This article is a part of the The FTC's New Normal symposium.
The Evolution of FTC Antitrust Enforcement – Highlights of Its Origins and Major Trends
1910-1914 – Creation and Launch
The election of 1912, which led to the creation of the Federal Trade Commission (FTC), occurred at the apex of the Progressive Era. Since antebellum times, Grover Cleveland had been the only Democrat elected as president. But a Democratic landslide in the 1910 midterms during the Taft administration substantially reduced the Republicans’ Senate majority and gave the Democrats a huge majority in the House, signaling a major political shift. Spurred by progressive concern that Standard Oil—decided in 1911—signaled judicial leniency toward trusts and monopolies, government control of big business became the leading issue of the 1912 campaign. Both the progressive Democrats and the so-called Republican “insurgents” favored stronger antitrust laws, reduced hours and an antitrust exemption for workers, and closer federal regulation of banking and currency, among other items. Progressive agendas led both Woodrow Wilson’s “New Freedom” platform and the “New Nationalism” of former Republican President Theodore Roosevelt and his Bull Moose Party.
The 1912 election added Democratic control of both the presidency and the Senate to the House majority won in 1910. Given Democratic control of the political branches, many progressive agenda items—including the FTC Act and the Clayton Act—were successfully enacted during Wilson’s first term. The full progressive program of legislation led to an unprecedented increase in the size and scope of the federal bureaucracy. The accompanying increase in federal resource demands was met through the new federal income tax imposed in 1913.
The FTC was one of the first federal administrative agencies governed by a college of commissioners. It was authorized to study industries and to investigate, identify, and order those engaged in “unfair methods of competition” to cease and desist. (The FTC had no authority to attack deception, as such, until 1938). Its authority extended across the entire economy, save for a short list of regulated sectors governed by other purpose-built agencies. Its unique administrative procedures also applied to conduct listed in the Clayton Act: if proven to threaten competition, stock acquisitions, exclusive dealing, tying, and certain forms of price discrimination could be challenged. Certain interlocking directorates were condemned even without proof of anticompetitive effect.
Despite its broad authority and flexible procedures—as well as favorable political winds—the FTC had trouble finding a sound footing. The new commission was cursed by weak appointees and disorganization. It initially focused on false advertising—an admirable effort, but contributing little to the ambitious progressive antitrust vision.
1917-1933: Detours Through War and Republican Administrations
Before the FTC could find a sense of mission, the United States entered World War I and the federal government suspended most antitrust enforcement. Instead, extensive direct government-industry collaboration was required to support the war effort. A number of industries were nationalized (railroads, telegraph, firearms) and the Food Administration, Fuel Administration, Railroad Administration, and War Industries Board directly controlled pricing, output, and product allocation in many key economic sectors. Then, in 1919, President Wilson was incapacitated, and from the end of his term in 1921 through 1933, three Republican presidents (Warren Harding, Calvin Coolidge, and Herbert Hoover) followed in succession. Coolidge’s Attorney General Harlan Fiske Stone asserted interest in bringing major antitrust cases, but Stone was elevated to the U.S. Supreme Court less than a year after becoming attorney general, mooting any thoughts of revitalizing antitrust. In fact, it has been suggested that Stone was sent to the Court to thwart his antitrust ambitions. Hence, in 1917, antitrust went quiet (broadly speaking) and would remain so for 20 years.
1933-1937: FDR Proposes and the Supreme Court Disposes of a Cartelization Program
The story of antitrust’s revival begins with the next major political wind shift, which followed the stock market crash of 1929 and the onset of the Great Depression. Franklin Delano Roosevelt’s New Deal became the dominant political canon. Unfortunately for the commission and antitrust, however, FDR regarded competition as the enemy of economic recovery, due in part to his direct experience with government control of industry as assistant Navy secretary during World War I. FDR’s National Industrial Recovery Act (NIRA), enacted on the 100th day of his presidency, suspended antitrust law and compelled private industries to adopt cartel agreements (known as “fair competition codes”) subject to oversight by a new bureaucracy, the National Recovery Administration. Given FDR’s antipathy to competition, had the Supreme Court not declared the NIRA unconstitutional in 1935, U.S. antitrust might have been extinguished as a result of FDR’s all-time record-setting dozen years in office.
1937-1943: Robert Jackson and Thurman Arnold – An Antitrust Revival
Instead, antitrust (including the FTC) was rescued, revived, and launched into a highly aggressive phase by unpredictable developments: in 1937, FDR was persuaded to reverse course and support vigorous antitrust enforcement—a policy choice in significant tension with his prior beliefs and with many New Deal initiatives involving extensive federal economic control of industry, including strict regulation of competition in key sectors (energy, telecommunications, and agriculture, as well as transportation of every ilk—railroad, truck, barge, ocean shipping, petroleum pipelines, commercial aviation). A leading advocate for this 180-degree turn was FDR adviser Robert Jackson—lawyer and longtime FDR crony, dating to their prior encounters in New York State politics. Jackson endeared himself to FDR by aggressively prosecuting—some would say abusively—Andrew W. Mellon. Mellon was a highly successful financier; one of the world’s first venture-capital investors (financing hundreds of enterprises); a leading philanthropist (original and main benefactor of the National Gallery of Art); and secretary of the U.S. Treasury for all three Republican presidents that preceded FDR. FDR openly despised Mellon and publicly labeled him as “the mastermind among the malefactors of great wealth” (borrowing an insult formulated in a 1907 speech by FDR’s relative Teddy Roosevelt).
Jackson, a U.S. Justice Department (DOJ) prosecutor, pursued Mellon for tax evasion—a controversial allegation left unresolved when Mellon succumbed to cancer before his case became final. Jackson next became FDR’s leading advocate for the ill-fated court-packing plan. FDR rewarded Jackson with stewardship of the DOJ’s Antitrust Division in 1937, then appointed him solicitor general (1938), then attorney general (1940) and, finally in 1941, Supreme Court justice. That sequence—and the speed of promotion—speaks eloquently of FDR’s high regard for Jackson. Indeed, it is said that—in 1939, before FDR decided to defy the traditional two-term limit on presidential tenure—he considered how he might maneuver to allow Jackson to succeed him. As things turned out, FDR ran in 1940 and again in 1944, preempting any succession intrigue.
Jackson became a staunch advocate for aggressive antitrust enforcement. He persuaded FDR to abandon his efforts to encourage cartelization or impose heavy government regulatory control on private enterprise, and to instead reinvigorate antitrust. Although Jackson’s meteoric rise took him out of the Antitrust Division in barely more than a year, he persuaded FDR to choose Yale law professor Thurman Arnold as his successor. Arnold proved no less enthusiastic about antitrust than Jackson. Arnold, who served until 1943, had the leading role in establishing the sound institutional structure of the Antitrust Division and in making the division a credible enforcer. Although World War II—echoing the last war—led to numerous profound economic interventions and a significant retreat from antitrust enforcement, Arnold’s accomplishments and the Antitrust Division’s vigor were restored after the war. Indeed, Jackson and Arnold launched an extended era (1937-1974) in which federal antitrust policy became increasingly stringent, inflexible, and unforgiving of business conduct.
1943-1974: Per Se Rules Become Rampant
With support from FDR’s Supreme Court appointees, among others, per se rules came to dominate the substance of antitrust, rendering automatically illegal all vertical restraints, numerous patent-licensing practices, and even joint ventures. In aggregate, this resulted in the near-total displacement of the rule of reason announced in Standard Oil in 1911. Although mergers and monopoly conduct were never subject to per se rules, as such (the Supreme Court first applied the term “per se” in an antitrust case in 1940), they became subject to all-but-conclusive presumptions of illegality. In 1972, the per se flood crested in U.S. v. Topco Associates, when the Supreme Court extolled the merits of the per se rule and openly mocked the idea of “leav[ing] courts free to ramble through the wilds of economic theory . . ..”
The FTC had been structured as a collegial administrative body. FDR, who created and empowered numerous federal agencies, soon discovered that the commissioners were immune from presidential control. In 1935, the Supreme Court ruled in Humphrey’s Executor that FDR acted illegally when he discharged FTC Commissioner William Humphrey, a Hoover appointee, for opposing New Deal policies. A commission freed from presidential constraint and subject to deferential judicial review enhanced FDR’s concern about the dangers of freewheeling agencies. He supported the movement to adopt broad legislation to place some basic procedural constraints on agency action. But no such legislation was enacted until years later—the Administrative Procedure Act of 1946. Although the APA imposed some procedural discipline on the federal agencies, it did nothing to restore executive control over commissioners.
Given this degree of insulation from constitutional checks and balances, it is no surprise that the commission’s agenda meandered. As stated by George Rublee, principal author of the legislation that created the FTC, “in so extending its jurisdiction the Commission has spread its effort over so wide a field that it has perhaps not been able to do the particular job for which it was established as well as it otherwise might have.” As confirmed by analysis of the legislative history of the major statutory innovations of 1914 in antitrust, this “particular job” was to assure an efficiency-based approach to the definition of “unfair methods of competition” whenever the commission encountered conduct that might not have been subject to Sherman Act prohibitions.[1]
The original progressive concern regarding underenforcement of the antitrust laws, however, has proven all-but-vestigial. As noted above, Jackson and Arnold, with support from the courts, expanded the scope of conduct subject to antitrust, and endorsed the near-universal adoption of per se rules and other heavy presumptions of liability (for agreements, monopoly conduct, and structural transactions, including joint ventures) from 1937 to 1974. The aggressive approach of the agencies undoubtedly deterred a wide variety of arguably lawful conduct, as well. Such a chilling effect was enhanced by massive improvements in and additions to the procedures and remedies available to detect, deter, prosecute, and punish antitrust violations.[2] By the 1960s, there remained few if any species of anticompetitive conduct that called for any extensions of the Sherman Act or Clayton Act by the commission or otherwise.
Aggressive antitrust in the per se era was not the federal government’s only display of indifference to sound economics. In every field of economic policy—fiscal and monetary policy, taxation and public finance, sectoral regulation, intellectual-property protection, among others—the policy prescriptions offered by Keynesian theory, central planning, and other similar impulses were ascendant, throughout FDR’s presidency and beyond.
1974-1981: The Advent of Antitrust Economics
The test of these policies as a source of material progress occurred during the 1960s and 1970s, when stagflation overtook the U.S. economy. The United States suffered soaring trade and budget deficits, rising inflation, slow growth, and serious competitive challenges from European and Asian imports in major U.S. industry sectors. In response, President Richard Nixon initiated three economic “shocks” in 1971—the United States abandoned the gold standard, placed an across-the-board 10% surcharge on imports, and imposed wage-and-price controls (among other policy changes of similar stripe). The Nixon shocks actually exacerbated economic problems, and by the time of the Carter-Reagan transition, inflation, interest rates, and unemployment were all in double digits: the first two at all-time record highs, while unemployment spiked but, fortunately, did not reach Great Depression levels (10.8% in 1982 versus 24.9% in 1933).
The grinding and widespread U.S. economic decline led to reassessment of many federal economic policies. Antitrust practitioners, as well as legal and economic scholars, heavily criticized antitrust rules that ignored or misused economic analysis and therefore unnecessarily restricted private competitive initiative and innovation. In 1974, the Supreme Court ended a string of successful government-merger challenges that had begun after the key Clayton Act amendments of 1950. In General Dynamics, the Court rejected an Antitrust Division effort to condemn a merger based strictly on concentration thresholds and presumptions. The Court reasoned that the government’s proffered market-share data failed to establish a prima facie case, because the type of data employed inaccurately reflected the competitive significance of industry participants. In Marine Bancorporation, the Court engaged in another fact-based economic analysis, rejecting a challenge to a bank merger based on potential-competition theory. These cases portended an end to the per se/presumptive condemnation approach to business conduct that had been launched in 1937 by Jackson, continued under Arnold, and promoted continuously before 1974.
Then, in 1977—overtly acknowledging the new scholarship of antitrust economics for the first time—the Court in Sylvania explicitly overturned the per se rule against all vertical agreements (retaining the rule only as to vertical price agreements), and repudiated Topco’s blanket rejection of economic analysis in antitrust, warning that “otherwise, all of antitrust law would be reduced to per se rules, thus introducing an unintended and undesirable rigidity in the law.” In 1979, the Court explicitly adopted “consumer welfare” as the objective of federal antitrust law.[3]
Where was the FTC in all of this? Among the commission’s notable efforts in the post-1937 period (in parallel with Antitrust Division crusades of this era), in the early 1970s, it filed several “deconcentration” cases, applying a narrow structuralism while seeking to impose vaguely conceived but potentially far-reaching remedies—including major divestitures—on the integrated petroleum industry and the ready-to-eat breakfast-cereal industry. It brought several “facilitating practices” cases, seeking to prohibit unilateral conduct perceived as oligopolistic, including preannouncement and/or public announcement of price changes, as well as “most-favored-customer” clauses. Despite Sylvania, the commission attempted to prohibit exclusive territories in the soft-drink industry.
None of these efforts succeeded. The commission’s deconcentration efforts in the integrated petroleum and breakfast-cereal industries became hopelessly bogged down and were eventually dismissed prior to decision. The “facilitating practices” effort went 0-3 in federal appellate courts. (Boise Cascade, Official Airline Guides, DuPont (Ethyl).) Congress enacted legislation nullifying the commission’s attempt to exclude the soft-drink industry from Sylvania. None of these commission efforts can be regarded as anything other than expensive misdirection of public resources.
Commentators censured the commission for these persistent attempts to press antitrust boundaries ever outward. Earlier concerns about the FTC had stimulated President Nixon to request a report on the commission from the American Bar Association. The ABA Section of Antitrust Law responded in 1969 with a scathing report by a special committee, which recommended profound changes in the commission and advised that, without reform, the commission should be abolished. One highly respected member of that committee, Richard Posner,[4] recommended against the probationary phase and supported immediate abolition of the FTC. (Notably, in a speech in 2004, given at a celebration of the commission’s 90th anniversary, Posner recanted, conceding that—contrary to his predictions—the commission had been redeemed by various reforms introduced during the 35 years following the ABA report, now known as “Kirkpatrick I”.) Nixon also appointed trusted ally Casper Weinberger as chair of the FTC, whose brief tenure there was largely devoted to administrative reform of the commission. Miles Kirkpatrick, chair of the ABA special committee, followed Weinberger as chair of the FTC in 1970.
As matters turned out, the policy reconsideration stimulated by U.S. economic distress in the 1960s and 1970s resulted not only in the Supreme Court cases cited above, but in the rationalization of economic policy through agency-leadership appointments, judicial appointments, and emerging consensus within the antitrust bar, and among the community of legal scholars and industrial-organization economists. This consensus favored a reaffirmation of material progress as the overall objective of antitrust. This objective has been expressed in various terms—“efficiency,” “consumer welfare,” “total welfare,” “maximum output,” “maximum productivity”—but it is difficult and probably futile to spend much effort trying to hammer down all the potential semantic and operational distinctions among these various terms. None is a term of art, nor do they appear in any statute. The instrument of antitrust enforcement is (fortunately) clear from the words of the primary statutes: the antitrust laws prohibit anticompetitive conduct. Given the broad wording of the prohibitions—restraint of trade, monopolization, acquisitions or other conduct whose “effect . . . may be” anticompetitive—the determination of what is anticompetitive requires specification in individual cases, and the “material progress” interpretation simply requires courts to construe antitrust law (where there is any remaining ambiguity) in accord with the broad objective of maximizing the size of the economic pie. No specific measure of welfare is prescribed as a legal instrument of antitrust.
As a policy objective—as opposed to a legal instrument under the direct control of the antitrust enforcement system—applying this standard does not require welfare measurement in individual cases, which is frequently and perhaps characteristically impossible or impractical, in any event. It requires only that anticompetitive conduct be defined by rules designed (insofar as possible given present understanding and the evidence and analysis in specific cases) to support the overall economic goal. To illustrate this critical distinction between policy instruments and policy objectives, consider another example: The Federal Reserve’s Board of Governors and the Federal Open Market Committee (FOMC) are required by statute to pursue “maximum employment, stable prices, and moderate long-term interest rates” but they have no direct control of any of these. Their legal instruments include the discount rate set by the Fed for short-term loans to member banks, open-market purchases of securities directed by the FOMC, and the reserve requirements that the board sets and applies to member banks. Stable prices, full employment, and moderate long-term interest rates—like material progress or consumer welfare under antitrust law—are only the intended effects of the Fed/FOMC manipulation of their specific legal instruments.
Antitrust enforcement did not flag as a result of the shift in enforcement philosophy, as some have argued, except in the sense expressed by William Baxter, President Ronald Reagan’s first assistant attorney general for antitrust. As Baxter said in an interview shortly after his appointment in 1981, when asked to describe his approach: “If it doesn’t make economic sense, it doesn’t happen.” Baxter vigorously investigated and prosecuted cartel cases of the day, and he promoted a distinct, if modest, innovation in attempted-monopolization law by suing an airline that had proposed, but not actually entered into, a price-fixing agreement (the offeree was electronically recording the verbal offer and then supplied the recording to the Antitrust Division), and promising to indict the perpetrators of any future similar conduct.
More consequentially, he successfully “litigated to the eyeballs” a major case filed during the Gerald Ford administration and continued through the Jimmy Carter years—arguably the most successful monopolization case in history, US v. AT&T (the former Bell System, not the present entity with that name). The result was the largest divestiture in history, thus dissolving what was then the largest private enterprise in history. Baxter was unpersuadable when presented with cases that had a chance of success under precedents from the per se era, but could not meet his “economic sense” criterion. He studied intensively and at length and then displayed little hesitation in dismissing another ambitious monopolization case, filed on the last day of the Lyndon Johnson administration late in the per se era, US v. IBM. Baxter considered the government’s case to be based on “flimsy” evidence and questionable substantive analysis.
But his unwavering devotion to the antitrust objective of producing the greatest material progress never diverted him from aggressive pursuit of any meritorious case that would “make economic sense.” Although a lawyer by training and a law professor for his entire career (except a stint as a young Washington D.C. law-firm associate and three years as assistant attorney general), Baxter was and remains almost universally acclaimed as one of the most talented antitrust economists of his generation. Of course, he received criticism, notably from certain congressional Democrats and surviving defenders of the per se approach that preceded General Dynamics and Sylvania.
1981-2021: FTC in the Era of Economic Rationality
After 1981, the FTC joined the emerging consensus supporting material progress as the fundamental antitrust objective. President Reagan appointed two distinguished industrial organization economists to the FTC—James C. Miller III and George Douglas, with Miller as chair—and continued to nominate other commissioners who were adherents of the economic vision. Senior staff appointments at the commission were similar—Thomas Campbell, who held both a JD degree and a PhD in economics, became head of the Bureau of Competition, and Tim Muris, another law & economics scholar, led the Bureau of Consumer Protection. Muris succeeded Campbell at the Bureau of Competition and ultimately became FTC chairman in 2001 under President George W. Bush. The reshaping of agency leadership and the support provided by the political wind shift (like the massive progressive victories in 1910 and 1912 that supported passage of the Clayton Act and creation of the FTC) changed the basic direction of antitrust. This fundamental orientation was not seriously challenged for the next 40 years.
The commission’s focus on economic analysis and its effort to employ all the unique tools available to it for study, analysis, investigation, and case development led to a variety of successful projects. Some were controversial or required special perseverance: analysis of competitor agreements (e.g., when to apply per se rules vs. “quick look”?) vacillated for years and involved several cases reviewed by the Supreme Court (with mixed success for the commission) until In re Polygram Holding[5] forged a persuasive synthesis of the relevant cases and principles. The commission aggressively but unsuccessfully attacked a number of hospital mergers, but after a period of intense introspection, research, and fine-tuning of litigation tactics, a consistent string of FTC wins followed. The commission’s attempt to impose a per se rule on certain Hatch-Waxman settlements involved a decade of struggle. At one point, the solicitor general (supported by the Antitrust Division) successfully opposed an FTC request for Supreme Court review in a key commission case. The effort was ultimately rejected by the Supreme Court in FTC v. Activis,[6] but the commission managed to squelch Noerr-Pennington immunity for most such settlements. Justice Stephen Breyer’s majority opinion in Actavis attempted to fashion a rule-of-reason compromise between patent rights and antitrust objectives, but a decade later, considerable confusion remains.
On the legislative front, however, the commission obtained statutory authority to require automatic submission of many such settlements for review. Aside from these examples, and the typical wrangling about the commission’s approach in particular acquisition matters, the FTC eventually earned broad (if not universal) respect from the bar, the business community, and scholars of antitrust law and economics. For the most part, it was following a consistent line of economic rationality and maintaining a winning record in court. Hence, by 2004, Posner’s “reprieve” of the commission from his earlier sentence of extinction was arguably well-deserved.
Part 2 will continue tomorrow.
[1] Werden, Gregory J., Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act: What Is the Intelligible Principle? (May 2023). Mercatus Working Paper, Available at SSRN: https://ssrn.com/abstract=4448795 or http://dx.doi.org/10.2139/ssrn.4448795
[2] Especially considered in their totality, such improvements have had a profound effect in promoting strict antitrust enforcement, encouraging businesses that are uncertain about legal consequences to avoid questionable but ultimately lawful conduct. To name just a few of these procedural and remedial improvements: Sherman Act violations, originally misdemeanors, became felonies; criminal fines and sentences were increased dramatically for individuals, as were fines applicable to business entities, through amendment of the Sherman Act and via the Alternative Fines statute; corporate and individual amnesty and leniency programs were implemented; surreptitious surveillance became available for antitrust investigations; successful amnesty applicants now received immunity from treble damages; gaps in Clayton Act coverage of structural transactions were closed in 1950 legislation; opt-out class actions and multidistrict litigation became the norm in private treble-damage actions, enhanced by “Illinois Brick repealers” – state laws allowing damage recovery by indirect purchasers; implementation of liberal pre-trial discovery rules; notice pleading; allowing proof of damages by any means short of speculation and guesswork; joint and several liability for antitrust conspirators, without rights of contribution; implementation of the Hart-Scott-Rodino Act requiring premerger notification and waiting periods, allowing the federal agencies to review thousands of significant corporate transactions annually, and to conduct intense and thorough investigations of the small fraction that pose any material competition issue.
[3] Reiter v. Sonotone Corp., 442 U.S. 330 (1979).
[4] An assistant to FTC Commissioner Philip Elman early in his career, Posner became a leading antitrust scholar, teacher, and outstanding exponent of law & economics, a highly influential federal appellate judge—the most-cited judge in history—as well as a prolific author on an extraordinary range of subjects extending well beyond antitrust.
[5] In re PolyGram Holding, Inc., Docket No. 9298 (FTC), available at http://www.ftc.gov/os/2003/07/polygramopinion.pdf, aff’d, Polygram Holding, Inc. v. FTC, 416 F.3d 29 (D.C. Cir. 2005).
[6] 570 U.S. 136 (2013).
