Perhaps more than at any time in its history, the Federal Trade Commission (FTC) under Chair Lina Khan has highlighted substantive rulemaking as a central element of its policy agenda. But despite a great deal of rule-related sound and fury (signifying nothing?), new final rules have yet to emerge, and do not appear imminent. This post explores some possible “whys and wherefores” that may help explain this seemingly peculiar state of affairs, and the policy implications of the commission’s recent rulemaking activity.
FTC Rulemaking Proposals Under Chair Khan
Khan’s arrival at the FTC in the summer of 2021 seemed to herald a new era of competition and consumer-protection rulemaking.
Khan’s first FTC statement of regulatory priorities, issued in December 2021, called for possible consumer-protection rules that would, among other things: authorize penalties for “data abuses”; and authorize penalties for “abuses . . . from surveillance-based business models.” Relatedly, rules to combat illegal discrimination stemming from algorithmic decision making were also mentioned. More generally, the statement envisioned rules to “define with specificity unfair or deceptive acts or practices.”
In addition, drawing upon recommendations in President Joe Biden’s July 2021 Executive Order on Promoting Competition, the statement announced that the FTC would consider “competition rulemakings” dealing with: noncompete clauses; surveillance; the right to repair; pay-for-delay pharmaceutical agreements; unfair competition in online marketplaces; occupational licensing; real-estate listing and brokerage; and industry-specific practices that substantially inhibit competition.
Also in late 2021, the FTC announced it was pursuing possible updates and modifications of existing consumer-protection rules, including the Children’s Online Privacy Protection Act; the Health Breach Notification Rule (HBNR); identity-theft rules; and the FTC Safeguards Rule (providing additional requirements for financial institutions’ privacy programs).
Flash forward to February 2023. In an article highlighting the FTC’s transformation into a major regulator, former FTC Bureau of Consumer Protection Director Jessica Rich pointed to major ongoing rulemaking initiatives:
- The addition of new reporting burdens to the existing Safeguards Rule;
- A proposed new Motor Vehicle Dealers Rule, regulating dealers’ pricing practices;
- A new Impersonation of Government and Businesses rule to ban impersonation fraud;
- Exploration of a possible new Earnings Claims Rule (dealing with information provided to consumers regarding possible earnings from business opportunities);
- A possible new Commercial Security and Data Protection Rule (see my discussion here regarding the overreach of the advanced notice of proposed rulemaking);
- A proposed Reviews and Endorsements Rule that would regulate testimonials;
- A proposed update to the Funeral Industry Practices Rule that would require online posting of prices;
- A proposed broadening of the coverage of the existing Business Opportunities Rule;
- A possible sweeping new Unfair or Deceptive Fees Rule that would regulate (and possibly prohibit certain) “junk fees” that are added on to the final price of goods; and
- A new “unfair methods of competition” Non-Compete Clauses Rule that would prohibit almost all such clauses in employment contracts throughout the economy. (See my takedown of this proposed rule here, explaining why the rule would be economically harmful and likely illegal.)
During 2023, the FTC’s rulemaking activity has focused on taking further steps to implement the proposals listed above, and to issue updates on reviews of possible modifications to existing rules. (See here for Federal Register announcements of these initiatives.) Two proposed actions merit particular note because of their potentially substantial economic impacts.
On June 27, 2023, the FTC—with the concurrence of the U.S. Justice Department (DOJ)—announced sweeping proposed amendments to the rules implementing the Hart-Scott-Rodino Act’s premerger-notification requirements. Those changes would require firms proposing to merge to provide huge amounts of business information that have no bearing on the potential competitive effects of their transaction. Amended pre-notification rules would be subject to deferential (to the FTC) “arbitrary and capricious” review under the Administrative Procedure Act (APA).
A Sidley & Austin analysis points out that “[t]he FTC estimates that the changes, as proposed, will quadruple the filing preparation burden. Some experts believe that is a significant underestimate.” These added costs would outweigh any benefits that the amended rules might generate. As explained in a Sept. 27, 2023 public comment by the International Center for Law & Economics (ICLE), the proposed regulatory change “would increase compliance costs for merging parties generally, with disproportionate impact on small and first-time filers; they would impose additional burdens on agency staff; yet it is unlikely that they would provide countervailing benefits to competition and consumers.”
On Oct. 11, the FTC announced a specific proposed rule that would ban “junk fees.” (The commission published and requested public comments on the rule on Nov. 11.) Specifically, the proposed rule would “[p]rohibit businesses from advertising prices that hide or omit mandatory fees” and “[p]rohibit sellers from misrepresenting fees and require sellers to disclose upfront the amount and purpose of fees and whether the fees are refundable.”
The junk fees proposal is quite problematic. Former FTC economist Mary Sullivan stresses that, by requiring additional fee-related disclosures, the proposal “has the potential to clutter advertising, making it less effective and more confusing” and “could result in enormous compliance and administrative costs, especially if applied to all industries.”
Sullivan adds that, depending on how it is implemented, the new rule might be used “to regulate optional add-ons in cases where regulators determine that the add-ons do not add enough value or consumers reasonably assume them to be included in the advertised price. Regulating add-ons would create inefficiencies and restrict firms’ freedom to design their own products.” More generally, the proposed rule may be seen as an unprecedented regulatory interference in business-pricing practices that could render affected markets less efficient.
In sum, while the Khan FTC has spawned an unprecedented number of significant regulatory proposals, they do not appear close to enactment (except perhaps the Hart-Scott-Rodino regulatory amendments, see here). Furthermore, it is entirely possible that a new FTC leadership might revisit at least some (if not all) of the proposals that have attracted significant controversy.
What Is Behind the FTC’s Rulemaking Blizzard?
It is not surprising that, shortly after President Biden designated the neo-Brandeisian Lina Khan as chair, the FTC announced plans to propose a large number of new rules. As explained by Christine Wilson and Adam Cella, neo-Brandeisians reject core classical-liberal tenets, including the importance of the rule of law and due process. Neo-Brandeisians also are skeptical of capitalism, view mergers as inherently harmful, and distrust large firms. Furthermore, and relatedly, they are critical of individualism and believe in central planning.
It therefore follows that neo-Brandeisians would support government control of markets through regulation. In particular, FTC regulation would be seen as superior to reliance on market forces, because it allows the agency to prescribe particular rules governing business conduct—rules that are deemed inherently superior to what unruly markets might yield.
At first blush, greater reliance on rulemaking seems to further the goal of putting the FTC “in charge of the entire economy,” and avoids the problems inherent in case-by-case litigation. Litigation is cumbersome (it requires a lot of discovery, consistent with due process), time-consuming, and lacks the economywide impact of rules. What’s worse, judicial case-law precedents and statutory language (such as the “balancing test” for consumer-protection unfairness found in Section 5(n) of the FTC Act) sharply limit the FTC’s ability to change the law dramatically by bringing enforcement actions.
It might have appeared initially to Khan that greater reliance on promulgating economywide FTC rules, which specify what businesses may or may not do, would avoid the limitations of litigation. But a closer look reveals the problems with a rulemaking-heavy approach.
Notably, rulemakings themselves are resource-intensive, and may take years to come to fruition. With respect to consumer protection, Jessica Rich explains that, despite 2021 FTC procedural changes to “streamline” Magnuson-Moss (Mag-Moss) rulemaking under Section 18 of the FTC Act, “the hurdles remain high” to the enactment of Magnuson-Moss rules. (Consumer-protection rules that implement specific congressional enactments are subject to the less exacting standards of the APA. But much of the FTC’s recent “innovative” consumer-protection rulemaking activity has focused on problems not specifically addressed by Congress.)
Specifically, Rich explains that Mag-Moss initiatives must still follow cumbersome statutory steps prior to enactment. Significantly, the FTC:
- Must seek public comment on a draft rule and hold public hearings if requested;
- It must have “reason to believe” targeted practices are prevalent (that requires hard evidence, not just assertions); and
- It must publish a final rule setting forth a cost-benefit regulatory analysis that also must demonstrate why the rule was chosen over alternatives.
Also, judicial review of a Mag-Moss rule is far more exacting than under the APA’s requirements (the relatively lenient “arbitrary and capricious” standard). A court may, of course, choose to strike down a poorly justified Mag-Moss rule under the relatively lenient APA “arbitrary and capricious standard.” But even if a Mag-Moss rule survives APA review, the FTC may still lose in court. Under Mag-Moss, a court may direct the FTC to consider additional submissions, may set aside the rule if it is not supported by “substantial evidence,” and may “set aside the rule if FTC’s limits on rebuttal or cross examination precluded disclosure of material facts.”
Finally, and perhaps most significantly, a reviewing court may decide that the FTC has done an inadequate job of demonstrating that a Mag-Moss rule would be cost-beneficial.
Given these high hurdles, the resource-constrained FTC would be expected to handle, at most, a couple of Mag-Moss rulemakings at a time. But it currently contemplates almost 10, based on its public pronouncements since 2021. Moreover, given the sweeping breadth of some of its announced initiatives, it would have a particularly hard time building a factual case that could withstand scrutiny for its more ambitious initiatives (such as business-data privacy and security). As such, it appears unlikely that the FTC will be able to bring even a single Mag-Moss rule to successful conclusion prior to the end of the current presidential term.
The outlook for FTC competition rules is even bleaker. Such rules are virtually unprecedented and stand very little chance of being upheld, due to a lack of legal authority to support their promulgation (see here). Nevertheless, the FTC has put forth an extremely detailed draft competition rule that would ban most noncompete agreements in the U.S. economy, an exercise that is highly problematic, both from a legal and economic standpoint (see here, for example). (If a final non-compete rule is issued in 2024, it will almost certainly fail judicial scrutiny.) Perhaps the realization that far-reaching competition rules are legal longshots (at best), due to a lack of statutory authority, explains why the FTC has not followed through on announcing additional proposals drawn from the 2021 FTC statement of regulatory priorities.
So why has the FTC announced it is considering a large number of very expansive potential Mag-Moss rules that would tread new ground?
Perhaps this is merely legal “vaporware,” meant to show that the FTC intends to second guess a variety of well-established (and often efficient) business practices that affect large swaths of the economy. Khan might hope that some risk-averse firms may decide to avoid those practices, even if no legal action is imminent, in order to avoid future problems with the government. She might also think that Mag-Moss rules, once developed, may garner additional public support and stand a reasonable chance of success in court.
Khan might also view potential Mag-Moss rule announcements as a means of spotlighting specific alleged “market failures,” in the hope of prodding future congressional action to deal with them (and perhaps grant the FTC specific rulemaking authority to fill in the details). This might be a form of “setting the stage” for a dramatic long-term expansion in federal regulatory activity when the time is ripe (that is, when the consciousness of legislators has been suitably raised to enable enlightened bureaucrats to exercise far broader authority).
Whatever Khan’s motives may have been, the FTC’s blizzard of Mag-Moss rulemaking initiatives (and one major competition rulemaking) has been economically wasteful. The substantial resources directed to developing dubious rulemaking proposals (many, if not all, of which could not satisfy cost-benefit scrutiny) could have far better been allocated to clearly beneficial enforcement activity—in particular, combating burgeoning mass-market consumer fraud (which remains a serious and seemingly growing source of consumer harm, see, for example, here, here, and here). Note that those wasted resources are sunk costs, and thus there is no justification to continue to allocate resources to those rulemaking projects “because they are there” (to do so would be to fall prey to the sunk cost fallacy).
It follows that FTC leadership should discontinue work on those rulemakings, perhaps after quick cost-benefit analyses by the FTC Bureau of Economics to assure itself that the proposals put forth fail a cost-benefit test. It should then redirect the rulemaking resources to the most welfare-enhancing uses it can identify (I would opt for hardcore-fraud enforcement). Of course, such a course of action must await the departure of Chair Khan, and the installation of new and enlightened leadership at the commission.
The FTC’s highly publicized proposals previewing the issuance of new rules, beginning in 2021, have not brought us much closer to the issuance of final rules, with perhaps one or two exceptions. The FTC has, however, wasted scarce staff resources on launching one competition rulemaking (banning noncompete clauses) and a large number of dubious consumer-protection (“unfair or deceptive acts or practices”) Magnuson-Moss rulemakings. Those are sunk costs, and the FTC should not waste additional resources on further developing those rules. (The FTC, of course, will remain obligated to issue or update rules dealing with discrete topics, as required by specific congressional statutory enactments.) New FTC leadership will, however, be required to bring about this salutary change in direction.
The continued allocation of significant resources to these troubled rulemaking initiatives could entail more than the large opportunity costs of added waste and foregone welfare-superior FTC enforcement activity. It could lead to economic inefficiency and harm by deterring some legitimate efficient business conduct that falls within “the shadow of rulemaking.” It could also impose further harm, to the extent that particular welfare-inimical rules were finalized and upheld in court. (There is at least a reasonable possibility that one or more Mag-Moss rules would survive judicial review.)
New FTC leadership should keep these sobering realities in mind as it considers whether to “pull the plug” on the Khan-era rulemaking folly.