Microsoft offered the CMA significant concessions to ensure that leading Activision games would remain available on other platforms for at least 10 years (see here, for example). The CMA itself acknowledged this in announcing its opposition to the merger, but rejected Microsoft’s proposals, stating:

Accepting Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA. By contrast, preventing the merger would effectively allow market forces to continue to operate and shape the development of cloud gaming without this regulatory intervention.

Ironically, the real “regulatory intervention” that threatens to hinder market forces is the CMA’s blocking of this transaction, which (as a vertical merger) does not eliminate any direct competition and, to the contrary, promises to reinvigorate direct competition with Sony’s PlayStation. As Aurelien Portuese explains:

Sony is cheering on . . . attempt[s] to block Microsoft’s acquisition of Activision. Why? The proposed merger is a bid to offer a robust platform with high-quality games and provide resources for creators to produce more gaming innovation. That’s great for gamers, but threatening to Japanese industry titans Sony and Nintendo, because it would also create a company capable of competing with them more effectively.

If antitrust officials block the merger, they would be giving Sony and its 70 percent share of the global gaming console market the upper hand while preventing Microsoft and its 30 percent market share from effectively challenging the incumbent. That would be a complete reversal of competition policy.

The Japanese gaming industry dominates the world—and yet, U.S. antitrust officials may very well further cement this already decades-long dominance by blocking the Activision-Microsoft merger. Wielding antitrust to impose a twisted conception of domestic competition at the expense of global competitiveness must end, and the proposed Activision-Microsoft combination exemplifies why.

Furthermore, Portuese debunks the notion that Microsoft would have a future incentive to deny access to Activision’s high-selling Call of Duty franchise, reemphasizing the vigorous nature of gaming competition post-merger:

[T]he very idea that Microsoft would want to foreclose access to “Call of Duty” for PlayStation users is controversial. Microsoft would rationally have little incentive to reduce sales across platforms of a popular game. Moreover, Microsoft’s competitive position is weaker than the FTC seems to think: It faces competition from gaming industry incumbents such as Sony, Nintendo, and Epic Games, and from other large tech companies such as Apple, Amazon, Google, Tencent, and Meta.

In short, there are strong reasons to believe that gaming competition would be enhanced by the Microsoft-Activision merger. What’s more, the merger would likely generate efficiencies of integration, such as the promotion of cross-team collaboration (see here, for example). Notably, in announcing its decision to block the merger, even the CMA acknowledged “the benefit of having Activision’s content available on [Microsoft’s subscription service] Game Pass.” In contrast, theoretical concerns about merger-related potential threats to future cloud-gaming competition are uncertain and not well-grounded.

Conclusion

The CMA should not have blocked the merger. The agency’s opposition to this transaction reflects a blinkered focus on questionable possible future harm in a not-yet developed market, and a failure to properly weigh likely substantial near-term competitive benefits in a thriving existing market.

This is the sort of decision that tends to discourage future procompetitive efficiencies-generating high-tech acquisitions, to the detriment of producers and consumers.

The threat to future vertical mergers that bring together complementary assets to generate attractive new offerings for consumers in dynamically evolving market sectors is particularly unfortunate. Competition agencies should reflect on this reality and rethink their approaches. (FTC, are you paying attention?)

In the meantime, the UK court should carefully assess and, hopefully, side with Microsoft in its appeal of this unfortunate administrative ruling.

In Antitrust & Competition, Federal Trade Commission, Mergers & Acquisitions, Platforms, Truth on the Market, United Kingdom , , ,
permalink

Untangling the 9th Circuit’s Ruling in Epic Games v Apple

Lazar Radic —  4 May 2023 — Leave a comment

The 9th U.S. Circuit Court of Appeals ruled late last month on Epic Games’ appeal of the decision rendered in 2021 by the U.S. District Court for the Northern District of California in Epic Games v Apple, affirming in part and reversing in part the district court’s judgment.

In the original case, Epic had challenged as a violation of antitrust law Apple’s prohibition of third-party app stores and in-app-payment (IAP) systems from operating on its proprietary iOS platform. The district court ruled against Epic, finding that the company’s real concern was its own business interests in the face of Apple’s business model—in particular, the commission that Apple charges for use of its IAP system—rather than harm to consumers and to competition more broadly.

We at the International Center for Law & Economics filed an amicus brief in the case last year on behalf of ourselves and 26 distinguished law & economics scholars in which we highlighted two important issues we thought the court got right:

  1. The assessment of competitive harm in two-sided markets (which, in turn, hinges on the correct definition of the relevant market); and
  2. The assessment of less-restrictive alternatives.

While the 9th Circuit reached the right conclusion on the whole, it didn’t always follow the right path. The court’s understanding of anticompetitive harm in two-sided markets and the role of less-restrictive alternatives, in particular, raise more questions than they answer. Whereas the immediate result is a victory for Apple, some of the more contentious aspects of the 9th Circuit’s ruling could complicate future cases for digital platforms.

Relevant and Irrelevant Mistakes in Antitrust Market Definition

The circuit court found that District Judge Yvonne Gonzalez Rogers erred in defining the relevant market, but that the error did not undermine her conclusion. The appellate panel was not unanimous on this issue, which became the subject of a partial dissent by Judge Sidney R. Thomas. After all, didn’t Epic Games v. Apple hinge largely on the correct definition of the relevant market (see, for example, here)? How can such a seemingly crucial mistake not reverberate down to the rule-of-reason analysis and, ultimately, the outcome of the case?

As the 9th Circuit explained, however, not all mistakes in market definition are terminal. The majority wrote:

We agree that the district court erred in certain aspects of its market-definition analysis but conclude that those errors were harmless.

The mistake stemmed from the district court’s imposition of “a categorical rule that an antitrust market can never relate to a product that is licensed or sold.” But this should be read as mere dicta, not as dispositive of the case. Indeed, what the appellate court had an issue with here is the blanket statement of principle; not with how it reflected on the specific case at hand.

While the notion that antitrust markets never relate to products that are licensed or sold can—and does—lead to the rejection of Epic’s proposed relevant market (if Apple does not license or sell its iOS, by the district court’s own reasoning, iOS can’t be the relevant market), the crucial point is that Epic had failed to show that consumers were unaware that purchasing iOS devices “locks” them in, as precedent requires.

Indeed, where the plaintiffs make a single-brand aftermarket claim, it is up to them to rebut the economic presumption that consumers make a knowing choice to restrict their aftermarket options when they enter into a contract on the competitive market (see Kodak and Newcal). For the record, however, it has been argued that even when consumers are totally uninformed about aftermarket conditions when they purchase equipment, they pay a competitive-package price because competition forces manufacturers to offset later aftermarket price increases with initial equipment-price decreases.

 As the 9th Circuit explains:

Moreover, the district court’s finding on Kodak/Newcal’s consumer-unawareness requirement renders harmless its rejection of Epic’s proposed aftermarkets on the legally erroneous basis that Apple does not license or sell iOS as a standalone product. […] To establish its single-brand aftermarkets, Epic bore the burden of “rebut[ting] the economic presumption that . . . consumers make a knowing choice to restrict their aftermarket options when they decide in the initial (competitive) market to enter a . . . contract.” […] Yet the district court found that there was “no evidence in the record” that could support such a showing. As a result, Epic cannot establish its proposed aftermarkets on the record before our court—even after the district court’s erroneous reasoning is corrected.

Because Epic’s proposed aftermarkets fail, and because Apple did not cross-appeal the district court’s rejection of its proposed market (the market for all game transactions, whether on consoles, smartphones, computers, or elsewhere), the district court’s middle-ground market of mobile-games transactions therefore stands on appeal. And it is that market in which the 9th Circuit turns to assessing whether Apple’s conduct is unlawful pursuant to the Sherman Act.

A broader point, and one that is easy to miss at first glance, is that operating systems (OS) could be a valid relevant market before the 9th Circuit. The practical consequences of this are ambiguous. For a platform with a relatively small share of the OS market, like Apple, this might be, on balance, a good thing. But to the extent that defining an OS as a relevant market may be used to undergird a narrow aftermarket (such as Epic attempted to do in this case), it could also be seen as a negative.

Anticompetitive Harm: One-Sided Logic in Two-Sided Markets

The 9th Circuit rightly underscored that a showing of harm in two-sided markets must be marketwide. Regrettably, however, it failed to apply this crucial insight correctly.

As we argued in our amicus brief, Epic didn’t demonstrate that Apple’s app-distribution and IAP practices caused the significant marketwide anticompetitive effects that the U.S. Supreme Court in Amex deemed necessary in cases involving two-sided transaction markets (like Apple’s App Store). Epic instead narrowly focused only on harms to developers.

Two-sided markets connect distinct sets of users whose demands for the platform are interdependent—i.e., consumers’ demand for a platform increases as more products are available and product developers’ demand for a platform increases as additional consumers use the platform. Together, the two sides’ demands increase the overall potential for transactions. As a result of these complex dynamics, conduct that may appear anticompetitive when considering the effects on only one set of customers may be entirely consistent with—and actually promote—healthy competition when examining the effects on both sides.

The 9th Circuit makes essentially the same mistake here. It notes a supracompetitive 30% commission fee for IAPs and, echoing the district court, finds “some evidence” of those costs being passed on to consumers as sufficient to establish anticompetitive harm.

But this is woefully insufficient to show marketwide harm. As we noted in our brief, the full effects on other sides of the market may include reduced prices for devices, a greater range of features, or various other benefits. All such factors need to be considered when assessing whether and to what extent “the market as a whole” is harmed by seemingly restrictive conduct on one side of the market.

Furthermore, just because some developers pay higher IAP fees to Apple doesn’t mean that the total number of mobile-game transactions is lower than the counterfactual. Developers that pay the 30% IAP fee may cross-subsidize those that distribute apps for free, thereby increasing the total number of game transactions.

The 9th Circuit therefore misapplied Amex and perpetuated a mistaken approach to the analysis of anticompetitive harm in two-sided markets. In other words: even if one applies “one-sided logic in two-sided markets” and looks at the two sides of the market separately, Epic failed to demonstrate anticompetitive harm. Of course, the mistake is even more glaring if one applies, as one should, two-sided logic in two-sided markets.

Procompetitive Benefits: Two-Sided Logic in Two-Sided Markets

Highlighting its error, the two-sided logic that the 9th Circuit should have applied in step one of the rule-of-reason analysis—i.e., identifying anticompetitive harm—is then applied in step two. The court asserts:

Contrary to Epic’s contention, Apple’s procompetitive justifications do relate to the app-transactions market. Because use of the App Store requires an iOS device, there are two ways of increasing App Store output: (1) increasing the total number of iOS device users, and (2) increasing the average number of downloads and in-app purchases made by iOS device users. Below, the district court found that a large portion of consumers factored security and privacy into their decision to purchase an iOS device—increasing total iOS device users. It also found that Apple’s security- and privacy-related restrictions “provide a safe and trusted user experience on iOS, which encourages both users and developers to transact freely”—increasing the per-user average number of app transactions.

If that same holistic approach had been taken in step one, the 9th Circuit wouldn’t need to assess procompetitive justifications, because it wouldn’t have found anticompetitive harm to begin with.

This ties into a longstanding debate in antitrust; namely, whether it is proper to put the burden on the defendant to show procompetitive benefits of its conduct, or whether those benefits need to be accounted for by the plaintiff at step one in making out its prima facie case. The Amex “market as a whole” approach goes some way toward suggesting that the benefits need to be incorporated into the prima facie case, at least insofar as they occur elsewhere in the (properly defined) relevant market and may serve to undermine the claim of net harm.

Arguably, however, the conflict can be avoided by focusing on output in the relevant market—i.e., on the number of transactions. To the extent that lower prices elsewhere increase the number of gaming transactions by increasing the number of users or cross-subsidizing transactions, it may not matter exactly where the benefit occurs.

In this case, the fact of a 30% fee should have been deemed insufficient to make out a prima facie case if it was accompanied by an increase in the total number of transactions.    

Steps Three and Four of Rule of Reason: Right Outcome, Wrong Reasoning

As we have written previously, there is a longstanding question about the role and limits of less-restrictive alternatives (LRAs) under the rule of reason.

Epic’s appeal relied on theoretical LRAs to Apple’s business model to satisfy step three of the rule of reason. According to Epic, because the district court had identified some anticompetitive effects on one side of the market, and because alternative business models could, in theory, be implemented to achieve the same procompetitive benefits as Apple’s current business model, the court should have ruled in Epic’s favor.

There were and are several problems with this reasoning. For starters, LRAs can clearly only be relevant if competitive harm has been established. As discussed above, Epic failed to demonstrate marketwide harm, as required in cases involving two-sided markets. In my view, the 9th Circuit’s findings don’t fundamentally alter this because there is still no convincing evidence of marketwide anticompetitive harm that would justify moving onto step three (or step two, for that matter) of rule-of-reason analysis.

Second, while it is true that, following the Supreme Court’s recent Alston decision, LRA analysis may well be appropriate in some contexts to identify anticompetitive conduct in the face of procompetitive justifications, contrary to the 9th Circuit’s assertions, there is no holding in either the 9th Circuit or the Supreme Court requiring it in the context of two-sided markets (Amex refers to LRA analysis as constituting step three of the rule of reason, but because that case was resolved at step one, it must be viewed as mere dictum).

And for good reason. In the case of two-sided platforms, an LRA approach would inevitably require courts to second guess the particular allocation of costs, prices, and product attributes across platform users (see here).

Moreover, LRAs like the ones proposed by Epic, which are based on maximizing competitor effectiveness by “opening” an incumbent’s platform, would convert the rule of reason into a regulatory tool that may not promote competition at all. This general approach is antithetical to the role of antitrust law. That role is to act as a prophylactic against anticompetitive conduct that harms consumers, not to be a makeshift regulatory tool for redrawing business models (here).

Unfortunately, the 9th Circuit failed to grasp this. It accepted Epic’s base argument and didn’t dispute that an LRA analysis should be conducted. It instead found that, on the facts, Epic failed to propose viable LRAs to Apple’s restrictions. Even further, the 9th Circuit posited (albeit reluctantly) that where the plaintiff fails to show a LRA as part of a “third step” in rule of reason, a fourth step is required to weigh the procompetitive against anticompetitive effects.

But as the 9th Circuit itself notes, the Supreme Court’s most recent rulings—i.e., Alston and Amex—did not require a fourth step. Why would it? Cost-benefit analysis is already baked into the rule of reason. As the 9th Circuit recognizes:

We are skeptical of the wisdom of superimposing a totality-of-the-circumstances balancing step onto a three-part test that is already intended to assess a restraint’s overall effect. 

Further:

Several amici suggest that balancing is needed to pick out restrictions that have significant anticompetitive effects but only minimal procompetitive benefits. But the three-step framework is already designed to identify such an imbalance: A court is likely to find the purported benefits pretextual at step two, or step-three review will likely reveal the existence of viable LRAs.

It is therefore unclear what benefits a fourth step would offer as, in most cases, this would only serve to “briefly [confirm] the result suggested by a step-three failure: that a business practice without a less restrictive alternative is not, on balance, anticompetitive.”

The 9th Circuit’s logic here appears circular. If the necessity of step four is practically precluded by failure at step three, how can it also be that failure to show LRAs in step three requires a fourth step? If step four is triggered after failure at step three, but step four is essentially an abridged version of step three, then what is the point of step four?

This entanglement leads the 9th Circuit to the inevitable conclusion that the failure to conduct a fourth step is immaterial where courts have hitherto diligently assessed anticompetitive harms and procompetitive benefits (under any procedural label):

Even though it did not expressly reference step four, it stated that it “carefully considered the evidence in the record and . . . determined, based on the rule of reason,” that the distribution and IAP restrictions “have procompetitive effects that offset their anticompetitive effects” (emphasis added). This analysis satisfied the court’s obligation pursuant to County of Tuolumne, and the court’s failure to expressly give this analysis a step-four label was harmless.

Conclusion

The 9th Circuit found in favor of Apple on nine out of 10 counts, but it is not entirely clear that the case is a “resounding victory” for Apple. The finding that Judge Rogers’ mistakes in market definition were relevant is, essentially, a red herring (except for the possibility of OS being a relevant market before the 9th Circuit). The important parts of this ruling—and the ones which should give Apple and other digital platforms some pause—are to be found in the rule-of-reason analysis.

First, the 9th Circuit found evidence of anticompetitive harm in a two-sided market without marketwide harm, all the while recognizing, in theory, that marketwide harm is the relevant question in antitrust analysis of two-sided markets. This kind of one-sided logic is bound to result in an overestimation of competitive harm in two-sided markets.

Second, the 9th Circuit’s flawed understanding of LRAs and the need for a fourth step in rule-of-reason analysis could grant plaintiffs not one, but two last-ditch (and unjustified) attempts to make their case, even after having failed previous steps. Ironically, the 9th Circuit found that a fourth step was needed because the rule of reason is not a “rotary list” and that substance, not form, should be dispositive of whether conduct passes muster. But if the rule of reason is not a “rotary list,” why was the district court’s failure to undertake a fourth step seen as a mistake (even if, by the circuit court’s own admission, it was a harmless one)? Shouldn’t it be enough that the district court weighed the procompettive and anticompetitive effects correctly?

The 9th Circuit appears to fall into the same kind of formalistic thinking that it claims to eschew; namely, that LRAs are necessary in all markets (including two-sided ones) and that a fourth step is always necessary where step three fails, even if skipping it is often inconsequential. We will have to see how this affects future antitrust cases involving digital platforms.

In Antitrust & Competition, Apple, Exclusionary Conduct, Monopolization, Platforms, Truth on the Market , , , , ,
permalink

Artificial Intelligence Meets Organic Folly

Daniel J. Gilman —  3 May 2023 — Leave a comment

In a May 3 op-ed in The New York Times, Federal Trade Commission (FTC) Chair Lina Khan declares that “We Must Regulate A.I. Here’s How.” I’m concerned after reading it that I missed both the regulatory issue and the “here’s how” part, although she does tell us that “enforcers and regulators must be vigilant.”

Indeed, enforcers should be vigilant in exercising their established authority, pace not-a-little controversy about the scope of the FTC’s authority. 

Most of the chair’s column reads like a parade of horribles. And there’s nothing wrong with identifying risks, even if not every worry represents a serious risk. As Descartes said—or, at least, sort of implied—feelings are never wrong, qua feelings. If one has a thought, it’s hard to deny that one is having it. 

To be clear, I can think of non-fanciful instantiations of the floats in Khan’s parade. Artificial intelligence (AI) could be used to commit fraud, which is and ought to be unlawful. Enforcers should be on the lookout for new forms of fraud, as well as new instances of it. Antitrust violations, likewise, may occur in the tech sector, just as they’ve been found in the hospital sector, electrical manufacturing, and air travel. 

Tech innovations entail costs as well as benefits, and we ought to be alert to both. But there’s a real point to parsing those harms from benefits—and the actual from the likely from the possible—if one seeks to identify and balance the tradeoffs entailed by conduct that may or may not cause harm on net.  

Doing so can be complicated. AI is not just ChatGPT; it’s not just systems that employ foundational large language learning models; and it’s not just systems that employ one or another form of machine learning. It’s not all (or chiefly) about fraud. The regulatory problem is not just what to do about AI but what to do about…what?

That is, what forms, applications, or consequences do we mean to address, and how and why? If some AI application costs me my job, is that a violation of the FTC Act? Some other law? Abstracting from my own preferences and inflated sense of self-importance, is it a federal issue? 

If one is to enforce the law or engage in regulation, there’s a real need to be specific about one’s subject matter, as well as what one plans to do about it, lest one throw out babies with bathwater. Which reminds me of parts of a famous (for certain people of a certain age) essay in 1970s computer science: Drew McDermott’s, “Artificial Intelligence Meets Natural Stupidity,” which is partly about oversimplification in characterizing AI.  

The cynic in me has three basic worries about Khan’s FTC, if not about AI generally:

  1. Vigilance is not so much a method as a state of mind (or part of a slogan, or a motto, sometimes put in Latin). It’s about being watchful.
  2. The commission’s current instantiation won’t stop at vigilance, and it won’t stick to established principles of antitrust and consumer-protection law, or to its established jurisdiction.
  3. Doing so without being clear on what counts as an actionable harm under Section 5 of the FTC Act risks considerable damage to innovation, and to the consumer benefits produced by such innovation. 

Perhaps I’m not being all that cynical, given the commission’s expansive new statement of enforcement principles regarding unfair methods of competition (UMC), not to mention the raft of new FTC regulatory proposals. For example, the Khan’s op-ed includes a link to the FTC’s proposed commercial surveillance and data security rulemaking, as Khan notes (without specifics) that “innovative services … came at a steep cost. What were initially conceived of as free services were monetized through extensive surveillance of people and businesses that used them.”

That reads like targeted advertising (as opposed to blanket advertising) engaged in cosplay as the Stasi:

I’ll never talk. 

Oh, yes, you’ll talk. You’ll talk or else we’ll charge you for some of your favorite media.

Ok, so maybe I’ll talk a little. 

Here again, it’s not that one couldn’t object to certain acquisitions or applications of consumer data (on some or another definition of “consumer data”). It’s that the concerns purported to motivate regulation read like a laundry list of myriad potential harms with barely a nod to the possibility—much less the fact—of benefits. Surveillance, we’re told in the FTC’s notice of proposed rulemaking, involves:

…the collection, aggregation, retention, analysis, transfer, or monetization of consumer data and the direct derivatives of that information. These data include both information that consumers actively provide—say, when they affirmatively register for a service or make a purchase—as well as personal identifiers and other information that companies collect, for example, when a consumer casually browses the web or opens an app.

That seems to encompass, roughly, anything one might do with data somehow connected to a consumer. For example, there’s the storage of information I voluntarily provide when registering for an airline’s rewards program, because I want the rewards miles. And there’s the information my physician collects, stores, and analyzes in treating me and maintaining medical records, including—but not limited to—things I tell the doctor because I want informed medical treatment.

Anyone might be concerned that personal medical information might be misused. It turns out that there are laws against various forms of misuse, but those laws are imperfect. But are all such practices really “surveillance”? Don’t many have some utility? Incidentally, don’t many consumers—as studies indicate—prefer arrangements whereby they can obtain “content” without a monetary payment? Should all such practices be regulated by the FTC without a new congressional charge, or allocated under a general prohibition of either UMC  or “unfair and deceptive acts or practices” (UDAP)? The commission is, incidentally, considering either or both as grounds. 

By statute, the FTC’s “unfairness” authority extends only to conduct that “causes or is likely to cause substantial injury to consumers which is not reasonably avoided by consumers themselves.” And it does not cover conduct where those costs are “outweighed by countervailing benefits to consumers or competition.” So which ones are those?

Chair Khan tells us that we have “an online economy where access to increasingly essential services is conditioned on widespread hoarding and sale of our personal data.”  “Essential” seems important, if unspecific. And “hoarding” seems bad, if undistinguished from legitimate collection and storage. It sounds as if Google’s servers are like a giant ball of aluminum foil distributed across many cluttered, if virtual, apartments. 

Khan breezily assures readers that the:

…FTC is well equipped with legal jurisdiction to handle the issues brought to the fore by the rapidly evolving A.I. sector, including collusion, monopolization, mergers, price discrimination and unfair methods of competition.

But I wonder whether concerns about AI—both those well-founded and those fanciful—all fit under these rubrics. And there’s really no explanation for how the agency means to parse, say, unlawful mergers (under the Sherman and/or Clayton acts) from lawful ones, whether they are to do with AI or not.

We’re told that a “handful of powerful businesses control the necessary raw materials that start-ups and other companies rely on to develop and deploy A.I. tools.” Perhaps, but why link to a newspaper article about Google and Microsoft for “powerful businesses” without establishing any relevant violations of the law? And why link to an article about Google and Nvidia AI systems—which are not raw materials—in suggesting that some firms control “essential” raw materials (as inputs) to innovation, without any further explanation? Was there an antitrust violation? 

Maybe we already regulate AI in various ways. And maybe we should consider some new ones. But I’m stuck at the headline of Khan’s piece: Must we regulate further? If so, how? And not incidentally, why, and at what cost? 

In Antitrust & Competition, Data Privacy & Security, Federal Trade Commission, Section 5, Truth on the Market , , , , ,
permalink