Archives For Truth on the Market

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

26 July, 10 A.F. (after fairness)

Dear Fellow Inquisitors,

It has been more than a decade now since the Federal Neutrality Commission, born of the ashes of the old world, ushered in the Age of Fairness. 

As you all know, the FNC was created during the Online Era, when the emergence of the largest companies in human history opened our eyes to the original sin of the competitive process: unfairness.

In the course of their evolution, digital platforms—the vanity fairs of the XXI century—had created entire ecosystems that offered integrated services that were so comfortable to use together that they led to a double-sin: sloth on the part of the consumers, and the unfair exclusion of competitors, who were barred from exercising their God-given right to participate in every market and every platform—and to prosper.

Digital stores selling their own branded goods, social-media apps with their own messaging services, search engines using search statistics to generate optimally efficient tools that surpassed the (legitimate) confines of their core functions and spilled over into the dominion of job search, flight booking, or housing apps … App stores were even using their own recognizable software to guarantee that the apps they distributed met the highest standards of security and trustworthiness!

While these things might not seem entirely unreasonable (especially to the heathens: selfish and individualistic consumers who care about nothing other than satisfying their base hedonistic desires), they in fact led to unspeakable evils that flouted the common good.

For example, they made it very, very uncomfortable for someone who wanted to start their own real-estate business to compete with such strong rival companies, who could leverage their superior efficiency in their core markets to become nigh-unbeatable in offering the cheapest, most relevant housing ads. To make matters worse, the gargantuan spending of the digital platforms on research and development built additional moats of quality and innovation around their products—both core and adjacent—that made them utterly unimpregnable to rivals specializing in just one area.

By constantly leveraging their core services to offer better and improved products on adjacent markets, digital platforms had made it unfairly difficult for other companies to join the race and deliver us to “perfect competition”—the euphoric state of blissful equilibrium foretold by the high priests of the only true belief system, Economics.

But not all was lost, and we hadn’t been forsaken. In those dark and faithless days, it was revealed to us by Sen. Amy Klobuchar—praise be her name—that the loathsome practice whereby online companies favored their own products and services over their rivals had a name, “self-preferencing,” and that it was a sin. And, most importantly, that it could be eradicated.

Fortunately, and thanks to the vigilance of the FNC, legal steps were swiftly taken to make the praxis of the Digital Economy more closely resemble its theory, as passed on to us by our forefathers.

And it worked, brothers and sisters! The prohibition of self-preferencing in digital markets made online products much more homogenous, thus validating one of the main assumptions of Economics. In addition, new competition-law Acts, with mechanisms such as forced data sharing, have eliminated all the messy experimentation that had hitherto led to varied (and risky) business models and diversified approaches. By turning competition into forced collaboration, we had finally made it stable, equal, and predictable; in one word: fair.

And what of the sinner in every one of us? Before the great revelation, blasphemous “consumers”—an anachronistic and reductive term for “socially responsible citizens”—were committing the sin of laziness: sloth. Now, choice is finally mandated, and nothing can be pre-selected or even integrated. No more arbitrary safe-browsing mechanisms, integrated malware detectors and spam filters. Where digital platforms experimented and imposed results on us, we are now coercively free to experiment by ourselves—and on ourselves! Online searches today lead to thousands of indistinguishable links hiding an infinity of surprises, requiring us to be more circumspect and informed than ever before. In one word: the prohibition of self-preferencing has improved the moral character of the human stock.

It is universally known that we owe the dawn of the Age of Fairness to the American Innovation and Choice Online Act, adopted by Congress in the year 2022; and the unwavering vigilance of the FNC. What is lesser known—and what I am here to instill in you today—is that that was just the beginning. The success of AICOA has opened our eyes to an even more ancient and perverse evil: self-preferencing in offline markets. It revealed to us that—for centuries, if not millennia—companies in various industries—from togas to wine, from cosmetics to insurance—had, in fact, always preferred their own initiatives over those of their rivals!

Just as the ancient chariot constructors designed chariots to suit the build of their own thoroughbred horses (thereby foreclosing horses raised by other breeders), the XX century car producers were using spare parts delivered by a supplier organizationally related to their company.

This realization has accelerated the birth pangs of the American Innovation and Choice Offline Act, which we are here to announce today. With it, the FNC will eliminate all remnants of unfair rivalry—online and offline—so that we, as one community of faith, can finally enjoy the true benefits of competition. But we must never forget that this tenuous equilibrium hangs by a thread, and that we owe it all to the indefatigable efforts of the FNC agents patrolling the streets, supermarkets, restaurants, gyms, factories, and just about everything else every single day.

Of course, there is still a lot to be done. But every long journey must begin somewhere.

Today, I want to warn you against sin and urge you to adopt the religion of fairness[1] before the day of judgment comes.

Amen.


[1] Or any other religion that condemns self-preferencing. I want to recommend them all equally.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

If S.2992—the American Innovation and Choice Online Act or AICOA—were to become law, it would be, at the very least, an incomplete law. By design—and not for good reason, but for political expediency—AICOA is riddled with intentional uncertainty. In theory, the law’s glaring definitional deficiencies are meant to be rectified by “expert” agencies (i.e., the DOJ and FTC) after passage. But in actuality, no such certainty would ever emerge, and the law would stand as a testament to the crass political machinations and absence of rigor that undergird it. Among many other troubling outcomes, this is what the future under AICOA would hold.

Two months ago, the American Bar Association’s (ABA) Antitrust Section published a searing critique of AICOA in which it denounced the bill for being poorly written, vague, and departing from established antitrust-law principles. As Lazar Radic and I discussed in a previous post, what made the ABA’s letter to Congress so eye-opening was that it was penned by a typically staid group with a reputation for independence, professionalism, and ideational heterogeneity.

One of the main issues the ABA flagged in its letter is that the introduction of vague new concepts—like “materially harm competition,” which does not exist anywhere in current antitrust law—into the antitrust mainstream will risk substantial legal uncertainty and produce swathes of unintended consequences.

According to some, however, the bill’s inherent uncertainty is a feature, not a bug. It leaves enough space for specialist agencies to define the precise meaning of key terms without unduly narrowing the scope of the bill ex ante.

In particular, supporters of the bill have pointed to the prospect of agency guidelines under the law to rescue it from the starkest of the fundamental issues identified by the ABA. Section 4 of AICOA requires the DOJ and FTC to issue “agency enforcement guidelines” no later than 270 days after the date of enactment:

outlining policies and practices relating to conduct that may materially harm competition under section 3(a), agency interpretations of the affirmative defenses under section 3(b), and policies for determining the appropriate amount of a civil penalty to be sought under section 3(c).

In pointing to the prospect of guidelines, however, supporters are inadvertently admitting defeat—and proving the ABA’s point: AICOA is not ready for prime time.

This thinking is misguided for at least three reasons:

Guidelines are not rules

As section 4(d) of AICOA recognizes, guidelines are emphatically nonbinding:

The joint guidelines issued under this section do not … operate to bind the Commission, Department of Justice, or any person, State, or locality to the approach recommended in the guidelines.

As such, the value of guidelines in dispelling legal uncertainty is modest, at best.

This is even more so in today’s highly politicized atmosphere, where guidelines can be withdrawn at the tip of the ballot (we’ve just seen the FTC rescind the Vertical Merger Guidelines it put in place less than a year ago). Given how politicized the issuing agencies themselves have become, it’s a virtual certainty that the guidelines produced in response to AICOA would be steeped in partisan politics and immediately changed with a change in administration, thus providing no more lasting legal certainty than speculation by a member of Congress.

Guidelines are not the appropriate tool to define novel concepts

Regardless of this political reality, however, the mixture of vagueness and novelty inherent in the key concepts that underpin the infringements and affirmative defenses under AICOA—such as “fairness,” “preferencing,” “materiality”, or the “intrinsic” value of a product—undermine the usefulness (and legitimacy) of guidelines.

Indeed, while laws are sometimes purposefully vague—operating as standards rather than prescriptive rules—to allow for more flexibility, the concepts introduced by AICOA don’t even offer any cognizable standards suitable for fine-tuning.

The operative terms of AICOA don’t have definitive meanings under antitrust law, either because they are wholly foreign to accepted antitrust law (as in the case of “self-preferencing”) or because the courts have never agreed on an accepted definition (as in the case of “fairness”). Nor are they technical standards, which are better left to specialized agencies rather than to legislators to define, such as in the case of, e.g., pollution (by contrast: what is the technical standard for “fairness”?).

Indeed, as Elyse Dorsey has noted, the only certainty that would emerge from this state of affairs is the certainty of pervasive rent-seeking by non-altruistic players seeking to define the rules in their favor.

As we’ve pointed out elsewhere, the purpose of guidelines is to reflect the state of the art in a certain area of antitrust law and not to push the accepted scope of knowledge and practice in a new direction. This not only overreaches the FTC’s and DOJ’s powers, but also risks galvanizing opposition from the courts, thereby undermining the utility of adopting guidelines in the first place.

Guidelines can’t fix a fundamentally flawed law

Expecting guidelines to provide sensible, administrable content for the bill sets the bar overly high for guidelines, and unduly low for AICOA.

The alleged harms at the heart of AICOA are foreign to antitrust law, and even to the economic underpinnings of competition policy more broadly. Indeed, as Sean Sullivan has pointed out, the law doesn’t even purport to define “harms,” but only serves to make specific conduct illegal:

Even if the conduct has no effect, it’s made illegal, unless an affirmative defense is raised. And the affirmative defense requires that it doesn’t ‘harm competition.’ But ‘harm competition’ is undefined…. You have to prove that harm doesn’t result, but it’s not really ever made clear what the harm is in the first place.”

“Self-preferencing” is not a competitive defect, and simply declaring it to be so does not make it one. As I’ve noted elsewhere:

The notion that platform entry into competition with edge providers is harmful to innovation is entirely speculative. Moreover, it is flatly contrary to a range of studies showing that the opposite is likely true…. The theory of vertical discrimination harm is at odds not only with this platform-specific empirical evidence, it is also contrary to the long-standing evidence on the welfare effects of vertical restraints more broadly …

… [M]andating openness is not without costs, most importantly in terms of the effective operation of the platform and its own incentives for innovation.

Asking agencies with an expertise in competition policy to enact economically sensible guidelines to direct enforcement against such conduct is a fool’s errand. It is a recipe for purely political legislation adopted by competition agencies that does nothing to further their competition missions.

AICOA’s Catch-22 Is Its Own Doing, and Will Be Its Downfall

AICOA’s Catch-22 is that, by making the law so vague that it needs enforcement guidelines to flesh it out, AICOA renders both itself and those same guidelines irrelevant and misses the point of both legal instruments.

Ultimately, guidelines cannot resolve the fundamental rule-of-law issues raised by the bill and highlighted by the ABA in its letter. To the contrary, they confirm the ABA’s concerns that AICOA is a poorly written and indeterminate bill. Further, the contentious elements of the bill that need clarification are inherently legislative ones that—paradoxically—shouldn’t be left to competition-agency guidelines to elucidate.

The upshot is that any future under AICOA will be one marked by endless uncertainty and the extreme politicization of both competition policy and the agencies that enforce it.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Much ink has been spilled regarding the potential harm to the economy and to the rule of law that could stem from enactment of the primary federal antitrust legislative proposal, the American Innovation and Choice Online Act (AICOA) (see here). AICOA proponents, of course, would beg to differ, emphasizing the purported procompetitive benefits of limiting the business freedom of “Big Tech monopolists.”

There is, however, one inescapable reality—as night follows day, passage of AICOA would usher in an extended period of costly litigation over the meaning of a host of AICOA terms. As we will see, this would generate business uncertainty and dampen innovative conduct that might be covered by new AICOA statutory terms. 

The history of antitrust illustrates the difficulties inherent in clarifying the meaning of novel federal statutory language. It was not until 21 years after passage of the Sherman Antitrust Act that the Supreme Court held that Section 1 of the act’s prohibition on contracts, combinations, and conspiracies “in restraint of trade” only covered unreasonable restraints of trade (see Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911)). Furthermore, courts took decades to clarify that certain types of restraints (for example, hardcore price fixing and horizontal market division) were inherently unreasonable and thus per se illegal, while others would be evaluated on a case-by-case basis under a “rule of reason.”

In addition, even far more specific terms related to exclusive dealing, tying, and price discrimination found within the Clayton Antitrust Act gave rise to uncertainty over the scope of their application. This uncertainty had to be sorted out through judicial case-law tests developed over many decades.

Even today, there is no simple, easily applicable test to determine whether conduct in the abstract constitutes illegal monopolization under Section 2 of the Sherman Act. Rather, whether Section 2 has been violated in any particular instance depends upon the application of economic analysis and certain case-law principles to matter-specific facts.

As is the case with current antitrust law, the precise meaning and scope of AICOA’s terms will have to be fleshed out over many years. Scholarly critiques of AICOA’s language underscore the seriousness of this problem.

In its April 2022 public comment on AICOA, the American Bar Association (ABA)  Antitrust Law Section explains in some detail the significant ambiguities inherent in specific AICOA language that the courts will have to address. These include “ambiguous terminology … regarding fairness, preferencing, materiality, and harm to competition on covered platforms”; and “specific language establishing affirmative defenses [that] creates significant uncertainty”. The ABA comment further stresses that AICOA’s failure to include harm to the competitive process as a prerequisite for a statutory violation departs from a broad-based consensus understanding within the antitrust community and could have the unintended consequence of disincentivizing efficient conduct. This departure would, of course, create additional interpretive difficulties for federal judges, further complicating the task of developing coherent case-law principles for the new statute.

Lending support to the ABA’s concerns, Northwestern University professor of economics Dan Spulber notes that AICOA “may have adverse effects on innovation and competition because of imprecise concepts and terminology.”

In a somewhat similar vein, Stanford Law School Professor (and former acting assistant attorney general for antitrust during the Clinton administration) Douglas Melamed complains that:

[AICOA] does not include the normal antitrust language (e.g., “competition in the market as a whole,” “market power”) that gives meaning to the idea of harm to competition, nor does it say that the imprecise language it does use is to be construed as that language is construed by the antitrust laws. … The bill could be very harmful if it is construed to require, not increased market power, but simply harm to rivals.

In sum, ambiguities inherent in AICOA’s new terminology will generate substantial uncertainty among affected businesses. This uncertainty will play out in the courts over a period of years. Moreover, the likelihood that judicial statutory constructions of AICOA language will support “efficiency-promoting” interpretations of behavior is diminished by the fact that AICOA’s structural scheme (which focuses on harm to rivals) does not harmonize with traditional antitrust concerns about promoting a vibrant competitive process.

Knowing this, the large high-tech firms covered by AICOA will become risk averse and less likely to innovate. (For example, they will be reluctant to improve algorithms in a manner that would increase efficiency and benefit consumers, but that might be seen as disadvantaging rivals.) As such, American innovation will slow, and consumers will suffer. (See here for an estimate of the enormous consumer-welfare gains generated by high tech platforms—gains of a type that AICOA’s enactment may be expected to jeopardize.) It is to be hoped that Congress will take note and consign AICOA to the rubbish heap of disastrous legislative policy proposals.

Winter in Helsinki

Dan Crane —  25 July 2022 — Leave a comment

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Jouko Hiltunen gazed out the window into the midday twilight. Eight stories down, across the plaza and promenade, the Helsinki harbor was already blanketed under a dusting of snow. By Christmas, the ice would be thick enough for walking out to the castle at Suomenlinna.

Jouko turned back to his computer screen. His fingers found the keys. At once, lines of code began spilling from the keyboard.

The desk phone rang. Sanna, who occupied the adjacent cubicle, arched her eyebrows. “Legal again?”

Jouko nodded. Without answering the phone, he got up and walked down three flights of stairs. The usual group was assembled in Partanen’s office: the woman in the dour gray suit who looked like an osprey, the fat man from Brussels who made them speak in English, and Partanen, the general counsel.

By habit, Jouko entered and stood behind a chair. Partanen nodded curtly. “We have an issue, Hiltunen. Again.”

“What now?”

“We’ve been watching how you’re coding the new walking tour search vertical. It seems that you are designing it to give preference to restaurants, cafès, and hotels that have been highly rated by the Tourism Board.”

“Yes, that’s right. Restaurants, cafès, and hotels that have been rated by the Tourism Board are cleaner, safer, and more convenient. That’s why they have been rated.”

“But you are forgetting that the Tourism Board is one of our investors. This will be considered self-preferencing.”

“But . . .”

“Listen, Hiltunen. We aren’t here to argue about this. Maybe it will, maybe it won’t be considered self-preferencing, but our company won’t take that risk. Do you understand?”

 “No.”

 “Then let me explain it . . .”

 But Jouko had already left. When he returned to his desk, Sanna was watching him. “Everything OK?” she asked.

Jouko shrugged. He started typing again, but more slowly than before. An hour later, the phone rang again. This time, Sanna only raised an eyebrow. Jouko gave half a nod and ambled downstairs.

“You are making it worse,” said Partanen. The osprey woman scowled and raked her fingernails across the desk.

“How am I making it worse? I did what you said and eliminated search results defaulting to rated establishments.”

“Yes, but you added a toggle for users to be shown only rated establishments.”

“Only if they decide to be shown only rated establishments. I’m giving them a choice.”

“Choice? What does choice have to do with it? Everyone who uses our search engine is choosing—” Partanen made rabbit ears in the air – “but we have a responsibility not to impede competition. If you give them a suggestive choice” – again, rabbit ears – “that will be considered self-preferencing?”

“Really?”

“Well, maybe it will and maybe it won’t, but the company won’t take the risk.”

When Jouko returned to his desk, Sanna averted her eyes. As he sat motionless behind his keyboard, hands folded in his lap, she occasionally shot him concerned glances.

The darkness outside was nearly complete when the phone rang again. Jouko let it go to voicemail and waited a long time before rising and walking wearily downstairs.

“What now? I haven’t done anything.”

“We’ve been talking and have a new idea. It would be better if you blocked from the search results any restaurants or hotels that have been rated by the Board of Tourism. That way, there is no chance that we will be accused of self-preferencing.”

“Or that people will end up in a safe, clean, or convenient restaurant.”

“That’s not your problem, is it?”

Jouko returned to his cubicle. He did not sit down at his desk, but started putting on his coat.

“Where are you going?” asked Sanna.

“I’m going to walk out towards Suomenlinna.”

Sanna’s voice rose in alarm: “But the ice has barely formed. It won’t hold you.”

Jouko shrugged. “Maybe it will, maybe it won’t. I’ll take the risk.”

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Earlier this month, Professors Fiona Scott Morton, Steve Salop, and David Dinielli penned a letter expressing their “strong support” for the proposed American Innovation and Choice Online Act (AICOA). In the letter, the professors address criticisms of AICOA and urge its approval, despite possible imperfections.

“Perhaps this bill could be made better if we lived in a perfect world,” the professors write, “[b]ut we believe the perfect should not be the enemy of the good, especially when change is so urgently needed.”

The problem is that the professors and other supporters of AICOA have shown neither that “change is so urgently needed” nor that the proposed law is, in fact, “good.”

Is Change ‘Urgently Needed’?

With respect to the purported urgency that warrants passage of a concededly imperfect bill, the letter authors assert two points. First, they claim that AICOA’s targets—Google, Apple, Facebook, Amazon, and Microsoft (collectively, GAFAM)—“serve as the essential gatekeepers of economic, social, and political activity on the internet.” It is thus appropriate, they say, to amend the antitrust laws to do something they have never before done: saddle a handful of identified firms with special regulatory duties.

But is this oft-repeated claim about “gatekeeper” status true? The label conjures up the old Terminal Railroad case, where a group of firms controlled the only bridges over the Mississippi River at St. Louis. Freighters had no choice but to utilize their services. Do the GAFAM firms really play a similar role with respect to “economic, social, and political activity on the internet”? Hardly.

With respect to economic activity, Amazon may be a huge player, but it still accounts for only 39.5% of U.S. ecommerce sales—and far less of retail sales overall. Consumers have gobs of other ecommerce options, and so do third-party merchants, which may sell their wares using Shopify, Ebay, Walmart, Etsy, numerous other ecommerce platforms, or their own websites.

For social activity on the internet, consumers need not rely on Facebook and Instagram. They can connect with others via Snapchat, Reddit, Pinterest, TikTok, Twitter, and scores of other sites. To be sure, all these services have different niches, but the letter authors’ claim that the GAFAM firms are “essential gatekeepers” of “social… activity on the internet” is spurious.

Nor are the firms singled out by AICOA essential gatekeepers of “political activity on the internet.” The proposed law touches neither Twitter, the primary hub of political activity on the internet, nor TikTok, which is increasingly used for political messaging.

The second argument the letter authors assert in support of their claim of urgency is that “[t]he decline of antitrust enforcement in the U.S. is well known, pervasive, and has left our jurisprudence unable to protect and maintain competitive markets.” In other words, contemporary antitrust standards are anemic and have led to a lack of market competition in the United States.

The evidence for this claim, which is increasingly parroted in the press and among the punditry, is weak. Proponents primarily point to studies showing:

  1. increasing industrial concentration;
  2. higher markups on goods and services since 1980;
  3. a declining share of surplus going to labor, which could indicate monopsony power in labor markets; and
  4. a reduction in startup activity, suggesting diminished innovation. 

Examined closely, however, those studies fail to establish a domestic market power crisis.

Industrial concentration has little to do with market power in actual markets. Indeed, research suggests that, while industries may be consolidating at the national level, competition at the market (local) level is increasing, as more efficient national firms open more competitive outlets in local markets. As Geoff Manne sums up this research:

Most recently, several working papers looking at the data on concentration in detail and attempting to identify the likely cause for the observed data, show precisely the opposite relationship. The reason for increased concentration appears to be technological, not anticompetitive. And, as might be expected from that cause, its effects are beneficial. Indeed, the story is both intuitive and positive.

What’s more, while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.

With respect to the evidence on markups, the claim of a significant increase in the price-cost margin depends crucially on the measure of cost. The studies suggesting an increase in margins since 1980 use the “cost of goods sold” (COGS) metric, which excludes a firm’s management and marketing costs—both of which have become an increasingly significant portion of firms’ costs. Measuring costs using the “operating expenses” (OPEX) metric, which includes management and marketing costs, reveals that public-company markups increased only modestly since the 1980s and that the increase was within historical variation. (It is also likely that increased markups since 1980 reflect firms’ more extensive use of technology and their greater regulatory burdens, both of which raise fixed costs and require higher markups over marginal cost.)

As for the declining labor share, that dynamic is occurring globally. Indeed, the decline in the labor share in the United States has been less severe than in Japan, Canada, Italy, France, Germany, China, Mexico, and Poland, suggesting that anemic U.S. antitrust enforcement is not to blame. (A reduction in the relative productivity of labor is a more likely culprit.)

Finally, the claim of reduced startup activity is unfounded. In its report on competition in digital markets, the U.S. House Judiciary Committee asserted that, since the advent of the major digital platforms:

  1. “[t]he number of new technology firms in the digital economy has declined”;
  2. “the entrepreneurship rate—the share of startups and young firms in the [high technology] industry as a whole—has also fallen significantly”; and
  3. “[u]nsurprisingly, there has also been a sharp reduction in early-stage funding for technology startups.” (pp. 46-47.)

Those claims, however, are based on cherry-picked evidence.

In support of the first two, the Judiciary Committee report cited a study based on data ending in 2011. As Benedict Evans has observed, “standard industry data shows that startup investment rounds have actually risen at least 4x since then.”

In support of the third claim, the report cited statistics from an article noting that the number and aggregate size of the very smallest venture capital deals—those under $1 million—fell between 2014 and 2018 (after growing substantially from 2008 to 2014). The Judiciary Committee report failed to note, however, the cited article’s observation that small venture deals ($1 million to $5 million) had not dropped and that larger venture deals (greater than $5 million) had grown substantially during the same time period. Nor did the report acknowledge that venture-capital funding has continued to increase since 2018.

Finally, there is also reason to think that AICOA’s passage would harm, not help, the startup environment:

AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.

Despite the letter authors’ claims, neither a paucity of avenues for “economic, social, and political activity on the internet” nor the general state of market competition in the United States establishes an “urgent need” to re-write the antitrust laws to saddle a small group of firms with unprecedented legal obligations.

Is the Vagueness of AICOA’s Primary Legal Standard a Feature?

AICOA bars covered platforms from engaging in three broad classes of conduct (self-preferencing, discrimination among business users, and limiting business users’ ability to compete) where the behavior at issue would “materially harm competition.” It then forbids several specific business practices, but allows the defendant to avoid liability by proving that their use of the practice would not cause a “material harm to competition.”

Critics have argued that “material harm to competition”—a standard that is not used elsewhere in the antitrust laws—is too indeterminate to provide business planners and adjudicators with adequate guidance. The authors of the pro-AICOA letter, however, maintain that this “different language is a feature, not a bug.”

That is so, the letter authors say, because the language effectively signals to courts and policymakers that antitrust should prohibit more conduct. They explain:

To clarify to courts and policymakers that Congress wants something different (and stronger), new terminology is required. The bill’s language would open up a new space and move beyond the standards imposed by the Sherman Act, which has not effectively policed digital platforms.

Putting aside the weakness of the letter authors’ premise (i.e., that Sherman Act standards have proven ineffective), the legislative strategy they advocate—obliquely signal that you want “change” without saying what it should consist of—is irresponsible and risky.

The letter authors assert two reasons Congress should not worry about enacting a liability standard that has no settled meaning. One is that:

[t]he same judges who are called upon to render decisions under the existing, insufficient, antitrust regime, will also be called upon to render decisions under the new law. They will be the same people with the same worldview.

It is thus unlikely that “outcomes under the new law would veer drastically away from past understandings of core concepts….”

But this claim undermines the argument that a new standard is needed to get the courts to do “something different” and “move beyond the standards imposed by the Sherman Act.” If we don’t need to worry about an adverse outcome from a novel, ill-defined standard because courts are just going to continue applying the standard they’re familiar with, then what’s the point of changing the standard?

A second reason not to worry about the lack of clarity on AICOA’s key liability standard, the letter authors say, is that federal enforcers will define it:

The new law would mandate that the [Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice], the two expert agencies in the area of competition, together create guidelines to help courts interpret the law. Any uncertainty about the meaning of words like ‘competition’ will be resolved in those guidelines and over time with the development of caselaw.

This is no doubt music to the ears of members of Congress, who love to get credit for “doing something” legislatively, while leaving the details to an agency so that they can avoid accountability if things turn out poorly. Indeed, the letter authors explicitly play upon legislators’ unwholesome desire for credit-sans-accountability. They emphasize that “[t]he agencies must [create and] update the guidelines periodically. Congress doesn’t have to do much of anything very specific other than approve budgets; it certainly has no obligation to enact any new laws, let alone amend them.”

AICOA does not, however, confer rulemaking authority on the agencies; it merely directs them to create and periodically update “agency enforcement guidelines” and “agency interpretations” of certain affirmative defenses. Those guidelines and interpretations would not bind courts, which would be free to interpret AICOA’s new standard differently. The letter authors presume that courts would defer to the agencies’ interpretation of the vague standard, and they probably would. But that raises other problems.

For one thing, it reduces certainty, which is likely to chill innovation. Giving the enforcement agencies de facto power to determine and redetermine what behaviors “would materially harm competition” means that the rules are never settled. Administrations differ markedly in their views about what the antitrust laws should forbid, so business planners could never be certain that a product feature or revenue model that is legal today will not be deemed to “materially harm competition” by a future administration with greater solicitude for small rivals and upstarts. Such uncertainty will hinder investment in novel products, services, and business models.

Consider, for example, Google’s investment in the Android mobile operating system. Google makes money from Android—which it licenses to device manufacturers for free—by ensuring that Google’s revenue-generating services (e.g., its search engine and browser) are strongly preferenced on Android products. One administration might believe that this is a procompetitive arrangement, as it creates a different revenue model for mobile operating systems (as opposed to Apple’s generation of revenue from hardware sales), resulting in both increased choice and lower prices for consumers. A subsequent administration might conclude that the arrangement materially harms competition by making it harder for rival search engines and web browsers to gain market share. It would make scant sense for a covered platform to make an investment like Google did with Android if its underlying business model could be upended by a new administration with de facto power to rewrite the law.

A second problem with having the enforcement agencies determine and redetermine what covered platforms may do is that it effectively transforms the agencies from law enforcers into sectoral regulators. Indeed, the letter authors agree that “the ability of expert agencies to incorporate additional protections in the guidelines” means that “the bill is not a pure antitrust law but also safeguards other benefits to consumers.” They tout that “the complementarity between consumer protection and competition can be addressed in the guidelines.”

Of course, to the extent that the enforcement guidelines address concerns besides competition, they will be less useful for interpreting AICOA’s “material harm to competition” standard; they might deem a practice suspect on non-competition grounds. Moreover, it is questionable whether creating a sectoral regulator for five widely diverse firms is a good idea. The history of sectoral regulation is littered with examples of agency capture, rent-seeking, and other public-choice concerns. At a minimum, Congress should carefully examine the potential downsides of sectoral regulation, install protections to mitigate those downsides, and explicitly establish the sectoral regulator.

Will AICOA Break Popular Products and Services?

Many popular offerings by the platforms covered by AICOA involve self-preferencing, discrimination among business users, or one of the other behaviors the bill presumptively bans. Pre-installation of iPhone apps and services like Siri, for example, involves self-preferencing or discrimination among business users of Apple’s iOS platform. But iPhone consumers value having a mobile device that offers extensive services right out of the box. Consumers love that Google’s search result for an establishment offers directions to the place, which involves the preferencing of Google Maps. And consumers positively adore Amazon Prime, which can provide free expedited delivery because Amazon conditions Prime designation on a third-party seller’s use of Amazon’s efficient, reliable “Fulfillment by Amazon” service—something Amazon could not do under AICOA.

The authors of the pro-AICOA letter insist that the law will not ban attractive product features like these. AICOA, they say:

provides a powerful defense that forecloses any thoughtful concern of this sort: conduct otherwise banned under the bill is permitted if it would ‘maintain or substantially enhance the core functionality of the covered platform.’

But the authors’ confidence that this affirmative defense will adequately protect popular offerings is misplaced. The defense is narrow and difficult to mount.

First, it immunizes only those behaviors that maintain or substantially enhance the “core” functionality of the covered platform. Courts would rightly interpret AICOA to give effect to that otherwise unnecessary word, which dictionaries define as “the central or most important part of something.” Accordingly, any self-preferencing, discrimination, or other presumptively illicit behavior that enhances a covered platform’s service but not its “central or most important” functions is not even a candidate for the defense.

Even if a covered platform could establish that a challenged practice would maintain or substantially enhance the platform’s core functionality, it would also have to prove that the conduct was “narrowly tailored” and “reasonably necessary” to achieve the desired end, and, for many behaviors, the “le[ast] discriminatory means” of doing so. That is a remarkably heavy burden, and it beggars belief to suppose that business planners considering novel offerings involving self-preferencing, discrimination, or some other presumptively illicit conduct would feel confident that they could make the required showing. It is likely, then, that AICOA would break existing products and services and discourage future innovation.

Of course, Congress could mitigate this concern by specifying that AICOA does not preclude certain things, such as pre-installed apps or consumer-friendly search results. But the legislation would then lose the support of the many interest groups who want the law to preclude various popular offerings that its text would now forbid. Unlike consumers, who are widely dispersed and difficult to organize, the groups and competitors that would benefit from things like stripped-down smartphones, map-free search results, and Prime-less Amazon are effective lobbyists.

Should the US Follow Europe?

Having responded to criticisms of AICOA, the authors of the pro-AICOA letter go on offense. They assert that enactment of the bill is needed to ensure that the United States doesn’t lose ground to Europe, both in regulatory leadership and in innovation. Observing that the European Union’s Digital Markets Act (DMA) has just become law, the authors write that:

[w]ithout [AICOA], the role of protecting competition and innovation in the digital sector outside China will be left primarily to the European Union, abrogating U.S. leadership in this sector.

Moreover, if Europe implements its DMA and the United States does not adopt AICOA, the authors claim:

the center of gravity for innovation and entrepreneurship [could] shift from the U.S. to Europe, where the DMA would offer greater protections to start ups and app developers, and even makers and artisans, against exclusionary conduct by the gatekeeper platforms.

Implicit in the argument that AICOA is needed to maintain America’s regulatory leadership is the assumption that to lead in regulatory policy is to have the most restrictive rules. The most restrictive regulator will necessarily be the “leader” in the sense that it will be the one with the most control over regulated firms. But leading in the sense of optimizing outcomes and thereby serving as a model for other jurisdictions entails crafting the best policies—those that minimize the aggregate social losses from wrongly permitting bad behavior, wrongly condemning good behavior, and determining whether conduct is allowed or forbidden (i.e., those that “minimize the sum of error and decision costs”). Rarely is the most restrictive regulatory regime the one that optimizes outcomes, and as I have elsewhere explained, the rules set forth in the DMA hardly seem calibrated to do so.

As for “innovation and entrepreneurship” in the technological arena, it would be a seismic shift indeed if the center of gravity were to migrate to Europe, which is currently home to zero of the top 20 global tech companies. (The United States hosts 12; China, eight.)

It seems implausible, though, that imposing a bunch of restrictions on large tech companies that have significant resources for innovation and are scrambling to enter each other’s markets will enhance, rather than retard, innovation. The self-preferencing bans in AICOA and DMA, for example, would prevent Apple from developing its own search engine to compete with Google, as it has apparently contemplated. Why would Apple develop its own search engine if it couldn’t preference it on iPhones and iPads? And why would Google have started its shopping service to compete with Amazon if it couldn’t preference Google Shopping in search results? And why would any platform continually improve to gain more users as it neared the thresholds for enhanced duties under DMA or AICOA? It seems more likely that the DMA/AICOA approach will hinder, rather than spur, innovation.

At the very least, wouldn’t it be prudent to wait and see whether DMA leads to a flourishing of innovation and entrepreneurship in Europe before jumping on the European bandwagon? After all, technological innovations that occur in Europe won’t be available only to Europeans. Just as Europeans benefit from innovation by U.S. firms, American consumers will be able to reap the benefits of any DMA-inspired innovation occurring in Europe. Moreover, if DMA indeed furthers innovation by making it easier for entrants to gain footing, even American technology firms could benefit from the law by launching their products in Europe. There’s no reason for the tech sector to move to Europe to take advantage of a small-business-protective European law.

In fact, the optimal outcome might be to have one jurisdiction in which major tech platforms are free to innovate, enter each other’s markets via self-preferencing, etc. (the United States, under current law) and another that is more protective of upstart businesses that use the platforms (Europe under DMA). The former jurisdiction would create favorable conditions for platform innovation and inter-platform competition; the latter might enhance innovation among businesses that rely on the platforms. Consumers in each jurisdiction, however, would benefit from innovation facilitated by the other.

It makes little sense, then, for the United States to rush to adopt European-style regulation. DMA is a radical experiment. Regulatory history suggests that the sort of restrictiveness it imposes retards, rather than furthers, innovation. But in the unlikely event that things turn out differently this time, little harm would result from waiting to see DMA’s benefits before implementing its restrictive approach. 

Does AICOA Threaten Platforms’ Ability to Moderate Content and Police Disinformation?

The authors of the pro-AICOA letter conclude by addressing the concern that AICOA “will inadvertently make content moderation difficult because some of the prohibitions could be read… to cover and therefore prohibit some varieties of content moderation” by covered platforms.

The letter authors say that a reading of AICOA to prohibit content moderation is “strained.” They maintain that the act’s requirement of “competitive harm” would prevent imposition of liability based on content moderation and that the act is “plainly not intended to cover” instances of “purported censorship.” They further contend that the risk of judicial misconstrual exists with all proposed laws and therefore should not be a sufficient reason to oppose AICOA.

Each of these points is weak. Section 3(a)(3) of AICOA makes it unlawful for a covered platform to “discriminate in the application or enforcement of the terms of service of the covered platform among similarly situated business users in a manner that would materially harm competition.” It is hardly “strained” to reason that this provision is violated when, say, Google’s YouTube selectively demonetizes a business user for content that Google deems harmful or misleading. Or when Apple removes Parler, but not every other violator of service terms, from its App Store. Such conduct could “materially harm competition” by impeding the de-platformed business’ ability to compete with its rivals.

And it is hard to say that AICOA is “plainly not intended” to forbid these acts when a key supporting senator touted the bill as a means of policing content moderation and observed during markup that it would “make some positive improvement on the problem of censorship” (i.e., content moderation) because “it would provide protections to content providers, to businesses that are discriminated against because of the content of what they produce.”

At a minimum, we should expect some state attorneys general to try to use the law to police content moderation they disfavor, and the mere prospect of such legal action could chill anti-disinformation efforts and other forms of content moderation.

Of course, there’s a simple way for Congress to eliminate the risk of what the letter authors deem judicial misconstrual: It could clarify that AICOA’s prohibitions do not cover good-faith efforts to moderate content or police disinformation. Such clarification, however, would kill the bill, as several Republican legislators are supporting the act because it restricts content moderation.

The risk of judicial misconstrual with AICOA, then, is not the sort that exists with “any law, new or old,” as the letter authors contend. “Normal” misconstrual risk exists when legislators try to be clear about their intentions but, because language has its limits, some vagueness or ambiguity persists. AICOA’s architects have deliberately obscured their intentions in order to cobble together enough supporters to get the bill across the finish line.

The one thing that all AICOA supporters can agree on is that they deserve credit for “doing something” about Big Tech. If the law is construed in a way they disfavor, they can always act shocked and blame rogue courts. That’s shoddy, cynical lawmaking.

Conclusion

So, I respectfully disagree with Professors Scott Morton, Salop, and Dinielli on AICOA. There is no urgent need to pass the bill right now, especially as we are on the cusp of seeing an AICOA-like regime put to the test. The bill’s central liability standard is overly vague, and its plain terms would break popular products and services and thwart future innovation. The United States should equate regulatory leadership with the best, not the most restrictive, policies. And Congress should thoroughly debate and clarify its intentions on content moderation before enacting legislation that could upend the status quo on that important matter.

For all these reasons, Congress should reject AICOA. And for the same reasons, a future in which AICOA is adopted is extremely unlikely to resemble the Utopian world that Professors Scott Morton, Salop, and Dinielli imagine.

Someone has turned up the heat on Congress. I’m not saying Congress is responsible for the extreme heat being felt in much of the world this week – but I wouldn’t be surprised. With forward movement this week on both the CHIPS Act (with the Senate version partially resuscitating UCITA as well) and ADPPA. It seems possible (if still not yet likely) this Congress will pass some tech-related legislation. Will all this heat provide some lift below the wings of Senator Klobuchar’s (D-MN) stalled American Innovation and Choice Online Act (AICOA)? Read on … 

But first: this week’s headline looks at some recent talks by FTC Chair Lina Khan. Videos were posted this week of two recent talks the FTC Chair gave at the UNCTAD Intergovernmental Group of Experts on Competition Law and Policy and to Yale’s Law and Political Economy Project. Both are worth watching. Speaking with NYU professor Eleanor Fox at UNCTAD, Khan discussed the FTC’s “ongoing project to reinvigorate the FTC’s standalone Section 5 authority,” explaining her view that Section 5 “is intended to go beyond the four corners of the Sherman Act and the Clayton Act,” and her efforts “to make sure that [the FTC is] resuscitating this tool and making the best use of it.”

Notably, if subtly, she also discussed the need to “make sure that the reforms we’re implementing will be durable. How do we ensure that we’re really pursuing these with an eye to longevity over the long term.” It is worth recalling here that one of Khan’s first acts was to rescind the FTC’s still-new Statement of Enforcement Principles Regarding “Unfair Methods of Competition.” As I wrote here back in 2013, “a policy statement isn’t enough” – subsequent commissions can wipe away a policy statement by administrative fiat. Rather, durable policies (to the extent agencies can render them) require rulemaking – Khan’s statement about durability seems to telegraph that long-anticipated UMC rulemaking is coming soon.

In her comments to the Yale LPE group, she reflected more on the FTC’s UMC authority. She pointed to Sandeep Vaheesan’s work on UMC as influential to her thinking. Here it is worth quoting at length, as she pondered aloud

“what do we really mean by Unfair Methods of Competition? This is in some ways a question that goes to the heart of the FTC’s existence and reason for being. I take very seriously that the text of the FTC statute uses this term Unfair Methods of Competition, but I think there are really still basic questions to be engaged in regarding how we distinguish fair from unfair methods of competition, questions that are rarely frontally engaged among antitrust practitioners but that are really critical for us as we chart a path forward.”

This takes us back to the UNCTAD discussion, where Khan noted that the FTC is “in a moment in our legal environment where there are a whole set of legal challenges to the FTC’s authority,” explaining that this “complicates how we’re approaching what level of risk we’re comfortable with and that sort of thing.” It is curious that she didn’t seem to discuss these risks or challenges in her discussion at Yale, especially given her own expressed uncertainty about the meaning of Unfair Methods of Competition. But surely she is correct: in a post-West Virginia v. EPA environment, any FTC action that “reinvigorate[s] the FTC’s standalone Section 5 authority … beyond the four corners of the Sherman Act and the Clayton Act” very likely poses some major questions.

Enough about Khan’s recent speeches. What else is going on at the FTC? Well, the FTC and NLRB have announced a Memorandum of Understanding around labor issues. At least one commentator has already suggested that this is the FTC “thumbing its nose” at the Supreme Court’s West Virginia v. EPA ruling. I’m less sure – a lot will depend on what the FTC substantively does. There is a good argument that the FTC turning to work with the NLRB is a positive turn, recognizing that the NLRB is the nation’s labor regulator, such that attempting to turn antitrust law into a tool for labor regulation would present some risky major questions. On the other hand, action under the MOU could flow the other direction – the FTC and NLRB might collude to address labor issues outside of the NLRB’s authority using the FTC’s UMC or UDAP tools. Major questions abound!

Is AICOA dead? Not yet, but its closest known relative is a doornail. This week saw meta-activity on the hill. Both the Wall Street Journal and CPI report that Senator Klobuchar is pushing Senate Leader Chuck Schumer (D-NY)  to bring the bill to the floor for a vote. 

Whether Klobuchar has the needed 60 votes remains unclear. In an effort to gin up support for the bill, the House Judiciary Committee “formally published” the Committee’s report on competition in the digital marketplace. That’s the report that the Committee marked up in 2021, and released in 2020. In other words, this week the Committee did a thing to get an already twice-released report back in the news in order to help push AICOA in the Senate. This included releasing many of the documents supporting the report – though as one would expect, these documents have already been quoted and discussed extensively over the past two years.

Outside support for AICOA continues to trickle in. Mozilla has opened a new tab in the Washington Post, taking out a full page ad “open letter to Congress.” And Yelp’s General Counsel Aaron Schur published a defense of the bill, attempting to respond to criticisms such as those raised by Georgetown professor Anupam Chander and University of Arizona professor Jane Bambauer. Adam Kovacevich isn’t impressed. Neither is Mark Jamison. The basic disagreement is over what words mean. Schur assures us they mean one thing; Kovacevich and Jamison argue they could mean other things – or at least, that their meaning is unclear enough that they would allow competition-damaging litigation. ICLE’s Brian Albrecht cuts to the quick, reminding us that “the bill’s ambiguity will scare companies” and that the cost of that ambiguity “will ultimately fall on consumers in the form of higher prices, lower quality or fewer innovative products.”

Wherever you are, it’s likely going to be hot. If you’re looking for something to do while you stay cool inside, you could do worse that catching up on the Shane Tews’s conversation with FTC Commissioner Noah Phillips. And CEI has published a comprehensive discussion of “terrible tech bills from the 117th Congress” – a great one-stop-shop summarizing, and offering one informed perspective on, the very many bills that have been on the table over the past two years. 

Welcome to the FTC UMC Roundup for the middle of July. As we sit between the Fourth of July and August recess, the  first images from the James Webb space telescope are a nice way to put the day-to-day grind of antitrust law into perspective. In part, that’s my way of saying that as Congress rushes towards recess, POTUS is out of the country, and several Senators are fighting Covid (we hope all get well soon), it hasn’t been the busiest week in antitrust law. But it’s also a useful framing for this week’s headline.

This week’s headline: Just as the Webb telescope peers back into the history of the universe, this is a week to look back into recent competition history: the one year anniversary of the President’s Executive Order on competition policy. Aspen Digital hosted a discussion about the Order with National Economic Council director Brian Deese. As one would expect, the discussion started with brief remarks in which Deese was able to very briefly outline the Order’s very several impacts over the past year. 

Deese’s remarks were followed by a Q&A hosted by NYT reporter Cecilia Kang. Kang pressed Deese on a few topics. She asked how the recent Major Questions Doctrine ruling in West Virginia v. EPA affects the administration’s thinking about competition policy. Deese’s response – undoubtedly the correct one – is that the administration is looking for areas where there is bipartisan legislative interest in Congress. She asked whether the administration would ask Senate leader Chuck Schumer (D-NY) to move on pending antitrust legislation (that is, AICOA); when Deese dodged the question about Schumer, she asked again. Curiously, Deese refused to mention Senator Schumer, instead saying that the administration has been working with the bill’s sponsors, Senator Klobuchar (D-MN) and Chuck Grassley (R-IA). (Ben Brody has a piece on the pressures being brought to bear upon Schumer to act on AICOA.)

Deese’s National Economic Council colleague Tim Wu offered some comments on Deese’s speech on Twitter, explaining that the Executive Order has “become a means of trying ensure that competition policy is in line with our macro-economic policy goals.” “In a sense, the agencies are doing microeconomic competition policy, while the Competition Council has an eye on macro effects, and is setting micro priorities from that perspective.”

Continuing with this week’s lede that there’s not much going on: AICOA continues to go nowhere, fast. Supporters of the bill are lobbying the intelligence community to assuage concerns that it could harm national security interests. A spokesperson for the Office of the Director of National Intelligence responded that “the [Intelligence Community] does not weigh in on the merits of policy options.” Conservative continue to support AICOA as a tool for cracking down on content moderation policies – contrary to Democratic assurances that it can’t be used in that way. And Access Now has sent a letter to Congress on behalf of various global NGOs arguing that AICOA is necessary to address Big Tech’s human rights violations facilitated by its “reign over the world.” Antitrust law truly is everything to everyone.

Advocacy aside, AICO continues to appear to be dead bill stalling. Cristiano Lima at the Washington Post did a whip call of its own, finding “the number of senators willing to publicly say at this point they back the bills is well short of 60.” Importantly, this includes several senators who had previously publicly supported the bill. Adam Kovacevich walks through the challenging calculus: Senator Klobuchar is focused on getting Republicans to support the bill, and is losing Democratic support along the way. He also screams the loud part out louder: “It’s awfully hard for AICOA backers to claim the bill doesn’t impact content moderation when MAGA conservatives … just come right out and say they’re backing the bill because it would stop Apple/Amazon from banning Parler.”

Lest we forget about small businesses, let’s not forget about small businesses: AICOA would be bad for them, too.

The irony of it all is mercatus uber alles. The Wall Street Journal is reporting that Amazon may be scaling back its private-label brands.

Is anything going on at the FTC? Surprisingly little. Perhaps everyone’s getting ready for the next open meeting. It’s not yet on the calendar, but rumors are flying that rulemakings could be on the agenda

A lack of activity, however, won’t keep bad news out of the FTC. In what is truly heartbreaking, if not unsurprising, news, under Chair Khan the FTC has fallen from one of the best to one of the worst federal agencies to work for in the latest “Best Places to Work in the Federal Government.” It’s not just FTC employees who have questions about Khan’s leadership. Leah Nylen reports that the US Chamber of Commerce has sued the FTC, asking for disclosure of information under FOIA that the Commission has refused to provide. The Chamber recently prevailed in its efforts to require the Commission to disclose its operations manual.

What should you be reading and watching during this lazy month of July? Well, you could start with contributions to the Truth on the Market FTC UMC Rulemaking Symposium. We have had recent contributions summarizing chapters from Dan Crane’s recent book on the topic. These chapters were presented at a recent CCIA/Concurrences conference, recordings of which are also now online. TechFreedom is hosting its 2022 Policy Summit on July 20 and on July 27 Punchbowl is hosting a conversation with Representative Eric Swalwell on “the importance of privacy and security in existing and new technologies.”

Signing off with a recommended deep read: Adam White helps to contextualize West Virginia v. EPA and the Major Questions Doctrine in the broader scheme of the Court’s recent jurisprudence. It’s easy for those in the trenches to focus on what individual opinions mean for specific agencies and issues. But these cases are dots in a much larger mosaic of shifting jurisprudential and political theory.

[On Monday, June 27, Concurrences hosted a conference on the Rulemaking Authority of the Federal Trade Commission. This conference featured the work of contributors to a new book on the subject edited by Professor Dan Crane. Several of these authors have previously contributed to the Truth on the Market FTC UMC Symposium. We are pleased to be able to share with you excerpts or condensed versions of chapters from this book prepared by authors of of those chapters. Our thanks and compliments to Dan and Concurrences for bringing together an outstanding event and set of contributors and for supporting our sharing them with you here.]

[The post below was authored by former Federal Trade Commission Acting Chair Maureen K. Ohlhausen and former FTC Senior Attorney Ben Rossen.]

Introduction

The Federal Trade Commission (FTC) has long steered the direction of competition law by engaging in case-by-case enforcement of the FTC Act’s prohibition on unfair methods of competition (UMC). Recently, some have argued that the FTC’s exclusive reliance on case-by-case adjudication is too long and arduous a route and have urged the commission to take a shortcut by invoking its purported authority to promulgate UMC rules under Section 6(g) of the Federal Trade Commission Act.

Proponents of UMC rulemaking rely on National Petroleum Refiners Association v. FTC, a 1973 decision by the U.S. Court of Appeals for the D.C. Circuit that upheld the commission’s authority to issue broad legislative rules under the FTC Act. They argue that the case provides a clear path to UMC rules and that Congress effectively ratified the D.C. Circuit’s decision when it enacted detailed rulemaking procedures governing unfair or deceptive acts or practices (UDAP) in the Magnuson Moss Warranty-Federal Trade Commission Improvement Act of 1975 (Magnuson-Moss).

The premise of this argument is fundamentally incorrect, because modern courts reject the type of permissive statutory analysis applied in National Petroleum Refiners. Moreover, contemporaneous congressional reaction to National Petroleum Refiners was not to embrace broad FTC rulemaking, but rather to put in strong guardrails on FTC UDAP rulemaking. Further, the congressional history of the particular FTC rule at issue—the Octane Ratings Rule—also points in the direction of a lack of broad UMC rulemaking, as Congress eventually adopted the rule solely as a UDAP provision, with heightened restrictions on FTC rulemaking.

Thus, the road to UMC rulemaking, which the agency wisely never tried to travel down in the almost 50 years since National Petroleum Refiners, is essentially a dead end. If the agency tries to go that route, it will be an unfortunate detour from its clear statutory direction to engage in case-by-case enforcement of Section 5.

Broad UMC-Rulemaking Authority Contradicts the History and Evolution of the FTC’s Authority

The FTC Act grants the commission broad authority to investigate unfair methods of competition and unfair and deceptive acts or practices across much of the American economy. The FTC’s administrative adjudicative authority under “Part 3” is central to the FTC’s mission of preserving fair competition and protecting consumers, as reflected by the comprehensive adjudicative framework established in Section 5 of the FTC Act. Section 6, meanwhile, details the commission’s investigative powers to collect confidential business information and conduct industry studies.

The original FTC Act contained only one sentence describing the agency’s ability to make rules, buried inconspicuously among various other provisions. Section 6(g) provided that the FTC would have authority “[f]rom time to time [to] classify corporations and . . . to make rules and regulations for the purpose of carrying out the provisions of this [Act].”[1] Unlike the detailed administrative scheme in Section 5, the FTC Act fails to provide for any sanctions for violations of rules promulgated under Section 6 or to otherwise specify that such rules would carry the force of law. This minimal delegation of power arguably conferred the right to issue procedural but not substantive rules.

Consistent with the understanding that Congress did not authorize substantive rulemaking, the FTC made no attempt to promulgate rules with the force of law for nearly 50 years after it was created, and at various times indicated that it lacked the authority to do so.

In 1962, the agency for the first time began to promulgate consumer-protection trade-regulation rules (TRRs), citing its authority under Section 6(g). Although these early TRRs plainly addressed consumer-protection matters, the agency frequently described violations of the rule as both an unfair method of competition and an unfair or deceptive trade practice. As the commission itself has observed, “[n]early all of the rules that the Commission actually promulgated under Section 6(g) were consumer protection rules.”

In fact, in the more than 100 years of the FTC Act, the agency has only once issued a solely competition rule. In 1967, the commission promulgated the Men and Boys’ Tailored Clothing Rule pursuant to authority under the Clayton Act, which prohibited apparel suppliers from granting discriminatory-advertising allowances that limited small retailers’ ability to compete. However, the rule was never enforced or subject to challenge and was subsequently repealed.

Soon after, the FTC promulgated the octane-ratings rule at issue in National Petroleum Refiners. Proponents of UMC rulemaking, such as former FTC Commissioner Rohit Chopra and current Chair Lina Khan, point to the case as evidence that the commission retains the power to promulgate substantive competition rules, governed only by the Administrative Procedure Act (APA) and, with respect to interpretations of UMC, entitled to Chevron deference. They argue that UMC rulemaking would provide significant benefits by providing clear notice to market participants about what the law requires, relieving the steep expert costs and prolonged trials common to antitrust adjudications, and fostering a “transparent and participatory process” that would provide meaningful public participation.

With Khan at the helm of the FTC, the agency has already begun to pave the way for new UMC rulemakings. For example, President Joe Biden’s Executive Order on promoting competition called on the commission to promulgate UMC rules to address noncompete clauses and pay-for-delay settlements, among other issues. Further, as one of Khan’s first actions as chair, the commission rescinded—without replacing—its bipartisan Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act. More recently, the commission’s Statement of Regulatory Priorities stated that the FTC “will consider developing both unfair-methods-of-competition rulemakings as well as rulemakings to define with specificity unfair or deceptive acts or practices.” This foray into UMC rulemaking is likely to take the FTC down a dead-end road.

The Signs Are Clear: National Petroleum Refiners Does Not Comport with Modern Principles of Statutory Interpretation

The FTC’s authority to conduct rulemaking under Section 6(g) has been tested in court only once, in National Petroleum Refiners, where the D.C. Circuit upheld the commission’s authority to promulgate a UDAP and UMC rule requiring the disclosure of octane ratings on gasoline pumps. The court found that Section 6(g) “clearly states that the Commission ‘may’ make rules and regulations for the purpose of carrying out the provisions of Section 5” and liberally construed the term ‘rules and regulations’ based on the background and purpose of the FTC Act.” The court’s opinion rested, in part, on pragmatic concerns about the benefits that rulemaking provides to fulfilling the agency’s mission, emphasizing the “invaluable resource-saving flexibility” it provides and extolling the benefits of rulemaking over case-by-case adjudication when developing agency policy.

National Petroleum Refiners reads today like an anachronism. Few modern courts would agree that an ambiguous grant of rulemaking authority should be construed to give agencies the broadest possible powers so that they will have flexibility in determining how to effectuate their statutory mandates. The Supreme Court has never adopted this approach and recent decisions strongly suggest it would decline to do so if presented the opportunity.

The D.C. Circuit’s opinion is in clear tension with the “elephants-in-mouseholes” doctrine first described by the U.S. Supreme Court in Whitman v. Am. Trucking Ass’n, because it largely ignored the significance of the FTC Act’s detailed adjudicative framework. The D.C. Circuit’s reasoning—that Congress buried sweeping legislative-rulemaking authority in a vague, ancillary provision, alongside the ability to “classify corporations”—stands in direct conflict with the Supreme Court’s admonition in Whitman.

Modern courts would also look to interpret the structure of the FTC Act to produce a coherent enforcement scheme. For instance, in AMG Capital Management v. FTC, the Supreme Court struck down the FTC’s use of Section 13(b) to obtain equitable monetary relief, in part, because the FTC Act elsewhere imposes specific limitations on the commission’s authority to obtain monetary relief. Unlike National Petroleum Refiners, which lauded the benefits and efficiencies of rulemaking for the agency’s mission, the AMG court reasoned: “Our task here is not to decide whether [the FTC’s] substitution of § 13(b) for the administrative procedure contained in § 5 and the consumer redress available under § 19 is desirable. Rather, it is to answer a more purely legal question” of whether Congress granted authority or not. The same rationale applies to UMC rulemaking.

The unanimous AMG decision was no judicial detour, and the Supreme Court has routinely posted clear road signs that Congress is expected “to speak clearly when authorizing an agency to exercise powers of vast economic and political significance,” as UMC rulemaking would do. Since 2000, the Court has increasingly applied the “major questions doctrine” to limit the scope of congressional delegation to the administrative state in areas of major political or economic importance. For example, in FDA v. Brown & Williamson, the Supreme Court declined to grant Chevron deference to an FDA rule permitting the agency to regulate nicotine and cigarettes. Crucial to the Court’s analysis was that the FDA’s rule contradicted the agency’s own view of its authority dating back to 1914, while asserting jurisdiction over a significant portion of the American economy. In Utility Air Regulatory Group v. EPA, the Court invoked the major questions doctrine to strike down the Environmental Protection Agency’s greenhouse-gas emissions standards as an impermissible interpretation of the Clean Air Act, finding that “EPA’s interpretation is [] unreasonable because it would bring about an enormous and transformative expansion in [the] EPA’s regulatory authority without clear congressional authorization.”

Most recently, in West Virginia v. EPAthe Court relied on the major questions doctrine to strike down EPA emissions rules that would have imposed billions of dollars in compliance costs on power plants, concluding that Congress had not provided “clear congressional authorization” for the rules despite explicitly authorizing the agency to set emissions levels for existing plants.  Because broad UMC-rulemaking authority under Section 6(g) is similarly a question of potentially “vast economic and political significance,” and would also represent a significant departure from past agency precedent, the FTC’s efforts to promulgate such rules would likely be met by a flashing red light.

Finally, while National Petroleum Refiners lauded the benefits of rulemaking authority and emphasized its usefulness for carrying out the FTC’s mission, the Supreme Court has since clarified that “[h]owever sensible (or not)” an interpretation may be, “a reviewing court’s task is to apply the text of the statute, not to improve upon it.” Whatever benefits rulemaking authority may confer on the FTC, they cannot justify departure from the text of the FTC Act.

The Road Not Taken: Congress Did Not Ratify UMC-Rulemaking Authority and the FTC Did Not Assert It

Two years after National Petroleum Refiners, Congress enacted the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act of 1975 (Magnuson-Moss). Section 202(a) of Magnuson-Moss amended the FTC Act to add a new Section 18 that, for the first time, gave the FTC express authority to issue UDAP rules, while imposing heightened procedural requirements for such rulemaking. Magnuson-Moss does not expressly address UMC rulemaking. Instead, it says only that Section 18 “shall not affect any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce.” Section 6(g) currently authorizes the FTC “(except as provided in [section 18] of this title) to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”

UMC-rulemaking proponents argue Magnuson-Moss effectively ratified National Petroleum Refiners and affirmed the commission’s authority with respect to substantive UMC rules. This revisionist interpretation is incorrect. The savings provision in Section 18(a)(2) that preserves “any authority” (as opposed to “the” authority) of the commission to prescribe UMC rules reflects, at most, an agnostic view on whether the FTC, in fact, possesses such authority. Rather, it suggests that whatever authority may exist for UMC rulemaking was unchanged by Section 18 and that Congress left the question open for the courts to resolve. The FTC itself appears to have recognized this uncertainty, as evidenced by the fact that it has never even attempted to promulgate a UMC rule in the nearly 50 years following the enactment of Magnuson-Moss.

Congressional silence on UMC hardly endorses the commission’s authority and is not likely to persuade an appellate court today. To rely on congressional acquiescence to a judicial interpretation, there must be “overwhelming evidence” that Congress considered and rejected the “precise issue” before the court. Although Congress considered adopting National Petroleum Refiners, it ultimately took no action on the FTC’s UMC-rulemaking authority. Hardly the “overwhelming evidence” required to read National Petroleum Refiners into the law.

The Forgotten Journey: The History of the Octane-Ratings Rule Reinforces the FTC’s Lack of UMC Rulemaking Authority

Those who argue that National Petroleum Refiners is still good law and that Congress silently endorsed UMC rulemaking have shown no interest in how the journey of the octane-ratings rule eventually ended. The FTC’s 1971 octane-ratings rule declared the failure to post octane disclosures on gasoline pumps both an unfair method of competition and an unfair or deceptive practice. But what has remained unexplored in the debate over FTC UMC rulemaking is what happened to the rule after the D.C. Circuit’s decision upheld rulemaking under Section 6(g), and what that tells us about congressional and agency views on UMC authority.

The octane-ratings rule upheld by the D.C. Circuit never took effect and was ultimately replaced when Congress enacted the Petroleum Marketing Practices Act (PMPA), Title II of which addressed octane-disclosure requirements and directed the FTC to issue new rules under the PMPA. But despite previous claims by the FTC that the rule drew on both UDAP and UMC authority, Congress declined to provide any authority beyond UDAP. While it is impossible to say whether Congress concluded that UMC rulemaking was unwise, illegal, or simply unnecessary, the PMPA—passed just two years after Magnuson-Moss—suggests that UMC rulemaking did not survive the enactment of Section 18. A brief summary of the rule’s meandering journey follows.

After the D.C. Circuit remanded National Petroleum Refiners, the district court ordered the FTC to complete an environmental-impact statement. While that analysis was pending, Congress began consideration of the PMPA. After its enactment, the commission understood Congress to have intended the requirements of Title II of the PMPA to replace those of the original octane-ratings rule. The FTC treated the enactment of the PMPA as effectively repealing the rule.

Section 203(a) of the PMPA gave the FTC rulemaking power to enforce compliance with Title II of the PMPA. Testimony in House subcommittee hearings centered on whether the legislation should direct the FTC to enact a TRR on octane ratings under expedited procedures that would be authorized by the legislation, or whether Congress should enact its own statutory requirements. Ultimately, Congress adopted a statutory definition of octane ratings (identical to the method adopted by the FTC in its 1971 rule) and granted the FTC rulemaking authority under the APA to update definitions and prescribe different procedures for determining fuel-octane ratings. Congress also specified that certain rules—such as those requiring manufacturers to display octane requirements on motor vehicles—would have heightened rulemaking procedures, such as rulemaking on the record after a hearing.

Notably, the PMPA specifically provides that violations of the statute, or any rule promulgated under the statute, “shall be an unfair or deceptive act or practice in or affecting commerce.” Although Section 203(d)(3) of the PMPA specifically exempts the FTC from the procedural requirements under Section 18, it does not simply revert to Section 6(g) or otherwise leave open a path for UMC rulemaking.

The record makes clear, however, that Congress was aware of FTC’s desire to claim UMC authority in connection with the octane-ratings rule, as FTC officials testified in legislative hearings that UMC authority was necessary to regulate octane ratings. After Magnuson-Moss was enacted, however, neither Congress nor the FTC tried to include UMC rulemaking in the PMPA. In a written statement reflecting the FTC’s views on the PMPA incorporated in the House report, the FTC described its original octane-ratings rule as UDAP only.[2] While not dispositive, the FTC’s apparent abandonment of its request for UMC authority after Magnuson-Moss, and Congress’ decision to limit the PMPA exclusively to UDAP, certainly suggests that UMC did not survive National Petroleum Refiners and that Congress did not endorse FTC UMC rulemaking.

Conclusion

The FTC appears poised to embark on a journey of broad, legislative-style competition rulemaking under Section 6(g) of the FTC Act. This would be a dead end. UMC rulemaking, rather than advancing clarity and certainty about what types of conduct constitute unfair methods of competition, would very likely be viewed by the courts as an illegal left turn. It would also be a detour for the agency from its core mission of case-by-case expert adjudication of the FTC Act—which, given limited agency resources, could result in a years-long escapade that significantly detracts from overall enforcement. The FTC should instead seek to build on the considerable success it has seen in recent years with administrative adjudications, both in terms of winning on appeal and in shaping the development of antitrust law overall by creating citable precedent in key areas.


[1]     H. Rep. No. 95-161, at 45, Appendix II, Federal Trade Commission—Agency Views, Statement of Federal Trade Commission by Christian S. White, Asst. Director for Special Statutes (Feb. 23, 1977).

[2]     38 Stat. 722 § 6(g), codified as amended at 15 U.S.C. §  46(g).


Slow wage growth and rising inequality over the past few decades have pushed economists more and more toward the study of monopsony power—particularly firms’ monopsony power over workers. Antitrust policy has taken notice. For example, when the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) initiated the process of updating their merger guidelines, their request for information included questions about how they should respond to monopsony concerns, as distinct from monopoly concerns. ​

From a pure economic-theory perspective, there is no important distinction between monopsony power and monopoly power. If Armen is trading his apples in exchange for Ben’s bananas, we can call Armen the seller of apples or the buyer of bananas. The labels (buyer and seller) are kind of arbitrary. It doesn’t matter as a pure theory matter. Monopsony and monopoly are just mirrored images.

Some infer from this monopoly-monopsony symmetry, however, that extending antitrust to monopsony power will be straightforward. As a practical matter for antitrust enforcement, it becomes less clear. The moment we go slightly less abstract and use the basic models that economists use, monopsony is not simply the mirror image of monopoly. The tools that antitrust economists use to identify market power differ in the two cases.

Monopsony Requires Studying Output

Suppose that the FTC and DOJ are considering a proposed merger. For simplicity, they know that the merger will generate efficiency gains (and they want to allow it) or market power (and they want to stop it) but not both. The challenge is to look at readily available data like prices and quantities to decide which it is. (Let’s ignore the ideal case that involves being able to estimate elasticities of demand and supply.)

In a monopoly case, if there are efficiency gains from a merger, the standard model has a clear prediction: the quantity sold in the output market will increase. An economist at the FTC or DOJ with sufficient data will be able to see (or estimate) the efficiencies directly in the output market. Efficiency gains result in either greater output at lower unit cost or else product-quality improvements that increase consumer demand. Since the merger lowers prices for consumers, the agencies (assume they care about the consumer welfare standard) will let the merger go through, since consumers are better off.

In contrast, if the merger simply enhances monopoly power without efficiency gains, the quantity sold will decrease, either because the merging parties raise prices or because quality declines. Again, the empirical implication of the merger is seen directly in the market in question. Since the merger raises prices for consumers, the agencies (assume they care about the consumer welfare standard) will let not the merger go through, since consumers are worse off. In both cases, you judge monopoly power by looking directly at the market that may or may not have monopoly power.

Unfortunately, the monopsony case is more complicated. Ultimately, we can be certain of the effects of monopsony only by looking at the output market, not the input market where the monopsony power is claimed.

To see why, consider again a merger that generates either efficiency gains or market (now monopsony) power. A merger that creates monopsony power will necessarily reduce the prices and quantity purchased of inputs like labor and materials. An overly eager FTC may see a lower quantity of input purchased and jump to the conclusion that the merger increased monopsony power. After all, monopsonies purchase fewer inputs than competitive firms.

Not so fast. Fewer input purchases may be because of efficiency gains. For example, if the efficiency gain arises from the elimination of redundancies in a hospital merger, the hospital will buy fewer inputs, hire fewer technicians, or purchase fewer medical supplies. This may even reduce the wages of technicians or the price of medical supplies, even if the newly merged hospitals are not exercising any market power to suppress wages.

The key point is that monopsony needs to be treated differently than monopoly. The antitrust agencies cannot simply look at the quantity of inputs purchased in the monopsony case as the flip side of the quantity sold in the monopoly case, because the efficiency-enhancing merger can look like the monopsony merger in terms of the level of inputs purchased.

How can the agencies differentiate efficiency-enhancing mergers from monopsony mergers? The easiest way may be for the agencies to look at the output market: an entirely different market than the one with the possibility of market power. Once we look at the output market, as we would do in a monopoly case, we have clear predictions. If the merger is efficiency-enhancing, there will be an increase in the output-market quantity. If the merger increases monopsony power, the firm perceives its marginal cost as higher than before the merger and will reduce output. 

In short, as we look for how to apply antitrust to monopsony-power cases, the agencies and courts cannot look to the input market to differentiate them from efficiency-enhancing mergers; they must look at the output market. It is impossible to discuss monopsony power coherently without considering the output market.

In real-world cases, mergers will not necessarily be either strictly efficiency-enhancing or strictly monopsony-generating, but a blend of the two. Any rigorous consideration of merger effects must account for both and make some tradeoff between them. The question of how guidelines should address monopsony power is inextricably tied to the consideration of merger efficiencies, particularly given the point above that identifying and evaluating monopsony power will often depend on its effects in downstream markets.

This is just one complication that arises when we move from the purest of pure theory to slightly more applied models of monopoly and monopsony power. Geoffrey Manne, Dirk Auer, Eric Fruits, Lazar Radic and I go through more of the complications in our comments summited to the FTC and DOJ on updating the merger guidelines.

What Assumptions Make the Difference Between Monopoly and Monopsony?

Now that we have shown that monopsony and monopoly are different, how do we square this with the initial observation that it was arbitrary whether we say Armen has monopsony power over apples or monopoly power over bananas?

There are two differences between the standard monopoly and monopsony models. First, in a vast majority of models of monopsony power, the agent with the monopsony power is buying goods only to use them in production. They have a “derived demand” for some factors of production. That demand ties their buying decision to an output market. For monopoly power, the firm sells the goods, makes some money, and that’s the end of the story.

The second difference is that the standard monopoly model looks at one output good at a time. The standard factor-demand model uses two inputs, which introduces a tradeoff between, say, capital and labor. We could force monopoly to look like monopsony by assuming the merging parties each produce two different outputs, apples and bananas. An efficiency gain could favor apple production and hurt banana consumers. While this sort of substitution among outputs is often realistic, it is not the standard economic way of modeling an output market.

European Union lawmakers appear close to finalizing a number of legislative proposals that aim to reform the EU’s financial-regulation framework in response to the rise of cryptocurrencies. Prominent within the package are new anti-money laundering and “countering the financing of terrorism” rules (AML/CFT), including an extension of the so-called “travel rule.” The travel rule, which currently applies to wire transfers managed by global banks, would be extended to require crypto-asset service providers to similarly collect and make available details about the originators and beneficiaries of crypto-asset transfers.

This legislative process proceeded with unusual haste in recent months, which partially explains why legal objections to the proposals have not been adequately addressed. The resulting legislation is fundamentally flawed to such an extent that some of its key features are clearly invalid under EU primary (treaty) law and liable to be struck down by the Court of Justice of the European Union (CJEU). 

In this post, I will offer a brief overview of some of the concerns, which I also discuss in this recent Twitter thread. I focus primarily on the travel rule, which—in the light of EU primary law—constitutes a broad and indiscriminate surveillance regime for personal data. This characterization also applies to most of AML/CFT.

The CJEU, the EU’s highest court, established a number of conditions that such legally mandated invasions of privacy must satisfy in order to be valid under EU primary law (the EU Charter of Fundamental Rights). The legal consequences of invalidity are illustrated well by the Digital Rights Ireland judgment, in which the CJEU struck down an entire piece of EU legislation (the Data Retention Directive). Alternatively, the CJEU could decide to interpret EU law as if it complied with primary law, even if that is contrary to the text.

The Travel Rule in the Transfer of Funds Regulation

The EU travel rule is currently contained in the 2015 Wire Transfer Regulation (WTR). But at the end of June, EU legislators reached a likely final deal on its replacement, the Transfer of Funds Regulation (TFR; see the original proposal from July 2021). I focus here on the TFR, but much of the argument also applies to the older WTR now in force. 

The TFR imposes obligations on payment-system providers and providers of crypto-asset transfers (refer to here, collectively, as “service providers”) to collect, retain, transfer to other service providers, and—in some cases—report to state authorities:

…information on payers and payees, accompanying transfers of funds, in any currency, and the information on originators and beneficiaries, accompanying transfers of crypto-assets, for the purposes of preventing, detecting and investigating money laundering and terrorist financing, where at least one of the payment or crypto-asset service providers involved in the transfer of funds or crypto-assets is established in the Union. (Article 1 TFR)

The TFR’s scope extends to money transfers between bank accounts or other payment accounts, as well as transfers of crypto assets other than peer-to-peer transfers without the involvement of a service provider (Article 2 TFR). Hence, the scope of the TFR includes, but is not limited to, all those who send or receive bank transfers. This constitutes the vast majority of adult EU residents.

The information that service providers are obligated to collect and retain (under Articles 4, 10, 14, and 21 TFR) include data that allow for the identification of both sides of a transfer of funds (the parties’ names, as well as the address, country, official personal document number, customer identification number, or the sender’s date and place of birth) and for linking their identity with the (payment or crypto-asset) account number or crypto-asset wallet address. The TFR also obligates service providers to collect and retain additional data to verify the accuracy of the identifying information “on the basis of documents, data or information obtained from a reliable and independent source” (Articles 4(4), 7(3), 14(5), 16(2) TFR). 

The scope of the obligation to collect and retain verification data is vague and is likely to lead service providers to require their customers to provide copies of passports, national ID documents, bank or payment-account statements, and utility bills, as is the case under the WTR and the 5th AML Directive. Such data is overwhelmingly likely to go beyond information on the civil identity of customers and will often, if not almost always, allow inferring even sensitive personal data about the customer.

The data-collection and retention obligations in the TFR are general and indiscriminate. No distinction is made in TFR’s data-collection and retention provisions based on likelihood of a connection with criminal activity, except for verification data in the case of transfers of funds (an exception not applicable to crypto assets). Even, the distinction in the case of verification data for transfers of funds (“has reasonable grounds for suspecting money laundering or terrorist financing”) arguably lacks the precision required under CJEU case law.

Analogies with the CJEU’s Passenger Name Records Decision

In late June, following its established approach in similar cases, the CJEU gave its judgment in the Ligue des droits humains case, which challenged the EU and Belgian regimes on passenger name records (PNR). The CJEU decided there that the applicable EU law, the PNR Directive, is valid under EU primary law. But it reached that result by interpreting some of the directive’s provisions in ways contrary to their express language and by deciding that some national legal rules implementing the directive are invalid. Some features of the PNR regime that were challenged by the court are strikingly similar to the TFR regime.

First, just like the TFR, the PNR rules imposed a five-year data-retention period for the data of all passengers, even where there is no “objective evidence capable of establishing a risk that relates to terrorist offences or serious crime having an objective link, even if only an indirect one, with those passengers’ air travel.” The court decided that this was a disproportionate restriction of the rights to privacy and to the protection of personal data under Articles 5-7 of the EU Charter of Fundamental Rights. Instead of invalidating the relevant article of the PNR Directive, the CJEU reinterpreted it as if it only allowed for five-year retention in cases where there is evidence of a relevant connection to criminality.

Applying analogous reasoning to the TFR, which imposes an indiscriminate five-year data retention period in its Article 21, the conclusion must be that this TFR provision is invalid under Articles 7-8 of the charter. Article 21 TFR may, at minimum, need to be recast to apply only to that transaction data where there is “objective evidence capable of establishing a risk” that it is connected to serious crime. The court also considered the issue of government access to data that has already been collected. Under the CJEU’s established interpretation of the EU Charter, “it is essential that access to retained data by the competent authorities be subject to a prior review carried out either by a court or by an independent administrative body.” In the PNR regime, at least some countries (such as Belgium) assigned this role to their “passenger information units” (PIUs). The court noted that a PIU is “an authority competent for the prevention, detection, investigation and prosecution of terrorist offences and of serious crime, and that its staff members may be agents seconded from the competent authorities” (e.g. from police or intelligence authorities). But according to the court:

That requirement of independence means that that authority must be a third party in relation to the authority which requests access to the data, in order that the former is able to carry out the review, free from any external influence. In particular, in the criminal field, the requirement of independence entails that the said authority, first, should not be involved in the conduct of the criminal investigation in question and, secondly, must have a neutral stance vis-a-vis the parties to the criminal proceedings …

The CJEU decided that PIUs do not satisfy this requirement of independence and, as such, cannot decide on government access to the retained data.

The TFR (especially its Article 19 on provision of information) does not provide for prior independent review of access to retained data. To the extent that such a review is conducted by Financial Intelligence Units (FIUs) under the AML Directive, concerns arise very similar to the treatment of PIUs under the PNR regime. While Article 32 of the AML Directive requires FIUs to be independent, that doesn’t necessarily mean that they are independent in the ways required of the authority that will decide access to retained data under Articles 7-8 of the EU Charter. For example, the AML Directive does not preclude the possibility of seconding public prosecutors, police, or intelligence officers to FIUs.

It is worth noting that none of the conclusions reached by the CJEU in the PNR case are novel; they are well-grounded in established precedent. 

A General Proportionality Argument

Setting aside specific analogies with previous cases, the TFR clearly has not been accompanied by a more general and fundamental reflection on the proportionality of its basic scheme in the light of the EU Charter. A pressing question is whether the TFR’s far-reaching restrictions of the rights established in Articles 7-8 of the EU Charter (and perhaps other rights, like freedom of expression in Article 11) are strictly necessary and proportionate. 

Arguably, the AML/CFT regime—including the travel rule—are significantly more costly and more rights-restricting than potential alternatives. The basic problem is that there is no reliable data on the relative effectiveness of measures like the travel rule. Defenders of the current AML/CFT regime focus on evidence that it contributes to preventing or prosecuting some crime. But this is not the relevant question when it comes to proportionality. The relevant question is whether those measures are as effective or more effective than alternative, less costly, and more privacy-preserving alternatives. One conservative estimate holds that AML compliance costs in Europe were “120 times the amount successfully recovered from criminals’ and exceeded the estimated total of criminal funds (including funds not seized or identified).” 

The fact that the current AML/CFT regime is a de facto global standard cannot serve as a sufficient justification either, given that EU fundamental law is perfectly comfortable in rejecting non-European law-enforcement practices (see the CJEU’s decision in Schrems). The travel rule has been unquestioningly imported to EU law from U.S. law (via FATF), where the standards of constitutional protection of privacy are much different than under the EU Charter. This fact would likely be noticed by the Court of Justice in any putative challenge to the TFR or other elements of the AML/CFT regime. 

Here, I only flag the possibility of a general proportionality challenge. Much more work needs to be done to flesh it out.

Conclusion

Due to the political and resource constraints of the EU legislative process, it is possible that the legislative proposals in the financial-regulation package did not receive sufficient legal scrutiny from the perspective of their compatibility with the EU Charter of Fundamental Rights. This hypothesis would explain the presence of seemingly clear violations, such as the indiscriminate five-year data-retention period. Given that none of the proposals has, as yet, been voted into law, making the legislators aware of the problem may help to address at least some of the issues.

Legal arguments about the AML/CFT regime’s incompatibility with the EU Charter should be accompanied with concrete alternative proposals to achieve the goals of preventing and combating serious crime that, according to the best evidence, the current AML/CFT regime does ineffectively. We need more regulatory imagination. For example, one part of the solution may be to properly staff and equip government agencies tasked with prosecuting financial crime.

But it’s also possible that the proposals, including the TFR, will be adopted broadly without amendment. In that case, the main recourse available to EU citizens (or to any EU government) will be to challenge the legality of the measures before the Court of Justice.

Happy Independence Day Week! Having started off with the holiday, this has been a relatively slow week on the antitrust front in the United States. But never fear, Europe is here to help fill out the weekly news roundup. And, even on a slow week there is plenty in the news domestically. Perhaps more important: everyone working on FTC and antitrust issues should take advantage of these respites when the come – any calm most likely is a harbinger of a storm to come.

This week’s headline is the passage of the Digital Markets Act (DMA) and Digital Services Act (DSA) by the European Parliament. The DMA has often been compared to the American Innovation and Choice Online Act (AICOA) – as of this week their biggest difference is that the DMA now is law while AICOA’s fate continues to appear fraught. For more details on the substance the DMA, we’ve discussed it on here on Truth on the Market, and both Axios and the Chamber of Commerce offer overviews.

Also on the European front, Europeans are beginning to reckon with the fact that soon Facebook may cease operations in Europe due to the bloc’s privacy rules. For pro-privacy regulators this may be viewed as a win. The rest of Europe was unavailable for comment (likely due to European privacy laws).

Back in the states the biggest news continues to be fallout from the Supreme Court’s embrace of the major questions doctrine. After a few days of misreporting on the opinion in West Virginia v. EPA as preventing the EPA from regulating greenhouse gasses, the media is now realizing that the import of the opinion goes to broader questions of the administrative state – and that it could impact tech regulation in particular.

Sophisticated thinkers have seen the potential impact of the case since before it was decided. In the days since they have been exploring the scope of the ruling and how the lower courts will implement it, discussing its implications for big tech, debating whether it will or will not limit the FCC’s net neutrality authority (answer: it will). And as numerous posts made as part of this TOTM FTC UMC Symposium have argued, it will likely substantially limit the FTC’s UMC rulemaking authority.

One thing I have wondered is how agencies will respond to the MQD in their rulemaking. Agencies often discuss the importance of their rules in an effort to justify them. Tom Wheeler was fond of discussing the Internet as the “most important network in the history of Man.” Arguing that the costs of regulatory action are very high helps to sell the benefits of regulation as substantial. But now, arguing that the costs of inaction are high might also make it easier to argue that the question being addressed in a major one – of vast political or economic significance. Will we start to see agencies downplay the importance of their work?

As usual, we can’t not have some updates on AICOA. The most salient update may be the lack of update. While Senator Klobuchar (D-MN) continues to push the bill forward, Leader Schumer (D-NY) has no apparent interest in bringing it to the floor. And even if it gets through the Senate, there may be trouble waiting in the House? Beyond that, this week saw both Zach Graves get off the fence and speak out against AICOA.

Quick hits: Protocol reports the CFPB is hoping to hire 25 technologists to help it wage war on the tech industry. Bloomberg reports the FTC is toying with the Robinson-Patman Act. And the FTC brings another right-to-repair action, this time against Weber, to prohibit warranties that are voided by independent repairs.

What you missed, What to watch? Last week’s Federalist Society discussion of Biden’s Antitrust Agenda: Mission Creep or Mission Achieved was a must-watch. Hope you didn’t miss it! If you did, you can redeem yourself by making it to AEI’s discussion with FTC Commissioner Noah Phillips on Crossing the Consumer Welfare Rubicon.

[On Monday, June 27, Concurrences hosted a conference on the Rulemaking Authority of the Federal Trade Commission. This conference featured the work of contributors to a new book on the subject edited by Professor Dan Crane. Several of these authors have previously contributed to the Truth on the Market FTC UMC Symposium. We are pleased to be able to share with you excerpts or condensed versions of chapters from this book prepared by authors of of those chapters. Our thanks and compliments to Dan and Concurrences for bringing together an outstanding event and set of contributors and for supporting our sharing them with you here.]

[The post below was authored by former Federal Trade Commission Acting Chair Maureen K. Ohlhausen and former Assistant U.S. Attorney General James F. Rill.]

Since its founding in 1914, the Federal Trade Commission (FTC) has held a unique and multifaceted role in the U.S. administrative state and the economy. It possesses powerful investigative and information-gathering powers, including through compulsory processes; a multi-layered administrative-adjudication process to prosecute “unfair methods of competition (UMC)” (and later, “unfair and deceptive acts and practices (UDAP),” as well); and an important role in educating and informing the business community and the public. What the FTC cannot be, however, is a legislature with broad authority to expand, contract, or alter the laws that Congress has tasked it with enforcing.

Recent proposals for aggressive UMC rulemaking, predicated on Section 6(g) of the FTC Act, would have the effect of claiming just this sort of quasi-legislative power for the commission based on a thin statutory reed authorizing “rules and regulations for the purpose of carrying out the provisions of” that act. This usurpation of power would distract the agency from its core mission of case-by-case expert application of the FTC Act through administrative adjudication. It would also be inconsistent with the explicit grants of rulemaking authority that Congress has given the FTC and run afoul of the congressional and constitutional “guard rails” that cabin the commission’s authority.

FTC’s Unique Role as an Administrative Adjudicator

The FTC’s Part III adjudication authority is central to its mission of preserving fair competition in the U.S. economy. The FTC has enjoyed considerable success in recent years with its administrative adjudications, both in terms of winning on appeal and in shaping the development of antitrust law overall (not simply a separate category of UMC law) by creating citable precedent in key areas. However, as a result of its July 1, 2021, open meeting and President Joe Biden’s “Promoting Competition in the American Economy” executive order, the FTC appears to be headed for another misadventure in response to calls to claim authority for broad, legislative-style “unfair methods of competition” rulemaking out of Section 6(g) of the FTC Act. The commission recently took a significant and misguided step toward this goal by rescinding—without replacing—its bipartisan Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, divorcing (at least in the commission majority’s view) Section 5 from prevailing antitrust-law principles and leaving the business community without any current guidance as to what the commission considers “unfair.”

FTC’s Rulemaking Authority Was Meant to Complement its Case-by-Case Adjudicatory Authority, Not Supplant It

As described below, broad rulemaking of this sort would likely encounter stiff resistance in the courts, due to its tenuous statutory basis and the myriad constitutional and institutional problems it creates. But even aside from the issue of legality, such a move would distract the FTC from its fundamental function as an expert case-by-case adjudicator of competition issues. It would be far too tempting for the commission to simply regulate its way to the desired outcome, bypassing all neutral arbiters along the way. And by seeking to promulgate such rules through abbreviated notice-and-comment rulemaking, the FTC would be claiming extremely broad substantive authority to directly regulate business conduct across the economy with relatively few of the procedural protections that Congress felt necessary for the FTC’s trade-regulation rules in the consumer-protection context. This approach risks not only a diversion of scarce agency resources from meaningful adjudication opportunities, but also potentially a loss of public legitimacy for the commission should it try to exempt itself from these important rulemaking safeguards.

FTC Lacks Authority to Promulgate Legislative-Style Competition Rules

The FTC has historically been hesitant to exercise UMC rulemaking authority under Section 6(g) of the FTC Act, which simply states that FTC shall have power “[f]rom time to time to classify corporations and … to make rules and regulations for the purpose of carrying out the provisions” of the FTC Act. Current proponents of UMC rulemaking argue for a broad interpretation of this clause, allowing for legally binding rulemaking on any issue subject to the FTC’s jurisdiction. But the FTC’s past reticence to exercise such sweeping powers is likely due to the existence of significant and unresolved questions of the FTC’s UMC rulemaking authority from both a statutory and constitutional perspective.

Absence of Statutory Authority

The FTC’s authority to conduct rulemaking under Section 6(g) has been tested in court only once, in National Petroleum Refiners Association v. FTC. In that case, the FTC succeeded in classifying the failure to post octane ratings on gasoline pumps as “an unfair method of competition.” The U.S. Court of Appeals for the D.C. Circuit found that Section 6(g) did confer this rulemaking authority. But Congress responded two years later with the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act of 1975, which created a new rulemaking scheme that applied exclusively to the FTC’s consumer-protection rules. This act expressly excluded rulemaking on unfair methods of competition from its authority. The statute’s provision that UMC rulemaking is unaffected by the legislation manifests strong congressional design that such rules would be governed not by Magnuson-Moss, but by the FTC Act itself. The reference in Magnuson-Moss to the statute not affecting “any authority” of the FTC to engage in UMC rulemaking—as opposed to “the authority”— reflects Congress’ agnostic view on whether the FTC possessed any such authority. It simply means that whatever authority exists for UMC rulemaking, the Magnuson-Moss provisions do not affect it, and Congress left the question open for the courts to resolve.

Proponents of UMC rulemaking argue that Magnuson-Moss left the FTC’s competition-rulemaking authority intact and entitled to Chevron deference. But, as has been pointed out by many commentators over the decades, that would be highly incongruous, given that National Petroleum Refiners dealt with both UMC and UDAP authority under Section 6(g), yet Congress’ reaction was to provide specific UDAP rulemaking authority and expressly take no position on UMC rulemaking. As further evidenced by the fact that the FTC has never attempted to promulgate a UMC rule in the years following enactment of Magnuson-Moss, the act is best read as declining to endorse the FTC’s UMC rulemaking authority. Instead, it leaves the question open for future consideration by the courts.

Turning to the terms of the FTC Act, modern statutory interpretation takes a far different approach than the court in National Petroleum Refiners, which discounted the significance of Section 5’s enumeration of adjudication as the means for restraining UMC and UDAP, reasoning that Section 5(b) did not use limiting language and that Section 6(g) provides a source of substantive rulemaking authority. This approach is in clear tension with the elephants-in-mouseholes doctrine developed by the Supreme Court in recent years. The FTC’s recent claim of broad substantive UMC rulemaking authority based on the absence of limiting language and a vague, ancillary provision authorizing rulemaking alongside the ability to “classify corporations” stands in conflict with the Court’s admonition in Whitman v. American Trucking Association. The Court in AMG Capital Management, LLC v. FTC recently applied similar principles in the context of the FTC’s authority under the FTC Act. Here,the Court emphasized “the historical importance of administrative proceedings” and declined to give the FTC a shortcut to desirable outcomes in federal court. Similarly, granting broad UMC-rulemaking authority to the FTC would permit it to circumvent the FTC Act’s defining feature of case-by-case adjudications. Applying the principles enunciated in Whitman and AMG, Section 5 is best read as specifying the sole means of UMC enforcement (adjudication), and Section 6(g) is best understood as permitting the FTC to specify how it will carry out its adjudicative, investigative, and informative functions. Thus, Section 6(g) grants ministerial, not legislative, rulemaking authority.

Notably, this reading of the FTC Act would accord with how the FTC viewed its authority until 1962, a fact that the D.C. Circuit found insignificant, but that later doctrine would weigh heavily. Courts should consider an agency’s “past approach” toward its interpretation of a statute, and an agency’s longstanding view that it lacks the authority to take a certain action is a “rather telling” clue that the agency’s newfound claim to such authority is incorrect. Conversely, even widespread judicial acceptance of an interpretation of an agency’s authority does not necessarily mean the construction of the statute is correct. In AMG, the Court gave little weight to the FTC’s argument that appellate courts “have, until recently, consistently accepted its interpretation.” It also rejected the FTC’s argument that “Congress has in effect twice ratified that interpretation in subsequent amendments to the Act.” Because the amendments did not address the scope of Section 13(b), they did not convince the Court in AMG that Congress had acquiesced in the lower courts’ interpretation.

The court in National Petroleum Refiners also lauded the benefits of rulemaking authority and emphasized that the ability to promulgate rules would allow the FTC to carry out the purpose of the act. But the Supreme Court has emphasized that “however sensible (or not)” an interpretation may be, “a reviewing court’s task is to apply the text of the statute, not to improve upon it.” Whatever benefits UMC-rulemaking authority may confer on the FTC, they cannot justify departure from the text of the FTC Act.

In sum, even Chevron requires the agency to rely on a “permissible construction” of the statute, and it is doubtful that the current Supreme Court would see a broad assertion of substantive antitrust rulemaking as “permissible” under the vague language of Section 6(g).

Constitutional Vulnerabilities

The shaky foundation supporting the FTC’s claimed authority for UMC rulemaking is belied by both the potential breadth of such rules and the lack of clear guidance in Section 6(g) itself. The presence of either of these factors increases the likelihood that any rule promulgated under Section 6 runs afoul of the constitutional nondelegation doctrine.

The nondelegation doctrine requires Congress to provide “an intelligible principle” to assist the agency to which it has delegated legislative discretion. Although long considered moribund, the doctrine was recently addressed by the U.S. Supreme Court in Gundy v. United States, which underscored the current relevance of limitations on Congress’ ability to transfer unfettered legislative-like powers to federal agencies. Although the statute in that case was ruled permissible by a plurality of justices, most of the Court’s current members have expressed concerns that the Court has long been too quick to reject nondelegation arguments, arguing for stricter controls in this area. In a concurrence, Justice Samuel Alito lamented that the Court has “uniformly rejected nondelegation arguments and has upheld provisions that authorized agencies to adopt important rules pursuant to extraordinarily capacious standards,” while Justices Neil Gorsuch and Clarence Thomas and Chief Justice John Roberts dissented, decrying the “unbounded policy choices” Congress had bestowed, stating that it “is delegation running riot” to “hand off to the nation’s chief prosecutor the power to write his own criminal code.”

The Gundy dissent cited to A.L.A. Schechter Poultry Corp. v. United States, where the Supreme Court struck down Congress’ delegation of authority based on language very similar to Section 5 of the FTC Act. Schechter Poultry examined whether the authority that Congress granted to the president under the National Industrial Recovery Act (NIRA) violated the nondelegation clause. The offending NIRA provision gave the president authority to approve “codes of fair competition,” which comes uncomfortably close to the FTC Act’s “unfair methods of competition” grant of authority. Notably, Schechter Poultry expressly differentiated NIRA from the FTC Act based on distinctions that do not apply in the rulemaking context. Specifically, the Court stated that, despite the similar delegation of authority, unlike NIRA, actions under the FTC Act are subject to an adjudicative process. The Court observed that the commission serves as “a quasi judicial body” and assesses what constitutes unfair methods of competition “in particular instances, upon evidence, in light of particular competitive conditions.” That essential distinction disappears in the case of rulemaking, where the commission acts in a quasi-legislative role and promulgates rules of broad application.

It appears that the nondelegation doctrine may be poised for a revival and may play a significant role in the Supreme Court’s evaluation of expansive attempts by the Biden administration to exercise legislative-type authority without explicit congressional authorization and guidance. This would create a challenging backdrop for the FTC to attempt aggressive new UMC rulemaking.

Antitrust Rulemaking by FTC Is Likely to Lead to Inefficient Outcomes and Institutional Conflicts

Aside from the doubts raised by these significant statutory and constitutional issues as to the legality of competition rulemaking by the FTC, there are also several policy and institutional factors counseling against legislative-style antitrust rulemaking.

Legislative Rulemaking on Competition Issues Runs Contrary to the Purpose of Antitrust Law

The core of U.S. antitrust law is based on broadly drafted statutes that, at least for violations outside the criminal-conspiracy context, leave determinations of likely anticompetitive effects, procompetitive justifications, and ultimate liability up to factfinders charged with highly detailed, case-specific determinations. Although no factfinder is infallible, this requirement for highly fact-bound analysis helps to ensure that each case’s outcome has a high likelihood of preserving or increasing consumer welfare.

Legislative rulemaking would replace this quintessential fact-based process with one-size-fits-all bright-line rules. Competition rules would function like per se prohibitions, but based on notice-and-comment procedures, rather than the broad and longstanding legal and economic consensus usually required for per se condemnation under the Sherman Act. Past experience with similar regulatory regimes should give reason for pause here: the Interstate Commerce Commission, for example, failed to efficiently regulate the railroad industry before being abolished with bipartisan consensus in 1996, costing consumers, by some estimates, as much as several billion (in today’s) dollars annually in lost competitive benefits. As FTC Commissioner Christine Wilson observes, regulatory rules “frequently stifle innovation, raise prices, and lower output and quality without producing concomitant health, safety, and other benefits for consumers.” By sacrificing the precision of case-by-case adjudication, rulemaking advocates are also losing one of the best tools we have to account for “market dynamics, new sources of competition, and consumer preferences.”

Potential for Institutional Conflict with DOJ

In addition to these substantive concerns, UMC rulemaking by the FTC would also create institutional conflicts between the FTC and DOJ and lead to divergence between the legal standards applicable to the FTC Act, on the one hand, and the Sherman and Clayton acts, on the other. At present, courts have interpreted the FTC Act to be generally coextensive with the prohibitions on unlawful mergers and anticompetitive conduct under the Sherman and Clayton acts, with the limited exception of invitations to collude. But because the FTC alone has the authority to enforce the FTC Act, and rulemaking by the FTC would be limited to interpretations of that act (and could not directly affect or repeal caselaw interpreting the Sherman and Clayton acts), it would create two separate standards of liability. Given that the FTC and DOJ historically have divided enforcement between the agencies based on the industry at issue, this could result in different rules of conduct, depending on the industry involved. Types of conduct that have the potential for anticompetitive effects under certain circumstances but generally pass a rule-of-reason analysis could nonetheless be banned outright if the industry is subject to FTC oversight. Dissonance between the two federal enforcement agencies would be even more difficult for companies not falling firmly within either agency’s purview; those entities would lack certainty as to which guidelines to follow: rule-of-reason precedent or FTC rules.

Conclusion

Following its rebuke at the Supreme Court in the AMG Capital Management case, now is the time for the FTC to focus on its core, case-by-case administrative mission, taking full advantage of its unique adjudicative expertise. Broad unfair methods of competition rulemaking, however, would be an aggressive step in the wrong direction—away from FTC’s core mission and toward a no-man’s-land far afield from the FTC’s governing statutes.