More, and not just about noncompetes, but first, yes (mea culpa/s’lach lanu), more about noncompetes.
Yesterday on Truth on the Market, I provided an overview of comments filed by the International Center for Law & Economics on the Federal Trade Commission’s (FTC) proposed noncompete rule. In addition to ICLE’s Geoffrey Manne, Dirk Auer, Brian Albrecht, Gus Hurwitz, and myself, we were joined in our comments by 25 other leading academics and former agency officials, including former chief economists at the U.S. Justice Department’s (DOJ) Antitrust Division and a former director of the FTC’s Bureau of Economics.
Not to beat a dead horse, but this is important, as it’s the FTC’s second-ever attempt to promulgate a competition rule under a supposed general rulemaking authority, and the first since the unenforced and long-ago rescinded rule on the Men’s and Boys’ Tailored Clothing Industry, initially adopted in 1967. Not incidentally, this would be a foray into regulation of the terms of labor agreements across the entire economy, on questionable authority (and certainly no express charge from Congress).
Asheesh Agarwal submitted comments reviewing legal concerns and risks to the FTC’s authority on behalf of a number of FTC alumni, including, among others, two former directors of the FTC’s Bureau of Economics; two former FTC general counsels; a former director of the FTC’s Office of Policy Planning; a former FTC chief technologist; a former acting director of the FTC’s Bureau of Consumer Protection; and me.
That’s a lot, I know, but these really do explore different issues, and there really are quite a few of them. No lie.
Bringing the Axon Down
As a reward for your patience—or your ability to skip ahead—now for the week’s other hot issue: the U.S. Supreme Court’s decision in Axon Enterprise Inc. v. FTC, which represented a 9-0 loss for the commission (and for the U.S. Securities and Exchange Commission). Does anybody remember the days—not so long ago, if not under current leadership—when the commission would win unanimous court decisions? Phoebe Putney, anyone?
A Bloomberg Law overview of Axon quoting my ICLE colleague Gus Hurwitz is here.
The issue in Axon might seem a narrow one at the intersection of administrative and constitutional law, but bear with me. Enforcement of the FTC Act and the SEC Act often follow a familiar pattern: an agency brings a complaint that, if not settled, may be heard by an administrative law judge (ALJ) in a hearing inside the agency itself. In the case of the FTC, a decision by the ALJ can be appealed to the commission itself. Thus, if the commission does not like the ALJ’s decision, it can appeal to itself.
As a general matter, once embroiled in such “agency process,” a defendant must “exhaust” the administrative process before challenging the complaint (or appealing an ALJ or commission decision) in federal court. That’s known as the Doctrine of Exhaustion of Administrative Remedies (see, e.g., McKart v. United States). The doctrine helps to conserve judicial resources, as the courts do not have to consider every challenge (including procedural ones) that arises in the course of administrative enforcement.
The disadvantage, for defendants, is that they may face a long and costly process of agency adjudication before they ever get before a federal judge (some FTC Act complaints initially are brought in federal court, but set that aside). That can exert substantial pressure to settle, even when defendants think the government’s case is a weak one.
At issue in Axon, was the question of whether a defendant had to exhaust agency process on the merits of an agency complaint before bringing a constitutional challenge to the agency’s enforcement action. The agencies said yes, natch. The unanimous Supreme Court said no.
To put the question differently, do the federal district courts have jurisdiction to hear and resolve defendants’ constitutional challenges independent of exhaustion? “The answer is yes,” said the Supreme Court of the United States. According to the court—and reasonably—the agencies don’t have any special expertise on such constitutional questions, even if they have expertise in, say, competition or securities policy. On fundamental constitutional questions, defendants can get their day in court without exhausting agency process.
So, what difference does that make?That remains to be seen, but perhaps more than it might seem. On the one hand, the Axon decision did not repudiate the FTC’s substantive expertise in antitrust (or consumer protection) or its authority to enforce the FTC Act. On the other hand, enforcement is costly for enforcers, and not just defendants, and the FTC is famously—as evidenced by its own recent pleas to Congress for more funding—resource-constrained, to an extent that is said to impair its ability to enforce the FTC Act.
While we constantly strive to enforce the law to the best of our capabilities, there is no doubt that—despite the much-needed increased appropriations Congress has provided in recent years—we continue to lack sufficient funding.
The Axon decision means, among other things, that the FTC’s average litigation costs are bound to rise, as we’ll doubtless see more constitutional challenges.
But perhaps there’s more to it than that. At least two of the nine justices—Thomas, in a concurring opinion, and Gorsuch, concurring with the decision—signaled an appetite to further rein-in the agencies. And doing so would be part-and-parcel with a judicial trend against deference to administrative agencies. For example, in AMG Capital Management, the Supreme Court narrowly interpreted the commission’s power to obtain equitable remedies, and specifically monetary remedies, repudiating established commission practice. And in West Virginia v. EPA, the court demonstrated concern with the breadth of the administrative state; specifically, it rejected the proposition that courts defer to agency interpretations of vague grants of statutory authority, where such interpretations are of major economic and political import.
Where this will all end is anybody’s guess. In the near term, Axon will impose extra costs on the FTC. And the commission’s broader bid to extend its reach faces an uphill battle.
As I noted in January, the Federal Trade Commission’s (FTC) proposal to ban nearly all noncompete agreements raises many questions. To be sure, there are contexts—perhaps many contexts—in which noncompete agreements raise legitimate policy concerns. But there also are contexts in which they can serve a useful procompetitive function. A per se ban across all industries and occupations, as the FTC’s notice of proposed rulemaking (NPRM) contemplates, seems at the least overly broad, and potentially a dubious and costly policy initiative.
Yesterday was the deadline to submit comments on the noncompete NPRM, and the International Center for Law & Economics and 30 distinguished scholars of law & economics—including leading academics and past FTC officials—did just that. I commend the comments to you, and not just because I drafted a good portion of them.
Still, given that we had about 75 pages of things to say about the proposal, an abridged treatment may be in order. The bottom line:
[W]e cannot recommend that the Commission adopt the proposed Non-compete Clause Rule (‘Proposed Rule’). It is not supported by the Commission’s experience, authority, or resources; neither is it supported by the evidence—empirical and otherwise—that is reviewed in the NPRM.
In no particular order, I will summarize some of our comments on key issues.
Not All Policy Concerns Are Antitrust Concerns
As the NPRM acknowledges, litigation over noncompetes focuses mostly on state labor and contract-law issues. And the federal and state cases that do consider specific noncompetes under the antitrust laws have nearly all found them to be lawful.
That’s not to say that there cannot be specific noncompetes in specific labor markets that run afoul of the Sherman Act (or the FTC Act). But antitrust is not a Swiss Army Knife, and it shouldn’t be twisted to respond to every possible policy concern.
Will Firms Invest Less in Employees?
While the NPRM amply catalogs potential problems associated with non-competes, [non-competes], like other vertical restrictions in labor agreements, are not necessarily inefficient, anticompetitive, or harmful to either labor or consumer welfare; they can be efficiency-enhancing and pro-competitive . . . [and] can solve a range of potential hold-up problems in labor contracting.
For example, there are circumstances in which both firms and their employees might benefit from additional employee training. But employees may lack the resources needed to acquire the right training on their own. Their employers might be better resourced, but might worry about their returns on investments in employee training.
Labor is alienable; that is, employees can walk out the door, and they can do so before firm-sponsored training has paid adequate dividends. Hence, they might renegotiate their compensation before it has paid for itself; or they might bring their enhanced skills to a competing firm. Knowing this, firms might tend to underinvest in employee training, which would lower their productivity. Noncompetes can mitigate this hold-up problem, and there is empirical evidence that they do just that.
The Available Literature Is Decidedly Mixed
A per se ban under the antitrust laws would seem to require considerable case law and a settled, and relatively comprehensive body of literature demonstrating that noncompetes pose significant harms to competition and consumers in nearly all cases. There isn’t.
First, “there appear to be numerous and broad gaps in the literature.” For example, most policy options, industries, and occupations haven’t been studied at all. And there’s only a single paper looking at downstream price effects in goods and services markets—one that doesn’t appear to be at all generalizable.
In addition, the available results don’t all impugn noncompetes; they’re mixed. For example, while some studies suggest certain classes of workers see increased wages, on average, when noncompete “enforceability” is reduced, others report contexts in which enforcement is associated with rising wages, depending on the occupation (there are studies of physicians, CEOs, and financial advisors) or even the timing with which workers are made aware of noncompetes.
more credible empirical studies tend to be narrow in scope, focusing on a limited number of specific occupations . . . or potentially idiosyncratic policy changes with uncertain and hard-to-quantify generalizability.
So, for example, a study of the effects of an idiosyncratic statutory change regarding noncompetes in certain parts of the tech sector, but not others, in Hawaii (which doesn’t have much of a tech sector) might tell us rather little about our policy options more broadly.
Being the Primary Federal Labor Regulator Requires Resources
There are also reasons to question the FTC’s drive to be the federal regulator of noncompetes and other vertical restraints in labor agreements. For one thing, the commission has very little experience with noncompetes, although it did (rush to?) settle three complaints involving noncompetes the day before they issued the NPRM.
All three (plus a fourth settled since) involved very specific facts and circumstances. Three of the four were situated in a single industry: the glass-container industry. And, as recently resigned Commissioner Christine Wilson explained in dissent, the opinions and orders settling the matters did little to explain how the conduct at issue violated the antitrust laws. In one complaint, the alleged restrictions on security guards seemed excessive and unreasonable (as a state court found them to be, under state law), but that doesn’t mean that they violated the FTC Act.
Moreover, this would be a sweeping regulation involving, based on the commission’s own estimates, some 30 million current labor agreements and several hundred billion dollars in annual wage effects. Just this week, the commission once again testified to Congress that it lacks adequate personnel and other resources to execute the laws it plainly is charged to enforce already. So, for example:
[w]hile we constantly strive to enforce the law to the best of our capabilities, there is no doubt that—despite the much-needed increased appropriations Congress has provided in recent years—we continue to lack sufficient funding.
Given these limitations, it’s hard to understand the pitch to regulate labor terms across the entire economy without any congressional charge to do so. And that’s leaving aside the FTC’s recent and problematic proposal to issue sweeping regulations for digital privacy, as well. Not incidentally, this is an active area of state policy reform, and an issue that’s currently before Congress.
A Flimsy Basis for Authority
In the end, the FTC’s claimed authority to issue competition regulations under its general “unfair methods of competition” authority (Section 5 of the FTC Act) and a single clause about regulations (for some purpose) in Section 6(g) of the FTC Act is both contentious and dubious.
All in all, the commission’s proposed rule would be a bridge too far—or several of them. The agency isn’t just risking the economic costs of a spectacularly overbroad rule and its own much-needed agency resources. Court challenges to such a rule are inevitable, and place both the substance of a noncompete rule and the FTC’s own authority at risk.
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 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.
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.
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.
[This is a guest post from Mario Zúñiga of EY Law in Lima, Perú. An earlier version was published in Spanish on the author’s personal blog. He gives thanks to Hugo Figari and Walter Alvarez for their comments on the initial version and special thanks to Lazar Radic for his advice and editing of the English version.]
There is a line of thinking according to which, without merger-control rules, antitrust law is “incomplete.” Without such a regime, the argument goes, whenever a group of companies faces with the risk of being penalized for cartelizing, they could instead merge and thus “raise prices without any legal consequences.”
A few months ago, at a symposium that INDECOPI organized for the first anniversary the Peruvian Merger Control Act’s enactment, Rubén Maximiano of the OECD’s Competition Division argued in support of the importance of merger-control regimes with the assessment that mergers are“like the ultimate cartel” because a merged firm could raise prices “with impunity.”
I get Maximiano’s point. Antitrust law was born, in part, to counter the rise of trusts, which had been used to evade the restriction that common law already imposed on “restraints of trade” in the United States. Let’s not forget, however, that these “trusts” were essentially a facade used to mask agreements to fix prices, and only to fix prices. They were not real combinations of two or more businesses, as occurs in a merger. Therefore, even if one agree that it is important to scrutinize mergers, describing them as an alternative means of “cartelizing” is, to say the least, incomplete.
While this might seem to some to be a debate about mere semantics, I think is relevant to the broader context in which competition agencies are being pushed from various fronts toward a more aggressive application of merger-control rules.
In describing mergers only as a strategy to gain more market power, or market share, or to expand profit margins, we would miss something very important: how these benefits would be obtained. Let’s not forget what the goal of antitrust law actually is. However we articulate this goal (“consumer welfare” or “the competitive process”), it is clear that antitrust law is more concerned with protecting a process than achieving any particular final result. It protects a dynamic in which, in principle, the market is trusted to be the best way to allocate resources.
In that vein, competition policy seeks to remove barriers to this dynamic, not to force a specific result. In this sense, it is not just what companies achieve in the market that matters, but how they achieve it. And there’s an enormous difference between price-fixing and buying a company. That’s why antitrust law gives a different treatment to “naked” agreements to collude while also contemplating an “ancillary agreements” doctrine.
By accepting this (“ultimate cartel”) approach to mergers, we would also be ignoring decades of economics and management literature. We would be ignoring, to start, the fundamental contributions of Ronald Coase in “The Nature of the Firm.” Acquiring other companies (or business lines or assets) allows us to reduce transaction costs and generate economies of scale in production. According to Coase:
The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism. The most obvious cost of ‘organising’ production through the price mechanism is that of discovering what the relevant prices are. This cost may be reduced but it will not be eliminated by the emergence of specialists who will sell this information. The costs of negotiating and concluding a separate contract for each exchange transaction which takes place on a market must also be taken into account.
The simple answer to that could be to enter into long-term contracts, but Coase notes that that’s not that easy. He explains that:
There are, however, other disadvantages-or costs of using the price mechanism. It may be desired to make a long-term contract for the supply of some article or service. This may be due to the fact that if one contract is made for a longer period, instead of several shorter ones, then certain costs of making each contract will be avoided. Or, owing to the risk attitude of the people concerned, they may prefer to make a long rather than a short-term contract. Now, owing to the difficulty of forecasting, the longer the period of the contract is for the supply of the commodity or service, the less possible, and indeed, the less desirable it is for the person purchasing to specify what the other contracting party is expected to do.
Coase, to be sure, makes this argument mainly with respect to vertical mergers, but I think it may be applicable to horizontal mergers, as well, to the extent that the latter generate “economies of scale.” Moreover, it’s not unusual for many acquisitions that are classified as “horizontal” to also have a “vertical” component (e.g., a consumer-goods company may buy another company in the same line of business because it wants to take advantage of the latter’s distribution network; or a computer manufacturer may buy another computer company because it has an integrated unit that produces microprocessors).
We also should not leave aside the entrepreneurship element, which frequently is ignored in the antitrust literature and in antitrust law and policy. As Israel Kirzner pointed out more than 50 years ago:
An economics that emphasizes equilibrium tends, therefore, to overlook the role of the entrepreneur. His role becomes somehow identified with movements from one equilibrium position to another, with ‘innovations,’ and with dynamic changes, but not with the dynamics of the equilibrating process itself.
Instead of the entrepreneur, the dominant theory of price has dealt with the firm, placing the emphasis heavily on its profit-maximizing aspects. In fact, this emphasis has misled many students of price theory to understand the notion of the entrepreneur as nothing more than the focus of profit-maximizing decision-making within the firm. They have completely overlooked the role of the entrepreneur in exploiting superior awareness of price discrepancies within the economic system.”
Working in mergers and acquisitions, either as an external advisor or in-house counsel, has confirmed the aforementioned for me (anecdotal evidence, to be sure, but with the advantage of allowing very in-depth observations). Firms that take control of other firms are seeking to exploit the comparative advantages they may have over whoever is giving up control. Sometimes a company has (or thinks it has) knowledge or assets (greater knowledge of the market, better sales strategies, a broader distribution network, better access to credit, among many other potential advantages) that allow it to make better use of the seller’s existing assets.
An entrepreneur is successful because he or she sees what others do not see. Beatriz Boza summarizes it well in a section of her book “Empresarios” in which she details the purchase of the Santa Isabel supermarket chain by Intercorp (one of Peru’s biggest conglomerates). The group’s main shareholder, Carlos Rodríguez-Pastor, had already decided to enter the retail business and the opportunity came in 2003 when the Dutch group Ahold put Santa Isabel up for sale. The move was risky for Intercorp, in that Santa Isabel was in debt and operating at a loss. But Rodríguez-Pastor had been studying what was happening similar markets in other countries and knew that having a stake in the supermarket business would allow him to reach more consumer-credit customers, in addition to offering other vertical-integration opportunities. In retrospect, the deal can only be described as a success. In 2014, the company reached 34.1% market share and took in revenues of more than US$1.25 billion, with an EBITDA margin of 6.2%. Rodríguez-Pastor saw the synergies that others did not see, but he also dared to take the risk. As Boza writes:
‘Nobody ever saw the synergies,’ concludes the businessman, reminding the businessmen and executives who warned him that he was going to go bankrupt after the acquisition of Ahold’s assets. ‘Today we have a retail circuit that no one else can have.’
Competition authorities need to recognize these sorts of synergies and efficiencies, and take them into account as compensating effects even where the combination might otherwise represent some risk to competition. That is why the vast majority of proposed mergers are approved by competition authorities around the world.
There is some evidence of companies that were sanctioned in cartel cases later choose to merge, but what this requires is that the competition authorities put more effort into prosecuting those mergers, not that they adopt a much more aggressive approach to reviewing all mergers.
I am not proposing, of course, that we should abolish merger control or even that it should necessarily be “permissive.” Some mergers may indeed represent a genuine risk to competition. But in analyzing them, employing technical analytic techniques and robust evidence, it is important to recognize that entrepreneurs may have countless valid business reasons to carry out a merger—reasons that are often not fully formalized or even understood by the entrepreneurs themselves, since they operate under a high degree of uncertainty and risk. An entrepreneur’s primary motivation is to maximize his or her own benefit, but we cannot just assume that this will be greater after “concentrating” markets.
Competition agencies must recognize this, and not simply presume anticompetitive intentions or impacts. Antitrust law—and, in particular, the concentration-control regimes throughout the world—require that any harm to competition must be proved, and this is so precisely because mergers are not like cartels.
 The debate prior to the enactment of Peru’s Merger Control Act became too politicized and polarized. Opponents went so far as to affirm that merger control was “unconstitutional” (highly debatable) or that it constituted an interventionist policy (something that I believe cannot be assumed but is contingent on the type of regulation that is approved or how it is applied). On the other hand, advocates of the regulation claimed an inevitable scenario of concentrated markets and monopolies if the act was not approved (without any empirical evidence of this claim). My personal position was initially skeptical, considering that the priority—from a competition policy point of view, at least in a developing economy like Peru—should continue to be deregulation to remove entry barriers and to prosecute cartels. That being said, a well-designed and well-enforced merger-control regime (i.e., one that generally does not block mergers that are not harmful to competition; is agile; and has adequate protection from political interference) does not have to be detrimental to markets and can generate benefits in terms of avoiding anti-competitive mergers.
In Peru, the Commission for the Defense of Free Competition and its Technical Secretariat have been applying the law pretty reasonably. To date, of more than 20 applications, the vast majority have been approved without conditions, and one conditionally. In addition, approval requests have been resolved in an average of 23 days, below the legal term.
 See, e.g., this peer-reviewed 2018 OECD report: “The adoption of a merger control regime should be a priority for Peru, since in its absence competitors can circumvent the prohibition against anticompetitive agreements by merging – with effects potentially similar to those of a cartel immune from antitrust scrutiny.”
 National Institute for the Defense of Competition and the Protection of Intellectual Property (INDECOPI, after its Spanish acronym), is the Peruvian competition agency. It is an administrative agency with a broad scope of tasks, including antitrust law, unfair competition law, consumer protection, and intellectual property registration, among others. It can adjudicate cases and impose fines. Its decisions can be challenged before courts.
 You can watch the whole symposium (which I recommend)here.
 See Gregory J. Werden’s “The Foundations of Antitrust.” Werden explains how the term “trust” had lost its original legal meaning and designated all kinds of agreements intended to restrict competition.
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?
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.
With just a week to go until the U.S. midterm elections, which potentially herald a change in control of one or both houses of Congress, speculation is mounting that congressional Democrats may seek to use the lame-duck session following the election to move one or more pieces of legislation targeting the so-called “Big Tech” companies.
Gaining particular notice—on grounds that it is the least controversial of the measures—is S. 2710, the Open App Markets Act (OAMA). Introduced by Sen. Richard Blumenthal (D-Conn.), the Senate bill has garnered 14 cosponsors: exactly seven Republicans and seven Democrats. It would, among other things, force certain mobile app stores and operating systems to allow “sideloading” and open their platforms to rival in-app payment systems.
Unfortunately, even this relatively restrained legislation—at least, when compared to Sen. Amy Klobuchar’s (D-Minn.) American Innovation and Choice Online Act or the European Union’s Digital Markets Act (DMA)—is highly problematic in its own right. Here, I will offer seven major questions the legislation leaves unresolved.
1. Are Quantitative Thresholds a Good Indicator of ‘Gatekeeper Power’?
It is no secret that OAMA has been tailor-made to regulate two specific app stores: Android’s Google Play Store and Apple’s Apple App Store (see here, here, and, yes, even Wikipedia knows it).The text makes this clear by limiting the bill’s scope to app stores with more than 50 million users, a threshold that only Google Play and the Apple App Store currently satisfy.
However, purely quantitative thresholds are a poor indicator of a company’s potential “gatekeeper power.” An app store might have much fewer than 50 million users but cater to a relevant niche market. By the bill’s own logic, why shouldn’t that app store likewise be compelled to be open to competing app distributors? Conversely, it may be easy for users of very large app stores to multi-home or switch seamlessly to competing stores. In either case, raw user data paints a distorted picture of the market’s realities.
As it stands, the bill’s thresholds appear arbitrary and pre-committed to “disciplining” just two companies: Google and Apple. In principle, good laws should be abstract and general and not intentionally crafted to apply only to a few select actors. In OAMA’s case, the law’s specific thresholds are also factually misguided, as purely quantitative criteria are not a good proxy for the sort of market power the bill purportedly seeks to curtail.
2. Why Does the Bill not Apply to all App Stores?
Rather than applying to app stores across the board, OAMA targets only those associated with mobile devices and “general purpose computing devices.” It’s not clear why.
For example, why doesn’t it cover app stores on gaming platforms, such as Microsoft’s Xbox or Sony’s PlayStation?
Currently, a PlayStation user can only buy digital games through the PlayStation Store, where Sony reportedly takes a 30% cut of all sales—although its pricing schedule is less transparent than that of mobile rivals such as Apple or Google.
Clearly, this bothers some developers. Much like Epic Games CEO Tim Sweeney’s ongoing crusade against the Apple App Store, indie-game publisher Iain Garner of Neon Doctrine recently took to Twitter to complain about Sony’s restrictive practices. According to Garner, “Platform X” (clearly PlayStation) charges developers up to $25,000 and 30% of subsequent earnings to give games a modicum of visibility on the platform, in addition to requiring them to jump through such hoops as making a PlayStation-specific trailer and writing a blog post. Garner further alleges that Sony severely circumscribes developers’ ability to offer discounts, “meaning that Platform X owners will always get the worst deal!” (see also here).
Microsoft’s Xbox Game Store similarly takes a 30% cut of sales. Presumably, Microsoft and Sony both have the same type of gatekeeper power in the gaming-console market that Apple and Google are said to have on their respective platforms, leading to precisely those issues that OAMA ostensibly purports to combat. Namely, that consumers are not allowed to choose alternative app stores through which to buy games on their respective consoles, and developers must acquiesce to Sony’s and Microsoft’s terms if they want their games to reach those players.
More broadly, dozens of online platforms also charge commissions on the sales made by their creators. To cite but a few: OnlyFans takes a 20% cut of sales; Facebook gets 30% of the revenue that creators earn from their followers; YouTube takes 45% of ad revenue generated by users; and Twitch reportedly rakes in 50% of subscription fees.
This is not to say that all these services are monopolies that should be regulated. To the contrary, it seems like fees in the 20-30% range are common even in highly competitive environments. Rather, it is merely to observe that there are dozens of online platforms that demand a percentage of the revenue that creators generate and that prevent those creators from bypassing the platform. As well they should, after all, because creating and improving a platform is not free.
It is nonetheless difficult to see why legislation regulating online marketplaces should focus solely on two mobile app stores. Ultimately, the inability of OAMA’s sponsors to properly account for this carveout diminishes the law’s credibility.
3. Should Picking Among Legitimate Business Models Be up to Lawmakers or Consumers?
“Open” and “closed” platforms posit two different business models, each with its own advantages and disadvantages. Some consumers may prefer more open platforms because they grant them more flexibility to customize their mobile devices and operating systems. But there are also compelling reasons to prefer closed systems. As Sam Bowman observed, narrowing choice through a more curated system frees users from having to research every possible option every time they buy or use some product. Instead, they can defer to the platform’s expertise in determining whether an app or app store is trustworthy or whether it contains, say, objectionable content.
Currently, users can choose to opt for Apple’s semi-closed “walled garden” iOS or Google’s relatively more open Android OS (which OAMA wants to pry open even further). Ironically, under the pretext of giving users more “choice,” OAMA would take away the possibility of choice where it matters the most—i.e., at the platform level. As Mikolaj Barczentewicz has written:
A sideloading mandate aims to give users more choice. It can only achieve this, however, by taking away the option of choosing a device with a “walled garden” approach to privacy and security (such as is taken by Apple with iOS).
This obviates the nuances between the two and pushes Android and iOS to converge around a single model. But if consumers unequivocally preferred open platforms, Apple would have no customers, because everyone would already be on Android.
Contrary to regulators’ simplistic assumptions, “open” and “closed” are not synonyms for “good” and “bad.” Instead, as Boston University’s Andrei Hagiu has shown, there are fundamental welfare tradeoffs at play between these two perfectly valid business models that belie simplistic characterizations of one being inherently superior to the other.
It is debatable whether courts, regulators, or legislators are well-situated to resolve these complex tradeoffs by substituting businesses’ product-design decisions and consumers’ revealed preferences with their own. After all, if regulators had such perfect information, we wouldn’t need markets or competition in the first place.
4. Does OAMA Account for the Security Risks of Sideloading?
Both Apple and Google do this, albeit to varying degrees. For instance, Android already allows sideloading and third-party in-app payment systems to some extent, while Apple runs a tighter ship. However, studies have shown that it is precisely the iOS “walled garden” model which gives it an edge over Android in terms of privacy and security. Even vocal Apple critic Tim Sweeney recently acknowledged that increased safety and privacy were competitive advantages for Apple.
The problem is that far-reaching sideloading mandates—such as the ones contemplated under OAMA—are fundamentally at odds with current privacy and security capabilities (see here and here).
OAMA’s defenders might argue that the law does allow covered platforms to raise safety and security defenses, thus making the tradeoffs between openness and security unnecessary. But the bill places such stringent conditions on those defenses that platform operators will almost certainly be deterred from risking running afoul of the law’s terms. To invoke the safety and security defenses, covered companies must demonstrate that provisions are applied on a “demonstrably consistent basis”; are “narrowly tailored and could not be achieved through less discriminatory means”; and are not used as a “pretext to exclude or impose unnecessary or discriminatory terms.”
Implementing these stringent requirements will drag enforcers into a micromanagement quagmire. There are thousands of potential spyware, malware, rootkit, backdoor, and phishing (to name just a few) software-security issues—all of which pose distinct threats to an operating system. The Federal Trade Commission (FTC) and the federal courts will almost certainly struggle to control the “consistency” requirement across such varied types.
Likewise, OAMA’s reference to “least discriminatory means” suggests there is only one valid answer to any given security-access tradeoff. Further, depending on one’s preferred balance between security and “openness,” a claimed security risk may or may not be “pretextual,” and thus may or may not be legal.
Finally, the bill text appears to preclude the possibility of denying access to a third-party app or app store for reasons other than safety and privacy. This would undermine Apple’s and Google’s two-tiered quality-control systems, which also control for “objectionable” content such as (child) pornography and social engineering.
5. How Will OAMA Safeguard the Rights of Covered Platforms?
OAMA is also deeply flawed from a procedural standpoint. Most importantly, there is no meaningful way to contest the law’s designation as “covered company,” or the harms associated with it.
Once a company is “covered,” it is presumed to hold gatekeeper power, with all the associated risks for competition, innovation, and consumer choice. Remarkably, this presumption does not admit any qualitative or quantitative evidence to the contrary. The only thing a covered company can do to rebut the designation is to demonstrate that it, in fact, has fewer than 50 million users.
By preventing companies from showing that they do not hold the kind of gatekeeper power that harms competition, decreases innovation, raises prices, and reduces choice (the bill’s stated objectives), OAMA severely tilts the playing field in the FTC’s favor. Even the EU’s enforcer-friendly DMA incorporated a last-minute amendment allowing firms to dispute their status as “gatekeepers.” While this defense is not perfect (companies cannot rely on the same qualitative evidence that the European Commission can use against them), at least gatekeeper status can be contested under the DMA.
6. Should Legislation Protect Competitors at the Expense of Consumers?
Like most of the new wave of regulatory initiatives against Big Tech (but unlike antitrust law), OAMA is explicitly designed to help competitors, with consumers footing the bill.
For example, OAMA prohibits covered companies from using or combining nonpublic data obtained from third-party apps or app stores operating on their platforms in competition with those third parties. While this may have the short-term effect of redistributing rents away from these platforms and toward competitors, it risks harming consumers and third-party developers in the long run.
Platforms’ ability to integrate such data is part of what allows them to bring better and improved products and services to consumers in the first place. OAMA tacitly admits this by recognizing that the use of nonpublic data grants covered companies a competitive advantage. In other words, it allows them to deliver a product that is better than competitors’.
Prohibiting self-preferencing raises similar concerns. Why wouldn’t a company that has invested billions in developing a successful platform and ecosystem not give preference to its own products to recoup some of that investment? After all, the possibility of exercising some control over downstream and adjacent products is what might have driven the platform’s development in the first place. In other words, self-preferencing may be a symptom of competition, and not the absence thereof. Third-party companies also would have weaker incentives to develop their own platforms if they can free-ride on the investments of others. And platforms that favor their own downstream products might simply be better positioned to guarantee their quality and reliability (see here and here).
In all of these cases, OAMA’s myopic focus on improving the lot of competitors for easy political points will upend the mobile ecosystems from which both users and developers derive significant benefit.
7. Shouldn’t the EU Bear the Risks of Bad Tech Regulation?
Finally, U.S. lawmakers should ask themselves whether the European Union, which has no tech leaders of its own, is really a model to emulate. Today, after all, marks the day the long-awaited Digital Markets Act— the EU’s response to perceived contestability and fairness problems in the digital economy—officially takes effect. In anticipation of the law entering into force, I summarized some of the outstanding issues that will define implementation moving forward in this recent tweet thread.
We have been critical of the DMA here at Truth on the Market on several factual, legal, economic, and procedural grounds. The law’s problems range from it essentially being a tool to redistribute rents away from platforms and to third-parties, despite it being unclear why the latter group is inherently more deserving (Pablo Ibañez Colomo has raised a similar point); to its opacity and lack of clarity, a process that appears tilted in the Commission’s favor; to the awkward way it interacts with EU competition law, ignoring the welfare tradeoffs between the models it seeks to impose and perfectly valid alternatives (see here and here); to its flawed assumptions (see, e.g., here on contestability under the DMA); to the dubious legal and economic value of the theory of harm known as “self-preferencing”; to the very real possibility of unintended consequences (e.g., in relation to security and interoperability mandates).
In other words, that the United States lags the EU in seeking to regulate this area might not be a bad thing, after all. Despite the EU’s insistence on being a trailblazing agenda-setter at all costs, the wiser thing in tech regulation might be to remain at a safe distance. This is particularly true when one considers the potentially large costs of legislative missteps and the difficulty of recalibrating once a course has been set.
U.S. lawmakers should take advantage of this dynamic and learn from some of the Old Continent’s mistakes. If they play their cards right and take the time to read the writing on the wall, they might just succeed in averting antitrust’s uncertain future.
[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.]
I wake up grudgingly to the loud ring of my phone’s preset alarm sound (I swear I gave third-party alarms a fair shot). I slide my feet into the bedroom slippers and mechanically chaperone my body to the coffee machine in the living room.
“Great,” I think to myself, “Out of capsules, again.” Still in my bathrobe, I make a grumpy face and post an interoperable story on social media. “Don’t even talk to me before I’ve had my morning coffee! #HateMondays.”
I flick my thumb and get a warm, fuzzy feeling of satisfaction as I consent to a series of privacy-related pop-ups on the official incumbent’s online marketplace website (I place immense importance on my privacy) before getting ready to sit through the usual fairness presentations.
I reach for a chair, grab a notepad and crack my neck sideways as I try to focus my (still) groggy brain on the kaleidoscope of thumbnails before me. “Time to do my part,” I sigh. My eyes—trained by years of practice—dart from left to right and from right to left, carefully scrutinizing each coffee capsule on offer for an equal number of seconds (ever since the self-preferencing ban, all available products within a search category are displayed simultaneously on the screen to avoid any explicit or tacit bias that could be interpreted as giving the online marketplace incumbent’s own products an unfair advantage over competitors).
After 13 brands and at least as many flavors, I select the platforms own brand, “Basic” (it matches my coffee machine and I’ve found through trial and error that they’re the least prone to malfunctioning), and then answer a series of questions to make sure I have actually given competitors’ products fair consideration. Platforms—including the online marketplace incumbent—use sneaky and illegal ways to leverage the attention market and give a leg up to their own products, such as offering lower prices or better delivery conditions. But with enough practice you learn to see through it. Not on my watch!
Exhausted but pleased with myself, I put the notepad down and my feet up on the coffee table. Victory.
I curse as I stub my toe on the office chair. Still with a pen in my right hand, ink dripping, I whip out my phone and pick Whatsapp to answer (I’ve never felt the need to use any of the other, newer apps—since everything is interoperable now). “No, of course I didn’t forget to do the groceries,” I tell my girlfriend with a tinge of deliberate frustration. But, of course, she knows that I know that she knows that I did.
I grab my notepad and almost fall over as I try to slide into my jeans and produce a grocery itinerary (like a grocery list, but longer) at the same time. “Trader Pete’s for fruits and vegetables, Gracey’s for canned goods, HTS for HTS frozen pizza,” I scribble, nerves tense.
(Not every company has gone the way of the online marketplace incumbent and some have decided they would be better off if they just sold their own products. After all, you can’t be fined for self-preferencing if you’re only selling your own stuff. Of course, the strategy is only viable in those industries in which vertical integration hasn’t been banned).
I finish getting dressed and dash down the stairs. I instinctively glance at my phone before getting in the car and immediately regret it, as I dismiss a bunch of notifications about malware infections. “Another app store that I’m striking from the list,” I think to myself as I turn on the ignition.
My girlfriend has already ordered a soda as I sit down at the table. “Sorry I’m late,” I mumble. We talk about her day and I tell her about the capsules I ordered (she nods approvingly) before we finally decide to order. I wave to the waiter and ask about the specials. A lanky young man no older than 19 fumbles through his (empty) pad and lists a couple of dishes.
He blurts out “homemade” and immediately turns pale. I look at my girlfriend nervously, and she stares back blankly—dazed. “Do you mean to say that it was made here, in this restaurant?” I ask in disbelief, dizzy. He comes up with some sorry excuse but I’m having none of it. I make my way to the toilet—sickened—and pull out my phone with a shaky hand. I have the Federal Trade Commission on speed-dial. I call and select number one: self-preferencing. They immediately put me through with someone. Sweating, I explain that the Italian restaurant on the corner between the 5th and Madison avenues just recommended me a special dish made by them—and barely even mentioned any of the specialties offered by the kebab joint next door. I assure the voice at the other end of the line that I had nothing to do it, and that I have not ordered—let alone tasted—the dish.
I rush out of the bathroom with blinders on and pull my girlfriend by the elbow. Her coat is on and she’s clearly impatient to get the hell out of there. As I reach for my jacket by the exit, an older man with a moustache approaches us with a bowed head and literally begs us to take a bottle of wine (no doubt a bribe for my silence). He assures us that the wine is not “della casa” (made by the restaurant), and that it’s, in fact, a French wine made by a competitor. I’m not having any of it: I bid him good day and slam the door behind us.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
If S.2992—the American Innovation and Choice Online Act or AICOA—were to become law, it would be, at the very least, an incomplete law. By design—and not for good reason, but for political expediency—AICOA is riddled with intentional uncertainty. In theory, the law’s glaring definitional deficiencies are meant to be rectified by “expert” agencies (i.e., the DOJ and FTC) after passage. But in actuality, no such certainty would ever emerge, and the law would stand as a testament to the crass political machinations and absence of rigor that undergird it. Among many other troubling outcomes, this is what the future under AICOA would hold.
Guidelines Cannot Substitute for the Law’s Lack of Legal Certainty
Two months ago, the American Bar Association’s (ABA) Antitrust Section published a searing critique of AICOA in which it denounced the bill for being poorly written, vague, and departing from established antitrust-law principles. As Lazar Radic and I discussed in a previous post, what made the ABA’s letter to Congress so eye-opening was that it was penned by a typically staid group with a reputation for independence, professionalism, and ideational heterogeneity.
One of the main issues the ABA flagged in its letter is that the introduction of vague new concepts—like “materially harm competition,” which does not exist anywhere in current antitrust law—into the antitrust mainstream will risk substantial legal uncertainty and produce swathes of unintended consequences.
According to some, however, the bill’s inherent uncertainty is a feature, not a bug. It leaves enough space for specialist agencies to define the precise meaning of key terms without unduly narrowing the scope of the bill ex ante.
In particular, supporters of the bill have pointed to the prospect of agency guidelines under the law to rescue it from the starkest of the fundamental issues identified by the ABA. Section 4 of AICOA requires the DOJ and FTC to issue “agency enforcement guidelines” no later than 270 days after the date of enactment:
outlining policies and practices relating to conduct that may materially harm competition under section 3(a), agency interpretations of the affirmative defenses under section 3(b), and policies for determining the appropriate amount of a civil penalty to be sought under section 3(c).
In pointing to the prospect of guidelines, however, supporters are inadvertently admitting defeat—and proving the ABA’s point: AICOA is not ready for prime time.
This thinking is misguided for at least three reasons:
Guidelines are not rules
As section 4(d) of AICOA recognizes, guidelines are emphatically nonbinding:
The joint guidelines issued under this section do not … operate to bind the Commission, Department of Justice, or any person, State, or locality to the approach recommended in the guidelines.
As such, the value of guidelines in dispelling legal uncertainty is modest, at best.
This is even more so in today’s highly politicized atmosphere, where guidelines can be withdrawn at the tip of the ballot (we’ve just seen the FTC rescind the Vertical Merger Guidelines it put in place less than a year ago). Given how politicized the issuing agencies themselves have become, it’s a virtual certainty that the guidelines produced in response to AICOA would be steeped in partisan politics and immediately changed with a change in administration, thus providing no more lasting legal certainty than speculation by a member of Congress.
Guidelines are not the appropriate tool to define novel concepts
Regardless of this political reality, however, the mixture of vagueness and novelty inherent in the key concepts that underpin the infringements and affirmative defenses under AICOA—such as “fairness,” “preferencing,” “materiality”, or the “intrinsic” value of a product—undermine the usefulness (and legitimacy) of guidelines.
Indeed, while laws are sometimes purposefully vague—operating as standards rather than prescriptive rules—to allow for more flexibility, the concepts introduced by AICOA don’t even offer any cognizable standards suitable for fine-tuning.
The operative terms of AICOA don’t have definitive meanings under antitrust law, either because they are wholly foreign to accepted antitrust law (as in the case of “self-preferencing”) or because the courts have never agreed on an accepted definition (as in the case of “fairness”). Nor are they technical standards, which are better left to specialized agencies rather than to legislators to define, such as in the case of, e.g., pollution (by contrast: what is the technical standard for “fairness”?).
Indeed, as Elyse Dorsey has noted, the only certainty that would emerge from this state of affairs is the certainty of pervasive rent-seeking by non-altruistic players seeking to define the rules in their favor.
As we’ve pointed out elsewhere, the purpose of guidelines is to reflect the state of the art in a certain area of antitrust law and not to push the accepted scope of knowledge and practice in a new direction. This not only overreaches the FTC’s and DOJ’s powers, but also risks galvanizing opposition from the courts, thereby undermining the utility of adopting guidelines in the first place.
Guidelines can’t fix a fundamentally flawed law
Expecting guidelines to provide sensible, administrable content for the bill sets the bar overly high for guidelines, and unduly low for AICOA.
The alleged harms at the heart of AICOA are foreign to antitrust law, and even to the economic underpinnings of competition policy more broadly. Indeed, as Sean Sullivan has pointed out, the law doesn’t even purport to define “harms,” but only serves to make specific conduct illegal:
Even if the conduct has no effect, it’s made illegal, unless an affirmative defense is raised. And the affirmative defense requires that it doesn’t ‘harm competition.’ But ‘harm competition’ is undefined…. You have to prove that harm doesn’t result, but it’s not really ever made clear what the harm is in the first place.”
“Self-preferencing” is not a competitive defect, and simply declaring it to be so does not make it one. As I’ve noted elsewhere:
The notion that platform entry into competition with edge providers is harmful to innovation is entirely speculative. Moreover, it is flatly contrary to a range of studies showing that the opposite is likely true…. The theory of vertical discrimination harm is at odds not only with this platform-specific empirical evidence, it is also contrary to the long-standing evidence on the welfare effects of vertical restraints more broadly …
… [M]andating openness is not without costs, most importantly in terms of the effective operation of the platform and its own incentives for innovation.
Asking agencies with an expertise in competition policy to enact economically sensible guidelines to direct enforcement against such conduct is a fool’s errand. It is a recipe for purely political legislation adopted by competition agencies that does nothing to further their competition missions.
AICOA’s Catch-22 Is Its Own Doing, and Will Be Its Downfall
AICOA’s Catch-22 is that, by making the law so vague that it needs enforcement guidelines to flesh it out, AICOA renders both itself and those same guidelines irrelevant and misses the point of both legal instruments.
Ultimately, guidelines cannot resolve the fundamental rule-of-law issues raised by the bill and highlighted by the ABA in its letter. To the contrary, they confirm the ABA’s concerns that AICOA is a poorly written and indeterminate bill. Further, the contentious elements of the bill that need clarification are inherently legislative ones that—paradoxically—shouldn’t be left to competition-agency guidelines to elucidate.
The upshot is that any future under AICOA will be one marked by endless uncertainty and the extreme politicization of both competition policy and the agencies that enforce it.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
Much ink has been spilled regarding the potential harm to the economy and to the rule of law that could stem from enactment of the primary federal antitrust legislative proposal, the American Innovation and Choice Online Act (AICOA) (see here). AICOA proponents, of course, would beg to differ, emphasizing the purported procompetitive benefits of limiting the business freedom of “Big Tech monopolists.”
There is, however, one inescapable reality—as night follows day, passage of AICOA would usher in an extended period of costly litigation over the meaning of a host of AICOA terms. As we will see, this would generate business uncertainty and dampen innovative conduct that might be covered by new AICOA statutory terms.
The history of antitrust illustrates the difficulties inherent in clarifying the meaning of novel federal statutory language. It was not until 21 years after passage of the Sherman Antitrust Act that the Supreme Court held that Section 1 of the act’s prohibition on contracts, combinations, and conspiracies “in restraint of trade” only covered unreasonable restraints of trade (see Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911)). Furthermore, courts took decades to clarify that certain types of restraints (for example, hardcore price fixing and horizontal market division) were inherently unreasonable and thus per se illegal, while others would be evaluated on a case-by-case basis under a “rule of reason.”
In addition, even far more specific terms related to exclusive dealing, tying, and price discrimination found within the Clayton Antitrust Act gave rise to uncertainty over the scope of their application. This uncertainty had to be sorted out through judicial case-law tests developed over many decades.
Even today, there is no simple, easily applicable test to determine whether conduct in the abstract constitutes illegal monopolization under Section 2 of the Sherman Act. Rather, whether Section 2 has been violated in any particular instance depends upon the application of economic analysis and certain case-law principles to matter-specific facts.
As is the case with current antitrust law, the precise meaning and scope of AICOA’s terms will have to be fleshed out over many years. Scholarly critiques of AICOA’s language underscore the seriousness of this problem.
In its April 2022 public comment on AICOA, the American Bar Association (ABA) Antitrust Law Section explains in some detail the significant ambiguities inherent in specific AICOA language that the courts will have to address. These include “ambiguous terminology … regarding fairness, preferencing, materiality, and harm to competition on covered platforms”; and “specific language establishing affirmative defenses [that] creates significant uncertainty”. The ABA comment further stresses that AICOA’s failure to include harm to the competitive process as a prerequisite for a statutory violation departs from a broad-based consensus understanding within the antitrust community and could have the unintended consequence of disincentivizing efficient conduct. This departure would, of course, create additional interpretive difficulties for federal judges, further complicating the task of developing coherent case-law principles for the new statute.
In a somewhat similar vein, Stanford Law School Professor (and former acting assistant attorney general for antitrust during the Clinton administration) Douglas Melamed complains that:
[AICOA] does not include the normal antitrust language (e.g., “competition in the market as a whole,” “market power”) that gives meaning to the idea of harm to competition, nor does it say that the imprecise language it does use is to be construed as that language is construed by the antitrust laws. … The bill could be very harmful if it is construed to require, not increased market power, but simply harm to rivals.
In sum, ambiguities inherent in AICOA’s new terminology will generate substantial uncertainty among affected businesses. This uncertainty will play out in the courts over a period of years. Moreover, the likelihood that judicial statutory constructions of AICOA language will support “efficiency-promoting” interpretations of behavior is diminished by the fact that AICOA’s structural scheme (which focuses on harm to rivals) does not harmonize with traditional antitrust concerns about promoting a vibrant competitive process.
Knowing this, the large high-tech firms covered by AICOA will become risk averse and less likely to innovate. (For example, they will be reluctant to improve algorithms in a manner that would increase efficiency and benefit consumers, but that might be seen as disadvantaging rivals.) As such, American innovation will slow, and consumers will suffer. (See here for an estimate of the enormous consumer-welfare gains generated by high tech platforms—gains of a type that AICOA’s enactment may be expected to jeopardize.) It is to be hoped that Congress will take note and consign AICOA to the rubbish heap of disastrous legislative policy proposals.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
Earlier this month, Professors Fiona Scott Morton, Steve Salop, and David Dinielli penned a letter expressing their “strong support” for the proposed American Innovation and Choice Online Act (AICOA). In the letter, the professors address criticisms of AICOA and urge its approval, despite possible imperfections.
“Perhaps this bill could be made better if we lived in a perfect world,” the professors write, “[b]ut we believe the perfect should not be the enemy of the good, especially when change is so urgently needed.”
The problem is that the professors and other supporters of AICOA have shown neither that “change is so urgently needed” nor that the proposed law is, in fact, “good.”
Is Change ‘Urgently Needed’?
With respect to the purported urgency that warrants passage of a concededly imperfect bill, the letter authors assert two points. First, they claim that AICOA’s targets—Google, Apple, Facebook, Amazon, and Microsoft (collectively, GAFAM)—“serve as the essential gatekeepers of economic, social, and political activity on the internet.” It is thus appropriate, they say, to amend the antitrust laws to do something they have never before done: saddle a handful of identified firms with special regulatory duties.
But is this oft-repeated claim about “gatekeeper” status true? The label conjures up the oldTerminal Railroad case, where a group of firms controlled the only bridges over the Mississippi River at St. Louis. Freighters had no choice but to utilize their services. Do the GAFAM firms really play a similar role with respect to “economic, social, and political activity on the internet”? Hardly.
With respect to economic activity, Amazon may be a huge player, but it still accounts foronly 39.5% of U.S. ecommerce sales—and far less of retail sales overall. Consumers have gobs of other ecommerce options, and so do third-party merchants, which may sell their wares using Shopify, Ebay, Walmart, Etsy, numerous other ecommerce platforms, or their own websites.
For social activity on the internet, consumers need not rely on Facebook and Instagram. They can connect with others via Snapchat, Reddit, Pinterest, TikTok, Twitter, and scores of other sites. To be sure, all these services have different niches, but the letter authors’ claim that the GAFAM firms are “essential gatekeepers” of “social… activity on the internet” is spurious.
The second argument the letter authors assert in support of their claim of urgency is that “[t]he decline of antitrust enforcement in the U.S. is well known, pervasive, and has left our jurisprudence unable to protect and maintain competitive markets.” In other words, contemporary antitrust standards are anemic and have led to a lack of market competition in the United States.
The evidence for this claim, which is increasingly parroted in the press and among the punditry, is weak. Proponents primarily point to studies showing:
increasing industrial concentration;
higher markups on goods and services since 1980;
a declining share of surplus going to labor, which could indicate monopsony power in labor markets; and
a reduction in startup activity, suggesting diminished innovation.
Examined closely, however, those studies fail to establish a domestic market power crisis.
Industrial concentration has little to do with market power in actual markets. Indeed, research suggests that, while industries may be consolidating at the national level, competition at the market (local) level is increasing, as more efficient national firms open more competitive outlets in local markets. As Geoff Manne sums up this research:
Most recently, several working papers looking at the data on concentration in detail and attempting to identify the likely cause for the observed data, show precisely the opposite relationship. The reason for increased concentration appears to be technological, not anticompetitive. And, as might be expected from that cause, its effects are beneficial. Indeed, the story is both intuitive and positive.
What’s more, while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.
With respect to the evidence on markups, the claim of a significant increase in the price-cost margin depends crucially on the measure of cost. The studies suggesting an increase in margins since 1980 use the “cost of goods sold” (COGS) metric, which excludes a firm’s management and marketing costs—both of which have become an increasingly significant portion of firms’ costs. Measuring costs using the “operating expenses” (OPEX) metric, which includes management and marketing costs,reveals that public-company markups increased only modestly since the 1980s and that the increase was within historical variation. (It is also likely that increased markups since 1980 reflect firms’ more extensive use of technology and their greater regulatory burdens, both of which raise fixed costs and require higher markups over marginal cost.)
As for the declining labor share, that dynamic is occurring globally. Indeed, the decline in the labor share in the United States has been less severe than in Japan, Canada, Italy, France, Germany, China, Mexico, and Poland, suggesting that anemic U.S. antitrust enforcement is not to blame. (A reduction in the relative productivity of labor is a more likely culprit.)
Finally, the claim of reduced startup activity is unfounded. In itsreport on competition in digital markets, the U.S. House Judiciary Committee asserted that, since the advent of the major digital platforms:
“[t]he number of new technology firms in the digital economy has declined”;
“the entrepreneurship rate—the share of startups and young firms in the [high technology] industry as a whole—has also fallen significantly”; and
“[u]nsurprisingly, there has also been a sharp reduction in early-stage funding for technology startups.” (pp. 46-47.)
Those claims, however, are based on cherry-picked evidence.
In support of the first two, the Judiciary Committee report cited astudy based on data ending in 2011. As Benedict Evans hasobserved, “standard industry data shows that startup investment rounds have actually risen at least 4x since then.”
In support of the third claim, the report cited statistics from anarticle noting that the number and aggregate size of the very smallest venture capital deals—those under $1 million—fell between 2014 and 2018 (after growing substantially from 2008 to 2014). The Judiciary Committee report failed to note, however, the cited article’s observation that small venture deals ($1 million to $5 million) had not dropped and that larger venture deals (greater than $5 million) had grown substantially during the same time period. Nor did the report acknowledge that venture-capital funding hascontinued to increase since 2018.
Finally, there is also reason to think that AICOA’s passage would harm, not help, the startup environment:
AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.
Despite the letter authors’ claims, neither a paucity of avenues for “economic, social, and political activity on the internet” nor the general state of market competition in the United States establishes an “urgent need” to re-write the antitrust laws to saddle a small group of firms with unprecedented legal obligations.
Is the Vagueness of AICOA’s Primary Legal Standard a Feature?
AICOA bars covered platforms from engaging in three broad classes of conduct (self-preferencing, discrimination among business users, and limiting business users’ ability to compete) where the behavior at issue would “materially harm competition.” It then forbids several specific business practices, but allows the defendant to avoid liability by proving that their use of the practice would not cause a “material harm to competition.”
Critics have argued that “material harm to competition”—a standard that is not used elsewhere in the antitrust laws—is too indeterminate to provide business planners and adjudicators with adequate guidance. The authors of the pro-AICOA letter, however, maintain that this “different language is a feature, not a bug.”
That is so, the letter authors say, because the language effectively signals to courts and policymakers that antitrust should prohibit more conduct. They explain:
To clarify to courts and policymakers that Congress wants something different (and stronger), new terminology is required. The bill’s language would open up a new space and move beyond the standards imposed by the Sherman Act, which has not effectively policed digital platforms.
Putting aside the weakness of the letter authors’ premise (i.e., that Sherman Act standards have proven ineffective), the legislative strategy they advocate—obliquely signal that you want “change” without saying what it should consist of—is irresponsible and risky.
The letter authors assert two reasons Congress should not worry about enacting a liability standard that has no settled meaning. One is that:
[t]he same judges who are called upon to render decisions under the existing, insufficient, antitrust regime, will also be called upon to render decisions under the new law. They will be the same people with the same worldview.
It is thus unlikely that “outcomes under the new law would veer drastically away from past understandings of core concepts….”
But this claim undermines the argument that a new standard is needed to get the courts to do “something different” and “move beyond the standards imposed by the Sherman Act.” If we don’t need to worry about an adverse outcome from a novel, ill-defined standard because courts are just going to continue applying the standard they’re familiar with, then what’s the point of changing the standard?
A second reason not to worry about the lack of clarity on AICOA’s key liability standard, the letter authors say, is that federal enforcers will define it:
The new law would mandate that the [Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice], the two expert agencies in the area of competition, together create guidelines to help courts interpret the law. Any uncertainty about the meaning of words like ‘competition’ will be resolved in those guidelines and over time with the development of caselaw.
This is no doubt music to the ears of members of Congress, who love to get credit for “doing something” legislatively, while leaving the details to an agency so that they can avoid accountability if things turn out poorly. Indeed, the letter authors explicitly play upon legislators’ unwholesome desire for credit-sans-accountability. They emphasize that “[t]he agencies must [create and] update the guidelines periodically. Congress doesn’t have to do much of anything very specific other than approve budgets; it certainly has no obligation to enact any new laws, let alone amend them.”
AICOA does not, however, confer rulemaking authority on the agencies; it merely directs them to create and periodically update “agency enforcement guidelines” and “agency interpretations” of certain affirmative defenses. Those guidelines and interpretations would not bind courts, which would be free to interpret AICOA’s new standard differently. The letter authors presume that courts would defer to the agencies’ interpretation of the vague standard, and they probably would. But that raises other problems.
For one thing, it reduces certainty, which is likely to chill innovation. Giving the enforcement agencies de facto power to determine and redetermine what behaviors “would materially harm competition” means that the rules are never settled. Administrations differ markedly in their views about what the antitrust laws should forbid, so business planners could never be certain that a product feature or revenue model that is legal today will not be deemed to “materially harm competition” by a future administration with greater solicitude for small rivals and upstarts. Such uncertainty will hinder investment in novel products, services, and business models.
Consider, for example, Google’s investment in the Android mobile operating system. Google makes money from Android—which it licenses to device manufacturers for free—by ensuring that Google’s revenue-generating services (e.g., its search engine and browser) are strongly preferenced on Android products. One administration might believe that this is a procompetitive arrangement, as itcreates a different revenue model for mobile operating systems (as opposed to Apple’s generation of revenue from hardware sales), resulting in both increased choice and lower prices for consumers. A subsequent administration might conclude that the arrangement materially harms competition by making it harder for rival search engines and web browsers to gain market share. It would make scant sense for a covered platform to make an investment like Google did with Android if its underlying business model could be upended by a new administration with de facto power to rewrite the law.
A second problem with having the enforcement agencies determine and redetermine what covered platforms may do is that it effectively transforms the agencies from law enforcers into sectoral regulators. Indeed, the letter authors agree that “the ability of expert agencies to incorporate additional protections in the guidelines” means that “the bill is not a pure antitrust law but also safeguards other benefits to consumers.” They tout that “the complementarity between consumer protection and competition can be addressed in the guidelines.”
Of course, to the extent that the enforcement guidelines address concerns besides competition, they will be less useful for interpreting AICOA’s “material harm to competition” standard; they might deem a practice suspect on non-competition grounds. Moreover, it is questionable whether creating a sectoral regulator for five widely diverse firms is a good idea. The history of sectoral regulation is littered with examples of agency capture, rent-seeking, and other public-choice concerns. At a minimum, Congress should carefully examine the potential downsides of sectoral regulation, install protections to mitigate those downsides, and explicitly establish the sectoral regulator.
Will AICOA Break Popular Products and Services?
Many popular offerings by the platforms covered by AICOA involve self-preferencing, discrimination among business users, or one of the other behaviors the bill presumptively bans.Pre-installation of iPhone apps and services like Siri, for example, involves self-preferencing or discrimination among business users of Apple’s iOS platform. But iPhone consumers value having a mobile device that offers extensive services right out of the box. Consumers love that Google’s search result for an establishment offers directions to the place, which involves the preferencing of Google Maps. And consumers positively adore Amazon Prime, which can provide free expedited delivery because Amazon conditions Prime designation on a third-party seller’s use of Amazon’s efficient, reliable “Fulfillment by Amazon” service—somethingAmazon could not do under AICOA.
The authors of the pro-AICOA letter insist that the law will not ban attractive product features like these. AICOA, they say:
provides a powerful defense that forecloses any thoughtful concern of this sort: conduct otherwise banned under the bill is permitted if it would ‘maintain or substantially enhance the core functionality of the covered platform.’
But the authors’ confidence that this affirmative defense will adequately protect popular offerings is misplaced. The defense is narrow and difficult to mount.
First, it immunizes only those behaviors that maintain or substantially enhance the “core” functionality of the covered platform. Courts would rightly interpret AICOA to give effect to that otherwise unnecessary word, which dictionariesdefine as “the central or most important part of something.” Accordingly, any self-preferencing, discrimination, or other presumptively illicit behavior that enhances a covered platform’s service but not its “central or most important” functions is not even a candidate for the defense.
Even if a covered platform could establish that a challenged practice would maintain or substantially enhance the platform’s core functionality, it would also have to prove that the conduct was “narrowly tailored” and “reasonably necessary” to achieve the desired end, and, for many behaviors, the “le[ast] discriminatory means” of doing so. That is a remarkably heavy burden, and it beggars belief to suppose that business planners considering novel offerings involving self-preferencing, discrimination, or some other presumptively illicit conduct would feel confident that they could make the required showing. It is likely, then, that AICOA would break existing products and services and discourage future innovation.
Of course, Congress could mitigate this concern by specifying that AICOA does not preclude certain things, such as pre-installed apps or consumer-friendly search results. But the legislation would then lose the support of the many interest groups who want the law to preclude various popular offerings that its text would now forbid. Unlike consumers, who are widely dispersed and difficult to organize, the groups and competitors that would benefit from things like stripped-down smartphones, map-free search results, and Prime-less Amazon are effective lobbyists.
Should the US Follow Europe?
Having responded to criticisms of AICOA, the authors of the pro-AICOA letter go on offense. They assert that enactment of the bill is needed to ensure that the United States doesn’t lose ground to Europe, both in regulatory leadership and in innovation. Observing that the European Union’s Digital Markets Act (DMA) has just become law, the authors write that:
[w]ithout [AICOA], the role of protecting competition and innovation in the digital sector outside China will be left primarily to the European Union, abrogating U.S. leadership in this sector.
Moreover, if Europe implements its DMA and the United States does not adopt AICOA, the authors claim:
the center of gravity for innovation and entrepreneurship [could] shift from the U.S. to Europe, where the DMA would offer greater protections to start ups and app developers, and even makers and artisans, against exclusionary conduct by the gatekeeper platforms.
Implicit in the argument that AICOA is needed to maintain America’s regulatory leadership is the assumption that to lead in regulatory policy is to have the most restrictive rules. The most restrictive regulator will necessarily be the “leader” in the sense that it will be the one with the most control over regulated firms. But leading in the sense of optimizing outcomes and thereby serving as a model for other jurisdictions entails crafting the best policies—those that minimize the aggregate social losses from wrongly permitting bad behavior, wrongly condemning good behavior, and determining whether conduct is allowed or forbidden (i.e., those that “minimize the sum of error and decision costs”). Rarely is the most restrictive regulatory regime the one that optimizes outcomes, and as I have elsewhereexplained, the rules set forth in the DMA hardly seem calibrated to do so.
As for “innovation and entrepreneurship” in the technological arena, it would be a seismic shift indeed if the center of gravity were to migrate to Europe, which is currently home tozero of the top 20 global tech companies. (The United States hosts 12; China, eight.)
It seems implausible, though, that imposing a bunch of restrictions on large tech companies that have significant resources for innovation and arescrambling to enter each other’s markets will enhance, rather than retard, innovation. The self-preferencing bans in AICOA and DMA, for example, would prevent Apple from developing its own search engine to compete with Google, as it has apparentlycontemplated. Why would Apple develop its own search engine if it couldn’t preference it on iPhones and iPads? And why would Google have started its shopping service to compete with Amazon if it couldn’t preference Google Shopping in search results? And why would any platform continually improve to gain more users as it neared the thresholds for enhanced duties under DMA or AICOA? It seems more likely that the DMA/AICOA approach will hinder, rather than spur, innovation.
At the very least, wouldn’t it be prudent to wait and see whether DMA leads to a flourishing of innovation and entrepreneurship in Europe before jumping on the European bandwagon? After all, technological innovations that occur in Europe won’t be available only to Europeans. Just as Europeans benefit from innovation by U.S. firms, American consumers will be able to reap the benefits of any DMA-inspired innovation occurring in Europe. Moreover, if DMA indeed furthers innovation by making it easier for entrants to gain footing, even American technology firms could benefit from the law by launching their products in Europe. There’s no reason for the tech sector to move to Europe to take advantage of a small-business-protective European law.
In fact, the optimal outcome might be to have one jurisdiction in which major tech platforms are free to innovate, enter each other’s markets via self-preferencing, etc. (the United States, under current law) and another that is more protective of upstart businesses that use the platforms (Europe under DMA). The former jurisdiction would create favorable conditions for platform innovation and inter-platform competition; the latter might enhance innovation among businesses that rely on the platforms. Consumers in each jurisdiction, however, would benefit from innovation facilitated by the other.
It makes little sense, then, for the United States to rush to adopt European-style regulation. DMA is a radical experiment. Regulatory history suggests that the sort of restrictiveness it imposes retards, rather than furthers, innovation. But in the unlikely event that things turn out differently this time, little harm would result from waiting to see DMA’s benefits before implementing its restrictive approach.
Does AICOA Threaten Platforms’ Ability to Moderate Content and Police Disinformation?
The authors of the pro-AICOA letter conclude by addressing the concern that AICOA “will inadvertently make content moderation difficult because some of the prohibitions could be read… to cover and therefore prohibit some varieties of content moderation” by covered platforms.
The letter authors say that a reading of AICOA to prohibit content moderation is “strained.” They maintain that the act’s requirement of “competitive harm” would prevent imposition of liability based on content moderation and that the act is “plainly not intended to cover” instances of “purported censorship.” They further contend that the risk of judicial misconstrual exists with all proposed laws and therefore should not be a sufficient reason to oppose AICOA.
Each of these points is weak. Section 3(a)(3) of AICOA makes it unlawful for a covered platform to “discriminate in the application or enforcement of the terms of service of the covered platform among similarly situated business users in a manner that would materially harm competition.” It ishardly “strained” to reason that this provision is violated when, say, Google’s YouTube selectively demonetizes a business user for content that Google deems harmful or misleading. Or when Apple removes Parler, but not every other violator of service terms, from its App Store. Such conduct could “materially harm competition” by impeding the de-platformed business’ ability to compete with its rivals.
And it is hard to say that AICOA is “plainly not intended” to forbid these acts when a key supporting senatortouted the bill as a means of policing content moderation andobserved during markup that it would “make some positive improvement on the problem of censorship” (i.e., content moderation) because “it would provide protections to content providers, to businesses that are discriminated against because of the content of what they produce.”
At a minimum, we should expect some state attorneys general to try to use the law to police content moderation they disfavor, and the mere prospect of such legal action could chill anti-disinformation efforts and other forms of content moderation.
Of course, there’s a simple way for Congress to eliminate the risk of what the letter authors deem judicial misconstrual: It could clarify that AICOA’s prohibitions do not cover good-faith efforts to moderate content or police disinformation. Such clarification, however, would kill the bill, asseveral Republican legislators are supporting the act because it restricts content moderation.
The risk of judicial misconstrual with AICOA, then, is not the sort that exists with “any law, new or old,” as the letter authors contend. “Normal” misconstrual risk exists when legislators try to be clear about their intentions but, because language has its limits, some vagueness or ambiguity persists. AICOA’s architects have deliberately obscured their intentions in order to cobble together enough supporters to get the bill across the finish line.
The one thing that all AICOA supporters can agree on is that they deserve credit for “doing something” about Big Tech. If the law is construed in a way they disfavor, they can always act shocked and blame rogue courts. That’s shoddy, cynical lawmaking.
So, I respectfully disagree with Professors Scott Morton, Salop, and Dinielli on AICOA. There is no urgent need to pass the bill right now, especially as we are on the cusp of seeing an AICOA-like regime put to the test. The bill’s central liability standard is overly vague, and its plain terms would break popular products and services and thwart future innovation. The United States should equate regulatory leadership with the best, not the most restrictive, policies. And Congress should thoroughly debate and clarify its intentions on content moderation before enacting legislation that could upend the status quo on that important matter.
For all these reasons, Congress should reject AICOA. And for the same reasons, a future in which AICOA is adopted is extremely unlikely to resemble the Utopian world that Professors Scott Morton, Salop, and Dinielli imagine.