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Federal Trade Commission (FTC) Chair Lina Khan recently joined with FTC Commissioner Rebecca Slaughter to file a “written submission on the public interest” in the U.S. International Trade Commission (ITC) Section 337 proceeding concerning imports of certain cellular-telecommunications equipment covered by standard essential patents (SEPs). SEPs are patents that “read on” technology adopted for inclusion in a standard. Regrettably, the commissioners’ filing embodies advice that, if followed, would effectively preclude Section 337 relief to SEP holders. Such a result would substantially reduce the value of U.S. SEPs and thereby discourage investments in standards that help drive American innovation.

Section 337 of the Tariff Act authorizes the ITC to issue “exclusion orders” blocking the importation of products that infringe U.S. patents, subject to certain “public interest” exceptions. Specifically, before issuing an exclusion order, the ITC must consider:

  1. the public health and welfare;
  2. competitive conditions in the U.S. economy;
  3. production of like or directly competitive articles in the United States; and
  4. U.S. consumers.

The Khan-Slaughter filing urges the ITC to consider the impact that issuing an exclusion order against a willing licensee implementing a standard would have on competition and consumers in the United States. The filing concludes that “where a complainant seeks to license and can be made whole through remedies in a different U.S. forum [a federal district court], an exclusion order barring standardized products from the United States will harm consumers and other market participants without providing commensurate benefits.”

Khan and Slaughter’s filing takes a one-dimensional view of the competitive effects of SEP rights. In short, it emphasizes that:

  1. standardization empowers SEP owners to “hold up” licensees by demanding more for a technology than it would have been worth, absent the standard;
  2. “hold ups” lead to higher prices and may discourage standard-setting activities and collaboration, which can delay innovation;
  3. many standard-setting organizations require FRAND (fair, reasonable, and non-discriminatory) licensing commitments from SEP holders to preclude hold-up and encourage standards adoption;
  4. FRAND commitments ensure that SEP licenses will be available at rates limited to the SEP’s “true” value;
  5. the threat of ITC exclusion orders would empower SEP holders to coerce licensees into paying “anticompetitively high” supra-FRAND licensing rates, discouraging investments in standard-compliant products;
  6. inappropriate exclusion orders harm consumers in the short term by depriving them of desired products and, in the longer run, through reduced innovation, competition, quality, and choice;
  7. thus, where the standard implementer is a “willing licensee,” an exclusion order would be contrary to the public interest; and
  8. as a general matter, exclusionary relief is incongruent and against the public interest where a court has been asked to resolve FRAND terms and can make the SEP holder whole.

In essence, Khan and Slaughter recite a parade of theoretical horribles, centered on anticompetitive hold-ups, to call-for denying exclusion orders to SEP owners on public-interest grounds. Their filing’s analysis, however, fails as a matter of empirics, law, and sound economics. 

First, the filing fails to note that there is a lack of empirical support for anticompetitive hold-up being a problem at all (see, for example, here, here, and here). Indeed, a far more serious threat is “hold-out,” whereby the ability of implementers to infringe SEPs without facing serious consequences leads to an inefficient undervaluation of SEP rights (see, for example, here). (At worst, implementers will have to pay at some future time a “reasonable” licensing fee if held to be infringers in court, since U.S. case law (unlike foreign case law) has essentially eliminated SEP holders’ ability to obtain an injunction.)  

Second, as a legal matter, the filing’s logic would undercut the central statutory purpose of Section 337, which is to provide all U.S. patent holders a right to exclude infringing imports. Section 337 does not distinguish between SEPs and other patents—all are entitled to full statutory protection. Former ITC Chair Deanna Tanner Okun, in critiquing a draft administration policy statement that would severely curtail the rights of SEP holders, assessed the denigration of Section 337 statutory protections in a manner that is equally applicable to the Khan-Slaughter filing:

The Draft Policy Statement also circumvents Congress by upending the statutory framework and purpose of Section 337, which includes the ITC’s practice of evaluating all unfair acts equally. Although the draft disclaims any “unique set of legal rules for SEPs,” it does, in fact, create a special and unequal analysis for SEPs. The draft also implies that the ITC should focus on whether the patents asserted are SEPs when judging whether an exclusion order would adversely affect the public interest. The draft fundamentally misunderstands the ITC’s purpose, statutory mandates, and overriding consideration of safeguarding the U.S. public interest and would — again, without statutory approval — elevate SEP status of a single patent over other weighty public interest considerations. The draft also overlooks Presidential review requirements, agency consultation opportunities and the ITC’s ability to issue no remedies at all.

[Notable,] Section 337’s statutory language does not distinguish the types of relief available to patentees when SEPs are asserted.

Third, Khan and Slaughter not only assert theoretical competitive harms from hold-ups that have not been shown to exist (while ignoring the far more real threat of hold-out), they also ignore the foregone dynamic economic gains that would stem from limitations on SEP rights (see, generally, here). Denying SEP holders the right to obtain a Section 337 exclusion order, as advocated by the filing, deprives them of a key property right. It thereby establishes an SEP “liability rule” (SEP holder relegated to seeking damages), as opposed to a “property rule” (SEP holder may seek injunctive relief) as the SEP holder’s sole means to obtain recompense for patent infringement. As my colleague Andrew Mercado and I have explained, a liability-rule approach denies society the substantial economic benefits achievable through an SEP property rule:

[U]nder a property rule, as contrasted to a liability rule, innovation will rise and drive an increase in social surplus, to the benefit of innovators, implementers, and consumers. 

Innovators’ welfare will rise. … First, innovators already in the market will be able to receive higher licensing fees due to their improved negotiating position. Second, new innovators enticed into the market by the “demonstration effect” of incumbent innovators’ success will in turn engage in profitable R&D (to them) that brings forth new cycles of innovation.

Implementers will experience welfare gains as the flood of new innovations enhances their commercial opportunities. New technologies will enable implementers to expand their product offerings and decrease their marginal cost of production. Additionally, new implementers will enter the market as innovation accelerates. Seeing the opportunity to earn high returns, new implementers will be willing to pay innovators a high licensing fee in order to produce novel and improved products.

Finally, consumers will benefit from expanded product offerings and lower quality-adjusted prices. Initial high prices for new goods and services entering the market will fall as companies compete for customers and scale economies are realized. As such, more consumers will have access to new and better products, raising consumers’ surplus.

In conclusion, the ITC should accord zero weight to Khan and Slaughter’s fundamentally flawed filing in determining whether ITC exclusion orders should be available to SEP holders. Denying SEP holders a statutorily provided right to exclude would tend to undermine the value of their property, diminish investment in improved standards, reduce innovation, and ultimately harm consumers—all to the detriment, not the benefit, of the public interest.  

Welcome to the FTC UMC Roundup, our new weekly update of news and events relating to antitrust and, more specifically, to the Federal Trade Commission’s (FTC) newfound interest in “revitalizing” the field. Each week we will bring you a brief recap of the week that was and a preview of the week to come. All with a bit of commentary and news of interest to regular readers of Truth on the Market mixed in.

This week’s headline? Of course it’s that Alvaro Bedoya has been confirmed as the FTC’s fifth commissioner—notably breaking the commission’s 2-2 tie between Democrats and Republicans and giving FTC Chair Lina Khan the majority she has been lacking. Politico and Gibson Dunn both offer some thoughts on what to expect next—though none of the predictions are surprising: more aggressive merger review and litigation; UMC rulemakings on a range of topics, including labor, right-to-repair, and pharmaceuticals; and privacy-related consumer protection. The real question is how quickly and aggressively the FTC will implement this agenda. Will we see a flurry of rulemakings in the next week, or will they be rolled out over a period of months or years? Will the FTC risk major litigation questions with a “go big or go home” attitude, or will it take a more incrementalist approach to boiling the frog?

Much of the rest of this week’s action happened on the Hill. Khan, joined by Securities and Exchange Commission (SEC) Chair Gary Gensler, made the regular trip to Congress to ask for a bigger budget to support more hires. (FTC, Law360) Sen. Mike Lee  (R-Utah) asked for unanimous consent on his State Antitrust Enforcement Venue Act, but met resistance from Sen. Amy Klobuchar (D-Minn.), who wants that bill paired with her own American Innovation and Choice Online Act. This follows reports that Senate Majority Leader Chuck Schumer (D-N.Y.) is pushing Klobuchar to get support in line for both AICOA and the Open App Markets Act to be brought to the Senate floor. Of course, if they had the needed support, we probably wouldn’t be talking so much about whether they have the needed support.

Questions about the climate at the FTC continue following release of the Office of Personnel Management’s (OPM) Federal Employee Viewpoint Survey. Sen. Roger Wicker (R-Miss.) wants to know what has caused staff satisfaction at the agency to fall precipitously. And former senior FTC staffer Eileen Harrington issued a stern rebuke of the agency at this week’s open meeting, saying of the relationship between leadership and staff that: “The FTC is not a failed agency but it’s on the road to becoming one. This is a crisis.”

Perhaps the only thing experiencing greater inflation than the dollar is interest in the FTC doing something about inflation. Alden Abbott and Andrew Mercado remind us that these calls are misplaced. But that won’t stop politicians from demanding the FTC do something about high gas prices. Or beef production. Or utilities. Or baby formula.

A little further afield, the 5th U.S. Circuit Court of Appeals issued an opinion this week in a case involving SEC administrative-law judges that took broad issue with them on delegation, due process, and “take care” grounds. It may come as a surprise that this has led to much overwrought consternation that the opinion would dismantle the administrative state. But given that it is often the case that the SEC and FTC face similar constitutional issues (recall that Kokesh v. SEC was the precursor to AMG Capital), the 5th Circuit case could portend future problems for FTC adjudication. Add this to the queue with the Supreme Court’s pending review of whether federal district courts can consider constitutional challenges to an agency’s structure. The court was already scheduled to consider this question with respect to the FTC this next term in Axon, and agreed this week to hear a similar SEC-focused case next term as well. 

Some Navel-Gazing News! 

Congratulations to recent University of Michigan Law School graduate Kacyn Fujii, winner of our New Voices competition for contributions to our recent symposium on FTC UMC Rulemaking (hey, this post is actually part of that symposium, as well!). Kacyn’s contribution looked at the statutory basis for FTC UMC rulemaking authority and evaluated the use of such authority as a way to address problematic use of non-compete clauses.

And, one for the academics (and others who enjoy writing academic articles): you might be interested in this call for proposals for a research roundtable on Market Structuring Regulation that the International Center for Law & Economics will host in September. If you are interested in writing on topics that include conglomerate business models, market-structuring regulation, vertical integration, or other topics relating to the regulation and economics of contemporary markets, we hope to hear from you!

The wave of populist antitrust that has been embraced by regulators and legislators in the United States, United Kingdom, European Union, and other jurisdictions rests on the assumption that currently dominant platforms occupy entrenched positions that only government intervention can dislodge. Following this view, Facebook will forever dominate social networking, Amazon will forever dominate cloud computing, Uber and Lyft will forever dominate ridesharing, and Amazon and Netflix will forever dominate streaming. This assumption of platform invincibility is so well-established that some policymakers advocate significant interventions without making any meaningful inquiry into whether a seemingly dominant platform actually exercises market power.

Yet this assumption is not supported by historical patterns in platform markets. It is true that network effects drive platform markets toward “winner-take-most” outcomes. But the winner is often toppled quickly and without much warning. There is no shortage of examples.

In 2007, a columnist in The Guardian observed that “it may already be too late for competitors to dislodge MySpace” and quoted an economist as authority for the proposition that “MySpace is well on the way to becoming … a natural monopoly.” About one year later, Facebook had overtaken MySpace “monopoly” in the social-networking market. Similarly, it was once thought that Blackberry would forever dominate the mobile-communications device market, eBay would always dominate the online e-commerce market, and AOL would always dominate the internet-service-portal market (a market that no longer even exists). The list of digital dinosaurs could go on.

All those tech leaders were challenged by entrants and descended into irrelevance (or reduced relevance, in eBay’s case). This occurred through the force of competition, not government intervention.

Why This Time is Probably Not Different

Given this long line of market precedents, current legislative and regulatory efforts to “restore” competition through extensive intervention in digital-platform markets require that we assume that “this time is different.” Just as that slogan has been repeatedly rebutted in the financial markets, so too is it likely to be rebutted in platform markets. 

There is already supporting evidence. 

In the cloud market, Amazon’s AWS now faces vigorous competition from Microsoft Azure and Google Cloud. In the streaming market, Amazon and Netflix face stiff competition from Disney+ and Apple TV+, just to name a few well-resourced rivals. In the social-networking market, Facebook now competes head-to-head with TikTok and seems to be losing. The market power once commonly attributed to leading food-delivery platforms such as Grubhub, UberEats, and DoorDash is implausible after persistent losses in most cases, and the continuous entry of new services into a rich variety of local and product-market niches.

Those who have advocated antitrust intervention on a fast-track schedule may remain unconvinced by these inconvenient facts. But the market is not. 

Investors have already recognized Netflix’s vulnerability to competition, as reflected by a 35% fall in its stock price on April 20 and a decline of more than 60% over the past 12 months. Meta, Facebook’s parent, also experienced a reappraisal, falling more than 26% on Feb. 3 and more than 35% in the past 12 months. Uber, the pioneer of the ridesharing market, has declined by almost 50% over the past 12 months, while Lyft, its principal rival, has lost more than 60% of its value. These price freefalls suggest that antitrust populists may be pursuing solutions to a problem that market forces are already starting to address.

The Forgotten Curse of the Incumbent

For some commentators, the sharp downturn in the fortunes of the so-called “Big Tech” firms would not come as a surprise.

It has long been observed by some scholars and courts that a dominant firm “carries the seeds of its own destruction”—a phrase used by then-professor and later-Judge Richard Posner, writing in the University of Chicago Law Review in 1971. The reason: a dominant firm is liable to exhibit high prices, mediocre quality, or lackluster innovation, which then invites entry by more adept challengers. However, this view has been dismissed as outdated in digital-platform markets, where incumbents are purportedly protected by network effects and switching costs that make it difficult for entrants to attract users. Depending on the set of assumptions selected by an economic modeler, each contingency is equally plausible in theory.

The plunging values of leading platforms supplies real-world evidence that favors the self-correction hypothesis. It is often overlooked that network effects can work in both directions, resulting in a precipitous fall from market leader to laggard. Once users start abandoning a dominant platform for a new competitor, network effects operating in reverse can cause a “run for the exits” that leaves the leader with little time to recover. Just ask Nokia, the world’s leading (and seemingly unbeatable) smartphone brand until the Apple iPhone came along.

Why Market Self-Correction Outperforms Regulatory Correction

Market self-correction inherently outperforms regulatory correction: it operates far more rapidly and relies on consumer preferences to reallocate market leadership—a result perfectly consistent with antitrust’s mission to preserve “competition on the merits.” In contrast, policymakers can misdiagnose the competitive effects of business practices; are susceptible to the influence of private interests (especially those that are unable to compete on the merits); and often mispredict the market’s future trajectory. For Exhibit A, see the protracted antitrust litigation by the U.S. Department against IBM, which started in 1975 and ended in withdrawal of the suit in 1982. Given the launch of the Apple II in 1977, the IBM PC in 1981, and the entry of multiple “PC clones,” the forces of creative destruction swiftly displaced IBM from market leadership in the computing industry.

Regulators and legislators around the world have emphasized the urgency of taking dramatic action to correct claimed market failures in digital environments, casting aside prudential concerns over the consequences if any such failure proves to be illusory or temporary. 

But the costs of regulatory failure can be significant and long-lasting. Markets must operate under unnecessary compliance burdens that are difficult to modify. Regulators’ enforcement resources are diverted, and businesses are barred from adopting practices that would benefit consumers. In particular, proposed breakup remedies advocated by some policymakers would undermine the scale economies that have enabled platforms to push down prices, an important consideration in a time of accelerating inflation.

Conclusion

The high concentration levels and certain business practices in digital-platform markets certainly raise important concerns as a matter of antitrust (as well as privacy, intellectual property, and other bodies of) law. These concerns merit scrutiny and may necessitate appropriately targeted interventions. Yet, any policy steps should be anchored in the factually grounded analysis that has characterized decades of regulatory and judicial action to implement the antitrust laws with appropriate care. Abandoning this nuanced framework for a blunt approach based on reflexive assumptions of market power is likely to undermine, rather than promote, the public interest in competitive markets.

Federal Trade Commission (FTC) Chair Lina Khan missed the mark once again in her May 6 speech on merger policy, delivered at the annual meeting of the International Competition Network (ICN). At a time when the FTC and U.S. Justice Department (DOJ) are presumably evaluating responses to the agencies’ “request for information” on possible merger-guideline revisions (see here, for example), Khan’s recent remarks suggest a predetermination that merger policy must be “toughened” significantly to disincentivize a larger portion of mergers than under present guidance. A brief discussion of Khan’s substantively flawed remarks follows.

Discussion

Khan’s remarks begin with a favorable reference to the tendentious statement from President Joe Biden’s executive order on competition that “broad government inaction has allowed far too many markets to become uncompetitive, with consolidation and concentration now widespread across our economy, resulting in higher prices, lower wages, declining entrepreneurship, growing inequality, and a less vibrant democracy.” The claim that “government inaction” has enabled increased market concentration and reduced competition has been shown to be  inaccurate, and therefore cannot serve as a defensible justification for a substantive change in antitrust policy. Accordingly, Khan’s statement that the executive order “underscores a deep mandate for change and a commitment to creating the enabling environment for reform” rests on foundations of sand.

Khan then shifts her narrative to a consideration of merger policy, stating:

Merger investigations invite us to make a set of predictive assessments, and for decades we have relied on models that generally assumed markets are self-correcting and that erroneous enforcement is more costly than erroneous non-enforcement. Both the experience of the U.S. antitrust agencies and a growing set of empirical research is showing that these assumptions appear to have been at odds with market realities.

Digital Markets

Khan argues, without explanation, that “the guidelines must better account for certain features of digital markets—including zero-price dynamics, the competitive significance of data, and the network externalities that can swiftly lead markets to tip.” She fails to make any showing that consumer welfare has been harmed by mergers involving digital markets, or that the “zero-price” feature is somehow troublesome. Moreover, the reference to “data” as being particularly significant to antitrust analysis appears to ignore research (see here) indicating there is an insufficient basis for having an antitrust presumption involving big data, and that big data (like R&D) may be associated with innovation, which enhances competitive vibrancy.

Khan also fails to note that network externalities are beneficial; when users are added to a digital platform, the platform’s value to other users increases (see here, for example). What’s more (see here), “gateways and multihoming can dissipate any monopoly power enjoyed by large networks[,] … provid[ing] another reason” why network effects may not raise competitive problems. In addition, the implicit notion that “tipping” is a particular problem is belied by the ability of new competitors to “knock off” supposed entrenched digital monopolists (think, for example, of Yahoo being displaced by Google, and Myspace being displaced by Facebook). Finally, a bit of regulatory humility is in order. Given the huge amount of consumer surplus generated by digital platforms (see here, for example), enforcers should be particularly cautious about avoiding more aggressive merger (and antitrust in general) policies that could detract from, rather than enhance, welfare.

Labor Markets

Khan argues that guidelines drafters should “incorporate new learning” embodied in “empirical research [that] has shown that labor markets are highly concentrated” and a “U.S. Treasury [report] recently estimating that a lack of competition may be costing workers up to 20% of their wages.” Unfortunately for Khan’s argument, these claims have been convincingly debunked (see here) in a new study by former FTC economist Julie Carlson (see here). As Carlson carefully explains, labor markets are not highly concentrated and labor-market power is largely due to market frictions (such as occupational licensing), rather than concentration. In a similar vein, a recent article by Richard Epstein stresses that heightened antitrust enforcement in labor markets would involve “high administrative and compliance costs to deal with a largely nonexistent threat.” Epstein points out:

[T]raditional forms of antitrust analysis can perfectly deal with labor markets. … What is truly needed is a close examination of the other impediments to labor, including the full range of anticompetitive laws dealing with minimum wage, overtime, family leave, anti-discrimination, and the panoply of labor union protections, where the gains to deregulation should be both immediate and large.

Nonhorizontal Mergers

Khan notes:

[W]e are looking to sharpen our insights on non-horizontal mergers, including deals that might be described as ecosystem-driven, concentric, or conglomerate. While the U.S. antitrust agencies energetically grappled with some of these dynamics during the era of industrial-era conglomerates in the 1960s and 70s, we must update that thinking for the current economy. We must examine how a range of strategies and effects, including extension strategies and portfolio effects, may warrant enforcement action.

Khan’s statement on non-horizontal mergers once again is fatally flawed.

With regard to vertical mergers (not specifically mentioned by Khan), the FTC abruptly withdrew, without explanation, its approval of the carefully crafted 2020 vertical-merger guidelines. That action offends the rule of law, creating unwarranted and costly business-sector confusion. Khan’s lack of specific reference to vertical mergers does nothing to solve this problem.

With regard to other nonhorizontal mergers, there is no sound economic basis to oppose mergers involving unrelated products. Threatening to do so would have no procompetitive rationale and would threaten to reduce welfare by preventing the potential realization of efficiencies. In a 2020 OECD paper drafted principally by DOJ and FTC economists, the U.S. government meticulously assessed the case for challenging such mergers and rejected it on economic grounds. The OECD paper is noteworthy in its entirely negative assessment of 1960s and 1970s conglomerate cases which Khan implicitly praises in suggesting they merely should be “updated” to deal with the current economy (citations omitted):

Today, the United States is firmly committed to the core values that antitrust law protect competition, efficiency, and consumer welfare rather than individual competitors. During the ten-year period from 1965 to 1975, however, the Agencies challenged several mergers of unrelated products under theories that were antithetical to those values. The “entrenchment” doctrine, in particular, condemned mergers if they strengthened an already dominant firm through greater efficiencies, or gave the acquired firm access to a broader line of products or greater financial resources, thereby making life harder for smaller rivals. This approach is no longer viewed as valid under U.S. law or economic theory. …

These cases stimulated a critical examination, and ultimate rejection, of the theory by legal and economic scholars and the Agencies. In their Antitrust Law treatise, Phillip Areeda and Donald Turner showed that to condemn conglomerate mergers because they might enable the merged firm to capture cost savings and other efficiencies, thus giving it a competitive advantage over other firms, is contrary to sound antitrust policy, because cost savings are socially desirable. It is now recognized that efficiency and aggressive competition benefit consumers, even if rivals that fail to offer an equally “good deal” suffer loss of sales or market share. Mergers are one means by which firms can improve their ability to compete. It would be illogical, then, to prohibit mergers because they facilitate efficiency or innovation in production. Unless a merger creates or enhances market power or facilitates its exercise through the elimination of competition—in which case it is prohibited under Section 7—it will not harm, and more likely will benefit, consumers.

Given the well-reasoned rejection of conglomerate theories by leading antitrust scholars and modern jurisprudence, it would be highly wasteful for the FTC and DOJ to consider covering purely conglomerate (nonhorizontal and nonvertical) mergers in new guidelines. Absent new legislation, challenges of such mergers could be expected to fail in court. Regrettably, Khan appears oblivious to that reality.

Khan’s speech ends with a hat tip to internationalism and the ICN:

The U.S., of course, is far from alone in seeing the need for a course correction, and in certain regards our reforms may bring us in closer alignment with other jurisdictions. Given that we are here at ICN, it is worth considering how we, as an international community, can or should react to the shifting consensus.

Antitrust laws have been adopted worldwide, in large part at the urging of the United States (see here). They remain, however, national laws. One would hope that the United States, which in the past was the world leader in developing antitrust economics and enforcement policy, would continue to seek to retain this role, rather than merely emulate other jurisdictions to join an “international community” consensus. Regrettably, this does not appear to be the case. (Indeed, European Commissioner for Competition Margrethe Vestager made specific reference to a “coordinated approach” and convergence between U.S. and European antitrust norms in a widely heralded October 2021 speech at the annual Fordham Antitrust Conference in New York. And Vestager specifically touted European ex ante regulation as well as enforcement in a May 5 ICN speech that emphasized multinational antitrust convergence.)

Conclusion

Lina Khan’s recent ICN speech on merger policy sends all the wrong signals on merger guidelines revisions. It strongly hints that new guidelines will embody pre-conceived interventionist notions at odds with sound economics. By calling for a dramatically new direction in merger policy, it interjects uncertainty into merger planning. Due to its interventionist bent, Khan’s remarks, combined with prior statements by U.S. Assistant Attorney General Jonathan Kanter (see here) may further serve to deter potentially welfare-enhancing consolidations. Whether the federal courts will be willing to defer to a drastically different approach to mergers by the agencies (one at odds with several decades of a careful evolutionary approach, rooted in consumer welfare-oriented economics) is, of course, another story. Stay tuned.  

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

Over the past three weeks, we have shared contributions from more than a dozen antitrust commentators—including academics, practitioners, students, and a commissioner of the Federal Trade Commission—discussing the potential for the FTC to develop substantive rules using its unfair methods of competition (UMC) authority. This post offers a recap of where we have been so far in this discussion and also discusses what comes next for this symposium and our coverage of these issues.

First, I must express a deep thank you to all who have contributed. Having helped to solicit, review, and edit many of these pieces, it has been a pleasure to engage with and learn from our authors. And second, I am happy to say to everyone: stay tuned! The big news this week is that, after a long wait, Alvaro Bedoya has been confirmed to the commission, likely creating a majority who will support Chair Lina Khan’s agenda. The ideas that we have been discussing as possibilities are likely to be translated into action over the coming weeks and months—and we will be here to continue sharing expert commentary and analysis.

The Symposium Goes On: An Open Call for Contributions

We will continue to run this symposium for the foreseeable future. We will not have daily posts, but we will have regular content: a weekly recap of relevant news, summaries of important FTC activity and new articles and scholarship, and other original content.

In addition, in the spirit of the symposium, we have an open call for contributions: if you would like to submit a piece for publication, please e-mail it to me or Keith Fierro. Submissions should be 1,500-4,000 words and may approach these issues from any perspective. They should be your original work, but may include short-form summaries of longer works published elsewhere, or expanded treatments of shorter publications (e.g., op-eds).

The Symposium So Far

We have covered a lot of ground these past three weeks. Contributors to the symposium have delved deeply into substantive areas where the FTC might try to use its UMC authority; they have engaged with one another over the scope and limits of the FTC’s authority; and they have looked at the FTC’s history, both ancient and recent, to better understand what the FTC may try to do, where it may be successful, and where it may run into a judicial wall.

Over 50,000 words of posts cannot be summarized in a few paragraphs, so I will not try to provide such a summary. The list of contributions to the symposium to date is below and each contribution is worth reading both on its own and in conjunction with others. Instead, I will pull out some themes that have come up across these posts:

Scope of FTC Authority

Unsurprisingly, several authors engaged with the potential scope of FTC UMC-rulemaking authority, with much of the discussion focused on whether the courts are likely to continue to abide the U.S. Court of Appeals for the D.C. Circuit’s 1973 Petroleum Refiners opinion. It is fair to say that “opinions varied.” Discussion included everything from modern trends of judicial interpretation and how they differ from those used in 1973, to close readings of the Magnuson-Moss legislation (adopted in the immediate wake of the Petroleum Refiners opinion), and consideration of how more recent cases such as AMG and the D.C. Circuit’s American Library Association case affect our thinking about Petroleum Refiners.

Likely Judicial Responses

Several contributors also considered how the courts might respond to FTC rulemaking, allowing that the commission may have some level of substantive-rulemaking authority. Several authors invoked the Court’s recent “major questions” jurisprudence. Dick Pierce captures the general sentiment that any broad UMC rulemaking “would be a perfect candidate for application of the major questions doctrine.” But as with any discussion of the “major” questions doctrine, the implicit question is when a question is “major.” There seems to be some comfort with the idea that the FTC can do some rulemaking, assuming that the courts find that it has substantive-rulemaking authority under Section 6(g), but that the Commission faces an uncertain path if it tries to use that authority for more than incremental changes to antitrust law.

Virtues and Vices of Rulemaking

A couple of contributors picked up on themes of the virtues and vices of developing legal norms through rulemaking, as opposed to case-by-case adjudication. Aaron Neilson, for instance, argues that the FTC likely most needs to use rules to make bigger changes to antitrust law than are possible through adjudication, but that such big changes are the ones most likely to face resistance from the courts. And FTC Commissioner Noah Phillips looks at the Court’s move away from per se rules in antitrust cases over the past 50 years, arguing that the same logic that has pushed the courts to embrace a case-by-case approach to antitrust law is likely to create judicial resistance to any effort by the FTC to tack an opposite course.

The Substance of Substantive Rules

Several contributors addressed specific substantive issues that the FTC may seek to address with rules. In some cases, these issues formed the heart of the post; in others, they were used as examples along the way. For instance, Josh Sarnoff evaluated whether the FTC should develop rules around aftermarket parts and to address right-to-repair concerns. Dick Pierce also looked at that issue, along with several others (potential rules to address reverse-payment settlements in the pharmaceutical industry, below-cost pricing, and non-compete clauses involving low-wage workers).

Gaining Perspective

And last, but far from least, several contributors asked questions that help to put any thinking about the FTC into perspective. Jonathan Barnett, for instance, looks at the changes the FTC has made over the past year to its public statements of mission and priorities, alongside its potential rulemaking activity, to discuss the commission’s changing thinking about free markets. Ramsi Woodcock juxtaposes the FTC, the statutory framing of its regulatory authority, with the FOMC and its statutory power to directly affect the value of the dollar. And Bill MacLeod takes us back to 1935 and the National Industrial Recovery Act, reflecting on how the history of rules of “fair competition” might inform our thinking about the FTC’s authority today.

That’s a lot of ground to have covered in three weeks. Of course, the FTC will keep moving, and the ground will keep shifting. We look forward to your continued engagement with Truth on the Market and the authors who have contributed to this discussion.

Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa)—cosponsors of the American Innovation Online and Choice Act, which seeks to “rein in” tech companies like Apple, Google, Meta, and Amazon—contend that “everyone acknowledges the problems posed by dominant online platforms.”

In their framing, it is simply an acknowledged fact that U.S. antitrust law has not kept pace with developments in the digital sector, allowing a handful of Big Tech firms to exploit consumers and foreclose competitors from the market. To address the issue, the senators’ bill would bar “covered platforms” from engaging in a raft of conduct, including self-preferencing, tying, and limiting interoperability with competitors’ products.

That’s what makes the open letter to Congress published late last month by the usually staid American Bar Association’s (ABA) Antitrust Law Section so eye-opening. The letter is nothing short of a searing critique of the legislation, which the section finds to be poorly written, vague, and departing from established antitrust-law principles.

The ABA, of course, has a reputation as an independent, highly professional, and heterogenous group. The antitrust section’s membership includes not only in-house corporate counsel, but lawyers from nonprofits, consulting firms, federal and state agencies, judges, and legal academics. Given this context, the comments must be read as a high-level judgment that recent legislative and regulatory efforts to “discipline” tech fall outside the legal mainstream and would come at the cost of established antitrust principles, legal precedent, transparency, sound economic analysis, and ultimately consumer welfare.

The Antitrust Section’s Comments

As the ABA Antitrust Law Section observes:

The Section has long supported the evolution of antitrust law to keep pace with evolving circumstances, economic theory, and empirical evidence. Here, however, the Section is concerned that the Bill, as written, departs in some respects from accepted principles of competition law and in so doing risks causing unpredicted and unintended consequences.

Broadly speaking, the section’s criticisms fall into two interrelated categories. The first relates to deviations from antitrust orthodoxy and the principles that guide enforcement. The second is a critique of the AICOA’s overly broad language and ambiguous terminology.

Departing from established antitrust-law principles

Substantively, the overarching concern expressed by the ABA Antitrust Law Section is that AICOA departs from the traditional role of antitrust law, which is to protect the competitive process, rather than choosing to favor some competitors at the expense of others. Indeed, the section’s open letter observes that, out of the 10 categories of prohibited conduct spelled out in the legislation, only three require a “material harm to competition.”

Take, for instance, the prohibition on “discriminatory” conduct. As it stands, the bill’s language does not require a showing of harm to the competitive process. It instead appears to enshrine a freestanding prohibition of discrimination. The bill targets tying practices that are already prohibited by U.S. antitrust law, but while similarly eschewing the traditional required showings of market power and harm to the competitive process. The same can be said, mutatis mutandis, for “self-preferencing” and the “unfair” treatment of competitors.

The problem, the section’s letter to Congress argues, is not only that this increases the teleological chasm between AICOA and the overarching goals and principles of antitrust law, but that it can also easily lead to harmful unintended consequences. For instance, as the ABA Antitrust Law Section previously observed in comments to the Australian Competition and Consumer Commission, a prohibition of pricing discrimination can limit the extent of discounting generally. Similarly, self-preferencing conduct on a platform can be welfare-enhancing, while forced interoperability—which is also contemplated by AICOA—can increase prices for consumers and dampen incentives to innovate. Furthermore, some of these blanket prohibitions are arguably at loggerheads with established antitrust doctrine, such as in, e.g., Trinko, which established that even monopolists are generally free to decide with whom they will deal.

In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.

Arguably, the reason why the Klobuchar-Grassley bill can so seamlessly exclude or redraw such a central element of antitrust law as competitive harm is because it deliberately chooses to ignore another, preceding one. Namely, the bill omits market power as a requirement for a finding of infringement or for the legislation’s equally crucial designation as a “covered platform.” It instead prescribes size metrics—number of users, market capitalization—to define which platforms are subject to intervention. Such definitions cast an overly wide net that can potentially capture consumer-facing conduct that doesn’t have the potential to harm competition at all.

It is precisely for this reason that existing antitrust laws are tethered to market power—i.e., because it long has been recognized that only companies with market power can harm competition. As John B. Kirkwood of Seattle University School of Law has written:

Market power’s pivotal role is clear…This concept is central to antitrust because it distinguishes firms that can harm competition and consumers from those that cannot.

In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.

Opaque language for opaque ideas

Another underlying issue is that the Klobuchar-Grassley bill is shot through with indeterminate language and fuzzy concepts that have no clear limiting principles. For instance, in order either to establish liability or to mount a successful defense to an alleged violation, the bill relies heavily on inherently amorphous terms such as “fairness,” “preferencing,” and “materiality,” or the “intrinsic” value of a product. But as the ABA Antitrust Law Section letter rightly observes, these concepts are not defined in the bill, nor by existing antitrust case law. As such, they inject variability and indeterminacy into how the legislation would be administered.

Moreover, it is also unclear how some incommensurable concepts will be weighed against each other. For example, how would concerns about safety and security be weighed against prohibitions on self-preferencing or requirements for interoperability? What is a “core function” and when would the law determine it has been sufficiently “enhanced” or “maintained”—requirements the law sets out to exempt certain otherwise prohibited behavior? The lack of linguistic and conceptual clarity not only explodes legal certainty, but also invites judicial second-guessing into the operation of business decisions, something against which the U.S. Supreme Court has long warned.

Finally, the bill’s choice of language and recent amendments to its terminology seem to confirm the dynamic discussed in the previous section. Most notably, the latest version of AICOA replaces earlier language invoking “harm to the competitive process” with “material harm to competition.” As the ABA Antitrust Law Section observes, this “suggests a shift away from protecting the competitive process towards protecting individual competitors.” Indeed, “material harm to competition” deviates from established categories such as “undue restraint of trade” or “substantial lessening of competition,” which have a clear focus on the competitive process. As a result, it is not unreasonable to expect that the new terminology might be interpreted as meaning that the actionable standard is material harm to competitors.

In its letter, the antitrust section urges Congress not only to define more clearly the novel terminology used in the bill, but also to do so in a manner consistent with existing antitrust law. Indeed:

The Section further recommends that these definitions direct attention to analysis consistent with antitrust principles: effects-based inquiries concerned with harm to the competitive process, not merely harm to particular competitors

Conclusion

The AICOA is a poorly written, misguided, and rushed piece of regulation that contravenes both basic antitrust-law principles and mainstream economic insights in the pursuit of a pre-established populist political goal: punishing the success of tech companies. If left uncorrected by Congress, these mistakes could have potentially far-reaching consequences for innovation in digital markets and for consumer welfare. They could also set antitrust law on a regressive course back toward a policy of picking winners and losers.

If you wander into an undergraduate economics class on the right day at the right time, you might catch the lecturer talking about Giffen goods: the rare case where demand curves can slope upward. The Irish potato famine is often used as an example. As the story goes, potatoes were a huge part of the Irish diet and consumed a large part of Irish family budgets. A failure of the potato crop reduced the supply of potatoes and potato prices soared. Because families had to spend so much on potatoes, they couldn’t afford much else, so spending on potatoes increased despite rising prices.

It’s a great story of injustice with a nugget of economics: Demand curves can slope upward!

Follow the students around for a few days, and they’ll be looking for Giffen goods everywhere. Surely, packaged ramen and boxed macaroni and cheese are Giffen goods. So are white bread and rice. Maybe even low-end apartments.

While it’s a fun concept to consider, the potato famine story is likely apocryphal. In truth, it’s nearly impossible to find a Giffen good in the real world. My version of Greg Mankiw’s massive “Principles of Economics” textbook devotes five paragraphs to Giffen goods, but it’s not especially relevant, which is perhaps why it’s only five paragraphs.

Wander into another economics class, and you might catch the lecturer talking about monopsony—that is, a market in which a small number of buyers control the price of inputs such as labor. I say “might” because—like Giffen goods—monopsony is an interesting concept to consider, but very hard to find a clear example of in the real world. Mankiw’s textbook devotes only four paragraphs to monopsony, explaining that the book “does not present a formal model of monopsony because, in the world, monopsonies are rare.”

Even so, monopsony is a hot topic these days. It seems that monopsonies are everywhere. Walmart and Amazon are monopsonist employers. So are poultry, pork, and beef companies. Local hospitals monopsonize the market for nurses and physicians. The National Collegiate Athletic Association is a monopsony employer of college athletes. Ultimate Fighting Championship has a monopsony over mixed-martial-arts fighters.

In 1994, David Card and Alan Krueger’s earthshaking study found a minimum wage increase had no measurable effect on fast-food employment and retail prices. They investigated monopsony power as one explanation but concluded that a monopsony model was not supported by their findings. They note:

[W]e find that prices of fast-food meals increased in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to consumers. Within New Jersey, however, we find no evidence that prices increased more in stores that were most affected by the minimum-wage rise. Taken as a whole, these findings are difficult to explain with the standard competitive model or with models in which employers face supply constraints (e.g., monopsony or equilibrium search models). [Emphasis added]

Even so, the monopsony hunt was on and it intensified during President Barack Obama’s administration. During his term, the U.S. Justice Department (DOJ) brought suit against several major Silicon Valley employers for anticompetitively entering into agreements not to “poach” programmers and engineers from each other. The administration also brought suit against a hospital association for an agreement to set uniform billing rates for certain nurses. Both cases settled but the Silicon Valley allegations led to a private class-action lawsuit.

In 2016, Obama’s Council of Economic Advisers published an issue brief on labor-market monopsony. The brief concluded that “evidence suggest[s] that firms may have wage-setting power in a broad range of settings.”

Around the same time, the Obama administration announced that it intended to “criminally investigate naked no-poaching or wage-fixing agreements that are unrelated or unnecessary to a larger legitimate collaboration between the employers.” The DOJ argued that no-poach agreements that allocate employees between companies are per se unlawful restraints of trade that violate Section 1 of the Sherman Act.

If one believes that monopsony power is stifling workers’ wages and benefits, then this would be a good first step to build up a body of evidence and precedence. Go after the low-hanging fruit of a conspiracy that is a per se violation of the Sherman Act, secure some wins, and then start probing the more challenging cases.

After several matters that resulted in settlements, the DOJ brought its first criminal wage-fixing case in late 2020. In United States v. Jindal, the government charged two employees of a Texas health-care staffing company of colluding with another staffing company to decrease pay rates for physical therapists and physical-therapist assistants.

The defense in Jindal conceded that that price-fixing was per se illegal under the Sherman Act but argued that prices and wages are two different concepts. Therefore, the defense claimed that, even if it was engaged in wage-fixing, the conduct would not be per se illegal. That was a stretch, and the district court judge was having none of that in ruling that: “The antitrust laws fully apply to the labor markets, and price-fixing agreements among buyers … are prohibited by the Sherman Act.”

Nevertheless, the jury in Jindal found the defendants not guilty of wage-fixing in violation of the Sherman Act, and also not guilty of a related conspiracy charge.

The DOJ also brought criminal no-poach cases against three other health-care companies and their employees: United States v. Surgical Care Affiliates LLC; United States v. Hee; and United States v. DaVita Inc. Each of the indictments alleged no-poach agreements in which defendants conspired with competitors not to recruit each other’s employees. Hee also included wage-fixing allegations.

Before trial, the defense in DaVita filed a motion to dismiss, arguing that no-poach agreements did not amount to illegal market-allocation agreements. Instead, the defense claimed that no-poach agreements were something less restrictive. Rather than a flat-out refusal to hire competitors’ employees, they were more akin to agreeing not to seek out competitors’ employees. As with Jindal, this was too much of a stretch for the judge who ruled that no-poach agreements could be an illegal market-allocation agreement.

A day after the Jindal verdict, the jury in DaVita acquitted the kidney-dialysis provider and its former CEO of charges that they conspired with competitors to suppress competition for employees through no-poach agreements.

The DaVita jurors appeared to be hung up on the definition of “meaningful competition” in the relevant market. The defense presented information showing that, despite any agreements, employees frequently changed jobs among the companies. Thus, it was argued that any agreement did not amount to an allocation of the market for employees.

The prosecution called several corporate executives who testified that the non-solicitation agreements merely required DaVita employees to tell their bosses they were looking for another job before they could be considered for positions at the three alleged co-conspirator companies. Some witnesses indicated that, by informing their bosses, they were able to obtain promotions and/or increased compensation. This was supported by expert testimony concluding that DaVita salaries changed during the alleged conspiracy period at a rate higher than the health-care industry as a whole. This finding is at-odds with a theory that the non-solicitation agreement was designed to stabilize or suppress compensation.

The Jindal and DaVita cases highlight some of the enormous challenges in mounting a labor-monopsonization case. Even if agencies can “win” or get concessions on defining the relevant markets, they still face challenges in establishing that no-poach agreements amount to a “meaningful” restraint of trade. DaVita suggests that a showing of job turnover and/or increased compensation during an alleged conspiracy period may be sufficient to convince a jury that a no-poach agreement may not be anticompetitive and—under certain circumstances—may even be pro-competitive.

For now, the hunt for a monopsony labor market continues its quest, along with the hunt for the ever-elusive Giffen good.

[The 15th entry in our FTC UMC Rulemaking symposium is a guest post from DePaul University College of Law‘s Josh Sarnoff, a former Thomas A. Edison Distinguished Scholar at the U.S. Patent and Trademark Office. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

We used to have a robust aftermarket for non-original equipment manufacturer (OEM) automobile repair parts and “independent” repair services, but car companies have increasingly resorted to design-patent protection to prevent competition in the supply of cosmetic repair parts such as bumpers, hoods, panels, and mirrors. The predictable and intended consequence has been to raise prices and reduce options for consumers, effectively monopolizing the separate repair parts and services markets through federal intellectual-property control over needed repair products or inputs to service markets.

Because this is a federal legal right, moreover, it preempts state “right to repair” laws that would authorize such products and services, either as a matter of consumer rights or as a remedy for anti-competitive conduct or “unfair or deceptive” acts and practices resulting from tying a monopoly over the original sales market for specific automobiles (protected by those intellectual-property rights) into a monopoly in the repair markets for those automobiles. Existing law under Section 102(c) of the 1975 Magnuson-Moss Warranty Act does not explicitly prohibit such supply-restriction anti-competitive conduct when protecting against warranty requirements that would void warranties based on “tie-in sales” requirements that would void warranties if third-party repair parts or independent repair services are used by consumers. 

Unlike for functional parts of “machines,” which have always been subject to utility-patent rights, non-functional parts of machines were not (and still are not) statutorily authorized as the subject of design-patent rights. However, in 1980, the U.S. Court of Appeals for the Federal Circuit—in an opinion by Judge Giles Rich—held that design patents can protect parts or fragments of “articles of manufacture,” the class of statutory subject matter for which ornamental design-patent rights can be provided.

By reducing the “size” of the thing to which the design-patent right applies—here, a part rather than an entire automobile (leaving aside the question of how machines get protection in the first place, when Congress hasn’t authorized it for design patents)—the historic right to repair a purchased machine without reconstructing it can be effectively overridden. This is because the third-party parts supplier is now constructing an entire part (e.g., a headlight) subject to design-patent rights, whereas they would have been authorized to make a part for use in repairing the entire car (and note that designs are supposed to be understood as a whole, not by assessing only parts of the objects to be protected—the article of manufacture).

In 2019, the Federal Circuit held that consumer desires to purchase and use replacement cosmetic auto parts to repair cars to their original appearance is not a “functional” requirement for which ornamental design-patent rights cannot be provided, and thus design patents protect against competition to supply such ornamental repair parts. As the court stated:

Our precedent gives weight to this language, holding that a de-sign patent must claim an “ornamental” design, not one ‘dictated by function.’…  We hold that, even in this context of a consumer preference for a particular design to match other parts of a whole, the aesthetic appeal of a design to consumers is inadequate to render that design functional.

This decision assures that design patents override both consumers’ “right” to restore the appearance of their products to the original condition and state or insurance-policy requirements that require the use of “must-match” aftermarket parts to do so. If the manufacture or import of aftermarket parts is prohibited by design-patent law, then obviously consumers and independent repair shops cannot use them to repair their vehicles, and insurers cannot control costs by paying for the use such aftermarket parts. This is true even when those aftermarket parts are superior in quality to the OEM parts, at lower prices.

The Federal Trade Commission (FTC) in theory could address the over-extension by the judiciary of design-patent protection for cosmetic auto parts, by finding such repair-restricting practices relying on design-patent protection to be either anticompetitive or unfair to consumers. The FTC has already recognized the need to protect the right to repair products. In 2013, the Supreme Court held in FTC v. Actavis that conduct within the scope of granted patent rights may still constitute an antitrust violation. Using patent rights to tie repair parts and services to the original purchase market may violate either Section 1 or Section 2 of the Sherman Act. 

The FTC might also, in theory, extend antitrust principles beyond what is prohibited under the Sherman Act, using its adjudicatory “unfair methods of competition” (UMC) authority under Section 5(a)(2) & (b) or its rulemaking authority under Section 6(g). Some have argued that the FTC cannot or should not adopt prohibitions on anticompetitive conduct that does not violate other statutory antitrust laws, and that Section 6(g) rulemaking authority is limited to procedural rules and does not authorize substantive antitrust rulemaking, even though the U.S. Court of Appeals for the D.C. Circuit upheld such substantive rulemaking in 1973 (which would now be overruled if the issue reached the Supreme Court). I’ll leave that issue aside for now, even though it is often difficult to distinguish UMC from unfair commercial practices.

Instead, I’ll focus on the clearer and undisputed authority of the FTC to issue (admittedly procedurally burdensome) rules to prohibit “unfair or deceptive commercial practices” (UDCP) using rulemaking authority under Section 18 of the FTC Act. Under that section, subsection (a)(1)(B), the FTC can “prescribe … rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce.” But the rulemaking authority does not define what “practices are unfair, except to refer to Section 5(a)(1)’s legislative declaration that “unfair … commercial practices” are “unlawful.”

In turn, Section 5(n) of the FTC Act defines an “unfair” act or practice as one that must “cause[] or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”

For the reasons described above, use of design-patent rights (even if they may result in lower upfront sales prices of cars, because manufacturers may obtain additional profits through leveraging those rights to prevent an aftermarket in repair parts) should clearly qualify as “unfair” under this definition, even if Congress (at least according to the Federal Circuit, even if the statutory text doesn’t support that and only activist judicial interpretation is the proximate cause of the authority) is the source of the patent right that is being used “unfairly.”

“Common wisdom,” however, suggests that the FTC will not choose to exercise its “unfairness” authority beyond recognized categories of specifically and legislatively prohibited acts, just like with its antitrust UMC authority, without further legislative enactment. This common wisdom may be belied by the fact that the FTC updated its Section 18 rulemaking procedures in July 2021, and recently requested that the public bring complaints over illegal repair restriction practices to its attention and indicated that it would “prioritize investigations into unlawful repair restrictions under … Section 5….”

More importantly, “common wisdom” suggests that Congress restricted the FTC’s authority to impose broad new rules defining unfair commercial practices when it adopted the Section 18 rules in response to purported overreach by the FTC in the late 1970s under the Carter administration, as well as temporarily defunded the agency. But Section 18 does not substantively modify the FTC’s Section 5(a) authority (to which Section 18 rulemaking applies), and the common wisdom is likely incorrect that the FTC lacks the power to issue such rules (even if it lacks the willpower).

Since the 1980 legislative change to FTC’s UDCP rulemaking requirements, the FTC has been reluctant to engage in broad rulemaking to define unfairness in commercial contexts, although it has continued to enforce more vigorously prohibitions against deception against consumers, including through deceptive advertisements. The FTC has not issued any similar, generally applicable principles as to what constitutes “unfairness” in commercial practices.

Nevertheless, it should be clear that the FTC has the power to do so. But in the current judicial-review context, the FTC may be even more reluctant than during the past four decades to exercise such authority, as it may lead to judicial invalidation of its Section 5(a)&(b) authority to declare what practices are “unfair.”

As many administrative law scholars have noted, the Supreme Court has recently adopted a much more aggressive “major questions” doctrine for refusing deference to agency interpretations of the scope of their regulatory authority. Instead of lack of deference, the Court has imposed a new and restrictive “clear statement” rule, requiring greater legislative specificity before finding that an agency possesses regulatory authority to take challenged actions. Accordingly, should the FTC issue a new, broad unfair commercial practices rule under Section 18 prohibiting the use of design patents to prevent aftermarket parts from being manufactured—on grounds that it is “unfair” to consumers and adversely affects their “right” of repair—then absent significant change to the Court’s composition, that rule will likely be invalidated because Congress did not define “unfairness” with sufficient specificity.

Even more importantly, such a rule would provide a very “good” test case for a Supreme Court itching to revive the non-delegation doctrine and to hamstring the administrative regulatory apparatus. Thus, the FTC might rightly fear outright repeal of its Section 5(a) as well as its Section 18 (and Section 6g substantive rulemaking) authority should it adopt an aggressive consumer-protection approach.

In conclusion, given the likely lack of political will on the FTC—in light of the likely response of the Supreme Court should the FTC exercise its legislatively conferred power in a consumer-friendly fashion—the use of design patents to restrict the right to repair is a problem that Congress should and must fix. Congress should do so both by adopting a right-to-repair law (such as the Fair Repair Act) and by amending the design-patent act to ensure that the consumer right to repair can be effectuated.

Since broad legislation to accomplish this in a general right-to-repair law or in a modification of the design-patent law that overturns partial and fragment protection for machines directly is likely to face significant opposition, Congress should at least act swiftly to pass the pending SMART Act, which provides that manufacture, import, and offer for sale of design-patented cosmetic automobile repair parts is not an act of infringement, and permits sale and use of those parts after a limited period of exclusivity (30 months) that assures more than sufficient returns on investment in such parts-design development. That way, consumers will be protected in regard to the second most valuable purchase they can make (the first being their home) and the one that is most likely to need repair given the continuing, widespread problem of traffic accidents (the subject of different consumer protection measures that are needed).

[The 14th entry in our FTC UMC Rulemaking symposium is a guest post from Bill MacLeod, a former Federal Trade Commission bureau director and currently a partner with Kelley Drye & Warren LLP, where he chairs the firm’s antitrust practice and co-chairs its consumer protection practice. Bill gratefully acknowledges the research and analysis of Jacob Hopkins in preparing this article, which does not represent the views of any firm or client. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

Introduction

In November 2021, the Federal Trade Commission (FTC) published a draft strategic plan for fiscal years 2022-2026 that previewed its vision for enforcement without the rule of reason guiding the analysis and without consumer welfare defining the objective. The draft plan dropped a longstanding commitment from the FTC’s previous strategic plans to foster “vigorous competition” and replaced it with a pledge to police “fair competition.”

The commission also broadened its focus beyond consumers. Instead of dedicating competition enforcement to them, the FTC would see to it that competition would serve the general public. Clues as to the nature of the public interest appeared among the plan’s more specific objectives. For example, to advance “all forms of equity, and support underserved and marginalized communities through the FTC’s competition mission.” The draft plan emphasized an objective to protect employees from unfair competition. Gone from the draft entirely was a previous vow to avoid “unduly burdening legitimate business activity.”

Additional details of the agenda emerged in December 2021, when the commission announced a statement of regulatory priorities describing plans to develop unfair-methods-of-competition (UMC) rulemakings. The annual regulatory plan, also released in December 2021, reiterated the list of practices that could be targeted for competition rules, prompting a dissent from Commissioner Christine S. Wilson, who saw in the plan “the foundation for an avalanche of problematic rulemakings.” Referring to the now-defunct Interstate Commerce Commission and Civil Aeronautics Board, she noted “the disastrous regulatory frameworks in the transportation industry teach the attentive student that rules stifle innovation, increase costs, raise prices, limit choice, and decrease output, frequently harming the very parties they are intended to benefit, and the benefits that flowed to consumers when competition replaced regulation in transportation.”

The Courts on Competition Rulemaking Authority

Whether the FTC has the authority to promulgate the rules it now contemplates has been a 50-year-old debate among legal scholars. Section 6(g) of the FTC Act authorizes the commission: “From time to time to classify corporations and to make rules and regulations for the purpose of carrying out the provisions of sections 41 to 46 and 47 to 58 of this title.”[1] Before 1964, this rulemaking power was directed to the FTC’s administrative functions. Since then, rulemaking has typically addressed consumer-protection concerns, the authority for which was codified in Magnuson-Moss Warranty Act in 1975, incorporated in Section 18 of the FTC Act.

Only once has the commission’s power to promulgate a competition rule under Section 6(g) been tested in the courts. That test played out in 1972 and 1973 in a case involving a rule the FTC issued requiring the posting of octane ratings on pumps at gas stations.[2] Failure to post was declared a UMC and an unfair or deceptive practice (UDAP). Petroleum refiners and retailers challenged various aspects of the rules, including the commission’s authority to issue them, and the case came to Judge Aubrey Robinson in the U.S. District Court for Washington, D.C. He held that the FTC lacked such authority.

The opinion began with a review of the legislative history, which was “clear” to the court.[3] Section 6(g) was intended “only as an authorization for internal rules of organization, practice, and procedure [and] to insure that the FTC had the power to require reports from all corporations.”[4] Buttressing the history were subsequent occasions in which Congress had explicitly granted FTC authority for regulations confined to specific practices, which would have been unnecessary if the power already resided in Section 6(g). That section had not changed since 1914, and the FTC for approximately 50 years had not asserted rulemaking authority under it.

The commission urged the court to apply the definitions of regulation in the Administrative Procedure Act (APA) to the FTC Act. The proposition that words written in 1946 had the same meaning as words written in 1914 was “inconceivable” without any indication that they were related. Further undermining the commission’s argument were amendments to other legislation after APA to authorize rulemaking at other agencies. The absence of a similar amendment to the FTC Act implied that the “rulemaking power in Section 6(g) of the FTCA remains unchanged by Congress to date, and conveys only the authority to make such rules and regulations in connection with its housekeeping chore and investigative responsibilities.”[5] Indeed, Congress considered an amendment that would have authorized the commission to “make, alter, or repeal regulations further defining more particularly unfair trade practices or unfair or oppressive competition.”[6] That legislation died.

Also rejected was the argument that the FTC’s authority under Section 5 to “prevent” UMC includes the power to regulate. The proposition ignored “the very next paragraph of the statute that requires the Commission to conduct adjudicative proceedings.”[7] Until recently, the court noted, the commission itself had repeatedly admitted it possessed no power to promulgate substantive rules,[8] and that the Supreme Court had impliedly rejected the existence of such power.[9] In his conclusion, Judge Robinson quoted Justice Louis Brandeis:

What the Government asks is not a construction of the statute, but, in effect, an enlargement of it by the court, so that what was omitted, presumably by inadvertence, may be included within its scope. To supply omissions transcends the judicial function.[10]

The FTC appealed, and the U.S. Court of Appeals for the D.C. Circuit reversed.[11] In an opinion by Judge J. Skelly Wright, the court cautioned:

Our duty here is not simply to make a policy judgment as to what mode of procedure…best accommodates the need for effective enforcement of the Commission’s mandate…. The extent of its powers can be decided only by considering the powers Congress specifically granted it in the light of the statutory language and background.[12]

But the legislative history that was clear to the lower court became opaque on appeal. Judge Wright acknowledged that Rep. J. Harry Covington (D-Md)—the floor manager of the bill that became the FTC Act—assured his colleagues that Congress was not granting the FTC the power for legislative rulemaking. That would have been unconstitutional, in Covington’s view, although a delegation of administrative rulemaking was not.[13] As he assured his colleagues:

The Federal trade commission will have no power to prescribe the methods of competition to be used in future. In issuing its orders it will not be exercising power of a legislative nature….

The function of the Federal trade commission will be to determine whether an existing method of competition is unfair, and, if it finds it to be unfair, to order the discontinuance of its use. In doing this it will exercise power of a judicial nature….[14]

Supporting Covington was a colloquy between two other congressmen, also quoted by the court:

Mr. SHERLEY. If the gentleman will permit, the Federal trade commission differs from the Interstate Commerce Commission in that it has no affirmative power to say what shall be done in the future?

Mr. STEVENS of Minnesota. Certainly.

Mr. SHERLEY. In other words, it exercises in no sense a legislative function such as is exercised by the Interstate Commerce Commission?

Mr. STEVENS of Minnesota. Yes. The gentleman is entirely right. We desired clearly to exclude that authority from the power of the commission. We did not know as we could grant it anyway. But the time has not arrived to consider or discuss such a question.[15]

But this legislative history, which concededly “carefully differentiated” the FTC’s power from the ICC’s power[16] was “utterly unhelpful” to Judge Wright, who somehow could not square synonymous assurances that the FTC would have “no power to prescribe methods of competition” and would exercise “in no sense a legislative function.” The judge found an easier approach:

If one ignores the “legislative” — “administrative” technical distinction which influenced Covington and utilizes a more practical, broader conception of “legislative” type activity prevalent today, they can be read to support substantive rule-making of the kind asserted by the [FTC].

Freed from the background of the 1914 act, the judge adopted a judicial philosophy popular in the early 1970s. Notions of practicality and fairness allowed courts to realize unexpressed purposes, which in the case of FTC rulemaking meant “specifically the advisability of utilizing the Administrative Procedure Act’s rule-making procedures to provide an agency about to embark on legal innovation with all relevant arguments and information.” Similar decisions supporting rulemaking powers “indisputably flesh out the contemporary legal framework in which both the FTC and this court operate and which we must recognize.”[17] For example, if the National Labor Relations Board (NLRB) could regulate, the FTC should be able to do so, as well. It did not bother the judge that the NLRB and other agencies had received explicit rulemaking authority, or that commission officials had often admitted that they lacked that power. 

The Supreme Court declined to review the Petroleum Refiners holdings, but its interpretation of the FTC Act last year casts serious doubt on the validity of Judge Wright’s decision today. In AMG Capital Management LLC v. Federal Trade Commission, the FTC used many of the same arguments that had worked in 1972. This time, however, the agency was unable to persuade a single justice that the act conferred an unexpressed power.

The question in AMG concerned whether the agency could bypass administrative adjudication and bring a cause of action directly in federal court for monetary relief. Section 13(b) of the FTC Act authorizes the agency to seek injunctions without administrative proceedings, but a different section of the act creates a cause of action for redress. Section 19(b) prescribes the procedure whereby the commission can seek money. An action to do so may commence only after the agency has concluded an administrative proceeding that finds a violation of Section 5. For decades, the commission shunned the cumbersome two-step procedure and resorted almost exclusively to consolidated Section 13(b) actions to obtain monetary relief. And for decades, courts affirmed these cases, but the Supreme Court had never weighed in.

Writing for a unanimous court, Justice Stephen Breyer found it highly unlikely “that Congress, without mentioning the matter, would have granted the Commission authority so readily to circumvent its traditional §5 administrative proceedings.”[18] Other statutes might merit broader construction, but not when the powers granted were as clearly expressed as in the FTC Act. The court rejected the commission’s arguments that Congress had intended to allow the commission to choose between alternative enforcement avenues. Congress had not acquiesced in the commission’s use of both approaches (even though Section 19 preserved “any authority of the Commission under any other provision of law”). Addressing the arguments that violators would keep billions of dollars in ill-gotten gains if the commission had to adjudicate first and litigate afterward, the court responded that the agency could ask Congress for the more efficient power. It appeared nowhere in the text of the FTC Act, and “Congress…does not…hide elephants in mouseholes.”[19]

Rules of Fair Competition Fail in the Supreme Court

Long before AMG, the Supreme Court had addressed the limits of the FTC’s authority. Judge Robinson in Petroleum Refiners cited five decisions dating from 1920 to 1965 supporting his conclusion that the court had impliedly rejected rulemaking power. One of those decisions came on May 27, 1935, when the Supreme Court used the limitations of FTC authority to deal a fatal blow to the National Industrial Recovery Act (NIRA). The centerpiece of the New Deal, NIRA authorized the federal government to adopt regulations intended to achieve “fair competition.” Those regulations normalized working conditions, wages, products, and prices in many trades. Their purpose was to stem the forces that were depressing wages and prices in the early years of the Great Depression. Vigorous competition was regarded as one of those forces.

Appeals of convictions for violating one of the codes gave the Supreme Court the opportunity to opine on the meaning of “fair competition” and the appropriate process by which competition should be assessed.[20] The court sought to reconcile fair competition and unfair methods of competition, as the terms were respectively defined in NIRA and the FTC Act. A provision in NIRA deemed a violation of “fair competition” to constitute an “unfair method of competition” under the FTC Act, but the dichotomy made no sense to the Court. The difference between the concepts “lies not only in procedure, but in subject matter.”

On substance, the court held:

We cannot regard the “fair competition” of the codes as antithetical to the “unfair methods of competition” of the FTCA. The “fair competition” of the codes has a much broader range, and a “new significance….for the protection of consumers, competitors, employees, and others, and in furtherance of the public interest… [21]

Such power was the province of Congress, not a regulatory agency.

The court then examined the procedures prescribed for rulemaking under NIRA and adjudicating under FTC Act. Fair competition codes were proposed by industry associations, reviewed by agencies, and adopted by executive orders. By contrast, the FTC had to prove violations in adjudicatory proceedings:

What are “unfair methods of competition” are thus to be determined in particular instances, upon evidence, in the light of particular competitive conditions and of what is found to be a specific and substantial public interest.…To make this possible, Congress set up a special procedure. A Commission, a quasi-judicial body, was created. Provision was made [for] formal complaint, for notice and hearing, for appropriate findings of fact supported by adequate evidence, and for judicial review to give assurance that the action of the Commission is taken within its statutory authority.[22]

In 1935, Congress could not constitutionally delegate the power to issue rules advancing undefined interests of consumers, competitors, employees, and the public to an agency of general jurisdiction. The Congress that passed the FTC Act was well aware of that constraint. That was why the bill’s floor manager assured his colleagues the FTC “will have no power to prescribe the methods of competition to be used in future [or] power of a legislative nature…it will exercise power of a judicial nature.”

Conclusion

A regulatory regime intended to replace vigorous competition with fair competition, to benefit interest groups other than customers, to be implemented while giving short shrift to costs and benefits is unprecedented (at least since NIRA). The mission that the FTC has previewed anticipates rules that can be expected to impose undue costs on legitimate businesses in markets far larger than the sectors once regulated by the ICC and CAB. If history is any guide, the commission’s agenda could cost U.S. consumers hundreds of billions of dollars.

But first, the agency will have to persuade the courts that Congress gave it the power to do so, and if precedent is any guide, the commission will fail. After AMG, courts will be reluctant to extract a phrase in Section 6(g) from the framework of the FTC Act. The power to prevent UMC is specified in the Act, and adjudication is the sole procedure described to exercise that power. If the commission argues that “rules and regulations for the purpose of carrying out the provisions of” the act include vast powers outside those provisions, the agency will end up asking the courts to find another elephant hiding in a mousehole.


[1] 15 U.S.C. §46 (An amendment excepted section 57a(a)(2) from its scope. The amendment specifically authorized consumer protection rules but declined to “affect any authority” the FTC to promulgate other rules.)

[2] National Petroleum Refiners Association v. FTC, 340 F. Supp. 1343 (D.D.C. 1972) (rev’d National Petroleum Refiners v. FTC, 482 F.2d 672 (D.C. Cir., 1973); cert. denied, 415 U.S. 915 (1974).

[3] 340 F. Supp. at 1345.

[4] Id. (citation omitted).

[5] Id. at 1348-49.

[6] Id. at 1346 (citation omitted).

[7] Id. at 1349.

[8] Id at 1350 (citing Congressional hearings from the 1960s and 1970s).

[9] Id. at 1350 (Federal Trade Commission v. Colgate Palmolive Co., 380 U.S. 374, 385, 85 S.Ct. 1035, 13 L.Ed.2d 904 (1965); Addison v. Holly Hill Fruit Products, Inc., 322 U.S. 607, 617-618, 64 S.Ct. 1215, 88 L.Ed. 1488 (1944); Schechter Poultry Corp. v. United States, 295 U.S. 495, 532-533, 55 S.Ct. 837, 79 L.Ed. 1570 (1935); Federal Trade Commission v. Raladam Co., 283 U.S. 643, 648, 51 S.Ct. 587, 75 L.Ed. 1324 (1931); Federal Trade Commission v. Gratz, 253 U.S. 421, 427, 40 S.Ct. 572, 64 L.Ed. 993 (1920)).

[10] Id. at 1350 (citing Iselin v. United States, 270 U.S. 245, 251 (1926).

[11] National Petroleum Refiners Ass’n v. F.T.C., 482 F.2d 672 (D.C. Cir., 1973) (Since the passage of Section 18, Section 6 no longer authorizes consumer protection rules.).

[12] 482 F.2d at 674.

[13] Id. at 708 (stating, “This view of Congressman Covington’s remarks is buttressed by a reading of one of the cases on which he relied to rebut arguments that the grant of power to the commission to enforce and elaborate the standard of illegality was an unconstitutional delegation of legislative power. United States v. Grimaud, 220 U.S. 506, 55 L. Ed. 563, 31 S.C.t. 480 (1911).”)

[14] Id. (citations omitted).

[15] Id. at 708, n 19 (citations omitted).

[16] Id. at 702 (citations omitted).

[17] Id. at 683.

[18] Id. (citing D. FitzGerald, The Genesis of Consumer Protection Remedies Under Section 13(b) of the FTC Act 1–2, Paper at FTC 90th Anniversary Symposium, Sept. 23, 2004, arguing that, in the mid-1970s, “no one imagined that Section 13(b) of the [FTC] Act would become an important part of the Commission’s consumer protection program”).

[19]  Id. (citing Whitman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2001)).

[20] Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935).

[21] Id at 534 (Citing Title I) (of no help was that the codes could “provide such exceptions to and exemptions from the provisions of such code as the President in his discretion deems necessary to effectuate the policy herein declared.” (quotation marks omitted).)

[22] Id. at 533-344 (citing Federal Trade Comm’n v. Beech-Nut Packing Co., 257 U. S. 441, 257 U. S. 453; Federal Trade Comm’n v. Klesner, 280 U. S. 19, 280 U. S. 27, 280 U. S. 28; Federal Trade Comm’n v. Raladam Co., supra; Federal Trade Comm’n v. Keppel & Bro., supra; Federal Trade Comm’n v. Algoma Lumber Co., 291 U. S. 67, 291 U. S. 73.) Federal Trade Comm’n v. Klesner, supra.)

[Closing out Week Two of our FTC UMC Rulemaking symposium is a contribution from a very special guest: Commissioner Noah J. Phillips of the Federal Trade Commission. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

In his July Executive Order, President Joe Biden called on the Federal Trade Commission (FTC) to consider making a series of rules under its purported authority to regulate “unfair methods of competition.”[1] Chair Lina Khan has previously voiced her support for doing so.[2] My view is that the Commission has no such rulemaking powers, and that the scope of the authority asserted would amount to an unconstitutional delegation of power by the Congress.[3] Others have written about those issues, and we can leave them for another day.[4] Professors Richard Pierce and Gus Hurwitz have each written that, if FTC rulemaking is to survive judicial scrutiny, it must apply to conduct that is covered by the antitrust laws.[5]

That idea raises an inherent tension between the concept of rulemaking and the underlying law. Proponents of rulemaking advocate “clear” rules to, in their view, reduce ambiguity, ensure predictability, promote administrability, and conserve resources otherwise spent on ex post, case-by-case adjudication.[6] To the extent they mean administrative adoption of per se illegality standards by rulemaking, it flies in the face of contemporary antitrust jurisprudence, which has been moving from per se standards back to the historical “rule of reason.”

Recognizing that the Sherman Act could be read to bar all contracts, federal courts for over a century have interpreted the 1890 antitrust law only to apply to “unreasonable” restraints of trade.[7] The Supreme Court first adopted this concept in its landmark 1911 decision in Standard Oil, upholding the lower court’s dissolution of John D. Rockefeller’s Standard Oil Company.[8] Just four years after the Federal Trade Commission Act was enacted, the Supreme Courtestablished the “the prevailing standard of analysis” for determining whether an agreement constitutes an unreasonable restraint of trade under Section 1 of the Sherman Act.[9] Justice Louis Brandeis, who as an adviser to President Woodrow Wilson was instrumental in creating the FTC, described the scope of this “rule of reason” inquiry in the Chicago Board of Trade case:

The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.[10]

The rule of reason was and remains today a fact-specific inquiry, but the Court also determined from early on that certain restraints invited a different analytical approach: per se prohibitions. The per se rule involves no weighing of the restraint’s procompetitive effects. Once proven, a restraint subject to the per se rule is presumed to be unreasonable and illegal.In the 1911 Dr. Miles case, the Court held that resale minimum price fixing was illegal per se under Section 1.[11] It found horizontal price-fixing agreements to be per se illegal in Socony Vacuum.[12] Since Socony Vacuum, the Court has limited the application of per se illegality to bid rigging (a form of horizontal price fixing),[13] horizontal market divisions,[14] tying,[15] and group boycotts[16].

Starting in the 1970s, especially following research demonstrating the benefits to consumers of a number of business arrangements and contracts previously condemned by courts as per se illegal, the Court began to limit the categories of conduct that received per se treatment. In 1977, in GTE Sylvania, the Courtheld that vertical customer and territorial restraints should be judged under the rule of reason.[17] In 1979, in BMI, it held that a blanket license issued by a clearinghouse of copyright owners that set a uniform price and prevented individual negotiation with licensees was a necessary precondition for the product and was thus subject to the rule of reason.[18] In 1984, in Jefferson Parish, the Court rejected automatic application of the per se rule to tying.[19] A year later, the Court held that the per se rule did not apply to all group boycotts.[20] In 1997, in State Oil Company v. Khan, it held that maximum resale price fixing is not per se illegal.[21] And, in 2007, the Court held that minimum resale price fixing should also be assessed under the rule of reason. In Leegin, the Court made clear that the per se rule is not the norm for analyzing the reasonableness of restraints; rather, the rule of reason is the “accepted standard for testing” whether a practice is unreasonable.[22]

More recent Court decisions reflect the Court’s refusal to expand the scope of “quick look” analysis, an application of the rule of reason that nonetheless truncates the necessary fact-finding for liability where “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.”[23] In 2013, the Supreme Court rejected an FTC request to require courts to apply the “quick look” approach to reverse-payment settlement agreements.[24] The Court has also backed away from presumptive rules of legality. In American Needle, the Court stripped the National Football League of Section 1 immunity by holding that the NFL is not entitled to the single entity defense under Copperweld and instead, its conduct must be analyzed under the “flexible” rule of reason.[25] And last year, in NCAA v. Alston, the Court rejected the National Collegiate Athletic Association’s argument that it should have benefited from a “quick look”, restating that “most restraints challenged under the Sherman Act” are subject to the rule of reason.[26]

The message from the Court is clear: rules are the exception, not the norm. It “presumptively applies rule of reason analysis”[27] and applies the per se rule only to restraints that “lack any redeeming virtue.”[28] Per se rules are reserved for “conduct that is manifestly anticompetitive” and that “would always or almost always tend to restrict competition and decrease output.”[29] And that’s a short list.  What is more, the Leegin Court made clear that administrative convenience—part of the justification for administrative rules[30]—cannot in and of itself be sufficient to justify application of the per se rule.[31]

The Court’s warnings about per se rules ring just as true for rules that could be promulgated under the Commission’s purported UMC rulemaking authority, which would function just as a per se rule would. Proof of the conduct ends the inquiry. No need to demonstrate anticompetitive effects. No procompetitive justifications. No efficiencies. No balancing.

But if the Commission attempts administratively to adopt per se rules, it will run up against precedents making clear that the antitrust laws do not abide such rules. This is not simply a matter of the—already controversial[32]—historical attempts by the agency to define under Section 5 conduct that goes outside the Sherman Act. Rather, establishing per se rules about conduct covered under the rule of reason effectively overrules Supreme Court precedent. For example, the Executive Order contemplates the FTC promulgating a rule concerning pay-for-delay settlements.[33] But, to the extent it can fashion rules, the agency can only prohibit by rule that which is illegal. To adopt a per se ban on conduct covered by the rule of reason is to take out of the analysis the justifications for and benefits of the conduct in question. And while the FTC Act enables the agency some authority to prohibit conduct outside the scope of the Sherman Act,[34] it does not do away with consideration of justifications or benefits when determining whether a practice is an “unfair method of competition.” As a result, the FTC cannot condemn categorically via rulemaking conduct that the courts have refused to condemn as per se illegal, and instead have analyzed under the rule of reason.[35] Last year, the FTC docketed a petition filed by the Open Markets Institute and others to ban “exclusionary contracts” by monopolists and other “dominant firms” under the agency’s unfair methods of competition authority.[36] The precise scope is not entirely clear from the filing, but courts have held consistently that some conduct clearly covered (e.g., exclusive dealing) is properly evaluated under the rule of reason.[37]

The Supreme Court has been loath to bless per se rules by courts. Rules are blunt instruments and not appropriately applied to conduct that the effect of which is not so clearly negative. Except for the “obvious,” an analysis of whether a restraint is unreasonable is not a “simple matter” and “easy labels do not always supply ready answers.” [38] Over the decades, the Court has rebuked lower courts attempting to apply rules to conduct properly evaluated under the rule of reason.[39] Should the Commission attempt the same administratively, or if it attempts administratively to rewrite judicial precedents, it would be rewriting the antitrust law itself and tempting a similar fate.


[1] Promoting Competition in the American Economy, Exec. Order No. 14036, 86 Fed. Reg. 36987, 36993 (July 9, 2021), https://www.govinfo.gov/content/pkg/FR-2021-07-14/pdf/2021-15069.pdf (hereinafter “Biden Executive Order”).

[2]  Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. Chi. L. Rev. 357 (2020) (hereinafter “Chopra & Khan”).

[3]  Prepared Remarks of Commissioner Noah Joshua Phillips at FTC Non-Compete Clauses in the Workplace Workshop (Jan. 9, 2020, https://www.ftc.gov/system/files/documents/public_statements/1561697/phillips_-_remarks_at_ftc_nca_workshop_1-9-20.pdf).

[4] See e.g., Maureen K. Ohlhausen & James Rill, Pushing the Limits? A Primer on FTC Competition Rulemaking, U.S. Chamber of Commerce (Aug. 12, 2021), https://www.uschamber.com/assets/archived/images/ftc_rulemaking_white_paper_aug12.pdf.

[5]  Richard J. Pierce Jr., Can the FTC Use Rulemaking to Change Antitrust Law?, Truth on the Market FTC UMC Rulemaking Symposium (April 28, 2022), https://truthonthemarket.com/2022/04/28/can-the-ftc-use-rulemaking-to-change-antitrust-law; Gus Hurwitz, Chevron and Administrative Antitrust, Redux, Truth on the Market FTC UMC Rulemaking Symposium (April 29, 2022), https://truthonthemarket.com/2022/04/29/chevron-and-administrative-antitrust-redux.

[6] See Chopra & Khan, supra n. 2, at 368.

[7] See e.g., Bd. of Trade v. United States, 246 U.S. 231, 238 (1918) (explaining that “the legality of an agreement . . . cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade … restrains. To bind, to restrain, is of their very essence”); Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 687-88 (1978) (“restraint is the very essence of every contract; read literally, § 1 would outlaw the entire body of private contract law”).

[8] Standard Oil Co., v. United States, 221 U.S. 1 (1911).

[9] See Continental T.V. v. GTE Sylvania, 433 U.S. 36, 49 (1977) (“Since the early years of this century a judicial gloss on this statutory language has established the “rule of reason” as the prevailing standard of analysis…”). See also State Oil Co. v. Khan, 522 U.S. 3, 10 (1997) (“most antitrust claims are analyzed under a ‘rule of reason’ ”); Arizona v. Maricopa Cty. Med. Soc’y, 457 U.S. 332, 343 (1982) (“we have analyzed most restraints under the so-called ‘rule of reason’ ”).

[10] Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918).

[11] Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

[12]  United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).

[13]  See e.g., United States v. Joyce, 895 F.3d 673, 677 (9th Cir. 2018); United States v. Bensinger, 430 F.2d 584, 589 (8th Cir. 1970).

[14]  United States v. Sealy, Inc., 388 U.S. 350 (1967).

[15]  Northern P. R. Co. v. United States, 356 U.S. 1 (1958).

[16]  NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998).

[17]  Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977).

[18]  Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. 441 U.S. 1 (1979).

[19] Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).

[20]  Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985).

[21] State Oil Company v. Khan, 522 U.S. 3 (1997).

[22] Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 885 (2007).

[23]  California Dental Association v. FTC, 526 U.S. 756, 770 (1999).

[24]  FTC v. Actavis, Inc., 570 U.S. 136 (2013).

[25] Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 187 (2010).

[26] Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2155, 2021 WL 2519036 (2021).

[27] Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006).

[28]  Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 885 (2007).

[29] Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988).

[30]  Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. Chi. L. Rev. 357 (2020).

[31]  Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 886-87 (2007).

[32] The FTC’s attempts to bring cases condemning conduct as a standalone Section 5 violation were not successful. See e.g., Boise Cascade Corp. v. FTC, 637 F.2d 573 (9th Cir. 1980); Airline Guides, Inc. v. FTC, 630 F.2d 920 (2d Cir. 1980); E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984).

[33] Biden Executive order, Section 5(h)(iii).

[34] Supreme Court precedent confirms that Section 5 of the FTC Act does not limit “unfair methods of competition” to practices that violate other antitrust laws (i.e., Sherman Act, Clayton Act). See e.g., FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 454 (1986); FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972); FTC v. Brown Shoe Co., 384 U.S. 316, 321 (1966); FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 394-95 (1953); FTC v. R.F. Keppel & Bros., Inc., 291 U.S. 304, 309-310 (1934).

[35] The agency also has recognized recently that such agreements are subject to the Rule of Reason under the FTC Act, which decisions was upheld by the U.S. Court of Appeals for the Fifth Circuit. Impax Labs., Inc. v. FTC, No. 19-60394 (5th Cir. 2021).

[36] Petition for Rulemaking to Prohibit Exclusionary Contracts by Open Market Institute et al., (July 21, 2021), https://www.regulations.gov/document/FTC-2021-0036-0002 (hereinafter “OMI Petition). 

[37] OMI Petition at 71 (“Given the real evidence of harm from certain exclusionary contracts and the specious justifications presented in their favor, the FTC should ban exclusivity with customers, distributors, or suppliers that results in substantial market foreclosure as per se illegal under the FTC Act. The present rule of reason governing exclusive dealing by all firms is infirm on multiple grounds.”) But see e.g., ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 271 (3d Cir. 2012) (“Due to the potentially procompetitive benefits of exclusive dealing agreements, their legality is judged under the rule of reason.”).

[38]  Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. 441 U.S. 1, 8-9 (1979).

[39] See e.g., Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977) (holding that nonprice vertical restraints have redeeming value and potential procompetitive justification and therefore are unsuitable for per se review); United States Steel Corp. v. Fortner Enters., Inc., 429 U.S. 610 (1977) (rejecting the assumption that tying lacked any purpose other than suppressing competition and recognized tying could be procompetitive); FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) (declining to apply the per se rule even though the conduct at issue resembled a group boycott).

Biden administration enforcers at the U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) have prioritized labor-market monopsony issues for antitrust scrutiny (see, for example, here and here). This heightened interest comes in light of claims that labor markets are highly concentrated and are rife with largely neglected competitive problems that depress workers’ income. Such concerns are reflected in a March 2022 U.S. Treasury Department report on “The State of Labor Market Competition.”

Monopsony is the “flip side” of monopoly and U.S. antitrust law clearly condemns agreements designed to undermine the “buyer side” competitive process (see, for example, this U.S. government submission to the OECD). But is a special new emphasis on labor markets warranted, given that antitrust enforcers ideally should seek to allocate their scarce resources to the most pressing (highest valued) areas of competitive concern?

A May 2022 Information Technology & Innovation (ITIF) study from ITIF Associate Director (and former FTC economist) Julie Carlson indicates that the degree of emphasis the administration’s antitrust enforcers are placing on labor issues may be misplaced. In particular, the ITIF study debunks the Treasury report’s findings of high levels of labor-market concentration and the claim that workers face a “decrease in wages [due to labor market power] at roughly 20 percent relative to the level in a fully competitive market.” Furthermore, while noting the importance of DOJ antitrust prosecutions of hard-core anticompetitive agreements among employers (wage-fixing and no-poach agreements), the ITIF report emphasizes policy reforms unrelated to antitrust as key to improving workers’ lot.

Key takeaways from the ITIF report include:

  • Labor markets are not highly concentrated. Local labor-market concentration has been declining for decades, with the most concentrated markets seeing the largest declines.
  • Labor-market power is largely due to labor-market frictions, such as worker preferences, search costs, bargaining, and occupational licensing, rather than concentration.
  • As a case study, changes in concentration in the labor market for nurses have little to no effect on wages, whereas nurses’ preferences over job location are estimated to lead to wage markdowns of 50%.
  • Firms are not profiting at the expense of workers. The decline in the labor share of national income is primarily due to rising home values, not increased labor-market concentration.
  • Policy reform should focus on reducing labor-market frictions and strengthening workers’ ability to collectively bargain. Policies targeting concentration are misguided and will be ineffective at improving outcomes for workers.

The ITIF report also throws cold water on the notion of emphasizing labor-market issues in merger reviews, which was teed up in the January 2022 joint DOJ/FTC request for information (RFI) on merger enforcement. The ITIF report explains:

Introducing the evaluation of labor market effects unnecessarily complicates merger review and needlessly ties up agency resources at a time when the agencies are facing severe resource constraints.48 As discussed previously, labor markets are not highly concentrated, nor is labor market concentration a key factor driving down wages.

A proposed merger that is reportable to the agencies under the Hart-Scott-Rodino Act and likely to have an anticompetitive effect in a relevant labor market is also likely to have an anticompetitive effect in a relevant product market. … Evaluating mergers for labor market effects is unnecessary and costly for both firms and the agencies. The current merger guidelines adequately address competition concerns in input markets, so any contemplated revision to the guidelines should not incorporate a “framework to analyze mergers that may lessen competition in labor markets.” [Citation to Request for Information on Merger Enforcement omitted.]

In sum, the administration’s recent pronouncements about highly anticompetitive labor markets that have resulted in severely underpaid workers—used as the basis to justify heightened antitrust emphasis on labor issues—appear to be based on false premises. As such, they are a species of government misinformation, which, if acted upon, threatens to misallocate scarce enforcement resources and thereby undermine efficient government antitrust enforcement. What’s more, an unnecessary overemphasis on labor-market antitrust questions could impose unwarranted investigative costs on companies and chill potentially efficient business transactions. (Think of a proposed merger that would reduce production costs and benefit consumers but result in a workforce reduction by the merged firm.)

Perhaps the administration will take heed of the ITIF report and rethink its plans to ramp up labor-market antitrust-enforcement initiatives. Promoting pro-market regulatory reforms that benefit both labor and consumers (for instance, excessive occupational-licensing restrictions) would be a welfare-superior and cheaper alternative to misbegotten antitrust actions.

[The 12th entry in our FTC UMC Rulemaking symposium is from guest contributor Steven J. Cernak, a partner in the antitrust and competition practice of BonaLaw in Detroit, Michigan. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

The Federal Trade Commission (FTC) has been in the antitrust-enforcement business for more than 100 years. Its new leadership is considering some of the biggest changes ever in its enforcement methods. Instead of a detailed analysis of each case on its own merits, some FTC leaders now want its unelected bureaucrats to write competition rules for the entire economy under its power to stop unfair methods of competition. Such a move would be bad for competition and the economy—and for the FTC itself.

The FTC enforces the antitrust laws through its statutory authority to police unfair methods of competition (UMC). Like all antitrust challengers, the FTC now must conduct a detailed analysis of the specific actions of particular competitors. Whether the FTC decides to challenge actions initially in its own administrative courts or in federal courts, eventually it must convince independent judges that the challenged conduct really does harm competition. When finalized, those decisions set precedent. Future parties can argue their particular details are different or otherwise require a different outcome. As a result, the antitrust laws slowly evolve in ways understandable to all.

Some members of FTC’s new leadership have argued that the agency should skip the hard work of individual cases and instead issue blanket rules to cover competitive situations across the economy. Since taking over in the new administration, they have taken steps that seem to make it easier for the FTC to issue such broad competition rules. Doing so would be a mistake for several reasons.

First, it is far from clear that Congress gave the FTC the authority to issue such rules. Also, any such grant of quasi-legislative power to this independent agency might be unconstitutional. The FTC already gets to play prosecutor and judge in many cases. Becoming a legislature might be going too far. Other commentators, both in this symposium and elsewhere, have detailed those arguments. But however those arguments shake out, the FTC will need to take the time and resources to fight off the inevitable challenges.

But even if it can, the FTC should not. The case-by-case approach allows for detailed analysis, making it more likely to be correct. If there are any mistakes, they only affect those parties.

If it turns to competition rulemaking, how will the FTC gain the knowledge and develop the wisdom to develop rules that apply across large swaths of the economy for an unlimited time? Will it apply the same rules to companies with 8% and 80% market share? And to companies making software or automobiles or flying passengers across the country? And will it apply those rules today and next year, no matter the innovations that occur in between? The hubris to think that some all-knowing Washington wizards can get all that right, all the time, is staggering.

Yes, there are some general antitrust rules, like price-fixing agreements being illegal because they harm consumers. But those rules were developed by many lawyers, economists, judges, and witnesses through decades of case-by-case analyses and, even today, parties can argue to a court that they don’t apply to their particular facts. A one-size-fits-all rule won’t have even that flexibility.

For example, what if the FTC develops a rule based on, say, an investigation of toilet-bowl manufacturers that all price-fixing, even if the fixed price is reasonable, is automatically illegal. How would such a rigid rule handle, say, a joint license with a single price issued by competing music composers? Or could a single rule that anticipates the very different facts of Trenton Potteriesand Broadcast Musicbe written in a way that is both short enough to be understood but broad enough to anticipate all potential future facts? Perhaps the rule inspired by Trenton Potteries could be adjusted when the Broadcast Music facts become known. But then, that is just back to the detailed, case-by-case, analysis that we have now, except with the FTC rule-makers changing the rules rather than an independent judge.

Any new FTC rules could conflict with the court opinions generated by antitrust cases brought by the U.S. Justice Department’s (DOJ) Antitrust Division, state attorneys general, or private parties. For instance, the FTC and the Division generally divide up the industries that make up the economy based on expertise and experience. Should the competitive rules differ by enforcer? By industry?

As an example, consider, say, a hypothetical automatic-transmission company whose smallest products can be used in light-duty pickup trucks while the bulk of its product line is used in the largest heavy-duty trucks and equipment. Traditionally, the FTC has reviewed antitrust issues in the light-duty industry while the Division has taken heavy-duty. Should the antitrust rules affecting this hypothetical company’s light-duty sales be different than those affecting the heavy-duty sales based solely on the enforcer and not the applicable competitive facts?

Antitrust is a law-enforcement regime with rules that have changed slowly over decades through individual cases, as economic understandings have evolved. It could have been a regulatory regime, but elected officials did not make that choice. Antitrust could be changed now to a regulatory regime. Individual rules could be changed. Such monumental changes, however, should only be made by Congress, as is being debated now, not by three unelected FTC officials.

In the 1970s, the FTC overreached on rules about deceptive marketing and was slapped down by Congress, the courts, and the public. The Washington Post criticized it as “the national nanny.” Its reputation and authority suffered. We did not need a national nanny then. We don’t need one today, hectoring us to follow overbroad, ill-fitting rules designed by insulated “experts” and not subject to review.

The FTC has very important roles to play regarding understanding and protecting competition in the U.S. economy (before even getting to its crucial consumer-protection mission.) Even with potential increases in its budget, the FTC, like all of us, will have limited resources, time, expertise, and reputation. It should not squander any of that on an ill-fated, quixotic, and hubristic effort to tell everyone how to compete. Instead, the FTC should focus on what it does best: challenging the bad actions of bad actors and convincing a court that it got it right. That is how the FTC can best protect America’s consumers, as its (nicely redesigned) website proclaims.