Late last month, 25 former judges and government officials, legal academics and economists who are experts in antitrust and intellectual property law submitted a letter to Assistant Attorney General Jonathan Kanter in support of the U.S. Justice Department’s (DOJ) July 2020 Avanci business-review letter (ABRL) dealing with patent pools. The pro-Avanci letter was offered in response to an October 2022 letter to Kanter from ABRL critics that called for reconsideration of the ABRL. A good summary account of the “battle of the scholarly letters” may be found here.

The University of Pennsylvania’s Herbert Hovenkamp defines a patent pool as “an arrangement under which patent holders in a common technology or market commit their patents to a single holder, who then licenses them out to the original patentees and perhaps to outsiders.” Although the U.S. antitrust treatment of patent pools might appear a rather arcane topic, it has major implications for U.S. innovation. As AAG Kanter ponders whether to dive into patent-pool policy, a brief review of this timely topic is in order. That review reveals that Kanter should reject the anti-Avanci letter and reaffirm the ABRL.

Background on Patent Pool Analysis

The 2017 DOJ-FTC IP Licensing Guidelines

Section 5.5 of joint DOJ-Federal Trade Commission (FTC) Antitrust Guidelines for the Licensing of Intellectual Property (2017 Guidelines, which revised a prior 1995 version) provides an overview of the agencies’ competitive assessment of patent pools. The 2017 Guidelines explain that, depending on how pools are designed and operated, they may have procompetitive (and efficiency-enhancing) or anticompetitive features.

On the positive side of the ledger, Section 5.5 states:

Cross-licensing and pooling arrangements are agreements of two or more owners of different items of intellectual property to license one another or third parties. These arrangements may provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation. By promoting the dissemination of technology, cross-licensing and pooling arrangements are often procompetitive.

On the negative side of the ledger, Section 5.5 states (citations omitted):

Cross-licensing and pooling arrangements can have anticompetitive effects in certain circumstances. For example, collective price or output restraints in pooling arrangements, such as the joint marketing of pooled intellectual property rights with collective price setting or coordinated output restrictions, may be deemed unlawful if they do not contribute to an efficiency-enhancing integration of economic activity among the participants. When cross-licensing or pooling arrangements are mechanisms to accomplish naked price-fixing or market division, they are subject to challenge under the per se rule.

Other aspects of pool behavior may be either procompetitive or anticompetitive, depending upon the circumstances, as Section 5.5 explains. The antitrust rule of reason would apply to pool restraints that may have both procompetitive and anticompetitive features.  

For example, requirements that pool members grant licenses to each other for current and future technology at minimal cost could disincentivize research and development. Such requirements, however, could also promote competition by exploiting economies of scale and integrating complementary capabilities of the pool members. According to the 2017 Guidelines, such requirements are likely to cause competitive problems only when they include a large fraction of the potential research and development in an R&D market.

Section 5.5 also applies rule-of-reason case-specific treatment to exclusion from pools. It notes that, although pooling arrangements generally need not be open to all who wish to join (indeed, exclusion of certain parties may be designed to prevent potential free riding), they may be anticompetitive under certain circumstances (citations omitted):

[E]xclusion from a pooling or cross-licensing arrangement among competing technologies is unlikely to have anticompetitive effects unless (1) excluded firms cannot effectively compete in the relevant market for the good incorporating the licensed technologies and (2) the pool participants collectively possess market power in the relevant market. If these circumstances exist, the [federal antitrust] [a]gencies will evaluate whether the arrangement’s limitations on participation are reasonably related to the efficient development and exploitation of the pooled technologies and will assess the net effect of those limitations in the relevant market.

The 2017 Guidelines are informed by the analysis of prior agency-enforcement actions and prior DOJ business-review letters. Through the business-review-letter procedure, an organization may submit a proposed action to the DOJ Antitrust Division and receive a statement as to whether the Division currently intends to challenge the action under the antitrust laws, based on the information provided. Historically, DOJ has used these letters as a vehicle to discuss current agency thinking about safeguards that may be included in particular forms of business arrangements to alleviate DOJ competitive concerns.

DOJ patent-pool letters, in particular, have prompted DOJ to highlight specific sorts of provisions in pool agreements that forestalled competitive problems. To this point, DOJ has never commented favorably on patent-pool safeguards in a letter and then subsequently reversed course to find the safeguards inadequate.

Subsequent to issuance of the 2017 Guidelines, DOJ issued two business-review letters on patent pools: the July 2020 ABRL letter and the January 2021 University Technology Licensing Program business-review letter (UTLP letter). Those two letters favorably discussed competitive safeguards proffered by the entities requesting favorable DOJ reviews.

ABRL Letter

The ABRL letter explains (citations omitted):

[Avanci] proposed [a] joint patent-licensing pool . . . to . . . license patent claims that have been declared “essential” to implementing 5G cellular wireless standards for use in automobile vehicles and distribute royalty income among the Platform’s licensors. Avanci currently operates a licensing platform related to 4G cellular standards and offers licenses to 2G, 3G, and 4G standards-essential patents used in vehicles and smart meters.

After consulting telecommunications and automobile-industry stakeholders, conducing an independent review, and considering prior guidance to other patent pools, “DOJ conclude[d] that, on balance, Avanci’s proposed 5G Platform is unlikely to harm competition.” As such, DOJ announced it had no present intention to challenge the platform.

The DOJ press release accompanying the ABRL letter provides additional valuable information on Avanci’s potential procompetitive efficiencies; its plan to charge fair, reasonable, and non-discriminatory (FRAND) rates; and its proposed safeguards:

Avanci’s 5G Platform may make licensing standard essential patents related to vehicle connectivity more efficient by providing automakers with a “one stop shop” for licensing 5G technology. The Platform also has the potential to reduce patent infringement and ensure that patent owners who have made significant contributions to the development of 5G “Release 15” specifications are compensated for their innovation. Avanci represents that the Platform will charge FRAND rates for the patented technologies, with input from both licensors and licensees.

In addition, Avanci has incorporated a number of safeguards into its 5G Platform that can help protect competition, including licensing only technically essential patents; providing for independent evaluation of essential patents; permitting licensing outside the Platform, including in other fields of use, bilateral or multi-lateral licensing by pool members, and the formation of other pools at levels of the automotive supply chain; and by including mechanisms to prevent the sharing of competitively sensitive information.  The Department’s review found that the Platform’s essentiality review may help automakers license the patents they actually need to make connected vehicles.  In addition, the Platform license includes “Have Made” rights that creates new access to cellular standard essential patents for licensed automakers’ third-party component suppliers, permitting them to make non-infringing components for 5G connected vehicles.

UTLP Letter

The United Technology Licensing Program business-review letter (issued less than a year after the ABRL letter, at the end of the Trump administration) discussed a proposal by participating universities to offer licenses to their physical-science patents relating to specified emerging technologies. According to DOJ:

[Fifteen universities agreed to cooperate] in licensing certain complementary patents through UTLP, which will be organized into curated portfolios relating to specific technology applications for autonomous vehicles, the “Internet of Things,” and “Big Data.”  The overarching goal of UTLP is to centralize the administrative costs associated with commercializing university research and help participating universities to overcome the budget, institutional relationship, and other constraints that make licensing in these areas particularly challenging for them.

The UTLP letter concluded, based on representations made in UTLP’s letter request, that the pool was on balance unlikely to harm competition. Specifically:

UTLP has incorporated a number of safeguards into its program to help protect competition, including admitting only non-substitutable patents, with a “safety valve” if a patent to accomplish a particular task is inadvertently included in a portfolio with another, substitutable patent. The program also will allow potential sublicensees to choose an individual patent, a group of patents, or UTLP’s entire portfolio, thereby mitigating the risk that a licensee will be required to license more technology than it needs. The department’s letter notes that UTLP is a mechanism that is intended to address licensing inefficiencies and institutional challenges unique to universities in the physical science context, and makes no assessment about whether this mechanism if set up in another context would have similar procompetitive benefits.

Patent-Pool Guidance in Context

DOJ and FTC patent-pool guidance has been bipartisan. It has remained generally consistent in character from the mid-1990s (when the first 1995 IP licensing guidelines were issued) to early 2021 (the end of the Trump administration, when the UTLP letter was issued). The overarching concern expressed in agency guidance has been to prevent a pool from facilitating collusion among competitors, from discouraging innovation, and from inefficiently excluding competitors.

As technology has advanced over the last quarter century, U.S. antitrust enforcers—and, in particular, DOJ, through a series of business-review letters beginning in 1997 (see the pro-Avanci letter at pages 9-10)—consistently have emphasized the procompetitive efficiencies that pools can generate, while also noting the importance of avoiding anticompetitive harms.

Those letters have “given a pass” to pools whose rules contained safeguards against collusion among pool members (e.g., by limiting pool patents to complementary, not substitute, technologies) and against anticompetitive exclusion (e.g., by protecting pool members’ independence of action outside the pool). In assessing safeguards, DOJ has paid attention to the particular market context in which a pool arises.

Notably, economic research generally supports the conclusion that, in recent decades, patent pools have been an important factor in promoting procompetitive welfare-enhancing innovation and technology diffusion.

For example, a 2015 study by Justus Baron and Tim Pohlmann found that a significant number of pools were created following antitrust authorities’ “more permissive stance toward pooling of patents” beginning in the late 1990s. Studying these new pools, they found “a significant increase in patenting rates after pool announcement” that was “primarily attributable to future members of the pool”.

A 2009 analysis by Richard Gilbert of the University of California, Berkeley (who served as chief economist of the DOJ Antitrust Division during the Clinton administration) concluded that (consistent with the approach adopted in DOJ business-review letters) “antitrust authorities and the courts should encourage policies that promote the formation and durability of beneficial pools that combine complementary patents.”

In a 2014 assessment of the role of patent pools in combatting “patent thickets,” Jonathan Barnett of the USC Gould School of Law concluded:

Using network visualization software, I show that information and communication technology markets rely on patent pools and other cross-licensing structures to mitigate or avoid patent thickets and associated inefficiencies. Based on the composition, structure, terms and pricing of selected leading patent pools in the ICT market, I argue that those pools are best understood as mechanisms by which vertically integrated firms mitigate transactional frictions and reduce the cost of accessing technology inputs.

Admittedly, a few studies of some old patents pools (e.g., the 19th century sewing-machine pool and certain early 20th century New Deal pools) found them to be associated with a decline in patenting. Setting aside possible questions of those studies’ methodologies, the old pooling arrangements bear little resemblance to the carefully crafted pool structures today. In particular, unlike the old pools, the more recent pools embody competitive safeguards (the old pools may have combined substitute patents, for example).   

Business-review letters dealing with pools have provided a degree of legal certainty that has helped encourage their formation, to the benefit of innovation in key industries. The anti-Avanci letter ignores that salient fact, focusing instead on allegedly “abusive” SEP-licensing tactics by the Avanci 5G pool—such as refusal to automatically grant a license to all comers—without considering that the pool may have had legitimate reasons not to license particular parties (who may, for instance, have made bad faith unreasonable licensing demands). In sum, this blinkered approach is wrong as a matter of SEP law and policy (as explained in the pro-Avanci letter) and wrong in its implicit undermining of the socially beneficial patent-pool business-review process.   

The pro-Avanci letter ably describes the serious potential harm generated by the anti-Avanci letter:

In evaluating the carefully crafted Avanci pool structure, the 2020 business review letter appropriately concluded that the pool’s design conformed to the well-established, fact-intensive inquiry concerning actual market practices and efficiencies set forth in previous business review letters. Any reconsideration of the 2020 business review letter, as proposed in the October 17 letter, would give rise to significant uncertainty concerning the Antitrust Division’s commitment to the aforementioned sequence of business review letters that have been issued concerning other patent pools in the information technology industry, as well as the larger group of patent pools that did not specifically seek guidance through the business review letter process but relied on the legal template that had been set forth in those previously issued letters.

This is a point of great consequence. Pooling arrangements in the information technology industry have provided an efficient market-driven solution to the transaction costs that are inherent to patent-intensive industries and, when structured appropriately in light of agency guidance and applicable case law, do not raise undue antitrust concerns. Thanks to pooling and related collective licensing arrangements, the innovations embodied in tens of thousands of patents have been made available to hundreds of device producers and other intermediate users, while innovators have been able to earn a commensurate return on the costs and risks that they undertook to develop new technologies that have transformed entire fields and industries to the benefit of consumers.

Conclusion

President Joe Biden’s 2021 Executive Order on Competition commits the Biden administration to “the promotion of competition and innovation by firms small and large, at home and worldwide.” One factor in promoting competition and innovation has been the legal certainty flowing from well-reasoned DOJ business-review letters on patent pools, issued on a bipartisan basis for more than a quarter of a century.

A DOJ decision to reconsider (in other words, to withdraw) the sound guidance embodied in the ABRL would detract from this certainty and thereby threaten to undermine innovation promoted by patent pools. Accordingly, AAG Kanter should reject the advice proffered by the anti-Avanci letter and publicly reaffirm his support for the ABRL—and, more generally, for the DOJ business-review process.

“Just when I thought I was out, they pull me back in!” says Al Pacino’s character, Michael Corleone, in Godfather III. That’s how Facebook and Google must feel about S. 673, the Journalism Competition and Preservation Act (JCPA)

Gus Hurwitz called the bill dead in September. Then it passed the Senate Judiciary Committee. Now, there are some reports that suggest it could be added to the obviously unrelated National Defense Authorization Act (it should be noted that the JCPA was not included in the version of NDAA introduced in the U.S. House).

For an overview of the bill and its flaws, see Dirk Auer and Ben Sperry’s tl;dr. The JCPA would force “covered” online platforms like Facebook and Google to pay for journalism accessed through those platforms. When a user posts a news article on Facebook, which then drives traffic to the news source, Facebook would have to pay. I won’t get paid for links to my banger cat videos, no matter how popular they are, since I’m not a qualifying publication.

I’m going to focus on one aspect of the bill: the use of “final offer arbitration” (FOA) to settle disputes between platforms and news outlets. FOA is sometimes called “baseball arbitration” because it is used for contract disputes in Major League Baseball. This form of arbitration has also been implemented in other jurisdictions to govern similar disputes, notably by the Australian ACCC.

Before getting to the more complicated case, let’s start simple.

Scenario #1: I’m a corn farmer. You’re a granary who buys corn. We’re both invested in this industry, so let’s assume we can’t abandon negotiations in the near term and need to find an agreeable price. In a market, people make offers. Prices vary each year. I decide when to sell my corn based on prevailing market prices and my beliefs about when they will change.

Scenario #2: A government agency comes in (without either of us asking for it) and says the price of corn this year is $6 per bushel. In conventional economics, we call that a price regulation. Unlike a market price, where both sides sign off, regulated prices do not enjoy mutual agreement by the parties to the transaction.

Scenario #3:  Instead of a price imposed independently by regulation, one of the parties (say, the corn farmer) may seek a higher price of $6.50 per bushel and petition the government. The government agrees and the price is set at $6.50. We would still call that price regulation, but the outcome reflects what at least one of the parties wanted and  some may argue that it helps “the little guy.” (Let’s forget that many modern farms are large operations with bargaining power. In our head and in this story, the corn farmer is still a struggling mom-and-pop about to lose their house.)

Scenario #4: Instead of listening only to the corn farmer,  both the farmer and the granary tell the government their “final offer” and the government picks one of those offers, not somewhere in between. The parties don’t give any reasons—just the offer. This is called “final offer arbitration” (FOA). 

As an arbitration mechanism, FOA makes sense, even if it is not always ideal. It avoids some of the issues that can attend “splitting the difference” between the parties. 

While it is better than other systems, it is still a price regulation.  In the JCPA’s case, it would not be imposed immediately; the two parties can negotiate on their own (in the shadow of the imposed FOA). And the actual arbitration decision wouldn’t technically be made by the government, but by a third party. Fine. But ultimately, after stripping away the veneer,  this is all just an elaborate mechanism built atop the threat of the government choosing the price in the market. 

I call that price regulation. The losing party does not like the agreement and never agreed to the overall mechanism. Unlike in voluntary markets, at least one of the parties does not agree with the final price. Moreover, neither party explicitly chose the arbitration mechanism. 

The JCPA’s FOA system is not precisely like the baseball situation. In baseball, there is choice on the front-end. Players and owners agree to the system. In baseball, there is also choice after negotiations start. Players can still strike; owners can enact a lockout. Under the JCPA, the platforms must carry the content. They cannot walk away.

I’m an economist, not a philosopher. The problem with force is not that it is unpleasant. Instead, the issue is that force distorts the knowledge conveyed through market transactions. That distortion prevents resources from moving to their highest valued use. 

How do we know the apple is more valuable to Armen than it is to Ben? In a market, “we” don’t need to know. No benevolent outsider needs to pick the “right” price for other people. In most free markets, a seller posts a price. Buyers just need to decide whether they value it more than that price. Armen voluntarily pays Ben for the apple and Ben accepts the transaction. That’s how we know the apple is in the right hands.

Often, transactions are about more than just price. Sometimes there may be haggling and bargaining, especially on bigger purchases. Workers negotiate wages, even when the ad stipulates a specific wage. Home buyers make offers and negotiate. 

But this just kicks up the issue of information to one more level. Negotiating is costly. That is why sometimes, in anticipation of costly disputes down the road, the two sides voluntarily agree to use an arbitration mechanism. MLB players agree to baseball arbitration. That is the two sides revealing that they believe the costs of disputes outweigh the losses from arbitration. 

Again, each side conveys their beliefs and values by agreeing to the arbitration mechanism. Each step in the negotiation process allows the parties to convey the relevant information. No outsider needs to know “the right” answer.For a choice to convey information about relative values, it needs to be freely chosen.

At an abstract level, any trade has two parts. First, people agree to the mechanism, which determines who makes what kinds of offers. At the grocery store, the mechanism is “seller picks the price and buyer picks the quantity.” For buying and selling a house, the mechanism is “seller posts price, buyer can offer above or below and request other conditions.” After both parties agree to the terms, the mechanism plays out and both sides make or accept offers within the mechanism. 

We need choice on both aspects for the price to capture each side’s private information. 

For example, suppose someone comes up to you with a gun and says “give me your wallet or your watch. Your choice.” When you “choose” your watch, we don’t actually call that a choice, since you didn’t pick the mechanism. We have no way of knowing whether the watch means more to you or to the guy with the gun. 

When the JCPA forces Facebook to negotiate with a local news website and Facebook offers to pay a penny per visit, it conveys no information about the relative value that the news website is generating for Facebook. Facebook may just be worried that the website will ask for two pennies and the arbitrator will pick the higher price. It is equally plausible that in a world without transaction costs, the news would pay Facebook, since Facebook sends traffic to them. Is there any chance the arbitrator will pick Facebook’s offer if it asks to be paid? Of course not, so Facebook will never make that offer. 

For sure, things are imposed on us all the time. That is the nature of regulation. Energy prices are regulated. I’m not against regulation. But we should defend that use of force on its own terms and be honest that the system is one of price regulation. We gain nothing by a verbal sleight of hand that turns losing your watch into a “choice” and the JCPA’s FOA into a “negotiation” between platforms and news.

In economics, we often ask about market failures. In this case, is there a sufficient market failure in the market for links to justify regulation? Is that failure resolved by this imposition?

European Union officials insist that the executive order President Joe Biden signed Oct. 7 to implement a new U.S.-EU data-privacy framework must address European concerns about U.S. agencies’ surveillance practices. Awaited since March, when U.S. and EU officials reached an agreement in principle on a new framework, the order is intended to replace an earlier data-privacy framework that was invalidated in 2020 by the Court of Justice of the European Union (CJEU) in its Schrems II judgment.

This post is the first in what will be a series of entries examining whether the new framework satisfies the requirements of EU law or, as some critics argue, whether it does not. The critics include Max Schrems’ organization NOYB (for “none of your business”), which has announced that it “will likely bring another challenge before the CJEU” if the European Commission officially decides that the new U.S. framework is “adequate.” In this introduction, I will highlight the areas of contention based on NOYB’s “first reaction.”

The overarching legal question that the European Commission (and likely also the CJEU) will need to answer, as spelled out in the Schrems II judgment, is whether the United States “ensures an adequate level of protection for personal data essentially equivalent to that guaranteed in the European Union by the GDPR, read in the light of Articles 7 and 8 of the [EU Charter of Fundamental Rights]” Importantly, as Theodore Christakis, Kenneth Propp, and Peter Swire point out, “adequate level” and “essential equivalence” of protection do not necessarily mean identical protection, either substantively or procedurally. The precise degree of flexibility remains an open question, however, and one that the EU Court may need to clarify to a much greater extent.

Proportionality and Bulk Data Collection

Under Article 52(1) of the EU Charter of Fundamental Rights, restrictions of the right to privacy must meet several conditions. They must be “provided for by law” and “respect the essence” of the right. Moreover, “subject to the principle of proportionality, limitations may be made only if they are necessary” and meet one of the objectives recognized by EU law or “the need to protect the rights and freedoms of others.”

As NOYB has acknowledged, the new executive order supplemented the phrasing “as tailored as possible” present in 2014’s Presidential Policy Directive on Signals Intelligence Activities (PPD-28) with language explicitly drawn from EU law: mentions of the “necessity” and “proportionality” of signals-intelligence activities related to “validated intelligence priorities.” But NOYB counters:

However, despite changing these words, there is no indication that US mass surveillance will change in practice. So-called “bulk surveillance” will continue under the new Executive Order (see Section 2 (c)(ii)) and any data sent to US providers will still end up in programs like PRISM or Upstream, despite of the CJEU declaring US surveillance laws and practices as not “proportionate” (under the European understanding of the word) twice.

It is true that the Schrems II Court held that U.S. law and practices do not “[correlate] to the minimum safeguards resulting, under EU law, from the principle of proportionality.” But it is crucial to note the specific reasons the Court gave for that conclusion. Contrary to what NOYB suggests, the Court did not simply state that bulk collection of data is inherently disproportionate. Instead, the reasons it gave were that “PPD-28 does not grant data subjects actionable rights before the courts against the US authorities” and that, under Executive Order 12333, “access to data in transit to the United States [is possible] without that access being subject to any judicial review.”

CJEU case law does not support the idea that bulk collection of data is inherently disproportionate under EU law; bulk collection may be proportionate, taking into account the procedural safeguards and the magnitude of interests protected in a given case. (For another discussion of safeguards, see the CJEU’s decision in La Quadrature du Net.) Further complicating the legal analysis here is that, as mentioned, it is far from obvious that EU law requires foreign countries offer the same procedural or substantive safeguards that are applicable within the EU.

Effective Redress

The Court’s Schrems II conclusion therefore primarily concerns the effective redress available to EU citizens against potential restrictions of their right to privacy from U.S. intelligence activities. The new two-step system proposed by the Biden executive order includes creation of a Data Protection Review Court (DPRC), which would be an independent review body with power to make binding decisions on U.S. intelligence agencies. In a comment pre-dating the executive order, Max Schrems argued that:

It is hard to see how this new body would fulfill the formal requirements of a court or tribunal under Article 47 CFR, especially when compared to ongoing cases and standards applied within the EU (for example in Poland and Hungary).

This comment raises two distinct issues. First, Schrems seems to suggest that an adequacy decision can only be granted if the available redress mechanism satisfies the requirements of Article 47 of the Charter. But this is a hasty conclusion. The CJEU’s phrasing in Schrems II is more cautious:

…Article 47 of the Charter, which also contributes to the required level of protection in the European Union, compliance with which must be determined by the Commission before it adopts an adequacy decision pursuant to Article 45(1) of the GDPR

In arguing that Article 47 “also contributes to the required level of protection,” the Court is not saying that it determines the required level of protection. This is potentially significant, given that the standard of adequacy is “essential equivalence,” not that it be procedurally and substantively identical. Moreover, the Court did not say that the Commission must determine compliance with Article 47 itself, but with the “required level of protection” (which, again, must be “essentially equivalent”).

Second, there is the related but distinct question of whether the redress mechanism is effective under the applicable standard of “required level of protection.” Christakis, Propp, and Swire offered a helpful analysis suggesting that it is, considering the proposed DPRC’s independence, effective investigative powers,  and authority to issue binding determinations. I will offer a more detailed analysis of this point in future posts.

Finally, NOYB raised a concern that “judgment by ‘Court’ [is] already spelled out in Executive Order.” This concern seems to be based on the view that a decision of the DPRC (“the judgment”) and what the DPRC communicates to the complainant are the same thing. Or in other words, that legal effects of a DPRC decision are exhausted by providing the individual with the neither-confirm-nor-deny statement set out in Section 3 of the executive order. This is clearly incorrect: the DPRC has power to issue binding directions to intelligence agencies. The actual binding determinations of the DPRC are not predetermined by the executive order, only the information to be provided to the complainant is.

What may call for closer consideration are issues of access to information and data. For example, in La Quadrature du Net, the CJEU looked at the difficult problem of notification of persons whose data has been subject to state surveillance, requiring individual notification “only to the extent that and as soon as it is no longer liable to jeopardise” the law-enforcement tasks in question. Given the “essential equivalence” standard applicable to third-country adequacy assessments, however, it does not automatically follow that individual notification is required in that context.

Moreover, it also does not necessarily follow that adequacy requires that EU citizens have a right to access the data processed by foreign government agencies. The fact that there are significant restrictions on rights to information and to access in some EU member states, though not definitive (after all, those countries may be violating EU law), may be instructive for the purposes of assessing the adequacy of data protection in a third country, where EU law requires only “essential equivalence.”

Conclusion

There are difficult questions of EU law that the European Commission will need to address in the process of deciding whether to issue a new adequacy decision for the United States. It is also clear that an affirmative decision from the Commission will be challenged before the CJEU, although the arguments for such a challenge are not yet well-developed. In future posts I will provide more detailed analysis of the pivotal legal questions. My focus will be to engage with the forthcoming legal analyses from Schrems and NOYB and from other careful observers.

What should a government do when it owns geese that lay golden eggs? Should it sell the geese to fund government programs? Or should it let them run wild so everyone can have a chance at a golden egg? 

That’s the question facing Congress as it considers re-authorizing the Federal Communications Commission’s (FCC’s) authority to auction and license spectrum. Should the FCC auction spectrum to maximize government revenue? Or, should it allow large portions to remain unlicensed to foster innovation and development?

The complication in this regard is that auction revenues play an outsized role in federal lawmakers’ deliberations about spectrum policy. Indeed, spectrum auctions have been wildly successful in generating revenue for the federal government. But the size of direct federal revenues are not necessarily a perfect gauge of the overall social welfare generated by particular policy choices.

As it considers future spe​​ctrum reauthorization, Congress needs to take a balanced approach that includes concern for federal revenues, but also considers the much larger social welfare that is created when diverse users in various situations can access services enabled by both licensed and unlicensed spectrum.

Licenced, Unlicensed, & Shared Spectrum

Most spectrum is licensed by the FCC to certain users. Licensees pay fees to the FCC for the exclusive right to transmit on an assigned frequency within a given geographical area. A license holder has the right to exclude others from accessing the assigned frequency and to be free from harmful interference from other service providers. In the private sector, radio and television broadcasters, as well as mobile-phone services, operate with licensed spectrum. Their right to exclude others and to be free from interference provides improved service and greater reliability in distributing their broadcasts or providing communication services.

SOURCE: U.S. Commerce Department

Licensing gets spectrum into the hands of those who are well-positioned—both technologically and financially—to deploy spectrum for commercial uses. Because a licensee has the right to exclude other operators from the licensed band, licensing offers the operator flexibility to deploy their network in ways that effectively mitigate potential interference. In addition, the auctioning of licenses provides revenues for the government, reducing pressures to increase taxes or cut spending. Spectrum auctions have reportedly raised more than $230 billion for the U.S. Treasury since their inception.

Unlicensed spectrum can be seen as an open-access resource available to all users without charge. Users are free to use as much of this spectrum as they wish, so long as it’s with FCC-certified equipment operating at authorized power levels. The most well-known example of unlicensed operations is Wi-Fi, a service that operates in the 2.4 GHz, and 5.8 GHz bands and is employed by millions of U.S. users across millions of devices in millions of locations each day. Wi-Fi isn’t the only use for unlicensed spectrum; it covers a range of devices such as those relying on Bluetooth, as well as personal medical devices, appliances, and a wide range of Internet-of-Things devices. 

As with any common resource, each user’s service-quality experience depends on how much spectrum is used by all. In particular, if the demand for spectrum at a particular place and point in time exceeds the available supply, then all users will experience diminished service quality. If you’ve been in a crowded coffee shop and complained that “the Internet sucks here,” it’s more than likely that demand for the shop’s Wi-Fi service is greater than the capacity of the Wi-Fi router.

SOURCE: Wall Street Journal

While there can be issues of interference among wireless devices, it’s not the Wild West. Equipment and software manufacturers have invested in developing technologies that work in noisy environments and in proximity to other products. The existence of sufficient unlicensed and shared spectrum allows for innovation with new technologies and services. Firms don’t have to make large upfront investments in licenses to research, develop, and experiment with their innovations. These innovations benefit consumers, businesses, and manufacturers. According to the Wi-Fi Alliance, the success of Wi-Fi has been enormous:

The United States remains one of the countries with the widest Wi-Fi adoption and use. Cisco estimates 33.5 million paid Wi-Fi access points, with estimates for free public Wi-Fi sites at around 18.6 million. Eighty-five percent of United States broadband subscribers have Wi-Fi capability at home, and mobile users connect to the internet through Wi-Fi over cellular networks more than 55 percent of the time. The United States also has a robust manufacturing ecosystem and increasing enterprise use, which have aided the rise in the value of Wi-Fi. The total economic value of Wi-Fi in 2021 is $995 billion.

The Need for Balanced Spectrum Policy

To be sure, both licensed and unlicensed spectrum play crucial roles and serve different purposes, sometimes as substitutes for one another and sometimes as complements. It can’t therefore be said that one approach is “better” than the other, as there is undeniable economic value to both.

That’s why it’s been said that the optimal amount of unlicensed spectrum is somewhere between 0% and 100%. While that’s true, it’s unhelpful as a guide for policymakers, even if it highlights the challenges they face. Not only must they balance the competing interests of consumers, wireless providers, and electronics manufacturers, but they also have to keep their own self-interest in check, insofar as they are forever tempted to use spectrum auctions to raise revenue.

To this last point, it is likely that the “optimum” amount of unlicensed spectrum for society differs significantly from the amount that maximizes government auction revenues.

For simplicity, let’s assume “consumer welfare” is a shorthand for social welfare less government-auction revenues. In the (purely hypothetical) figure below, consumer welfare is maximized when about 56% of the available spectrum is licensed. Government auction revenues, however, are maximized when all available spectrum is licensed.

SOURCE: Authors

In this example, politicians have a keen interest in licensing more spectrum than is socially optimal. Doing so provides more revenues to the government without raising taxes. The additional costs passed on to individual consumers (or voters) would be so disperse as to be virtually undetectable. It’s a textbook case of concentrated benefits and diffused costs.

Of course, we can debate about the size, shape, and position of each of the curves, as well as where on the curve the United States currently sits. Nevertheless, available evidence indicates that the consumer welfare generated through use of unlicensed broadband will often exceed the revenue generated by spectrum auctions. For example, if the Wi-Fi Alliance’s estimate of $995 billion in economic value for Wi-Fi is accurate (or even in the ballpark), then the value of Wi-Fi alone is more than three times greater than the auction revenues received by the U.S. Treasury.

Of course, licensed-spectrum technology also provides tremendous benefit to society, but the basic basic point cannot be ignored: a congressional calculation that seeks simply to maximize revenue to the U.S. Treasury will almost certainly rob society of a great deal of benefit.

Conclusion

Licensed spectrum is obviously critical, and not just because it allows politicians to raise revenue for the federal government. Cellular technology and other licensed applications are becoming even more important as a wide variety of users opt for cellular-only Internet connections, or where fixed wireless over licensed spectrum is needed to reach remote users.

At the same time, shared and unlicensed spectrum has been a major success story, and promises to keep delivering innovation and greater connectivity in a wide variety of use cases.  As we note above, the federal revenue generated from auctions should not be the only benefit counted. Unlicensed spectrum is responsible for tens of billions of dollars in direct value, and close to $1 trillion when accounting for its indirect benefits.

Ultimately, allocating spectrum needs to be a question of what most enhances consumer welfare. Raising federal revenue is great, but it is only one benefit that must be counted among a number of benefits (and costs). Any simplistic formula that pushes for maximizing a single dimension of welfare is likely to be less than ideal. As Congress considers further spectrum reauthorization, it needs to take seriously the need to encourage both private ownership of licensed spectrum, as well as innovative uses of unlicensed and shared spectrum.

[The final post in Truth on the Market‘s digital symposium “FTC Rulemaking on Unfair Methods of Competition” comes from Joshua Wright, the executive director of the Global Antitrust Institute at George Mason University and the architect, in his time as a member of the Federal Trade Commission, of the FTC’s prior 2015 UMC statement. You can find all of the posts in this series at the symposium page here.]

The Federal Trade Commission’s (FTC) recently released Policy Statement on unfair methods of competition (UMC) has a number of profound problems, which I will detail below. But first, some praise: if the FTC does indeed plan to bring many lawsuits challenging conduct as a standalone UMC (I am dubious it will), then the public ought to have notice about the change. Providing such notice is good government, and the new Statement surely provides that notice. And providing notice in this way was costly to the FTC: the contents of the statement make surviving judicial review harder, not easier (I will explain my reasons for this view below). Incurring that cost to provide notice deserves some praise.

Now onto the problems. I see four major ones.

First, the Statement seems to exist in a fantasy world; the FTC majority appears to wish away the past problems associated with UMC enforcement. Those problems have not, in fact, gone away and pretending they don’t exist—as this Statement does—is unlikely to help the Commission’s prospects for success in court.

Second, the Statement provides no guidance whatsoever about how a potential respondent might avoid UMC liability, which stands in sharp contrast to other statements and guidance documents issued by the Commission.

Third, the entire foundation of the statement is that, in 1914, Congress intended the FTC Act to have broader coverage than the Sherman Act. Fair enough. But the coverage of the Sherman Act isn’t fixed to what the Supreme Court thought it was in 1914: It’s a moving target that, in fact, has moved dramatically over the last 108 years. Congress in 1914 could not have intended UMC to be broader than how the courts would interpret the Sherman Act in the future (whether that future is 1918, much less 1970 or 2023).

And fourth, Congress has passed other statutes since it passed the FTC Act in 1914, one of which is the Administrative Procedure Act. The APA unambiguously and explicitly directs administrative agencies to engage in reasoned decision making. In a nutshell, this means that the actions of such agencies must be supported by substantial record evidence and can be set aside by a court on judicial review if they are arbitrary and capricious. “Congress intended to give the FTC broad authority in 1914” is not an argument to address the fact that, 32 years later, Congress also intended to limit the FTC’s authority (as well as other agencies’) by requiring reasoned decision making.

Each of these problems on its own would be enough to doom almost any case the Commission might bring to apply the statement. Together, they are a death knell.

A Record of Failure

As I have explained elsewhere, there are a number of reasons the FTC has pursued few standalone UMC cases in recent decades. The late-1970s effort to reinvigorate UMC enforcement via bringing cases was a total failure: the Commission did not lose the game on a last-second buzzer beater; it got blown out by 40 points. According to William Kovacic and Mark Winerman, in each of those UMC cases, “the tribunal recognized that Section 5 allows the FTC to challenge behavior beyond the reach of the other antitrust laws. In each instance, the court found that the Commission had failed to make a compelling case for condemning the conduct in question.”

Since these losses, the Commission hasn’t successfully litigated a UMC case in federal court. This, in my view, is because of a (very plausible) concern that, when presented with such a case, Article III courts would either define the Commission’s UMC authority on their own terms—i.e., restricting the Commission’s authority—or ultimately decide that the space beyond the Sherman Act that Congress in 1914 intended Section 5 to occupy exists only in theory and not in the real world, and declare the two statutes functionally equivalent. Those reasons—and not Chair Lina Khan’s preferred view that the Commission has been feckless, weak, or captured by special interests since 1981—explain why Section 5 has been used so sparingly over the last 40 years (and mostly just to extract settlements from parties under investigation). The majority’s effort to put all its eggs in the “1914 legislative history” basket simply ignores this reality.

Undefined Harms

The second problem is evident when one compares this statement with other policy statements or guidance documents issued by the Commission over the years. On the antitrust side of the house, these include the Horizontal Merger Guidelines, the (now-withdrawn by the FTC) Vertical Merger Guidelines, the Guidelines for Collaboration Among Competitors, the IP Licensing Guidelines, the Health Care Policy Statement, and the Antitrust Guidance for Human Resources Professionals.

Each of these documents is designed (at least in part) to help market participants understand what conduct might or might not violate one or more laws enforced by the FTC, and for that reason, each document provides specific examples of conduct that would violate the law, and conduct that would not.

The new UMC Policy Statement provides no such examples. Instead, we are left with the conclusory statement that, if the Commission can characterize the conduct as “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power” or “otherwise restrictive or exclusionary,” then the conduct can be a UMC.

What does this salad of words mean? I have no idea, and the Commission doesn’t even bother to try and define them. If a lawyer is asked, “based upon the Commission’s new UMC Statement, what conduct might be a violation?” the only defensible advice to give is “anything three Commissioners think.”

Ahistorical Jurisprudence

The third problem is the majority’s fictitious belief that Sherman Act jurisprudence is frozen in 1914—the year Congress passed the FTC Act. The Statement states that “Congress passed the FTC Act to push back against the judiciary’s open-ended rule of reason for analyzing Sherman Act claims” and cites the Supreme Court’s opinion in Standard Oil Co. of New Jersey v. United States from 1911.

It’s easy to understand why Congress in 1914 was dissatisfied with the opinion in Standard Oil; reading Standard Oil in 2022 is also a dissatisfying experience. The opinion takes up 106 pages in the U.S. Reporter, and individual paragraphs are routinely three pages long; it meanders between analyzing Section 1 and Section 2 of the Sherman Act without telling the reader; and is generally inscrutable. I have taught antitrust for almost 20 years and, though we cover Standard Oil because of its historical importance, I don’t teach the opinion, because the opinion does not help modern students understand how to practice antitrust law.

This stands in sharp contrast to Justice Louis Brandeis’s opinion in Chicago Board of Trade (issued four years after Congress passed the FTC Act), which I do teach consistently, because it articulates the beginning of the modern rule of reason. Although the majority of the FTC is on solid ground when it points out that Congress in 1914 intended the FTC’s UMC authority to have broader coverage than the Sherman Act, the coverage of the Sherman Act has changed since 1914.

This point is well-known, of course: Kovacic and Winerman explain that “[p]robably the most important” reason “Section 5 has played so small a role in the development of U.S. competition policy principles” “is that the Sherman Act proved to be a far more flexible tool for setting antitrust rules than Congress expected in the early 20th century.” The 10 pages in the Statement devoted to century-old legislative history just pretend like Sherman Act jurisprudence hasn’t changed in that same amount of time. The federal courts are going to see right through that.

What About the APA?

The fourth problem with the majority’s trip back to 1914 is that, since then, Congress has passed other statutes limiting the Commission’s authority. The most prominent of these is the Administrative Procedure Act, which was passed in 1946 (for those counting, 1946 is more than 30 years after 1914).

There are hundreds of opinions interpreting the APA, and indeed, an entire body of law has developed pursuant to those cases. These cases produce many lessons, but one of them is that it is not enough for an agency to have the legal authority to act: “Congress gave me this power. I am exercising this power. Therefore, my exercise of this power is lawful,” is, by definition, insufficient justification under the APA. An agency has the obligation to engage in reasoned decision making and must base its actions on substantial evidence. Its enforcement efforts will be set aside on judicial review if they are arbitrary and capricious.

By failing to explain how a company can avoid UMC liability—other than by avoiding conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power” or “otherwise restrictive or exclusionary,” without defining those terms—the majority is basically shouting to the federal courts that its UMC enforcement program is going to be arbitrary and capricious. That’s going to fail for many reasons. A simple one is that 1946 is later in time than 1914, which is why the Commission putting all its eggs in the 1914 legislative history basket is not going to work once its actions are challenged in federal court.

Conclusion

These problems with the majority’s statement are so significant, so obvious, and so unlikely to be overcome, that I don’t anticipate that the Commission will pursue many UMC enforcement actions. Instead, I suspect UMC rulemaking is on the agenda, which has its own set of problems (not to mention the fact that the 1914 legislative history points away from Congress intending that the Commission has legislative rulemaking authority). Rather, I think the value of this statement is symbolic for Chair Khan and her supporters.

When one considers the record of the Khan Commission—many policy statements, few enforcement actions, and even fewer successful enforcement actions—it all makes more sense. The audience for this Statement is Chair Khan’s friends working on Capitol Hill and at think tanks, as well as her followers on Twitter. They might be impressed by it. The audience she should be concerned about is Article III judges, who surely won’t be. 

[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

The Federal Trade Commission’s (FTC) Nov. 10 Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act—adopted by a 3-1 vote, with Commissioner Christine Wilson issuing a dissenting statement—holds out the prospect of dramatic new enforcement initiatives going far beyond anything the FTC has done in the past. Of particular note, the statement abandons the antitrust “rule of reason,” rejects the “consumer welfare standard” that has long guided FTC competition cases, rejects economic analysis, rejects relevant precedent, misleadingly discusses legislative history, and cites inapposite and dated case law.

And what is the statement’s aim?  As Commissioner Wilson aptly puts it, the statement “announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.” This sweeping claim, which extends far beyond the scope of prior Commission pronouncements, might be viewed as mere puffery with no real substantive effect: “a tale told by an idiot, full of sound and fury, signifying nothing.”

Various scholarly commentators have already explored the legal and policy shortcomings of this misbegotten statement (see, for example, here, here, here, here, here, and here). Suffice it to say there is general agreement that, as Gus Hurwitz explains, the statement “is non-precedential and lacks the force of law.”

The statement’s almost certain lack of legal effect, however, does not mean it is of no consequence. Businesses are harmed by legal risk, even if they are eventually likely to prevail in court. Markets react negatively to antitrust lawsuits, and thus firms may be expected to shy away from efficient profitable behavior that may draw the FTC’s ire. The resources firms redirect to less-efficient conduct impose costs on businesses and ultimately consumers. (And when meritless FTC lawsuits still come, wasteful litigation-related costs will be coupled with unwarranted reputational harm to businesses.)

Moreover, as Wilson points out, uncertainty about what the Commission may characterize as unfair “does not allow businesses to structure their conduct to avoid possible liability. . . . [T]he Policy Statement . . . significantly increases uncertainty for businesses[,] which . . . . are left with no navigational tools to map the boundaries of lawful and unlawful conduct.” This will further disincentivize new and innovative (and easily misunderstood) business initiatives. In the perhaps-vain hope that a Commission majority will take note of these harms and have second thoughts about retention of the statement, I will briefly summarize the legal case against the statement’s effectiveness. The FTC actually would be better able to “push the Section 5 envelope” a bit through some carefully tailored innovative enforcement actions if it could jettison the legal baggage that the statement represents. To understand why, a brief review of FTC competition rulemaking and competition enforcement authority is warranted

FTC Competition Rulemaking

As I and others have written at great length (see, for examples, this compilation of essays on FTC rulemaking published by Concurrences), the case for substantive FTC competition rulemaking under Section 6(g) of the FTC Act is exceedingly weak. In particular (see my July 2022 Truth on the Market commentary):

First, the “nondelegation doctrine” suggests that, under section 6(g), Congress did not confer on the FTC the specific statutory authority required to issue rules that address particular competitive practices.

Second, principles of statutory construction strongly indicate that the FTC’s general statutory provision dealing with rulemaking refers to procedural rules of organization, not substantive rules bearing on competition.

Third, even assuming that proposed competition rules survived these initial hurdles, principles of administrative law would raise the risk that competition rules would be struck down as “arbitrary and capricious.”

Fourth, there is a substantial possibility that courts would not defer to the FTC’s construction through rulemaking of its “unfair methods of competition” as authorizing the condemnation of specific competitive practices.

The 2022 statement raises these four problems in spades.

First, the Supreme Court has stated that the non-delegation doctrine requires that a statutory delegation must be supported by an “intelligible principle” guiding its application. There is no such principle that may be drawn from the statement, which emphasizes that unfair business conduct “may be coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature.” The conduct also must tend “to negatively affect competitive conditions – whether by affecting consumers, workers, or other market participants.” Those descriptions are so broad and all-encompassing that they are the antithesis of an “intelligible principle.”

Second, the passing nod to rulemaking referenced in Section 6(g) is best understood as an aid to FTC processes and investigations, not a source of substantive policymaking. The Supreme Court’s unanimous April 2021 decision in AMG Capital Management v. FTC (holding that the FTC could not obtain equitable monetary relief under its authority to seek injunctions) embodies a reluctance to read general non-specific language as conferring broad substantive powers on the FTC. This interpretive approach is in line with other Supreme Court case law that rejects finding “elephants in mouseholes.” While multiple federal courts had upheld the FTC’s authority to obtain injunctive monetary relief prior to its loss in the AMG case, only one nearly 50-year-old decision, National Petroleum Refiners, supports substantive competition-rulemaking authority, and its reasoning is badly dated. Nothing in the 2022 statement makes a convincing case for giving substantive import to Section 6(g).   

Third, given the extremely vague terms used to describe unfair method of competition in the 2022 statement (see first point, above), any effort to invoke them to find a source of authority to define new categories of competition-related violations would be sure to raise claims of agency arbitrariness and capriciousness under the Administrative Procedure Act (APA). Admittedly, the “arbitrary and capricious review” standard “has gone through numerous cycles since the enactment of the APA” and currently is subject to some uncertainty. Nevertheless, the statement’s untrammeled breadth and lack of clear definitions for unfair competitive conduct suggests that courts would likely employ a “hard look review,” which would make it relatively easy for novel Section 6(g) rules to be deemed arbitrary (especially in light of the skepticism of broad FTC claims of authority that is implicit in the Supreme Court’s unanimous AMG holding).

Fourth, given the economywide breadth of the phrase “unfair methods of competition,” it is quite possible (in fact, probably quite likely) that the Supreme Court would invoke the “major questions doctrine” and hold that unfair methods of competition rulemaking is “too important” to be left to the FTC. Under this increasingly invoked doctrine, “the Supreme Court has rejected agency claims of regulatory authority when (1) the underlying claim of authority concerns an issue of vast ‘economic and political significance,’ and (2) Congress has not clearly empowered the agency with authority over the issue.”

The fact that the 2022 statement plainly asserts vast authority to condemn a wide range of economically significant practices strengthens the already-strong case for condemning Section 5 competition rulemaking under this doctrine. Application of the doctrine would render moot the question of whether Section 6(g) rules would receive any Chevron deference. In any event, based on the 2022 Statement’s flouting of modern antitrust principles, including such core principles as consumer harm, efficiencies, and economic analysis, it appears unlikely that courts would accord such deference subsequent Section 6(g) rules. As Gus Hurwitz recently explained:

Administrative antitrust is a preferred vehicle for administering antitrust law, not for changing it. Should the FTC use its power aggressively, in ways that disrupt longstanding antitrust principles or seem more grounded in policy better created by Congress, it is likely to find itself on the losing side of the judicial opinion.

FTC Competition-Enforcement Authority

In addition to Section 6(g) competition-rulemaking initiatives, the 2022 statement, of course, aims to inform FTC Act Section 5(a) “unfair methods of competition” (UMC) enforcement actions. The FTC could bring a UMC suit before its own administrative tribunal or, in the alternative, seek to enjoin an alleged unfair method of competition in federal district court, pursuant to its authority under Section 13(b) of the FTC Act. The tenor of the 2022 statement undermines, rather than enhances, the likelihood that the FTC will succeed in “standalone Section 5(a)” lawsuits that challenge conduct falling beyond the boundaries of the Sherman and Clayton Antitrust Acts.

In a June 2019 FTC report to Congress on using standalone Section 5 cases to combat high pharma prices, the FTC explained:

[C]ourts have confirmed that the unilateral exercise of lawfully acquired market power does not violate the antitrust laws. Therefore, the attempted use of standalone Section 5 to address high prices, untethered from accepted theories of antitrust liability under the Sherman Act, is unlikely to find success in the courts.

There have been no jurisprudential changes since 2019 to suggest that a UMC suit challenging the exploitation of lawfully obtained market power by raising prices is likely to find judicial favor. It follows, a fortiori (legalese that I seldom have the opportunity to trot out), that the more “far out” standalone suits implied by the statement’s analysis would likely generate embarrassing FTC judicial losses.

Applying three of the four principles assessed in the analysis of FTC competition rulemaking (the second principle, referring to statutory authority for rulemaking, is inapplicable), the negative influence of the statement on FTC litigation outcomes is laid bare.

First, as is the case with rules, the unconstrained laundry list of “unfair” business practices fails to produce an “intelligible principle” guiding the FTC’s exercise of enforcement discretion. As such, courts could well conclude that, if the statement is to be taken seriously, the non-delegation doctrine applies, and the FTC does not possess delegated UMC authority. Even if such authority were found to have been properly delegated, some courts might separately conclude, on due process grounds, that the UMC prohibition is “void for vagueness” and therefore cannot support an enforcement action. (While the “void for vagueness” doctrine is controversial, related attacks on statutes based on “impossibility of compliance” may have a more solid jurisprudential footing, particularly in the case of civil statutes (see here). The breadth and uncertainty of the statement’s references to disfavored conduct suggests “impossibility of compliance” as a possible alternative critique of novel Section 5 competition cases.) These concerns also apply equally to possible FTC Section 13(b) injunctive actions filed in federal district court.

Second, there is a not insubstantial risk that an appeals court would hold that a final Section 5 competition-enforcement decision by the Commission would be “arbitrary and capricious” if it dealt with behavior far outside the scope of the Sherman or Clayton Acts, based on vague policy pronouncements found in the 2022 statement.

Third, and of greatest risk to FTC litigation prospects, it is likely that appeals courts (and federal district courts in Section 13(b) injunction cases) would give no deference to new far-reaching non-antitrust-based theories alluded to in the statement. As discussed above, this could be based on invocation of the major questions doctrine or, separately, on the (likely) failure to accord Chevron deference to theories that are far removed from recognized antitrust causes of action under modern jurisprudence.

What Should the FTC Do About the Statement?

In sum, the startling breadth and absence of well-defined boundaries that plagues the statement’s discussion of potential Section 5 UMC violations means that the statement’s issuance materially worsens the FTC’s future litigation prospects—both in defending UMC rulemakings and in seeking to affirm case-specific Commission findings of UMC violations.

What, then, should the FTC do?

It should, put simply, withdraw the 2022 statement and craft a new UMC policy statement (NPS) that avoids the major pitfalls inherent in the statement. The NPS should carefully delineate the boundaries of standalone UMC rulemakings and cases, so as (1) to minimize uncertainty in application; and (2) to harmonize UMC actions with the pro-consumer welfare goal (as enunciated by the Supreme Court) of the antitrust laws. In drafting the NPS, the FTC would do well to be mindful of the part of Commissioner Wilson’s dissenting statement that highlights the deficiencies in the 2022 statement that detract from its persuasiveness to courts:

First, . . . the Policy Statement does not provide clear guidance to businesses seeking to comply with the law.

Second, the Policy Statement does not establish an approach for the term “unfair” in the competition context that matches the economic and analytical rigor that Commission policy offers for the same term, “unfair,” in the consumer protection context.

Third, the Policy Statement does not provide a framework that will result in credible enforcement. Instead, Commission actions will be subject to the vicissitudes of prevailing political winds.

Fourth, the Policy Statement does not address the legislative history that both demands economic content for the term “unfair” and cautions against an expansive approach to enforcing Section 5.

Consistent with avoiding these deficiencies, a new PS could carefully identify activities that are beyond the reach of the antitrust laws yet advance the procompetitive consumer-welfare-oriented goal that is the lodestar of antitrust policy. The NPS should also be issued for public comment (as recommended by Commissioner Wilson), an action that could give it additional “due process luster” in the eyes of federal judges.

More specifically, the NPS could state that standalone UMC actions should be directed at private conduct that undermines the competitive process, but is not subject to the reach of the antitrust laws (say, because of the absence of contracts). Such actions might include, for example: (1) invitations to collude; (2)  facilitating practices (“activities that tend to promote interdependence by reducing rivals’ uncertainty or diminishing incentives to deviate from a coordinated strategy”—see here); (3) exchanges of competitively sensitive information among competitors that do not qualify as Sherman Act “agreements” (see here); and (4) materially deceptive conduct (lacking efficiency justifications) that likely contributes to obtaining or increasing market power, as in the standard-setting context (see here); and (5) non-compete clauses in labor employment agreements that lack plausible efficiency justifications (say, clauses in contracts made with low-skill, low-salary workers) or otherwise plainly undermine labor-market competition (say, clauses presented to workers only after they have signed an initial contract, creating a “take-it-or-leave-it scenario” based on asymmetric information).

After promulgating a list of examples, the NPS could explain that additional possible standalone UMC actions would be subject to the same philosophical guardrails: They would involve conduct inconsistent with competition on the merits that is likely to harm consumers and that lacks strong efficiency justifications. 

A revised NPS along the lines suggested would raise the probability of successful UMC judicial outcomes for the Commission. It would do this by strengthening the FTC’s arguments that there is an intelligible principle underlying congressional delegation; that specificity of notice is sufficient to satisfy due process (arbitrariness and capriciousness) concerns; that the Section 5 delegation is insufficiently broad to trigger the major questions doctrine; and that Chevron deference may be accorded determinations stemming from precise NPS guidance.     

In the case of rules, of course, the FTC would still face the substantial risk that a court would deem that Section 6(g) does not apply to substantive rulemakings. And it is far from clear to what extent an NPS along the lines suggested would lead courts to render more FTC-favorable rulings on non-delegation, due process, the major questions doctrine, and Chevron deference. Moreover, even if they entertained UMC suits, the courts could, of course, determine in individual cases that, on the facts, the Commission had failed to show a legal violation. (The FTC has never litigated invitation-to-collude cases, and it lost a variety of facilitating practices cases during the 1980s and 1990s; see here).

Nonetheless, if I were advising the FTC as general counsel, I would tell the commissioners that the choice is between having close to a zero chance of litigation or rulemaking success under the 2022 statement, and some chance of success (greater in the case of litigation than in rulemaking) under the NPS.

Conclusion

The FTC faces a future of total UMC litigation futility if it plows ahead under the 2022 statement. Promulgating an NPS as described would give the FTC at least some chance of success in litigating cases beyond the legal limits of the antitrust laws, assuming suggested principles and guardrails were honored. The outlook for UMC rulemaking (which turns primarily on how the courts view the structure of the FTC Act) remains rather dim, even under a carefully crafted NPS.

If the FTC decides against withdrawing the 2022 statement, it could still show some wisdom by directing more resources to competition advocacy and challenging clearly anticompetitive conduct that falls within the accepted boundaries of the antitrust laws. (Indeed, to my mind, error-cost considerations suggest that the Commission should eschew UMC causes of action that do not also constitute clear antitrust offenses.) It need not undertake almost sure-to-fail UMC initiatives just because it has published the 2022 statement.

In short, treating the 2022 statement as a purely symbolic vehicle to showcase the FTC’s fondest desires—like a new, never-to-be-driven Lamborghini that merely sits in the driveway to win the admiring glances of neighbors—could well be the optimal Commission strategy, given the zeitgeist. That assumes, of course, that the FTC cares about protecting its institutional future and (we also hope) promoting economic well-being.

[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

When Congress created the Federal Trade Commission (FTC) in 1914, it charged the agency with condemning “unfair methods of competition.” That’s not the language Congress used in writing America’s primary antitrust statute, the Sherman Act, which prohibits “monopoliz[ation]” and “restraint[s] of trade.”

Ever since, the question has lingered whether the FTC has the authority to go beyond the Sherman Act to condemn conduct that is unfair, but not necessarily monopolizing or trade-restraining.

According to a new policy statement, the FTC’s current leadership seems to think that the answer is “yes.” But the peculiar strand of progressivism that is currently running the agency lacks the intellectual foundation needed to tell us what conduct that is unfair but not monopolizing might actually be—and misses an opportunity to bring about an expansion of its powers that courts might actually accept.

Better to Keep the Rule of Reason but Eliminate the Monopoly-Power Requirement

The FTC’s policy statement reads like a thesaurus. What is unfair competition? Answer: conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature.”

In other words: the FTC has no idea. Presumably, the agency thinks, like Justice Potter Stewart did of obscenity, it will know it when it sees it. Given the courts’ long history of humiliating the FTC by rejecting its cases, even when the agency is able to provide a highly developed account of why challenged conduct is bad for America, one shudders to think of the reception such an approach to fairness will receive.

The one really determinate proposal in the policy statement is to attack bad conduct regardless whether the defendant has monopoly power. “Section 5 does not require a separate showing of market power or market definition when the evidence indicates that such conduct tends to negatively affect competitive conditions,” writes the FTC.

If only the agency had proposed this change alone, instead of cracking open the thesaurus to try to redefine bad conduct as well. Dropping the monopoly-power requirement would, by itself, greatly increase the amount of conduct subject to the FTC’s writ without forcing the agency to answer the metaphysical question: what is fair?

Under the present rule-of-reason approach, the courts let consumers answer the question of what constitutes bad conduct. Or to be precise, the courts assume that the only thing consumers care about is the product—its quality and price—and they try to guess whether consumers prefer the changes that the defendant’s conduct had on products in the market. If a court thinks consumers don’t prefer the changes, then the court condemns the conduct. But only if the defendant happens to have monopoly power in the market for those products.

Preserving this approach to identifying bad conduct would let the courts continue to maintain the pretense that they are doing the bidding of consumers—a role they will no doubt prefer to deciding what is fair as an absolute matter.

The FTC can safely discard the monopoly-power requirement without disturbing the current test for bad conduct because—as I argue in a working paper and as Timothy J. Brennen has long insisted—the monopoly-power requirement is directed at the wrong level of the supply chain: the market in which the defendant has harmed competition rather than the input market through which the defendant causes harm.

Power, not just in markets but in all social life, is rooted in one thing only: control over what others need. Harm to competition depends not on how much a defendant can produce relative to competitors but on whether a defendant controls an input that competitors need, but which the defendant can deny to them.

What others need, they do not buy from the market for which they produce. They buy what they need from other markets: input markets. It follows that the only power that should matter for antitrust—the only power that determines whether a firm can harm competition—is power over input markets, not power in the market in which competition is harmed.

And yet, apart from vertical-merger and contracting cases, where an inquiry into foreclosure of inputs still occasionally makes an appearance, antitrust today never requires systematic proof of power in input markets. The efforts of economists are wasted on the proof of power at the wrong level of the supply chain.

That represents an opportunity for the FTC, which can at one stroke greatly expand its authority to encompass conduct by firms having little power in the markets in which they harm competition.

To be sure, really getting the rule of reason right would require that proof of monopoly power continue to be required, only now at the input level instead of in the downstream market in which competition is harmed. But the courts have traditionally required only informal proof of power over inputs. The FTC could probably eliminate the economics-intensive process of formal proof of monopoly power entirely, instead of merely kicking it up one level in the supply chain.

That is surely an added plus for a current leadership so fearful of computation that it was at pains in the policy statement specifically to forswear “numerical” cost-benefit analysis.

Whatever Happened to No Fault?  

The FTC’s interest in expanding enforcement by throwing off the monopoly-power requirement is a marked departure from progressive antimonopolisms of the past. Mid-20th century radicals did not attack the monopoly-power side of antitrust’s two-part test, but rather the anticompetitive-conduct side.

For more than two decades, progressives mooted establishing a “no-fault” monopolization regime in which the only requirement for liability was size. By contrast, the present movement has sought to focus on conduct, rather than size, its own anti-concentration rhetoric notwithstanding.

Anti-Economism

That might, in part, be a result of the movement’s hostility toward economics. Proof of monopoly power is a famously economics-heavy undertaking.

The origin of contemporary antimonopolism is in activism by journalists against the social-media companies that are outcompeting newspapers for ad revenue, not in academia. As a result, the best traditions of the left, which involve intellectually outflanking opponents by showing how economic theory supports progressive positions, are missing here.

Contemporary antimonopolism has no “Capital” (Karl Marx), no “Progress and Poverty” (Henry George), and no “Freedom through Law” (Robert Hale). The most recent installment in this tradition of left-wing intellectual accomplishment is “Capital in the 21st Century” (Thomas Piketty). Unfortunately for progressive antimonopolists, it states: “pure and perfect competition cannot alter . . . inequality[.]’”

The contrast with the last revolution to sweep antitrust—that of the Chicago School—could not be starker. That movement was born in academia and its triumph was a triumph of ideas, however flawed they may in fact have been.

If one wishes to understand how Chicago School thinking put an end to the push for “no-fault” monopolization, one reads the Airlie House conference volume. In the conversations reproduced therein, one finds the no-faulters slowly being won over by the weight of data and theory deployed against them in support of size.

No equivalent watershed moment exists for contemporary antimonopolism, which bypassed academia (including the many progressive scholars doing excellent work therein) and went straight to the press and the agencies.

There is an ongoing debate about whether recent increases in markups result from monopolization or scarcity. It has not been resolved.

Rather than occupy economics, contemporary antimonopolists—and, perhaps, current FTC leadership—recoil from it. As one prominent antimonopolist lamented to a New York Times reporter, merger cases should be a matter of counting to four, and “[w]e don’t need economists to help us count to four.”

As the policy statement puts it: “The unfair methods of competition framework explicitly contemplates a variety of non-quantifiable harms, and justifications and purported benefits may be unquantifiable as well.”

Moralism

Contemporary antimonopolism’s focus on conduct might also be due to moralism—as reflected in the litany of synonyms for “bad” in the FTC’s policy statement.

For earlier progressives, antitrust was largely a means to an end—a way of ensuring that wages were high, consumer prices were low, and products were safe and of good quality. The fate of individual business entities within markets was of little concern, so long as these outcomes could be achieved.

What mattered were people. While contemporary antimonopolism cares about people, too, it differs from earlier antimonopolisms in that it personifies the firm.

If the firm dies, we are to be sad. If the firm is treated roughly by others, starved of resources or denied room to grow and reach its full potential, we are to be outraged, just as we would be if a child were starved. And, just as in the case of a child, we are to be outraged even if the firm would not have grown up to contribute anything of worth to society.

The irony, apparently lost on antimonopolists, is that the same personification of the firm as a rights-bearing agent, operating in other areas of law, undermines progressive policies.

The firm personified not only has a right to be treated gently by competing firms but also to be treated well by other people. But that means that people no longer come first relative to firms. When the Supreme Court holds that a business firm has a First Amendment right to influence politics, the Court takes personification of the firm to its logical extreme.

The alternative is not to make the market a morality play among firms, but to focus instead on market outcomes that matter to people—wages, prices, and product quality. We should not care whether a firm is “coerc[ed], exploitat[ed], collu[ded against], abus[ed], dece[ived], predate[ed], or [subjected to] economic power of a similar nature” except insofar as such treatment fails to serve people.

If one firm wishes to hire away the talent of another, for example, depriving the target of its lifeblood and killing it, so much the better if the result is better products, lower prices, or higher wages.

Antitrust can help maintain this focus on people only in part—by stopping unfair conduct that degrades products. I have argued elsewhere that the rest is for price regulation, taxation, and direct regulation to undertake.  

Can We Be Fairer and Still Give Product-Improving Conduct a Pass?

The intellectual deficit in contemporary antimonopolism is also evident in the care that the FTC’s policy statement puts into exempting behavior that creates superior products.

For one cannot expand the FTC’s powers to reach bad conduct without condemning product-improving conduct when the major check on enforcement today under the rule of reason (apart from the monopoly-power requirement) is precisely that conduct that improves products is exempt.

Under the rule of reason, bad conduct is a denial of inputs to a competitor that does not help consumers, meaning that the denial degrades the competitor’s products without improving the defendant’s products. Bad conduct is, in other words, unfairness that does not improve products.

If the FTC’s goal is to increase fairness relative to a regime that already pursues it, except when unfairness improves products, the additional fairness must come at the cost of product improvement.

The reference to superior products in the policy statement may be an attempt to compromise with the rule of reason. Unlike the elimination of the monopoly-power requirement, it is not a coherent compromise.

The FTC doesn’t need an economist to grasp this either.  

[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

On Nov. 10, the Federal Trade Commission (FTC) issued a new statement explaining how it will exercise its standalone FTC Act Section 5 authority. Despite the length of the statement and the accompanying commentaries from most of the commissioners, there is less guidance than one might expect from so many words. One thing is clear, however: Expect more antitrust enforcement from the FTC in ways we have not seen in years, if ever.

The FTC enforces the antitrust laws through Section 5’s prohibition of unfair methods of competition (UMC). Courts and commentators alike have long agreed that Section 5’s prohibition covers everything covered by the other antitrust laws, such as the Sherman and Clayton Act, plus something more.

How far that extra standalone authority extends has been a point of contention for decades. In the early 1980s, several appellate courts admonished the FTC for an expansive interpretation of that authority, leaving parties uncertain of which actions would be challenged. Or, as the 2nd U.S. Circuit Court of Appeals put it: “the Commission owes a duty to define the conditions under which conduct … would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.”

In recent decades, the FTC has interpreted its authority much more narrowly. In 2015, a bipartisan collection of commissioners approved a short statement saying that the FTC would interpret its standalone authority consistently with the consumer welfare standard of the other antitrust laws and use the well-known rule of reason to judge any actions. Last year, the Democratic majority of commissioners voted to rescind that 2015 statement. Last week’s statement is the replacement.

Antitrust Fun, Little Guidance

The 16 pages of guidance and the accompanying commentary from three commissioners—two Democrats in support, one Republican in opposition—can be a fun read for antitrust geeks. There is plenty of well-written antitrust history. I learned something. Also, there are arguments about old FTC and appellate court cases that I had not read in 30 years.

But that history lesson did not give as much guidance about future enforcement as it should have. Most of the seven pages the guidance spends on its historical review is dedicated to showing that the FTC’s standalone authority extends beyond the Sherman and Clayton Acts. But that contention is in little dispute.

The more helpful historical question for parties today is how this Commission plans to respond to appellate court cases such as Boise Cascade, OAG, and the above-cited Ethyl that criticized the old Commission for, to paraphrase the statement, insufficient facts of unfairness, oppressiveness, or negative effects on the market. Chair Lina Khan’s commentary does mention the “trifecta” of cases, describing them as cases where courts found that the Commission “had not met its factual or evidentiary burden.” What would have been more helpful is some “inkling” of what kinds of facts this Commission will rely on to avoid the same types of “stinging” losses suffered by those earlier Commissions. Instead, we get multiple references to the Commission as a body of experts with the unstated assumption that, in the future, at least three commissioners will offer enough facts of some kind to convince any appellate court.

After the history section, the statement offers plenty of words on what the FTC majority think will be a standalone violation. All of those words add up, however, to much less guidance than the very brief 2015 statement. That prior statement said that the FTC would use its Section 5 standalone authority to pursue a single goal—consumer welfare—and would use a well-known analytical method to pursue it: the rule of reason. While even that statement left some ambiguity for businesses, and freedom for the Commission, at least it pursued only one goal with an analysis used in decades worth of antitrust cases.

The new statement does not list one goal but instead several, namely that it will challenge conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature … that negatively affect[s] competitive conditions [and thereby negatively affects] consumers, workers, or other market participants.”

But mathematically, you cannot maximize more than one variable. Nowhere in this statement is there any attempt to explain the analytical method to be used to balance pursuit of these different goals. What if a challenged action helps workers but harms consumers? What if an action helps workers at some competitors but not others? What if an action helps all competitors but harms workers at some of them? Merely combining all those goals into a single term, “competitive conditions,” does not provide any guidance as to how the FTC will balance all these named (and any unnamed) elements of “competitive conditions.” Again, there is an unstated assumption that three commissioners will expertly balance those competing goals.

Incomplete Lessons from the Past

The new statement does try to provide some guidance at the end of the document when it points to past cases that, perhaps, will be the types of cases that the Commission will now bring under Section 5. One such large category is actions that do not meet the standards for antitrust illegality now but, somehow, violate the “spirit of the antitrust laws.” The statement lists several examples.

To take one, what if a tying case does not meet the standards embodied in Jefferson Parish and its progeny? How will the Commission determine what the statement calls “de facto tying”? Which one or more of the elements expounded in Jefferson Parish will be eased? How? Will the same action by the same parties be subject to different substantive standards if a private plaintiff—or the U.S. Justice Department—is the plaintiff? If so, then parties wanting to avoid any antitrust challenge will need to default to the law of tying laid down by the then-current FTC, not by dozens of court cases over decades. And how will the FTC determine what violates the “spirit” of its own particular law of tying? Again, the unstated assumption is that the decisions of three expert commissioners will set the new law, at least until three new expert commissioners gain control.

Conclusion

To be (slightly) fairer to the new statement, it does confirm what has seemed obvious since the Biden administration started staffing the FTC: this Commission will more aggressively pursue antitrust challenges and will use any tool, including Section 5 standalone authority, to do it. Also, while the statement injects uncertainty into the thinking of businesses, which likely will lead to fewer and less-aggressive business actions, that result would be seen as a feature, not a bug, by the statement’s authors.

Finally, the statement does correctly point out that Section 5 was written at a time when Congress might have thought that the decisions of three expert commissioners would lead to “better” results for the economy, however defined, than decisions of dozens of juries and judges in dozens of cases. That Progressive Era confidence in the decisions of a few government-employed experts has not always worked out for the best, as some would claim from study of the Whiz Kids (Robert McNamara, not Robin Roberts) or recent pandemic policy.

Like it or not, the statement is another step toward a government of men (and women), not laws, and an economy dictated by a handful of experts in Washington, not millions of consumers across the country. Expect aggressive antitrust enforcement from the FTC in ways that many businesses and antitrust practitioners have only read about — about that, the new statement’s guidance is clear.

The massive New Deal sculptures that frame Federal Trade Commission headquarters are both called “Man Controlling Trade.” And according to the Commission’s new Policy Statement Regarding Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, “Three Commissioners Controlling the Economy” appears to now be one of the agency’s guiding principles. The last FTC roundup suggested that winter is coming. This week’s theme: bundle up because, baby, it’s getting cold outside.

By now, you’ve probably seen the statement. Or maybe it’s three statements. There’s the official statement, adopted by a three-to-one vote (Chair Lina Khan and Commissioners Rebecca Slaughter and Alvaro Bedoya, with Commissioner Christine Wilson dissenting); the chair’s statement (joined by Slaughter and Bedoya); and Bedoya’s statement (joined by Khan and Slaughter). Nothing from Slaughter?

As Gus Hurwitz pointed out, the policy statement lacks legal force or precedential value. Its value, if any, is as guidance. There’s probably a point to distinguishing the Commission’s guidance and the separate statements signed by each member of the Commission who voted for the guidance, but I have no idea what it is.

I commend Wilson’s dissenting statement. To cut to the chase: “Unfortunately, instead of providing meaningful guidance to businesses, the Policy Statement announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.” Other than that, Commissioner Wilson, how did you like the play?

Inspired by the current majority’s penchant for self-citation, I’ll begin by pilfering ICLE’s day-after string of tweets about the new statement:

But wait, there’s more, and more self-reference, including the ICLE issue “brief” that I wrote with Gus Hurwitz.

To recap, the statement expressly disavows the rule of reason, the consumer welfare standard, actual or likely impact on competition or consumers, measurement (or estimation) of harms, and the potential for countervailing efficiencies, at least in the form of net efficiency or a “numerical cost-benefit analysis.”

It’s all supposed to be grounded in the legislative history and case law, but it’s a highly selective reading of the historical record and case law, with a skew to old cases and a number of citations seeming inapt. It’s supposed to add rigor and predictability to FTC enforcement, but it’s hard to see how it could. If actual or likely impact on competition and consumers is supposed to be unwieldy and unpredictable, how does it help to focus on a “tendency” (not necessarily a likelihood) for analogous conduct to affect “competitive conditions,” and thus “consumers, workers, or other market participants”?    

Discussion—including trenchant criticism—continues apace. Themes of an enforcement policy unmoored, overreaching, and unpredictable can be found in additional Truth on the Market posts from Dirk AuerJonathan Barnett, and Brian Albrecht.

As Jonathan Barnett puts it:

FTC rejected the applicability of the balancing test set forth in the rule of reason (and with it, several decades of case law, agency guidance, and legal and economic scholarship). … In the statement …the agency has now adopted this “just trust us” approach as a permanent operating principle.

Former Commissioner Maureen Ohlhausen also emphasizes the broad discretion claimed by the Commission, and its failure to provide specific guidance:

While ostensibly intended to provide such guidance, the new Policy Statement contains few specifics about the particular conduct that the Commission might deem to be unfair, and suggests that the FTC has broad discretion to challenge nearly any conduct with which it disagrees.

No doubt there’s more commentary on the way. But because the statement has no legal force, it’s hard to see how it can be challenged in court until it’s cited by the Commission in an enforcement action or rulemaking. Stay tuned.

There’s much more on the horizon. Axon Enterprises, Inc. v. FTC was argued before the U.S. Supreme Court, with questioning from several justices suggesting skepticism about the FTC’s position. As we’ve noted in recent weeks, the Commission has announced a raft of potential competition rulemakings, and new horizontal merger guidelines may be forthcoming. Among other things. We shall see.

Happy Thanksgiving.

[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

Federal Trade Commission (FTC) Chair Lina Khan has just sent her holiday wishlist to Santa Claus. It comes in the form of a policy statement on unfair methods of competition (UMC) that the FTC approved last week by a 3-1 vote. If there’s anything to be gleaned from the document, it’s that Khan and the agency’s majority bloc wish they could wield the same powers as Margrethe Vestager does in the European Union. Luckily for consumers, U.S. courts are unlikely to oblige.

Signed by the commission’s three Democratic commissioners, the UMC policy statement contains language that would be completely at home in a decision of the European Commission. It purports to reorient UMC enforcement (under Section 5 of the FTC Act) around typically European concepts, such as “competition on the merits.” This is an unambiguous repudiation of the rule of reason and, with it, the consumer welfare standard.

Unfortunately for its authors, these European-inspired aspirations are likely to fall flat. For a start, the FTC almost certainly does not have the power to enact such sweeping changes. More fundamentally, these concepts have been tried in the EU, where they have proven to be largely unworkable. On the one hand, critics (including the European judiciary) have excoriated the European Commission for its often economically unsound policymaking—enabled by the use of vague standards like “competition on the merits.” On the other hand, the Commission paradoxically believes that its competition powers are insufficient, creating the need for even stronger powers. The recently passed Digital Markets Act (DMA) is designed to fill this need.

As explained below, there is thus every reason to believe the FTC’s UMC statement will ultimately go down as a mistake, brought about by the current leadership’s hubris.

A Statement Is Just That

The first big obstacle to the FTC’s lofty ambitions is that its leadership does not have the power to rewrite either the FTC Act or courts’ interpretation of it. The agency’s leadership understands this much. And with that in mind, they ostensibly couch their statement in the case law of the U.S. Supreme Court:

Consistent with the Supreme Court’s interpretation of the FTC Act in at least twelve decisions, this statement makes clear that Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.

It is telling, however, that the cases cited by the agency—in a naked attempt to do away with economic analysis and the consumer welfare standard—are all at least 40 years old. Antitrust and consumer-protection laws have obviously come a long way since then, but none of that is mentioned in the statement. Inconvenient case law is simply shrugged off. To make matters worse, even the cases the FTC cites provide, at best, exceedingly weak support for its proposed policy.

For instance, as Commissioner Christine Wilson aptly notes in her dissenting statement, “the policy statement ignores precedent regarding the need to demonstrate anticompetitive effects.” Chief among these is the Boise Cascade Corp. v. FTC case, where the 9th U.S. Circuit Court of Appeals rebuked the FTC for failing to show actual anticompetitive effects:

In truth, the Commission has provided us with little more than a theory of the likely effect of the challenged pricing practices. While this general observation perhaps summarizes all that follows, we offer  the following specific points in support of our conclusion.

There is a complete absence of meaningful evidence in the record that price levels in the southern plywood industry reflect an anticompetitive effect.

In short, the FTC’s statement is just that—a statement. Gus Hurwitz summarized this best in his post:

Today’s news that the FTC has adopted a new UMC Policy Statement is just that: mere news. It doesn’t change the law. It is non-precedential and lacks the force of law. It receives the benefit of no deference. It is, to use a term from the consumer-protection lexicon, mere puffery.

Lina’s European Dream

But let us imagine, for a moment, that the FTC has its way and courts go along with its policy statement. Would this be good for the American consumer? In order to answer this question, it is worth looking at competition enforcement in the European Union.

There are, indeed, striking similarities between the FTC’s policy statement and European competition law. Consider the resemblance between the following quotes, drawn from the FTC’s policy statement (“A” in each example) and from the European competition sphere (“B” in each example).

Example 1 – Competition on the merits and the protection of competitors:

A. The method of competition must be unfair, meaning that the conduct goes beyond competition on the merits.… This may include, for example, conduct that tends to foreclose or impair the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers. (here)

B. The emphasis of the Commission’s enforcement activity… is on safeguarding the competitive process… and ensuring that undertakings which hold a dominant position do not exclude their competitors by other means than competing on the merits… (here)

Example 2 – Proof of anticompetitive harm:

A. “Unfair methods of competition” need not require a showing of current anticompetitive harm or anticompetitive intent in every case. … [T]his inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue. (here)

B. The Commission cannot be required… systematically to establish a counterfactual scenario…. That would, moreover, oblige it to demonstrate that the conduct at issue had actual effects, which…  is not required in the case of an abuse of a dominant position, where it is sufficient to establish that there are potential effects. (here)

    Example 3 – Multiple goals:

    A. Given the distinctive goals of Section 5, the inquiry will not focus on the “rule of reason” inquiries more common in cases under the Sherman Act, but will instead focus on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions. (here)

    B. In its assessment the Commission should pursue the objectives of preserving and fostering innovation and the quality of digital products and services, the degree to which prices are fair and competitive, and the degree to which quality or choice for business users and for end users is or remains high. (here)

    Beyond their cosmetic resemblances, these examples reflect a deeper similarity. The FTC is attempting to introduce three core principles that also undergird European competition enforcement. The first is that enforcers should protect “the competitive process” by ensuring firms compete “on the merits,” rather than a more consequentialist goal like the consumer welfare standard (which essentially asks how a given practice affects economic output). The second is that enforcers should not be required to establish that conduct actually harms consumers. Instead, they need only show that such an outcome is (or will be) possible. The third principle is that competition policies pursue multiple, sometimes conflicting, goals.

    In short, the FTC is trying to roll back U.S. enforcement to a bygone era predating the emergence of the consumer welfare standard (which is somewhat ironic for the agency’s progressive leaders). And this vision of enforcement is infused with elements that appear to be drawn directly from European competition law.

    Europe Is Not the Land of Milk and Honey

    All of this might not be so problematic if the European model of competition enforcement that the FTC now seeks to emulate was an unmitigated success, but that could not be further from the truth. As Geoffrey Manne, Sam Bowman, and I argued in a recently published paper, the European model has several shortcomings that militate against emulating it (the following quotes are drawn from that paper). These problems would almost certainly arise if the FTC’s statement was blessed by courts in the United States.

    For a start, the more open-ended nature of European competition law makes it highly vulnerable to political interference. This is notably due to its multiple, vague, and often conflicting goals, such as the protection of the “competitive process”:

    Because EU regulators can call upon a large list of justifications for their enforcement decisions, they are free to pursue cases that best fit within a political agenda, rather than focusing on the limited practices that are most injurious to consumers. In other words, there is largely no definable set of metrics to distinguish strong cases from weak ones under the EU model; what stands in its place is political discretion.

    Politicized antitrust enforcement might seem like a great idea when your party is in power but, as Milton Friedman wisely observed, the mark of a strong system of government is that it operates well with the wrong person in charge. With this in mind, the FTC’s current leadership would do well to consider what their political opponents might do with these broad powers—such as using Section 5 to prevent online platforms from moderating speech.

    A second important problem with the European model is that, because of its competitive-process goal, it does not adequately distinguish between exclusion resulting from superior efficiency and anticompetitive foreclosure:

    By pursuing a competitive process goal, European competition authorities regularly conflate desirable and undesirable forms of exclusion precisely on the basis of their effect on competitors. As a result, the Commission routinely sanctions exclusion that stems from an incumbent’s superior efficiency rather than welfare-reducing strategic behavior, and routinely protects inefficient competitors that would otherwise rightly be excluded from a market.

    This vastly enlarges the scope of potential antitrust liability, leading to risks of false positives that chill innovative behavior and create nearly unwinnable battles for targeted firms, while increasing compliance costs because of reduced legal certainty. Ultimately, this may hamper technological evolution and protect inefficient firms whose eviction from the market is merely a reflection of consumer preferences.

    Finally, the European model results in enforcers having more discretion and enjoying greater deference from the courts:

    [T]he EU process is driven by a number of laterally equivalent, and sometimes mutually exclusive, goals.… [A] large problem exists in the discretion that this fluid arrangement of goals yields.

    The Microsoft case illustrates this problem well. In Microsoft, the Commission could have chosen to base its decision on a number of potential objectives. It notably chose to base its findings on the fact that Microsoft’s behavior reduced “consumer choice”. The Commission, in fact, discounted arguments that economic efficiency may lead to consumer welfare gains because “consumer choice” among a variety of media players was more important.

    In short, the European model sorely lacks limiting principles. This likely explains why the European Court of Justice has started to pare back the commission’s powers in a series of recent cases, including Intel, Post Danmark, Cartes Bancaires, and Servizio Elettrico Nazionale. These rulings appear to be an explicit recognition that overly broad competition enforcement not only fails to benefit consumers but, more fundamentally, is incompatible with the rule of law.

    It is unfortunate that the FTC is trying to emulate a model of competition enforcement that—even in the progressively minded European public sphere—is increasingly questioned and cast aside as a result of its multiple shortcomings.

    [This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

    In a 3-2 July 2021 vote, the Federal Trade Commission (FTC) rescinded the nuanced statement it had issued in 2015 concerning the scope of unfair methods of competition under Section 5 of the FTC Act. At the same time, the FTC rejected the applicability of the balancing test set forth in the rule of reason (and with it, several decades of case law, agency guidance, and legal and economic scholarship).

    The July 2021 statement not only rejected these long-established guiding principles for Section 5 enforcement but left in its place nothing but regulatory fiat. In the statement the FTC issued Nov. 10, 2022 (again, by a divided 3-1 vote), the agency has now adopted this “just trust us” approach as a permanent operating principle.

    The November 2022 statement purports to provide a standard under which the agency will identify unfair methods of competition under Section 5. As Commissioner Christine Wilson explains in her dissent, however, it clearly fails to do so. Rather, it delivers a collection of vaguely described principles and pejorative rhetoric that encompass loosely defined harms to competition, competitors, workers and a catch-all group of “other market participants.”  

    The methodology for identifying these harms is comparably vague. The agency not only again rejects the rule of reason but asserts the authority to take action against a variety of “non-quantifiable harms,” all of which can be addressed at the most “incipient” stages. Moreover, and perhaps most remarkably, the statement specifically rejects any form of “net efficiencies” or “numerical cost-benefit analysis” to guide its enforcement decisions or provide even a modicum of predictability to the business community.  

    The November 2022 statement amounts to regulatory fiat on overdrive, presented with a thin veneer of legality derived from a medley of dormant judicial decisions, incomplete characterizations of precedent, and truncated descriptions of legislative history. Under the agency’s dubious understanding of Section 5, Congress in 1914 elected to provide the FTC with the authority to declare any business practice “unfair” subject to no principle other than the agency’s subjective understanding of that term (and, apparently, never to be informed by “numerical cost-benefit analysis”).

    Moreover, any enforcement action that targeted a purportedly “unfair” practice would then be adjudicated within the agency and appealable in the first instance to the very same commissioners who authorized the action. This institutional hall of mirrors would establish the FTC as the national “fairness” arbiter subject to virtually no constraining principles under which the exercise of such powers could ever be deemed to have exceeded its scope. The license for abuse is obvious and the departure from due process inherent.

    The views reflected in the November 2022 statement would almost certainly lead to a legal dead-end.  If the agency takes action under its idiosyncratic understanding of the scope of unfair methods of competition under Section 5, it would elicit a legal challenge that would likely lead to two possible outcomes, both being adverse to the agency. 

    First, it is likely that a judge would reject the agency’s understanding of Section 5, since it is irreconcilable with a well-developed body of case law requiring that the FTC (just like any other administrative agency) act under principles that provide businesses with, as described by the 2nd U.S. Circuit Court of Appeals, at least “an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.”

    Any legally defensible interpretation of the scope of unfair methods of competition under Section 5 must take into account not only legislative intent at the time the FTC Act was enacted but more than a century’s worth of case law that courts have developed to govern the actions of administrative powers. Contrary to suggestions made in the November 2022 statement, neither the statute nor the relevant body of case law mandates unqualified deference by courts to the presumed wisdom of expert regulators.

    Second, even if a court accepted the agency’s interpretation of the statute (or did so provisionally), there is a strong likelihood that it would then be compelled to strike down Section 5 as an unconstitutional delegation of lawmaking powers from the legislative to the executive branch. Given the concern that a majority of the Supreme Court has increasingly expressed over actions by regulatory agencies—including the FTC, specifically, in AMG Capital Management LLC v. FTC (2021)and now again in the pending case, Axon Enterprise Inc. v. FTCthat do not clearly fall within the legislatively specified scope of an agency’s authority (as in the AMG decision and other recent Court decisions concerning the U.S. Securities and Exchange Commission, the Occupational Safety and Health Administration, the U.S. Environmental Protection Agency, and the United States Patent and Trademark Office), this would seem to be a high-probability outcome.

    In short: any enforcement action taken under the agency’s newly expanded understanding of Section 5 is unlikely to withstand judicial scrutiny, either as a matter of statutory construction or as a matter of constitutional principle. Given this legal forecast, the November 2022 statement could be viewed as mere theatrics that is unlikely to have a long legal life or much practical impact (although, until judicial intervention, it could impose significant costs on firms that must defend against agency-enforcement actions brought under the unilaterally expanded scope of Section 5). 

    Even if that were the case, however, the November 2022 statement and, in particular, its expanded understanding of the harms that the agency is purportedly empowered to target, is nonetheless significant because it should leave little doubt concerning the lack of any meaningful commitment by agency leadership to the FTC’s historical mission to preserve market competition. Rather, it has become increasingly clear that agency leadership seeks to deploy the powerful remedies of the FTC Act (and the rest of the antitrust-enforcement apparatus) to displace a market-driven economy governed by the free play of competitive forces with an administered economy in which regulators continuously intervene to reengineer economic outcomes on grounds of fairness to favored constituencies, rather than to preserve the competitive process.

    Reengineering Section 5 of the FTC Act as a “shadow” antitrust statute that operates outside the rule of reason (or any other constraining objective principle) provides a strategic detour around the inconvenient evidentiary and other legal obstacles that the agency would struggle to overcome when seeking to achieve these policy objectives under the Sherman and Clayton Acts. This intentionally unstructured and inherently politicized approach to antitrust enforcement threatens not only the institutional preconditions for a market economy but ultimately the rule of law itself.

    [This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

    Just over a decade ago, in a speech at the spring meeting of the American Bar Association’s Antitrust Law Section, then-recently appointed Commissioner Joshua Wright of the Federal Trade Commission (FTC) announced his hope that the FTC would adopt a policy statement on the use of its unfair methods of competition (UMC) authority:

    [The Commission] can and should issue a policy statement clearly setting forth its views on what constitutes an unfair method of competition as we have done with respect to our consumer protection mission … I will soon informally and publicly distribute a proposed Section 5 Unfair Methods Policy Statement more fully articulating my views and perhaps even providing a useful starting point for a fruitful discussion among the enforcement agencies, the antitrust bar, consumer groups, and the business community.

    Just over a decade ago, in a speech at the spring meeting of the American Bar Association’s Antitrust Law Section, then-recently appointed Commissioner Joshua Wright of the Federal Trade Commission (FTC) announced his hope that the FTC would adopt a policy statement on the use of its unfair methods of competition (UMC) authority:

    [The Commission] can and should issue a policy statement clearly setting forth its views on what constitutes an unfair method of competition as we have done with respect to our consumer protection mission…. I will soon informally and publicly distribute a proposed Section 5 Unfair Methods Policy Statement more fully articulating my views and perhaps even providing a useful starting point for a fruitful discussion among the enforcement agencies, the antitrust bar, consumer groups, and the business community.

    Responding to this, I wrote a post here on Truth on the Market explaining that “a policy statement is not enough.” That post is copied in its entirety below. In it, I explained that: “In a contentious policy environment—that is, one where the prevailing understanding of an ambiguous law changes with the consensus of a three-commissioner majority—policy statements are worth next to nothing.”

    Needless to say, that characterization proved apt when Lina Khan took the helm of the current FTC and promptly, unceremoniously, dispatched with the UMC policy statement that Commissioner Wright successfully championed prior to his departure from the FTC in 2015.

    Today’s news that the FTC has adopted a new UMC Policy Statement is just that: mere news. It doesn’t change the law. It is non-precedential and lacks the force of law. It receives the benefit of no deference. It is, to use a term from the consumer-protection lexicon, mere puffery.

    The greatest difference between this policy statement and the 2015 policy statement will likely not be in how the FTC’s authority is interpreted, but how its interpretations are credited by the courts. The 2015 policy statement encapsulated long-established law and precedent as understood and practiced by the FTC, U.S. Justice Department (DOJ), courts, and enforcers around the world. It was a credibility-enhancing commitment to consistency and stability in the law, along with providing credible, if non-binding, guidance for industry.

    Today’s policy statement is the opposite, marking a clear rejection of and departure from decades of established precedent and relying on long-fallow caselaw to do so. When it comes time for this policy to be judicially tested, it will carry no weight. More importantly, it will give the courts pause in crediting the FTC’s interpretations of the law; any benefit of the doubt or inclination toward deference will likely be found in default.

    And it seems likely that that judicial fate will, in fact, be met. This FTC adopted the statement not to bind itself to the mast of precedent against the tempting shoals of indiscretion, but rather to chart a course toward the jagged barrier rocks lining the shores of unbounded authority.

    Of course, the purpose of this statement—as with so much of Chair Khan’s agenda—is not to use the law effectively. It is quite plainly to make a statement—a political and hortatory one about what she wishes the law to be. With this statement, that statement has been made. It has been made again. And again. It has been heard loudly and clearly. In her treatment of antitrust law, “the lady doth protest too much, methinks.”

    Administrative law really is a strange beast. My last post explained this a bit, in the context of Chevron. In this post, I want to make this point in another context, explaining how utterly useless a policy statement can be. Our discussion today has focused on what should go into a policy statement – there seems to be general consensus that one is a good idea. But I’m not sure that we have a good understanding of how little certainty a policy statement offers.

    Administrative Stare Decisis?

    I alluded in my previous post to the absence of stare decisis in the administrative context. This is one of the greatest differences between judicial and administrative rulemaking: agencies are not bound by either prior judicial interpretations of their statutes, or even by their own prior interpretations. These conclusions follow from relatively recent opinions – Brand-X in 2005 and Fox I in 2007 – and have broad implications for the relationship between courts and agencies.

    In Brand-X, the Court explained that a “court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” This conclusion follows from a direct application of Chevron: courts are responsible for determining whether a statute is ambiguous; agencies are responsible for determining the (reasonable) meaning of a statute that is ambiguous.

    Not only are agencies not bound by a court’s prior interpretations of an ambiguous statute – they’re not even bound by their own prior interpretations!

    In Fox I, the Court held that an agency’s own interpretation of an ambiguous statute impose no special obligations should the agency subsequently change its interpretation.[1] It may be necessary to acknowledge the prior policy; and factual findings upon which the new policy is based that contradict findings upon which the prior policy was based may need to be explained.[2] But where a statute may be interpreted in multiple ways – that is, in any case where the statute is ambiguous – Congress, and by extension its agencies, is free to choose between those alternative interpretations. The fact that an agency previously adopted one interpretation does not necessarily render other possible interpretations any less reasonable; the mere fact that one was previously adopted therefore, on its own, cannot act as a bar to subsequent adoption of a competing interpretation.

    What Does This Mean for Policy Statements?

    In a contentious policy environment – that is, one where the prevailing understanding of an ambiguous law changes with the consensus of a three-Commissioner majority – policy statements are worth next to nothing. Generally, the value of a policy statement is explaining to a court the agency’s rationale for its preferred construction of an ambiguous statute. Absent such an explanation, a court is likely to find that the construction was not sufficiently reasoned to merit deference. That is: a policy statement makes it easier for an agency to assert a given construction of a statute in litigation.

    But a policy statement isn’t necessary to make that assertion, or for an agency to receive deference. Absent a policy statement, the agency needs to demonstrate to the court that its interpretation of the statute is sufficiently reasoned (and not merely a strategic interpretation adopted for the purposes of the present litigation).

    And, more important, a policy statement in no way prevents an agency from changing its interpretation. Fox I makes clear that an agency is free to change its interpretations of a given statute. Prior interpretations – including prior policy statements – are not a bar to such changes. Prior interpretations also, therefore, offer little assurance to parties subject to any given interpretation.

    Are Policy Statements Entirely Useless?

    Policy statements may not be entirely useless. The likely front on which to challenge an unexpected change in agency interpretation of its statute is on Due Process or Notice grounds. The existence of a policy statement may make it easier for a party to argue that a changed interpretation runs afoul of Due Process or Notice requirements. See, e.g., Fox II.

    So there is some hope that a policy statement would be useful. But, in the context of Section 5 UMC claims, I’m not sure how much comfort this really affords. Regulatory takings jurisprudence gives agencies broad power to seemingly contravene Due Process and Notice expectations. This is largely because of the nature of relief available to the FTC: injunctive relief, such as barring certain business practices, even if it results in real economic losses, is likely to survive a regulatory takings challenge, and therefore also a Due Process challenge. Generally, the Due Process and Notice lines of argument are best suited against fines and similar retrospective remedies; they offer little comfort against prospective remedies like injunctions.

    Conclusion

    I’ll conclude the same way that I did my previous post, with what I believe is the most important takeaway from this post: however we proceed, we must do so with an understanding of both antitrust and administrative law. Administrative law is the unique, beautiful, and scary beast that governs the FTC – those who fail to respect its nuances do so at their own peril.


    [1] Fox v. FCC, 556 U.S. 502, 514–516 (2007) (“The statute makes no distinction [] between initial agency action and subsequent agency action undoing or revising that action. … And of course the agency must show that there are good reasons for the new policy. But it need not demonstrate to a court’s satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better, which the conscious change of course adequately indicates.”).

    [2] Id. (“To be sure, the requirement that an agency provide reasoned explanation for its action would ordinarily demand that it display awareness that it is changing position. … This means that the agency need not always provide a more detailed justification than what would suffice for a new policy created on a blank slate. Sometimes it must—when, for example, its new policy rests upon factual findings that contradict those which underlay its prior policy; or when its prior policy has engendered serious reliance interests that must be taken into account. It would be arbitrary or capricious to ignore such matters. In such cases it is not that further justification is demanded by the mere fact of policy change; but that a reasoned explanation is needed for disregarding facts and circumstances that underlay or were engendered by the prior policy.”).