Archives For administrative

In recent years much ink has been spilled on the problem of online privacy breaches, involving the unauthorized use of personal information transmitted over the Internet.  Internet privacy concerns are warranted.  According to a 2016 National Telecommunications and Information Administration survey of Internet-using households, 19 percent of such households (representing nearly 19 million households) reported that they had been affected by an online security breach, identity theft, or similar malicious activity during the 12 months prior to the July 2015 survey.  Security breaches appear to be more common among the most intensive Internet-using households – 31 percent of those using at least five different types of online devices suffered such breaches.  Security breach statistics, of course, do not directly measure the consumer welfare losses attributable to the unauthorized use of personal data that consumers supply to Internet service providers and to the websites which they visit.

What is the correct overall approach government should take in dealing with Internet privacy problems?  In addressing this question, it is important to focus substantial attention on the effects of online privacy regulation on economic welfare.  In particular, policies should aim at addressing Internet privacy problems in a manner that does not unduly harm the private sector or deny opportunities to consumers who are not being harmed.  The U.S. Federal Trade Commission (FTC), the federal government’s primary consumer protection agency, has been the principal federal regulator of online privacy practices.  Very recently, however, the U.S. Federal Communications Commission (FCC) has asserted the authority to regulate the privacy practices of broadband Internet service providers, and is proposing an extremely burdensome approach to such regulation that would, if implemented, have harmful economic consequences.

In March 2016, FTC Commissioner Maureen Ohlhausen succinctly summarized the FTC’s general approach to online privacy-related enforcement under Section 5 of the FTC Act, which proscribes unfair or deceptive acts or practices:

[U]nfairness establishes a baseline prohibition on practices that the overwhelming majority of consumers would never knowingly approve. Above that baseline, consumers remain free to find providers that match their preferences, and our deception authority governs those arrangements. . . .  The FTC’s case-by-case enforcement of our unfairness authority shapes our baseline privacy practices.  Like the common law, this incremental approach has proven both relatively predictable and adaptable as new technologies and business models emerge.

In November 2015, Professor (and former FTC Commissioner) Joshua Wright argued the FTC’s approach is insufficiently attuned to economic analysis, in particular, the “tradeoffs between the value to consumers and society of the free flow and exchange of data and the creation of new products and services on the one hand, against the value lost by consumers from any associated reduction in privacy.”  Nevertheless, on balance, FTC enforcement in this area generally is restrained and somewhat attentive to cost-benefit considerations.  (This undoubtedly reflects the fact (see my Heritage Legal Memorandum, here) that the statutory definition of “unfairness” in Section 5(n) of the FTC Act embodies cost-benefit analysis, and that the FTC’s Policy Statement on Deception requires detriment to consumers acting reasonably in the circumstances.)  In other words, federal enforcement policy with respect to online privacy, although it could be improved, is in generally good shape.

Or it was in good shape.  Unfortunately, on April 1, 2016, the Federal Communications Commission (FCC) decided to inject itself into “privacy space” by issuing a Notice of Proposed Rulemaking entitled “Protecting the Privacy of Customers of Broadband and Other Telecommunications Services.”  This “Privacy NPRM” sets forth detailed rules that, if adopted, would impose onerous privacy obligations on “Broadband Internet Access Service” (BIAS) Providers, the firms that provide the cables, wires, and telecommunications equipment through which Internet traffic flows – primarily cable (Comcast, for example) and telephone (Verizon, for example) companies.   The Privacy NPRM reclassifies BIAS provision as a “common carrier” service, thereby totally precluding the FTC from regulating BIAS Providers’ privacy practices (since the FTC is barred by law from regulating common carriers, under 15 U.S. Code § 45(a)(2)).  Put simply, the NPRM required BIAS Providers “to obtain express consent in advance of practically every use of a customer[s] data”, without regard to the effects of such a requirement on economic welfare.  All other purveyors of Internet services, however – in particular, the large numbers of “edge providers” that generate Internet content and services (Google, Amazon, and Facebook, for example) – are exempt from the new FCC regulatory requirements.  In short, the Privacy NPRM establishes a two-tier privacy regulatory system, with BIAS Providers subject to tight FCC privacy rules, while all other Internet service firms are subject to more nuanced, case-by-case, effects-based evaluation of their privacy practices by the FTC.  This disparate regulatory approach is peculiar (if not wholly illogical), since edge providers in general have greater access than BIAS Providers to consumers’ non-public information, and thus may appear to pose a greater threat to consumers’ interest in privacy.

The FCC’s proposal to regulate BIAS Providers’ privacy practices represents bad law and horrible economic policy.  First, it undermines the rule of law by extending the FCC’s authority beyond its congressional mandate.  It does this by basing its regulation of a huge universe of information exchanges on Section 222 of the Telecommunications Act of 1996, a narrow provision aimed at a very limited type of customer-related data obtained in connection with old-style voice telephony transmissions.  This is egregious regulatory overreach.  Second, if implemented, it will harm consumers, producers, and the overall economic by imposing a set of sweeping opt-in consent requirements on BIAS Providers, without regard to private sector burdens or actual consumer welfare (see here); by reducing BIAS Provider revenues and thereby dampening investment that is vital to the continued growth of and innovation in Internet-related industries (see here); by reducing the ability of BIAS Providers to provide welfare-enhancing competitive pressure on providers on Internet edge providers (see here); and by raising consumer prices for Internet services and deny discount programs desired by consumers (see here).

What’s worse, the FCC’s proposed involvement in online privacy oversight comes at a time of increased Internet privacy regulation by foreign countries, much of it highly intrusive and lacking in economic sophistication.  A particularly noteworthy effort to clarify cross-national legal standards is the Privacy Shield, a 2016 United States – European Union agreement that establishes regulatory online privacy protection norms, backed by FTC enforcement, that U.S. companies transmitting data into Europe may choose to accept on a voluntary basis.  (If they do not accede to the Shield, they may be subject to uncertain and heavy-handed European sanctions.)  The Privacy NPRM, if implemented, will create an additional concern for BIAS Providers, since they will have to evaluate the implications of new FCC regulation (rather than simply rely on FTC oversight) in deciding whether to opt in to the Shield’s standards and obligations.

In sum, the FCC’s Privacy NPRM would, if implemented, harm consumers and producers, slow innovation, and offend the rule of law.  This prompts four recommendations.

  • The FCC should withdraw the NPRM and leave it to the FTC to oversee all online privacy practices, under its Section 5 unfairness and deception authority. The adoption of the Privacy Shield, which designates the FTC as the responsible American privacy oversight agency, further strengthens the case against FCC regulation in this area. 
  • In overseeing online privacy practices, the FTC should employ a very light touch that stresses economic analysis and cost-benefit considerations. Moreover, it should avoid requiring that rigid privacy policy conditions be kept in place for long periods of time through consent decree conditions, in order to allow changing market conditions to shape and improve business privacy policies. 
  • Moreover, the FTC should borrow a page from former FTC Commissioner Joshua Wright by implementing an “economic approach” to privacy. Under such an approach:  

o             FTC economists would help make the Commission a privacy “thought leader” by developing a rigorous academic research agenda on the economics of privacy, featuring the economic evaluation of industry sectors and practices; 

o             the FTC would bear the burden of proof of showing that violations of a company’s privacy policy are material to consumer decision-making;

o             FTC economists would report independently to the FTC about proposed privacy-related enforcement initiatives; and

o             the FTC would publish the views of its Bureau of Economics in all privacy-related consent decrees that are placed on the public record.   

  • The FTC should encourage the European Commission and other foreign regulators to take into account the economics of privacy in developing their privacy regulatory policies. In so doing, it should emphasize that innovation is harmed, the beneficial development of the Internet is slowed, and consumer welfare and rights are undermined through highly prescriptive regulation in this area (well-intentioned though it may be).  Relatedly, the FTC and other U.S. Government negotiators should argue against adoption of a “one-size-fits-all” global privacy regulation framework.   Such a global framework could harmfully freeze into place over-regulatory policies and preclude beneficial experimentation in alternative forms of “lighter-touch” regulation and enforcement. 

While no panacea, these recommendations would help deter (or, at least, constrain) the economically harmful government micromanagement of businesses’ privacy practices, in the United States and abroad.

The Global Antitrust Institute (GAI) at George Mason University Law School (officially the “Antonin Scalia Law School at George Mason University” as of July 1st) is doing an outstanding job at providing sound law and economics-centered advice to foreign governments regarding their proposed antitrust laws and guidelines.

The GAI’s latest inspired filing, released on July 9 (July 9 Comment), concerns guidelines on the disgorgement of illegal gains and punitive fines for antitrust violations proposed by China’s National Development and Reform Commission (NDRC) – a powerful agency that has broad planning and administrative authority over the Chinese economy.  With respect to antitrust, the NDRC is charged with investigating price-related anticompetitive behavior and abuses of dominance.  (China has two other antitrust agencies, the State Administration of Industry and Commerce (SAIC) that investigates non-price-related monopolistic behavior, and the Ministry of Foreign Commerce (MOFCOM) that reviews mergers.)  The July 9 Comment stresses that the NDRC’s proposed Guidelines call for Chinese antitrust enforcers to impose punitive financial sanctions on conduct that is not necessarily anticompetitive and may be efficiency-enhancing – an approach that is contrary to sound economics.  In so doing, the July 9 Comment summarizes the economics of penalties, recommends that the NDRD employ economic analysis in considering sanctions, and provides specific suggested changes to the NDRC’s draft.  The July 9 Comment provides a helpful summary of its analysis:

We respectfully recommend that the Draft Guidelines be revised to limit the application of disgorgement (or the confiscating of illegal gain) and punitive fines to matters in which: (1) the antitrust violation is clear (i.e., if measured at the time the conduct is undertaken, and based on existing laws, rules, and regulations, a reasonable party should expect that the conduct at issue would likely be found to be illegal) and without any plausible efficiency justifications; (2) it is feasible to articulate and calculate the harm caused by the violation; (3) the measure of harm calculated is the basis for any fines or penalties imposed; and (4) there are no alternative remedies that would adequately deter future violations of the law.  In the alternative, and at the very least, we strongly urge the NDRC to expand the circumstances under which the Anti-Monopoly Enforcement Agencies (AMEAs) will not seek punitive sanctions such as disgorgement or fines to include two conduct categories that are widely recognized as having efficiency justifications: unilateral conduct such as refusals to deal and discriminatory dealing and vertical restraints such as exclusive dealing, tying and bundling, and resale price maintenance.

We also urge the NDRC to clarify how the total penalty, including disgorgement and fines, relate to the specific harm at issue and the theoretical optimal penalty.  As explained below, the economic analysis determines the total optimal penalties, which includes any disgorgement and fines.  When fines are calculated consistent with the optimal penalty framework, disgorgement should be a component of the total fine as opposed to an additional penalty on top of an optimal fine.  If disgorgement is an additional penalty, then any fines should be reduced relative to the optimal penalty.

Lastly, we respectfully recommend that the AMEAs rely on economic analysis to determine the harm caused by any violation.  When using proxies for the harm caused by the violation, such as using the illegal gains from the violations as the basis for fines or disgorgement, such calculations should be limited to those costs and revenues that are directly attributable to a clear violation.  This should be done in order to ensure that the resulting fines or disgorgement track the harms caused by the violation.  To that end, we recommend that the Draft Guidelines explicitly state that the AMEAs will use economic analysis to determine the but-for world, and will rely wherever possible on relevant market data.  When the calculation of illegal gain is unclear due to a lack of relevant information, we strongly recommend that the AMEAs refrain from seeking disgorgement.

The lack of careful economic analysis of the implications of disgorgement (which is really a financial penalty, viewed through an economic lens) is not confined to Chinese antitrust enforcers.  In recent years, the U.S. Federal Trade Commission (FTC) has shown an interest in more broadly employing disgorgement as an antitrust remedy, without fully weighing considerations of error costs and the deterrence of efficient business practices (see, for example, here and here).  Relatedly, the U.S. Department of Justice’s Antitrust Division has determined that disgorgement may be invoked as a remedy for a Sherman Antitrust Act violation, a position confirmed by a lower court (see, for example, here).  The general principles informing the thoughtful analysis delineated in the July 9 Comment could profitably be consulted by FTC and DOJ policy officials should they choose to reexamine their approach to disgorgement and other financial penalties.

More broadly, emphasizing the importantance of optimal sanctions and the economic analysis of business conduct, the July 9 Comment is in line with a cost-benefit framework for antitrust enforcement policy, rooted in decision theory – an approach that all antitrust agencies (including United States enforcers) should seek to adopt (see also here for an evaluation of the implicit decision-theoretic approach to antitrust employed by the U.S. Supreme Court under Chief Justice John Roberts).  Let us hope that DOJ, the FTC, and other government antitrust authorities around the world take to heart the benefits of decision-theoretic antitrust policy in evaluating (and, as appropriate, reforming) their enforcement norms.  Doing so would promote beneficial international convergence toward better enforcement policy and redound to the economic benefit of both producers and consumers.

In the wake of the recent OIO decision, separation of powers issues should be at the forefront of everyone’s mind. In reaching its decision, the DC Circuit relied upon Chevron to justify its extreme deference to the FCC. The court held, for instance, that

Our job is to ensure that an agency has acted “within the limits of [Congress’s] delegation” of authority… and that its action is not “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”… Critically, we do not “inquire as to whether the agency’s decision is wise as a policy matter; indeed, we are forbidden from substituting our judgment for that of the agency.”… Nor do we inquire whether “some or many economists would disapprove of the [agency’s] approach” because “we do not sit as a panel of referees on a professional economics journal, but as a panel of generalist judges obliged to defer to a reasonable judgment by an agency acting pursuant to congressionally delegated authority.

The DC Circuit’s decision takes a broad view of Chevron deference and, in so doing, ignores or dismisses some of the limits placed upon the doctrine by cases like Michigan v. EPA and UARG v. EPA (though Judge Williams does bring up UARG in dissent).

Whatever one thinks of the validity of the FCC’s approach to regulating the Internet, there is no question that it has, at best, a weak statutory foothold. Without prejudging the merits of the OIO, or the question of deference to agencies that find “[regulatory] elephants in [statutory] mouseholes,”  such broad claims of authority, based on such limited statutory language, should give one pause. That the court upheld the FCC’s interpretation of the Act without expressing reservations, suggesting any limits, or admitting of any concrete basis for challenging the agency’s authority beyond circular references to “abuse of discretion” is deeply troubling.

Separation of powers is a fundamental feature of our democracy, and one that has undoubtedly contributed to the longevity of our system of self-governance. Not least among the important features of separation of powers is the ability of courts to review the lawfulness of legislation and executive action.

The founders presciently realized the dangers of allowing one part of the government to centralize power in itself. In Federalist 47, James Madison observed that

The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny. Were the federal Constitution, therefore, really chargeable with the accumulation of power, or with a mixture of powers, having a dangerous tendency to such an accumulation, no further arguments would be necessary to inspire a universal reprobation of the system. (emphasis added)

The modern administrative apparatus has become the sort of governmental body that the founders feared and that we have somehow grown to accept. The FCC is not alone in this: any member of the alphabet soup that constitutes our administrative state, whether “independent” or otherwise, is typically vested with great, essentially unreviewable authority over the economy and our daily lives.

As Justice Thomas so aptly put it in his must-read concurrence in Michigan v. EPA:

Perhaps there is some unique historical justification for deferring to federal agencies, but these cases reveal how paltry an effort we have made to understand it or to confine ourselves to its boundaries. Although we hold today that EPA exceeded even the extremely permissive limits on agency power set by our precedents, we should be alarmed that it felt sufficiently emboldened by those precedents to make the bid for deference that it did here. As in other areas of our jurisprudence concerning administrative agencies, we seem to be straying further and further from the Constitution without so much as pausing to ask why. We should stop to consider that document before blithely giving the force of law to any other agency “interpretations” of federal statutes.

Administrative discretion is fantastic — until it isn’t. If your party is the one in power, unlimited discretion gives your side the ability to run down a wish list, checking off controversial items that could never make it past a deliberative body like Congress. That same discretion, however, becomes a nightmare under extreme deference as political opponents, newly in power, roll back preferred policies. In the end, regulation tends toward the extremes, on both sides, and ultimately consumers and companies pay the price in the form of excessive regulatory burdens and extreme uncertainty.

In theory, it is (or should be) left to the courts to rein in agency overreach. Unfortunately, courts have been relatively unwilling to push back on the administrative state, leaving the task up to Congress. And Congress, too, has, over the years, found too much it likes in agency power to seriously take on the structural problems that give agencies effectively free reign. At least, until recently.

In March of this year, Representative Ratcliffe (R-TX) proposed HR 4768: the Separation of Powers Restoration Act (“SOPRA”). Arguably this is first real effort to fix the underlying problem since the 1995 “Comprehensive Regulatory Reform Act” (although, it should be noted, SOPRA is far more targeted than was the CRRA). Under SOPRA, 5 U.S.C. § 706 — the enacted portion of the APA that deals with judicial review of agency actions —  would be amended to read as follows (with the new language highlighted):

(a) To the extent necessary to decision and when presented, the reviewing court shall determine the meaning or applicability of the terms of an agency action and decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by agencies. Notwithstanding any other provision of law, this subsection shall apply in any action for judicial review of agency action authorized under any provision of law. No law may exempt any such civil action from the application of this section except by specific reference to this section.

These changes to the scope of review would operate as a much-needed check on the unlimited discretion that agencies currently enjoy. They give courts the ability to review “de novo all relevant questions of law,” which includes agencies’ interpretations of their own rules.

The status quo has created a negative feedback cycle. The Chevron doctrine, as it has played out, gives outsized incentives to both the federal agencies, as well as courts, to essentially disregard Congress’s intended meaning for particular statutes. Today an agency can write rules and make decisions safe in the knowledge that Chevron will likely insulate it from any truly serious probing by a district court with regards to how well the agency’s action actually matches up with congressional intent or with even rudimentary cost-benefit analysis.

Defenders of the administrative state may balk at changing this state of affairs, of course. But defending an institution that is almost entirely immune from judicial and legal review seems to be a particularly hard row to hoe.

Public Knowledge, for instance, claims that

Judicial deference to agency decision-making is critical in instances where Congress’ intent is unclear because it balances each branch of government’s appropriate role and acknowledges the realities of the modern regulatory state.

To quote Justice Scalia, an unfortunate champion of the Chevron doctrine, this is “pure applesauce.”

The very core of the problem that SOPRA addresses is that the administrative state is not a proper branch of government — it’s a shadow system of quasi-legislation and quasi-legal review. Congress can be chastened by popular vote. Judges who abuse discretion can be overturned (or impeached). The administrative agencies, on the other hand, are insulated through doctrines like Chevron and Auer, and their personnel subject more or less to the political whims of the executive branch.

Even agencies directly under the control of the executive branch  — let alone independent agencies — become petrified caricatures of their original design as layers of bureaucratic rule and custom accrue over years, eventually turning the organization into an entity that serves, more or less, to perpetuate its own existence.

Other supporters of the status quo actually identify the unreviewable see-saw of agency discretion as a feature, not a bug:

Even people who agree with the anti-government premises of the sponsors [of SOPRA] should recognize that a change in the APA standard of review is an inapt tool for advancing that agenda. It is shortsighted, because it ignores the fact that, over time, political administrations change. Sometimes the administration in office will generally be in favor of deregulation, and in these circumstances a more intrusive standard of judicial review would tend to undercut that administration’s policies just as surely as it may tend to undercut a more progressive administration’s policies when the latter holds power. The APA applies equally to affirmative regulation and to deregulation.

But presidential elections — far from justifying this extreme administrative deference — actually make the case for trimming the sails of the administrative state. Presidential elections have become an important part about how candidates will wield the immense regulatory power vested in the executive branch.

Thus, for example, as part of his presidential bid, Jeb Bush indicated he would use the EPA to roll back every policy that Obama had put into place. One of Donald Trump’s allies suggested that Trump “should turn off [CNN’s] FCC license” in order to punish the news agency. And VP hopeful Elizabeth Warren has suggested using the FDIC to limit the growth of financial institutions, and using the FCC and FTC to tilt the markets to make it easier for the small companies to get an advantage over the “big guys.”

Far from being neutral, technocratic administrators of complex social and economic matters, administrative agencies have become one more political weapon of majority parties as they make the case for how their candidates will use all the power at their disposal — and more — to work their will.

As Justice Thomas, again, noted in Michigan v. EPA:

In reality…, agencies “interpreting” ambiguous statutes typically are not engaged in acts of interpretation at all. Instead, as Chevron itself acknowledged, they are engaged in the “formulation of policy.” Statutory ambiguity thus becomes an implicit delegation of rulemaking authority, and that authority is used not to find the best meaning of the text, but to formulate legally binding rules to fill in gaps based on policy judgments made by the agency rather than Congress.

And this is just the thing: SOPRA would bring far-more-valuable predictability and longevity to our legal system by imposing a system of accountability on the agencies. Currently, commissions often believe they can act with impunity (until the next election at least), and even the intended constraints of the APA frequently won’t do much to tether their whims to statute or law if they’re intent on deviating. Having a known constraint (or, at least, a reliable process by which judicial constraint may be imposed) on their behavior will make them think twice about exactly how legally and economically sound proposed rules and other actions are.

The administrative state isn’t going away, even if SOPRA were passed; it will continue to be the source of the majority of the rules under which our economy operates. We have long believed that a benefit of our judicial system is its consistency and relative lack of politicization. If this is a benefit for interpreting laws when agencies aren’t involved, it should also be a benefit when they are involved. Particularly as more and more law emanates from agencies rather than Congress, the oversight of largely neutral judicial arbiters is an essential check on the administrative apparatus’ “accumulation of all powers.”

The interest of judges tends to include a respect for the development of precedent that yields consistent and transparent rules for all future litigants and, more broadly, for economic actors and consumers making decisions in the shadow of the law. This is markedly distinct from agencies which, more often than not, promote the particular, shifting, and often-narrow political sentiments of the day.

Whether a Republican- or a Democrat— appointed district judge reviews an agency action, that judge will be bound (more or less) by the precedent that came before, regardless of the judge’s individual political preferences. Contrast this with the FCC’s decision to reclassify broadband as a Title II service, for example, where previously it had been committed to the idea that broadband was an information service, subject to an entirely different — and far less onerous — regulatory regime.  Of course, the next FCC Chairman may feel differently, and nothing would stop another regulatory shift back to the pre-OIO status quo. Perhaps more troublingly, the enormous discretion afforded by courts under current standards of review would permit the agency to endlessly tweak its rules — forbearing from some regulations but not others, un-forbearing, re-interpreting, etc., with precious few judicial standards available to bring certainty to the rules or to ensure their fealty to the statute or the sound economics that is supposed to undergird administrative decisionmaking.

SOPRA, or a bill like it, would have required the Commission to actually be accountable for its historical regulations, and would force it to undergo at least rudimentary economic analysis to justify its actions. This form of accountability can only be to the good.

The genius of our system is its (potential) respect for the rule of law. This is an issue that both sides of the aisle should be able to get behind: minority status is always just one election cycle away. We should all hope to see SOPRA — or some bill like it — gain traction, rooted in long-overdue reflection on just how comfortable we are as a polity with a bureaucratic system increasingly driven by unaccountable discretion.

A key issue raised by the United Kingdom’s (UK) withdrawal from the European Union (EU) – popularly referred to as Brexit – is its implications for competition and economic welfare.  The competition issue is rather complex.  Various potentially significant UK competition policy reforms flowing from Brexit that immediately suggest themselves are briefly summarized below.  (These are merely examples – further evaluation may point to additional significant competition policy changes that Brexit is likely to inspire.)

First, UK competition policy will no longer be subject to European Commission (EC) competition law strictures, but will be guided instead solely by UK institutions, led by the UK Competition and Markets Authority (CMA).  The CMA is a free market-oriented, well-run agency that incorporates careful economic analysis into its enforcement investigations and industry studies.  It is widely deemed to be one of the world’s best competition and consumer protection enforcers, and has first-rate leadership.  (Former U.S. Federal Trade Commission Chairman William Kovacic, a very sound antitrust scholar, professor, and head of George Washington University Law School’s Competition Law Center, serves as one of the CMA’s “Non-Executive Directors,” who set the CMA’s policies.)  Post-Brexit, the CMA will no longer have to conform its policies to the approaches adopted by the EC’s Directorate General for Competition (DG Comp) and determinations by European courts.   Despite its recent increased reliance on an “economic effects-based” analytical approach, DG-Comp still suffers from excessive formalism and an over-reliance on pure theories of harm, rather than hard empiricism.  Moreover, EU courts still tend to be overly formalistic and deferential to EC administrative determinations.  In short, CMA decision-making in the competition and consumer protection spheres, free from constraining EU influences, should (at least marginally) prove to be more welfare-enhancing within the UK post-Brexit.  (For a more detailed discussion of Brexit’s implication for EU and UK competition law, see here.)  There is a countervailing risk that Brexit might marginally worsen EU competition policy by eliminating UK pro-free market influence on EU policies, but the likelihood and scope of such a marginal effect is not readily measurable.

Second, Brexit will allow the UK to escape participation in the protectionist, wasteful, output-limiting European agricultural cartel knows as the “Common Agricultural Policy,” or CAP, which involves inefficient subsidies whose costs are borne by consumers.  This would be a clearly procompetitive and welfare-enhancing result, to the extent that it undermined the CAP.  In the near term, however, its net effects on CAP financing and on the welfare of UK farmers appear to be relatively small.

Third, the UK may be able to avoid the restrictive EU Common Fisheries Policy and exercise greater control over its coastal fisheries.  In so doing, the UK could choose to authorize the creation of a market-based tradable fisheries permit system that would enhance consumer and producer welfare and increase competition.

Fourth, Brexit will free the UK economy from one-size-fits-all supervisory regulatory frameworks in such areas as the environment, broadband policy (“digital Europe”), labor, food and consumer products, among others.  This regulatory freedom, properly handled, could prove a major force for economic flexibility, reductions in regulatory burdens, and enhanced efficiency.

Fifth, Brexit will enable the UK to enter into true free trade pacts with the United States and other nations that avoid the counterproductive bells and whistles of EU industrial policy.  For example, a “zero tariffs” agreement with the United States that featured reciprocal mutual recognition of health, safety, and other regulatory standards would avoid heavy-handed regulatory harmonization features of the Transatlantic Trade and Investment Policy agreement being negotiated between the EU and the United States.  (As I explained in a previous Truth on the Market post, “a TTIP focus on ‘harmonizing’ regulations could actually lower economic freedom (and welfare) by ‘regulating upward’ through acceptance of [a] more intrusive approach, and by precluding future competition among alternative regulatory models that could lead to welfare-enhancing regulatory improvements.”)

In sum, while Brexit’s implications for other economic factors, such as macroeconomic stability, remain to be seen, Brexit will likely prove to have an economic welfare-enhancing influence on key aspects of competition policy.

P.S.  Notably, a recent excellent study by Iain Murray and Rory Broomfield of Brexit’s implications for various UK industry sectors (commissioned by the London-based Institute of Economic Affairs) concluded “that in almost every area we have examined the benefit: cost trade-off [of Brexit] is positive. . . .  Overall, the UK will benefit substantially from a reduction in regulation, a better fisheries management system, a market-based immigration system, a free market in agriculture, a globally-focused free trade policy, control over extradition, and a shale gas-based energy policy.”

In a Heritage Foundation Legal Memorandum released today, I explore both the “constitutionalist” as well as utilitarian, economic-welfare-oriented justifications for robust U.S. patent and copyright systems.  The Memorandum explains:

Intellectual property (IP) is increasingly important to the American private economy, and a discussion of the appropriate public policy toward IP is timely, particularly given the recent growth in public skepticism toward IP rights. Robust federal protection for IP is not just important to America’s economic future, but also consistent with constitutional originalism and the early U.S. historical understanding of the nature and role of IP.

Critical scrutiny has focused on the federal patent and copyright systems, which are authorized by the Patent and Copyright Clause (IP Clause) of the U.S. Constitution. The following discussion of IP also focuses on patents and copyrights. The other two principal forms of intellectual property, trademarks and trade secrets, are the subject of federal legislation pursuant to the Commerce Clause of the U.S. Constitution,as well as protections in state law. These forms have received less critical attention lately and are beyond the scope of this commentary.

Contrary to what some critics have argued, the robust protection of patents and copyrights as property is consistent with the original understanding of the Framers of the Constitution, who viewed IP through the lens of natural rights. During the early stages of the Republic, leading commentators and legislators, as well as President Abraham Lincoln, held IP rights in high regard. Supporters of robust IP rights can therefore claim the force of history and constitutional political philosophy, while critics fail in their claims that IP rights are special privileges that should be deemed second-class property rights (if they qualify as rights at all).

Admittedly, the fact that IP rights have solid constitutional backing does not address the question of how Congress should deal with them today. One might ask whether Congress, consistent with its authority under the IP Clause, should cut back on IP rights for pragmatic reasons, such as strengthening the American economy. Far from being inefficient, monopolistic drags on economic efficiency as some critics have suggested, however, the patent and copyright systems are vital to innovation, wealth creation, and economic growth.

Thus, calls to degrade IP rights are misplaced and, if heeded, would prove detrimental to the American economy. Congress and the executive branch should enhance rather than lessen the protection of American IP rights both in the United States and around the world.

I’m delighted to announce that David Olson will be guest blogging at Truth on the Market this summer.

olson1David is an Associate Professor at Boston College Law School. He teaches antitrust, patents, and intellectual property law. Professor Olson’s writing has been cited in Supreme Court and other legal opinions. Olson came to Boston College from Stanford Law School’s Center for Internet and Society, where he researched in patent law and litigated copyright fair use impact cases. Before entering academia, Professor Olson practiced as a patent litigator. He has published scholarly articles on patent law and antitrust, copyright law, and First Amendment copyright issues. He has been quoted in stories by the Wall Street Journal, Associated Press and Reuters, and has appeared as a guest panelist on WBUR’s Radio Boston, WAMU’s Kojo Namdi Show, and on Public Radio Canada. His scholarly papers are available here.

Perhaps foremost among his many deserved claims to fame, David (along with Hofstra law professor Irina Manta) is the co-author of an excellent paper with musician Aloe Blacc (of Wake Me Up fame).

Welcome David!

The U.S. Supreme Court’s unanimous June 13 decision (per Chief Justice John Roberts) in Halo Electronics v. Pulse Electronics, overturning the Federal Circuit’s convoluted Seagate test for enhanced damages, is good news for patent holders.  By reducing the incentives for intentional patent infringement (due to the near impossibility of obtaining punitive damages relief under Seagate), Halo Electronics helps enhance the effectiveness of patent enforcement, thereby promoting a more robust patent system.

The complexity and unwieldiness of the Seagate test is readily apparent from this description:

35 U.S.C. § 284 provides simply that “the court may increase the damages up to three times the amount found or assessed.” Nevertheless, in In re Seagate Technology, LLC, 497 F.3d 1360 (2007) (en banc) the Federal Circuit erected a two-part barrier for patentees to clear before a district court could exercise its enhancement discretion under the statute. First, a patent owner must “show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted an infringement of a valid patent.” This first part of the test is not met if the infringer, during infringement proceedings, raises a substantial question as to the validity or non-infringement of the patent, regardless of whether the infringer’s prior conduct was egregious. Second, the patentee must demonstrate that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” On appeal, the Federal Circuit would review the first step of the test—objective recklessness—de novo; the second part—subjective knowledge—for substantial evidence; and the ultimate decision—whether to award enhanced damages—for abuse of discretion.

In short, under Seagate, even if (1) the patentee presented substantial evidence that the infringer intentionally infringed its patent (under the second part of the test), and (2) the infringer’s prior conduct was egregious, the infringer could avoid enhanced damages merely by raising a “substantial question” as to the validity or non-infringement of the patent.  Because in most cases mere “questions” as to validity or non-infringement could readily be ginned up ex post, intentional infringers, including truly “bad actors,” could largely ignore the risk of being assessed anything more than actual damages.

Moreover, the Seagate test should be viewed in light of other major policy changes that have diminished the value of patents, such as the near impossibility of obtaining permanent injunctive relief for patent infringement following the Supreme Court’s 2006 eBay decision (see, for example, here), plus the recent downward trend in patent damage awards (see, for example, here) and increasingly common administrative patent invalidations (see, for example, here).  All told, these developments have incentivized parties to “go ahead and produce,” without regard to the patents they might be infringing, in the knowledge that, at worst, they might at some future time be held liable for something akin to the reasonable royalties they should have agreed to pay in the first place.

Chief Justice Roberts’ opinion for the Court in Halo Electronics in effect reinstates the longstanding historical understandings that in patent infringement cases:  (1) district court judges enjoy broad discretion to assess enhanced damages “for egregious infringement behavior”; and (2) the standard “preponderance of the evidence” standard of civil litigation (rather than the far more exacting “clear and convincing evidence” standard of proof) applies to enhanced damages determinations.  In so doing, it puts potential infringers on notice that exemplary damages for egregious infringing actions cannot be avoided after the fact by manufactured theories (“questions”) of possible patent invalidity or non-applicability of a patent’s claims to the conduct in question.  This in turn should raise the expected costs of intentional patent infringement, thereby increasing the incentive for technology implementers to negotiate ex ante with patent holders over license terms.  To the extent this incentive change results in a higher incidence of licensing ex ante, a lower incidence of costly infringement litigation, and higher returns to patentees, economic welfare should tend to rise.

Halo Electronics’ “halo effect” should not, of course, be oversold.  The meaning of “egregious infringement behavior” will have to be hashed out in federal litigation, and it is unclear to what extent federal district courts may show a greater inclination to assess enhanced damages.   Furthermore, recent legislative and regulatory policy changes and uncertainties (including rising “anti-patent” sentiments in the Executive Branch, see, for example, here) continue to constrain incentives to patent, to the detriment of economic welfare.  Nevertheless, while perhaps less than “heavenly” in its impact, the Halo Electronics decision should have some effect in summoning up “the better angels of technology implementers’ nature” (paraphrasing Abraham Lincoln, a firm believer in a robust patent system) and causing them to better respect the property rights imbedded in the patented innovations on which they rely.

In a recent Truth on the Market blog posting, I summarized the discussion at a May 17 Heritage Foundation program on the problem of anticompetitive market distortions (ACMDs), featuring Shanker Singham of the Legatum Institute (a market-oriented London think tank) and me.  The program highlighted the topic of anticompetitive government-imposed laws and regulations (which Singham and I refer to as anticompetitive market distortions, or ACMDs):

Trade freedom has increased around the world, according to the 2016 Heritage Foundation Index of Economic Freedom, due to a decrease in trade barriers, particularly tariffs. Despite this progress, many economies struggle with another burden that is increasing costs for families and businesses. Non-tariff barriers and overregulation, in the form of government-imposed laws and regulations, continue to stifle innovation and competition. These onerous and excessive regulations, backed by the power of the state, benefit the well-connected and act as an additional layer of government favoritism. Meanwhile, individuals are strapped with higher costs and fewer options.  

Singham and three colleagues (Srinivasa Rangan of Babson College, Molly Kiniry of the Competere Group, and Robert Bradley of Northeastern University) have now produced an impressive study of the economic impact of ACMDs in India (which has one of the world’s most highly regulated economies), released on May 31 by the Legatum Institute.  The study applies to India’s ACMDs the authors’ “Productivity Simulator,” which aggregates economic data to gauge the theoretical economic growth potential of an economy if ACMDs are eliminated.  Focusing on the full gamut of ACMDs affecting a nation in the areas of property rights, domestic competition, and international competition, the Simulator estimates the potential productivity gains for individual economies as measured in changes to GDP per capita, assuming all ACMDs are eliminated.  Using those productivity estimates, the Simulator can then be employed to derive resultant nation-specific estimates of potential GDP increases from “perfect” regulatory reform.  Although a perfect “regulatory nirvana” may not be achievable in the “real world,” Productivity Simulator estimates have the virtue of spotlighting the magnitude of forgone welfare due to regulatory excesses.  Even assuming a degree of imperfection in Productivity Simulator estimates applied to India, the results are startling, as the Executive Summary to the May 31 report reveals:

 “The [May 31] Study makes the following key findings:

» If India eliminated all its distortions it would be the fifth largest economy in the

world, and in GDP per capita terms, it would rise from being ranked 169th to being ranked 67th.

» If India eliminated all its distortions it would generate over 200 million new jobs, and reduce absolute poverty to zero.

» If India improved its insolvency rules, opened up to foreign investment in certain areas and better protected intellectual property rules, the number of people living on less than $2 per day would be reduced from 770 million to 627 million.

» Simply optimising its regulatory environment with regard to the World Bank Doing Business Index would lead to a productivity gain of only 0.07%.

» Improving its insolvency rules, opening up to foreign investment in certain areas and better protecting intellectual property (L2) could lead to a productivity gain of 148%.

» Fully optimising its distortions could lead to a productivity gain of 1875% of which the Indian economy would capture almost 700%.”

I look forward to further application of the Productivity Simulator to other economies.  Research reports of this sort, in conjunction with studies carried out by the World Bank and the Organization for Economic Cooperation and Development that employ other methodologies, build a strong case for sweeping market-oriented regulatory reform, in foreign countries and in the United States.

The Consumer Financial Protection Bureau (CFPB) is, to say the least, a controversial agency.  As documented by such experts as Scalia Law School Professor Todd Zywicki, the CFPB imposes enormous costs on consumers and financial service providers through costly and unwarranted command-and-control regulation.  Furthermore, as I explained in a February 2016 Heritage Foundation legal memorandum, the CFPB’s exemption from the oversight constraints that apply to other federal agencies offends the separation of powers and thus raises serious constitutional problems.  (Indeed, a federal district court in the District of Columbia is currently entertaining a challenge to the Bureau’s constitutionality.)

Given its freedom from normal constitutionally-mandated supervision, the CFPB’s willingness to take sweeping and arguably arbitrary actions is perhaps not surprising.  Nevertheless, even by its own standards, the Bureau’s latest initiative is particularly egregious.  Specifically, on June 2, 2016, the CFPB issued a “Notice of Proposed Rulemaking on Payday, Vehicle Title, and Certain High-Cost Installment Loans” (CFPB NPRM) setting forth a set of requirements that would effectively put “payday loan” companies out of business.  (The U.S. Government has already unjustifiably harmed payday lenders through “Operation Choke Point,” pursuant to which federal bank regulators, in particular the Federal Deposit Insurance Corporation (FDIC), have sought to deny those lenders access to banking services.  A Heritage Foundation overview of Operation Choke Point and a call for its elimination may be found here; the harm the FDIC has imposed on payday lenders is detailed here.)

The CFPB defines a “payday loan” as “a short-term loan, generally for $500 or less, that is typically due on your next payday. . . .  [The borrower] must give lenders access to . . . [his or her] checking account or write a check for the full balance in advance that the lender has an option of depositing when the loan comes due.”  Moreover, payday loans are often structured to be paid off in one lump-sum payment, but interest-only payments – “renewals” or “rollovers” – are not unusual. In some cases, payday loans may be structured so that they are repayable in installments over a longer period of time.”

Despite their unusual character, economic analysis reveals that payday loans efficiently serve the needs of a certain class of borrower and that welfare is reduced if government seeks to sharply limit them.  In a 2009 study, Professor Zywicki summarized key research findings:

Economic research strongly supports two basic conclusions about payday lending:  First, those who use payday lending do so because they have to, not because they want to.  They use payday lending to deal with short-term exigencies and a lack of access to payday loans would likely cause them substantial cost and personal difficulty, such as bounced checks, disconnected utilities, or lack of funds for emergencies such as medical expenses or car repairs. Those who use payday loans have limited alternative sources of credit, such as pawn shops, bank overdraft protection, credit card cash advances (where available), and informal lenders. Although expensive, payday loans are less expensive than available alternatives. Misguided paternalistic regulation that deprives consumers of access to payday loans would likely force many of them to turn to even more expensive lenders or to do without emergency funds. Although payday loans may lead some consumers to be trapped in a “debt trap” of repeated revolving debt, this concern is not unique to payday lending. Moreover, evidence indicates that those who are led into a debt trap by payday lending are far fewer in number than those who are benefited by access to payday loans.

Second, efforts by legislators to regulate the terms of small consumer loans (such as by imposing price caps on fees or limitations on repeated use “rollovers”) almost invariably produce negative unintended consequences that vastly exceed any social benefits gained from the legislation. Moreover, prior studies of price caps on lending have found that low-income and minority borrowers are most negatively affected by the regulations and the adjustments that they produce. Volumes of economic theory and empirical analysis indicate that further restrictions on payday lending likely would prove counterproductive and harmful to the very people such restrictions would be intended to help.

Unfortunately, the CFPB seems to be oblivious to these findings on payday lending, as demonstrated by key language of the CFPB NPRM:

[T]he [CFPB’s] proposal would identify it as an abusive and unfair practice for a lender to make a covered loan without reasonably determining that the consumer has the ability to repay the loan.  The proposal generally would require that, before making a covered loan, a lender must reasonably determine that the consumer has the ability to repay the loan.  The proposal also would impose certain restrictions on making covered loans when a consumer has or recently had certain outstanding loans. . . .  The proposal also would identify it as an unfair and abusive practice to attempt to withdraw payment from a consumer’s account for a covered loan after two consecutive payment attempts have failed, unless the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account. The proposal would require lenders to provide certain notices to the consumer before attempting to withdraw payment for a covered loan from the consumer’s account. The proposal would also prescribe processes and criteria for registration of information systems, and requirements for furnishing loan information to and obtaining consumer reports from those registered information systems. The Bureau is proposing to adopt official interpretations to the proposed regulation.

In short, the CFPB NPRM, if implemented, would impose new and onerous costs on payday lenders with respect to each loan, arising out of:  (1) determination of the borrower’s ability to pay; (2) identification of the borrower’s other outstanding loans; (3) the practical inability to recover required payments from a defaulting consumer’s account (due to required consumer authorization and notice obligations); and (4) the registration of information systems and requirements for obtaining various sorts of consumer information from those systems.  In the aggregate, these costs would likely make a large number of payday loan programs unprofitable – thereby (1) driving those loans out of the market and harming legitimate lenders while also (2) denying credit to, and thereby reducing the welfare of, the consumers who would be denied their best feasible source of credit.

As Heritage Foundation scholar Norbert Michel put it in a June 2, 2016 Daily Signal article:

The CFPB’s [NPRM] regulatory solution . . . centers on an absurd concept: ability to repay. Basically, the new rules force lenders to certify that consumers have the ability to repay their loan, turning the idea of voluntary exchange on its head.

Here, too, the new rules are based on the flawed idea that firms typically seek out consumers who can’t possibly pay what they owe. It doesn’t take a graduate degree to figure out that’s not a viable long-term business strategy.

None of this matters to the CFPB. Shockingly, neither does the CFPB’s own evidence.

In sum, the CFPB NPRM provides yet one more good reason for Congress to seriously consider abolishing the CFPB (legislation introduced by the House and Senate in 2015 would do this), with consumer protection authority authorities currently exercised by the Bureau returned to the seven agencies that originally administered them.   While we are awaiting congressional action, however, the CFPB would be well-advised (assuming it truly desires to promote economic welfare) to reconsider its latest ill-considered initiative and withdraw the NPRM as soon as possible.

Public policies that rely on free-market forces and avoid government interventions that distort terms of international trade benefit producers, consumers, and national economies alike.  The  full benefits of international trade will not be realized, however, if sales and purchase decisions are distorted by anticompetitive behavior or other illegitimate commercial conduct (such as theft, fraud, or deceit) that undermines market forces.  Thus, the importation of goods produced through the theft of U.S. property, including intangible “intellectual property” (including, for example, patents, copyrights, and trademarks), distorts the market and merits being curbed.

The provision of U.S. trade law that is targeted most specifically at anticompetitive and other harmful business conduct affecting American imports is Section 337 of the Tariff Act of 1930, which is administered by the U.S. International Trade Commission (USITC).  Section 337 condemns as illegal imports that violate U.S. intellectual property (IP) rights related to a U.S. industry or involve “unfair methods of competition and unfair acts” that harm a U.S. industry.  The standard remedy for a Section 337 violation is the issuance of an order excluding the offending imports from the U.S. market.  As I explain in a Heritage Foundation “Backgrounder” published on June 2, 2016, congressional consideration of reforms that address policy constraints on its application, potential limitations on its reach, and the breadth of the conduct it covers could help Section 337 to become an even more valuable tool with which to protect U.S. IP rights and combat truly unfair competition in a manner that is consistent with general free trade principles.

More specifically, while Section 337 should be judiciously modified to make it an even more effective weapon against foreign theft of U.S. IP rights, it should at the same time be amended so that it cannot be applied in a protectionist manner to curb vigorous and legitimate competition from abroad.  The U.S. antitrust laws are well designed to deal with legitimate cases of anticompetitive foreign business activity not involving IP.  Moreover, the USITC’s brief (and unsuccessful) experimentation during the 1970s with non-IP-related investigations revealed that Section 337, if not appropriately cabined, had a welfare-inimical protectionist potential.  That potential will remain unless and until Section 337 is amended to make it an “IP theft only” statute.

My June 2 Backgrounder concludes as follows:

Section 337 of the Tariff Act of 1930 provides valuable relief to American IP holders whose property rights are undermined by infringing imports. In many cases, Section 337 may be the only truly effective means by which industries that depend on U.S. IP can protect their interests and compete on an undistorted playing field with imported products. Nevertheless, a few carefully tailored amendments to the statute could render it even more effective. Specifically, Congress should seriously consider language that would:

  • Clarify that Section 337 covers all imports, both intangible (such as electronic data compilations) and tangible;
  • Specify that it applies to import schemes aimed at infringing IP rights, even if there is no direct infringement at the precise time of importation;
  • Limit the President’s unreviewable discretion to overturn Section 337 exclusion orders, except on grounds of public health or safety; and
  • Eliminate Section 337’s application to non-IP-related import practices.

Adoption of reforms along these lines could make Section 337 an even more effective tool with which to protect U.S. IP rights in international trade and ensure that Section 337 is applied in a procompetitive, pro-consumer fashion. Such reforms would enhance the role of Section 337 as a law that supports American innovation and economic growth in a manner that is consistent with free trade principles.