FTC Rulemaking and Unintended Consequences

For obvious reasons, many scholars, lawyers, and policymakers are thinking hard about whether the Federal Trade Commission (FTC) has authority to promulgate substantive “unfair methods of competition” (UMC) regulations. I first approached this issue a couple of years ago when the FTC asked me to present on the agency’s rulemaking powers. For my presentation, I focused on 1973’s National Petroleum Refiners Association v. FTC and, in particular, whether the U.S. Court of Appeals for the D.C. Circuit correctly held that the FTC has authority to promulgate such rules. I ventured that relying on National Petroleum Refiners would present “litigation risk” for the FTC because the method of statutory interpretation used by the D.C. Circuit is out of step with how courts read statutes today. Richard Pierce, who presented at the same event, was even more blunt:

Let me just express my complete agreement with Aaron’s analysis of the extraordinary fragility of the FTC position that National Petroleum Refiners is going to protect them. I teach National Petroleum Refiners every year. And I teach it as an object lesson in what no court, modern court, would ever do today. The reasoning is, by today’s standards, preposterous.  … [T]he interpretive method that was used in that case was fairly commonly used on the DC Circuit at that time. There is no justice today—not just Gorsuch, but Kagan, Breyer—there is no justice today that would [use that method]. 

That was a fun academic discussion—with emphasis on the word academic. After all, for decades, this issue has only been an academic question because the FTC has not attempted to use such authority. That academic question, however, may soon become a concrete dispute. 

Pierce and others have advanced the anti-National Petroleum Refiners position. Recently, Kacyn H. Fujii has advanced the pro-National Petroleum Refiners position. Should the FTC promulgate a substantive UMC rule, the federal courts will decide which position is right. As that day approaches, many more experts will offer thoughts on this important question. 

Here, however, I want to focus on a different question. What would happen if the FTC can promulgate broad high-profile UMC rules, including new antitrust tests? 

I’ve just posted to SSRN a new essay that addresses that question: “What Happens If the FTC Becomes a Serious Rulemaker?” This essay will be published in the forthcoming book FTC’s Rulemaking Authority. Here is the abstract:

The Federal Trade Commission (FTC) is no one’s idea of a serious rulemaker. To the contrary, the FTC is in many respects a law enforcement agency that operates through litigation and consent decrees. There are understandable reasons for this absence of FTC rulemaking. Not only has Congress imposed heightened procedural obligations on the FTC’s ability to promulgate consumer protection rules, but also it is far from clear that the FTC even has statutory authority to promulgate substantive rules relating to unfair methods of competition (UMC). Yet things may be changing. It appears that the FTC is preparing to begin using rulemaking more aggressively, including for substantive UMC regulations. The FTC’s ability to use rulemaking this way will undoubtedly prompt sharp and important legal challenges.

This short essay, however, considers the question of FTC rulemaking from a different angle: What if the FTC has broad rulemaking authority?  And what if the FTC begins to use that authority for controversial policies? Traditionally, the FTC operates in a case-by-case fashion that attempts to apply familiar principles to the facts of individual matters. Should the FTC begin making broader policy choices through rulemaking, however, it should be prepared for at least three unintended consequences: (i) more ossification, including more judicial challenges and perhaps White House oversight; (ii) more zigzagging policy as new FTC leadership, in response to changes in presidential control, moves to undo what the agency has just done; and (iii) to more often be the target of what has been called “administrative law as blood sport,” by which political actors make it more difficult for the agency to function, for example by delaying the confirmation process.  The upshot would be an agency that could in theory (and sometimes no doubt in fact) regulate more broadly than the FTC does now, but also one with a different character.  In short, the more the FTC becomes a serious rulemaker, the more the FTC will change as an institution.

Here, I will summarize some of the thoughts from my essay. Please read the full essay, however, if you’re looking for citations and a more complete explanation. 

At the outset, my essay is not an attack on rulemaking. There are good reasons to prefer agencies to make policy through rulemaking rather than, say, case-by-case adjudication or threats. In fact, Kristin Hickman and I have written an entire article explaining why rulemaking (generally) should be favored over adjudication. That said, I am concerned about the idea that the FTC has substantive rulemaking authority to promulgate broad UMC rules under Section 5 of the FTC Act. Rulemaking has many advantages, but it does not follow that rulemaking under this very open-ended statute makes sense, especially if the goal is broad policy change. Indeed, if the FTC were to use rulemaking authority for small issues, presumably some of the concerns I sketch out would not apply (though the legal question, of course, still would). 

As I explain in my essay, when agencies attempt to use rulemaking for significant policies—which, not by coincidence, disproportionately tend to be controversial policies—at least three unintended consequences may result: ossification, zigzagging policy, and blood-sport tactics.   

First, ossification. For decades, many administrative law scholars have lamented how ossified the rulemaking process has become. Notice-and-comment rulemaking may not look all that difficult. The process has become challenging, at least for the most significant rules. (There is an empirical dispute about how ossified the process is, but part of that debate may be explained by the nature of the rules at issue; agencies perhaps can promulgate lower-profile rules without much trouble, while struggling with the more significant ones.) Agencies looking to make important policy changes through notice-and-comment rulemaking, for example, often receive mountains of comments from the public. Indeed, agencies may receive millions of comments.  Because agencies have to respond to material comments, rules that prompt that volume of commentary aren’t so easy to do. Likewise, the most consequential rules almost invariably prompt litigation, and as part of so-called “hard look” review, the agency will have to persuade a court that it has considered the important aspects of the problem. Preparing for that sort of review can require a great deal of upfront work. And although its domain does not extend to independent agencies, the Office of Information and Regulatory Affairs (OIRA) also requires agencies to do a great deal of analysis before promulgating the most significant rules. 

If the FTC begins promulgating significant rules, it should be prepared for an ossified process that requires reallocating resources within the agency and engaging in more “admin law” litigation. Because rulemaking can be labor intensive, moreover, the FTC may not be able to pursue as many policies as some no doubt wish. Furthermore, the U.S. Justice Department has concluded that the White House has the authority to subject independent agencies to the OIRA process. If the FTC begins promulgating significant rules—especially regulations of the sort that may be improved by inter-agency coordination and external evaluation, two hallmarks of the OIRA process—the White House may decide that the time has come to put the FTC within OIRA’s tent. Such developments would change how the FTC functions. 

Second, zigzagging policy. It turns out that when agencies use regulatory power for significant policies, agencies sometimes find themselves using that same power to undo those policies when control of the White House shifts. Elsewhere, I’ve written about the Federal Communications Commission and so-called “net neutrality” rules. For decades, the FCC has flip-flopped on this significant issue; when Republicans control the White House, the FCC does one thing, but when Democrats take over, it does something else. Flip-flopping, however, is not limited to the FCC.  As Pierce has put it, “[t]he same analysis applies in each of the hundreds of contexts in which Democrats and Republicans have opposing and uncompromising preferences with respect to policy issues. …” Zigzagging policy is bad for business because it makes it harder to invest, and for that same reason, is bad for consumers who do not gain the benefits of foregone investment. It is also bad for regulators, who must spend time and effort to undo the agency’s own prior actions. To be sure, agencies don’t always flip-flop; indeed, the ossification of the rulemaking process may limit it, at the margins. But especially for the most consequential policies, zigzagging sometimes happens.

Accordingly, if the FTC begins promulgating significant policies through rulemaking, it should expect some zigzagging policy when the White House changes hands. As my essay explains:

In this current age of polarization, regulatory efforts to address divisive issues may not work well because what an agency does under one administration can be undone in the next administration. Thus, the end result may be policy that exists under some administrations but not others. Indeed, the FTC’s recent slew of party-line votes suggests that if the FTC begins using rulemaking for controversial policies, the FTC will look to undo those rules when the political balance flips.  Of course, not all FTC rules will vacillate—there are not enough resources to undo everything, especially as agencies confront new issues. But if the FTC becomes a serious rulemaker, some zigzagging should occur.

Finally, consider “administrative law as blood sport”—an evocative phrase that comes from Thomas McGarity. The idea is that agencies engaged in rulemaking are increasingly subject to political opposition across several dimensions, including “strategies aimed at indirectly disrupting the implementation of regulatory programs by blocking Senate confirmation of new agency leaders, cutting off promised funding for agencies, introducing rifle-shot riders aimed at undoing ongoing agency action, and subjecting agency heads to contentious oversight hearings.” In other words, an opponent of a proposed regulation may try to stop it through the rulemaking process (for example, by filing comment and then going to court), but may also try to stop it outside of the rulemaking process through political means. 

As my essay explains, if the FTC begins using rulemaking for controversial policies, blood-sport tactics presumably will follow. Similarly, the FTC should also expect litigation of a more fundamental character. The U.S. Supreme Court is increasingly wary of independent agencies; to the extent that the FTC begins making significant policy choices without presidential control, the likelihood that the Supreme Court will say “enough” increases. 

In short, if the FTC engages in significant rulemaking, its character will change. No doubt, some proponents of FTC rulemaking would accept that cost, but in assessing FTC rulemaking, it is important to remember unintended consequences, too.