One of the most fundamental issues in the ongoing debate concerning the costs and benefits of expanded FTC Section 5 enforcement is the extent to which one must be concerned with its collateral consequences. A central claim of proponents of a broad interpretation of Section 5 coupled with its aggressive enforcement is that concerns with false positives are misplaced because plaintiffs do not have a private right of action, and thus collateral consequences associated with follow-on litigation will be muted.
Commissioner Rosch has articulated this view concerning the lack of “spillover effects” of federal enforcement:
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.
On the other hand, Commissioner Kovacic has highlighted how state Consumer Protection Act enforcement and federal enforcement are interdependent and could generate significant collateral consequences. In discussing the N-Data settlement, Kovacic observed that the Commission was downplaying the role of State CPAs (sometimes called “Little FTC Acts”) in an effort to justify expanded and aggressive use of Section 5:
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.
At the end of the day, the question concerning the collateral consequences of Section 5 enforcement is an empirical one. And as I’ve discussed at some length, the discussion thus far has involved been plenty of assertion and little empirical data:
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.” … 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.
On this front — in a recent speech, Commissioner Rosch shifted the debate in the right direction, i.e. toward empirical evidence and away from broad-sweeping theoretical assertions. Writing about the potential for state “little FTC Act” follow-on actions to Section 5 enforcement actions, the Commissioner writes:
The biggest threat of follow-on relief most likely comes from state “little FTC Acts.” Indeed, this was the concern that Commissioner Kovacic expressed in his dissent from the N-Data settlement.26 However, an exhaustive study of state “little FTC Acts” has found that most of these statutes have such significant limitations that there is little likelihood of follow-on litigation.27 In any event, in the wake of the few Section 5 cases that the Commission has brought thus far—including N-Data,28 Valassis,29 and U-Haul30—there have not been any follow-on suits, so until there is more evidence that “little FTC Acts” actually have deleterious consequences for our Section 5 enforcement, I have no reason to consider the hypothetical risk of those actions to be a real threat.
There is some elaboration of this discussion in n. 27 (emphasis added):
See Justin J. Hakala, Follow-On State Actions Based on the FTC’s Enforcement of Section 5 at 7 (Wayne State Univ. Law Sch., Working Paper Grp., Oct. 9, 2008), available at http://www.ftc.gov/os/comments/section5workshop/537633-00002.pdf (“[T]he follow-on actions
that are possible are not numerous enough, nor are they certain enough, to give the Commission or the courts cause for concern.”). A review of state “little FTC Acts” on file with the National Association of Attorneys General similarly shows that the possibilities of follow-on state court litigation from FTC Section 5 cases are quite limited. Only nineteen states have a private right of action, and only eleven of those have a multiple damages provision. Of the eleven states, only two have mandatory trebling (Alaska and Hawaii). Two states (North and South Carolina) have mandatory trebling only if the violation was willful or knowing. One state (Wisconsin) has mandatory doubling, and two (New Hampshire and Massachusetts) have mandatory doubling with a possibility for more damages if the violation was willful or knowing. The rest of those eleven (Vermont, Rhode Island, Montana and Washington) have discretionary trebling, and one of those (Washington) has a cap of $25,000.
Let me make offer the bullet point version of my analysis here and continue with the details below the fold.
First, Commissioner Rosch appropriately shifts the focus of the debate from the theoretical to the empirical. Understanding State CPAs is important to understanding the likely collateral consequences of Section 5 enforcement.
Second, the data Commissioner Rosch relies upon are incomplete and, in some cases, require correction to be useful to answer the question at hand. Recall that the issue is whether Section 5 judgments are likely to have collateral consequences. One must then understand the mechanisms through which these collateral consequences would occur. One is that Section 5 cases would encourage private cases under the Sherman Act (e.g. here and here). A second mechanism is that Section 5 enforcement actions could be used to facilitate enforcement actions under State CPAs — this is where the debate has focused. In either event, the key point is that it should be obvious that while “automatic liability” from a Section 5 judgment under the follow-on statute i.e., either the State CPA or Sherman Act, is surely helpful from the plaintiff’s perspective, it is not necessary for the follow-on. Commissioner Rosch has chosen to focus on only those states that have “incorporated” the FTC standard into the State CPA. This is understandable. But I think it is a mistake. Even if it is not, the data he relies upon is still not correct.
Third, when one corrects the data to include all State CPAs, it becomes pretty clear that these statutes provide a fairly profitable opportunity to free-ride upon Section 5 enforcement efforts.
As it turns out, there has been some significant research done on State CPAs over the past several years. I was involved in much of it, through the Searle Center Civil Justice Institute on State Consumer Protection Acts, which issued this Report in 2009. There is a wealth of evidence in there, as the Report offers a comprehensive sweep through existing state consumer protection legislation, as well as data from some 17,000 litigated judicial opinions under those statutes from 2000-07. I’m also involved in ongoing studies of State CPAs and their effects at the George Mason Searle Civil Justice Institute, along with Henry Butler, Eric Helland and Samantha Zyontz.
Let me start by clarifying the “incorporation” point and its relevance for the antitrust follow-on question. 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. “Follow-ons” in federal court pursuant to Sherman Act claims, which are in turn based upon Section 5 enforcement actions, suggest that “incorporation” is not a necessary condition for policy relevance. The real question is whether the underlying state CPA is amenable to a follow-on claim. There is a second question of whether such a claim is likely; I’ll return to that issue.
First, let’s correct the data. Much of this is in the Report linked above (and we’ve done a significant amount of work since then). But I also would be more than happy to provide the underlying and updated data to Commissioner Rosch and his staff at their request.
The Commissioner relies both upon Hakala (2008) and a NAAG study which I have not been able to track down. Here are the data Commissioner Rosch reports from the NAAG study:
- 19 states have a private right of action
- 11 of those have multiple damages provisions
It is pretty clear the NAAG data (though I don’t have it) are restricted to those State CPAs that expressly incorporate the FTC standard. Hakala, on the other hand, restricting his attention to the 29 “incorporation” states, finds:
- 27 states with private rights of action
- 20 of those have multiple damages provisions
It is unclear why Commissioner Rosch reports the data from the NAAG study rather than the “exhaustive” Hakala study. It is also unclear what time frame the NAAG study is using to examine the state CPAs, i.e. the numbers could be correct for some earlier period. Hakala, to his credit, provides an explanation for his focus on incorporated CPAs (“lacking this incorporation, these states do not present any possibility of follow-on actions in the traditional sense”). If the traditional sense means “automatic liability” conditional upon an FTC judgment under Section 5, that is no doubt true. But given that the policy issue here is the collateral consequences from FTC Section 5 enforcement, and ruling out states where plaintiffs could bring claims based upon Section 5 enforcement actions without automatic liability is mistaken. For example, some states have very permissive liability standards but are not incorporated. In fact, there is some evidence that State CPA standards are significantly easier for plaintiffs to satisfy than the FTC standard, whether or not there is incorporation. Nonetheless, the central point is that both the Hakala and NAAG studies appear to be restricting their attention to incorporated State CPAs, which is less useful for our purposes than all state CPAs. Further, at least one is either wrong or out of date.
Here is what the Searle Study finds in terms of state CPA statutes (see, in particular, Appendix A in the study that cites the relevant statutes — with some states having more than one):
- All states and D.C. had a private right of action by 2009 (Iowa added its on 7/1/2009)
- 37 states allowed some form of enhanced (either multipliers or punitive) damages either by statute or case law
These data pretty clearly suggest that potential follow-on plaintiffs will not have any trouble finding a state CPA with a friendly standard and generous remedies. The evidence of the quantity and quality of litigation activity under these statutes is also quite consistent with the notion that the plaintiff’s bar finds them quite suitable.
Having said the above, let me note clearly what I am not claiming. The above pretty clearly, in my view, shows that State CPAs are not a bar to follow-on actions. The law “on the books,” as they say, is certainly conducive to those follow-on actions. The debate thus far has focused around that point. Commissioner Rosch’s focus on what is in the statutes is helpful in that regard. And I hope the data here move the ball forward.
I can imagine that Section 5 advocates might respond “sure, but where is the evidence of actual Section 5 follow-on actions under State CPAs?” It is a fair question. As Commissioner Rosch points out, there have only been a handful of Section 5 enforcement actions thus far — and so it is pretty speculative business to make bold predictions about how frequent they will be. I agree with that. But given that the relevant question here is how much Section 5 activity should there be, an assessment of the likely costs of that activity — including collateral costs through follow-on litigation — is important to discuss and analyze with the best available data.
Having limited data, we might turn to theory. It is there where I might take objection to Commissioner Rosch’s conclusion that he has no reason “to consider the hypothetical risk of those actions to be a real threat.” Hypothetical, because perhaps the private plaintiffs bar will ignore the availability of permissive standards, free-riding upon agency work under Section 5, and generous remedies! Maybe they will. But doesn’t that seem rather far-fetched? And at a minimum, it’s highly ironic in light of the FTC argument that it is those pesky and aggressive private plaintiffs’ overuse of Section 2 that has influenced the Supreme Court to restrict the law in ways that shouldn’t apply to agencies???
Query: if these naive plaintiffs’ lawyers the Commission appears to envision in the State CPA environment ever talked to and were able to learn from those resourceful and aggressive antitrust plaintiffs’ lawyers that justify its desire to free themselves of the constraints of Section 2 case law — would the Section 5 advocates change their tune?
Isn’t it best to assume that the private plaintiffs bar is behaving rationally and will bring profitable cases under state CPAs with multiple damages? And for fans of behavioral antitrust, let’s not get tied down in the rationality assumption for plaintiffs’ lawyers. If we assume economic agents that irrationally take on too much risk, we would see too much use of State CPAs and thus even greater collateral consequences!
Anyway, the argument seems to be that the private plaintiffs bar is insufficiently creative, resourceful, or aggressive enough to make use of a perfectly operational statute that allows free-riding on the Commission’s efforts and access to attorneys’ fees and multiple damages. If the existing empirical evidence doesn’t entirely resolve the question of estimating how large the problem collateral consequences will be, the theoretical arrows point pretty clearly in the direction of caution.
If Section 5 advocates have their way, and particularly with non-“mixed” Section 2/ Section 5 hybrids, I suspect we will observe the natural experiment in the real world soon enough.