Why Congress Should Reject the FTC’s Request for a Trinko Exemption

Josh Wright —  16 June 2010

One of the most significant issues in current US antitrust policy has been the Federal Trade Commission’s attempt to avoid some of the rigorous requirements imposed by Section 2 of the Sherman Act in monopolization cases by expanding FTC authority under Section 5 of the Federal Trade Commission Act (FTCA). This issue is nothing new. FTC leadership has made clear its view that the limitations the Supreme Court has imposed on antitrust plaintiffs apply only in the context of private plaintiff cases – not in cases brought by the agencies. Thus, according to the FTC’s current line of thought, the Supreme Court’s restrictions on the agencies have been imposed erroneously on the agencies both by the Supreme Court and lower courts misinterpreting those decisions. Chairman Leibowitz frames the argument as follows:

…[C]oncern over class actions, treble damages awards, and costly jury trials have caused many courts in recent decades to limit the reach of antitrust. The result has been that some conduct harmful to consumers may be given a “free pass” under antitrust jurisprudence, not because the conduct is benign but out of a fear that the harm might be outweighed by the collateral consequences created by private enforcement. For this reason, we have seen an increasing amount of potentially anticompetitive conduct that is not easily reached under the antitrust laws, and it is more important than ever that the Commission actively consider whether it may be appropriate to exercise its full Congressional authority under Section 5.

TOTM readers will know that I think this argument is wrong. And wrong in an important way I’ve discussed in this space previously: the Supreme Court’s jurisprudence on Section 2 doesn’t impose tough burdens on plaintiffs merely because of the liability imposed in the class action setting with private damages. This argument is a misreading of the Court’s Section 2 jurisprudence, which expresses concerns not only with: (1) the amplification of error costs created by private rights of action and treble damages, but also with (2) the social costs associated with the frequency of false positives that derives from the fact that distinguishing pro-competitive conduct from anti-competitive conduct in the single firm setting is a task fraught with incredible complexity and uncertainty.

It simply does not follow that because the FTC is a public enforcement agency rather than a private plaintiff, it should be free of the constraints the Supreme Court has imposed on antitrust plaintiffs in cases like Trinko, Credit Suisse, Brooke Group, Weyerhaeuser and Linkline.

The Commission has availed itself of two strategies available in its quest to escape the requirements of Section 2. The first is an end run around Section 2 using Section 5. The difficulty with this strategy is that it requires the Commission to eventually convince the D.C. Circuit Court of Appeals that its interpretation and application of Section 5 are sensible. Of course, in the meantime it can extract settlements using this approach without ever having to litigate Section 5. But eventually, and perhaps soon, a Section 5 defendant will make the agency put its interpretation on the line in a court of appeals that has not been sympathetic to the Commission’s recent Section 5 agenda. If the Intel case is representative, based on an analysis of that complaint, I predict this strategy will not be successful. The second potential strategy is a more direct attack on Section 2. The FTC could lobby Congress to undo whatever the agency doesn’t like about the Supreme Court’s jurisprudence. This strategy appears to be gaining popularity generally based on the proposed legislation to undo Twombly and Leegin. But if you were trying to get the biggest bang for your buck with plausible Congressional action to help the agencies out along these lines, wouldn’t you go straight to Trinko?

Wait no longer.  In testimony offered on behalf of the Commission by Howard Shelanski (Deputy Director for Antitrust in the Bureau of Economics, and a professor at Georgetown Law), the Commission extends the argument about expanding Section 5 to weakening Section 2 for public enforcement agencies. Check out the whole thing, but I think the argument in favor of Congressional action to “clarify” that Trinko and Credit Suisse apply only to private plaintiffs is an application of the positions taken by Chairman Leibowitz and Commissioner Rosch in previous policy speeches (and excerpted above). Consider the opening paragraph of Section III (p.15):

Both Trinko and Credit Suisse involved private antitrust suits rather than public enforcement actions by the Federal Trade Commission or the Department of Justice. The Supreme Court’s decisions appear, however, to apply to both public and private actions. This is unfortunate because the Court’s core concern in both cases about the costs and potential deterrent effects of antitrust are more relevant to private suits, while the benefits of antitrust law as a complement and substitute for regulation are likely to be greatest through public enforcement. The lower costs and higher benefits of cases brought by public agencies arise because of differences in the incentives and capabilities of public and private antitrust plaintiffs.

There are three claims here. The first is about the core concerns of the Court applying exclusively to private plaintiffs. The second is that public enforcement cases have lower costs and greater benefits because of the incentives and capabilities of the agencies relative to private plaintiffs. The third is the oft-repeated claim that the FTCA doesn’t involve collateral consequences because (1) there is no private right of action under it and (2) the FTCA doesn’t involve treble damages. I don’t think that any of these claims warrants an expansion of Section 5 to cover cases like Intel. The first misleads with respect to the Supreme Court’s Section 2 jurisprudence. The second and third claims suffer from theoretical weaknesses and lack empirical support. More to the point, I don’t believe that any of these claims is successful in making the case that government agencies deserve special treatment as plaintiffs under the Sherman Act. Let’s take the claims one at a time.

I. Private Plaintiffs, Government Agencies & The Problem of False Positives

First, the fear that emerges out of Trinko, the most relevant case, is not merely that private actions and treble damages are bad, but also that vulnerability to false positives itself is a real problem, warranting tougher Section 2 standards. The concern is that: (1) neither the agencies nor courts nor private plaintiffs have access to technology that reliably predicts whether would-be exclusionary conduct is pro-competitive, anti-competitive, or competitively neutral, (2) this raises the inevitable and unavoidable risk of Type I and Type II errors, and (3) Type I errors should be of greater concern because they create more substantial social costs (“error costs”). Given (1)-(3), the Supreme Court has adopted liability rules that reflect the realities of the economic technology available to distinguish anticompetitive single firm conduct from pro-competitive conduct, and the asymmetrical costs of errors. Consider the following language from Justice Scalia’s opinion in Trinko:

Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its costs. Under the best of circumstances, applying the requirements of §2 “can be difficult” because “the means of illicit exclusion, like the means of legitimate competition, are myriad.” United States v. Microsoft Corp., 253 F. 3d 34, 58 (CADC 2001) (en banc) (per curiam). Mistaken inferences and the resulting false condemnations “are especially costly, because they chill the very conduct the antitrust laws are designed to protect.” Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U. S. 574, 594 (1986). The cost of false positives counsels against an undue expansion of §2 liability. One false-positive risk is that an incumbent LEC’s failure to provide a service with sufficient alacrity might have nothing to do with exclusion. Allegations of violations of §251(c)(3) duties are difficult for antitrust courts to evaluate, not only because they are highly technical, but also because they are likely to be extremely numerous, given the incessant, complex, and constantly changing interaction of competitive and incumbent LECs implementing the sharing and interconnection obligations.

Treble damage concerns are a consequence of, not the source of, the underlying problem Justice Scalia cites. What Justice Scalia is talking about is the core problem with the antitrust law and economics of Section 2 and the reason we had Section 2 hearings: it is really tough to identify and distinguish pro-competitive from anti-competitive conduct. I don’t know of any economists who disagree with that proposition, and I suspect Shelanksi agrees with it as well. But this is an argument about the law. At least one motivating concern in Trinko – and one that has been repeated time after time in the Court’s Section 2 jurisprudence – is that judges might mistakenly condemn efficient conduct because of the complexity of the task demanded of them. This is not language cherry-picked from a single case. In fact, the language is stronger in Brooke Group, Linkline, and Weyerhaeuser.

The point is that this core concern running through the Supreme Court’s Section 2 jurisprudence applies both to private plaintiffs and public plaintiffs. Not so fast, you might say, that’s only true if the public plaintiffs bring cases that are just as prone to false positives as private plaintiffs. Here’s where the FTC argument gets creative and takes us to the second claim.

II. Public Enforcement Agencies Versus Private Plaintiffs

The Commission argues that, unlike the private plaintiffs who have a financial stake in the litigation,

…the government, however, has no reason to use antitrust law against regulated firms unless doing so could yield net benefits on top of those the market already achieves through regulation. The FTC does not collect revenue or otherwise materially benefit from successful competition enforcement. Federal antitrust authorities also have greater resources than private plaintiffs to assess the costs and benefits of a particular antitrust enforcement action and to avoid interfering with regulatory objectives.

Read that again. The claim is that the government is more likely to bring cases that do not result in false positives than private plaintiffs, first, because the government has greater resources to evaluate claims, and second, because their focus is on bringing cases in the public interest and that focus is untainted by the profit motive. But, surely, government agencies have incentives. They are not incentive–free zones. To believe that agencies act without regards to external incentives is first to disregard forty years of literature exploring this phenomenon, spanning the political continuum from Gordon Tullock to Ralph Nader.   This is an extreme version of the public-interest model of regulation.  But most importantly, it is a claim with testable implications!

Is there any evidence that the FTC has brought monopolization cases that have produced significant consumer gains? I do not ask the question to disparage the Commission or staff. Recall that primary thrust of the error-cost approach is that it is inherently a vexing task to understand complex business arrangements and to distinguish efficient practices from those that result in consumer harm. Further, the available empirical evidence suggests that a great deal of single firm conduct is pro-competitive, and that it is. It is just a hard thing to do. Even for a well-equipped and well-intentioned agency. But even if one answers the first question in the affirmative, the claim is that the agencies do better than private plaintiffs. This may or may not be true. I’m skeptical, especially considering the most recent Intel complaint.  But I’m also quite certain the claim requires some empirical support before the FTC asks Congress to rely on it as a stylized fact of the antitrust enforcement landscape in favor of significant legislation.

III. Collateral Consequences of the FTCA

The third claim is that we need not worry about allowing the FTC to have expansive FTCA authority because it does not involve treble damages:

The Commission believes that its authority to prevent “unfair methods of competition” through Section 5 of the FTCA enables the agency to pursue conduct that it cannot reach under the Sherman Act, and thus avoid the potential strictures of Trinko. There is good reason for the courts applying Trinko to treat FTCA actions differently from private suits under the Sherman Act given, among other things, the absence of treble damages under the FTCA.

We nonetheless believe that the better course is for Congress to clarify that neither Credit Suisse nor Trinko prevents public antitrust agencies from acting under any of the antitrust laws when they conclude that anticompetitive conduct would otherwise escape effective regulatory scrutiny.

This is an argument I’ve discussed before. But the key point is that the Commission is making debatable empirical assertions about collateral consequences without evidence. The mere fact that Section 5 judgments do not automatically result in treble damages or follow-on liability under Sherman Act Section 1 or 2 in federal court doesn’t resolve the matter. 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. In theory, of course, because treble damage remedies are not generally available for Section 5 violations, over-deterrence is likely to be less of a problem under Section 5 than Section 2. But there are two key points to consider before leaping to the conclusion that Section 5 should be untethered from Section 2 for an unlimited set of cases.

First, one must keep in mind that the treble damage, follow-on liability point is only one of two key themes in constraining Section 2 jurisprudence that the Commission is trying to avoid.
Second, and more important in some ways, is that FTCA liability is not truly collateral-free 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. This is the point that Commissioner Kovacic made in his N-Data dissent. As I’ve written previously:

In response to [Kovacic’s] argument, the Commissioners favoring expansion of Section 5 have played the unicorn card. The claim is, quite simply, that such state level follow-ons (like unicorns) are talked about from time to time but don’t really exist. 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 (including treble damages in some states). A systematic empirical evaluation of state CPA litigation to determine how frequent Section 5 follow-on litigation occurs, and how often it might occur under an expanded use of the FTCA, seems like a superior alternative to the current debate.

The bottom line is that there is plenty of reason not to dismiss the possibility that FTCA claims will result in significant collateral consequences and the FTC has not presented any evidence to the contrary.

IV. Conclusion

In sum, the legal underpinnings of the Commission’s argument that government plaintiffs should receive special treatment suffers from serious flaws because it ignores the Court’s consistent sensitivity to both the cost of false positives derived from treble damages and follow-ons, as well as the frequency of judicial error inherent in the monopolization enterprise, based on the complexity of the underlying economics.

The argument that the Commission is entitled to special treatment because it is free from the profit motive and thus can be trusted to bring cases only in the consumer interest is no less problematic. The claim has no empirical support that I’m aware of, ignores the public choices literature that suggests agencies might have their own incentive problems, and asks consumers to accept whatever definition of “consumer interest” is prevailing wisdom at the agencies for the moment.

Finally, the claim that the FTCA is a collateral-consequence free zone defies theory in a particularly ironic way. The FTC would like to be free of the profit-motive plaintiffs’ bar which brings too many cases (including some not in the public interest and prone to judicial error) – but it wants us to believe that the plaintiffs’ bar will not bring cases under state CPAs with treble damages!

The case for either an expanded Section 5 or special treatment for government agencies as plaintiffs under Section 2 is weak and unconvincing.

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