The United Kingdom’s Competition and Markets Authority (CMA) late last month moved to block Microsoft’s proposed vertical acquisition of Activision Blizzard, a video-game developer that creates and publishes games such as Call of Duty, World of Warcraft, Diablo, and Overwatch. Microsoft summarized this transaction’s substantial benefits to video game players in its January 2022 press release announcing the proposed merger.
The CMA based its decision on speculative future harm in UK cloud-based gaming, neglecting the dramatic and far more likely dynamic competitive benefits the transaction would produce in gaming markets. The FTC announced its own challenge to the merger in December and has scheduled administrative hearings into the matter later in 2023.
If not overturned on appeal, the CMA’s decision is likely to reduce future consumer welfare and innovation in the gaming sector, to the detriment of producers and consumers.
Microsoft has a strong position in cloud gaming services and the evidence available to the CMA showed that Microsoft would find it commercially beneficial to make Activision’s games exclusive to its own cloud gaming service.
Microsoft already accounts for an estimated 60-70% of global cloud gaming services and has other important strengths in cloud gaming from owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming).
The deal would reinforce Microsoft’s advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch, and World of Warcraft. The evidence available to the CMA indicates that, absent the merger, Activision would start providing games via cloud platforms in the foreseeable future.
The CMA’s discussion ignores a number of salient facts regarding cloud gaming. Cloud gaming has not yet arrived as a major competitor to device-based gaming, as Dirk Auer points out (see also here regarding problems that have constrained the rapid emergence of cloud gaming). Google, for example, discontinued its Stadia cloud-gaming service just over three months ago, “after having failed to gain the traction that the company was expecting” (see here). Although cloud gaming does not require the purchase of specific gaming devices, it does require substantial bandwidth, stable internet connections, and subscriptions to particular services.
What’s more, Microsoft offered the CMA significant concessions to ensure that leading Activision games would remain available on other platforms for at least 10 years (see here, for example). The CMA itself acknowledged this in announcing its opposition to the merger, but rejected Microsoft’s proposals, stating:
Accepting Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA. By contrast, preventing the merger would effectively allow market forces to continue to operate and shape the development of cloud gaming without this regulatory intervention.
Ironically, the real “regulatory intervention” that threatens to hinder market forces is the CMA’s blocking of this transaction, which (as a vertical merger) does not eliminate any direct competition and, to the contrary, promises to reinvigorate direct competition with Sony’s PlayStation. As Aurelien Portuese explains:
Sony is cheering on . . . attempt[s] to block Microsoft’s acquisition of Activision. Why? The proposed merger is a bid to offer a robust platform with high-quality games and provide resources for creators to produce more gaming innovation. That’s great for gamers, but threatening to Japanese industry titans Sony and Nintendo, because it would also create a company capable of competing with them more effectively.
If antitrust officials block the merger, they would be giving Sony and its 70 percent share of the global gaming console market the upper hand while preventing Microsoft and its 30 percent market share from effectively challenging the incumbent. That would be a complete reversal of competition policy.
The Japanese gaming industry dominates the world—and yet, U.S. antitrust officials may very well further cement this already decades-long dominance by blocking the Activision-Microsoft merger. Wielding antitrust to impose a twisted conception of domestic competition at the expense of global competitiveness must end, and the proposed Activision-Microsoft combination exemplifies why.
Furthermore, Portuese debunks the notion that Microsoft would have a future incentive to deny access to Activision’s high-selling Call of Duty franchise, reemphasizing the vigorous nature of gaming competition post-merger:
[T]he very idea that Microsoft would want to foreclose access to “Call of Duty” for PlayStation users is controversial. Microsoft would rationally have little incentive to reduce sales across platforms of a popular game. Moreover, Microsoft’s competitive position is weaker than the FTC seems to think: It faces competition from gaming industry incumbents such as Sony, Nintendo, and Epic Games, and from other large tech companies such as Apple, Amazon, Google, Tencent, and Meta.
In short, there are strong reasons to believe that gaming competition would be enhanced by the Microsoft-Activision merger. What’s more, the merger would likely generate efficiencies of integration, such as the promotion of cross-team collaboration (see here, for example). Notably, in announcing its decision to block the merger, even the CMA acknowledged “the benefit of having Activision’s content available on [Microsoft’s subscription service] Game Pass.” In contrast, theoretical concerns about merger-related potential threats to future cloud-gaming competition are uncertain and not well-grounded.
Conclusion
The CMA should not have blocked the merger. The agency’s opposition to this transaction reflects a blinkered focus on questionable possible future harm in a not-yet developed market, and a failure to properly weigh likely substantial near-term competitive benefits in a thriving existing market.
This is the sort of decision that tends to discourage future procompetitive efficiencies-generating high-tech acquisitions, to the detriment of producers and consumers.
The threat to future vertical mergers that bring together complementary assets to generate attractive new offerings for consumers in dynamically evolving market sectors is particularly unfortunate. Competition agencies should reflect on this reality and rethink their approaches. (FTC, are you paying attention?)
In the meantime, the UK court should carefully assess and, hopefully, side with Microsoft in its appeal of this unfortunate administrative ruling.
Four prominent horsemen of the Biden administration’s bureaucraticapocalypse—the Federal Trade Commission (FTC), U.S. Justice Department (DOJ) Civil Rights Division (DOJ), Consumer Financial Protection Bureau (CFPB), and the U.S. Equal Employment Opportunity Commission (EEOC)—came together April 25 to issue a joint statement pledging vigorous enforcement against illegal activity perpetrated through the use of artificial intelligence (AI) and automated systems.
AI is, of course, very much in the news these days. And when AI is used to violate the law, it obviously is fully subject to enforcement scrutiny. But why make a big splash announcement merely to state a truism?
One suspects there is more to the story. The language of the joint statement, together with the FTC’s accompanying press release, provide some hints. Those hints point to a campaign by the administration to effectuate de facto bureaucratic regulation of AI through overly expansive interpretations of existing law. The following discussion will focus on the FTC’s role in this initiative.
Discussion
The FTC’s brief press release embodies a broad view of AI-related wrongdoing. It notes that the four agencies “pledged today to uphold America’s commitment to the core principles of fairness, equality, and justice” as emerging automated systems, including AI, “become increasingly common in our daily lives – impacting civil rights, fair competition, consumer protection, and equal opportunity.” The release adds that the agencies have “resolved to vigorously enforce their collective authorities and to monitor the development and use of automated systems.”
The FTC’s references to ”fairness” and “fair competition” by implication allude to the fatally flawed November 2022 FTC Policy Statement on Unfair Methods of Competition (UMC). That policy statement has been roundly criticized (see the thoughtful critiques in the Truth on the Market symposium on the UMC statement) for rejecting the venerable consumer-welfare standard that had long guided FTC competition-enforcement policy, and replacing it with subjective notions of “unfair” conduct that could arbitrarily be invoked by the Commission to attack any conduct it found distasteful. (See then-Commissioner Christine Wilson’s dissenting statement.) Such an approach undermines the rule of law, ignores efficiencies, promotes uncertainty, and thereby harmfully interferes with welfare-promoting business conduct.
The specter of arbitrary FTC challenges to AI-related competitive practices that are misunderstood by the commission is obvious. Arbitrary legal attacks on AI practices on dubious subjective grounds could forestall a substantial amount of welfare-generating innovation in the AI space. This would reduce economic wealth creation and harm American technological progress in AI, in addition to weakening the U.S. efforts to prevent China from becoming dominant in this key realm (see here for a discussion of the U.S.-China AI rivalry).
The statement’s announcement that the agencies intend “to monitor the development and use of automated systems” is likewise troublesome. In the FTC’s case, it suggests a potential interest in deciding what forms of AI “development and use” are appropriate. Although rulemaking is not mentioned, the threat of litigation being brought by one or more of the agencies against certain disfavored AI implementations is real.
In particular, the threat of FTC UMC investigations and prosecutions could shape the nature of AI research by directing it away from innovations that the commission dislikes. This would be a form of “regulation by enforcement oversight” that could substantially slow progress in AI and thereby reduce economic growth.
The joint statement reinforces this problematic reading of the FTC’s press release. It stresses the FTC’s finding that:
AI tools can be inaccurate, biased, and discriminatory by design and incentivize relying on increasingly invasive forms of commercial surveillance.
The FTC, however, lacks a general statutory authority to combat “discrimination,” and its authority to attack forms of commercial surveillance likewise is highly dubious. The FTC’s proposed commercial surveillance and data security rulemaking, for example, flunks cost-benefit analysis and has other flaws that would prevent it from passing legal muster; see more here.
The notion that the FTC may challenge AI innovations it disfavors by bringing new questionable “discrimination” suits, and by concocting legally indefensible rule-based surveillance and data-security obligations, is a source of serious concern. As in the case of the UMC policy statement, the FTC would be taking novel actions beyond the scope of its congressionally granted authorities. Even if the courts eventually rejected such FTC initiatives, the costs reflected in foregone welfare-enhancing improvements in AI capabilities would be considerable.
The joint statement’s discussion of the CFPB, EEOC, and the DOJ Civil Rights Division less obviously supports the proposition that those agencies will be encouraged to act beyond their statutory mandates. It is notable, however, that various commentators have raised concerns about regulatory overreach by these three entities; with regard to the CFPB, for example, see here, here, and here.
Nevertheless, it is concerning that the administration would assign high priority to oversight of AI—an area of enormous technological and economic potential—to agencies that are concerned primarily with civil-rights issues and with consumer protection in the realm of financial services. The potential for regulatory mission creep that would harm American AI development and the dynamic competition it sparks is obvious.
Conclusion
The joint statement on AI and automated systems should be seen as a yellow (if not a red) warning flag that Biden administration efforts to micromanage AI development may be in the works. Particular attention should focus on the FTC, which has the potential to seriously undermine beneficial AI development through ill-conceived litigation and regulatory initiatives.
This is a serious matter. AI is of major consequence in the global political economy, particularly given China’s interest in the field. One can only hope that the FTC and the Biden administration will keep this sober reality in mind before they gin up new misguided forms of regulatory interference in the evolution of AI.
The European Commission on March 27 showered the public with a series of documents heralding a new, more interventionist approach to enforce Article 102 of the Treaty on the Functioning of the European Union (TFEU), which prohibits “abuses of dominance.” This new approach threatens more aggressive, less economically sound enforcement of single-firm conduct in Europe.
EU courts may eventually constrain the Commission’s overreach in this area somewhat, but harmful business uncertainty will be the near-term reality. What’s more, the Commission’s new approach may unfortunately influence U.S. states that are considering European-style abuse-of-dominance amendments to their own substantive antitrust laws. As such, market-oriented U.S. antitrust commentators will need to be even more vigilant in keeping tabs of—and, where necessary, promptly critiquing—economically problematic shifts in European antitrust-enforcement policy.
The Commission’s Emerging Reassessment of Abuses of Dominance
In a press release summarizing its new initiative, the Commission made a “call for evidence” to obtain feedback on the adoption of first-time guidelines on exclusionary abuses of dominance under Article 102 TFEU.
In parallel, the Commission also published a “communication” announcing amendments to its 2008 guidance on enforcement priorities in challenging abusive exclusionary conduct. According to the press release, until final Article 102 guidelines are approved, this guidance “provides certain clarifications on its approach to determine whether to pursue cases of exclusionary conduct as a matter of priority.” An annex to the communication sets forth specific amendments to the 2008 guidance.
Finally, the Commission also released a competition policy brief (“a dynamic and workable effects-based approach to the abuse of dominance”) that discusses the policy justifications for the changes enumerated in the annex.
In short, the annex “toughens” the approach to abuse of dominance enforcement in five ways:
It takes a broader view of what constitutes “anticompetitive foreclosure.” The Annex rejects the 2008 guidance’s emphasis on profitability (cases where a dominant firm can profitably maintain supracompetitive prices or profitably influence other parameters of competition) as key to prioritizing matters for enforcement. Instead, a new, far less-demanding prosecutorial standard is announced, one that views anticompetitive foreclosure as a situation “that allow[s] the dominant undertaking to negatively influence, to its own advantage and to the detriment of consumers, the various parameters of competition, such as price, production, innovation, variety or quality of goods or services.” Under this new approach, highly profitable competition on the merits (perhaps reflecting significant cost efficiencies) might be challenged, say, merely because enforcers were dissatisfied with a dominant firm’s particular pricing decisions, or the quality, variety, and “innovativeness” of its output. This would be a recipe for bureaucratic micromanagement of dominant firms’ business plans by competition-agency officials. The possibilities for arbitrary decision making by those officials, who may be sensitive to the interests of politically connected rent seekers (say, less-efficient competitors) are obvious.
The annex diminishes the importance of economic efficiency in dominant-firm analysis. The Commission’s 2008 guidance specified that Commission enforcers “would generally intervene where the conduct concerned has already been or is capable of hampering competition from competitors that are considered to be as efficient as the dominant undertaking.” The revised 2023 guidance “recognizes that in certain circumstances a less efficient competitor should be taken into account when considering whether particular price-based conduct leads to anticompetitive foreclosure.” This amendment plainly invites selective-enforcement actions to assist less-efficient competitors, placing protection of those firms above consumer-welfare maximization. In order to avoid liability, dominant firms may choose to raise their prices or reduce their investments in cost-reducing innovations, so as to protect a relatively inefficient competitive fringe. The end result would be diminished consumer welfare.
The annex encourages further micromanagement of dominant-firm pricing and other business decisions. Revised 2023 guidance invites the Commission to “examine economic data relating to prices” and to possible below-cost pricing, in considering whether a hypothetical as-efficient competitor would be foreclosed. Relatedly, the Commission encourages “taking into account other relevant quantitative and/or qualitative evidence” in determining whether an as-efficient competitor can compete “effectively” (emphasis added). This focus on often-subjective criteria such as “qualitative” indicia and the “effectiveness” of competition could subject dominant firms to costly new business-planning uncertainty. Similarly, the invitation to enforcers to “examine” prices may be viewed as a warning against “overaggressive” price discounting that would be expected to benefit consumers.
The annex imposes new constraints on a firm’s decision as to whether or not to deal (beneficial voluntary exchange, an essential business freedom that underlies our free-market system – see here, for example). A revision to the 2008 guidance specifies that, “[i]n situations of constructive refusal to supply (subjecting access to ‘unfair conditions’), it is not appropriate to pursue as a matter of priority only cases concerning the provision of an indispensable input or the access to an essential facility.” This encourages complaints to Brussels enforcers by scores ofcompanies that are denied an opportunity to deal with a dominant firm, due to “unfairness.” This may be expected to substantially undermine business efficiency, as firms stuck with the “dominant” label are required to enter into suboptimal supply relationships. Dynamic efficiency will also suffer, to the extent that intellectual-property holders are required to license on unfavorable terms (a reality that may be expected to diminish dominant firms’ incentives to invest in innovative activities).
The annex threatens to increase the number of Commission “margin-squeeze” cases, whereby vertically integrated firms are required to offer favorable sales terms to, and thereby prop up, wholesalers who want to “compete” with them at retail. (See here for a more detailed discussion of the margin-squeeze concept.) The current standard for margin-squeeze liability already is far narrower in the United States than in Europe, due to the U.S. Supreme Court’s decision in linkLine (2009).
Specifically, the annex announces margin-squeeze-related amendments to the 2008 guidance. The amendments aim to clarify that “it is not appropriate to pursue as a matter of priority margin squeeze cases only where those cases involve a product or service that is objectively necessary to be able to compete effectively on the downstream market.” This extends margin-squeeze downstream competitor-support obligations far beyond regulated industries; how far, only time will tell. (See here for an economic study indicating that even the Commission’s current less-intrusive margin-squeeze policy undermines consumer welfare.) The propping up of less-efficient competitors may, of course, be facilitated by having the dominant firm take the lead in raising retail prices, to ensure that the propped-up companies get “fair margins.” Such a result diminishes competitive vigor and (once again) directly harms consumers.
In sum, through the annex’s revisions to the 2008 guidance, the Commission has, without public comment (and well prior to the release of new first-time guidelines), taken several significant steps that predictably will reduce competitive vitality and harm consumers in those markets where “dominant firms” exist. Relatedly, of course, to the extent that innovative firms respond to incentives to “pull their punches” so as not to become dominant, dynamic competition will be curtailed. As such, consumers will suffer, and economic welfare will diminish.
How Will European Courts Respond?
Fortunately, there is a ray of hope for those concerned about the European Commission’s new interventionist philosophy regarding abuses of dominance. Although the annex and the related competition policy brief cite a host of EU judicial decisions in support of revisions to the guidance, their selective case references and interpretations of judicial holdings may be subject to question. I leave it to EU law experts (I am not one) to more thoroughly parse specific judicial opinions cited in the March 27 release. Nevertheless, it seems to me that the Commission may face some obstacles to dramatically “stepping up” its abuse-of-dominance enforcement actions along the lines suggested by the annex.
A number of relatively recent judicial decisions underscore the concerns that EU courts have demonstrated regarding the need for evidentiary backing and economic analysis to support the Commission’s findings of anticompetitive foreclosure. Let’s look at a few.
In Intel v. Commission (2017), the European Court of Justice (ECJ) held that the Commission had failed to adequately assess whether Intel’s conditional rebates on certain microprocessors were capable of restricting competition on the basis of the “as-efficient competitor” (AEC) test, and referred the case back to the General Court. The ECJ also held that the balancing of the favorable and unfavorable effects of Intel’s rebate practice could only be carried out after an analysis of that practice’s ability to exclude at least as-efficient-competitors.
In 2022, on remand, the General Court annulled the Commission’s determination (thereby erasing its 1.06 billion Euro fine) that Intel had abused its dominant position. The Court held that the Commission’s failure to respond to Intel’s argument that the AEC test was flawed, coupled with the Commission’s errors in its analysis of contested Intel practices, meant that the “analysis carried out by the Commission is incomplete and, in any event, does not make it possible to establish to the requisite legal standard that the rebates at issue were capable of having, or were likely to have, anticompetitive effects.”
In Unilever Italia (2023), the ECJ responded to an Italian Council of State request for guidance in light of the Italian Competition Authority’s finding that Unilever had abused its dominant position through exclusivity clauses that covered the distribution of packaged ice cream in Italy. The court found that a competition authority is obliged to assess the actual capacity to exclude by taking into account evidence submitted by the dominant undertaking (in this case, the Italian Authority had failed to do so). The ECJ stated that its 2017 clarification of rebate-scheme analysis in Intel also was applicable to exclusivity clauses.
Finally, in Qualcomm v. Commission (2022), the General Court set aside a 2018 Commission decision imposing a 1 billion Euro fine on Qualcomm for abuse of a dominant position in LTE chipsets. The Commission contended that Qualcomm’s 2011-2016 incentive payments to Apple for exclusivity reduced Apple’s incentive to shift suppliers and had the capability to foreclose Qualcomm’s competitors from the LTE-chipset market. The court found massive procedural irregularities by the Commission and held that the Commission had not shown that Qualcomm’s payments either had foreclosed or were capable of foreclosing competitors. The Court concluded that the Commission had seriously erred in the evidence it relied upon, and in its failure to take into account all relevant factors, as required under the 2022 Intel decision.
These decisions are not, of course, directly related to the specific changes announced in the annex. They do, however, raise serious questions about how EU judges will view new aggressive exclusionary-conduct theories based on amendments to the 2008 guidance. In particular, EU courts have signaled that they will:
closely scrutinize Commission fact-finding and economic analysis in evaluating exclusionary-abuse cases;
require enforcers to carefully weigh factual and economic submissions put forth by dominant firms under investigation;
require that enforcers take economic-efficiency arguments seriously; and
continue to view the “as-efficient competitor” concept as important, even though the Commission may seek to minimize the test’s significance.
In other words, in the EU, as in the United States, reviewing courts may “put a crimp” in efforts by national competition agencies to read case law very broadly, so as to “rein in” allegedly abusive dominant-firm conduct. In jurisdictions with strong rule-of-law traditions, enforcers propose but judges dispose. The kicker, however, is that judicial review takes time. In the near term, firms will have to absorb additional business-uncertainty costs.
What About the States?
“Monopolization”—rather than the European “abuse of a dominant position”—is, of course, the key single-firm conduct standard under U.S. federal antitrust law. But the debate over the Commission’s abuse-of-dominance standards nonetheless is significant to domestic American antitrust enforcement.
Under U.S. antitrust federalism, the individual states are empowered to enact antitrust legislation that goes beyond the strictures of federal antitrust law. Currently, several major states—New York, Pennsylvania, and Minnesota—are considering antitrust bills that would add abuse of a dominant position as a new state antitrust cause of action (see here, here, here, and here). What’s more, the most populous U.S. state, California, may also consider similar legislation (see here). Such new laws would harmfully undermine consumer welfare (see my commentary here).
If certain states enacted a new abuse-of-dominance standard, it would be natural for their enforcers to look to EU enforcers (with their decades of relevant experience) for guidance in the area. As such, the annex (and future Commission guidelines, which one would expect to be consistent with the new annex guidance) could prove quite influential in promoting highly interventionist state policies that reach far beyond federal monopolization standards.
What’s worse, federal judicial case law that limits the scope of Sherman Act monopolization cases would have little or no influence in constraining state judges’ application of any new abuse-of-dominance standards. It is questionable that state judges would feel themselves empowered or even capable of independently applying often-confusing EU case law regarding abuse of dominance as a possible constraint on state officials’ prosecutions.
Conclusion
The Commission’s emerging guidance on abuse of dominance is bad for consumers and for competition. EU courts may constrain some Commission enforcement excesses, but that will take time, and new short-term business uncertainty costs are likely.
Moreover, negative effects may eventually also be felt in the United States if states enact proposed abuse-of-dominance prohibitions and state enforcers adopt the European Commission’s interventionist philosophy. State courts, applying an entirely new standard not found in federal law, should not be expected to play a significant role in curtailing aggressive state prosecutions for abuse of dominance.
Promoters of principled, effects-based, economics-centric antitrust enforcement should take heed. They must be prepared to highlight the ramifications of both foreign and state-level initiatives as they continue to advocate for market-based antitrust policies. Sound law & economics training for state enforcers and judges likely will become more important than ever.
Regrettably, but not unexpectedly, the Federal Trade Commission (FTC) yesterday threw out a reasoned decision by its administrative law judge and ordered DNA-sequencing provider Illumina Inc. to divest GRAIL Inc., makers of a multi-cancer early detection (MCED) test.
The FTC claims that this vertical merger would stifle competition and innovation in the U.S. market for life-saving cancer tests. The FTC’s decision ignores Illumina’s ability to use its resources to obtain regulatory clearances and bring GRAIL’s test to market more quickly, thereby saving many future lives. Other benefits of the transaction, including the elimination of double marginalization, have been succinctly summarized by Thom Lambert. See also the outstanding critique of the FTC’s case by Bruce Kobayashi, Jessica Melugin, Kent Lassman, and Timothy Muris, and this update by Dan Gilman.
The transaction’s potential boon to consumers and patients has, alas, been sacrificed at the altar of theoretical future harms in a not-yet-existing MCED market, and ignores Illumina’s proffered safeguards (embodied in contractual assurances) that it would make its platform available to third parties in a neutral fashion.
The FTC’s holding comes in tandem with a previous European Commission holding to prohibit Illumina’s acquisition of GRAIL and impose a large fine. These two decisions epitomize antitrust enforcement policy at its worst: the sacrifice of clear and substantial near-term welfare benefits to consumers (including lives saved!) based on highly questionable future harms that cannot be reasonably calibrated at this time. A federal appeals court should quickly and decisively overturn this problematic FTC holding, and a European tribunal should act in similar fashion.
The courts cannot, of course, undo the harm flowing from delays in moving GRAIL’s technology forward. This is a sad day for believers in economically sound, evidence-based antitrust enforcement, as well as for patients and consumers.
Spring is here, and hope springs eternal in the human breast that competition enforcers will focus on welfare-enhancing initiatives, rather than on welfare-reducing interventionism that fails the consumer welfare standard.
Fortuitously, on March 27, the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) are hosting an international antitrust-enforcement summit, featuring senior state and foreign antitrust officials (see here). According to an FTC press release, “FTC Chair Lina M. Khan and DOJ Assistant Attorney General Jonathan Kanter, as well as senior staff from both agencies, will facilitate discussions on complex challenges in merger and unilateral conduct enforcement in digital and transitional markets.”
I suggest that the FTC and DOJ shelve that topic, which is the focus of endless white papers and regular enforcement-oriented conversations among competition-agency staffers from around the world. What is there for officials to learn? (Perhaps they could discuss the value of curbing “novel” digital-market interventions that undermine economic efficiency and innovation, but I doubt that this important topic would appear on the agenda.)
Rather than tread familiar enforcement ground (albeit armed with novel legal theories that are known to their peers), the FTC and DOJ instead should lead an international dialogue on applying agency resources to strengthen competition advocacy and to combat anticompetitive market distortions. Such initiatives, which involve challenging government-generated impediments to competition, would efficiently and effectively promote the Biden administration’s “whole of government” approach to competition policy.
[C]ompetition may be lessened significantly by various public policies and institutional arrangements as well [as by private restraints]. Indeed, private restrictive business practices are often facilitated by various government interventions in the marketplace. Thus, the mandate of the competition office extends beyond merely enforcing the competition law. It must also participate more broadly in the formulation of its country’s economic policies, which may adversely affect competitive market structure, business conduct, and economic performance. It must assume the role of competition advocate, acting proactively to bring about government policies that lower barriers to entry, promote deregulation and trade liberalization, and otherwise minimize unnecessary government intervention in the marketplace.
The FTC and DOJ have a proud history of competition-advocacy initiatives. In an article exploring the nature and history of FTC advocacy efforts, FTC scholars James Cooper, Paul Pautler, & Todd Zywicki explained:
Competition advocacy, broadly, is the use of FTC expertise in competition, economics, and consumer protection to persuade governmental actors at all levels of the political system and in all branches of government to design policies that further competition and consumer choice. Competition advocacy often takes the form of letters from the FTC staff or the full Commission to an interested regulator, but also consists of formal comments and amicus curiae briefs.
Cooper, Pautler, & Zywicki also provided guidance—derived from an evaluation of FTC public-interest interventions—on how advocacy initiatives can be designed to maximize their effectiveness.
During the Trump administration, the FTC’s Economic Liberty Task Force shone its advocacy spotlight on excessive state occupational-licensing restrictions that create unwarranted entry barriers and distort competition in many lines of work. (The Obama administration in 2016 issued a report on harms to workers that stem from excessive occupational licensing, but it did not accord substantial resources to advocacy efforts in this area.)
ACMDs refer to government-imposed restrictions on competition. These distortions may take the form of distortions of international competition (trade distortions), distortions of domestic competition, or distortions of property-rights protection (that with which firms compete). Distortions across any of these pillars could have a negative effect on economic growth. (See here.)
Because they enjoy state-backed power and the force of law, ACMDs cannot readily be dislodged by market forces over time, unlike purely private restrictions. What’s worse, given the role that governments play in facilitating them, ACMDs often fall outside the jurisdictional reach of both international trade laws and domestic competition laws.
The OECD’s Competition Assessment Toolkit sets forth four categories of regulatory restrictions that distort competition. Those are provisions that:
limit the number or range of providers;
limit the ability of suppliers to compete;
reduce the incentive of suppliers to compete; and that
limit the choices and information available to consumers.
When those categories explicitly or implicitly favor domestic enterprises over foreign enterprises, they may substantially distort international trade and investment decisions, to the detriment of economic efficiency and consumer welfare in multiple jurisdictions.
Given the non-negligible extraterritorial impact of many ACMDs, directing the attention of foreign competition agencies to the ACMD problem would be a particularly efficient use of time at gatherings of peer competition agencies from around the world. Peer competition agencies could discuss strategies to convince their governments to phase out or limit the scope of ACMDs.
The collective action problem that may prevent any one jurisdiction from acting unilaterally to begin dismantling its ACMDs might be addressed through international trade negotiations (perhaps, initially, plurilateral negotiations) aimed at creating ACMD remedies in trade treaties. (Shanker Singham has written about crafting trade remedies to deal with ACMDs—see here, for example.) Thus, strategies whereby national competition agencies could “pull in” their fellow national trade agencies to combat ACMDs merit exploration. Why not start the ball rolling at next week’s international antitrust-enforcement summit? (Hint, why not pull in a bunch of DOJ and FTC economists, who may feel underappreciated and underutilized at this time, to help out?)
Conclusion
If the Biden administration truly wants to strengthen the U.S. economy by bolstering competitive forces, the best way to do that would be to reallocate a substantial share of antitrust-enforcement resources to competition-advocacy efforts and the dismantling of ACMDs.
In order to have maximum impact, such efforts should be backed by a revised “whole of government” initiative – perhaps embodied in a new executive order. That new order should urge federal agencies (including the “independent” agencies that exercise executive functions) to cooperate with the DOJ and FTC in rooting out and repealing anticompetitive regulations (including ACMDs that undermine competition by distorting trade flows).
The DOJ and FTC should also be encouraged by the executive order to step up their advocacy efforts at the state level. The Office of Management and Budget (OMB) could be pulled in to help identify ACMDs, and the U.S. Trade Representative’s Office (USTR), with DOJ and FTC economic assistance, could start devising an anti-ACMD negotiating strategy.
In addition, the FTC and DOJ should directly urge foreign competition agencies to engage in relatively more competition advocacy. The U.S. agencies should simultaneously push to make competition-advocacy promotion a much higher International Competition Network priority (see here for the ICN Advocacy Working Group’s 2022-2025 Work Plan). The FTC and DOJ could simultaneously encourage their competition-agency peers to work with their fellow trade agencies (USTR’s peer bureaucracies) to devise anti-ACMD negotiating strategies.
These suggestions may not quite be ripe for meetings to be held in a few days. But if the administration truly believes in an all-of-government approach to competition, and is truly committed to multilateralism, these recommendations should be right up its alley. There will be plenty of bilateral and plurilateral trade and competition-agency meetings (not to mention the World Bank, OECD, and other multilateral gatherings) in the next year or so at which these sensible, welfare-enhancing suggestions could be advanced. After all, “hope springs eternal in the human breast.”
Franchising plays a key role in promoting American job creation and economic growth. As explained in Forbes (hyperlinks omitted):
Franchise businesses help drive growth in local, state and national economies. They are major contributors to small business growth and job creation in nearly every local economy in the United States. On a local level, growth is spurred by a number of successful franchise impacts, including multiple new locations opening in the area and the professional development opportunities they provide for the workforce.
Franchises Create Jobs
What kind of impact do franchises have on national economic data and job growth? All in all, small businesses like franchises generate more than 60 percent of all jobs added annually in the U.S., according to the Bureau of Labor Statistics.
Although it varies widely by state, you will often find that the highest job creation market leaders are heavily influenced by franchising growth. The national impact of franchising, according to the IFA Economic Impact Study conducted by IHS Market Economics in January 2018, is huge.
By the numbers:
There are 733,000 franchised establishments in the Unites States
Franchising directly creates 7.6 million jobs
Franchising indirectly supports 13.3 million jobs
Franchising directly accounts for $404.6 billion in GDP
Franchising indirectly accounts for $925.9 billion in GDP
Franchises Drive Economic Growth
How do franchises spur economic growth? Successful franchise brands can grow new locations at a faster rate than other types of small businesses. Individual franchise locations create jobs, and franchise networks multiply the jobs they create by replicating in more markets — or often in more locations in a single market if demand allows. The more they succeed, the greater the multiplier.
It’s also a matter of longevity. According to the Small Business Administration (SBA), 50 percent of new businesses fail during the first five years. Franchises can offer greater sustainability than non-franchised businesses. Franchises are much more likely to be operating after five years. This means more jobs being created longer for each location opened.
Successful franchise brands help stack the deck in favor of success by offering substantial administrative and marketing support for individual locations. Success for the brands means success for the overall economy, driving a virtuous cycle of growth.
Franchising as a business institution is oriented toward reducing economic inefficiencies in commercial relationships. Specifically, economic analysis reveals that it is a potential means for dealing with opportunism and cabining transaction costs in vertical-distribution contracts. In a survey article in the Encyclopedia of Law & Economics, Antony Dnes explores capital raising, agency, and transactions-cost-control theories of franchising. He concludes:
Several theories have been constructed to explain franchising, most of which emphasize savings of monitoring costs in an agency framework. Details of the theories show how opportunism on the part of both franchisors and franchisees may be controlled. In separate developments, writers have argued that franchisors recruit franchisees to reduce information-search costs, or that they signal franchise quality by running company stores.
Empirical studies tend to support theories emphasizing opportunism on the part of franchisors and franchisees. Thus, elements of both agency approaches and transactions-cost analysis receive support. The most robust finding is that franchising is encouraged by factors like geographical dispersion of units, which increases monitoring costs. Other key findings are that small units and measures of the importance of the franchisee’s input encourage franchising, whereas increasing the importance of the franchisor’s centralized role encourages the use of company stores. In many key respects, in result although not in principle, transaction-cost analysis and agency analysis are just two different languages describing the same franchising phenomena.
In short, overall, franchising has proven to be an American welfare-enhancement success story.
There is, however, a three-letter regulatory storm cloud on the horizon that could eventually threaten to undermine economically beneficial franchising. In a March 10 press release, the Federal Trade Commission (FTC) “requests [public] comment[s] on franchise agreements and franchisor business practices, including how franchisors may exert control over franchisees and their workers.” The public will have 60 days to submit comments in response to this request for information (RFI).
Language in the FTC’s press release makes it clear that the commission’s priors are to be skeptical of (if not downright hostile toward) the institution of franchising. The director of the FTC’s Bureau of Consumer Protection notes that there is “growing concern around unfair and deceptive practices in the franchise industry.” The director of the FTC Office of Policy Planning states that “[i]t’s clear that, at least in some instances, the promise of franchise agreements as engines of economic mobility and gainful employment is not being fully realized.” She adds that “[t]his RFI will begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.” The references to “unequal bargaining power” and “workers” once again highlight this FTC’s unfortunate fascination with issues that fall outside the proper scope of its competition and consumer-protection mandates.
The FTC’s press release lists representative questions on which it hopes to receive comments, including specifically:
franchisees’ ability to negotiate the terms of franchise agreements before signing, and the ability of franchisors to unilaterally make changes to the franchise system after franchisees join;
franchisors’ enforcement of non-disparagement, goodwill or similar clauses;
the prevalence and justification for certain contract terms in franchise agreements;
franchisors’ control over the wages and working conditions in franchised entities, other than through the terms of franchise agreements;
payments or other consideration franchisors receive from third parties (e.g., suppliers, vendors) related to franchisees’ purchases of goods or services from those third parties;
indirect effects on franchisee labor costs related to franchisor business practices; and
the pervasiveness and rationale for franchisors marketing their franchises using languages other than English.
This litany by implication casts franchisors in a negative light, and suggests a potential FTC interest in micromanaging the terms of franchise contractual agreements. Presumably, this would be accomplished through a new proposed rule to be issued after the RFI responses are received. Such “expert” micromanagement reflects a troublesome FTC pretense of regulatory knowledge.
But hold on, the worst is still to come. To top it all off, the press release closes by asking for comments on whether the commission’s highly problematic proposed rule on noncompete agreements should apply to noncompete clauses between franchisors and franchisees.
Barring noncompetes could severely undermine the incentive of franchisors to create new franchising opportunities in the first place, thereby reducing the use of franchising and denying new business opportunities to potential franchisees. Job creation and economic growth prospects would be harmed. As a result, franchise workers, small businesses, and consumers (who enjoy patronizing franchise outlets because of the quality assurance associated with a franchise trademark) would suffer.
The only saving grace is that a final FTC noncompete rule likely would be struck down in court. Before that happened, however, many rationally risk-averse firms would discontinue using welfare-beneficial noncompetes—including in franchising, assuming franchising was covered by the final rule.
As it is, FTC law and state-consumer protection law already provide more than ample protection for franchisees in their relationship with franchisors. The FTC’s Franchise Rule requires franchisors to make key disclosures upfront before people make a major investment. What’s more, the FTC Act prohibits material misrepresentations about any business opportunity, including franchises.
Moreover, as the FTC itself admits, franchisees may be able to use state statutes that prohibit unfair or deceptive practices to challenge conduct that violates the Franchise Rule or truth-in-advertising standards.
The FTC should stick with its current consumer-protection approach and ignore the siren song of micromanaging (and, indeed, discouraging) franchisor-franchisee relationships. If it is truly concerned about the economic welfare of consumers and producers, it should immediately withdraw the RFI.
Economists have long recognized that innovation is key to economic growth and vibrant competition. As an Organisation for Economic Co-operation and Development (OECD) report on innovation and growth explains, “innovative activity is the main driver of economic progress and well-being as well as a potential factor in meeting global challenges in domains such as the environment and health. . . . [I]nnovation performance is a crucial determinant of competitiveness and national progress.”
It follows that an economically rational antitrust policy should be highly attentive to innovation concerns. In a December 2020 OECD paper, David Teece and Nicolas Petit caution that antitrust today is “missing broad spectrum competition that delivers innovation, which in turn is the main driver of long term growth in capitalist economies.” Thus, the authors stress that “[i]t is about time to put substance behind economists’ and lawyers’ long time admonition to inject more dynamism in our analysis of competition. An antitrust renaissance, not a revolution, is long overdue.”
Accordingly, before the U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) finalize their new draft merger guidelines, they would be well-advised to take heed of new research that “there is an important connection between merger activity and innovation.” This connection is described in a provocative new NERA Economic Consulting paper by Robert Kulick and Andrew Card titled “Mergers, Industries, and Innovation: Evidence from R&D Expenditures and Patent Applications.” As the executive summary explains (citation deleted):
For decades, there has been a broad consensus among policymakers, antitrust enforcers, and economists that most mergers pose little threat from an antitrust perspective and that mergers are generally procompetitive. However, over the past year, leadership at the FTC and DOJ has questioned whether mergers are, as a general matter, economically beneficial and asserted that mergers pose an active threat to innovation. The Agencies have also set the stage for a substantial increase in the scope of merger enforcement by focusing on new theories of anticompetitive harm such as elimination of potential competition from nascent competitors and the potential for cumulative anticompetitive harm from serial acquisitions. Despite the importance of the question of whether mergers have a positive or negative effect on industry-level innovation, there is very little empirical research on the subject. Thus, in this study, we investigate this question utilizing, what is to our knowledge, a never before used dataset combining industry-level merger data from the FTC/DOJ annual HSR reports with industry-level data from the NSF on R&D expenditure and patent applications. We find a strong positive and statistically significant relationship between merger activity and industry-level innovative activity. Over a three- to four-year cycle, a given merger is associated with an average increase in industry-level R&D expenditure of between $299 million and $436 million in R&D intensive industries. Extrapolating our results to the industry level implies that, on average, mergers are associated with an increase in R&D expenditure of between $9.27 billion and $13.52 billion per year in R&D intensive industries and an increase of between 1,430 and 3,035 utility patent applications per year. Furthermore, using a statistical technique developed by Nobel Laureate Clive Granger, we find that the direction of causality goes, to a substantial extent, directly from merger activity to increased R&D expenditure and patent applications. Based on these findings we draw the following key conclusions:
There is no evidence that mergers are generally associated with reduced innovation, nor do the results indicate that supposedly lax antitrust enforcement over the period from 2008 to 2020 diminished innovative activity. Indeed, R&D expenditure and patent applications increased substantially over the period studied, and this increase was directly linked to increases in merger activity.
In previous research, we found that “trends in industrial concentration do not provide a reliable basis for making inferences about the competitive effects of a proposed merger” as “trends in concentration may simply reflect temporary fluctuations which have no broader economic significance” or are “often a sign of increasing rather than decreasing market competition.” This study presents further evidence that previous consolidation in an industry or a “trend toward concentration” may reflect procompetitive responses to competitive pressures, and therefore should not play a role in merger review beyond that already embodied in the market-level concentration screens considered by the Agencies.
The Agencies should proceed cautiously in pursuing novel theories of anticompetitive harm; our findings are consistent with the prevailing consensus from the previous decades that there is an important connection between merger activity and innovation, and thus, a broad “anti-merger” policy, particularly one pursued in the absence of strong empirical evidence, has the potential to do serious harm by perversely inhibiting innovative activity.
Due to the link between mergers and innovative activity in R&D intensive industries where the potential for anticompetitive consequences can be resolved through remedies, relying on remedies rather than blocking transactions outright may encourage innovation while protecting consumers where there are legitimate competitive concerns about a particular transaction.
The potential for mergers to create procompetitive benefits should be taken seriously by policymakers, antitrust enforcers, courts, and academics and the Agencies should actively study the potential benefits, in addition to the costs, of mergers.
In short, the Kulick & Card paper lends valuable empirical support for an economics-based approach to merger analysis that fully takes into account innovation concerns. If the FTC and DOJ truly care about strengthening the American economy (consistent with “President Biden’s stated goals of renewing U.S. innovation and global competitiveness”—see, e.g., here and here), they should take heed in crafting new merger guidelines. An emphasis in the guidelines on avoiding interference with merger-related innovation (taking into account research by such scholars as Kulick, Card, Teece, and Petit) would demonstrate that the antitrust agencies are fully behind President Joe Biden’s plans to promote an innovative economy.
Various states recently have enacted legislation that requires authors, publishers, and other copyright holders to license to lending libraries digital texts, including e-books and audio books. These laws violate the Constitution’s conferral on Congress of the exclusive authority to set national copyright law. Furthermore, as a policy matter, they offend free-market principles.
The laws interfere with the right of copyright holders to set the price for the fruit of their intellectual labor. The laws lower incentives for the production of new creative digital works in the future, thereby reducing consumers’ and producers’ surplus. Furthermore, the claim that “unfair” pricing prevents libraries from stocking “sufficient” numbers of e-books to satisfy public demand is belied by the reality that libraries have substantially grown their digital collections in recent years.
Finally, proponents of legislation ignore the fact that libraries actually pay far less than consumers do when they purchase an e-book license for personal use.
At the Jan. 26 Policy in Transition forum—the Mercatus Center at George Mason University’s second annual antitrust forum—various former and current antitrust practitioners, scholars, judges, and agency officials held forth on the near-term prospects for the neo-Brandeisian experiment undertaken in recent years by both the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ). In conjunction with the forum, Mercatus also released a policy brief on 2022’s significant antitrust developments.
Below, I summarize some of the forum’s noteworthy takeaways, followed by concluding comments on the current state of the antitrust enterprise, as reflected in forum panelists’ remarks.
Takeaways
The consumer welfare standard is neither a recent nor an arbitrary antitrust-enforcement construct, and it should not be abandoned in order to promote a more “enlightened” interventionist antitrust.
George Mason University’s Donald Boudreaux emphasized in his introductory remarks that the standard goes back to Adam Smith, who noted in “The Wealth of Nations” nearly 250 years ago that the appropriate end of production is the consumer’s benefit. Moreover, American Antitrust Institute President Diana Moss, a leading proponent of more aggressive antitrust enforcement, argued in standalone remarks against abandoning the consumer welfare standard, as it is sufficiently flexible to justify a more interventionist agenda.
The purported economic justifications for a far more aggressive antitrust-enforcement policy on mergers remain unconvincing.
Moss’ presentation expressed skepticism about vertical-merger efficiencies and called for more aggressive challenges to such consolidations. But Boudreaux skewered those arguments in a recent four-point rebuttal at Café Hayek. As he explains, Moss’ call for more vertical-merger enforcement ignores the fact that “no one has stronger incentives than do the owners and managers of firms to detect and achieve possible improvements in operating efficiencies – and to avoid inefficiencies.”
Moss’ complaint about chronic underenforcement mistakes by overly cautious agencies also ignores the fact that there will always be mistakes, and there is no reason to believe “that antitrust bureaucrats and courts are in a position to better predict the future [regarding which efficiencies claims will be realized] than are firm owners and managers.” Moreover, Moss provided “no substantive demonstration or evidence that vertical mergers often lead to monopolization of markets – that is, to industry structures and practices that harm consumers. And so even if vertical mergers never generate efficiencies, there is no good argument to use antitrust to police such mergers.”
And finally, Boudreaux considers Moss’ complaint that a court refused to condemn the AT&T-Time Warner merger, arguing that this does not demonstrate that antitrust enforcement is deficient:
[A]s soon as the . . . merger proved to be inefficient, the parties themselves undid it. This merger was undone by competitive market forces and not by antitrust! (Emphasis in the original.)
The agencies, however, remain adamant in arguing that merger law has been badly unenforced. As such, the new leadership plans to charge ahead and be willing to challenge more mergers based on mere market structure, paying little heed to efficiency arguments or actual showings of likely future competitive harm.
In her afternoon remarks at the forum, Principal Deputy Assistant U.S. Attorney General for Antitrust Doha Mekki highlighted five major planks of Biden administration merger enforcement going forward.
Clayton Act Section 7 is an incipiency statute. Thus, “[w]hen a [mere] change in market structure suggests that a firm will have an incentive to reduce competition, that should be enough [to justify a challenge].”
“Once we see that a merger may lead to, or increase, a firm’s market power, only in very rare circumstances should we think that a firm will not exercise that power.”
A structural presumption “also helps businesses conform their conduct to the law with more confidence about how the agencies will view a proposed merger or conduct.”
Efficiencies defenses will be given short shrift, and perhaps ignored altogether. This is because “[t]he Clayton Act does not ask whether a merger creates a more or less efficient firm—it asks about the effect of the merger on competition. The Supreme Court has never recognized efficiencies as a defense to an otherwise illegal merger.”
Merger settlements have often failed to preserve competition, and they will be highly disfavored. Therefore, expect a lot more court challenges to mergers than in recent decades. In short, “[w]e must be willing to litigate. . . . [W]e need to acknowledge the possibility that sometimes a court might not agree with us—and yet go to court anyway.”
Mekki’s comments suggest to me that the soon-to-be-released new draft merger guidelines may emphasize structural market-share tests, generally reject efficiencies justifications, and eschew the economic subtleties found in the current guidelines.
The agencies—and the FTC, in particular—have serious institutional problems that undermine their effectiveness, and risk a loss of credibility before the courts in the near future.
In his address to the forum, former FTC Chairman Bill Kovacic lamented the inefficient limitations on reasoned FTC deliberations imposed by the Sunshine Act, which chills informal communications among commissioners. He also pointed to our peculiarly unique global status of having two enforcers with duplicative antitrust authority, and lamented the lack of policy coherence, which reflects imperfect coordination between the agencies.
Perhaps most importantly, Kovacic raised the specter of the FTC losing credibility in a possible world where Humphrey’s Executor is overturned (see here) and the commission is granted little judicial deference. He suggested taking lessons on policy planning and formulation from foreign enforcers—the United Kingdom’s Competition and Markets Authority, in particular. He also decried agency officials’ decisions to belittle prior administrations’ enforcement efforts, seeing it as detracting from the international credibility of U.S. enforcement.
The FTC is embarking on a novel interventionist path at odds with decades of enforcement policy.
In luncheon remarks, Commissioner Christine S. Wilson lamented the lack of collegiality and consultation within the FTC. She warned that far-reaching rulemakings and other new interventionist initiatives may yield a backlash that undermines the institution.
Following her presentation, a panel of FTC experts discussed several aspects of the commission’s “new interventionism.” According to one panelist, the FTC’s new Section 5 Policy Statement on Unfair Methods of Competition (which ties “unfairness” to arbitrary and subjective terms) “will not survive in” (presumably, will be given no judicial deference by) the courts. Another panelist bemoaned rule-of-law problems arising from FTC actions, called for consistency in FTC and DOJ enforcement policies, and warned that the new merger guidelines will represent a “paradigm shift” that generates more business uncertainty.
The panel expressed doubts about the legal prospects for a proposed FTC rule on noncompete agreements, and noted that constitutional challenges to the agency’s authority may engender additional difficulties for the commission.
The DOJ is greatly expanding its willingness to litigate, and is taking actions that may undermine its credibility in court.
Assistant U.S. Attorney General for Antitrust Jonathan Kanter has signaled a disinclination to settle, as well as an eagerness to litigate large numbers of cases (toward that end, he has hired a huge number of litigators). One panelist noted that, given this posture from the DOJ, there is a risk that judges may come to believe that the department’s litigation decisions are not well-grounded in the law and the facts. The business community may also have a reduced willingness to “buy in” to DOJ guidance.
Panelists also expressed doubts about the wisdom of DOJ bringing more “criminal Sherman Act Section 2” cases. The Sherman Act is a criminal statute, but the “beyond a reasonable doubt” standard of criminal law and Due Process concerns may arise. Panelists also warned that, if new merger guidelines are ”unsound,” they may detract from the DOJ’s credibility in federal court.
International antitrust developments have introduced costly new ex ante competition-regulation and enforcement-coordination problems.
As one panelist explained, the European Union’s implementation of the new Digital Markets Act (DMA) will harmfully undermine market forces. The DMA is a form of ex ante regulation—primarily applicable to large U.S. digital platforms—that will harmfully interject bureaucrats into network planning and design. The DMA will lead to inefficiencies, market fragmentation, and harm to consumers, and will inevitably have spillover effects outside Europe.
Even worse, the DMA will not displace the application of EU antitrust law, but merely add to its burdens. Regrettably, the DMA’s ex ante approach is being imitated by many other enforcement regimes, and the U.S. government tacitly supports it. The DMA has not been included in the U.S.-EU joint competition dialogue, which risks failure. Canada and the U.K. should also be added to the dialogue.
Other International Concerns
The international panelists also noted that there is an unfortunate lack of convergence on antitrust procedures. Furthermore, different jurisdictions manifest substantial inconsistencies in their approaches to multinational merger analysis, where better coordination is needed. There is a special problem in the areas of merger review and of criminal leniency for price fixers: when multiple jurisdictions need to “sign off” on an enforcement matter, the “most restrictive” jurisdiction has an effective veto.
Finally, former Assistant U.S. Attorney General for Antitrust James Rill—perhaps the most influential promoter of the adoption of sound antitrust laws worldwide—closed the international panel with a call for enhanced transnational cooperation. He highlighted the importance of global convergence on sound antitrust procedures, emphasizing due process. He also advocated bolstering International Competition Network (ICN) and OECD Competition Committee convergence initiatives, and explained that greater transparency in agency-enforcement actions is warranted. In that regard, Rill said, ICN nongovernmental advisers should be given a greater role.
Conclusion
Taken as a whole, the forum’s various presentations painted a rather gloomy picture of the short-term prospects for sound, empirically based, economics-centric antitrust enforcement.
In the United States, the enforcement agencies are committed to far more aggressive antitrust enforcement, particularly with respect to mergers. The agencies’ new approach downplays efficiencies and they will be quick to presume broad categories of business conduct are anticompetitive, relying far less closely on case-specific economic analysis.
The outlook is also bad overseas, as European Union enforcers are poised to implement new ex ante regulation of competition by large platforms as an addition to—not a substitute for—established burdensome antitrust enforcement. Most foreign jurisdictions appear to be following the European lead, and the U.S. agencies are doing nothing to discourage them. Indeed, they appear to fully support the European approach.
The consumer welfare standard, which until recently was the stated touchstone of American antitrust enforcement—and was given at least lip service in Europe—has more or less been set aside. The one saving grace in the United States is that the federal courts may put a halt to the agencies’ overweening ambitions, but that will take years. In the meantime, consumer welfare will suffer and welfare-enhancing business conduct will be disincentivized. The EU courts also may place a minor brake on European antitrust expansionism, but that is less certain.
Recall, however, that when evils flew out of Pandora’s box, hope remained. Let us hope, then, that the proverbial worm will turn, and that new leadership—inspired by hopeful and enlightened policy advocates—will restore principled antitrust grounded in the promotion of consumer welfare.
The Federal Trade Commission’s (FTC) Jan. 5 “Notice of Proposed Rulemaking on Non-Compete Clauses” (NPRMNCC) is the first substantive FTC Act Section 6(g) “unfair methods of competition” rulemaking initiative following the release of the FTC’s November 2022 Section 5 Unfair Methods of Competition Policy Statement. Any final rule based on the NPRMNCC stands virtually no chance of survival before the courts. What’s more, this FTC initiative also threatens to have a major negative economic-policy impact. It also poses an institutional threat to the Commission itself. Accordingly, the NPRMNCC should be withdrawn, or as a “second worst” option, substantially pared back and recast.
The NPRMNCC is succinctly described, and its legal risks ably summarized, in a recent commentary by Gibson Dunn attorneys: The proposal is sweeping in its scope. The NPRMNCC states that it “would, among other things, provide that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”
The Gibson Dunn commentary adds that it “would require employers to rescind all existing non-compete provisions within 180 days of publication of the final rule, and to provide current and former employees notice of the rescission. If employers comply with these two requirements, the rule would provide a safe harbor from enforcement.”
Legal Risks
As I have explained previously, any FTC Section 6(g) rulemaking is likely to fail as a matter of law. Specifically, the structure of the FTC Act indicates that Section 6(g) is best understood as authorizing procedural regulations, not substantive rules. What’s more, Section 6(g) rules raise serious questions under the U.S. Supreme Court’s nondelegation and major questions doctrines (given the breadth and ill-defined nature of “unfair methods of competition”) and under administrative law (very broad unfair methods of competition rules may be deemed “arbitrary and capricious” and raise due process concerns). The cumulative weight of these legal concerns “makes it highly improbable that substantive UMC rules will ultimately be upheld.
The legal concerns raised by Section 6(g) rulemaking are particularly acute in the case of the NPRMNCC, which is exceedingly broad and deals with a topic—employment-related noncompete clauses—with which the FTC has almost no experience. FTC Commissioner Christine Wilson highlights this legal vulnerability in her dissenting statement opposing issuance of the NPRMNCC.
As Andrew Mercado and I explained in our commentary on potential FTC noncompete rulemaking: “[a] review of studies conducted in the past two decades yields no uniform, replicable results as to whether such agreements benefit or harm workers.” In a comprehensive literature review made available online at the end of 2019, FTC economist John McAdams concluded that “[t]here is little evidence on the likely effects of broad prohibitions of non-compete agreements.” McAdams also commented on the lack of knowledge regarding the effects that noncompetes may have on ultimate consumers. Given these realities, the FTC would be particularly vulnerable to having a court hold that a final noncompete rule (even assuming that it somehow surmounted other legal obstacles) lacked an adequate factual basis, and thus was arbitrary and capricious.
The poor legal case for proceeding with the NPRMNCC is rendered even weaker by the existence of robust state-law provisions concerning noncompetes in almost every state (see here for a chart comparing state laws). Differences in state jurisprudence may enable “natural experimentation,” whereby changes made to state law that differ across jurisdictions facilitate comparisons of the effects of different approaches to noncompetes. Furthermore, changes to noncompete laws in particular states that are seen to cause harm, or generate benefits, may allow “best practices” to emerge and thereby drive welfare-enhancing reforms in multiple jurisdictions.
The Gibson Dunn commentary points out that, “[a]s a practical matter, the proposed [FTC noncompete] rule would override existing non-compete requirements and practices in the vast majority of states.” Unfortunately, then, the NPRMNCC would largely do away with the potential benefits of competitive federalism in the area of noncompetes. In light of that, federal courts might well ask whether Congress meant to give the FTC preemptive authority over a legal field traditionally left to the states, merely by making a passing reference to “mak[ing] rules and regulations” in Section 6(g) of the FTC Act. Federal judges would likely conclude that the answer to this question is “no.”
Economic Policy Harms
How much economic harm could an FTC rule on noncompetes cause, if the courts almost certainly would strike it down? Plenty.
The affront to competitive federalism, which would prevent optimal noncompete legal regimes from developing (see above), could reduce the efficiency of employment contracts and harm consumer welfare. It would be exceedingly difficult (if not impossible) to measure such harms, however, because there would be no alternative “but-for” worlds with differing rules that could be studied.
The broad ban on noncompetes predictably will prevent—or at least chill—the use of noncompete clauses to protect business-property interests (including trade secrets and other intellectual-property rights) and to protect value-enhancing investments in worker training. (See here for a 2016 U.S. Treasury Department Office of Economic Policy Report that lists some of the potential benefits of noncompetes.) The NPRMNCC fails to account for those and other efficiencies, which may be key to value-generating business-process improvements that help drive dynamic economic growth. Once again, however, it would be difficult to demonstrate the nature or extent of such foregone benefits, in the absence of “but-for” world comparisons.
Business-litigation costs would also inevitably arise, as uncertainties in the language of a final noncompete rule were worked out in court (prior to the rule’s legal demise). The opportunity cost of firm resources directed toward rule-related issues, rather than to business-improvement activities, could be substantial. The opportunity cost of directing FTC resources to wasteful noncompete-related rulemaking work, rather than potential welfare-enhancing endeavors (such as anti-fraud enforcement activity), also should not be neglected.
Finally, the substantial error costs that would attend designing and seeking to enforce a final FTC noncompete rule, and the affront to the rule of law that would result from creating a substantial new gap between FTC and U.S. Justice Department competition-enforcement regimes, merits note (see here for my discussion of these costs in the general context of UMC rulemaking).
Conclusion
What, then, should the FTC do? It should withdraw the NPRMNCC.
If the FTC is concerned about the effects of noncompete clauses, it should commission appropriate economic research, and perhaps conduct targeted FTC Act Section 6(b) studies directed at noncompetes (focused on industries where noncompetes are common or ubiquitous). In light of that research, it might be in position to address legal policy toward noncompetes in competition advocacy before the states, or in testimony before Congress.
If the FTC still wishes to engage in some rulemaking directed at noncompete clauses, it should consider a targeted FTC Act Section 18 consumer-protection rulemaking (see my discussion of this possibility, here). Unlike Section 6(g), the legality of Section 18 substantive rulemaking (which is directed at “unfair or deceptive acts or practices”) is well-established. Categorizing noncompete-clause-related practices as “deceptive” is plainly a nonstarter, so the Commission would have to bases its rulemaking on defining and condemning specified “unfair acts or practices.”
Section 5(n) of the FTC Act specifies that the Commission may not declare an act or practice to be unfair unless it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” This is a cost-benefit test that plainly does not justify a general ban on noncompetes, based on the previous discussion. It probably could, however, justify a properly crafted narrower rule, such as a requirement that an employer notify its employees of a noncompete agreement before they accept a job offer (see my analysis here).
Should the FTC nonetheless charge forward and release a final competition rule based on the NPRMNCC, it will face serious negative institutional consequences. In the previous Congress, Sens. Mike Lee (R-Utah) and Chuck Grassley (R-Iowa) have introduced legislation that would strip the FTC of its antitrust authority (leaving all federal antitrust enforcement in DOJ hands). Such legislation could gain traction if the FTC were perceived as engaging in massive institutional overreach. An unprecedented Commission effort to regulate one aspect of labor contracts (noncompete clauses) nationwide surely could be viewed by Congress as a prime example of such overreach. The FTC should keep that in mind if it values maintaining its longstanding role in American antitrust-policy development and enforcement.
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.”
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.
[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 thesymposium 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.]
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 2022Truth 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.
[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.
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