In February’s FTC roundup, I noted an op-ed in the Wall Street Journal in which Commissioner Christine Wilson announced her intent to resign from the Federal Trade Commission. Her departure, and her stated reasons therefore, were not encouraging for those of us who would prefer to see the FTC function as a stable, economically grounded, and genuinely bipartisan independent agency. Since then, Wilson has specified her departure date: March 31, two weeks hence.
With Wilson’s departure, and that of Commissioner Noah Phillips in October 2022 (I wrote about that here, and I recommend Alden Abbott’s post on Noah Phillips’ contribution to the 1-800 Contacts case), we’ll have a strictly partisan commission—one lacking any Republican commissioners or, indeed, anyone who might properly be described as a moderate or mainstream antitrust lawyer or economist. We shall see what the appointment process delivers and when; soon, I hope, but I’m not holding my breath.
Next Comes Exodus
As followers of the FTC—faithful, agnostic, skeptical, or occasional—are all aware, the commissioners have not been alone in their exodus. Not a few staffers have left the building.
In a Bloomberg column just yesterday, Dan Papscun covers the scope of the departures, “at a pace not seen in at least two decades.” Based on data obtained from a Bloomberg Freedom of Information Act request, Papscun notes the departure of “99 senior-level career attorneys” from 2021-2022, including 71 experienced GS-15 level attorneys and 28 from the senior executive service.
To put those numbers in context, this left the FTC—an agency with dual antitrust and consumer-protection authority ranging over most of domestic commerce—with some 750 attorneys at the end of 2022. That’s a decent size for a law firm that lacks global ambitions, but a little lean for the agency. Papscun quotes Debbie Feinstein, former head of the FTC’s Bureau of Competition during the Obama administration: “You lose a lot of institutional knowledge” with the departure of senior staff and career leaders. Indeed you do.
Onward and Somewhere
The commission continues to scrutinize noncompete terms in employment agreements by bringing cases, even as it entertains comments on its proposal to ban nearly all such terms by regulation (see here, here, here, here, here, here, here, here, and here for “a few” ToTM posts on the proposal). As I noted before, the NPRM cites three recent settlements of Section 5 cases against firms’ use of noncompetes as a means of documenting the commission’s experience with such terms. It’s important to define one’s terms clearly. By “cases,” I mean administrative complaints resolved by consent orders, with no stipulation of any antitrust violation, rather than cases litigated to their conclusion in federal court. And by “recent,” I mean settlements announced the very day before the publication of the NPRM.
Also noted was the brevity of the complaints, and the memoranda and orders memorializing the settlements.It’s entirely possible that the FTC’s allegations in one, two, or all of the matters were correct, but based on the public documents, it’s hard to tell how the noncompetes violated Section 5. Commissioner Wilson noted as much in her dissents (here and here).
On March 15, the FTC’s record on noncompete cases grew by a third; that is, the agency announced a fourth settlement (again in an administrative process, and again without a decision on the merits or a stipulation of an antitrust violation). Once again, the public documents are . . . compact, providing little by way of guidance as to how (in the commission’s view), the specific terms of the agreements violated Section 5 (of course, if—as suggested in the NPRM—all such terms violate Section 5, then there you go). Again, Commissioner Wilson noticed.
Here’s a wrinkle: the staff do seem to be building on their experience regarding the use of noncompete terms in the glass container industry. Of the four noncompete competition matters now settled (all this year), three—including the most recent—deal with firms in the glass-container industry, which, according to the allegations, is highly concentrated (at least in its labor markets). The NPRM asked for input on its sweeping proposed rule, but it also asked for input on possible regulatory alternatives. A smarter aleck than myself might suggest that they consider regulating the use of noncompetes in the glass-container industry, given the commission’s burgeoning experience in this specific labor market (or markets).
Someone Deserves a Break Today
The commission’s foray into labor matters continues, with a request for information (RFI) on “the means by which franchisors exert control over franchisees and their workers.” On the one hand, the commission has a longstanding consumer-protection interest in the marketing of franchises, enforcing its Franchise Rule, which was first adopted in 1978 and amended in 2007. The rule chiefly requires certain disclosures—23 of them—in marketing franchise opportunities to potential franchisees. Further inquiry into the operation of the rule, and recent market developments, could be part of the normal course of regulatory business.
But this is not exactly that. The RFI raises a panoply of questions about both competition and consumer-protection issues, well beyond the scope of the rule, that may pertain to franchise businesses. It asks, among other things, how the provisions of franchise agreements “affects franchisees, consumers, workers, and competition, or . . . any justifications for such provision[s].” Working its way back to noncompetes:
The FTC is currently seeking public comment on a proposed rule to ban noncompete clauses for workers in some situations. As part of that proposed rulemaking, the FTC is interested in public comments on the question of whether that proposed rule should also apply to noncompete clauses between franchisors and franchisees.
As Alden Abbott observed, franchise businesses represent a considerable engine of economic growth. That’s not to say that a given franchisor cannot run afoul of either antitrust or consumer-protection law, but it does suggest that there are considerable positive aspects to many franchisor/franchisee relationships, and not just potential harms.
If that’s right, one might wonder whether the commission’s litany of questions about “the means by which franchisors exert control over franchisees and their workers” represents a neutral inquiry into a complex class of business models employed in diverse industries. If you’re still wondering, Elizabeth Wilkins, director of the FTC’s Office of Policy Planning (full disclosure, she was my boss for a minute, and, in my opinion, a good manager) issued a spoiler alert: “This RFI will begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.” What could be more neutral than that?
The RFI also seeks input on the use of intra-franchise no-poach agreements, a relatively narrow but still significant issue for franchise brand development. More about us: a recent amicus brief filed by the International Center for Law & Economics and 20 scholars of antitrust law and economics (including your humble scribe, but also, and not for nothin’, a Nobel laureate), explains some of the pro-competitive potential of such agreements, both generally and with a focus on a specific case, Delandes v. McDonald’s.
It’s here, if you or the commission are interested.
The 117th Congress closed out without a floor vote on either of the major pieces of antitrust legislation introduced in both chambers: the American Innovation and Choice Online Act (AICOA) and the Open Apps Market Act (OAMA). But it was evident at yesterday’s hearing of the Senate Judiciary Committee’s antitrust subcommittee that at least some advocates—both in academia and among the committee leadership—hope to raise those bills from the dead.
Of the committee’s five carefully chosen witnesses, only New York University School of Law’s Daniel Francis appeared to appreciate the competitive risks posed by AICOA and OAMA—noting, among other things, that the bills’ failure to distinguish between harm to competition and harm to certain competitors was a critical defect.
Yale School of Management’s Fiona Scott Morton acknowledged that ideal antitrust reforms were not on the table, and appeared open to amendments. But she also suggested that current antitrust standards were deficient and, without much explanation or attention to the bills’ particulars, that AICOA and OAMA were both steps in the right direction.
Subcommittee Chair Amy Klobuchar (D-Minn.), who sponsored AICOA in the last Congress, seems keen to reintroduce it without modification. In her introductory remarks, she lamented the power, wealth (if that’s different), and influence of Big Tech in helping to sink her bill last year.
Apparently, firms targeted by anticompetitive legislation would rather they weren’t. Folks outside the Beltway should sit down for this: it seems those firms hire people to help them explain, to Congress and the public, both the fact that they don’t like the bills and why. The people they hire are called “lobbyists.” It appears that, sometimes, that strategy works or is at least an input into a process that sometimes ends, more or less, as they prefer. Dirty pool, indeed.
There are, of course, other reasons why AICOA and OAMA might have stalled. Had they been enacted, it’s very likely that they would have chilled innovation, harmed consumers, and provided a level of regulatory discretion that would have been very hard, if not impossible, to dial back. If reintroduced and enacted, the bills would be more likely to “rein in” competition and innovation in the American digital sector and, specifically, targeted tech firms’ ability to deliver innovative products and services to tens of millions of (hitherto very satisfied) consumers.
Our colleagues at the International Center for Law & Economics (ICLE) and its affiliated scholars, among others, have explained why. For a selected bit of self-plagiarism, AICOA and OAMA received considerable attention in our symposium on Antitrust’s Uncertain Future; ICLE’s Dirk Auer had a Truth on the Market post on AICOA; and Lazar Radic wrote a piece on OAMA that’s currently up for a Concurrences award.
To revisit just a few critical points:
AICOA and OAMA both suppose that “self-preferencing” is generally harmful. Not so. A firm might invest in developing a successful platform and ecosystem because it expects to recoup some of that investment through, among other means, preferred treatment for some of its own products. Exercising a measure of control over downstream or adjacent products might drive the platform’s development in the first place (see here and here for some potential advantages). To cite just a few examples from the empirical literature, Li and Agarwal (2017) find that Facebook’s integration of Instagram led to a significant increase in user demand, not just for Instagram, but for the entire category of photography apps; Foerderer, et al. (2018) find that Google’s 2015 entry into the market for photography apps on Android created additional user attention and demand for such apps generally; and Cennamo, et al. (2018) find that video games offered by console firms often become blockbusters and expanded the consoles’ installed base. As a result, they increase the potential for independent game developers, even in the face of competition from first-party games.
AICOA and OAMA, in somewhat different ways, favor open systems, interoperability, and/or data portability. All of these have potential advantages but, equally, potential costs or disadvantages. Whether any is procompetitive or anticompetitive depends on particular facts and circumstances. In the abstract, each represents a business model that might well be procompetitive or benign, and that consumers might well favor or disfavor. For example, interoperability has potential benefits and costs, and, as Sam Bowman has observed, those costs sometimes exceed the benefits. For instance, interoperability can be exceedingly costly to implement or maintain, and it can generate vulnerabilities that challenge or undermine data security. Data portability can be handy, but it can also harm the interests of third parties—say, friends willing to be named, or depicted in certain photos on a certain platform, but not just anywhere. And while recent commentary suggests that the absence of “open” systems signals a competition problem, it’s hard to understand why. There are many reasons that consumers might prefer “closed” systems, even when they have to pay a premium for them.
AICOA and OAMA both embody dubious assumptions. For example, underlying AICOA is a supposition that vertical integration is generally (or at least typically) harmful. Critics of established antitrust law can point to a few recent studies that cast doubt on the ubiquity of benefits from vertical integration. And it is, in fact, possible for vertical mergers or other vertical conduct to harm competition. But that possibility, and the findings of these few studies, are routinely overstated. The weight of the empirical evidence shows that vertical integration tends to be competitively benign. For example, widely acclaimed meta-analysis by economists Francine Lafontaine (former director of the Federal Trade Commission’s Bureau of Economics under President Barack Obama) and Margaret Slade led them to conclude:
“[U]nder most circumstances, profit-maximizing vertical integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view. Although there are isolated studies that contradict this claim, the vast majority support it. . . . We therefore conclude that, faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked.”
Network effects and data advantages are not insurmountable, nor even necessarily harmful. Advantages of scope and scale for data sets vary according to the data at issue; the context and analytic sophistication of those with access to the data and application; and are subject to diminishing returns, in any case. Simple measures of market share or other numerical thresholds may signal very little of competitive import. See, e.g., this on the contestable platform paradox; Carl Shapiro on the putative decline of competition and irrelevance of certain metrics; and, more generally, antitrust’s well-grounded and wholesale repudiation of the Structure-Conduct-Performance paradigm.
These points are not new. As we note above, they’ve been made more carefully, and in more detail, before. What’s new is that the failure of AICOA and OAMA to reach floor votes in the last Congress leaves their sponsors, and many of their advocates, unchastened.
Conclusion
At yesterday’s hearing, Sen. Klobuchar noted that nations around the world are adopting regulatory frameworks aimed at “reining in” American digital platforms. True enough, but that’s exactly what AICOA and OAMA promise; they will not foster competition or competitiveness.
Novel industries may pose novel challenges, not least to antitrust. But it does not follow that the EU’s Digital Markets Act (DMA), proposed policies in Australia and the United Kingdom, or AICOA and OAMA represent beneficial, much less optimal, policy reforms. As Francis noted, the central commitments of OAMA and AICOA, like the DMA and other proposals, aim to help certain firms at the expense of other firms and consumers. This is not procompetitive reform; it is rent-seeking by less-successful competitors.
AICOA and OAMA were laid to rest with the 117th Congress. They should be left to rest in peace.
In the world of video games, the process by which players train themselves or their characters in order to overcome a difficult “boss battle” is called “leveling up.” I find that the phrase also serves as a useful metaphor in the context of corporate mergers. Here, “leveling up” can be thought of as acquiring another firm in order to enter or reinforce one’s presence in an adjacent market where a larger and more successful incumbent is already active.
In video-game terminology, that incumbent would be the “boss.” Acquiring firms choose to level up when they recognize that building internal capacity to compete with the “boss” is too slow, too expensive, or is simply infeasible. An acquisition thus becomes the only way “to beat the boss” (or, at least, to maximize the odds of doing so).
Alas, this behavior is often mischaracterized as a “killer acquisition” or “reverse killer acquisition.” What separates leveling up from killer acquisitions is that the former serve to turn the merged entity into a more powerful competitor, while the latter attempt to weaken competition. In the case of “reverse killer acquisitions,” the assumption is that the acquiring firm would have entered the adjacent market regardless absent the merger, leaving even more firms competing in that market.
In other words, the distinction ultimately boils down to a simple (though hard to answer) question: could both the acquiring and target firms have effectively competed with the “boss” without a merger?
Because they are ubiquitous in the tech sector, these mergers—sometimes also referred to as acquisitions of nascent competitors—have drawn tremendous attention from antitrust authorities and policymakers. All too often, policymakers fail to adequately consider the realistic counterfactual to a merger and mistake leveling up for a killer acquisition. The most recent high-profile example is Meta’s acquisition of the virtual-reality fitness app Within. But in what may be a hopeful sign of a turning of the tide, a federal court appears set to clear that deal over objections from the Federal Trade Commission (FTC).
Some Recent ‘Boss Battles’
The canonical example of leveling up in tech markets is likely Google’s acquisition of Android back in 2005. While Apple had not yet launched the iPhone, it was already clear by 2005 that mobile would become an important way to access the internet (including Google’s search services). Rumors were swirling that Apple, following its tremendously successful iPod, had started developing a phone, and Microsoft had been working on Windows Mobile for a long time.
In short, there was a serious risk that Google would be reliant on a single mobile gatekeeper (i.e., Apple) if it did not move quickly into mobile. Purchasing Android was seen as the best way to do so. (Indeed, averting an analogous sort of threat appears to be driving Meta’s move into virtual reality today.)
The natural next question is whether Google or Android could have succeeded in the mobile market absent the merger. My guess is that the answer is no. In 2005, Google did not produce any consumer hardware. Quickly and successfully making the leap would have been daunting. As for Android:
Google had significant advantages that helped it to make demands from carriers and OEMs that Android would not have been able to make. In other words, Google was uniquely situated to solve the collective action problem stemming from OEMs’ desire to modify Android according to their own idiosyncratic preferences. It used the appeal of its app bundle as leverage to get OEMs and carriers to commit to support Android devices for longer with OS updates. The popularity of its apps meant that OEMs and carriers would have great difficulty in going it alone without them, and so had to engage in some contractual arrangements with Google to sell Android phones that customers wanted. Google was better resourced than Android likely would have been and may have been able to hold out for better terms with a more recognizable and desirable brand name than a hypothetical Google-less Android. In short, though it is of course possible that Android could have succeeded despite the deal having been blocked, it is also plausible that Android became so successful only because of its combination with Google. (citations omitted)
In short, everything suggests that Google’s purchase of Android was a good example of leveling up. Note that much the same could be said about the company’s decision to purchase Fitbit in order to compete against Apple and its Apple Watch (which quickly dominated the market after its launch in 2015).
A more recent example of leveling up is Microsoft’s planned acquisition of Activision Blizzard. In this case, the merger appears to be about improving Microsoft’s competitive position in the platform market for game consoles, rather than in the adjacent market for games.
At the time of writing, Microsoft is staring down the barrel of a gun: Sony is on the cusp of becoming the runaway winner of yet another console generation. Microsoft’s executives appear to have concluded that this is partly due to a lack of exclusive titles on the Xbox platform. Hence, they are seeking to purchase Activision Blizzard, one of the most successful game studios, known among other things for its acclaimed Call of Duty series.
Again, the question is whether Microsoft could challenge Sony by improving its internal game-publishing branch (known as Xbox Game Studios) or whether it needs to acquire a whole new division. This is obviously a hard question to answer, but a cursory glance at the titles shipped by Microsoft’s publishing studio suggest that the issues it faces could not simply be resolved by throwing more money at its existing capacities. Indeed, Microsoft Game Studios seems to be plagued by organizational failings that might only be solved by creating more competition within the Microsoft company. As one gaming journalist summarized:
The current predicament of these titles goes beyond the amount of money invested or the buzzwords used to market them – it’s about Microsoft’s plan to effectively manage its studios. Encouraging independence isn’t an excuse for such a blatantly hands-off approach which allows titles to fester for years in development hell, with some fostering mistreatment to occur. On the surface, it’s just baffling how a company that’s been ranked as one of the top 10 most reputable companies eight times in 11 years (as per RepTrak) could have such problems with its gaming division.
The upshot is that Microsoft appears to have recognized that its own game-development branch is failing, and that acquiring a well-functioning rival is the only way to rapidly compete with Sony. There is thus a strong case to be made that competition authorities and courts should approach the merger with caution, as it has at least the potential to significantly increase competition in the game-console industry.
Finally, leveling up is sometimes a way for smaller firms to try and move faster than incumbents into a burgeoning and promising segment. The best example of this is arguably Meta’s effort to acquire Within, a developer of VR fitness apps. Rather than being an attempt to thwart competition from a competitor in the VR app market, the goal of the merger appears to be to compete with the likes of Google, Apple, and Sony at the platform level. As Mark Zuckerberg wrote back in 2015, when Meta’s VR/AR strategy was still in its infancy:
Our vision is that VR/AR will be the next major computing platform after mobile in about 10 years… The strategic goal is clearest. We are vulnerable on mobile to Google and Apple because they make major mobile platforms. We would like a stronger strategic position in the next wave of computing….
Over the next few years, we’re going to need to make major new investments in apps, platform services, development / graphics and AR. Some of these will be acquisitions and some can be built in house. If we try to build them all in house from scratch, then we risk that several will take too long or fail and put our overall strategy at serious risk. To derisk this, we should acquire some of these pieces from leading companies.
In short, many of the tech mergers that critics portray as killer acquisitions are just as likely to be attempts by firms to compete head-on with incumbents. This “leveling up” is precisely the sort of beneficial outcome that antitrust laws were designed to promote.
Building Products Is Hard
Critics are often quick to apply the “killer acquisition” label to any merger where a large platform is seeking to enter or reinforce its presence in an adjacent market. The preceding paragraphs demonstrate that it’s not that simple, as these mergers often enable firms to improve their competitive position in the adjacent market. For obvious reasons, antitrust authorities and policymakers should be careful not to thwart this competition.
The harder part is how to separate the wheat from the chaff. While I don’t have a definitive answer, an easy first step would be for authorities to more seriously consider the supply side of the equation.
Building a new product is incredibly hard, even for the most successful tech firms. Microsoft famously failed with its Zune music player and Windows Phone. The Google+ social network never gained any traction. Meta’s foray into the cryptocurrency industry was a sobering experience. Amazon’s Fire Phone bombed. Even Apple, which usually epitomizes Silicon Valley firms’ ability to enter new markets, has had its share of dramatic failures: Apple Maps, its Ping social network, and the first Home Pod, to name a few.
To put it differently, policymakers should not assume that internal growth is always a realistic alternative to a merger. Instead, they should carefully examine whether such a strategy is timely, cost-effective, and likely to succeed.
This is obviously a daunting task. Firms will struggle to dispositively show that they need to acquire the target firm in order to effectively compete against an incumbent. The question essentially hinges on the quality of the firm’s existing management, engineers, and capabilities. All of these are difficult—perhaps even impossible—to measure. At the very least, policymakers can improve the odds of reaching a correct decision by approaching these mergers with an open mind.
Under Chair Lina Khan’s tenure, the FTC has opted for the opposite approach and taken a decidedly hostile view of tech acquisitions. The commission sued to block both Meta’s purchase of Within and Microsoft’s acquisition of Activision Blizzard. Likewise, several economists—notably Tommasso Valletti—have called for policymakers to reverse the burden of proof in merger proceedings, and opined that all mergers should be viewed with suspicion because, absent efficiencies, they always reduce competition.
Unfortunately, this skeptical approach is something of a self-fulfilling prophecy: when authorities view mergers with suspicion, they are likely to be dismissive of the benefits discussed above. Mergers will be blocked and entry into adjacent markets will occur via internal growth.
Large tech companies’ many failed attempts to enter adjacent markets via internal growth suggest that such an outcome would ultimately harm the digital economy. Too many “boss battles” will needlessly be lost, depriving consumers of precious competition and destroying startup companies’ exit strategies.
Under a recently proposed rule, the Federal Trade Commission (FTC) would ban the use of noncompete terms in employment agreements nationwide. Noncompetes are contracts that workers sign saying they agree to not work for the employer’s competitors for a certain period. The FTC’s rule would be a major policy change, regulating future contracts and retroactively voiding current ones. With limited exceptions, it would cover everyone in the United States.
When I scan academic economists’ public commentary on the ban over the past few weeks (which basically means people on Twitter), I see almost universal support for the FTC’s proposed ban. You see similar support if you expand to general econ commentary, like Timothy Lee at Full Stack Economics. Where you see pushback, it is from people at think tanks (like me) or hushed skepticism, compared to the kind of open disagreement you see on most policy issues.
The proposed rule grew out of an executive order by President Joe Biden in 2021,which I wrote about at the time. My argument was that there is a simple economic rationale for the contract: noncompetes encourage both parties to invest in the employee-employer relationship, just like marriage contracts encourage spouses to invest in each other.
Somehow, reposting my newsletter on the economic rationale for noncompetes has turned me into a “pro-noncompete guy” on Twitter.
The discussions have been disorienting.I feel like I’m taking crazy pills! If you ask me, “what new thing should policymakers do to address labor market power?” I would probably say something about noncompetes! Employers abuse them. The stories are devastating about people unable to find a new job because noncompetes bind them.
Yet, while recognizing the problems with noncompetes, I do not support the complete ban.
That puts me out of step with most vocal economics commentators. Where does this disagreement come from? How do I think about policy generally, and why am I the odd one out?
My Interpretation of the Research
One possibility is that I’m not such a lonely voice, and that the sample of vocal Twitter users is biased toward particular policy views. The University of Chicago Booth School of Business’ Initiative on Global Markets recently conducted a poll of academic economists about noncompetes, which mostly finds differing opinions and levels of certainty about the effects of a ban. For example, 43% were uncertain that a ban would generate a “substantial increase in wages in the affected industries.” However, maybe that is because the word substantial is unclear. That’s a problem with these surveys.
Still, more economists surveyed agreed than disagreed. I would answer “disagree” to that statement, as worded.
Why do I differ? One cynical response would be that I don’t know the recent literature, and my views are outdated. From the research I’ve done for a paper that I’m writing on labor-market power, I’m fairly well-versed in the noncompete literature. I don’t know it better than the active researchers in the field, but better than the average economists responding to the FTC’s proposal and definitely better than most lawyers. My disagreement also isn’t about me being some free-market fanatic. I’m not, and someother free-market types are skeptical of noncompetes. My priors are more complicated (critics might say “confused”) than that, as I will explain below.
After much soul-searching, I’ve concluded that the disagreement is real and results from my—possibly weird—understanding of how we should go from the science of economics to the art of policy. That’s what I want to explain today and get us to think more about.
Let’s start with the literature and the science of economics. First, we need to know “the facts.” The original papers focused a lot on collecting data and facts about noncompetes. We don’t have amazing data on the prevalence of noncompetes, but we know something, which is more than we could say a decade ago. For example,Evan Starr, J.J. Prescott, & Norman Bishara (2021) conducted a large survey in which they found that “18 percent of labor force participants are bound by noncompetes, with 38 percent having agreed to at least one in the past.”[1] We need to know these things and thank the researchers for collecting data.
With these facts, we can start running regressions. In addition to the paper above, many papers develop indices of noncompete “enforceability” by state. Then we can regress things like wages on an enforceability index. Many papers—like Starr, Prescott, & Bishara above—run cross-state regressions and find that wages are higher in states with higher noncompete enforceability. They also find more training with noncompete enforceability. But that kind of correlation is littered with selection issues. High-income workers are more likely to sign noncompetes. That’s not causal. The authors carefully explain this, but sometimes correlations are the best we have—e.g., if we want to study noncompetes on doctors’ wages and their poaching of clients.
Some people will simply point to California (which has banned noncompetes for decades) and say, “see, noncompete bans don’t destroy an economy.” Unfortunately, many things make California unique, so while that is evidence, it’s hardly causal.
The most credible results come from recent changes in state policy. These allow us to run simple difference-in-difference types of analysis to uncover causal estimates. These results are reasonably transparent and easy to understand.
Michael Lipsitz & Evan Starr (2021) (are you starting to recognize thatStarr name?) study a 2008 Oregon ban on noncompetes for hourly workers. They find the ban increased hourly wages overall by 2 to 3%, which implies that those signing noncompetes may have seen wages rise as much as 14 to 21%. This 3% number is what the FTC assumes will apply to the whole economy when they estimate a $300 billion increase in wages per year under their ban. It’s a linear extrapolation.
Similarly, in 2015, Hawaii banned noncompetes for new hires within tech industries.Natarajan Balasubramanian et al. (2022) find that the ban increased new-hire wages by 4%. They also estimate that the ban increased worker mobility by 11%. Labor economists generally think of worker turnover as a good thing. Still, it is tricky here when the whole benefit of the agreement is to reduce turnover and encourage a better relationship between workers and firms.
The FTC also points to three studies that find that banning noncompetes increases innovation, according to a few different measures. I won’t say anything about these because you can infer my reaction based on what I will say below on wage studies. If anything, I’m more skeptical of innovation studies, simply because I don’t think we have a good understanding of what causes innovation generally, let alone how to measure the impact of noncompetes on innovation. You can readwhat the FTC cites on innovation and make up your own mind.
From Academic Research to an FTC Ban
Now that we understand some of the papers, how do we move to policy?
Let’s assume I read the evidence basically as the FTC does. I don’t, and will explain as much in a future paper, but that’s not the debate for this post. How do we think about the optimal policy response, given the evidence?
There are two main reasons I am not ready to extrapolate from the research to the proposed ban. Every economist knows them: the dreaded pests of external validity and general equilibrium effects.
Let’s consider external validity through theOregon ban paper and theHawaii tech ban paper. Again, these are not critiques of the papers, but of how the FTC wants to move from them to a national ban.
Notice above that I said the Oregon ban went into effect in 2008, which means it happened as the whole country was entering a major recession and financial crisis. The authors do their best to deal with differential responses to the recession, but every state in their data went through a recession. Did the recession matter for the results? It seems plausible to me.
Another important detail about the Oregon ban is that it only applied to hourly workers, while the FTC rule would apply to all workers. You can’t just confidently assume hourly workers are just like salaried workers. Hourly workers who sign noncompetes are less likely to read them, less likely to consult with their family about them, and less likely to negotiate over them. If part of the problem with noncompetes is that people don’t understand them until it is too late, you will overstate the harm if you just look at hourly workers who understand noncompetes even less than salaried workers. Also, with a partial ban, Lipsitz & Starr recognize that spillovers matter and firms respond in different ways, such as converting workers to salaried to keep the noncompete, which won’t exist with a national ban. It’s not the same experiment at a national scale. Which way will it change? How confident are we?
The effects of the Hawaii ban are likely not the same as the FTC one would be. First of all, Hawaii is weird. It has a small population, and tech is a small part of the state’s economy. The ban even excluded telecom from within the tech sector. We are talking about a targeted ban. What does the Hawaii experiment tell us about a ban on noncompetes for tech workers in a non-island location like Boston? What does it tell us about a national ban on all noncompetes, like the FTC is proposing? Maybe these things do not matter. To further complicate things, the policy change included a ban on nonsolicitation clauses. Maybe the nonsolicitation clause was unimportant. But I’d want more research and more policy experimentation to tease out these details.
As you dig into these papers, you find more and more of these issues. That’s not a knock on the papers but an inherent difficulty in moving from research to policy. It’s further compounded by the fact that this empirical literature is still relatively new.
What will happen when we scale these bans up to the national level? That’s a huge question for any policy change, especially one as large as a national ban. The FTC seems confident in what will happen, but moving from micro to macro is not trivial. Macroeconomists arestarting to really get serious about how the micro adds up to the macro, but it takes work.
I want to know more. Which effects are amplified when scaled? Which effects drop off?What’s the full National Income and Product Accounts (NIPA) accounting? I don’t know. No one does, because we don’t have any of that sort of price-theoretic, general equilibrium research. There are lots of margins that firms will adjust on. There’s always another margin that firms will adjust that we are not capturing. Instead, what the FTC did is a simple linear extrapolation from the state studies to a national ban. Studies find a 3% wage effect here. Multiply that by the number of workers.
When we are doing policy work, we would also like some sort of welfare analysis. It’s not just about measuring workers in isolation. We need a way to think about the costs and benefits and how to trade them off. All the diff-in-diff regressions in the world won’t get at it; we need a model.
Luckily, we have one paper that blends empirics and theory to do welfare analysis.[2] Liyan Shi has a paper forthcoming in Econometrica—which is no joke to publish in—titled “Optimal Regulation of Noncompete Contracts.” In it, she studies a model meant to capture the tradeoff between encouraging a firm’s investment in workers and reducing labor mobility. To bring the theory to data, she scrapes data on U.S. public firms from Securities and Exchange Commission filings and merges those with firm-level data from Compustat, plus some others, to get measures of firm investment in intangibles. She finds that when she brings her model to the data and calibrates it, the optimal policy is roughly a ban on noncompetes.
It’s an impressive paper. Again, I’m unsure how much to take from it to extrapolate to a ban on all workers. First,as I’ve written before, we know publicly traded firms are different from private firms, and that difference has changed over time. Second, it’s plausible that CEOs are different from other workers, and the relationship between CEO noncompetes and firm-level intangible investment isn’t identical to the relationship between mid-level engineers and investment in that worker.
Beyond particular issues of generalizing Shi’s paper, the larger concern is that this is the paper that does a welfare analysis. That’s troubling to me as a basis for a major policy change.
I think an analogy to taxation is helpful here. I’ve published a few papers about optimal taxation, so it’s an area I’ve thought more about. Within optimal taxation, you see this type of paper a lot. Here’s a formal model that captures something that theorists find interesting. Here’s a simple approach that takes the model to the data.
My favorite optimal-taxation papers take this approach. Take this paper that I absolutely love, “Optimal Taxation with Endogenous Insurance Markets” by Mikhail Golosov & Aleh Tsyvinski.[3] It is not a price-theory paper; it is a Theory—with a capital T—paper. I’m talking lemmas and theorems type of stuff. A bunch of QEDs and then calibrate their model to U.S. data.
How seriously should we take their quantitative exercise? After all, it was in the Quarterly Journal of Economics and my professors were assigning it, so it must be an important paper. But people who know this literature will quickly recognize that it’s not the quantitative result that makes that paper worthy of the QJE.
I was very confused by this early in my career. If we find the best paper, why not take the result completely seriously? My first publication, which was in theJournal of Economic Methodology, grew out of my confusion about how economists were evaluating optimal tax models. Why did professors think some models were good? How were the authors justifying that their paper was good? Sometimes papers are good because they closely match the data. Sometimes papers are good because they quantify an interesting normative issue. Sometimes papers are good because they expose an interesting means-ends analysis. Most of the time, papers do all three blended together, and it’s up to the reader to be sufficiently steeped in the literature to understand what the paper is really doing. Maybe I read the Shi paper wrong, but I read it mostly as a theory paper.
One difference between the optimal-taxation literature and the optimal-noncompete policy world is that the Golosov & Tsyvinski paper is situated within 100 years of formal optimal-taxation models. The knowledgeable scholar of public economics can compare and contrast. The paper has a lot of value because it does one particular thing differently than everything else in the literature.
Or think about patent policies, which was what I compared noncompetes toin my original post. There is a tradeoff between encouraging innovation and restricting monopoly. This takes a model and data to quantify the trade-off. Rafael Guthmann & David Rahman have a new paper on the optimal length of patents that Rafael summarized at Rafael’s Commentary. The basic structure is very similar to the Shi or Golosov &Tsyvinski papers: interesting models supplemented with a calibration exercise to put a number on the optimal policy. Guthmann & Rahman find four to eight years, instead of the current system of 20 years.
Is that true? I don’t know. I certainly wouldn’t want the FTC to unilaterally put the number at four years because of the paper. But I am certainly glad for their contribution to the literature and our understanding of the tradeoffs and that I can position that number in a literature asking similar questions.
I’m sorry to all the people doing great research on noncompetes, but we are just not there yet with them, by my reading. For studying optimal-noncompete policy in a model, we have one paper. It was groundbreaking to tie this theory to novel data, but it is still one welfare analysis.
My Priors: What’s Holding Me Back from the Revolution
In a world where you start without any thoughts about which direction is optimal (a uniform prior) and you observe one paper that says bans are net positive, you should think that bans are net positive. Some information is better than none and now you have some information. Make a choice.
But that’s not the world we live in. We all come to a policy question with prior beliefs that affect how much we update our beliefs.
For me, I have three slightly weird priors that I will argue you should also have but currently place me out of step with most economists.
First, I place more weight on theoretical arguments than most. No one sits back and just absorbs the data without using theory; that’s impossible. All data requires theory. Still, I think it ismeaningful to say some people place more weight on theory. I’m one of those people.
To be clear, I also care deeply about data. But I writetheory papers and a theory-heavy newsletter. And I think these theories matter for how we think about data. The theoretical justification for noncompetes has been around for a long time,as I discussed in my original post, so I won’t say more.
The second way that I differ from most economists is even weirder. I place weight on the benefits of existing agreements or institutions. The longer they have been in place, the more weight I place on the benefits.Josh Hendrickson and I have a paper with Alex Salter that basically formalized the argument from George Stigler that “every long-lasting institution is efficient.” When there are feedback mechanisms, such as with markets or democracy, the resulting institutions are the result of an evolutionary process that slowly selects more and more gains from trade. If they were so bad, people would get rid of them eventually. That’s not a free-market bias, since it also means that I think something like the Medicare system is likely an efficient form of social insurance and intertemporal bargaining for people in the United States.
Back to noncompetes, many companies use noncompetes in many different contexts. Many workers sign them. My prior is that they do so because a noncompete is a mutually beneficial contract that allows them to make trades in a world with transaction costs.As I explained in a recent post, Yoram Barzel taught us that, in a world with transaction costs, people will “erect social institutions to impose and enforce the restraints.”
One possible rebuttal is that noncompetes, while existing for a long time, have only become common in the past few decades. That is not very long-lasting, and so the FTC ban is a natural policy response to a new challenge that arose and the discovery that these contracts are actually bad. That response would persuade me more if this were a policy response brought about by a democratic bargain instead of an ideological agenda pushed by the chair of the FTC, which I think is closer to reality. That isEarl Thompson and Charlie Hickson’s spin on Stigler’s efficient institutions point. Ideology gets in the way.
Finally, relative to most economists, I place more weight on experimentation and feedback mechanisms. Most economists still think of the world through the lens of the benevolent planner doing a cost-benefit analysis. I do that sometimes, too, but I also think we need to really take our own informational limitations seriously. That’s why we talk about limited informationall the time on my newsletter. Again, if we started completely agnostic, this wouldn’t point one way or another. We recognize that we don’t know much, but a slight signal pushes us either way. But when paired with my previous point about evolution, it means I’m hesitant about a national ban.
It’s not a free-market bias, either. I’m not convinced theJones Act is bad. I’m not convinced it’s good, but Josh has convinced me that the question is complicated.
Because I’m not ready to easily say the science is settled, I want to know how we will learn if we are wrong. In a prior Truth on the Market post about the FTC rule, I quoted Thomas Sowell’s Knowledge and Decisions:
In a world where people are preoccupied with arguing about what decision should be made on a sweeping range of issues, this book argues that the most fundamental question is not what decision to make but who is to make it—through what processes and under what incentives and constraints, and with what feedback mechanisms to correct the decision if it proves to be wrong.
A national ban bypasses this and severely cuts off our ability to learn if we are wrong. That worries me.
Maybe this all means that I am too conservative and need to be more open to changing my mind. Maybe I’m inconsistent in how I apply these ideas. After all, “there’s always another margin” also means that the harm of a policy will be smaller than anticipated since people will adjust to avoid the policy. I buy that. There are a lot more questions to sort through on this topic.
Unfortunately, the discussion around noncompetes has been short-circuited by the FTC. Hopefully, this post gave you tools to think about a variety of policies going forward.
[1]The U.S. Bureau of Labor Statistics now collects data on noncompetes. Since 2017, we’ve had one question on noncompetes in the National Longitudinal Survey of Youth 1997.Donna S. Rothstein and Evan Starr (2021) also find that noncompetes cover around 18% of workers. It is very plausible this is an understatement, since noncompetes are complex legal documents, and workers may not understand that they have one.
[2] Other papers combine theory and empirics.Kurt Lavetti, Carol Simon, & William D. White (2023), build a model to derive testable implications about holdups. They use data on doctors and find noncompetes raise returns to tenure and lower turnover.
[3] It’s not exactly the same. The Golosov & Tsyvinski paper doesn’t even take the calibration seriously enough to include the details in the published version. Shi’s paper is a more serious quantitative exercise.
The big news from the Federal Trade Commission (FTC) is all about noncompetes. From what were once the realms of labor and contract law, noncompetes are terms in employment contracts that limit in various ways the ability of an employee to work at a competing firm after separation from the signatory firm. They’ve been a matter of increasing interest to economists, policymakers, and enforcers for several reasons. For one, there have been prominent news reports of noncompetes used in dubious places; the traditional justifications for noncompetes seem strained when applied to low-wage workers, so why are we reading about noncompetes binding sandwich-makers at Jimmy John’s?
For another, there’s been increased interest in the application of antitrust to labor markets more generally. One example among many: a joint FTC/U.S. Justice Department workshop in December 2021.
Common-law cases involving one or another form of noncompete go back several hundred years. So, what’s new? First, on Jan. 4, the FTC announced settlements with three firms regarding their use of noncompetes, which the FTC had alleged to violate Section 5. These are consent orders, not precedential decisions. The complaints were, presumably, based on rule-of-reason analyses of facts, circumstances, and effects. On the other hand, the Commission’s recent Section 5 policy statement seemed to disavow the time-honored (and Supreme-Court-affirmed) application of the rule of reason. I wrote about it here, and with Gus Hurwitz here. My ICLE colleagues Dirk Auer, Brian Albrecht, and Jonathan Barnett did too, among others.
Noncompete restrictions harm both workers and competing businesses. For workers, noncompete restrictions lead to lower wages and salaries, reduced benefits, and less favorable working conditions. For businesses, these restrictions block competitors from entering and expanding their businesses.
Always?Distinct facts and circumstances? Commissioner Christine Wilson noted the brevity of the statement in her dissent:
…each Complaint runs three pages, with a large percentage of the text devoted to boilerplate language. Given how brief they are, it is not surprising that the complaints are woefully devoid of details that would support the Commission’s allegations. In short, I have seen no evidence of anticompetitive effects that would give me reason to believe that respondents have violated Section 5 of the FTC Act.
She did not say that the noncompetes were fine. In a separate statement regarding one of the matters, she noted that various aspects of noncompetes imposed on security guards (running two years from termination of employment, with $10,000 liquidated damages for breach) had been found unreasonable by a state court, and therefore unenforceable under Michigan law. That seemed to her “reasonable.” I’m no expert on Michigan state law, but those terms seem to me suspect under general standards of reasonability. Whether there was a federal antitrust violation is far less clear.
One more clue–and even bigger news–came the very next day: the Commission published a notice of proposed rulemaking (NPRM) proposing to ban the use of noncompetes in general. Subject to a limited exception for the sale of a business, noncompetes would be deemed violative of Section 5 across occupations, income levels, and industries. That is, the FTC proposed to regulate the terms of employment agreements for nearly the whole of the U.S. labor force. Step aside federal and state labor law (and the U.S. Labor Department and Congress); and step aside ongoing and active statutory experimentation on noncompete enforcement in the states.
So many questions.There are reasons to wonder about many noncompetes. They do have the potential to solve holdup problems for firms that might otherwise underinvest in employee training and might undershare trade secrets or other proprietary information. But that’s not much of an explanation for restrictions on a counter person at a sub shop, and I’m pretty suspicious of the liquidated damages provision in the security-guards matter. Credible economic studies raise concerns, as well.
Still, this is an emerging area of study, and many positive contributions to it (like the one linked just now, and this) illustrate research challenges that remain. An FTC Bureau of Economics working paper (oddly not cited in the 215-page NPRM) reviews the body of literature, observing that results are mixed, and that many of the extant studies have shortcomings.
So here are a few more questions that cannot possibly be resolved in a single blog post:
Does the FTC have the authority to issue substantive (“legislative”) competition regulations?
Would a regulation restricting a common contracting practice across all occupations, industries, and income levels raise the major questions doctrine? (Ok, skipping ahead: Yes.)
Does it matter, for the major questions doctrine or otherwise, that there’s a substantial body of federal statutory law regarding labor and employment and a federal agency (a good deal larger than the FTC) charged to enforce the law?
Does it matter that the FTC simply doesn’t have the personnel (or congressionally appropriated budget) to enforce such a sweeping regulation?
Is the number of experienced labor lawyers currently employed as staff in the FTC’s Bureau of Competition nonzero? If so, what is it?
Does it matter that this is an active area of state-level legislation and enforcement?
Do the effects of noncompetes vary as the terms of noncompetes vary, as suggested in the ABA comments linked above? And if so, on what dimensions?
Do the effects vary according to the market power of the employer in local (or other geographically relevant) labor markets and, if so, should that matter to an antitrust enforcer?
If the effects vary significantly, is a one-size-fits-all regulation the best path forward?
Many published studies seem to report average effects of policy changes on, e.g., wages or worker mobility for some class of workers. Should we know more about the distribution of those effects before the FTC (or anyone else) adopts uniform federal regulations?
How well do we know the answer to the myriad questions raised by noncompetes? As the FTC working paper observes, many published studies seem to rely heavily on survey evidence on the incidence of noncompetes. Prior to adopting a sweeping competition regulation, should the FTC use its 6b subpoena authority to gather direct evidence? Why hasn’t it?
The FTC’s Bureau of Economics employs a large expert staff of research economists. Given the questions raised by the FTC Working Paper, how else might the FTC contribute to the state of knowledge of noncompete usage and effects before adopting a sweeping, nationwide prohibition? Are there lacunae in the literature that the FTC could fill? For example, there seem to be very few papers regarding the downstream effects on consumers, which might matter to consumers. And while we’re in labor markets, what about the relationship between noncompetes and employment?
I didn’t even get to the once-again dismal ratings of FTC’s senior agency leadership in the 2022 OPM Federal Employee Viewpoint Survey. Last year’s results were terrible—a precipitous drop from 2020. This year’s results were worse. Worse yet, they show that last year’s results were not mere transient deflation in morale. But a discussion will have to wait for another blog post.
Late last month, 25 former judges and government officials, legal academics and economists who are experts in antitrust and intellectual property law submitted a letter to Assistant Attorney General Jonathan Kanter in support of the U.S. Justice Department’s (DOJ) July 2020 Avanci business-review letter (ABRL) dealing with patent pools. The pro-Avanci letter was offered in response to an October 2022 letter to Kanter from ABRL critics that called for reconsideration of the ABRL. A good summary account of the “battle of the scholarly letters” may be found here.
The University of Pennsylvania’s Herbert Hovenkamp defines a patent pool as “an arrangement under which patent holders in a common technology or market commit their patents to a single holder, who then licenses them out to the original patentees and perhaps to outsiders.” Although the U.S. antitrust treatment of patent pools might appear a rather arcane topic, it has major implications for U.S. innovation. As AAG Kanter ponders whether to dive into patent-pool policy, a brief review of this timely topic is in order. That review reveals that Kanter should reject the anti-Avanci letter and reaffirm the ABRL.
Background on Patent Pool Analysis
The 2017 DOJ-FTC IP Licensing Guidelines
Section 5.5 of joint DOJ-Federal Trade Commission (FTC) Antitrust Guidelines for the Licensing of Intellectual Property (2017 Guidelines, which revised a prior 1995 version) provides an overview of the agencies’ competitive assessment of patent pools. The 2017 Guidelines explain that, depending on how pools are designed and operated, they may have procompetitive (and efficiency-enhancing) or anticompetitive features.
On the positive side of the ledger, Section 5.5 states:
Cross-licensing and pooling arrangements are agreements of two or more owners of different items of intellectual property to license one another or third parties. These arrangements may provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation. By promoting the dissemination of technology, cross-licensing and pooling arrangements are often procompetitive.
On the negative side of the ledger, Section 5.5 states (citations omitted):
Cross-licensing and pooling arrangements can have anticompetitive effects in certain circumstances. For example, collective price or output restraints in pooling arrangements, such as the joint marketing of pooled intellectual property rights with collective price setting or coordinated output restrictions, may be deemed unlawful if they do not contribute to an efficiency-enhancing integration of economic activity among the participants. When cross-licensing or pooling arrangements are mechanisms to accomplish naked price-fixing or market division, they are subject to challenge under the per se rule.
Other aspects of pool behavior may be either procompetitive or anticompetitive, depending upon the circumstances, as Section 5.5 explains. The antitrust rule of reason would apply to pool restraints that may have both procompetitive and anticompetitive features.
For example, requirements that pool members grant licenses to each other for current and future technology at minimal cost could disincentivize research and development. Such requirements, however, could also promote competition by exploiting economies of scale and integrating complementary capabilities of the pool members. According to the 2017 Guidelines, such requirements are likely to cause competitive problems only when they include a large fraction of the potential research and development in an R&D market.
Section 5.5 also applies rule-of-reason case-specific treatment to exclusion from pools. It notes that, although pooling arrangements generally need not be open to all who wish to join (indeed, exclusion of certain parties may be designed to prevent potential free riding), they may be anticompetitive under certain circumstances (citations omitted):
[E]xclusion from a pooling or cross-licensing arrangement among competing technologies is unlikely to have anticompetitive effects unless (1) excluded firms cannot effectively compete in the relevant market for the good incorporating the licensed technologies and (2) the pool participants collectively possess market power in the relevant market. If these circumstances exist, the [federal antitrust] [a]gencies will evaluate whether the arrangement’s limitations on participation are reasonably related to the efficient development and exploitation of the pooled technologies and will assess the net effect of those limitations in the relevant market.
The 2017 Guidelines are informed by the analysis of prior agency-enforcement actions and prior DOJ business-review letters. Through the business-review-letter procedure, an organization may submit a proposed action to the DOJ Antitrust Division and receive a statement as to whether the Division currently intends to challenge the action under the antitrust laws, based on the information provided. Historically, DOJ has used these letters as a vehicle to discuss current agency thinking about safeguards that may be included in particular forms of business arrangements to alleviate DOJ competitive concerns.
DOJ patent-pool letters, in particular, have prompted DOJ to highlight specific sorts of provisions in pool agreements that forestalled competitive problems. To this point, DOJ has never commented favorably on patent-pool safeguards in a letter and then subsequently reversed course to find the safeguards inadequate.
Subsequent to issuance of the 2017 Guidelines, DOJ issued two business-review letters on patent pools: the July 2020 ABRL letter and the January 2021 University Technology Licensing Program business-review letter (UTLP letter). Those two letters favorably discussed competitive safeguards proffered by the entities requesting favorable DOJ reviews.
ABRL Letter
The ABRL letter explains (citations omitted):
[Avanci] proposed [a] joint patent-licensing pool . . . to . . . license patent claims that have been declared “essential” to implementing 5G cellular wireless standards for use in automobile vehicles and distribute royalty income among the Platform’s licensors. Avanci currently operates a licensing platform related to 4G cellular standards and offers licenses to 2G, 3G, and 4G standards-essential patents used in vehicles and smart meters.
After consulting telecommunications and automobile-industry stakeholders, conducing an independent review, and considering prior guidance to other patent pools, “DOJ conclude[d] that, on balance, Avanci’s proposed 5G Platform is unlikely to harm competition.” As such, DOJ announced it had no present intention to challenge the platform.
The DOJ press release accompanying the ABRL letter provides additional valuable information on Avanci’s potential procompetitive efficiencies; its plan to charge fair, reasonable, and non-discriminatory (FRAND) rates; and its proposed safeguards:
Avanci’s 5G Platform may make licensing standard essential patents related to vehicle connectivity more efficient by providing automakers with a “one stop shop” for licensing 5G technology. The Platform also has the potential to reduce patent infringement and ensure that patent owners who have made significant contributions to the development of 5G “Release 15” specifications are compensated for their innovation. Avanci represents that the Platform will charge FRAND rates for the patented technologies, with input from both licensors and licensees.
In addition, Avanci has incorporated a number of safeguards into its 5G Platform that can help protect competition, including licensing only technically essential patents; providing for independent evaluation of essential patents; permitting licensing outside the Platform, including in other fields of use, bilateral or multi-lateral licensing by pool members, and the formation of other pools at levels of the automotive supply chain; and by including mechanisms to prevent the sharing of competitively sensitive information. The Department’s review found that the Platform’s essentiality review may help automakers license the patents they actually need to make connected vehicles. In addition, the Platform license includes “Have Made” rights that creates new access to cellular standard essential patents for licensed automakers’ third-party component suppliers, permitting them to make non-infringing components for 5G connected vehicles.
UTLP Letter
The United Technology Licensing Program business-review letter (issued less than a year after the ABRL letter, at the end of the Trump administration) discussed a proposal by participating universities to offer licenses to their physical-science patents relating to specified emerging technologies. According to DOJ:
[Fifteen universities agreed to cooperate] in licensing certain complementary patents through UTLP, which will be organized into curated portfolios relating to specific technology applications for autonomous vehicles, the “Internet of Things,” and “Big Data.” The overarching goal of UTLP is to centralize the administrative costs associated with commercializing university research and help participating universities to overcome the budget, institutional relationship, and other constraints that make licensing in these areas particularly challenging for them.
The UTLP letter concluded, based on representations made in UTLP’s letter request, that the pool was on balance unlikely to harm competition. Specifically:
UTLP has incorporated a number of safeguards into its program to help protect competition, including admitting only non-substitutable patents, with a “safety valve” if a patent to accomplish a particular task is inadvertently included in a portfolio with another, substitutable patent. The program also will allow potential sublicensees to choose an individual patent, a group of patents, or UTLP’s entire portfolio, thereby mitigating the risk that a licensee will be required to license more technology than it needs. The department’s letter notes that UTLP is a mechanism that is intended to address licensing inefficiencies and institutional challenges unique to universities in the physical science context, and makes no assessment about whether this mechanism if set up in another context would have similar procompetitive benefits.
Patent-Pool Guidance in Context
DOJ and FTC patent-pool guidance has been bipartisan. It has remained generally consistent in character from the mid-1990s (when the first 1995 IP licensing guidelines were issued) to early 2021 (the end of the Trump administration, when the UTLP letter was issued). The overarching concern expressed in agency guidance has been to prevent a pool from facilitating collusion among competitors, from discouraging innovation, and from inefficiently excluding competitors.
As technology has advanced over the last quarter century, U.S. antitrust enforcers—and, in particular, DOJ, through a series of business-review letters beginning in 1997 (see the pro-Avanci letter at pages 9-10)—consistently have emphasized the procompetitive efficiencies that pools can generate, while also noting the importance of avoiding anticompetitive harms.
Those letters have “given a pass” to pools whose rules contained safeguards against collusion among pool members (e.g., by limiting pool patents to complementary, not substitute, technologies) and against anticompetitive exclusion (e.g., by protecting pool members’ independence of action outside the pool). In assessing safeguards, DOJ has paid attention to the particular market context in which a pool arises.
Notably, economic research generally supports the conclusion that, in recent decades, patent pools have been an important factor in promoting procompetitive welfare-enhancing innovation and technology diffusion.
For example, a 2015 study by Justus Baron and Tim Pohlmann found that a significant number of pools were created following antitrust authorities’ “more permissive stance toward pooling of patents” beginning in the late 1990s. Studying these new pools, they found “a significant increase in patenting rates after pool announcement” that was “primarily attributable to future members of the pool”.
A 2009 analysis by Richard Gilbert of the University of California, Berkeley (who served as chief economist of the DOJ Antitrust Division during the Clinton administration) concluded that (consistent with the approach adopted in DOJ business-review letters) “antitrust authorities and the courts should encourage policies that promote the formation and durability of beneficial pools that combine complementary patents.”
Using network visualization software, I show that information and communication technology markets rely on patent pools and other cross-licensing structures to mitigate or avoid patent thickets and associated inefficiencies. Based on the composition, structure, terms and pricing of selected leading patent pools in the ICT market, I argue that those pools are best understood as mechanisms by which vertically integrated firms mitigate transactional frictions and reduce the cost of accessing technology inputs.
Admittedly, a few studies of some old patents pools (e.g., the 19th century sewing-machine pool and certain early 20th century New Deal pools) found them to be associated with a decline in patenting. Setting aside possible questions of those studies’ methodologies, the old pooling arrangements bear little resemblance to the carefully crafted pool structures today. In particular, unlike the old pools, the more recent pools embody competitive safeguards (the old pools may have combined substitute patents, for example).
Business-review letters dealing with pools have provided a degree of legal certainty that has helped encourage their formation, to the benefit of innovation in key industries. The anti-Avanci letter ignores that salient fact, focusing instead on allegedly “abusive” SEP-licensing tactics by the Avanci 5G pool—such as refusal to automatically grant a license to all comers—without considering that the pool may have had legitimate reasons not to license particular parties (who may, for instance, have made bad faith unreasonable licensing demands). In sum, this blinkered approach is wrong as a matter of SEP law and policy (as explained in the pro-Avanci letter) and wrong in its implicit undermining of the socially beneficial patent-pool business-review process.
The pro-Avanci letter ably describes the serious potential harm generated by the anti-Avanci letter:
In evaluating the carefully crafted Avanci pool structure, the 2020 business review letter appropriately concluded that the pool’s design conformed to the well-established, fact-intensive inquiry concerning actual market practices and efficiencies set forth in previous business review letters. Any reconsideration of the 2020 business review letter, as proposed in the October 17 letter, would give rise to significant uncertainty concerning the Antitrust Division’s commitment to the aforementioned sequence of business review letters that have been issued concerning other patent pools in the information technology industry, as well as the larger group of patent pools that did not specifically seek guidance through the business review letter process but relied on the legal template that had been set forth in those previously issued letters.
This is a point of great consequence. Pooling arrangements in the information technology industry have provided an efficient market-driven solution to the transaction costs that are inherent to patent-intensive industries and, when structured appropriately in light of agency guidance and applicable case law, do not raise undue antitrust concerns. Thanks to pooling and related collective licensing arrangements, the innovations embodied in tens of thousands of patents have been made available to hundreds of device producers and other intermediate users, while innovators have been able to earn a commensurate return on the costs and risks that they undertook to develop new technologies that have transformed entire fields and industries to the benefit of consumers.
Conclusion
President Joe Biden’s 2021 Executive Order on Competition commits the Biden administration to “the promotion of competition and innovation by firms small and large, at home and worldwide.” One factor in promoting competition and innovation has been the legal certainty flowing from well-reasoned DOJ business-review letters on patent pools, issued on a bipartisan basis for more than a quarter of a century.
A DOJ decision to reconsider (in other words, to withdraw) the sound guidance embodied in the ABRL would detract from this certainty and thereby threaten to undermine innovation promoted by patent pools. Accordingly, AAG Kanter should reject the advice proffered by the anti-Avanci letter and publicly reaffirm his support for the ABRL—and, more generally, for the DOJ business-review process.
The practice of so-called “self-preferencing” has come to embody the zeitgeist of competition policy for digital markets, as legislative initiatives are undertaken in jurisdictions around the world that to seek, in various ways, to constrain large digital platforms from granting favorable treatment to their own goods and services. The core concern cited by policymakers is that gatekeepers may abuse their dual role—as both an intermediary and a trader operating on the platform—to pursue a strategy of biased intermediation that entrenches their power in core markets (defensive leveraging) and extends it to associated markets (offensive leveraging).
In addition to active interventions by lawmakers, self-preferencing has also emerged as a new theory of harm before European courts and antitrust authorities. Should antitrust enforcers be allowed to pursue such a theory, they would gain significant leeway to bypass the legal standards and evidentiary burdens traditionally required to prove that a given business practice is anticompetitive. This should be of particular concern, given the broad range of practices and types of exclusionary behavior that could be characterized as self-preferencing—only some of which may, in some specific contexts, include exploitative or anticompetitive elements.
In a new working paper for the International Center for Law & Economics (ICLE), I provide an overview of the relevant traditional antitrust theories of harm, as well as the emerging case law, to analyze whether and to what extent self-preferencing should be considered a new standalone offense under EU competition law. The experience to date in European case law suggests that courts have been able to address platforms’ self-preferencing practices under existing theories of harm, and that it may not be sufficiently novel to constitute a standalone theory of harm.
European Case Law on Self-Preferencing
Practices by digital platforms that might be deemed self-preferencing first garnered significant attention from European competition enforcers with the European Commission’s Google Shoppinginvestigation, which examined whether the search engine’s results pages positioned and displayed its own comparison-shopping service more favorably than the websites of rival comparison-shopping services. According to the Commission’s findings, Google’s conduct fell outside the scope of competition on the merits and could have the effect of extending Google’s dominant position in the national markets for general Internet search into adjacent national markets for comparison-shopping services, in addition to protecting Google’s dominance in its core search market.
Rather than explicitly posit that self-preferencing (a term the Commission did not use) constituted a new theory of harm, the Google Shopping ruling described the conduct as belonging to the well-known category of “leveraging.” The Commission therefore did not need to propagate a new legal test, as it held that the conduct fell under a well-established form of abuse. The case did, however, spur debate over whether the legal tests the Commission did apply effectively imposed on Google a principle of equal treatment of rival comparison-shopping services.
But it should be noted that conduct similar to that alleged in the Google Shopping investigation actually came before the High Court of England and Wales several months earlier, this time in a dispute between Google and Streetmap. At issue in that case was favorable search results Google granted to its own maps, rather than to competing online maps. The UK Court held, however, that the complaint should have been appropriately characterized as an allegation of discrimination; it further found that Google’s conduct did not constitute anticompetitive foreclosure. A similar result was reached in May 2020 by the Amsterdam Court of Appeal in the Funda case.
Conversely, in June 2021, the French Competition Authority (AdlC) followed the European Commission into investigating Google’s practices in the digital-advertising sector. Like the Commission, the AdlC did not explicitly refer to self-preferencing, instead describing the conduct as “favoring.”
Given this background and the proliferation of approaches taken by courts and enforcers to address similar conduct, there was significant anticipation for the judgment that the European General Court would ultimately render in the appeal of the Google Shopping ruling. While the General Court upheld the Commission’s decision, it framed self-preferencing as a discriminatory abuse. Further, the Court outlined four criteria that differentiated Google’s self-preferencing from competition on the merits.
Specifically, the Court highlighted the “universal vocation” of Google’s search engine—that it is open to all users and designed to index results containing any possible content; the “superdominant” position that Google holds in the market for general Internet search; the high barriers to entry in the market for general search services; and what the Court deemed Google’s “abnormal” conduct—behaving in a way that defied expectations, given a search engine’s business model, and that changed after the company launched its comparison-shopping service.
While the precise contours of what the Court might consider discriminatory abuse aren’t yet clear, the decision’s listed criteria appear to be narrow in scope. This stands at odds with the much broader application of self-preferencing as a standalone abuse, both by the European Commission itself and by some national competition authorities (NCAs).
Indeed, just a few weeks after the General Court’s ruling, the Italian Competition Authority (AGCM) handed down a mammoth fine against Amazon over preferential treatment granted to third-party sellers who use the company’s own logistics and delivery services. Rather than reflecting the qualified set of criteria laid out by the General Court, the Italian decision was clearly inspired by the Commission’s approach in Google Shopping. Where the Commission described self-preferencing as a new form of leveraging abuse, AGCM characterized Amazon’s practices as tying.
Self-preferencing has also been raised as a potential abuse in the context of data and information practices. In November 2020, the European Commission sent Amazon a statement of objections detailing its preliminary view that the company had infringed antitrust rules by making systematic use of non-public business data, gathered from independent retailers who sell on Amazon’s marketplace, to advantage the company’s own retail business. (Amazon responded with a set of commitments currently under review by the Commission.)
Both the Commission and the U.K. Competition and Markets Authority have lodged similar allegations against Facebook over data gathered from advertisers and then used to compete with those advertisers in markets in which Facebook is active, such as classified ads. The Commission’s antitrust proceeding against Apple over its App Store rules likewise highlights concerns that the company may use its platform position to obtain valuable data about the activities and offers of its competitors, while competing developers may be denied access to important customer data.
These enforcement actions brought by NCAs and the Commission appear at odds with the more bounded criteria set out by the General Court in Google Shopping, and raise tremendous uncertainty regarding the scope and definition of the alleged new theory of harm.
Self-Preferencing, Platform Neutrality, and the Limits of Antitrust Law
The growing tendency to invoke self-preferencing as a standalone theory of antitrust harm could serve two significant goals for European competition enforcers. As mentioned earlier, it offers a convenient shortcut that could allow enforcers to skip the legal standards and evidentiary burdens traditionally required to prove anticompetitive behavior. Moreover, it can function, in practice, as a means to impose a neutrality regime on digital gatekeepers, with the aims of both ensuring a level playing field among competitors and neutralizing the potential conflicts of interests implicated by dual-mode intermediation.
The dual roles performed by some platforms continue to fuel the never-ending debate over vertical integration, as well as related concerns that, by giving preferential treatment to its own products and services, an integrated provider may leverage its dominance in one market to related markets. From this perspective, self-preferencing is an inevitable byproduct of the emergence of ecosystems.
However, as the Australian Competition and Consumer Commission has recognized, self-preferencing conduct is “often benign.” Furthermore, the total value generated by an ecosystem depends on the activities of independent complementors. Those activities are not completely under the platform’s control, although the platform is required to establish and maintain the governance structures regulating access to and interactions around that ecosystem.
Given this reality, a complete ban on self-preferencing may call the very existence of ecosystems into question, challenging their design and monetization strategies. Preferential treatment can take many different forms with many different potential effects, all stemming from platforms’ many different business models. This counsels for a differentiated, case-by-case, and effects-based approach to assessing the alleged competitive harms of self-preferencing.
Antitrust law does not impose on platforms a general duty to ensure neutrality by sharing their competitive advantages with rivals. Moreover, possessing a competitive advantage does not automatically equal an anticompetitive effect. As the European Court of Justice recently stated in Servizio Elettrico Nazionale, competition law is not intended to protect the competitive structure of the market, but rather to protect consumer welfare. Accordingly, not every exclusionary effect is detrimental to competition. Distinctions must be drawn between foreclosure and anticompetitive foreclosure, as only the latter may be penalized under antitrust.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
Things are heating up in the antitrust world. There is considerable pressure to pass the American Innovation and Choice Online Act (AICOA) before the congressional recess in August—a short legislative window before members of Congress shift their focus almost entirely to campaigning for the mid-term elections. While it would not be impossible to advance the bill after the August recess, it would be a steep uphill climb.
But whether it passes or not, some of the damage from AICOA may already be done. The bill has moved the antitrust dialogue that will harm innovation and consumers. In this post, I will first explain AICOA’s fundamental flaws. Next, I discuss the negative impact that the legislation is likely to have if passed, even if courts and agencies do not aggressively enforce its provisions. Finally, I show how AICOA has already provided an intellectual victory for the approach articulated in the European Union (EU)’s Digital Markets Act (DMA). It has built momentum for a dystopian regulatory framework to break up and break into U.S. superstar firms designated as “gatekeepers” at the expense of innovation and consumers.
The Unseen of AICOA
AICOA’s drafters argue that, once passed, it will deliver numerous economic benefits. Sen. Amy Klobuchar (D-Minn.)—the bill’s main sponsor—has stated that it will “ensure small businesses and entrepreneurs still have the opportunity to succeed in the digital marketplace. This bill will do just that while also providing consumers with the benefit of greater choice online.”
Section 3 of the bill would provide “business users” of the designated “covered platforms” with a wide range of entitlements. This includes preventing the covered platform from offering any services or products that a business user could provide (the so-called “self-preferencing” prohibition); allowing a business user access to the covered platform’s proprietary data; and an entitlement for business users to have “preferred placement” on a covered platform without having to use any of that platform’s services.
These entitlements would provide non-platform businesses what are effectively claims on the platform’s proprietary assets, notwithstanding the covered platform’s own investments to collect data, create services, and invent products—in short, the platform’s innovative efforts. As such, AICOA is redistributive legislation that creates the conditions for unfair competition in the name of “fair” and “open” competition. It treats the behavior of “covered platforms” differently than identical behavior by their competitors, without considering the deterrent effect such a framework will have on consumers and innovation. Thus, AICOA offers rent-seeking rivals a formidable avenue to reap considerable benefits at the expense of the innovators thanks to the weaponization of antitrust to subvert, not improve, competition.
In mandating that covered platforms make their data and proprietary assets freely available to “business users” and rivals, AICOA undermines the underpinning of free markets to pursue the misguided goal of “open markets.” The inevitable result will be the tragedy of the commons. Absent the covered platforms having the ability to benefit from their entrepreneurial endeavors, the law no longer encourages innovation. As Joseph Schumpeter seminally predicted: “perfect competition implies free entry into every industry … But perfectly free entry into a new field may make it impossible to enter it at all.”
To illustrate, if business users can freely access, say, a special status on the covered platforms’ ancillary services without having to use any of the covered platform’s services (as required under Section 3(a)(5)), then platforms are disincentivized from inventing zero-priced services, since they cannot cross-monetize these services with existing services. Similarly, if, under Section 3(a)(1) of the bill, business users can stop covered platforms from pre-installing or preferencing an app whenever they happen to offer a similar app, then covered platforms will be discouraged from investing in or creating new apps. Thus, the bill would generate a considerable deterrent effect for covered platforms to invest, invent, and innovate.
AICOA’s most detrimental consequences may not be immediately apparent; they could instead manifest in larger and broader downstream impacts that will be difficult to undo. As the 19th century French economist Frederic Bastiat wrote: “a law gives birth not only to an effect but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen it is well for, if they are foreseen … it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come,—at the risk of a small present evil.”
To paraphrase Bastiat, AICOA offers ill-intentioned rivals a “small present good”–i.e., unconditional access to the platforms’ proprietary assets–while society suffers the loss of a greater good–i.e., incentives to innovate and welfare gains to consumers. The logic is akin to those who advocate the abolition of intellectual-property rights: The immediate (and seen) gain is obvious, concerning the dissemination of innovation and a reduction of the price of innovation, while the subsequent (and unseen) evil remains opaque, as the destruction of the institutional premises for innovation will generate considerable long-term innovation costs.
Fundamentally, AICOA weakens the benefits of scale by pursuing vertical disintegration of the covered platforms to the benefit of short-term static competition. In the long term, however, the bill would dampen dynamic competition, ultimately harming consumer welfare and the capacity for innovation. Themeasure’s opportunity costs will prevent covered platforms’ innovations from benefiting other business users or consumers. They personify the “unseen,” as Bastiat put it: “[they are] always in the shadow, and who, personifying what is not seen, [are] an essential element of the problem. [They make] us understand how absurd it is to see a profit in destruction.”
The costs could well amount to hundreds of billions of dollars for the U.S. economy, even before accounting for the costs of deterred innovation. The unseen is costly, the seen is cheap.
A New Robinson-Patman Act?
Most antitrust laws are terse, vague, and old: The Sherman Act of 1890, the Federal Trade Commission Act, and the Clayton Act of 1914 deal largely in generalities, with considerable deference for courts to elaborate in a common-law tradition on the specificities of what “restraints of trade,” “monopolization,” or “unfair methods of competition” mean.
In 1936, Congress passed the Robinson-Patman Act, designed to protect competitors from the then-disruptive competition of large firms who—thanks to scale and practices such as price differentiation—upended traditional incumbents to the benefit of consumers. Passed after “Congress made no factual investigation of its own, and ignored evidence that conflicted with accepted rhetoric,” the law prohibits price differentials that would benefit buyers, and ultimately consumers, in the name of less vigorous competition from more efficient, more productive firms. Indeed, under the Robinson-Patman Act, manufacturers cannot give a bigger discount to a distributor who would pass these savings onto consumers, even if the distributor performs extra services relative to others.
Former President Gerald Ford declared in 1975 that the Robinson-Patman Act “is a leading example of [a law] which restrain[s] competition and den[ies] buyers’ substantial savings…It discourages both large and small firms from cutting prices, making it harder for them to expand into new markets and pass on to customers the cost-savings on large orders.” Despite this, calls to amend or repeal the Robinson-Patman Act—supported by, among others, competition scholars like Herbert Hovenkamp and Robert Bork—have failed.
In the 1983 Abbott decision, Justice Lewis Powell wrote: “The Robinson-Patman Act has been widely criticized, both for its effects and for the policies that it seeks to promote. Although Congress is aware of these criticisms, the Act has remained in effect for almost half a century.”
Nonetheless, the act’s enforcement dwindled, thanks to wise reactions from antitrust agencies and the courts. While it is seldom enforced today, the act continues to create considerable legal uncertainty, as it raises regulatory risks for companies who engage in behavior that may conflict with its provisions. Indeed, many of the same so-called “neo-Brandeisians” who support passage of AICOA also advocate reinvigorating Robinson-Patman. More specifically, the new FTC majority has expressed that it is eager to revitalizeRobinson-Patman, even as the law protects less efficient competitors. In other words, the Robinson-Patman Act is a zombie law: dead, but still moving.
Even if the antitrust agencies and courts ultimately follow the same path of regulatory and judicial restraint on AICOA that they have on Robinson-Patman, the legal uncertainty its existence will engender will act as a powerful deterrent on disruptive competition that dynamically benefits consumers and innovation. In short, like the Robinson-Patman Act, antitrust agencies and courts will either enforce AICOA–thus, generating the law’s adverse effects on consumers and innovation–or they will refrain from enforcing AICOA–but then, the legal uncertainty shall lead to unseen, harmful effects on innovation and consumers.
For instance, the bill’s prohibition on “self-preferencing” in Section 3(a)(1) will prevent covered platforms from offering consumers new products and services that happen to compete with incumbents’ products and services. Self-preferencing often is a pro-competitive, pro-efficiency practice that companies widely adopt—a reality that AICOA seems to ignore.
Would AICOA prevent, e.g., Apple from offering a bundled subscription to Apple One, which includes Apple Music, so that the company can effectively compete with incumbents like Spotify? As with Robinson-Patman, antitrust agencies and courts will have to choose whether to enforce a productivity-decreasing law, or to ignore congressional intent but, in the process, generate significant legal uncertainties.
Judge Bork once wrote that Robinson-Patman was “antitrust’s least glorious hour” because, rather than improving competition and innovation, it reduced competition from firms who happen to be more productive, innovative, and efficient than their rivals. The law infamously protected inefficient competitors rather than competition. But from the perspective of legislative history perspective, AICOA may be antitrust’s new “least glorious hour.” If adopted, it will adversely affect innovation and consumers, as opportunistic rivals will be able to prevent cost-saving practices by the covered platforms.
As with Robinson-Patman, calls to amend or repeal AICOA may follow its passage. But Robinson-Patman Act illustrates the path dependency of bad antitrust laws. However costly and damaging, AICOA would likely stay in place, with regular calls for either stronger or weaker enforcement, depending on whether the momentum shifts from populist antitrust or antitrust more consistent with dynamic competition.
Victory of the Brussels Effect
The future of AICOA does not bode well for markets, either from a historical perspective or from a comparative-law perspective. The EU’s DMA similarly targets a few large tech platforms but it isbroader, harsher, and swifter. In the competition between these two examples of self-inflicted techlash, AICOA will pale in comparison with the DMA. Covered platforms will be forced to align with theDMA’s obligations and prohibitions.
Consequently, AICOA is a victory of the DMA and of the Brussels effect in general. AICOA effectively crowns the DMA as the all-encompassing regulatory assault on digital gatekeepers. While members of Congress have introduced numerous antitrust bills aimed at targeting gatekeepers, the DMA is the one-stop-shop regulation that encompasses multiple antitrust bills and imposes broader prohibitions and stronger obligations on gatekeepers. In other words, the DMA outcompetes AICOA.
Commentators seldom lament the extraterritorial impact of European regulations. Regarding regulating digital gatekeepers, U.S. officials should have pushed back against the innovation-stifling, welfare-decreasing effects of the DMA on U.S. tech companies, in particular, and on U.S. technological innovation, in general. To be fair, a few U.S. officials, such as Commerce Secretary Gina Raimundo, didvoice opposition to the DMA. Indeed, well-aware of the DMA’s protectionist intent and its potential tobreak up and break into tech platforms, Raimundoexpressed concerns that antitrust should not be about protecting competitors and deterring innovation but rather about protecting the process of competition, however disruptive may be.
The influential neo-Brandeisians and radical antitrust reformers, however,lashed out at Raimundo andeffectively shamed the Biden administration into embracing the DMA (and its sister regulation, AICOA). Brussels did not have to exert its regulatory overreach; the U.S. administration happily imports and emulates European overregulation. There is no better way for European officials to see their dreams come true: a techlash against U.S. digital platforms that enjoys the support of local officials.
In that regard, AICOA has already played a significant role in shaping the intellectual mood in Washington and in altering the course of U.S. antitrust. Members of Congress designed AICOA along the linespioneered by the DMA. Sen. Klobuchar has argued that America should emulate European competition policy regarding tech platforms. Lina Khan, now chair of the FTC, co-authoredthe U.S. House Antitrust Subcommittee report, which recommended adopting the European concept of “abuse of dominant position” in U.S. antitrust. In her current position, Khan nowpraises the DMA. Tim Wu, competition counsel for the White House,has praised European competition policy and officials. Indeed, the neo-Brandeisians’ have not only praised the European Commission’s fines against U.S. tech platforms (despiteearly criticisms from former President Barack Obama) but have more dramatically called for the United States to imitate the European regulatory framework.
In this regulatory race to inefficiency, the standard is set in Brussels with the blessings of U.S. officials. Not even the precedent set by the EU’s General Data Protection Regulation (GDPR) fully captures the effects the DMA will have. Privacy laws passed by U.S. states’ privacy have mostly reacted to the reality of the GDPR. With AICOA, Congress is proactively anticipating, emulating, and welcoming the DMA before it has even been adopted. The intellectual and policy shift is historical, and so is the policy error.
AICOA and the Boulevard of Broken Dreams
AICOA is a failure similar to the Robinson-Patman Act and a victory for the Brussels effect and the DMA. Consumers will be the collateral damages, and the unseen effects on innovation will take years before they materialize. Calls for amendments and repeals of AICOA are likely to fail, so that the inevitable costs will forever bear upon consumers and innovation dynamics.
AICOA illustrates the neo-Brandeisian opposition to large innovative companies. Joseph Schumpeter warned against such hostility and its effect on disincentivizing entrepreneurs to innovate when he wrote:
Faced by the increasing hostility of the environment and by the legislative, administrative, and judicial practice born of that hostility, entrepreneurs and capitalists—in fact the whole stratum that accepts the bourgeois scheme of life—will eventually cease to function. Their standard aims are rapidly becoming unattainable, their efforts futile.
President William Howard Taft once said, “the world is not going to be saved by legislation.” AICOA will not save antitrust, nor will consumers. To paraphrase Schumpeter, the bill’s drafters “walked into our future as we walked into the war, blindfolded.” AICOA’s intentions to deliver greater competition, a fairer marketplace, greater consumer choice, and more consumer benefits will ultimately scatter across the boulevard of broken dreams.
The Baron de Montesquieu once wrote that legislators should only change laws with a “trembling hand”:
It is sometimes necessary to change certain laws. But the case is rare, and when it happens, they should be touched only with a trembling hand: such solemnities should be observed, and such precautions are taken that the people will naturally conclude that the laws are indeed sacred since it takes so many formalities to abrogate them.
AICOA’s drafters had a clumsy hand, coupled with what Friedrich Hayek would call “a pretense of knowledge.” They were certain to do social good and incapable of thinking of doing social harm. The future will remember AICOA as the new antitrust’s least glorious hour, where consumers and innovation were sacrificed on the altar of a revitalized populist view of antitrust.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
May 2007, Palo Alto
The California sun shone warmly on Eric Schmidt’s face as he stepped out of his car and made his way to have dinner at Madera, a chic Palo Alto restaurant.
Dining out was a welcome distraction from the endless succession of strategy meetings with the nitpickers of the law department, which had been Schmidt’s bread and butter for the last few months. The lawyers seemed to take issue with any new project that Google’s engineers came up with. “How would rivals compete with our maps?”; “Our placement should be no less favorable than rivals’’; etc. The objections were endless.
This is not how things were supposed to be. When Schmidt became Google’s chief executive officer in 2001, his mission was to take the company public and grow the firm into markets other than search. But then something unexpected happened. After campaigning on an anti-monopoly platform, a freshman senator from Minnesota managed to get her anti-discrimination bill through Congress in just her first few months in office. All companies with a market cap of more than $150 billion were now prohibited from favoring their own products. Google had recently crossed that Rubicon, putting a stop to years of carefree expansion into new markets.
But today was different. The waiter led Schmidt to his table overlooking Silicon Valley. His acquaintance was already seated.
With his tall and slender figure, Andy Rubin had garnered quite a reputation among Silicon Valley’s elite. After engineering stints at Apple and Motorola, developing various handheld devices, Rubin had set up his own shop. The idea was bold: develop the first open mobile platform—based on Linux, nonetheless. Rubin had pitched the project to Google in 2005 but given the regulatory uncertainty over the future of antitrust—the same wave of populist sentiment that would carry Klobuchar to office one year later—Schmidt and his team had passed.
“There’s no money in open source,” the company’s CFO ruled. Schmidt had initially objected, but with more pressing matters to deal with, he ultimately followed his CFO’s advice.
Schmidt and Rubin were exchanging pleasantries about Microsoft and Java when the meals arrived–sublime Wagyu short ribs and charred spring onions paired with a 1986 Chateau Margaux.
Rubin finally cut to the chase. “Our mobile operating system will rely on state-of-the-art touchscreen technology. Just like the device being developed by Apple. Buying Android today might be your only way to avoid paying monopoly prices to access Apple’s mobile users tomorrow.”
Schmidt knew this all too well: The future was mobile, and few companies were taking Apple’s upcoming iPhone seriously enough. Even better, as a firm, Android was treading water. Like many other startups, it had excellent software but no business model. And with the Klobuchar bill putting the brakes on startup investment—monetizing an ecosystem had become a delicate legal proposition, deterring established firms from acquiring startups–Schmidt was in the middle of a buyer’s market. “Android we could make us a force to reckon with” Schmidt thought to himself.
But he quickly shook that thought, remembering the words of his CFO: “There is no money in open source.” In an ideal world, Google would have used Android to promote its search engine—placing a search bar on Android users to draw users to its search engine—or maybe it could have tied a proprietary app store to the operating system, thus earning money from in-app purchases. But with the Klobuchar bill, these were no longer options. Not without endless haggling with Google’s planning committee of lawyers.
And they would have a point, of course. Google risked heavy fines and court-issued injunctions that would stop the project in its tracks. Such risks were not to be taken lightly. Schmidt needed a plan to make the Android platform profitable while accommodating Google’s rivals, but he had none.
The desserts were served, Schmidt steered the conversation to other topics, and the sun slowly set over Sand Hill Road.
Present Day, Cupertino
Apple continues to dominate the smartphone industry with little signs of significant competition on the horizon. While there are continuing rumors that Google, Facebook, or even TikTok might enter the market, these have so far failed to transpire.
Google’s failed partnership with Samsung, back in 2012, still looms large over the industry. After lengthy talks to create an open mobile platform failed to materialize, Google ultimately entered into an agreement with the longstanding mobile manufacturer. Unfortunately, the deal was mired by antitrust issues and clashing visions—Samsung was believed to favor a closed ecosystem, rather than the open platform envisioned by Google.
The sense that Apple is running away with the market is only reinforced by recent developments. Last week, Tim Cook unveiled the company’s new iPhone 11—the first ever mobile device to come with three cameras. With an eye-watering price tag of $1,199 for the top-of-the-line Pro model, it certainly is not cheap. In his presentation, Cook assured consumers Apple had solved the security issues that have been an important bugbear for the iPhone and its ecosystem of competing app stores.
Analysts expect the new range of devices will help Apple cement the iPhone’s 50% market share. This is especially likely given the important challenges that Apple’s main rivals continue to face.
The Windows Phone’s reputation for buggy software continues to undermine its competitive position, despite its comparatively low price point. Andy Rubin, the head of the Windows Phone, was reassuring in a press interview, but there is little tangible evidence he will manage to successfully rescue the flailing ship. Meanwhile, Huawei has come under increased scrutiny for the threats it may pose to U.S. national security. The Chinese manufacturer may face a U.S. sales ban, unless the company’s smartphone branch is sold to a U.S. buyer. Oracle is said to be a likely candidate.
The sorry state of mobile competition has become an increasingly prominent policy issue. President Klobuchar took to Twitter and called on mobile-device companies to refrain from acting as monopolists, intimating elsewhere that failure to do so might warrant tougher regulation than her anti-discrimination bill:
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
When I was a kid, I trailed behind my mother in the grocery store with a notepad and a pencil adding up the cost of each item she added to our cart. This was partly my mother’s attempt to keep my math skills sharp, but it was also a necessity. As a low-income family, there was no slack in the budget for superfluous spending. The Hostess cupcakes I longed for were a luxury item that only appeared in our cart if there was an unexpected windfall. If the antitrust populists who castigate all forms of market power succeed in their crusade to radically deconcentrate the economy, life will be much harder for low-income families like the one I grew up in.
Antitrust populists like Biden White House officialTim Wu and authorMatt Stoller decry the political influence of large firms. But instead of advocating for policies that tackle this political influence directly, they seek reforms to antitrust enforcement that aim to limit the economic advantages of these firms, believing that will translate into political enfeeblement. The economic advantages arising from scale benefit consumers, particularly low-income consumers, often at the expense of smaller economic rivals. But because the protection of small businesses is so paramount to their worldview, antitrust populists blithely ignore the harm that advancing their objectives would cause to low-income families.
This desire to protect small businesses, without acknowledging the economic consequences for low-income families, is plainly obvious in calls for reinvigorated Robinson-Patman Act enforcement (a law from the 1930s for which independent businesses advocated to limit the rise of chain stores) and in plans to revise the antitrust enforcement agencies’ merger guidelines. The U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) recently held a series of listening sessions to demonstrate the need for new guidelines. During the listening session on food and agriculture, independent grocer Anthony Pena described the difficulty he has competing with larger competitors like Walmart. He stated that:
Just months ago, I was buying a 59-ounce orange juice just north of $4 a unit, where we couldn’t get the supplier to sell it to us … Meanwhile, I go to the bigger box like a Walmart or a club store. Not only do they have it fully stocked, but they have it about half the price that I would buy it for at cost.
Half the price. Anthony Pena is complaining that competitors such as Walmart are selling the same product at half the price. To protect independent grocers like Anthony Pena, antitrust populists would have consumers, including low-income families, pay twice as much for groceries.
Walmart is an important food retailer for low-income families.Nearly a fifth of all spending through the Supplemental Nutrition Assistance Program (SNAP), the program formerly known as food stamps, takes place at Walmart. After housing and transportation, food is the largest expense for low-income families. The share of expenditures going toward food for low-income families (i.e., families in the lowest 20% of the income distribution) is34% higher than for high-income families (i.e., families in the highest 20% of the income distribution). This means that higher grocery prices disproportionately burden low-income families.
In 2019, the U.S. Department of Agriculture (USDA) launched theSNAP Online Purchasing Pilot, which allows SNAP recipients to use their benefits at online food retailers. The pandemic led to an explosion in the number ofSNAP recipients using their benefits online—increasing from just 35,000 households in March 2020 to nearly 770,000 households just three months later. While the pilot originally only included Walmart and Amazon, thenumber of eligible retailers has expanded rapidly. In order to make grocery delivery more accessible to low-income families, an important service during the pandemic, Amazon reduced itsPrime membership fee (which helps pay for free delivery) by 50% for SNAP recipients.
The antitrust populists are not only targeting the advantages of large brick-and-mortar retailers, such as Walmart, but also of large online retailers like Amazon. Again, these advantages largely flow to consumers—particularly low-income ones.
The proposedAmerican Innovation and Choice Online Act (AICOA), which was voted out of the Senate Judiciary Committee in February and may make an appearance on the Senate floor this summer, threatens those consumer benefits. AICOA would prohibit so-called “self-preferencing” by Amazon and other large technology platforms.
Should a ban on self-preferencing come to fruition, Amazon would not be able to prominently show its own products in any capacity—even when its products are a good match for a consumer’s search. In search results, Amazon will not be able to promote its private-label products, including Amazon Basics and 365 by Whole Foods, or products for which it is a first-party seller (i.e., a reseller of another company’s product). Amazon may also have to downgrade the ranking of popular products it sells, making them harder for consumers to find. Forcing Amazon to present offers that do not correspond to products consumers want to buy or are not a good value inflicts harm on all consumers but is particularly problematic for low-income consumers. All else equal, most consumers, especially low-income ones, obviously prefer cheaper products. It is important not to take that choice away from them.
Consider the case of orange juice, the product causing so much consternation for Mr. Pena. In a recent search on Amazon for a 59-ounce orange juice, as seen in the image below, the first four “organic” search results are SNAP-eligible, first-party, or private-label products sold by Amazon and ranging in price from $3.55 to $3.79. The next two results are from third-party sellers offering two 59-ounce bottles of orange juice at $38.99 and $84.54—more than five times the unit price offered by Amazon. By prohibiting self-preferencing, Amazon would be forced to promote products to consumers that are significantly more expensive and that are not SNAP-eligible. This increases costs directly for consumers who purchase more expensive products when cheaper alternatives are available but not presented. But it also increases costs indirectly by forcing consumers to search longer for better prices and SNAP-eligible products or by discouraging them from considering timesaving, online shopping altogether. Low-income families are least able to afford these increased costs.
The upshot is that antitrust populists are choosing to support (often well-off) small-business owners at the expense of vulnerable working people. Congress should not allow them to put the squeeze on low-income families. These families are already suffering due to record-high inflation—particularly for items that constitute the largest share of their expenditures, such as transportation and food. Proposed antitrust reforms such as AICOA and reinvigorated Robinson-Patman Act enforcement will only make it harder for low-income families to make ends meet.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
Jouko Hiltunen gazed out the window into the midday twilight. Eight stories down, across the plaza and promenade, the Helsinki harbor was already blanketed under a dusting of snow. By Christmas, the ice would be thick enough for walking out to the castle at Suomenlinna.
Jouko turned back to his computer screen. His fingers found the keys. At once, lines of code began spilling from the keyboard.
The desk phone rang. Sanna, who occupied the adjacent cubicle, arched her eyebrows. “Legal again?”
Jouko nodded. Without answering the phone, he got up and walked down three flights of stairs. The usual group was assembled in Partanen’s office: the woman in the dour gray suit who looked like an osprey, the fat man from Brussels who made them speak in English, and Partanen, the general counsel.
By habit, Jouko entered and stood behind a chair. Partanen nodded curtly. “We have an issue, Hiltunen. Again.”
“What now?”
“We’ve been watching how you’re coding the new walking tour search vertical. It seems that you are designing it to give preference to restaurants, cafès, and hotels that have been highly rated by the Tourism Board.”
“Yes, that’s right. Restaurants, cafès, and hotels that have been rated by the Tourism Board are cleaner, safer, and more convenient. That’s why they have been rated.”
“But you are forgetting that the Tourism Board is one of our investors. This will be considered self-preferencing.”
“But . . .”
“Listen, Hiltunen. We aren’t here to argue about this. Maybe it will, maybe it won’t be considered self-preferencing, but our company won’t take that risk. Do you understand?”
“No.”
“Then let me explain it . . .”
But Jouko had already left. When he returned to his desk, Sanna was watching him. “Everything OK?” she asked.
Jouko shrugged. He started typing again, but more slowly than before. An hour later, the phone rang again. This time, Sanna only raised an eyebrow. Jouko gave half a nod and ambled downstairs.
“You are making it worse,” said Partanen. The osprey woman scowled and raked her fingernails across the desk.
“How am I making it worse? I did what you said and eliminated search results defaulting to rated establishments.”
“Yes, but you added a toggle for users to be shown only rated establishments.”
“Only if they decide to be shown only rated establishments. I’m giving them a choice.”
“Choice? What does choice have to do with it? Everyone who uses our search engine is choosing—” Partanen made rabbit ears in the air – “but we have a responsibility not to impede competition. If you give them a suggestive choice” – again, rabbit ears – “that will be considered self-preferencing?”
“Really?”
“Well, maybe it will and maybe it won’t, but the company won’t take the risk.”
When Jouko returned to his desk, Sanna averted her eyes. As he sat motionless behind his keyboard, hands folded in his lap, she occasionally shot him concerned glances.
The darkness outside was nearly complete when the phone rang again. Jouko let it go to voicemail and waited a long time before rising and walking wearily downstairs.
“What now? I haven’t done anything.”
“We’ve been talking and have a new idea. It would be better if you blocked from the search results any restaurants or hotels that have been rated by the Board of Tourism. That way, there is no chance that we will be accused of self-preferencing.”
“Or that people will end up in a safe, clean, or convenient restaurant.”
“That’s not your problem, is it?”
Jouko returned to his cubicle. He did not sit down at his desk, but started putting on his coat.
“Where are you going?” asked Sanna.
“I’m going to walk out towards Suomenlinna.”
Sanna’s voice rose in alarm: “But the ice has barely formed. It won’t hold you.”
Jouko shrugged. “Maybe it will, maybe it won’t. I’ll take the risk.”
We will learn more in the coming weeks about the fate of the proposed American Innovation and Choice Online Act (AICOA), legislation sponsored by Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa) that would, among other things, prohibit “self-preferencing” by large digital platforms like Google, Amazon, Facebook, Apple, and Microsoft. But while the bill has already been subject to significant scrutiny, a crucially important topic has been absent from that debate: the measure’s likely effect on startup acquisitions.
Of course, AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.
This would be a significant loss. As Dirk Auer, Sam Bowman, and I discuss in a recent article in the Missouri Law Review, acquisitions are arguably the most important component in providing vitality to the overall venture ecosystem:
Startups generally have two methods for achieving liquidity for their shareholders: IPOs or acquisitions. According to the latest data from Orrick and Crunchbase, between 2010 and 2018 there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion. By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. As venture capitalist Scott Kupor said in his testimony during the FTC’s hearings on “Competition and Consumer Protection in the 21st Century,” “these large players play a significant role as acquirers of venture-backed startup companies, which is an important part of the overall health of the venture ecosystem.”
Moreover, acquisitions by large incumbents are known to provide a crucial channel for liquidity in the venture capital and startup communities: While at one time the source of the “liquidity events” required to yield sufficient returns to fuel venture capital was evenly divided between IPOs and mergers, “[t]oday that math is closer to about 80 percent M&A and about 20 percent IPOs—[with important implications for any] potential actions that [antitrust enforcers] might be considering with respect to the large platform players in this industry.” As investor and serial entrepreneur Leonard Speiser said recently, “if the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.” (emphasis added)
Going after self-preferencing may have exactly the same harmful effect on venture investors and competition.
It’s unclear exactly how the legislation would be applied in any given context (indeed, this uncertainty is one of the most significant problems with the bill, as the ABA Antitrust Section has argued at length). But AICOA is designed, at least in part, to keep large online platforms in their own lanes—to keep them from “leveraging their dominance” to compete against more politically favored competitors in ancillary markets. Indeed, while covered platforms potentially could defend against application of the law by demonstrating that self-preferencing is necessary to “maintain or substantially enhance the core functionality” of the service, no such defense exists for non-core (whatever that means…) functionality, the enhancement of which through self-preferencing is strictly off limits under AICOA.
As I have written (and so have many, many, many, many others), this is terrible policy on its face. But it is also likely to have significant, adverse, indirect consequences for startup acquisitions, given the enormous number of such acquisitions that are outside the covered platforms’ “core functionality.”
Just take a quick look at a sample of the largest acquisitions made by Apple, Microsoft, Amazon, and Alphabet, for example. (These are screenshots of the first several acquisitions by size drawn from imperfect lists collected by Wikipedia, but for purposes of casual empiricism they are well-suited to give an idea of the diversity of acquisitions at issue):
Vanishingly few of these acquisitions go to the “core functionalities” of these platforms. Alphabet’s acquisitions, for example, involve (among many other things) cybersecurity; home automation; cloud computing; wearables, smart glasses, and AR hardware; GPS navigation software; communications security; satellite technology; and social gaming. Microsoft’s acquisitions include companies specializing in video games; social networking; software versioning; drawing software; cable television; cybersecurity; employee engagement; and e-commerce. The technologies and applications involved in acquisitions by Apple and Amazon are similarly varied.
Drilling down a bit, consider the companies Alphabet acquired and put to use in the service of Google Maps:
Which, if any, of these companies would Google have purchased if it knew it would be unable to prioritize Maps in its search results? Would Google have invested more than $1 billion in these companies—and likely significantly more in internal R&D to develop Maps—if it had to speculate whether it would be required (or even be able) to prove someday in the future that prioritizing Google Maps results would enhance its core functionality?
What about Xbox? As noted, AICOA’s terms aren’t perfectly clear, so I’m not certain it would apply to Xbox (is Xbox a “website, online or mobile application, operating system, digital assistant, or online service”?). Here are Microsoft’s video-gaming-related purchases:
The vast majority of these (and all of the acquisitions for which Wikipedia has purchase-price information, totaling some $80 billion of investment) involve video games, not the development of hardware or the functionality of the Xbox platform. Would Microsoft have made these investments if it knew it would be prohibited from prioritizing its own games or exclusively using data gleaned through these games to improve its platform? No one can say for certain, but, at the margin, it is absolutely certain that these self-preferencing bills would make such acquisitions less likely.
Perhaps the most obvious—and concerning—example of the problem arises in the context of Google’s Android platform. Google famously gives Android away for free, of course, and makes its operating system significantly open for bespoke use by all comers. In exchange, Google requires that implementers of the Android OS provide some modicum of favoritism to Google’s revenue-generating products, like Search. For all its uncertainty, there is no question that AICOA’s terms would prohibit this self-preferencing. Intentionally or not, it would thus prohibit the way in which Google monetizes Android and thus hopes to recoup some of the—literally—billions of dollars it has invested in the development and maintenance of Android.
Here are Google’s Android-related acquisitions:
Would Google have bought Android in the first place (to say nothing of subsequent acquisitions and its massive ongoing investment in Android) if it had been foreclosed from adopting its preferred business model to monetize its investment? In the absence of Google bidding for these companies, would they have earned as much from other potential bidders? Would they even have come into existence at all?
Of course, AICOA wouldn’t preclude Google chargingdevice makers for Android and thus raising the price of mobile devices. But that mechanism may not have been sufficient to support Google’s investment in Android, and it would certainly constrain its ability to compete. Even if rules like those proposed by AICOA didn’t undermine Google’s initial purchase of and investment in Android, it is manifestly unclear how forcing Google to adopt a business model that increases consumer prices and constrains its ability to compete head-to-head with Apple’s iOS ecosystem would benefit consumers. (This excellent series of posts—1, 2, 3, 4—by Dirk Auer on the European Commission’s misguided Android decision discusses in detail the significant costs of prohibiting self-preferencing on Android.)
There are innumerable further examples, as well. In all of these cases, it seems clear not only that an AICOA-like regime would diminish competition and reduce consumer welfare across important dimensions, but also that it would impoverish the startup ecosystem more broadly.
And that may be an even bigger problem. Even if you think, in the abstract, that it would be better for “Big Tech” not to own these startups, there is a real danger that putting that presumption into force would drive down acquisition prices, kill at least some tech-startup exits, and ultimately imperil the initial financing of tech startups. It should go without saying that this would be a troubling outcome. Yet there is no evidence to suggest that AICOA’s proponents have even considered whether the presumed benefits of the bill would be worth this immense cost.
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