Section 5, Collateral Consequences, and Counting Unicorns

Josh Wright —  29 April 2010

Judge Frank Easterbrook once opined that observing predatory pricing was a bit like seeing a unicorn —  in the sense that it was a phenomena around which there was much lore but not much empirical evidence.  The debate over the current expansion of Section 5 liability increasingly has become about the search for a different sort of “unicorn” — follow-on actions. The conventional wisdom is that private rights of action in the US, ceteris paribus, militate in favor of less aggressive enforcement of Section 2 relative to other countries.  It follows, some have argued, that an expansive view of Section 5 is appropriate because it avoids the social costs —  and in particular the chilling effects on efficient behavior associated with potential antitrust liability — associated with false positives.

On one side of this debate, Commissioners Rosch and Leibowitz have extolled the virtues of Section 5 as  a zone free of collateral consequences.   Indeed, Chairman Leibowitz and Commissioner Rosch have gone so far as to assert that the logic underlying the Supreme Court’s jurisprudence recognizing the social costs of antitrust error should only apply to private plaintiffs, but not the enforcement agencies because the latter know anticompetitive conduct when they see it while generalist judges and juries do not and thus are more prone to costly errors.

As a preliminary matter, I should note that my view is that the Rosch/ Leibowitz claim that antitrust law has been narrowed exclusively because of concerns about private plaintiffs is dramatically overstated at best, and at worst, blatantly inconsistent with the Supreme Court’s jurisprudence which has been remarkably consistent in focusing on the inherent difficulties associated with identifying anticompetitive conduct when discussing error costs and the role they play in setting antitrust rules.  It is certainly true that courts have expressed concerns about abuse of the antitrust laws by private plaintiffs, but it is impossible to read the Supreme Court’s antitrust jurisprudence (see, e.g. Trinko, Nynex, Credit Suisse, Brooke Group, Linkline) without taking away a much the Court’s much more general fear that the social costs of false positives — stemming both from the burdens of antitrust discovery and chilling of efficient, pro-competitive conduct — warrants a reduction in the scope of the antitrust laws.

Holding that point aside for a moment, the primary argument supporting the controversial expansion of Section 5 has been that it does not have collateral consequences because only Section 2 create follow-on opportunities for private plaintiffs.  Section 5, Chairman Leibowitz and Commissioner Rosch tell us, does not present such problems.  The social costs associated with Section 5 follow-ons do not exist. Here is a recent version of that assertion from Commissioner Rosch:

The problem here, however, is that these Supreme Court decisions adversely impact all cases in which public antitrust enforcers proceed under the same statute as private plaintiffs and state enforcers, including, most significantly Sections 1 and 2 of the Sherman Act. The Commission can avoid implicating both of these concerns if it proceeds under Section 5: first, only the Commission (as divorced from private plaintiffs, for example), can proceed under Section 5 and, second, if the Commission
proceeds under its Part 3 administrative process in a Section 5 proceeding, there is no role for the district courts or federal juries to play.

Here’s another version of the case for Section 5 resting on an empirical claim about the lack of collateral consequences:

This is an especially important consideration when federal court private treble damage litigation involving the same conduct is pending or threatened. But is it important whenever there is a reasonable prospect that such a private claim will be filed. A plaintiff cannot rely on favorable Section 5 case law in a federal treble damage action. Neither can a federal district court rely on such a decision because the FTC alone can avail itself of Section 5 at the federal level. Conversely, the spillover effects on federal law enforcement of Supreme Court substantive law jurisprudence that is the product of concern about such treble damage actions can be reduced if the Commission uses Section 5, instead of traditional antitrust law that is equally applicable to private and public plaintiffs.

Whether an expanded Section 5 would lead to collateral consequences is fundamentally an empirical question.  There are two potential sources of collateral consequences that have been discussed.  The first is private actions using FTC Act settlements or judgments to create claims under state consumer protection acts (CPAs), which are often interpreted in light of the FTC Act and allow for both attorneys’ fees and multiple damages. The second is the possibility of follow-ons in which private plaintiffs rely on the Section 5 settlement or judgment in federal court under a traditional antitrust statute such as Section 1 or 2.

Thus far, the debate has focused on the first source: state CPAs.  Commissioner Kovacic first responded to the aggressive use of Section 5 in his dissent in the N-Data settlement, responding to the majority assertion that Section 5 provides a free lunch:

The Commission overlooks how the proposed settlement could affect the application of state statutes that are modeled on the FTC Act and prohibit unfair methods of competition (“UMC”) or unfair acts or practices (“UAP”). The federal and state UMC and UAP systems do not operate in watertight compartments. As commentators have documented, the federal and state regimes are interdependent. [Citations omitted].  By statute or judicial decision, courts in many states interpret the state UMC and UDP laws in light of FTC decisions, including orders. As a consequence, such states might incorporate the theories of liability in the settlement and order proposed here into their own UMC or UAP jurisprudence. A number of states that employ this incorporation principle have authorized private parties to enforce their UMC and UAP statutes in suits that permit the court to impose treble damages for infringements.

As a matter of theory, because treble damage remedies are not generally available for Section 5 violations, overdeterrence is likely to be less of a problem under Section 5 than Section 2. But make no mistake — the difference is one of degree rather than of kind.  And as a practical matter, the difference virtually disappears when private remedies are available under Little FTC Acts, including those that are construed in harmony with Section 5 and allow for multiple damages and attorneys’ fees.

In response to this argument, the Commissioners favoring expansion of Section 5 have played the unicorn card.  The claim is, quite simply, that such state level follow-ons don’t happen.  Unfortunately, this side of the debate has been a data-free zone thus far.  Well, almost data free.  Much has been made about the fact that the N-Data settlement itself did not give rise to private causes of action under any “Little FTC Acts.”  For example, Chairman Leibowitz has pointed to the fact that no plaintiff in N-Data filed under a state consumer protection act as evidence that “Section 5 violators do not find themselves subject to private antitrust actions under federal law— and probably under state baby FTC acts as well—certainly not for treble damages.”  Well, state consumer protection acts do indeed exist.  And there is, as the Searle Report on Private Litigation under CPAs notes, quite a bit of litigation under them.  A systematic empirical evaluation of state CPA litigation to determine how frequent Section 5 follow-on litigation occurs seems like a superior alternative to the current debate.

As a tangent, I find the theoretical underpinnings of the “it doesn’t happen” response both unpersuasive and a little bit odd without systematic data supporting it.  The argument seems to be that the private plaintiffs bar is insufficiently creative, resourceful, or aggressive enough to make use a perfectly operational statute that allows free-riding on the Commission’s efforts, and access to attorneys’ fees and multiple damages.  Has anybody seen a modern public policy debate in which it has been asserted that the private plaintiffs bar is asleep behind the wheel?  Now I’m the first to say that measuring the extent and magnitude of any collateral effects of Section 5 is an important empirical question that really ought to be addressed in detail with a serious study.  But pointing to a particular case (N-Data) where a particular plaintiff chose not to make use of the statute for any number of reasons as evidence that it “doesn’t happen” despite obvious incentives for private plaintiffs to use state acts doesn’t quite do the trick.  The appropriate default presumption, I’d imagine, should be that the plaintiffs bar makes use of these statutes where it is profitable to do so.

Of course — state courts are not the only source of follow-ons.  One might believe that a Commission action under Section 5 would encourage private plaintiffs to proceed under Section 2 (or some other statute, e.g. Robinson-Patman) as well.  We are told that such a possibility is pure theory and a Chicago School figment of the imagination.  Well … not so fast.

Readers might recall that the Commission recently announced a settlement with Transitions Optical in a Section 5 case involving exclusive dealing contracts.  A private class action suit alleging a violation of Section 2 of the Sherman Act has been filed in the Western District of Washington based on the Commission Section 5 settlement.

The class action suit comes a month after the Federal Trade Commission (FTC) reached a settlement with Transitions Optical that bars Transitions Optical from using allegedly anticompetitive practices to maintain its monopoly and increase prices on photochromic lenses. The settlement was accompanied by a “consent agreement” between the FTC and Transitions Optical that includes restrictions on exclusive or preferred customer relationships. Transitions Optical has denied any wrongdoing in the matter. … A Transitions Optical spokesperson said, “It’s not unusual for lawsuits like this to be attempted after consent agreements like ours are filed with the FTC. We remain confident about our company and our business practices and feel that we have always done what is right for the success of all our customers and partners. The continued support we receive from our customers and partners shows, more than anything, that we are working in the best interest of the optical industry overall.”

Similarly, a class action Section 1 complaint has been filed against Guitar Center and the National Association of Music Merchants in the Northern District of Illinois.  In that complaint, which relies heavily on the FTC Section 5 complaint, consent order and press releases throughout, the plaintiff alleges that defendants’ minimum advertised pricing (MAP) policies resulted in collusion and higher prices.

The fact that Section 5 judgments do not automatically result in liability under Sherman Act Section 1 or 2 in federal court makes these follow-ons different in at least some important ways from the state CPAs, where at least in principle, liability is automatic.  However, the debate over whether Section 5 consents are free of collateral consequences doesn’t turn on automatic liability.  Rather, the debate is over whether and to what extent Section 5 consents and judgments generate collateral consequences in the form of follow-ons that can lead to the same treble damages actions that generate the concerns about socially costly false positives in the Section 2 setting.  All parties apparently agree that the the Supreme Court’s jurisprudence reacting to the problem of false positives is a sound and rational approach.   The two federal court cases revealed by a few Google searches, combined with the possibility of state CPA actions which have the advantage of multiplied damages along with automatic liability, suggests that we are not talking about unicorns here. The ratio of theory to evidence in the policy discussion of error costs and Section 5 is greater than optimal.  But the claim that the Commission’s expanded vision of Section 5 is free of those concerns should be subjected to more rigorous empirical testing before accepted as a sound basis for competition policy.