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James Cooper is Director, Research and Policy at the Law & Economics Center at George Mason University School of Law

In this posting, I sketch out a sensible limitation to the FTC’s Section 5 authority.   This domain should be narrow, focusing only on harmful conduct that but for the application of Section 5 would remain un-remedied.

As a threshold matter, the FTC explicitly should renounce its reliance on early Section 5 case law like S&H and Brown Shoe and write from a clean slate.  No serious antitrust enforcer today would consider challenging the conduct at issue in these cases, yet, in each of its recent standard-setting cases, the Commission dutifully invokes the language in S&H and Brown Shoe like a sacred talisman that will conjure the authority to act beyond the “letter and spirit of the antitrust laws.”   This dicta, however, comes from seriously outmoded cases. For example, S&H upheld the Commission’s challenge to the practice of preventing unauthorized green-stamp exchanges, and cited approvingly a Section 5 decision from 1934 that condemned the practice of selling penny candy to children in “break and take” packs, because “it tempted children to gamble and compelled those who would successful compete with Keppel to abandon their scruples by similarly tempting children.”[1]  Brown Shoe and S&H were decided in the era of Schwinn and Utah Pie.  Sherman Act case law has moved light years in the direction of economic literacy since then, and the Commission should recognize that had the Supreme Court entertained Section 5 case in the past forty years, precedents like S&H and Brown Shoe likely would have met fates similar to these outmoded cases.

Second, the FTC should not use Section 5 when the conduct at issue is reachable under the Sherman or Clayton Acts.  Section 5 should never be used as a trump card to reduce the Commission’s burden to show a practice is harmful to consumers. If the Commission cannot carry its burden under the Sherman Act, then presumably the conduct is not likely to be a threat to competition.

Third, the Commission must explain how consumers would benefit from expansion of the antitrust laws beyond the current Sherman Act limits.  Again, merely because there is old Supreme Court language blessing an expansive Section 5 does not ipso facto convert Section 5 enforcement beyond the Sherman Act into a welfare-enhancing exercise.  Accordingly, demonstrable consumer harm must be a necessary condition for invoking Section 5 against a particular practice.

Further, to mitigate the possibility of errors, and hence the probability that FTC action is welfare enhancing, the practice in question should be one that is unlikely to generate cognizable efficiencies.  Thus the FTC should limit itself to the type of conduct that would be subject to per se or a “quick look” condemnation – the type of conduct that can be assessed without an elaborate inquiry into market characteristics.  It should avoid using Section 5 to challenge conduct that would require complex balancing.

How would such a standard treat the FTC’s portfolio of Section 5 cases?  First, ITCs involving small firms would remain.  This conduct is not reachable under Sherman Act and is likely to generate substantial consumer harm.  At the same time, the risk of deterring beneficial conduct is minimal, although as one moves from private solicitations to engage in price fixing or market allocation towards public communications and unilateral conduct, the calculus changes.  Relatedly, involving information sharing seems sensible to retain as well.  Like ITCs, this conduct is not reachable under the Sherman Act (assuming sufficiently low market shares), poses a significant threat to competition, and it is hard to justify on efficiency grounds. Of course, the Sherman Section 1 can reach agreements among competitors to exchange competitively sensitive information, so this genre of cases should be limited to instances where an agreement cannot be shown.  Further, as in the ITC case, the FTC needs to tread carefully as the conduct moves further from direct and private exchanges of future competitive actions toward unilateral public announcements of current and past price and output decisions.  Bolstering the case for the use of Section 5 in these cases is that both ITCs and information sharing cases fall under the broad rubric of incipient harms.  Legislative history and subsequent Supreme pronouncements suggest that Congress intended Section 5 to concern itself with incipiency – a concern lacking in the Sherman Act.

The FTC should abandon its use of Section 5 to reach breaches of FRAND commitments.  Although policies that encourage participation in standard setting are likely to be beneficial to consumers, it is not evident that Section 5 is the best – or even a good – vehicle to address these issues.  That hold-up may result in a higher end price for consumers is insufficient to justify use of Section 5.  There are a host of institutions arguably better suited than the FTC to handle these policy issues, including Article III courts, the ITC, the Patent & Trademark Office, Congress, and self-regulatory bodies. As Commissioner Ohlhausen remarked in her dissent in Bosch, the FTC appears to lack “regulatory humility when it usurps the resolution of FRAND disputes from these other fora.

Finally, deceptive conduct in business-to-business relationships – such as that alleged in Intel or Dell– should be left out of the portfolio entirely.  To the extent that deception gives rise to, or helps maintain, monopoly power, it is reachable under Sherman Section 2.  Otherwise, deception should be left to the domain of contract law or business torts.  Further, these practices should not be challenged under UDAP, which should be confined to deception that directly involves consumers.


[1] S&H, 405 U.S. at 242-43 (quoting FTC v. R.F. Keppel & Bro., Inc., 291 U.S. 304 (1934)).

James Cooper is Director, Research and Policy at the Law & Economics Center at George Mason University School of Law

The FTC has long been on a quest to find the elusive species of conduct that Section 5 alone can tackle.  A series of early Supreme Court cases interpreting the FTC Act – the most recent and widely cited of which is more than forty years old (FTC v. Sperry & Hutchinson Co., 405 U.S. 233 (1972)) –appeared to grant the FTC wide ranging powers to condemn methods of competition as “unfair.”[1]  A series of judicial setbacks in the 1980s and early 1990s, however, scaled back Section 5’s domain.[2]

Since 1992, the FTC has continued to define Section 5’s reach internally – through settlements primarily involving two classes of conduct: so-called “invitations to collude” (ITC);[3] and breaches of agreements to disclose or to license standard-essential patents (SEPs).[4] Similar in spirit to ITCs, the Commission has also alleged pure Section 5 violations in cases involving sharing of competitively sensitive information.[5]

In addition to these lines of cases, the FTC has used Section 5 in two additional matters: the “CD MAP” cases, involving the parallel adoption by major record companies of “minimum advertised price” restrictions; and the suit against Intel for engaging in exclusionary conduct, including deception and certain pricing practices.

Absent external appellate review, however, it remains unclear whether Congress intended for these classes of conduct to be illegal as “unfair methods of competition.”  Because settlement with the FTC will be preferable to litigation in a wide array of circumstances, what is considered illegal under Section 5 largely has become whatever at least three Commissioners can agree on.  Accordingly, there is still a relatively large zone in which the FTC can develop this quasi Section 5 common law with little fear of triggering litigation, and the concomitant specter of judicial scrutiny.

The recent Google investigation provides some evidence as to just how large this zone of discretion may be.  Although the Commission eventually decided to close its investigation into Google’s search practices – and was able to extract informal concessions from Google related to “scraping” and failures to facilitate “multihoming” – that the Commission would entertain a case premised on such conduct hints at a willingness to make arguments that clear Sherman Act precedent involving duties to aid rivals does not apply to the Section 5 actions, or that misappropriation can serve as the basis for a Section 5 theory.  The Commission’s settlement with Google concerning breaches of commitments to license SEPs on FRAND terms, moreover, continued its application of antitrust and consumer protection law to contractual disputes between sophisticated businesses.

Parsing the statements in Google suggest at least four directions in which at least one commissioner was willing to expand Section 5 beyond the Sherman Act:  duties to aid rivals, misappropriation, failure to disclose the relationship between data collection and market power, and breach of an agreement to license SEPs on FRAND terms.  Further, in two instances, at least one commissioner additionally was willing to declare the same conduct an unfair act or practice.  This is far from a coherent framework for Section 5.

The FTC’s discretion under Section 5 potentially comes at a steep price.  First, it creates uncertainty.  If businesses are unsure about where the line between legal an illegal behavior is drawn, they rationally will take too much care to avoid violating the law, which in antitrust can mean competing less aggressively.  Second, the more discretion the FTC enjoys to condemn a practice as an unfair method of competition, the more competition will be channeled from the marketplace to 600 Pennsylvania Avenue.  Although this may be a good development for economists and attorneys, it is bad for consumers.

The FTC could go a long way toward solving this problem if it were to take a cue from the history of its consumer protection program.  The FTC’s overreach in the 1970s earned it the moniker “national nanny,” nearly shut the agency down.  As part of a program to instill public – and more importantly Congressional – trust, the FTC adopted a series of binding policy statements that made consumer harm the touchstone of its authority to challenge “unfair or deceptive acts or practices” (UDAP authority).

A similar effort at self-restraint that limits the FTC’s UMC authority could help reduce uncertainty and rent seeking.  Both Commissioners Ohlhausen and Wright should be commended on their impressive efforts to start this discussion.  In my first post, however, I’d like to discuss a more dramatic path that neither has addressed: confining Section 5 to the Sherman Act.

In many ways the search for Section 5’s domain beyond the Sherman Act is a solution in search of a problem.  There is certainly no consensus that the Sherman Act – even after some recent limitations imposed by cases like Twombly, Trinko, and Credit Suisse – is no longer fit for the task of policing anticompetitive conduct.  It may well be that the FTC is trying to sell a product that nobody needs.  Consequently, the costs of abandoning an expansive Section 5 may be small; with the exceptions of ITCs and information sharing involving small firms, the rest of the FTC’s Section 5 portfolio also can be reached under existing Sherman Act theories (albeit with more difficulty), or handled through other bodies of law or self-regulation.

For example, under the D.C. Circuit’s decision in Rambus, Section 2 is available for cases involving deception at the time of the standard adoption that materially affected the choice of standard.[6] Accordingly, a Section 2 case could be made out if the Commission could show that the defendant either concealed an SEP or if a FRAND commitment was made in bad faith and affected the choice of standard.  Even if deception cannot be show, breaches of FRAND commitments involving SEPs that result in hold-up necessarily involve legal review; the court (or ITC) must decide whether to grant the SEP holder’s request for an injunction (or an exclusion order), and the alleged infringer has opportunities to raise a variety of contract and patent law objections.  Likewise, bundling, predatory pricing, and deception claims like those in Intel are clearly cognizable under Sherman Section 2 (which is why Intel was pled both ways).

Confining Section 5 to the Sherman Act would also have the advantage reduce arbitrage opportunities between the FTC and the Antitrust Division.  As Commissioner Ohlhausen has noted, if the same conduct results in different legal treatment depending on which agency wins clearance – as it arguably would have in the Google investigation – these routine bureaucratic procedures could have substantial influence on ultimate liability.

Although this conduct is reachable under the Sherman Act, many of the cases would be difficult to win.  To the extent that these Sherman Act rules reasonably sort anticompetitive from procompetitive or benign conduct, however, forcing the Commission to satisfy Sherman Act standards would assure that its actions promote consumer welfare.

The only types of conduct that clearly slip out of the FTC’s reach when Section 5 is confined to the Sherman Act are ITCs and information sharing involving firms with low market shares.  The costs of letting this conduct go, however, are likely minimal.  Although most would agree that this conduct is  worth stopping, the FTC has pursued less than ten of these cases in the past 20 years.  Even including deterrence effects, removing ITCs and information sharing cases from the FTC portfolio is unlikely to cause a great deal of consumer harm.  Most managers are probably aware that price fixing is illegal, and it is doubtful that anybody proposes a cartel or shares information without hoping that the other party will get on board.  At the same time, these Section 5 cases are obscure – lurking in a series of consent orders on the FTC’s web site.  The sophisticated antitrust bar likely is familiar with this strain of Section 5 activity, but outside of the clients counseled by top tier law firms, it is not obvious that many businesses are aware of there existence.  Without awareness, there can be no deterrence.  Further, if either of these acts leads to a conspiracy or significant market power, it will be reachable under the Sherman Act.

Finally, removing the FTC’s Section 5 authority will not diminish its role as an antitrust norm creator.  Indeed, over its near 100-year history, however, the FTC has not used Section 5 to implement any important antitrust norms.[7]  That is not to say that the FTC has lacked influence over the development of antitrust jurisprudence – to the contrary, it clearly has, but within the confines of the Sherman Act.  For example, the FTC has made major positive contribution in the fields of joint conduct,[8] state action,[9] Noerr-Pennington,[10] the treatment of professional regulation,[11] and most recently in the context of pharmaceutical reverse settlements.[12]

Of course, if Section 5 is to offer nothing beyond the Sherman Act, that begs the question of whether the FTC is needed at all? In this manner, the quest for a species of harmful conduct that is reachable only through Section 5 is an existential one.  Does it make sense to have two agencies enforcing the same law?[13]  Probably not.  The FTC’s comparative advantage over DOJ lays in its research capability, and of course its consumer protection mission.  Accordingly, stripped of a unique antirust enforcement authority, one possible reorganization would be to house enforcement in DOJ, with the FTC providing competition and consumer protection policy R&D that would feed into case selection designed to improve these bodies of law.

However attractive it may be from a policy standpoint, jettisoning Section 5 beyond the Sherman Act is a political non-starter; Congress would never permit the FTC to abrogate its UMC power.  Indeed, recall the nasty fight that erupted when the FTC and DOJ attempted to reach a clearance agreement in 2002.  Accordingly, a more realistic path for the Commission to take would be to spell out the circumstances under which it would consider a stand alone Section 5 case.[14]  I will turn to this in my next posting.


[1] See, e.g., FTC v. Sperry & Hutchinson Co., 405 U.S. 233 (1972); William E. Kovacic & Marc Winerman, Competition Policy and the Application of Section 5 of the Federal Trade Commission Act, 76 Antitrust L.J. 929, 930-31 (2010).

[2] FTC v. Boise Cascade, 637 F.2d 573, 581 (9th Cir. 1980); Official Airline Guides, Inc. v. FTC, 630 F.2d 920 (2d. Cir. 1980); E.I DuPont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984).  The FTC’s last judicially decided Section 5 action was in 1992. FTC v. Abbott Labs, 853 F. Supp. 526 (D.D.C. 1992).

[3] In re U-Haul Int’l, Inc. (June 9, 2010); In re Valassis Communications, Inc. (April 19, 2006); In re Stone Container Corp. (June 3, 1998); In re Precision Moulding Co. (Sept. 3, 1996); In re YKK(USA) (July 1, 1993); In re A.E. Clevite, Inc. (June 8, 1993); In re Quality Trailer Prods. Corp. (Nov. 5, 1992).

[4] In re Dell Computer (1996); In re Negotiated Data Systems, Inc. (2008); In re Robert Bosch GmbH (2012); In re Google, Inc. (2013).

[5] In re Bosely (2013); In re Nat’l Ass’n of Music Merchants (2009).

[6] Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008); see also Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3rd Cir. 2007); Microsoft, 253 F.3d 3, 76 (D.C. Cir. 2001); Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2002).

[7] See Kovaic & Winerman, supra note__, at 941 (“The FTC’s record of appellate litigation involving applications of Section 5 that go beyond prevailing antitrust norms is uninspiring.”).

[8] See Polygram Holding, Ltd. v. FTC, 416 F.3d 29 (D.C. Cir. 2005).

[9] See FTC v. Ticor Ins. Co, 504 U.S. 621 (1992); North Carolina Board of Dental Examiners v. FTC, No. 12-1172 (4th Cir. May 31, 2013).

[10] See FTC v. Phoebe Putney Healthcare System, Inc. (Feb. 13, 2013); FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411 (1990).

[11] See FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986); FTC v. California Dental Association, 526 U.S. 756 (1999).

[12] FTC v. Actavis, Inc., Slip Op. No. 12-416 (June 16, 2013).

[13] See Kovacic & Winerman

[14] Commissioners Ohlhausen and Wright have recently begun this discussion.  See __.

Marina Lao is Professor of Law at Seton Hall University School of Law

FTC Commissioner Josh Wright’s recent issuance of a proposed policy statement on Section 5 of the FTC Act has reignited the debate on the appropriate scope of the agency’s authority to prosecute “unfair methods of competition” as standalone Section 5 violations.  While the Supreme Court has held, consistent with clear congressional intent, that the FTC’s authority under Section 5 extends to conduct that is well beyond the reach of the Sherman and Clayton Acts, its last decision on the issue (S&H) is over four decades old.  Given that antitrust jurisprudence has changed dramatically since, and all three subsequent circuit court decisions (Boise Cascade, OAG, Ethyl) have gone against the FTC, it is questionable whether today’s Supreme Court would give as expansive a reading to the Commission’s enforcement discretion.  In any event, it is unlikely that the agency would attempt to exercise its full enforcement authority under the elusive terms in the old case law.  Under the circumstances, if the FTC intends to continue to invoke the section to bring standalone cases—and I believe it should–it would be helpful to the antitrust community for the agency to develop standards and to articulate an analytical framework for its application.  Commissioner Wright’s proposed policy statement, and Commissioner Maureen Ohlhausen’s comments on it, are invaluable in re-starting the discussion, which I hope will result in guidelines from the Commission at some point.

Under Commissioner Wright’s proposal, an act or practice must satisfy a two-prong test before the Commission may challenge it as an unfair method of competition: it must harm or is likely to harm competition, and it must not generate cognizable efficiencies.  I find the second element somewhat troubling.

The Cognizable Efficiency Screen.  Under Commissioner Wright’s proposal, cognizable efficiencies operate as a safe harbor: the FTC would not be able to challenge conduct as an unfair method of competition if any cognizable efficiency exists, no matter how slight the efficiency and how substantial the anticompetitive effects.  There is no balancing of the efficiencies against the anticompetitive harm at all, as is called for in the rule of reason under the Sherman Act.  Under this interpretation, Section 5 will effectively set a higher, rather than a lower, bar than the Sherman Act, which seems contrary to the common understanding of the relative standards of the relevant laws.  Though Commissioner Wright does include some useful limiting principles on what efficiencies would be deemed cognizable (conduct-specific, verifiable, and not derived from anticompetitive reductions in output or service), one can still probably come up with a plausible efficiency for almost any business conduct.  If this prong of the test is adopted, the section may prove to be of limited use to the FTC in bringing pure unfair methods of competition cases.

I would prefer a consideration of efficiencies on a sliding scale, as is done in merger analysis.  The greater the harm (or likely harm) to competition, and the greater the deviation from “normally acceptable business behavior” (Ethyl), the more efficiencies must be generated to offset the harm and avoid an injunction under Section 5.  The lesser the competitive harm, the fewer the efficiencies required.

Commissioner Wright provides three rationales for his bright-line efficiencies screen: it would clearly distinguish between acceptable business behavior and unfair methods of competition thereby providing certainty to businesses; it would allocate the agency’s scarce resources toward targeting conduct that is most likely to harm consumers; and it would avoid deterrence of welfare-enhancing conduct.  In my view, none of the three rationales is entirely persuasive.

Of course, a bright-line safe harbor always provides more certainty to a firm than a standard that requires balancing, but there is nothing in the nature of Section 5 enforcement that calls for this degree of certainty.  Remedies for violations of Section 5 are typically limited to injunctions; the FTC does not recover treble damages.  Moreover, the FTC Act cannot be enforced by private parties.  Even if private plaintiffs attempt to build a class-action under the Sherman Act based on a Section 5 adjudication, a finding for the FTC in the ALJ proceeding is not given prima facie effect in the private lawsuit.  Moreover, when the FTC is relying on Section 5 to prohibit conduct outside of the Sherman Act, its findings on fully litigated issues have no preclusive effect whatsoever on the same issues in any follow-on Sherman Act litigation that private parties may attempt to bring.  Therefore, enforcement of pure Section 5 cases does not inflict the kinds of burdens on defendants that are associated with Department of Justice prosecutions under the Sherman Act, for which a higher degree of certainty for businesses may be justified given the collateral consequences.  In the context of Section 5 enforcement, which results only in an injunction, it is not clear why a firm is entitled to know with absolute certainty that, no matter how harmful its conduct may be to consumers, it would be acceptable if it has any efficiencies at all.

To the extent that an FTC adjudication carries no unusual consequences for the firm, relative to other litigation, requiring a balancing of the conduct’s efficiencies against its anticompetitive harms does not subject a firm to an intolerable amount of uncertainty.  Even in those commercial settings in which businesses are usually governed by very specific rules, generalized standards do exist. For example, though the Uniform Commercial Code (covering a wide variety of commercial transactions) consists primarily of very specific rules, it also includes a number of well-accepted overarching fairness-based provisions, such as the requirements of good faith and fair dealing, the doctrine of unconscionability, and standards based on commercial course of dealing and trade usage.  These benchmarks clearly provide a less predictable standard to distinguish between permissible and impermissible conduct than the “uncertain” standard of a rule-of-reason balancing of efficiencies and harms.

As to the second rationale–that an efficiencies screen would focus the FTC’s resources on conduct most likely to harm consumers–I question the premise that anticompetitive conduct with some efficiencies is necessarily less harmful than conduct with no efficiencies.  Consider the following two examples: First, assume, as in Commissioner Wright’s Example 6, that Firm A makes an ex ante commitment on licensing to an SSO as a condition for the adoption of its IP as part of the standard; Firm A later sells its patent to Firm B which announces that it will no longer license under those terms.  Assume further that Firm B is able to show some efficiency gain from its breach of its predecessor’s commitment, but the consumer harm from the breach may be substantial.  (Reneging on Firm A’s commitment undermines the integrity of the standard-setting process, which could reduce the incentives to participate in the process or to implement the standard because of concerns of patent hold-ups, and ultimately affect consumers who would lose some of the benefits of interoperability which comes from standard setting.)  Under the proposed efficiency screen, the FTC cannot challenge the conduct, regardless of the magnitude and nature of the consumer harm.

Second, assume, as in Commissioner Wright’s Example 2, that Firm A invites Firm B to fix prices, but Firm B declines.  Assume further that Firms A and B operate in an industry that has a competitive culture with no history of collusion.  Thus, while the invitation to collude meets the harm to competition element of the test, the risk of competitive harm may be relatively small.  Though the invitation to collude has no efficiencies, whereas Firm B’s breach in the preceding example is found to have some efficiencies, the conduct in the preceding example is likely to cause more consumer harm than the invitation to collude under my facts.

Rather than set a categorical rule which allows the FTC to only challenge competitively harmful conduct with zero efficiencies, why not allow the FTC to make a judgment based on the evidence of harms and efficiencies, if any, that is available?

As for the third rationale, while the need to avoid false positives in ambiguous situations is an important consideration, so too is the need to avoid false negatives.  As I’ve suggested earlier, the social cost of a false positive is much smaller in a pure Section 5 case than in a Sherman Act action.  There is no threat of treble damages, or of automatic follow-on class action suits (that usually follow a successful Department of Justice antitrust action) for which the liability finding in the DOJ action would have a prima facie effect.  Even if a practice is erroneously identified as an unfair method of competition under Section 5—e.g., a delivered pricing term that, though anticompetitive, had efficiencies that were insufficiently recognized and, thus, wrongly enjoined–the cost of the false positive would be that the market may be deprived of the enjoined practice, and firms may have to look to an alternative practice.  But that is probably not a major social cost as firms are generally adept at finding substitutes.

Conduct Must Harm Competition:

Anticompetitive Effect as Definition of Harm to Competition.   I agree with Commissioner Wright that conduct challenged under Section 5 must have an anticompetitive effect; that is, “it must harm the competitive process and thereby harm consumers,” (Microsoft); harm to competitors alone will not suffice.  One difficulty lies in defining harm to the “competitive process,” which is susceptible to different interpretations.  To me, injury to the competitive process is different than having an effect on price or output, or even diminished quality.  It is less measurable, and the ultimate effect on consumers less obvious.  What would be considered indicia of harm to the competitive process and what would not?  Today, there are many markets with minimal or no price competition, or where firms compete primarily through creativity or product development.  In these types of markets, a price and output measure would be inappropriate; perhaps any forthcoming Guidelines could provide more guidance in this regard.

Anticompetitive Effect/CausationCausation is often intertwined with the concept of anticompetitive effect.  In deciding section 2 cases, courts have sometimes held that there is no anticompetitive effect unless the plaintiff can demonstrate that, absent the defendant’s conduct, the “bad” market situation would not have occurred.  For example, assume that a firm deceptively fails to disclose its patents in technologies to an SSO and the technologies were subsequently included by the SSO in industry standards.  However, there was an insufficient showing that, but for the firm’s deception, the SSO would not have included the technologies or would have imposed limits on the patent owner’s licensing fees as a condition for inclusion.  In that situation, courts have held that anticompetitive effect was not shown under Section 2 of the Sherman Act (Rambus).  Even assuming that this restrictive analysis of effect/causation is required under Section 2, though I don’t believe it is, it would seem appropriate to relax this requirement in a pure Section 5 case for the reasons that I have discussed: the absence of collateral impact of a Section 5 violation and the limited remedies that the FTC may seek.  It should be sufficient in this situation to show that the deceptive failure to disclose to the SSO the patents underlying the technology under consideration undermined and harmed the standard-setting processes.  And it should be unnecessary for the FTC to demonstrate that the firm’s deception enabled it to either acquire a monopoly or to avoid the imposition of patent licensing fee limits by the SSO.

Examples of Conduct that is Likely to Harm Competition.  I like both broad categories of conduct that Commissioner Wright described as likely to harm competition under Section 5: invitations to collude; and incipient Section 2 violations—conduct “to acquire market power that does not yet arise to the level of monopoly power” required under Section 2.

With respect to the category of incipient Section 2 violations, I would prefer a slightly broader reach to cover situations where a firm with monopoly power in one market uses that power in a second (complementary or collateral) market and causes considerable harm in the collateral market; however, the firm is unlikely to attain a monopoly in the second market but merely seeks to raise its rivals’ costs.  This claim would clearly not constitute a Section 2 violation today.  I believe that it could fit under Commissioner Wright’s second broad category of conduct likely to harm competition, provided that there is good evidence that competitive harm in the collateral market is likely.

Parallel exclusion, described by Professors Scott Hemphill and Tim Wu in a recent article, could constitute an additional broad category of conduct that could be appropriately addressed under Section 5.  As Professors Hemphill and Wu have explained, the economic effects of parallel exclusion by oligopolists are quite similar to that of exclusion by a monopolist.  Yet, neither section 1 nor section 2 of the Sherman Act can reach that conduct: the agreement element is absent, precluding a section 1 violation; and each firm does not have the requisite market share to meet the monopoly power requirement of section 2 though they collectively share a monopoly, thus precluding a section 2 violation.

Terry Calvani is a former FTC Commissioner and Member of the Governing Board of the of the Competition Authority of Ireland. He is  currently Of Counsel at Freshfields Bruckhaus Deringer. Angela Diveley is an Associate at Freshfields Bruckhaus Deringer.

We welcome Commissioner Wright’s contribution in making the important point that the Commission’s unfair methods of competition (UMC) jurisdiction under Section 5 of the FTCA should be subject to limiting principles.  We make two observations about the policy statement and a more general observation about the FTC in light of its upcoming 100th anniversary.  The first is that injury to competition has long played a role in the debate concerning the appropriate scope of Section 5.  The second is that it is not yet clear what role efficiencies should play in a Section 5 claim.  Finally, we observe that Section 5 is one of a number of aspects of the FTC’s enforcement mandate that is ripe for reconsideration as we approach the centennial anniversary of both the statute and the agency.

Injury to Competition

It is now uncontroversial that the sine qua non of a violation of the antitrust laws is injury to competition.  Yet, the Commission has been struggling with what this assertion means for decades.  In its 1984 General Motors Corp. decision, the Commission declined to adopt the “spirit theory” and find a Section 5 violation where Complaint Counsel did not claim competition was harmed.  The case was brought under Section 2(d) of the Robinson-Patman Act, which prohibits the discriminatory payment of advertising allowances in connection with the resale of goods.  GM was accused of making advertising payments to GMC dealers that leased and rented cars they bought from GM while declining to make such payments to other leasing and rental companies.  The Robinson-Patman Act claim failed because the conduct at issue involved the leasing of cars rather than the resale, a necessary element of the claim.  Complaint Counsel proffered that the Commission should find a Section 5 violation because, although the conduct did not violate the letter of the Robinson-Patman Act, it violated the spirit of the Act.  The Commission in General Motors stated that it would “decline to apply [Section 5] in cases . . . where there has been no demonstration of an anticompetitive impact.”

Commissioner Wright’s proposal finds the General Motors decision to be too restrictive.  Similar to the lease/rental conduct described above, an invitation to collude falls short of a requisite element—an agreement—of a Section 1 claim.  However, many, including Commissioner Wright, would agree that failed invitations to collude should fall squarely within the boundaries of Section 5, even though they do not actually produce anticompetitive effects.  The Commission’s invitation to collude cases, as well as Commissioner Wright’s policy statement thus add to General Motors the ability to establish a Section 5 violation where the effect of the conduct is to “create[] a substantial risk of competitive harm.”  We do not disagree, but observe that this “gap filling” is likely quite small since the Department of Justice prosecutes most such cases as wire or mail fraud.  The universe of cases not involving these media, and thus otherwise unenforced, is likely very small.

Efficiencies

In an attempt to create more certainty for the business community, Commissioner Wright’s policy statement precludes the application of Section 5 where a respondent can proffer any efficiencies.  Commissioner Ohlhausen, on the other hand, has indicated her support of a “disproportionate harm test,” which would allow a Section 5 claim in the face of efficiencies but where the harm substantially outweighs any procompetitive benefits.  Commissioner Wright’s test, while providing certainty to the business community, risks torpedoing claims where substantial competitive harm is present.  Commissioner Ohlhausen’s test would allow for such claims, but risks uncertainty in determining what exactly constitutes disproportionate harm.

Commissioner Wright has explained that the Commission has a poor track record of balancing pro- and anticompetitive effects in a way that provides guidance to the business community.  Moreover, he points out, the limited application of Section 5 does not deprive the FTC of its ability to challenge conduct under the traditional antitrust laws.  He therefore has set forth a clear limitation on the applicability of Section 5 to utilize it in a way that he believes will allow the FTC to best enhance consumer welfare.

Commissioner Ohlhausen’s addition of the disproportionality test is somewhat more expansive in application than Commissioner Wright’s test.  She explains it would avoid the challenges associated with the precise balancing of pro- and anticompetitive effects.  She also states that the disproportionality test is consistent with Commission advocacy and Professor Hovenkamp’s preferred definition of exclusion in the context of Section 2.

Both of these positions have their merits, and we believe they have established the boundaries for the continuing discussion of the appropriate application of Section 5 in its “gap filling” role.

Conclusion

As we approach the FTC’s 100th anniversary, it is important to look at the boundaries of the appropriate utilization of Section 5 in the antitrust context.  Commissioner Wright’s proposed Section 5 policy statement is a timely contribution to the debate.

In light of the milestone anniversary, it is appropriate also to think about the procedural aspects of the FTC’s enforcement mandate.  There has been substantial criticism of the European Commission for its role as judge, jury, and prosecutor; this criticism also applies to the FTC’s Part 3 proceedings, under which the Commission both initiates cases and then acts as the ultimate fact finder.  That said, Part 3 has procedural protections that the EC does not, for example, impartial administrative law judges.  Nevertheless, we believe it important at this juncture to rethink whether the adjudicative process at the Commission is the best practice.

Tim Wu is Isidor and Seville Sulzbacher Professor of Law at Columbia Law School

I personally believe that a policy statement on Section 5 would be a very good thing for the Federal Trade Commission, especially over the long run.  I think it would strengthen the agency, renew its distinct sense of purpose, and clarify the jobs of the attorneys who enforce the competition laws on a day-to-day basis.  And so, while there is some possibility that Josh Wright & I may disagree on aspects of substance, on the principle of having a policy statement, we agree entirely.

In this post I’ll explain a few reasons why I think a policy statement is a good idea, and then give a very rough idea of what I think a good one would look like; space obviously forecloses full treatment.

First, I think a policy statement would very useful internally.  It can be natural to think, when you’re working at an agency, that the broadest discretion possible would be best.  Who wants rules?  Without any constraints, you can do what you want, and change your mind later, free from having to consult some policy statement written years ago.  In practice, however, I think limits can be, counter-intuitively, both empowering and clarifying, especially in day-to-day practice.

Consider asking a musician to “write a song” – that’s hard.  Ask him to write country, blues, or R&B – and suddenly it’s easier.  And it’s even easier to “write in the style of 1970s heavy metal” or “a piano ballad like Elton John.”

Lawyers, like musicians, actually don’t do well with too much discretion.  The Anticompetitive Practices division is sometimes in this position.  The division knows that, in theory, the FTC has the power to go beyond the Sherman Act – but how far, it doesn’t really know, because nobody does.  Instead of the blank page serving as an inspiration, it becomes a trap.  I think, for day-to-day work of the division, a policy statement would provide a framework for trying to decide in a clearer way whether a complaint is worth looking into or not.  I would expect this to become more valuable over time.

Relatedly, for the agency’s work, a policy statement could be a useful thing for litigation.  If the agency can stand up in appellate court and say, (1) here are our standards for Section 5, and (2) here’s why we think this firm violated them, that strikes me as much stronger than something along the lines of, “we didn’t like what this firm was doing so we trotted out section 5 to deal with it.”  The former position seems much more likely to get at least Skidmore deference, the latter position, judicial mockery.

Externally, and I’m sure others have said this, for those subject to Section 5 (and by this I suppose I mean just about every business other than common carriers) a policy statement would obviously eliminate some uncertainty, particularly if the agency repudiated some of the wilder visions of what section 5 covers.   For example, I think the FTC could and should walk away from:

  • The “regardless … of its effect on competition” line in Sperry & Hutchison.
  • The “deconcentration” policy pursued in Kellogg.
  • Challenges to methods of operation or manufacturing (such as, for example, questionable tax practices that give an advantage, or something like failing to comply with minimum-wage laws).
  • Any targeting of pure parallel pricing.

The third beneficiary is the agency itself. The FTC has something of an identity problem.  Right now, the FTC’s Bureau of Competition is close to a copy of the Justice Department, minus the criminal element; the agency would be stronger with a clear identity of its own.  Of course, the consumer protection business helps distinguish the agency, but a Section 5 policy statement would help clarify what makes the agency distinctive in the competition sphere.

In a strange way the culprit here is the Sherman Act.  Having the Sherman Act jurisprudence to rely on has made the FTC somewhat lazy about developing its own jurisprudence and vision, the way it was supposed to.  Once upon a time it was unclear whether the FTC would have the power to enforce the Sherman Act at all; that surely would have forced the FTC to develop a clearer vision of what Section 5 meant.  Obviously I don’t see the FTC giving up on the Sherman Act – but it could use the policy statement to give some sense of what the FTC stands for.

* * *

These are the reasons I think a policy statement is a good idea.  What would an ideal policy statement contain?  On this, of course, there is more I’d like to say than I have room for.

I favor an approach that emphasizes elements and categories.  I think the FTC should require two elements in any section 5 case, namely: (1) unfair methods and (2) harm to competition or the competitive process.  Unfair methods is an actus reus, or conduct element, familiar to lawyers, and means conduct that is in some way deceptive, collusive, coercive, predatory, exclusionary, or otherwise oppressive.

While it’s at it, the agency should make clear, also, some of its criteria for deciding whether to bring a case — like its relative institutional expertise, the prospects of follow-on litigation by private plaintiffs, and the possibility of deference to other enforcement agencies or legal institutions.

In addition to elements, I think the Commission should create clearer categories that delineate what kind of Section 5 cases it will bring.  Three categories that come to mind are (1) conduct that violates the letter of the Sherman Act; (2) conduct contrary to the policy of the Sherman Act, though possibly beyond the letter; and (3) conduct that independently threatens the competitive process.  The third category is obviously the most interesting and open-ended, but I think it could be cabined by strict attention to the conduct and harm elements.  In particular, as in Section 2 cases, pro-competitive justifications would have to be taken very seriously.

There’s obviously much more to say, but I’ll end instead with a quote from Justice Cardozo about the FTC that I like.  “The careless and the unscrupulous must rise to the standards of the scrupulous and diligent. The Commission was not organized to drag the standards down.”

Tim Wu was formerly a senior advisor to the FTC, but the views expressed here are entirely his own.

Joe Sims is a Partner at Jones Day

I find that discussions on antitrust policy, if they are not to devolve into simple recitations of preferred industrial policy, are most focused when grounded in first principles and, frequently, a little history.  So a few words on both with respect to Section 5, starting with the history.

The FTC Act, in addition to being an early manifestation of the “can we help” school of antitrust, was a reaction to the perceptions of some that the Sherman Act, two decades old at the time, had not been enforced aggressively enough.  Indeed, there was considerable concern that the Supreme Court’s invention, just a couple of years earlier in the Standard Oil decision, of a Rule of Reason doctrine in interpreting the otherwise very broad words of the Sherman Act was going to effectively gut the statute.  Of course, that interpretation almost certainly saved the Sherman Act from an early demise, and opened the door for the extremely wide-ranging enforcement regime we have today.  So in large part, the premises underlying the FTC Act (including the now quaint notion that FTC Commissioners would be business experts) have proven completely wrong.  Does anyone really want to argue today that Standard Oil’s creation of a broad but limiting principle for the unworkable literal language of the Sherman Act was a bad idea?

The main point to take from this history is that the world has changed just a little bit in the last 100 years, so whatever Congress may have intended (of course, the notion of Congressional intent is itself almost a complete oxymoron) in 1914 tells us virtually nothing about what is sensible today.  So I hope we do not hear today the silly argument that the authority exists, so therefore we must use it, or the even sillier argument that if the FTC does not use this “unique” authority, it might as well go out of business.  Whether we need two antitrust agencies is a very valid question, but as we have seen for the last hundred years, Section 5 has very little to add to that debate.

So the real issue today is not what Congress intended a century ago, but what is sensible today – in a very different world.  And to intelligently answer that, we need to return to first principles of competition policy.  Here is how I would phrase the question:  Is even intelligent application (a heroic assumption, no doubt, but appropriate for a policy debate) of an unbounded statutory power by whoever happens to be the majority of FTC Commissioners at any given time likely to improve the competitive environment in the US?

It is very difficult for me to see how that is possible, and even harder to see how it is likely.  We know what the downside is.  Remember Mike Pertschuck saying that Section 5 could possibly be used to enforce compliance with desirable energy policies or environmental requirements, or to attack actions that, in the opinion of the FTC majority, impeded desirable employment programs or were inconsistent with the nation’s “democratic, political and social ideals.”  The two speeches he delivered on this subject in 1977 were the beginning of the end for increased Section 5 enforcement in that era, since virtually everyone who heard or read them said:  “Whoa!  Is this really what we want the FTC to be doing?”

Oh, but you say:  this is unfair, since that was then and this is now.  No FTC Chair or Commissioner would take this position today.  Well, I refer you to Jon Leibowitz’s concurring opinion in Rambus, where he says that Section 5 is “a flexible and powerful Congressional mandate to protect competition from unreasonable restraints, whether long-since recognized or newly discovered, that violate the antitrust laws, constitute incipient violations of those laws, or contravene those laws’ fundamental policies.”  Of course, unlike Mike Pertschuck, he does recognize that there must be some constraints, so his version of Section 5 would “only” reach actions that are “collusive, coercive, predatory, restrictive or deceitful, or otherwise oppressive, and without a justification grounded in legitimate, independent self-interest.”  Does that make you feel better?

Let’s be honest.  Enforcement of Section 5, if it actually becomes a regular part of the FTC toolbox, will depend solely on the common sense, good faith, and modesty of the FTC Commissioners as a group.  For purposes of this discussion, we can even assume the former two traits, although history tells us that they are not universal in this sample, because modesty will surely be the toughest test to meet.  By and large, people become FTC Commissioners to do things, not to be modest.  The Rambus dissent quotes, apparently approvingly, a statement from one Senator at the time of the FTC Act debate that “five good men [a reflection of the times] could hardly make mistakes about whether a particular practice is contrary to good morals or not.”  Really?  Don’t we have irrefutable evidence over the years that this assumption about government is clearly wrong?  But even if you don’t agree with that perception, aren’t we well past the time that we are willing to let five men or women enforce their personal moral or social or even business views with the force of law?  As Leibowitz’s outline of “reasonable” criteria shows – and as in fact the Commission’s history clearly demonstrates — if Section 5 is in the toolbox, it will be impossible to resist stretching the language to meet the perceived ill of the day, especially if and when it is too hard – meaning not enough factual or economic evidence – to carry the burden of a Sherman Act challenge.  And who knows what tomorrow’s reverse payment issue will be?

So there is a lot of downside to increased utilization of Section 5.  What is the argument on the other side of the scale?  Is there any need  — literally, any need at all — for Section 5 enforcement today?  If we did not have this anachronistic vestige of the past already on the books, would there be a groundswell of support to pass a new law giving the FTC this authority?  Is there anyone participating in this symposium that is willing to argue that there is any chance that a statue as unhinged as this to any statement of need or standard of application could become law today?  (Dodd-Frank and Obamacare are not good answers, even if they meet this prescription; the policy support in this area is not anywhere near the level of financial manipulation or health care.)

I have yet to hear anyone answer this question persuasively.  To me, it is instructive that the best illustration – certainly the most common example — anyone can give for an actual “need” for Section 5 is to attack invitations to collude – which, in case anyone has not noticed, involves conduct that by definition has no effect on anyone.  So the best argument is that we need to accept all the risks of Section 5 enforcement in order to be able to attack potential anticompetitive agreements that never actually happened?  Would we prefer that people not seek to collude?  Sure.  Does it really matter to anyone if they try and fail?  No.  And this is the best argument anyone can think of after 100 years of trying?  It does not pass the laugh test.

Section 5 is like your appendix – harmless enough if ignored and unused, but very dangerous if aroused or active.  We have already exceeded the optimal number of Section 5 cases this century, and we are only in the 14th year.  Time to stop for at least the next eight decades.  Let’s renew the debate in 2100.

[Robert Chang-hsien Tsai (Assistant Professor, Institute of Law for Science and Technology, National Tsing Hua University) Taiwan asked us to post this remembrance, and we are glad to do so]

I’ve been deeply saddened since I heard of the heartbreaking news about Larry. I had the privilege to be advised by Larry along my intellectual journey when studying in the US. Larry has set an example of what it means to be a passionate researcher and an enthusiastic educator, which will always remind me of how to be a professor in my lifetime.

My admiration for Larry can be traced back to when I was writing my master thesis at National Taiwan University in 2003. Reading his works, I was amazed by his thorough and original reasoning and hoped I could meet and learn from him someday. Years later, when I was applying for an LLM program in the US, NYU became my first choice because Larry would be visiting there at the same time. Luckily, I could keep learning from him in person during the JSD program at UIUC. Within the whole three-year mentoring process and even until recently, Larry generously spent his time providing constructive and timely feedback whenever I needed. On countless occasions, his broad knowledge and astute observations on law and the global market provided me with the kinds of insight that I needed to find a fruitful direction. His encouragement and confidence in me sustained me through difficult times and I will definitely draw on them as I meet the challenges to come.

No doubt Larry’s scholarship will keep influencing me in my lifetime. As his JSD advisee in the Chinese world, I’ll try my best to make his scholarship remembered.

My deepest thoughts are with Ann, Sarah and Susanna for remembering Larry, my unforgotten mentor.

Remembering Larry Ribstein

totmauthor —  2 January 2012

[Note: Professor Roberta Romano asked that we post her remembrance of Larry Ribstein, which we are glad to do below]

I was terribly saddened and, quite frankly, dumbfounded when I heard that Larry Ribstein had passed away. I had seen Larry approximately three weeks before when he gave a workshop at Yale and the last thought that would have crossed my mind would have been that I would be receiving such horrible news. At the time, Larry mentioned in his no-nonsense way numerous projects that he had in the works and how much he was looking forward to spending the Spring semester in New York. It is exceedingly difficult to accept that all of this will not happen.

Although life is transient, Larry’s scholarship will endure.  His work on the non-corporate business form (the “uncorporation” as he put it) must be consulted by anyone venturing to work in the area, which has become one of increasing importance, as evidenced by the greater attention given to it in casebooks and law school classes, a resurgence integrally related to Larry’s writings. He also successfully arbitraged his insights on uncorporations into our understanding of corporations. To take one example, his research examining small business operators’ choice of the limited liability company form over the limited liability partnership advanced our understanding of the importance of network externalities. Of course, he was as well a preeminent scholar in corporate law.  His outstanding critique of the enactment and implementation of the Sarbanes-Oxely Act is but one example. And there is much more. His keen ability to draw connections across fields led to enduring contributions in franchising law, choice of law, and the legal profession, to name just a few.  I would be remiss to not mention as well his entertaining, and insightful work on Hollywood’s portrayal of business.  It always seemed to me to be a shining example of the motto, Who says corporate law is not fun?  Larry was an original and creative voice, and he fearlessly ventured into, and took positions on, areas which the meek would scrupulously avoid. He will be missed.

Larry Ribstein, Philosopher

totmauthor —  1 January 2012

[Nelson Lund asked that TOTM publish this post in Larry Ribstein’s honor and we are very pleased to do so on his behalf]

Everyone who knew Larry Ribstein realized that he was very smart, very tough, and very hard working. Less well appreciated was his absolutely uncompromising commitment to the pursuit of the truth. Surprisingly, perhaps, this is a very rare quality among legal academics. It is the mark of a philosopher, by which I emphatically do not mean a professor of philosophy.

During countless conversations over a distressingly short period of twenty years, I knew that I could count on Larry to correct any lazy or thoughtless comment I made, just as I knew he would instantly recognize any useful insight I might happen upon. If we all have our intellectual biases and unjustified presuppositions, as I suppose we do, Larry was as aggressive as anyone I’ve known in resisting such barriers to the truth within himself. In that sense, he was far more tough on himself than he was on those of us who were fortunate to have his help in our own intellectual pursuits.

I do have one regret about my friendship with Larry, which is that I have only dabbled in the fields where he was a giant. Had I worked seriously in the areas on which he focused, or had he given more attention to the subjects that occupy most of my attention, I would have a much better understanding of many things. His death has made my life poorer, as it has the world in which he lived.

As we approach the end of this Symposium, I am struck by how much consensus exists on this subject. Of course, we are not conducting this exercise under the auspices of the ABA. Nevertheless, there is sufficient intellectual backing for a major push to begin the deregulation of legal services. Despite warnings that this is a bad time to consider such action, I think that there are reasons why this is a very good time to proceed. Contrary to popular wisdom, the number of employed lawyers has expanded through the recession, if one is to believe the results of the CPS household survey. But the employment in legal services firms has declined according to the BLS establishment survey. This is consistent with Larry Ribstein’s view on the decline of Big Law. The number of lawyers is growing slowly, but they are not having as much fun as before and are therefore less likely to come to the defense of their guild.

Cliff Winston and I think that the best way to proceed is through a variety of different state experiments. Some states could allow bar exams for persons who have not attended law school or who have subscribed to on-line law school programs. Others could offer a variety of different exams for different prospective specialties. Still others could repeal their unauthorized practice of law prohibitions. Others could allow non-lawyers to own legal services operations. Still other variants could be tried, including total deregulation. Let’s see what works – and not only in the United Kingdom.

Attorneys earn excess rents by maintaining barriers to entering the legal profession.  Legislation and regulation expanding the scope of work that only an attorney legally can perform is an obvious way in which attorneys attempt to expand or protect the market for their services.  The FTC has a long history of trying to convince state legislators and courts that expanding the scope of the practice of law is likely to have unjustified anticompetitive consequences.   A more subtle way attorneys limit competition for legal services is by interpreting existing legislation and rules in a manner that expands the universe of practices that are considered “unethical” or “unauthorized practice of law.”  In this symposium, I will address the application of antitrust law to this conduct.

The Legal practice no stranger to antitrust scrutiny.  Indeed, in several seminal antitrust cases the Supreme Court has grappled with the tension between a national policy in favor of competition and states’ abilities as sovereigns to regulate the practice of law.  See e.g., Bates v. State Bar of Arizona; Goldfarb v. Virginia; Hoover v. Ronwin.  Taken together, what these cases make clear that entry barriers erected directly by the state supreme court acting in its legislative capacity are ipso facto exempt from antitrust scrutiny as acts of the state sovereign.  Agreements among private attorneys (e.g., via a private state bar association as opposed to a mandatory state bar) to set competitively sensitive variables (like price and advertising), on the other hand, clearly are not unless both the “clear articulation” and “active supervision” tests from Midcal are met.  One area that has yet to be addressed, but which I think merits closer attention, is the use of ethics opinions or threats of enforcement for violations of ethical codes to limit competition in the market for legal services.

Let me provide a hypothetical to motivate this discussion:

  • Imagine a firm that uses a website to match attorneys with potential clients.  The site works like this:  you post on the website that you’re looking for someone to draft partnership agreements under Virginia law for your new business; attorneys who have paid to participate in the platform see your request, and, if interested, post a reply describing their qualifications and in some cases price.  The website make money from attorney subscriptions.  Recently, however, the state bar ethics committee issued an ethical opinion that participation in this platform would violate the state bars’ ethics rules by constituting and illegal payment to a non-attorney (the web site) for a referral.  Now, as an attorney in State X, you have a dilemma.  The website has been quite useful in helping you build your practice, but if you continue to participate, you risk being sued – either by an arm of the state bar, or a private attorney acting to protect the integrity of the legal practice – for violation of ethical rules.  The possible penalties (in addition to legal and opportunity costs to address any ethical challenge) could include fines, suspension, or even disbarment.

In this case, the state has not issued a new rule or regulation that explicitly expands the legal monopoly.  Instead, a group of attorneys (who most likely do not work full time for the state bar) have merely opined on what the state ethics rules require.  This opinion, however, has the practical effect of discouraging use of the online legal platform by threating legal sanctions.   In this manner, it has a clear anticompetitive effect of reducing consumer choice and retarding competition among attorneys.  Established attorneys with large client bases and existing referral systems operated by local bar associations, moreover, are likely to be the primary beneficiaries of this new opinion.

The interesting antitrust questions that arise in this scenario are (1) whether the state action doctrine protects this conduct; and (2) does this conduct constitute a restraint of trade.

Is This State Action?

Turning to the state action issue, the ethics committee of a state bar is not the sovereign, so its actions are not ipso facto immune from antitrust scrutiny.  Thus, a necessary condition for state action exemption is that the ethics committee was acting pursuant to a clearly articulated and affirmatively expressed state policy. Less clear, however, is whether this is also a sufficient condition for state action protection.  I argue that it is not, and that in addition the ethics committee must show that the state approved its decision to adopt an interpretation of the ethics rules that was likely to have anticompetitive effects.

Support for this position can be found in the FTC decision, In re North Carolina State Board of Dental Examiners (NCDE), (Feb. 8, 2011).  NCDE concerned a state dental regulatory board composed of private dentists that had sent cease and desist letters to non-dentists who performed teeth whitening procedures.  The Board acted on its interpretation that these non-dentists were engaging in the unauthorized practice of dentistry.  The Dental Board, however, lacked the authority to enjoin anyone from teeth whitening; its statute only allowed it to file a complaint in state court alleging unauthorized practice of dentistry.  The Board claimed state action exemption, arguing that as a state subdivision it needed only to show that it satisfied the clear articulation prong of the Midcal test.  The FTC disagreed, and held that to enjoy state action protection the Board also must show that the state actively supervised its decision to issue the cease and desist letters. (Id. at 9-11).

The important factor in the FTC analysis was its conclusion that the Dental Board’s interests were insufficiently independent from the interest of those it was regulating.  Turning to first principles, the Commission explained:

[I]f a state permits private conduct to go unchecked by market forces, the only assurance the electorate can have that the private parties will act in the public interest is if the state is politically accountable for any resulting anticompetitive conduct . . . .  Decisions that are made by private parties who participate in the market that they regulate are not subject to these political constraints unless these decisions are reviewed by disinterested state actors to assure fealty to state policy.

Id. at 10-11.  The Commission went on to find that the state of North Carolina had not supervised the Dental Board’s decision to classify teeth whitening as the practice of dentistry, thereby restraining competition in the market for teeth whitening, “was subject to any supervision, let along sufficient supervision to convert the Board’s conduct into that of the state of North Carolina. “ Id. at 17.

The reasoning in NCDE is equally applicable to expansive interpretation of rules or statutes to limit competition in legal services.  For example, in the above hypothetical, the ethics committee’s opinion should not enjoy state action protection unless the committee can show that the state reviewed and approved its decision to limit competition.  True, this rule will impose costs, but as I (along with Bill Kovacic) have argued elsewhere (see 90 B.U.L. Rev. 1555, 1597 (2010)) this is the price a state must pay if it wants to circumvent the national policy in favor of competition.  In deference to federalism, Parker and its progeny allow states to adopt policies that contravene the antitrust laws.  But regulatory bodies comprising unelected market participants are not sovereign, so deference to their anticompetitive policies does not vindicate the federalism principles that animate the state action doctrine.   What’s more, these bodies are likely to pose a greater risk to competition than elected officials, who at least are politically accountable for the anticompetitive policies that they pursue.

Finally, I argue that ex post review by a state court of decisions by ethics committees that expand the definition of the practice of law or that suggest some new practice is unethical should be insufficient to constitute active state supervision.   The active supervision prong of Midcal requires the state to approve prices set by a private cartel before they go into effect, so logically it should also require the state to approve ex ante an ethics committee’s decision to interpret ethical rules in a manner that is likely to restrain competition in the market for legal services.

Restraint of Trade?

Even if the ethical committee’s actions are not protected by the state action doctrine, we must also address a second question:  does the ethics committee’s opinion constitute a restraint of trade under the antitrust laws?  In Schachar v. Am. Academy  of Ophthalmology, 870 F.2d 397 (7th Cir. 1989), an ophthalmologist challenged the AAO under the antirust laws for opining that radial keratotomy was an experimental procedure.  Judge Easterbrook held that this could not be a restraint because although the AAO’s opinions carried weight due to its reputation, it had no power to prevent anybody from performing radial keratotomy.   Could the same issue exist for my hypothetical?  Is an opinion by the ethics committee no different from that of a trade association or an expert body?  I argue no, because unlike that AAO in Schachar, the ethics committee is acting under the color of law, which provides a reasonable basis for attorneys licensed in State X to believe that they risk state sanction if they fail to heed the warning.

Again, NCDE is illuminating.  Following the Commission’s state action decision, and after a full trial, the ALJ found that the Board’s conduct related to non-dentist teeth whiteners constituted an unreasonable restraint of trade. (see http://ftc.gov/os/adjpro/d9343/110719ncb-decision.pdf).   He based this finding on two grounds: the nature of the Board’s conduct coupled with its power to exclude competitors, which flowed from the fact that it was a state agency; and evidence that the Board’s actions actually caused some non-dentist teeth whiteners to exit the marketplace.   It would be hard to distinguish a state bar’s ethics committee’s expansive interpretation of an ethical requirement from the facts in NCDE; both regulatory bodies have the power to exclude competition because their opinions, unlike those of a private association, carry the possibility of legal sanction for non-compliance.

The traditional narrative is that Asian jurisdictions have fewer lawyers than in the West because they are much less litigious societies; they don’t need lawyers! Recent evidence has suggested the causation is probably reversed; there are not enough lawyers to provide services to all potential litigants.

Legal markets in East Asia were largely kept closed by excluding foreign law firms and imposing a significantly low passing rate for bar exams (usually less than 10%). In this context, Japan and Korea have enacted important legal reforms to modernize their legal practice and make it more competitive in the last ten years. Quite remarkably, they have been inspired by the U.S. model of legal education. The most immediate consequence has been the notable increase of passing rates in the Japanese and Korean bar exams, still low for U.S. standards (below 50%), but clearly above the traditional figures. The transformation of the law degree from undergraduate to postgraduate (similar to a J.D. program) has been less far-reaching than expected, since the undergraduate degrees were not fully eliminated.

Taiwan and Hong Kong have been changing at a slower pace. The political context (a process of democratization) has been fundamentally influenced by lawyers, but the changes in the market for legal services have been less remarkable than in Japan and Korea. Taiwan is the Asian jurisdiction with more law professors educated in the United States (still a minority though). The Hong Kongnese legal profession has been shaped by the British. Its vibrant market and the strategic location within the Greater China have attracted the attention of the big law firms.

Mainland China is a different story. For many political and historical reasons, the reform of the legal profession has not been a major priority. Passing rates in Chinese bar are extremely low (possibly below 5%) which, in my view, explains the big Chinese demand for U.S. LLMs degrees (even if low, the chances of passing the New York bar are higher than passing the Chinese bar). The big demand for legal services is concentrated in Beijing and Shanghai. Legal education has expanded significantly since the early 1990s, but most commentators agree that quality is a serious problem. The market is heavily regulated by the government (which does not exclude the possibility of less strict informal practices).

We cannot say we see a pattern of deregulation of legal services in East Asia. At best, most jurisdictions have been investing on improving the quality of their legal human capital. Entry controls traditionally were severe (they still are in mainland China), thus failing to create a competitive market (probably with the exception of Hong Kong). Recent reforms might change this pattern in the future but, at this stage, their impact is unclear. Local commentators are divided on the merits of these reforms.