Archives For Vertical Restraints

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

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

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

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

The Antitrust Section’s Comments

As the ABA Antitrust Law Section observes:

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

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

Departing from established antitrust-law principles

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

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

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

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

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

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

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

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

Opaque language for opaque ideas

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Key takeaways from the ITIF report include:

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

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

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

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

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

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

[Continuing our FTC UMC Rulemaking symposium, today’s first guest post is from Richard J. Pierce Jr., the Lyle T. Alverson Professor of Law at George Washington University Law School. We are also publishing a related post today from Andrew K. Magloughlin and Randolph J. May of the Free State Foundation. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

FTC Rulemaking Power

In 2021, President Joe Biden appointed a prolific young scholar, Lina Khan, to chair the Federal Trade Commission (FTC). Khan strongly dislikes almost every element of antitrust law. She has stated her intention to use notice and comment rulemaking to change antitrust law in many ways. She was unable to begin this process for almost a year because the FTC was evenly divided between Democratic and Republican appointees, and she has not been able to elicit any support for her agenda from the Republican members. She will finally get the majority she needs to act in the next few days, as the U.S. Senate appears set to confirm Alvaro Bedoya to the fifth spot on the commission.   

Chair Khan has argued that the FTC has the power to use notice-and-comment rulemaking to define the term “unfair methods of competition” as that term is used in Section 5 of the Federal Trade Commission Act. Section 5 authorizes the FTC to define and to prohibit both “unfair acts” and “unfair methods of competition.” For more than 50 years after the 1914 enactment of the statute, the FTC, Congress, courts, and scholars interpreted it to empower the FTC to use adjudication to implement Section 5, but not to use rulemaking for that purpose.

In 1973, the U.S. Court of Appeals for the D.C. Circuit held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. Congress responded by amending the statute in 1975 and 1980 to add many time-consuming and burdensome procedures to the notice-and-comment process. Those added procedures had the effect of making the rulemaking process so long that the FTC gave up on its attempts to use rulemaking to implement Section 5.

Khan claims that the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it must use the extremely burdensome procedures that Congress added in 1975 and 1980 to define “unfair acts.” Her claim is based on a combination of her belief that the current U.S. Supreme Court would uphold the 1973 D.C. Circuit decision that held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5 and her belief that a peculiarly worded provision of the 1975 amendment to the FTC Act allows the FTC to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it requires the FTC to use the extremely burdensome procedure to issue rules that define “unfair acts.” The FTC has not attempted to use notice-and-comment rulemaking to define “unfair methods of competition” since Congress amended the statute in 1975. 

I am skeptical of Khan’s argument. I doubt that the Supreme Court would uphold the 1973 D.C. Circuit opinion, because the D.C. Circuit used a method of statutory interpretation that no modern court uses and that is inconsistent with the methods of statutory interpretation that the Supreme Court uses today. I also doubt that the Supreme Court would interpret the 1975 statutory amendment to distinguish between “unfair acts” and “unfair methods of competition” for purposes of the procedures that the FTC is required to use to issue rules to implement Section 5.

Even if the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” I am confident that the Supreme Court would not uphold an exercise of that power that has the effect of making a significant change in antitrust law. That would be a perfect candidate for application of the major questions doctrine. The court will not uphold an “unprecedented” action of “vast economic or political significance” unless it has “unmistakable legislative support.” I will now describe four hypothetical exercises of the rulemaking power that Khan believes that the FTC possesses to illustrate my point.

Hypothetical Exercises of FTC Rulemaking Power

Creation of a Right to Repair

President Biden has urged the FTC to create a right for an owner of any product to repair the product or to have it repaired by an independent service organization (ISO). The Supreme Court’s 1992 opinion in Eastman Kodak v. Image Technical Services tells us all we need to know about the likelihood that it would uphold a rule that confers a right to repair. When Kodak took actions that made it impossible for ISOs to repair Kodak photocopiers, the ISOs argued that Kodak’s action violated both Section 1 and Section 2 of the Sherman Act. The Court held that Kodak could prevail only if it could persuade a jury that its view of the facts was accurate. The Court remanded the case for a jury trial to address three contested issues of fact.

The Court’s reasoning in Kodak is inconsistent with any version of a right to repair that the FTC might attempt to create through rulemaking. The Court expressed its view that allowing an ISO to repair a product sometimes has good effects and sometimes has bad effects. It concluded that it could not decide whether Kodak’s new policy was good or bad without first resolving the three issues of fact on which the parties disagreed. In a 2021 report to Congress, the FTC agreed with the Supreme Court. It identified seven factual contingencies that can cause a prohibition on repair of a product by an ISO to have good effects or bad effects. It is naïve to expect the Supreme Court to change its approach to repair rights in response to a rule in which the FTC attempts to create a right to repair, particularly when the FTC told Congress that it agrees with the Court’s approach immediately prior to Khan’s arrival at the agency.

Prohibition of Reverse-Payment Settlements of Patent Disputes Involving Prescription Drugs

Some people believe that settlements of patent-infringement disputes in which the manufacturer of a generic drug agrees not to market the drug in return for a cash payment from the manufacturer of the brand-name drug are thinly disguised agreements to create a monopoly and to share the monopoly rents. Khan has argued that the FTC could issue a rule that prohibits such reverse-payment settlements. Her belief that a court would uphold such a rule is contradicted by the Supreme Court’s 2013 opinion in FTC v. Actavis. The Court unanimously rejected the FTC’s argument in support of a rebuttable presumption that reverse payments are illegal. Four justices argued that reverse-payment settlements can never be illegal if they are within the scope of the patent. The five-justice majority held that a court can determine that a reverse-payment settlement is illegal only after a hearing in which it applies the rule of reason to determine whether the payment was reasonable.

A Prohibition on Below-Cost Pricing When the Firm Cannot Recoup Its Losses

Khan believes that illegal predatory pricing by dominant firms is widespread and extremely harmful to competition. She particularly dislikes the Supreme Court’s test for identifying predatory pricing. That test requires proof that a firm that engages in below-cost pricing has a reasonable prospect of recouping its losses. She wants the FTC to issue a rule in which it defines predatory pricing as below-cost pricing without any prospect that the firm will be able to recoup its losses.

The history of the Court’s predatory-pricing test shows how unrealistic it is to expect the Court to uphold such a rule. The Court first announced the test in a Sherman Act case in 1986. Plaintiffs attempted to avoid the precedential effect of that decision by filing complaints based on predatory pricing under the Robinson-Patman Act. The Court rejected that attempt in a 1993 opinion. The Court made it clear that the test for determining whether a firm is engaged in illegal predatory pricing is the same no matter whether the case arises under the Sherman Act or the Robinson-Patman Act. The Court undoubtedly would reject the FTC’s effort to change the definition of predatory pricing by relying on the FTC Act instead of the Sherman Act or the Robinson-Patman Act.

A Prohibition of Noncompete Clauses in Contracts to Employ Low-Wage Employees

President Biden has expressed concern about the increasing prevalence of noncompete clauses in employment contracts applicable to low wage employees. He wants the FTC to issue a rule that prohibits inclusion of noncompete clauses in contracts to employ low-wage employees. The Supreme Court would be likely to uphold such a rule.

A rule that prohibits inclusion of noncompete clauses in employment contracts applicable to low-wage employees would differ from the other three rules I discussed in many respects. First, it has long been the law that noncompete clauses can be included in employment contracts only in narrow circumstances, none of which have any conceivable application to low-wage contracts. The only reason that competition authorities did not bring actions against firms that include noncompete clauses in low-wage employment contracts was their belief that state labor law would be effective in deterring firms from engaging in that practice. Thus, the rule would be entirely consistent with existing antitrust law.

Second, there are many studies that have found that state labor law has not been effective in deterring firms from including noncompete clauses in low-wage employment contracts and many studies that have found that the increasing use of noncompete clauses in low-wage contracts is causing a lot of damage to the performance of labor markets. Thus, the FTC would be able to support its rule with high-quality evidence.

Third, the Supreme Court’s unanimous 2021 opinion in NCAA v. Alstom indicates that the Court is receptive to claims that a practice that harms the performance of labor markets is illegal. Thus, I predict that the Court would uphold a rule that prohibits noncompete clauses in employment contracts applicable to low-wage employees if it holds that the FTC can use notice-and-comment rulemaking to define “unfair methods of competition,” as that term is used in Section 5 of the FTC Act. That caveat is important, however. As I indicated at the beginning of this essay, I doubt that the FTC has that power.

I would urge the FTC not to use notice-and comment rulemaking to address the problems that are caused by the increasing use of noncompete clauses in low-wage contracts. There is no reason for the FTC to put a lot of time and effort into a notice-and-comment rulemaking in the hope that the Court will conclude that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. The FTC can implement an effective prohibition on the inclusion of noncompete clauses in employment contracts applicable to low-wage employees by using a combination of legal tools that it has long used and that it clearly has the power to use—issuance of interpretive rules and policy statements coupled with a few well-chosen enforcement actions.

Alternative Ways to Improve Antitrust Law       

There are many other ways in which Khan can move antitrust law in the directions that she prefers. She can make common cause with the many mainstream antitrust scholars who have urged incremental changes in antitrust law and who have conducted the studies needed to support those proposed changes. Thus, for instance, she can move aggressively against other practices that harm the performance of labor markets, change the criteria that the FTC uses to decide whether to challenge proposed mergers and acquisitions, and initiate actions against large platform firms that favor their products over the products of third parties that they sell on their platforms.     

The following post was authored by counsel with White & Case LLP, who represented the International Center for Law & Economics (ICLE) in an amicus brief filed on behalf of itself and 12 distinguished law & economics scholars with the U.S. Court of Appeals for the D.C. Circuit in support of affirming U.S. District Court Judge James Boasberg’s dismissal of various States Attorneys General’s antitrust case brought against Facebook (now, Meta Platforms).

Introduction

The States brought an antitrust complaint against Facebook alleging that various conduct violated Section 2 of the Sherman Act. The ICLE brief addresses the States’ allegations that Facebook refused to provide access to an input, a set of application-programming interfaces that developers use in order to access Facebook’s network of social-media users (Facebook’s Platform), in order to prevent those third parties from using that access to export Facebook data to competitors or to compete directly with Facebook.

Judge Boasberg dismissed the States’ case without leave to amend, relying on recent Supreme Court precedent, including Trinko and Linkline, on refusals to deal. The Supreme Court strongly disfavors forced sharing, as shown by its decisions that recognize very few exceptions to the ability of firms to deal with whom they choose. Most notably, Aspen Skiing Co. v. Aspen Highlands Skiing is a 1985 decision recognizing an exception to the general rule that firms may deal with whom they want that was limited, though not expressly overturned, by Trinko in 2004. The States appealed to the D.C. Circuit on several grounds, including by relying on Aspen Skiing, and advocating for a broader view of refusals to deal than dictated by current jurisprudence. 

ICLE’s brief addresses whether the District Court was correct to dismiss the States’ allegations that Facebook’s Platform policies violated Section 2 of the Sherman Act in light of the voluminous body of precedent and scholarship concerning refusals to deal. ICLE’s brief argues that Judge Boasberg’s opinion is consistent with economic and legal principles, allowing firms to choose with whom they deal. Furthermore, the States’ allegations did not make out a claim under Aspen Skiing, which sets forth extremely narrow circumstances that may constitute an improper refusal to deal.  Finally, ICLE takes issue with the States’ attempt to create an amorphous legal standard for refusals to deal or otherwise shoehorn their allegations into a “conditional dealing” framework.

Economic Actors Should Be Able to Choose Their Business Partners

ICLE’s basic premise is that firms in a free-market system should be able to choose their business partners. Forcing firms to enter into certain business relationships can have the effect of stifling innovation, because the firm getting the benefit of the forced dealing then lacks incentive to create their own inputs. On the other side of the forced dealing, the owner would have reduced incentives to continue to innovate, invest, or create intellectual property. Forced dealing, therefore, has an adverse effect on the fundamental nature of competition. As the Supreme Court stated in Trinko, this compelled sharing creates “tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.” 

Courts Are Ill-Equipped to Regulate the Kind of Forced Sharing Advocated by the States

ICLE also notes the inherent difficulties of a court’s assessing forced access and the substantial risk of error that could create harm to competition. This risk, ICLE notes, is not merely theoretical and would require the court to scrutinize intricate details of a dynamic industry and determine which decisions are lawful or not. Take the facts of New York v. Facebook: more than 10 million apps and websites had access to Platform during the relevant period and the States took issue with only seven instances where Facebook had allegedly improperly prevented access to Platform. Assessing whether conduct would create efficiency in one circumstance versus another is challenging at best and always risky. As Frank Easterbook wrote: “Anyone who thinks that judges would be good at detecting the few situations in which cooperation would do more good than harm has not studied the history of antitrust.”

Even assuming a court has rightly identified a potentially anticompetitive refusal to deal, it would then be put to the task of remedying it. But imposing a remedy, and in effect assuming the role of a regulator, is similarly complicated. This is particularly true in dynamic, quickly evolving industries, such as social media. This concern is highlighted by the broad injunction the States seek in this case: to “enjoin[] and restrain [Facebook] from continuing to engage in any anticompetitive conduct and from adopting in the future any practice, plan, program, or device having a similar purpose or effect to the anticompetitive actions set forth above.”  Such a remedy would impose conditions on Facebook’s dealings with competitors for years to come—regardless of how the industry evolves.

Courts Should Not Expand Refusal-to-Deal Analysis Beyond the Narrow Circumstances of Aspen Skiing

In light of the principles above, the Supreme Court, as stated in Trinko, “ha[s] been very cautious in recognizing [refusal-to-deal] exceptions, because of the uncertain virtue of forced sharing and the difficulty of identifying and remedying anticompetitive conduct by a single firm.” Various scholars (e.g., Carlton, Meese, Lopatka, Epstein) have analyzed Aspen Skiing consistently with Trinko as, at most, “at or near the boundary of § 2 liability.”

So is a refusal-to-deal claim ever viable?  ICLE argues that refusal-to-deal claims have been rare (rightly so) and, at most, should only go forward under the delineated circumstances in Aspen Skiing. ICLE sets forth the 10th U.S. Circuit’s framework in Novell, which makes clear that “the monopolist’s conduct must be irrational but for its anticompetitive effect.”

  • First, “there must be a preexisting voluntary and presumably profitable course of dealing between the monopolist and rival.”
  • Second, “the monopolist’s discontinuation of the preexisting course of dealing must suggest a willingness to forsake short-term profits to achieve an anti-competitive end.”
  • Finally, even if these two factors are present, the court recognized that “firms routinely sacrifice short-term profits for lots of legitimate reasons that enhance consumer welfare.”

The States seek to broaden Aspen Skiing in order to sinisterize Facebook’s Platform policies, but the facts do not fit. The States do not plead an about-face with respect to Facebook’s Platform policies; the States do not allege that Facebook’s changes to its policies were irrational (particularly in light of the dynamic industry in which Facebook operates); and the States do not allege that Facebook engaged in less efficient behavior with the goal of hurting rivals. Indeed, Facebook changed its policies to retain users—which is essential to its business model (and therefore, rational).

The States try to evade these requirements by arguing for a looser refusal-to-deal standard (and by trying to shoehorn the conduct as “conditional dealing”)—but as ICLE explains, allowing such a claim to go forward would fly in the face of the economic and policy goals upheld by the current jurisprudence. 

Conclusion

The District Court was correct to dismiss the States’ allegations concerning Facebook’s Platform policies. Allowing a claim against Facebook to progress under the circumstances alleged in the States’ complaint would violate the principle that a firm, even one that is a monopolist, should not be held liable for refusing to deal with a certain business partner. The District Court’s decision is in line with key economic principles concerning refusals to deal and consistent with the Supreme Court’s decision in Aspen Skiing. Aspen Skiing is properly read to severely limit the circumstances giving rise to a refusal-to-deal claim, or else risk adverse effects such as reduced incentive to innovate.  

Amici Scholars Signing on to the Brief

(The ICLE brief presents the views of the individual signers listed below. Institutions are listed for identification purposes only.)

Henry Butler
Henry G. Manne Chair in Law and Economics and Executive Director of the Law & Economics Center, Scalia Law School
Daniel Lyons
Professor of Law, Boston College Law School
Richard A. Epstein
Laurence A. Tisch Professor of Law at NY School of Law, the Peter and Kirsten Bedford Senior Lecturer at the Hoover Institution, and the James Parker Hall Distinguished Service Professor Emeritus
Geoffrey A. Manne
President and Founder, International Center for Law & Economics, Distinguished Fellow Northwestern University Center on Law, Business & Economics
Thomas Hazlett
H.H. Macaulay Endowed Professor of Economics and Director of the Information Economy Project, Clemson University
Alan J. Meese
Ball Professor of Law, Co-Director, Center for the Study of Law and Markets, William & Mary Law School
Justin (Gus) Hurwitz
Professor of Law and Menard Director of the Nebraska Governance and Technology Center, University of Nebraska College of Law
Paul H. Rubin
Samuel Candler Dobbs Professor of Economics Emeritus, Emory University
Jonathan Klick
Charles A. Heimbold, Jr. Professor of Law, University of Pennsylvania Carey School of Law; Erasmus Chair of Empirical Legal Studies, Erasmus University Rotterdam
Michael Sykuta
Associate Professor of Economics and Executive Director of Financial Research Institute, University of Missouri Division of Applied Social Sciences
Thomas A. Lambert
Wall Chair in Corporate Law and Governance, University of Missouri Law School
John Yun
Associate Professor of Law and Deputy Executive Director of the Global Antitrust Institute, Scalia Law School

The International Center for Law & Economics (ICLE) filed an amicus brief on behalf of itself and 26 distinguished law & economics scholars with the 9th U.S. Circuit Court of Appeals in the hotly anticipated and intensely important Epic Games v Apple case.

A fantastic group of attorneys from White & Case generously assisted us with the writing and filing of the brief, including George Paul, Jack Pace, Gina Chiapetta, and Nicholas McGuire. The scholars who signed the brief are listed at the end of this post. A summary of the brief’s arguments follows. For some of our previous writings on the case, see here, here, here, and here.

Introduction

In Epic Games v. Apple, Epic challenged Apple’s prohibition of third-party app stores and in-app payments (IAP) systems from operating on its proprietary iOS platform as a violation of antitrust law. The U.S. District Court for the Northern District of California ruled against Epic, finding that Epic’s real concern is its own business interests in the face of Apple’s business model—in particular, the commission Apple charges for use of its IAP system—rather than harm to consumers and to competition more broadly.

Epic appealed to the 9th Circuit on several grounds. Our brief primarily addresses two of Epic’s arguments:

  • First, Epic takes issue with the district court’s proper finding that Apple’s procompetitive justifications outweigh the anticompetitive effects of Apple’s business model. But Epic’s case fails at step one of the rule-of-reason analysis, as it didn’t demonstrate that Apple’s app distribution and IAP practices caused the significant, market-wide, anticompetitive effects that the Supreme Court, in 2018’s Ohio v. American Express (“Amex”), deemed necessary to show anticompetitive harm in cases involving two-sided transaction markets (like Apple’s App Store).
  • Second, Epic argues that the theoretical existence of less restrictive alternatives (“LRA”) to Apple’s business model is sufficient to meet its burden under the rule of reason. But the reliance on LRA in this case is misplaced. Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition and improperly permit antitrust plaintiffs to commandeer the judiciary to modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice—irrespective of whether the practice promotes consumer welfare. This is especially true in the context of two-sided platform businesses, where such an approach would sacrifice interbrand, systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.

Competitive Effects in Two-Sided Markets

Two-sided markets connect distinct sets of users whose demands for the platform are interdependent—i.e., consumers’ demand for a platform increases as more products are available, and conversely, product developers’ demand for a platform increases as additional consumers use the platform, increasing the overall potential for transactions. As a result of these complex dynamics, conduct that may appear anticompetitive when considering the effects on only one set of customers may be entirely consistent with—and actually promote—healthy competition when examining the effects on both sides.

That’s why the Supreme Court recognized in Amex that it was improper to focus on only one side of a two-sided platform. And this holding doesn’t require adherence to the Court’s contentious finding of a two-sided relevant market in Amex. Indeed, even scholars highly critical of the Amex decision recognize the importance of considering effects on both sides of a two-sided platform.

While the district court did find that Epic demonstrated some anticompetitive effects, Epic’s evidence focused only on the effects that Apple’s conduct had on certain app developers; it failed to appropriately examine whether consumers were harmed overall. As Geoffrey Manne has observed, in two-sided markets, “some harm” is not the same thing as “competitively relevant harm.” Supracompetitive prices on one side do not tell us much about the existence or exercise of (harmful) market power in two-sided markets. As the Supreme Court held in Amex:

The fact that two-sided platforms charge one side a price that is below or above cost reflects differences in the two sides’ demand elasticity, not market power or anticompetitive pricing. Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.

Without further evidence of the effect of Apple’s practices on consumers, no conclusions can be drawn about the competitive effects of Apple’s conduct. 

Nor can an appropriate examination of anticompetitive effects ignore output. The ability to restrict output, after all, is what allows a monopolist to increase prices. Whereas price effects alone might appear predatory on one side of the market and supra-competitive on the other, output reflects what is happening in the market as a whole. It is therefore the most appropriate measure for antitrust law generally, and it is especially useful in two-sided markets, where asymmetrical price changes are of little use in determining anticompetitive effects.

Ultimately, the question before the court must be whether Apple’s overall pricing structure and business model reduces output, either by deterring app developers from participating in the market or by deterring users from purchasing apps (or iOS devices) as a consequence of the app-developer commission. The district court here noted that it could not ascertain whether Apple’s alleged restrictions had a “positive or negative impact on game transaction volume.”

Thus, Epic’s case fails at step one of the rule of reason analysis because it simply hasn’t demonstrated the requisite harm to competition.

Less Restrictive Alternatives and the Rule of Reason

But even if that weren’t the case, Epic’s claims also don’t make it past step three of the rule of reason analysis.

Epic’s appeal relies on theoretical “less restrictive alternatives” (LRA) to Apple’s business model, which highlights longstanding questions about the role and limits of LRA analysis under the rule of reason. 

According to Epic, because the district court identified some anticompetitive effects on one side of the market, and because alternative business models could, in theory, be implemented to achieve the same procompetitive benefits as Apple’s current business model, the court should have ruled in Epic’s favor at step three. 

There are several problems with this.

First, the existence of an LRA is irrelevant if anticompetitive harm has not been established, of course (as is the case here).

Nor does the fact that some hypothetically less restrictive alternative exists automatically render the conduct under consideration anticompetitive. As the Court held in Trinko, antitrust laws do not “give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition.” 

While, following the Supreme Court’s recent Alston decision, LRA analysis may well be appropriate in some contexts to identify anticompetitive conduct in the face of procompetitive justifications, there is no holding (in either the 9th Circuit or the Supreme Court) requiring it in the context of two-sided markets. (Amex refers to LRA analysis as constituting step three, but because that case was resolved at step one, it must be viewed as mere dictum).And for good reason. In the context of two-sided platforms, an LRA approach would inevitably require courts to second guess the particular allocation of costs, prices, and product attributes across platform users. As Tom Nachbar writes:

Platform defendants, even if they are able to establish the general procompetitive justifications for charging above and below cost prices on the two sides of their platforms, will have to defend the precise combination of prices they have chosen [under an LRA approach] . . . . The relative difficulty of defending any particular allocation of costs will present considerable risk of destabilizing platform markets.

Moreover, LRAs—like the ones proposed by Epic—that are based on maximizing competitor effectiveness by “opening” an incumbent’s platform would convert the rule of reason into a regulatory tool that may not promote competition at all. As Alan Devlin deftly puts it:

This construction of antitrust law—that dominant companies must affirmatively support their fringe rivals’ ability to compete effectively—adopts a perspective of antitrust that is regulatory in nature. . . . [I]f one adopts the increasingly prevalent view that antitrust must facilitate unfettered access to markets, thus spurring free entry and expansion by incumbent rivals, the Sherman Act goes from being a prophylactic device aimed at protecting consumers against welfare-reducing acts to being a misplaced regulatory tool that potentially sacrifices both consumer welfare and efficiency in a misguided pursuit of more of both.

Open Platforms Are not Necessarily Less Restrictive Platforms

It is also important to note that Epic’s claimed LRAs are neither viable alternatives nor actually “less restrictive.” Epic’s proposal would essentially turn Apple’s iOS into an open platform more similar to Google’s Android, its largest market competitor.

“Open” and “closed” platforms both have distinct benefits and drawbacks; one is not inherently superior to the other. Closed proprietary platforms like Apple’s iOS create incentives for companies to internalize positive indirect network effects, which can lead to higher levels of product variety, user adoption, and total social welfare. As Andrei Hagiu has written:

A proprietary platform may in fact induce more developer entry (i.e., product variety), user adoption and higher total social welfare than an open platform.

For example, by filtering which apps can access the App Store and precluding some transactions from taking place on it, a closed or semi-closed platform like Apple’s may ultimately increase the number of apps and transactions on its platform, where doing so makes the iOS ecosystem more attractive to both consumers and developers. 

Any analysis of a supposedly less restrictive alternative to Apple’s “walled garden” model thus needs to account for the tradeoffs between open and closed platforms, and not merely assume that “open” equates to “good,” and “closed” to “bad.” 

Further, such analysis also must consider tradeoffs among consumers and among developers. More vigilant users might be better served by an “open” platform because they find it easier to avoid harmful content; less vigilant ones may want more active assistance in screening for malware, spyware, or software that simply isn’t optimized for the user’s device. There are similar tradeoffs on the developer side: Apple’s model lowers the cost to join the App store, which particularly benefits smaller developers and those whose apps fall outside the popular gaming sector. In a nutshell, the IAP fee cross-subsidizes the delivery of services to the approximately 80% of apps on the App Store that are free and pay no IAP fees.

In fact, the overwhelming irony of Epic’s proposed approach is that Apple could avoid condemnation if it made its overall platform more restrictive. If, for example, Apple had not adopted an App Store model and offered a completely closed and fully integrated device, there would be no question of relative costs and benefits imposed on independent app developers; there would be no independent developers on the iOS platform at all. 

Thus, Epic’s proposed LRA approach, which amounts to converting iOS to an open platform, proves too much. It would enable any contractual or employment relationship for a complementary product or service to be challenged because it could be offered through a “less restrictive” open market mechanism—in other words, that any integrated firm should be converted into an open platform. 

At least since the Supreme Court’s seminal 1977 Sylvania ruling, U.S. antitrust law has been unequivocal in its preference for interbrand over intrabrand competition. Paradoxically, turning a closed platform into an open one (as Epic intends) would, under the guise of protecting competition, actually destroy competition where it matters most: at the interbrand, systems level.

Conclusion

Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition among platform providers. It would also more broadly allow antitrust plaintiffs to insist the courts modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice, regardless of whether that practice nevertheless promotes consumer welfare. In the context of two-sided platform businesses, this would mean sacrificing systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.

The bottom line is that an order compelling Apple to allow competing app stores would require the company to change the way in which it monetizes the App Store. This might have far-reaching distributional consequences for both groups— consumers and distributors. Courts (and, obviously, competitors) are ill-suited to act as social planners and to balance out such complex tradeoffs, especially in the absence of clear anticompetitive harm and the presence of plausible procompetitive benefits.

Amici Scholars Signing on to the Brief


(The ICLE brief presents the views of the individual signers listed below. Institutions are listed for identification purposes only.)

Alden Abbott
Senior Research Fellow, Mercatus Center, George Mason University
Former General Counsel, U.S. Federal Trade Commission
Ben Klein
Professor of Economics Emeritus, University of California Los Angeles
Thomas C. Arthur
L. Q. C. Lamar Professor of Law, Emory University School of Law
Peter Klein
Professor of Entrepreneurship and Corporate Innovation, Baylor University, Hankamer School of Business
Dirk Auer
Director of Competition Policy, International Center for Law & Economics
Adjunct Professor, University of Liège (Belgium)
Jonathan Klick
Charles A. Heimbold, Jr. Professor of Law, University of Pennsylvania Carey Law School
Jonathan M. Barnett
Torrey H. Webb Professor of Law, University of Southern California, Gould School of Law
Daniel Lyons
Professor of Law, Boston College Law School
Donald J. Boudreaux
Professor of Economics, former Economics Department Chair, George Mason University
Geoffrey A. Manne
President and Founder, International Center for Law & Economics
Distinguished Fellow, Northwestern University Center on Law, Business & Economics
Giuseppe Colangelo
Jean Monnet Chair in European Innovation Policy and Associate Professor of Competition Law and Economics, University of Basilicata and Libera Università Internazionale degli Studi Sociali
Francisco Marcos
Associate Professor of Law, IE University Law School (Spain)
Anthony Dukes
Chair and Professor of Marketing, University of Southern California, Marshall School of Business
Scott E. Masten
Professor of Business Economics and Public Policy, University of Michigan, Ross Business School
Richard A. Epstein
Laurence A. Tisch Professor of Law, New York University, School of Law James Parker Hall Distinguished Service Professor of Law Emeritus, University of Chicago Law School
Alan J. Meese
Ball Professor of Law, College of William & Mary Law School
Vivek Ghosal
Economics Department Chair and Virginia and Lloyd W. Rittenhouse Professor of Economics, Rensselaer Polytechnic Institute
Igor Nikolic
Research Fellow, Robert Schuman Centre for Advanced Studies, European University Institute (Italy)
Janice Hauge
Professor of Economics, University of North Texas
Paul H. Rubin
Samuel Candler Dobbs Professor of Economics Emeritus, Emory University
Justin (Gus) Hurwitz
Professor of Law, University of Nebraska College of Law
Vernon L. Smith
George L. Argyros Endowed Chair in Finance and Economics and Professor of Economics and Law, Chapman University Nobel Laureate in Economics (2002)
Michael S. Jacobs
Distinguished Research Professor of Law Emeritus, DePaul University College of Law
Michael Sykuta
Associate Professor of Economics, University of Missouri
Mark A. Jamison
Gerald Gunter Professor of the Public Utility Research Center, University of Florida, Warrington College of Business
Alexander “Sasha” Volokh
Associate Professor of Law, Emory University School of Law

The Biden administration finally has taken a public position on parallel House (H.R. 3816) and Senate (S. 2992) bills that would impose new welfare-reducing regulatory constraints on the ability of large digital platforms to engage in innovative business practices that benefit consumers and the economy.

The administration’s articulation of its position—set forth in a March 28 U.S. Justice Department (DOJ letter to House and Senate Judiciary Committee leadership—is a fine example of draftsmanship. With just a few very minor redline edits, which I suggest below, the letter would advance sound and enlightened procompetitive policy.

I hope the DOJ will accept my modest redlines and incorporate them into a new letter to Congress, superseding the March 28 draft. My edited redline and clean revisions of the current draft follow (redline draft is in italics, clean draft in bold italics):

Redline Version

Dear Chairman Nadler, Chairman Cicilline, Representative Jordan, and Representative Buck:

The Department of Justice (Department) appreciates the considerable attention and resources devoted by the House and Senate Committees on the Judiciary over the past several years to ensuring the competitiveness of our digital economy, and writes today to express support for oppose the American Innovation and Choice Online Act, Senate bill S. 2992, and the American Innovation and Choice Online Act, House bill H.R. 3816, which contain similar prohibitions on discriminatory conduct by dominant platforms (the “bills”). Unfortunately, the legislative efforts expended on these bills have been a waste of time.

The Department views the rise of major digitaldominant platforms as presenting a great boon tothreat to open markets and competition, with bestowing benefits onrisks for consumers, businesses, innovation, resiliency, global competitiveness, and our democracy. By enhancing value controllingtransmitted through key arteries of the nation’s commerce and communications, such platforms have promoted a more vibrant and innovative can exercise outsized market power in our modern economy. Vesting in government the power to pick winners and losers across markets through legislative regulation as found in the bills in a small number of corporations contravenes the foundations of our capitalist system, and given the increasing importance of these markets, the economic benefits flowing frompower of such platforms activity areis likely to be curtailed if the bills are passed continue to grow unless checked. Enactment of the bills wouldThis puts at risk the nation’s economic progress and prosperity, ultimately threatening the economic liberty that undergirds our democracy.

The legislation, if enacted, would emphasize causes of action prohibiting the largest digital platforms from discriminating in favor of their own products or services, or among third parties. In so doing, it would eliminate and disincentivize many provide important clarification from Congress on types of discriminatory conduct efficient business arrangements that can materially enhanceharm competition. This would thereby undermineimprove upon the system of ex ante enforcement through which the United States maintains competitive markets with legal prohibitions on competitively harmful corporate conduct. By mistakenly characterizing confirming the illegality of as anticompetitive platform behaviors that in reality enhancereduce incentives for vigorous innovation and dynamic competition, smaller or newer firms to innovate and compete, the legislation would underminesupplement the existing antitrust laws. Specifically, the legislation would  in preventing the largest digital companies from managing their business transactions in an efficient welfare-enhancing manner, abusing and exploiting their dominant positions to the detriment of competition and the competitive process. The Department is strongly concerned aboutsupportive of these harmful effects.objectives and As such, it encourages both the Committees and Congress to work to abandon all efforts to finalize this legislationfinalize this legislation[1] and pass it into law.

The Department views the legislation’s new prohibitions on discrimination as a harmful detrimenthelpful complement to, and interference withclarification of, existing antitrust authority. In our view, the most significant harmbenefits would arise where the legislation seeks to elucidates Congress’ views of anticompetitive conduct—particularly with respect to harmful types of discrimination and self-preferencing by dominant platforms. Enumerating specific  discriminatory and self-preferencing conduct that Congress views as anticompetitive and therefore illegal would undermine the economically informed, fact-specific evaluation of business conduct that lies at the heart of modern antitrust analysis, centered on consumer welfare. Modern economic analysis demonstrates that a great deal of superficially “discriminatory” and “self-preferencing” conduct often represents consumer welfare-enhancing behavior that adds to economic surplus. Deciding whether such conduct is procompetitive (welfare-enhancing) or anticompetitive in a particular instance is the role of existing case-by-case antitrust enforcement. This approach vindicates competition while avoiding the wrongful condemnation of economically beneficial behavior. In contrast, by creating a new class of antitrust “wrongs,” the bills would lead to the incorrect condemnation of many business practices that enhance market efficiency and strengthen the economy.clarify the antitrust laws and supplement the available causes of action and legal frameworks to pursue that conduct. Doing so would enhance the ability of the DOJ and FTC to challenge that conduct efficiently and effectively and better enable them to promote competition in digital markets. The legislation also has the potential to effectively harmonize broad prohibitions with the particularized needs and business practices of individual platforms over time.

If enacted, we believe that this legislation has the potential to have a major negativepositive effect on dynamism in digital markets going forward. Our future global competitiveness depends on innovators and entrepreneurs having the ability to access markets, free from counterproductive inflexible government market regulationdominant incumbents that impede innovation, competition, resiliency, and widespread prosperity. Discriminatory conduct by majordominant platforms, properly understood, often benefits can sap the rewards from other innovators and entrepreneurs, increasingreducing the incentives for entrepreneurship and innovation. Even more importantly, the legislation may undercutsupport the creation and growth of new tech businesses adjacent to the platforms., Such an unfortunate result would reduce the welfare-enhancing initiatives of new businesses that are complementary to the economically beneficial activity (to consumers and producers) generated by the platforms. which may ultimately pose a critically needed competitive check to the covered platforms themselves. We view reduction of these new business initiatives benefits  as a significant harm that would stem from passage of the bills. For these reasons, the Department strongly supports the principles and goals animating opposes the legislation and looks forward to working with Congress to further explain why this undoubtedly well-meaning legislative initiative is detrimental to vigorous competition and a strong American economy.ensure that the final legislation enacted meets these goals.

Thank you for the opportunity to present our views. We hope this information is helpful. Please do not hesitate to contact this office if we may be of additional assistance to you.


[1] In other words,As , the Department respectfully recommends that members of Congress stop wasting time seeking to revise and enact this legislation.members continue to revise the legislation, the Department will provide under separate cover additional assistance to ensure that the bills achieve their goals.

Clean Version (incorporating all redline edits)

Dear Chairman Nadler, Chairman Cicilline, Representative Jordan, and Representative Buck:

The Department of Justice (Department) appreciates the considerable attention and resources devoted by the House and Senate Committees on the Judiciary over the past several years to ensuring the competitiveness of our digital economy, and writes today to oppose the American Innovation and Choice Online Act, Senate bill S. 2992, and the American Innovation and Choice Online Act, House bill H.R. 3816, which contain similar prohibitions on discriminatory conduct by dominant platforms (the “bills”). Unfortunately, the legislative efforts expended on these bills have been a waste of time.

The Department views the rise of major digital platforms as presenting a great boon to open markets and competition, bestowing benefits on consumers, businesses, innovation, resiliency, global competitiveness, and our democracy. By enhancing value transmitted through key arteries of the nation’s commerce and communications, such platforms have promoted a more vibrant and innovative modern economy. Vesting in government the power to pick winners and losers across markets through legislative regulation as found in the bills contravenes the foundations of our capitalist system, and given the increasing importance of these markets, the economic benefits flowing from platform activity are likely to be curtailed if the bills are passed. Enactment of the bills would put at risk the nation’s economic progress and prosperity, ultimately threatening the economic liberty that undergirds our democracy.

The legislation, if enacted, would emphasize causes of action prohibiting the largest digital platforms from “discriminating” in favor of their own products or services, or among third parties. In so doing, it would eliminate and disincentivize many efficient business arrangements that can materially enhance competition. This would thereby undermine the system of ex ante enforcement through which the United States maintains competitive markets with legal prohibitions on competitively harmful corporate conduct. By mistakenly characterizing as anticompetitive platform behaviors that in reality enhance incentives for vigorous innovation and dynamic competition, the legislation would undermine the existing antitrust laws. Specifically, the legislation would prevent the largest digital companies from managing their business transactions in an efficient welfare-enhancing manner, to the detriment of competition and the competitive process. The Department is strongly concerned about these harmful effects. As such, it encourages both the Committees and Congress to abandon all efforts to finalize this legislation and pass it into law.[1]

The Department views the legislation’s new prohibitions on discrimination as a harmful detriment to, and interference with, existing antitrust authority. In our view, the most significant harm would arise where the legislation seeks to elucidate Congress’ views of anticompetitive conduct—particularly with respect to harmful types of discrimination and self-preferencing by dominant platforms. Enumerating specific “discriminatory” and “self-preferencing” conduct that Congress views as anticompetitive and therefore illegal would undermine the economically informed, fact-specific evaluation of business conduct that lies at the heart of modern antitrust analysis, centered on consumer welfare. Modern economic analysis demonstrates that a great deal of superficially “discriminatory” and “self-preferencing” conduct often represents consumer welfare-enhancing behavior that adds to economic surplus. Deciding whether such conduct is procompetitive (welfare-enhancing) or anticompetitive in a particular instance is the role of existing case-by-case antitrust enforcement. This approach vindicates competition while avoiding the wrongful condemnation of economically beneficial behavior. In contrast, by creating a new class of antitrust “wrongs,” the bills would lead to the incorrect condemnation of many business practices that enhance market efficiency and strengthen the economy.

If enacted, we believe that this legislation has the potential to have a major negative effect on dynamism in digital markets going forward. Our future global competitiveness depends on innovators and entrepreneurs having the ability to access markets, free from counterproductive inflexible government market regulation that impede innovation, competition, resiliency, and widespread prosperity. “Discriminatory” conduct by major platforms, properly understood, often benefits innovators and entrepreneurs, increasing the incentives for entrepreneurship and innovation. Even more importantly, the legislation may undercut the creation and growth of new tech businesses adjacent to the platforms. Such an unfortunate result would reduce the welfare-enhancing initiatives of new businesses that are complementary to the economically beneficial activity (to consumers and producers) generated by the platforms. We view reduction of these new business initiatives as a significant harm that would stem from passage of the bills. For these reasons, the Department strongly opposes the legislation and looks forward to working with Congress to further explain why this undoubtedly well-meaning legislative initiative is detrimental to vigorous competition and a strong American economy.

Thank you for the opportunity to present our views. We hope this information is helpful. Please do not hesitate to contact this office if we may be of additional assistance to you.


[1] In other words, the Department respectfully recommends that members of Congress stop wasting time seeking to revise and enact this legislation.

After years of debate and negotiations, European Lawmakers have agreed upon what will most likely be the final iteration of the Digital Markets Act (“DMA”), following the March 24 final round of “trilogue” talks. 

For the uninitiated, the DMA is one in a string of legislative proposals around the globe intended to “rein in” tech companies like Google, Amazon, Facebook, and Apple through mandated interoperability requirements and other regulatory tools, such as bans on self-preferencing. Other important bills from across the pond include the American Innovation and Choice Online Act, the ACCESS Act, and the Open App Markets Act

In many ways, the final version of the DMA represents the worst possible outcome, given the items that were still up for debate. The Commission caved to some of the Parliament’s more excessive demands—such as sweeping interoperability provisions that would extend not only to “ancillary” services, such as payments, but also to messaging services’ basic functionalities. Other important developments include the addition of voice assistants and web browsers to the list of Core Platform Services (“CPS”), and symbolically higher “designation” thresholds that further ensure the act will apply overwhelmingly to just U.S. companies. On a brighter note, lawmakers agreed that companies could rebut their designation as “gatekeepers,” though it remains to be seen how feasible that will be in practice. 

We offer here an overview of the key provisions included in the final version of the DMA and a reminder of the shaky foundations it rests on.

Interoperability

Among the most important of the DMA’s new rules concerns mandatory interoperability among online platforms. In a nutshell, digital platforms that are designated as “gatekeepers” will be forced to make their services “interoperable” (i.e., compatible) with those of rivals. It is argued that this will make online markets more contestable and thus boost consumer choice. But as ICLE scholars have been explaining for some time, this is unlikely to be the case (here, here, and here). Interoperability is not the panacea EU legislators claim it to be. As former ICLE Director of Competition Policy Sam Bowman has written, there are many things that could be interoperable, but aren’t. The reason is that interoperability comes with costs as well as benefits. For instance, it may be worth letting different earbuds have different designs because, while it means we sacrifice easy interoperability, we gain the ability for better designs to be brought to the market and for consumers to be able to choose among them. Economists Michael L. Katz and Carl Shapiro concur:

Although compatibility has obvious benefits, obtaining and maintaining compatibility often involves a sacrifice in terms of product variety or restraints on innovation.

There are other potential downsides to interoperability.  For instance, a given set of interoperable standards might be too costly to implement and/or maintain; it might preclude certain pricing models that increase output; or it might compromise some element of a product or service that offers benefits specifically because it is not interoperable (such as, e.g., security features). Consumers may also genuinely prefer closed (i.e., non-interoperable) platforms. Indeed: “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 that belie simplistic characterizations of one being inherently superior to the other. 

Further, as Sam Bowman observed, narrowing choice through a more curated experience can also be valuable for users, as it frees them from having to research every possible option every time they buy or use some product (if you’re unconvinced, try turning off your spam filter for a couple of days). Instead, the relevant choice consumers exercise might be in choosing among brands. In sum, where interoperability is a desirable feature, consumer preferences will tend to push for more of it. However, it is fundamentally misguided to treat mandatory interoperability as a cure-all elixir or a “super tool” of “digital platform governance.” In a free-market economy, it is not—or, it should not—be up to courts and legislators to substitute for businesses’ product-design decisions and consumers’ revealed preferences with their own, based on diffuse notions of “fairness.” After all, if we could entrust such decisions to regulators, we wouldn’t need markets or competition in the first place.

Of course, it was always clear that the DMA would contemplate some degree of mandatory interoperability – indeed, this was arguably the new law’s biggest selling point. What was up in the air until now was the scope of such obligations. The Commission had initially pushed for a comparatively restrained approach, requiring interoperability “only” in ancillary services, such as payment systems (“vertical interoperability”). By contrast, the European Parliament called for more expansive requirements that would also encompass social-media platforms and other messaging services (“horizontal interoperability”). 

The problem with such far-reaching interoperability requirements is that they are fundamentally out of pace with current privacy and security capabilities. As ICLE Senior Scholar Mikolaj Barczentewicz has repeatedly argued, the Parliament’s insistence on going significantly beyond the original DMA’s proposal and mandating interoperability of messaging services is overly broad and irresponsible. Indeed, as Mikolaj notes, the “likely result is less security and privacy, more expenses, and less innovation.”The DMA’s defensers would retort that the law allows gatekeepers to do what is “strictly necessary” (Council) or “indispensable” (Parliament) to protect safety and privacy (it is not yet clear which wording the final version has adopted). Either way, however, the standard may be too high and companies may very well offer lower security to avoid liability for adopting measures that would be judged by the Commission and the courts as going beyond what is “strictly necessary” or “indispensable.” These safeguards will inevitably be all the more indeterminate (and thus ineffectual) if weighed against other vague concepts at the heart of the DMA, such as “fairness.”

Gatekeeper Thresholds and the Designation Process

Another important issue in the DMA’s construction concerns the designation of what the law deems “gatekeepers.” Indeed, the DMA will only apply to such market gatekeepers—so-designated because they meet certain requirements and thresholds. Unfortunately, the factors that the European Commission will consider in conducting this designation process—revenues, market capitalization, and user base—are poor proxies for firms’ actual competitive position. This is not surprising, however, as the procedure is mainly designed to ensure certain high-profile (and overwhelmingly American) platforms are caught by the DMA.

From this perspective, the last-minute increase in revenue and market-capitalization thresholds—from 6.5 billion euros to 7.5 billion euros, and from 65 billion euros to 75 billion euros, respectively—won’t change the scope of the companies covered by the DMA very much. But it will serve to confirm what we already suspected: that the DMA’s thresholds are mostly tailored to catch certain U.S. companies, deliberately leaving out EU and possibly Chinese competitors (see here and here). Indeed, what would have made a difference here would have been lowering the thresholds, but this was never really on the table. Ultimately, tilting the European Union’s playing field against its top trading partner, in terms of exports and trade balance, is economically, politically, and strategically unwise.

As a consolation of sorts, it seems that the Commission managed to squeeze in a rebuttal mechanism for designated gatekeepers. Imposing far-reaching obligations on companies with no  (or very limited) recourse to escape the onerous requirements of the DMA would be contrary to the basic principles of procedural fairness. Still, it remains to be seen how this mechanism will be articulated and whether it will actually be viable in practice.

Double (and Triple?) Jeopardy

Two recent judgments from the European Court of Justice (ECJ)—Nordzucker and bpost—are likely to underscore the unintended effects of cumulative application of both the DMA and EU and/or national competition laws. The bpost decision is particularly relevant, because it lays down the conditions under which cases that evaluate the same persons and the same facts in two separate fields of law (sectoral regulation and competition law) do not violate the principle of ne bis in idem, also known as “double jeopardy.” As paragraph 51 of the judgment establishes:

  1. There must be precise rules to determine which acts or omissions are liable to be subject to duplicate proceedings;
  2. The two sets of proceedings must have been conducted in a sufficiently coordinated manner and within a similar timeframe; and
  3. The overall penalties must match the seriousness of the offense. 

It is doubtful whether the DMA fulfills these conditions. This is especially unfortunate considering the overlapping rules, features, and goals among the DMA and national-level competition laws, which are bound to lead to parallel procedures. In a word: expect double and triple jeopardy to be hotly litigated in the aftermath of the DMA.

Of course, other relevant questions have been settled which, for reasons of scope, we will have to leave for another time. These include the level of fines (up to 10% worldwide revenue, or 20% in the case of repeat offenses); the definition and consequences of systemic noncompliance (it seems that the Parliament’s draconian push for a general ban on acquisitions in case of systemic noncompliance has been dropped); and the addition of more core platform services (web browsers and voice assistants).

The DMA’s Dubious Underlying Assumptions

The fuss and exhilaration surrounding the impending adoption of the EU’s most ambitious competition-related proposal in decades should not obscure some of the more dubious assumptions which underpin it, such as that:

  1. It is still unclear that intervention in digital markets is necessary, let alone urgent.
  2. Even if it were clear, there is scant evidence to suggest that tried and tested ex post instruments, such as those envisioned in EU competition law, are not up to the task.
  3. Even if the prior two points had been established beyond any reasonable doubt (which they haven’t), it is still far from clear that DMA-style ex ante regulation is the right tool to address potential harms to competition and to consumers that arise in digital markets.

It is unclear that intervention is necessary

Despite a mounting moral panic around and zealous political crusading against Big Tech (an epithet meant to conjure antipathy and distrust), it is still unclear that intervention in digital markets is necessary. Much of the behavior the DMA assumes to be anti-competitive has plausible pro-competitive justifications. Self-preferencing, for instance, is a normal part of how platforms operate, both to improve the value of their core products and to earn returns to reinvest in their development. As ICLE’s Dirk Auer points out, since platforms’ incentives are to maximize the value of their entire product ecosystem, those that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product (the example of Facebook’s integration of Instagram is a case in point). Thus, while self-preferencing may, in some cases, be harmful, a blanket presumption of harm is thoroughly unwarranted

Similarly, the argument that switching costs and data-related increasing returns to scale (in fact, data generally entails diminishing returns) have led to consumer lock-in and thereby raised entry barriers has also been exaggerated to epic proportions (pun intended). As we have discussed previously, there are plenty of counterexamples where firms have easily overcome seemingly “insurmountable” barriers to entry, switching costs, and network effects to disrupt incumbents. 

To pick a recent case: how many of us had heard of Zoom before the pandemic? Where was TikTok three years ago? (see here for a multitude of other classic examples, including Yahoo and Myspace).

Can you really say, with a straight face, that switching costs between messaging apps are prohibitive? I’m not even that active and I use at least six such apps on a daily basis: Facebook Messenger, Whatsapp, Instagram, Twitter, Viber, Telegram, and Slack (it took me all of three minutes to download and start using Slack—my newest addition). In fact, chances are that, like me, you have always multihomed nonchalantly and had never even considered that switching costs were impossibly high (or that they were a thing) until the idea that you were “locked-in” by Big Tech was drilled into your head by politicians and other busybodies looking for trophies to adorn their walls.

What about the “unprecedented,” quasi-fascistic levels of economic concentration? First, measures of market concentration are sometimes anchored in flawed methodology and market definitions  (see, e.g., Epic’s insistence that Apple is a monopolist in the market for operating systems, conveniently ignoring that competition occurs at the smartphone level, where Apple has a worldwide market share of 15%—see pages 45-46 here). But even if such measurements were accurate, high levels of concentration don’t necessarily mean that firms do not face strong competition. In fact, as Nicolas Petit has shown, tech companies compete vigorously against each other across markets.

But perhaps the DMA’s raison d’etre rests less on market failure, but rather on a legal or enforcement failure? This, too, is misguided.

EU competition law is already up to the task

As Giuseppe Colangelo has argued persuasively (here and here), it is not at all clear that ex post competition regulation is insufficient to tackle anti-competitive behavior in the digital sector:

Ongoing antitrust investigations demonstrate that standard competition law still provides a flexible framework to scrutinize several practices described as new and peculiar to app stores. 

The recent Google Shopping decision, in which the Commission found that Google had abused its dominant position by preferencing its own online-shopping service in Google Search results, is a case in point (the decision was confirmed by the General Court and is now pending review before the European Court of Justice). The “self-preferencing” category has since been applied by other EU competition authorities. The Italian competition authority, for instance, fined Amazon 1 billion euros for preferencing its own distribution service, Fulfilled by Amazon, on the Amazon marketplace (i.e., Amazon.it). Thus, Article 102, which includes prohibitions on “applying dissimilar conditions to similar transactions,” appears sufficiently flexible to cover self-preferencing, as well as other potentially anti-competitive offenses relevant to digital markets (e.g., essential facilities).

For better or for worse, EU competition law has historically been sufficiently pliable to serve a range of goals and values. It has also allowed for experimentation and incorporated novel theories of harm and economic insights. Here, the advantage of competition law is that it allows for a more refined, individualized approach that can avoid some of the pitfalls of applying a one-size fits all model across all digital platforms. Those pitfalls include: harming consumers, jeopardizing the business models of some of the most successful and pro-consumer companies in existence, and ignoring the differences among platforms, such as between Google and Apple’s app stores. I turn to these issues next.

Ex ante regulation probably isn’t the right tool

Even if it were clear that intervention is necessary and that existing competition law was insufficient, it is not clear that the DMA is the right regulatory tool to address any potential harms to competition and consumers that may arise in the digital markets. Here, legislators need to be wary of unintended consequences, trade-offs, and regulatory fallibility. For one, It is possible that the DMA will essentially consolidate the power of tech platforms, turning them into de facto public utilities. This will not foster competition, but rather will make smaller competitors systematically dependent on so-called gatekeepers. Indeed, why become the next Google if you can just free ride off of the current Google? Why download an emerging messaging app if you can already interact with its users through your current one? In a way, then, the DMA may become a self-fulfilling prophecy. 

Moreover, turning closed or semi-closed platforms such as the iOS into open platforms more akin to Android blurs the distinctions among products and dampens interbrand competition. It is a supreme paradox that interoperability and sideloading requirements purportedly give users more choice by taking away the option of choosing a “walled garden” model. As discussed above, overriding the revealed preferences of millions of users is neither pro-competitive nor pro-consumer (but it probably favors some competitors at the expense of those two things). 

Nor are many of the other obligations contemplated in the DMA necessarily beneficial to consumers. Do users really not want to have default apps come preloaded on their devices and instead have to download and install them manually? Ditto for operating systems. What is the point of an operating system if it doesn’t come with certain functionalities, such as a web browser? What else should we unbundle—keyboard on iOS? Flashlight? Do consumers really want to choose from dozens of app stores when turning on their new phone for the first time? Do they really want to have their devices cluttered with pointless split-screens? Do users really want to find all their contacts (and be found by all their contacts) across all messaging services? (I switched to Viber because I emphatically didn’t.) Do they really want to have their privacy and security compromised because of interoperability requirements?Then there is the question of regulatory fallibility. As Alden Abott has written on the DMA and other ex ante regulatory proposals aimed at “reining in” tech companies:

Sorely missing from these regulatory proposals is any sense of the fallibility of regulation. Indeed, proponents of new regulatory proposals seem to implicitly assume that government regulation of platforms will enhance welfare, ignoring real-life regulatory costs and regulatory failures (see here, for example). 

This brings us back to the second point: without evidence that antitrust law is “not up to the task,” far-reaching and untested regulatory initiatives with potentially high error costs are put forth as superior to long-established, consumer-based antitrust enforcement. Yes, antitrust may have downsides (e.g., relative indeterminacy and slowness), but these pale in comparison to the DMA’s (e.g., large error costs resulting from high information requirements, rent-seeking, agency capture).

Conclusion

The DMA is an ambitious piece of regulation purportedly aimed at ensuring “fair and open digital markets.” This implies that markets are not fair and open; or that they risk becoming unfair and closed absent far-reaching regulatory intervention at EU level. However, it is unclear to what extent such assumptions are borne out by the reality of markets. Are digital markets really closed? Are they really unfair? If so, is it really certain that regulation is necessary? Has antitrust truly proven insufficient? It also implies that DMA-style ex ante regulation is necessary to tackle it, and that the costs won’t outweigh the benefits. These are heroic assumptions that have never truly been seriously put to the test. 

Considering such brittle empirical foundations, the DMA was always going to be a contentious piece of legislation. However, there was always the hope that EU legislators would show restraint in the face of little empirical evidence and high error costs. Today, these hopes have been dashed. With the adoption of the DMA, the Commission, Council, and the Parliament have arguably taken a bad piece of legislation and made it worse. The interoperability requirements in messaging services, which are bound to be a bane for user privacy and security, are a case in point.

After years trying to anticipate the whims of EU legislators, we finally know where we’re going, but it’s still not entirely sure why we’re going there.

For decades, consumer-welfare enhancement appeared to be a key enforcement goal of competition policy (antitrust, in the U.S. usage) in most jurisdictions:

  • The U.S. Supreme Court famously proclaimed American antitrust law to be a “consumer welfare prescription” in Reiter v. Sonotone Corp. (1979).
  • A study by the current adviser to the European Competition Commission’s chief economist found that that there are “many statements indicating that, seen from the European Commission, modern EU competition policy to a large extent is about protecting consumer welfare.”
  • A comprehensive international survey presented at the 2011 Annual International Competition Network Conference, found that a majority of competition authorities state that “their national [competition] legislation refers either directly or indirectly to consumer welfare,” and that most competition authorities “base their enforcement efforts on the premise that they enlarge consumer welfare.”  

Recently, however, the notion that a consumer welfare standard (CWS) should guide antitrust enforcement has come under attack (see here). In the United States, this movement has been led by populist “neo-Brandeisians” who have “call[ed] instead for enforcement that takes into account firm size, fairness, labor rights, and the protection of smaller enterprises.” (Interestingly, there appear to be more direct and strident published attacks on the CWS from American critics than from European commentators, perhaps reflecting an unspoken European assumption that “ordoliberal” strong government oversight of markets advances the welfare of consumers and society in general.) The neo-Brandeisian critique is badly flawed and should be rejected.

Assuming that the focus on consumer welfare in U.S. antitrust enforcement survives this latest populist challenge, what considerations should inform the design and application of a CWS? Before considering this question, one must confront the context in which it arises—the claim that the U.S. economy has become far less competitive in recent decades and that antitrust enforcement has been ineffective at addressing this problem. After dispatching with this flawed claim, I advance four principles aimed at properly incorporating consumer-welfare considerations into antitrust-enforcement analysis.  

Does the US Suffer from Poor Antitrust Enforcement and Declining Competition?

Antitrust interventionists assert that lax U.S. antitrust enforcement has coincided with a serious decline in competition—a claim deployed to argue that, even if one assumes that promoting consumer welfare remains an overarching goal, U.S. antitrust policy nonetheless requires a course correction. After all, basic price theory indicates that a reduction in market competition raises deadweight loss and reduces consumers’ relative share of total surplus. As such, it might seem to follow that “ramping up antitrust” would lead to more vigorously competitive markets, featuring less deadweight loss and relatively more consumer surplus.

This argument, of course, avoids error cost, rent seeking, and public choice issues that raise serious questions about the welfare effects of more aggressive “invigorated” enforcement (see here, for example). But more fundamentally, the argument is based on two incorrect premises:

  1. That competition has declined; and
  2. That U.S. trustbusters have applied the CWS in a narrow manner ineffective to address competitive problems.

Those premises (which also underlie President Joe Biden’s July 2021 Executive Order on Promoting Competition in the American Economy) do not stand up to scrutiny.

In a recent article in the Stigler Center journal Promarket, Yale University economics professor Fiona Scott-Morton and Yale Law student Leah Samuel accepted those premises in complaining about poor antitrust enforcement and substandard competition (hyperlinks omitted and emphasis in the original):

In recent years, the [CWS] term itself has become the target of vocal criticism in light of mounting evidence that recent enforcement—and what many call the “consumer welfare standard era” of antitrust enforcement—has been a failure. …

This strategy of non-enforcement has harmed markets and consumers. Today we see the evidence of this under-enforcement in a range of macroeconomic measures, studies of markups, as well as in merger post-mortems and studies of anticompetitive behavior that agencies have not pursued. Non-economist observers– journalists, advocates, and lawyers – who have noticed the lack of enforcement and the pernicious results have learned to blame “economics” and the CWS. They are correct that using CWS, as defined and warped by Chicago-era jurists and economists, has been a failure. That kind of enforcement—namely, insufficient enforcement—does not protect competition. But we argue that the “economics” at fault are the corporate-sponsored Chicago School assumptions, which are at best outdated, generally unjustified, and usually incorrect.

While the Chicago School caused the “consumer welfare standard” to become associated with an anti-enforcement philosophy in the legal community, it has never changed its meaning among PhD-trained economists.

To an economist, consumer welfare is a well-defined concept. Price, quality, and innovation are all part of the demand curve and all form the basis for the standard academic definition of consumer welfare. CW is the area under the demand curve and above the quality-adjusted price paid. … Quality-adjusted price represents all the value consumers get from the product less the price they paid, and therefore encapsulates the role of quality of any kind, innovation, and price on the welfare of the consumer.

In my published response to Scott-Morton and Samuel, I summarized recent economic literature that contradicts the “competition is declining” claim. I also demonstrated that antitrust enforcement has been robust and successful, refuting the authors’ claim to the contrary (cross links to economic literature omitted):

There are only two problems with the [authors’] argument. First, it is not clear at all that competition has declined during the reign of this supposedly misused [CWS] concept. Second, the consumer welfare standard has not been misapplied at all. Indeed, as antitrust scholars and enforcement officials have demonstrated … modern antitrust enforcement has not adopted a narrow “Chicago School” view of the world. To the contrary, it has incorporated the more sophisticated analysis the authors advocate, and enforcement initiatives have been vigorous and largely successful. Accordingly, the authors’ call for an adjustment in antitrust enforcement is a solution in search of a non-existent problem.

In short, competitive conditions in U.S. markets are robust and have not been declining. Moreover, U.S. antitrust enforcement has been sophisticated and aggressive, fully attuned to considerations of quality and innovation.

A Suggested Framework for Consumer Welfare Analysis

Although recent claims of “weak” U.S. antitrust enforcement are baseless, they do, nevertheless, raise “front and center” the nature of the CWS. The CWS is a worthwhile concept, but it eludes a precise definition. That is as it should be. In our common law system, fact-specific analyses of particular competitive practices are key to determining whether welfare is or is not being advanced in the case at hand. There is no simple talismanic CWS formula that is readily applicable to diverse cases.

While Scott-Morton argues that the area under the demand curve (consumer surplus) is essentially coincident with the CWS, other leading commentators take account of the interests of producers as well. For example, the leading antitrust treatise writer, Herbert Hovenkamp, suggests thinking about consumer welfare in terms of “maxim[izing] output that is consistent with sustainable competition. Output includes quantity, quality, and improvements in innovation. As an aside, it is worth noting that high output favors suppliers, including labor, as well as consumers because job opportunities increase when output is higher.” (Hovenkamp, Federal Antitrust Policy 102 (6th ed. 2020).)

Federal Trade Commission (FTC) Commissioner Christine Wilson (like Ken Heyer and other scholars) advocates a “total welfare standard” (consumer plus producer surplus). She stresses that it would beneficially:

  1. Make efficiencies more broadly cognizable, capturing cost reductions not passed through in the short run;
  2. Better enable the agencies to consider multi-market effects (whether consumer welfare gains in one market swamp consumer welfare losses in another market); and
  3. Better capture dynamic efficiencies (such as firm-specific efficiencies that are emulated by other “copycat” firms in the market).

Hovenkamp and Wilson point to the fact that efficiency-enhancing business conduct often has positive ramifications for both consumers and producers. As such, a CWS that focuses narrowly on short-term consumer surplus may prompt antitrust challenges to conduct that, properly understood, will prove beneficial to both consumers and producers over time.

With this in mind, I will now suggest four general “framework principles” to inform a CWS analysis that properly accounts for innovation and dynamic factors. These principles are tentative and merely suggestive, intended to prompt a further dialogue on CWS among interested commentators. (Also, many practical details will need to be filled in, based on further analysis.)

  1. Enforcers should consider all effects on consumer welfare in evaluating a transaction. Under the rule of reason, a reduction in surplus to particular defined consumers should not condemn a business practice (merger or non-merger) if other consumers are likely to enjoy accretions to surplus and if aggregate consumer surplus appears unlikely to decline, on net, due to the practice. Surplus need not be quantified—the likely direction of change in surplus is all that is required. In other words, “actual welfare balancing” is not required, consistent with the practical impossibility of quantifying new welfare effects in almost all cases (see, e.g., Hovenkamp, here). This principle is unaffected by market definition—all affected consumers should be assessed, whether they are “in” or “out” of a hypothesized market.
  2. Vertical intellectual-property-licensing contracts should not be subject to antitrust scrutiny unless there is substantial evidence that they are being used to facilitate horizontal collusion. This principle draws on the “New Madison Approach” associated with former Assistant Attorney General for Antitrust Makan Delrahim. It applies to a set of practices that further the interests of both consumers and producers. Vertical IP licensing (particularly patent licensing) “is highly important to the dynamic and efficient dissemination of new technologies throughout the economy, which, in turn, promotes innovation and increased welfare (consumer and producer surplus).” (See here, for example.) The 9th U.S. Circuit Court of Appeals’ refusal to condemn Qualcomm’s patent-licensing contracts (which had been challenged by the FTC) is consistent with this principle; it “evinces a refusal to find anticompetitive harm in licensing markets without hard empirical support.” (See here.)
  3. Furthermore, enforcers should carefully assess the ability of “non-standard” commercial contracts—horizontal and vertical—to overcome market failures, as described by transaction-cost economics (see here, and here, for example). Non-standard contracts may be designed to deal with problems (for instance) of contractual incompleteness and opportunism that stymie efforts to advance new commercial opportunities. To the extent that such contracts create opportunities for transactions that expand or enhance market offerings, they generate new consumer surplus (new or “shifted out” demand curves) and enhance consumer welfare. Thus, they should enjoy a general (though rebuttable) presumption of legality.
  4. Fourth, and most fundamentally, enforcers should take account of cost-benefit analysis, rooted in error-cost considerations, in their enforcement initiatives, in order to further consumer welfare. As I have previously written:

Assuming that one views modern antitrust enforcement as an exercise in consumer welfare maximization, what does that tell us about optimal antitrust enforcement policy design? In order to maximize welfare, enforcers must have an understanding of – and seek to maximize the difference between – the aggregate costs and benefits that are likely to flow from their policies. It therefore follows that cost-benefit analysis should be applied to antitrust enforcement design. Specifically, antitrust enforcers first should ensure that the rules they propagate create net welfare benefits. Next, they should (to the extent possible) seek to calibrate those rules so as to maximize net welfare. (Significantly, Federal Trade Commissioner Josh Wright also has highlighted the merits of utilizing cost-benefit analysis in the work of the FTC.) [Eight specific suggestions for implementing cost-beneficial antitrust evaluations are then put forth in this article.]

Conclusion

One must hope that efforts to eliminate consumer welfare as the focal point of U.S. antitrust will fail. But even if they do, market-oriented commentators should be alert to any efforts to “hijack” the CWS by interventionist market-skeptical scholars. A particular threat may involve efforts to define the CWS as merely involving short-term consumer surplus maximization in narrowly defined markets. Such efforts could, if successful, justify highly interventionist enforcement protocols deployed against a wide variety of efficient (though too often mischaracterized) business practices.

To counter interventionist antitrust proposals, it is important to demonstrate that claims of faltering competition and inadequate antitrust enforcement under current norms simply are inaccurate. Such an effort, though necessary, is not enough.

In order to win the day, it will be important for market mavens to explain that novel business practices aimed at promoting producer surplus tend to increase consumer surplus as well. That is because efficiency-enhancing stratagems (often embodied in restrictive IP-licensing agreements and non-standard contracts) that further innovation and overcome transaction-cost difficulties frequently pave the way for innovation and the dissemination of new technologies throughout the economy. Those effects, in turn, expand and create new market opportunities, yielding huge additions to consumer surplus—accretions that swamp short-term static effects.

Enlightened enforcers should apply enforcement protocols that allow such benefits to be taken into account. They should also focus on the interests of all consumers affected by a practice, not just a narrow subset of targeted potentially “harmed” consumers. Finally, public officials should view their enforcement mission through a cost-benefit lens, which is designed to promote welfare. 

As the European Union’s Digital Markets Act (DMA) has entered the final stage of its approval process, one matter the inter-institutional negotiations appears likely to leave unresolved is how the DMA’s the relationship with competition law affects the very rationale and legal basis for the intervention. 

The DMA is explicitly grounded on the questionable assumption that competition law alone is insufficient to rein in digital gatekeepers. Accordingly, EU lawmakers have declared the proposal to be a necessary regulatory intervention that will complement antitrust rules by introducing a set of ex ante obligations.

To support this line of reasoning, the DMA’s drafters insist that it protects a different legal interest from antitrust. Indeed, the intervention is ostensibly grounded in Article 114 of the Treaty on the Functioning of the European Union (TFEU), rather than Article 103—the article that spells out the implementation of competition law. Pursuant to Article 114, the DMA opts for centralized enforcement at the EU level to ensure harmonized implementation of the new rules.

It has nonetheless been clear from the very beginning that the DMA lacks a distinct purpose. Indeed, the interests it nominally protects (the promotion of fairness and contestability) do not differ from the substance and scope of competition law. The European Parliament has even suggested that the law’s aims should also include fostering innovation and increasing consumer welfare, which also are within the purview of competition law. Moreover, the DMA’s obligations focus on practices that have already been the subject of past and ongoing antitrust investigations.

Where the DMA differs in substance from competition law is simply that it would free enforcers from the burden of standard antitrust analysis. The law is essentially a convenient shortcut that would dispense with the need to define relevant markets, prove dominance, and measure market effects (see here). It essentially dismisses economic analysis and the efficiency-oriented consumer welfare test in order to lower the legal standards and evidentiary burdens needed to bring an investigation.

Acknowledging the continuum between competition law and the DMA, the European Competition Network and some member states (self-appointed as “friends of an effective DMA”) have proposed empowering national competition authorities (NCAs) to enforce DMA obligations.

Against this background, my new ICLE working paper pursues a twofold goal. First, it aims to show how, because of its ambiguous relationship with competition law, the DMA falls short of its goal of preventing regulatory fragmentation. Moreover, despite having significant doubts about the DMA’s content and rationale, I argue that fully centralized enforcement at the EU level should be preserved and that frictions with competition law would be better confined by limiting the law’s application to a few large platforms that are demonstrably able to orchestrate an ecosystem.

Welcome to the (Regulatory) Jungle

The DMA will not replace competition rules. It will instead be implemented alongside them, creating several overlapping layers of regulation. Indeed, my paper broadly illustrates how the very same practices that are targeted by the DMA may also be investigated by NCAs under European and national-level competition laws, under national competition laws specific to digital markets, and under national rules on economic dependence.

While the DMA nominally prohibits EU member states from imposing additional obligations on gatekeepers, member states remain free to adapt their competition laws to digital markets in accordance with the leeway granted by Article 3(3) of the Modernization Regulation. Moreover, NCAs may be eager to exploit national rules on economic dependence to tackle perceived imbalances of bargaining power between online platforms and their business counterparties.

The risk of overlap with competition law is also fostered by the DMA’s designation process, which may further widen the law’s scope in the future in terms of what sorts of digital services and firms may fall under the law’s rubric. As more and more industries explore platform business models, the DMA would—without some further constraints on its scope—be expected to cover a growing number of firms, including those well outside Big Tech or even native tech companies.

As a result, the European regulatory landscape could become even more fragmented in the post-DMA world. The parallel application of the DMA and antitrust rules poses the risks of double jeopardy (see here) and of conflicting decisions.

A Fully Centralized and Ecosystem-Based Regulatory Regime

To counter the risk that digital-market activity will be subject to regulatory double jeopardy and conflicting decisions across EU jurisdictions, DMA enforcement should not only be fully centralized at the EU level, but that centralization should be strengthened. This could be accomplished by empowering the Commission with veto rights, as was requested by the European Parliament.

This veto power should certainly extend to national measures targeting gatekeepers that run counter to the DMA or to decisions adopted by the Commission under the DMA. But it should also include prohibiting national authorities from carrying out investigations on their own initiative without prior authorization by the Commission.

Moreover, it will also likely be necessary to significantly redefine the DMA’s scope. Notably, EU leaders could mitigate the risk of fragmentation from the DMA’s frictions with competition law by circumscribing the law to ecosystem-related issues. This would effectively limit its application to a few large platforms who are demonstrably able to orchestrate an ecosystem. It also would reinstate the DMA’s original justification, which was to address the emergence of a few large platforms who are able act as gatekeepers and enjoy an entrenched position as a result of conglomerate ecosystems.

Changes to the designation process should also be accompanied by confining the list of ex ante obligations the law imposes. These should reflect relevant differences in platforms’ business models and be tailored to the specific firm under scrutiny, rather than implementing a one-size-fits-all approach.

There are compelling arguments against the policy choice to regulate platforms and their ecosystems like utilities. The suggested adaptations would at least acknowledge the regulatory nature of the DMA, removing the suspicion that it is just an antitrust intervention vested by regulation.

Responding to a new draft policy statement from the U.S. Patent & Trademark Office (USPTO), the National Institute of Standards and Technology (NIST), and the U.S. Department of Justice, Antitrust Division (DOJ) regarding remedies for infringement of standard-essential patents (SEPs), a group of 19 distinguished law, economics, and business scholars convened by the International Center for Law & Economics (ICLE) submitted comments arguing that the guidance would improperly tilt the balance of power between implementers and inventors, and could undermine incentives for innovation.

As explained in the scholars’ comments, the draft policy statement misunderstands many aspects of patent and antitrust policy. The draft notably underestimates the value of injunctions and the circumstances in which they are a necessary remedy. It also overlooks important features of the standardization process that make opportunistic behavior much less likely than policymakers typically recognize. These points are discussed in even more detail in previous work by ICLE scholars, including here and here.

These first-order considerations are only the tip of the iceberg, however. Patent policy has a huge range of second-order effects that the draft policy statement and policymakers more generally tend to overlook. Indeed, reducing patent protection has more detrimental effects on economic welfare than the conventional wisdom typically assumes. 

The comments highlight three important areas affected by SEP policy that would be undermined by the draft statement. 

  1. First, SEPs are established through an industry-wide, collaborative process that develops and protects innovations considered essential to an industry’s core functioning. This process enables firms to specialize in various functions throughout an industry, rather than vertically integrate to ensure compatibility. 
  2. Second, strong patent protection, especially of SEPs, boosts startup creation via a broader set of mechanisms than is typically recognized. 
  3. Finally, strong SEP protection is essential to safeguard U.S. technology leadership and sovereignty. 

As explained in the scholars’ comments, the draft policy statement would be detrimental on all three of these dimensions. 

To be clear, the comments do not argue that addressing these secondary effects should be a central focus of patent and antitrust policy. Instead, the point is that policymakers must deal with a far more complex set of issues than is commonly recognized; the effects of SEP policy aren’t limited to the allocation of rents among inventors and implementers (as they are sometimes framed in policy debates). Accordingly, policymakers should proceed with caution and resist the temptation to alter by fiat terms that have emerged through careful negotiation among inventors and implementers, and which have been governed for centuries by the common law of contract. 

Collaborative Standard-Setting and Specialization as Substitutes for Proprietary Standards and Vertical Integration

Intellectual property in general—and patents, more specifically—is often described as a means to increase the monetary returns from the creation and distribution of innovations. While this is undeniably the case, this framing overlooks the essential role that IP also plays in promoting specialization throughout the economy.

As Ronald Coase famously showed in his Nobel-winning work, firms must constantly decide whether to perform functions in-house (by vertically integrating), or contract them out to third parties (via the market mechanism). Coase concluded that these decisions hinge on whether the transaction costs associated with the market mechanism outweigh the cost of organizing production internally. Decades later, Oliver Williamson added a key finding to this insight. He found that among the most important transaction costs that firms encounter are those that stem from incomplete contracts and the scope for opportunistic behavior they entail.

This leads to a simple rule of thumb: as the scope for opportunistic behavior increases, firms are less likely to use the market mechanism and will instead perform tasks in-house, leading to increased vertical integration.

IP plays a key role in this process. Patents drastically reduce the transaction costs associated with the transfer of knowledge. This gives firms the opportunity to develop innovations collaboratively and without fear that trading partners might opportunistically appropriate their inventions. In turn, this leads to increased specialization. As Robert Merges observes

Patents facilitate arms-length trade of a technology-intensive input, leading to entry and specialization.

More specifically, it is worth noting that the development and commercialization of inventions can lead to two important sources of opportunistic behavior: patent holdup and patent holdout. As the assembled scholars explain in their comments, while patent holdup has drawn the lion’s share of policymaker attention, empirical and anecdotal evidence suggest that holdout is the more salient problem.

Policies that reduce these costs—especially patent holdout—in a cost-effective manner are worthwhile, with the immediate result that technologies are more widely distributed than would otherwise be the case. Inventors also see more intense and extensive incentives to produce those technologies in the first place.

The Importance of Intellectual Property Rights for Startup Activity

Strong patent rights are essential to monetize innovation, thus enabling new firms to gain a foothold in the marketplace. As the scholars’ comments explain, this is even more true for startup companies. There are three main reasons for this: 

  1. Patent rights protected by injunctions prevent established companies from simply copying innovative startups, with the expectation that they will be able to afford court-set royalties; 
  2. Patent rights can be the basis for securitization, facilitating access to startup funding; and
  3. Patent rights drive venture capital (VC) investment.

While point (1) is widely acknowledged, many fail to recognize it is particularly important for startup companies. There is abundant literature on firms’ appropriability mechanisms (these are essentially the strategies firms employ to prevent rivals from copying their inventions). The literature tells us that patent protection is far from the only strategy firms use to protect their inventions (see. e.g., here, here and here). 

The alternative appropriability mechanisms identified by these studies tend to be easier to implement for well-established firms. For instance, many firms earn returns on their inventions by incorporating them into physical products that cannot be reverse engineered. This is much easier for firms that already have a large industry presence and advanced manufacturing capabilities.  In contrast, startup companies—almost by definition—must outsource production.

Second, property rights could drive startup activity through the collateralization of IP. By offering security interests in patents, trademarks, and copyrights, startups with little or no tangible assets can obtain funding without surrendering significant equity. As Gaétan de Rassenfosse puts it

SMEs can leverage their IP to facilitate R&D financing…. [P]atents materialize the value of knowledge stock: they codify the knowledge and make it tradable, such that they can be used as collaterals. Recent theoretical evidence by Amable et al. (2010) suggests that a systematic use of patents as collateral would allow a high growth rate of innovations despite financial constraints.

Finally, there is reason to believe intellectual-property protection is an important driver of venture capital activity. Beyond simply enabling firms to earn returns on their investments, patents might signal to potential investors that a company is successful and/or valuable. Empirical research by Hsu and Ziedonis, for instance, supports this hypothesis

[W]e find a statistically significant and economically large effect of patent filings on investor estimates of start-up value…. A doubling in the patent application stock of a new venture [in] this sector is associated with a 28 percent increase in valuation, representing an upward funding-round adjustment of approximately $16.8 million for the average start-up in our sample.

In short, intellectual property can stimulate startup activity through various mechanisms. There is thus a sense that, at the margin, weakening patent protection will make it harder for entrepreneurs to embark on new business ventures.

The Role of Strong SEP Rights in Guarding Against China’s ‘Cyber Great Power’ Ambitions 

The United States, due in large measure to its strong intellectual-property protections, is a nation of innovators, and its production of IP is one of its most important comparative advantages. 

IP and its legal protections become even more important, however, when dealing with international jurisdictions, like China, that don’t offer similar levels of legal protection. By making it harder for patent holders to obtain injunctions, licensees and implementers gain the advantage in the short term, because they are able to use patented technology without having to engage in negotiations to pay the full market price. 

In the case of many SEPs—particularly those in the telecommunications sector—a great many patent holders are U.S.-based, while the lion’s share of implementers are Chinese. The anti-injunction policy espoused in the draft policy statement thus amounts to a subsidy to Chinese infringers of U.S. technology.

At the same time, China routinely undermines U.S. intellectual property protections through its industrial policy. The government’s stated goal is to promote “fair and reasonable” international rules, but it is clear that China stretches its power over intellectual property around the world by granting “anti-suit injunctions” on behalf of Chinese smartphone makers, designed to curtail enforcement of foreign companies’ patent rights.

This is part of the Chinese government’s larger approach to industrial policy, which seeks to expand Chinese power in international trade negotiations and in global standards bodies. As one Chinese Communist Party official put it

Standards are the commanding heights, the right to speak, and the right to control. Therefore, the one who obtains the standards gains the world.

Insufficient protections for intellectual property will hasten China’s objective of dominating collaborative standard development in the medium to long term. Simultaneously, this will engender a switch to greater reliance on proprietary, closed standards rather than collaborative, open standards. These harmful consequences are magnified in the context of the global technology landscape, and in light of China’s strategic effort to shape international technology standards. Chinese companies, directed by their government authorities, will gain significant control of the technologies that will underpin tomorrow’s digital goods and services.

The scholars convened by ICLE were not alone in voicing these fears. David Teece (also a signatory to the ICLE-convened comments), for example, surmises in his comments that: 

The US government, in reviewing competition policy issues that might impact standards, therefore needs to be aware that the issues at hand have tremendous geopolitical consequences and cannot be looked at in isolation…. Success in this regard will promote competition and is our best chance to maintain technological leadership—and, along with it, long-term economic growth and consumer welfare and national security.

Similarly, comments from the Center for Strategic and International Studies (signed by, among others, former USPTO Director Anrei Iancu, former NIST Director Walter Copan, and former Deputy Secretary of Defense John Hamre) argue that the draft policy statement would benefit Chinese firms at U.S. firms’ expense:

What is more, the largest short-term and long-term beneficiaries of the 2021 Draft Policy Statement are firms based in China. Currently, China is the world’s largest consumer of SEP-based technology, so weakening protection of American owned patents directly benefits Chinese manufacturers. The unintended effect of the 2021 Draft Policy Statement will be to support Chinese efforts to dominate critical technology standards and other advanced technologies, such as 5G. Put simply, devaluing U.S. patents is akin to a subsidized tech transfer to China.

With Chinese authorities joining standardization bodies and increasingly claiming jurisdiction over F/RAND disputes, there should be careful reevaluation of the ways the draft policy statement would further weaken the United States’ comparative advantage in IP-dependent technological innovation. 

Conclusion

In short, weakening patent protection could have detrimental ramifications that are routinely overlooked by policymakers. These include increasing inventors’ incentives to vertically integrate rather than develop innovations collaboratively; reducing startup activity (especially when combined with antitrust enforcers’ newfound proclivity to challenge startup acquisitions); and eroding America’s global technology leadership, particularly with respect to China.

For these reasons (and others), the text of the draft policy statement should be reconsidered and either revised substantially to better reflect these concerns or withdrawn entirely. 

The signatories to the comments are:

Alden F. AbbottSenior Research Fellow, Mercatus Center
George Mason University
Former General Counsel, U.S. Federal Trade Commission
Jonathan BarnettTorrey H. Webb Professor of Law
University of Southern California
Ronald A. CassDean Emeritus, School of Law
Boston University
Former Commissioner and Vice-Chairman, U.S. International Trade Commission
Giuseppe ColangeloJean Monnet Chair in European Innovation Policy and Associate Professor of Competition Law & Economics
University of Basilicata and LUISS (Italy)
Richard A. EpsteinLaurence A. Tisch Professor of Law
New York University
Bowman HeidenExecutive Director, Tusher Initiative at the Haas School of Business
University of California, Berkeley
Justin (Gus) HurwitzProfessor of Law
University of Nebraska
Thomas A. LambertWall Chair in Corporate Law and Governance
University of Missouri
Stan J. LiebowitzAshbel Smith Professor of Economics
University of Texas at Dallas
John E. LopatkaA. Robert Noll Distinguished Professor of Law
Penn State University
Keith MallinsonFounder and Managing Partner
WiseHarbor
Geoffrey A. MannePresident and Founder
International Center for Law & Economics
Adam MossoffProfessor of Law
George Mason University
Kristen Osenga Austin E. Owen Research Scholar and Professor of Law
University of Richmond
Vernon L. SmithGeorge L. Argyros Endowed Chair in Finance and Economics
Chapman University
Nobel Laureate in Economics (2002)
Daniel F. SpulberElinor Hobbs Distinguished Professor of International Business
Northwestern University
David J. TeeceThomas W. Tusher Professor in Global Business
University of California, Berkeley
Joshua D. WrightUniversity Professor of Law
George Mason University
Former Commissioner, U.S. Federal Trade Commission
John M. YunAssociate Professor of Law
George Mason University
Former Acting Deputy Assistant Director, Bureau of Economics, U.S. Federal Trade Commission 

The Jan. 18 Request for Information on Merger Enforcement (RFI)—issued jointly by the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ)—sets forth 91 sets of questions (subsumed under 15 headings) that provide ample opportunity for public comment on a large range of topics.

Before chasing down individual analytic rabbit holes related to specific questions, it would be useful to reflect on the “big picture” policy concerns raised by this exercise (but not hinted at in the questions). Viewed from a broad policy perspective, the RFI initiative risks undermining the general respect that courts have accorded merger guidelines over the years, as well as disincentivizing economically beneficial business consolidations.

Policy concerns that flow from various features of the RFI, which could undermine effective merger enforcement, are highlighted below. These concerns counsel against producing overly detailed guidelines that adopt a merger-skeptical orientation.

The RFI Reflects the False Premise that Competition is Declining in the United States

The FTC press release that accompanied the RFI’s release made clear that a supposed weakening of competition under the current merger-guidelines regime is a key driver of the FTC and DOJ interest in new guidelines:

Today, the Federal Trade Commission (FTC) and the Justice Department’s Antitrust Division launched a joint public inquiry aimed at strengthening enforcement against illegal mergers. Recent evidence indicates that many industries across the economy are becoming more concentrated and less competitive – imperiling choice and economic gains for consumers, workers, entrepreneurs, and small businesses.

This premise is not supported by the facts. Based on a detailed literature review, Chapter 6 of the 2020 Economic Report of the President concluded that “the argument that the U.S. economy is suffering from insufficient competition is built on a weak empirical foundation and questionable assumptions.” More specifically, the 2020 Economic Report explained:

Research purporting to document a pattern of increasing concentration and increasing markups uses data on segments of the economy that are far too broad to offer any insights about competition, either in specific markets or in the economy at large. Where data do accurately identify issues of concentration or supercompetitive profits, additional analysis is needed to distinguish between alternative explanations, rather than equating these market indicators with harmful market power.

Soon to-be-published quantitative research by Robert Kulick of NERA Economic Consulting and the American Enterprise Institute, presented at the Jan. 26 Mercatus Antitrust Forum, is consistent with the 2020 Economic Report’s findings. Kulick stressed that there was no general trend toward increasing industrial concentration in the U.S. economy from 2002 to 2017. In particular, industrial concentration has been declining since 2007; the Herfindahl–Hirschman index (HHI) for manufacturing has declined significantly since 2002; and the economywide four-firm concentration ratio (CR4) in 2017 was approximately the same as in 2002. 

Even in industries where concentration may have risen, “the evidence does not support claims that concentration is persistent or harmful.” In that regard, Kulick’s research finds that higher-concentration industries tend to become less concentrated, while lower-concentration industries tend to become more concentrated over time; increases in industrial concentration are associated with economic growth and job creation, particularly for high-growth industries; and rising industrial concentration may be driven by increasing market competition.

In short, the strongest justification for issuing new merger guidelines is based on false premises: an alleged decline in competition within the Unites States. Given this reality, the adoption of revised guidelines designed to “ratchet up” merger enforcement would appear highly questionable.

The RFI Strikes a Merger-Skeptical Tone Out of Touch with Modern Mainstream Antitrust Scholarship

The overall tone of the RFI reflects a skeptical view of the potential benefits of mergers. It ignores overarching beneficial aspects of mergers, which include reallocating scarce resources to higher-valued uses (through the market for corporate control) and realizing standard efficiencies of various sorts (including cost-based efficiencies and incentive effects, such as the elimination of double marginalization through vertical integration). Mergers also generate benefits by bringing together complementary assets and by generating synergies of various sorts, including the promotion of innovation and scaling up the fruits of research and development. (See here, for example.)

What’s more, as the Organisation for Economic Co-operation and Development (OECD) has explained, “[e]vidence suggests that vertical mergers are generally pro-competitive, as they are driven by efficiency-enhancing motives such as improving vertical co-ordination and realizing economies of scope.”

Given the manifold benefits of mergers in general, the negative and merger-skeptical tone of the RFI is regrettable. It not only ignores sound economics, but it is at odds with recent pronouncements by the FTC and DOJ. Notably, the 2010 DOJ-FTC Horizontal Merger Guidelines (issued by Obama administration enforcers) struck a neutral tone. Those guidelines recognized the duty to challenge anticompetitive mergers while noting the public interest in avoiding unnecessary interference with non-anticompetitive mergers (“[t]he Agencies seek to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral”). The same neutral approach is found in the 2020 DOJ-FTC Vertical Merger Guidelines (“the Agencies use a consistent set of facts and assumptions to evaluate both the potential competitive harm from a vertical merger and the potential benefits to competition”).

The RFI, however, expresses no concern about unnecessary government interference, and strongly emphasizes the potential shortcomings of the existing guidelines in questioning whether they “adequately equip enforcers to identify and proscribe unlawful, anticompetitive mergers.” Merger-skepticism is also reflected throughout the RFI’s 91 sets of questions. A close reading reveals that they are generally phrased in ways that implicitly assume competitive problems or reject potential merger justifications.

For example, the questions addressing efficiencies, under RFI heading 14, casts efficiencies in a generally negative light. Thus, the RFI asks whether “the [existing] guidelines’ approach to efficiencies [is] consistent with the prevailing legal framework as enacted by Congress and interpreted by the courts,” citing the statement in FTC v. Procter & Gamble (1967) that “[p]ossible economies cannot be used as a defense to illegality.”

The view that antitrust disfavors mergers that enhance efficiencies (the “efficiencies offense”) has been roundly rejected by mainstream antitrust scholarship (see, for example, here, here, and here). It may be assumed that today’s Supreme Court (which has deemed consumer welfare to be the lodestone of antitrust enforcement since Reiter v. Sonotone (1979)) would give short shrift to an “efficiencies offense” justification for a merger challenge.

Another efficiencies-related question, under RFI heading 14.d, may in application fly in the face of sound market-oriented economics: “Where a merger is expected to generate cost savings via the elimination of ‘excess’ or ‘redundant’ capacity or workers, should the guidelines treat these savings as cognizable ‘efficiencies’?”

Consider a merger that generates synergies and thereby expands and/or raises the quality of goods and services produced with reduced capacity and fewer workers. This merger would allow these resources to be allocated to higher-valued uses elsewhere in the economy, yielding greater economic surplus for consumers and producers. But there is the risk that such a merger could be viewed unfavorably under new merger guidelines that were revised in light of this question. (Although heading 14.d includes a separate question regarding capacity reductions that have the potential to reduce supply resilience or product or service quality, it is not stated that this provision should be viewed as a limitation on the first sentence.)

The RFI’s discussion of topics other than efficiencies similarly sends the message that existing guidelines are too “pro-merger.” Thus, for example, under RFI heading 5 (“presumptions”), one finds the rhetorical question: “[d]o the [existing] guidelines adequately identify mergers that are presumptively unlawful under controlling case law?”

This question answers itself, by citing to the Philadelphia National Bank (1963) statement that “[w]ithout attempting to specify the smallest market share which would still be considered to threaten undue concentration, we are clear that 30% presents that threat.” This statement predates all of the merger guidelines and is out of step with the modern economic analysis of mergers, which the existing guidelines embody. It would, if taken seriously, threaten a huge number of proposed mergers that, until now, have not been subject to second-request review by the DOJ and FTC. As Judge Douglas Ginsburg and former Commissioner Joshua Wright have explained:

The practical effect of the PNB presumption is to shift the burden of proof from the plaintiff, where it rightfully resides, to the defendant, without requiring evidence – other than market shares – that the proposed merger is likely to harm competition. . . . The presumption ought to go the way of the agencies’ policy decision to drop reliance upon the discredited antitrust theories approved by the courts in such cases as Brown Shoe, Von’s Grocery, and Utah Pie. Otherwise, the agencies will ultimately have to deal with the tension between taking advantage of a favorable presumption in litigation and exerting a reformative influence on the direction of merger law.

By inviting support for PNB-style thinking, RFI heading 5’s lead question effectively rejects the economic effects-based analysis that has been central to agency merger analysis for decades. Guideline revisions that downplay effects in favor of mere concentration would likely be viewed askance by reviewing courts (and almost certainly would be rejected by the Supreme Court, as currently constituted, if the occasion arose).

These particularly striking examples are illustrative of the questioning tone regarding existing merger analysis that permeates the RFI.

New Merger Guidelines, if Issued, Should Not Incorporate the Multiplicity of Issues Embodied in the RFI

The 91 sets of questions in the RFI read, in large part, like a compendium of theoretical harms to the working of markets that might be associated with mergers. While these questions may be of general academic interest, and may shed some light on particular merger investigations, most of them should not be incorporated into guidelines.

As Justice Stephen Breyer has pointed out, antitrust is a legal regime that must account for administrative practicalities. Then-Judge Breyer described the nature of the problem in his 1983 Barry Wright opinion (affirming the dismissal of a Sherman Act Section 2 complaint based on “unreasonably low” prices):

[W]hile technical economic discussion helps to inform the antitrust laws, those laws cannot precisely replicate the economists’ (sometimes conflicting) views. For, unlike economics, law is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients. Rules that seek to embody every economic complexity and qualification may well, through the vagaries of administration, prove counter-productive, undercutting the very economic ends they seek to serve.

It follows that any effort to include every theoretical merger-related concern in new merger guidelines would undercut their (presumed) overarching purpose, which is providing useful guidance to the private sector. All-inclusive “guidelines” in reality provide no guidance at all. Faced with a laundry list of possible problems that might prompt the FTC or DOJ to oppose a merger, private parties would face enormous uncertainty, which could deter them from proposing a large number of procompetitive, welfare-enhancing or welfare-neutral consolidations. This would “undercut the very economic ends” of promoting competition that is served by Section 7 enforcement.

Furthermore, all-inclusive merger guidelines could be seen by judges as undermining the rule of law (see here, for example). If DOJ and FTC were able to “pick and choose” at will from an enormously wide array of considerations to justify opposing a proposed merger, they could be seen as engaged in arbitrary enforcement, rather than in a careful weighing of evidence aimed at condemning only anticompetitive transactions. This would be at odds with the promise of fair and dispassionate enforcement found in the 2010 Horizontal Merger Guidelines, namely, to “seek to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral.”

Up until now, federal courts have virtually always implicitly deferred to (and not questioned) the application of merger-guideline principles by the DOJ and FTC. The agencies have won or lost cases based on courts’ weighing of particular factual and economic evidence, not on whether guideline principles should have been applied by the enforcers.

One would expect courts to react very differently, however, to cases brought in light of ridiculously detailed “guidelines” that did not provide true guidance (particularly if they were heavy on competitive harm possibilities and discounted efficiencies). The agencies’ selective reliance on particular anticompetitive theories could be seen as exercises in arbitrary “pre-cooked” condemnations, not dispassionate enforcement. As such, the courts would tend to be far more inclined to reject (or accord far less deference to) the new guidelines in evaluating agency merger challenges. Even transactions that would have been particularly compelling candidates for condemnation under prior guidelines could be harder to challenge successfully, due to the taint of the new guidelines.

In short, the adoption of highly detailed guidelines that emphasize numerous theories of harm would likely undermine the effectiveness of DOJ and FTC merger enforcement, the precise opposite of what the agencies would have intended.

New Merger Guidelines, if Issued, Should Avoid Relying on Outdated Case Law and Novel Section 7 Theories, and Should Give Due Credit to Economic Efficiencies

The DOJ and FTC could, of course, acknowledge the problem of administrability  and issue more straightforward guideline revisions, of comparable length and detail to prior guidelines. If they choose to do so, they would be well-advised to eschew relying on dated precedents and novel Section 7 theories. They should also give due credit to efficiencies. Seemingly biased guidelines would undermine merger enforcement, not strengthen it.

As discussed above, the RFI’s implicitly favorable references to Philadelphia National Bank and Procter & Gamble are at odds with contemporary economics-based antitrust thinking, which has been accepted by the federal courts. The favorable treatment of those antediluvian holdings, and Brown Shoe Co. v. United States (1962) (another horribly dated case cited multiple times in the RFI), would do much to discredit new guidelines.

In that regard, the suggestion in RFI heading 1 that existing merger guidelines may not “faithfully track the statutory text, legislative history, and established case law around merger enforcement” touts the Brown Shoe and PNB concerns with a “trend toward concentration” and “the danger of subverting congressional intent by permitting a too-broad economic investigation.”

New guidelines that focus on (or even give lip service to) a “trend” toward concentration and eschew overly detailed economic analyses (as opposed, perhaps, to purely concentration-based negative rules of thumb?) would predictably come in for judicial scorn as economically unfounded. Such references would do as much (if not more) to ensure judicial rejection of enforcement-agency guidelines as endless lists of theoretically possible sources of competitive harm, discussed previously.

Of particular concern are those references that implicitly reject the need to consider efficiencies, which is key to modern enlightened merger evaluations. It is ludicrous to believe that a majority of the current Supreme Court would have a merger-analysis epiphany and decide that the RFI’s preferred interventionist reading of Section 7 statutory language and legislative history trumps decades of economically centered consumer-welfare scholarship and agency guidelines.

Herbert Hovenkamp, author of the leading American antitrust treatise and a scholar who has been cited countless times by the Supreme Court, recently put it well (in an article coauthored with Carl Shapiro):

When the FTC investigates vertical and horizontal mergers will it now take the position that efficiencies are irrelevant, even if they are proven? If so, the FTC will face embarrassing losses in court.

Reviewing courts wound no doubt take heed of this statement in assessing any future merger guidelines that rely on dated and discredited cases or that minimize efficiencies.

New Guidelines, if Issued, Should Give Due Credit to Efficiencies

Heading 14 of the RFI—listing seven sets of questions that deal with efficiencies—is in line with the document’s implicitly negative portrayal of mergers. The heading begins inauspiciously, with a question that cites Procter & Gamble in suggesting that the current guidelines’ approach to efficiencies is “[in]consistent with the prevailing legal framework as enacted by Congress and interpreted by the courts.” As explained above, such an anti-efficiencies reference would be viewed askance by most, if not all, reviewing judges.

Other queries in heading 14 also view efficiencies as problematic. They suggest that efficiency claims should be treated negatively because efficiency claims are not always realized after the fact. But merger activity is a private-sector search process, and the ability to predict ex post effects with perfect accuracy is an inevitable part of market activity. Using such a natural aspect of markets as an excuse to ignore efficiencies would prevent many economically desirable consolidations from being achieved.

Furthermore, the suggestion under heading 14 that parties should have to show with certainty that cognizable efficiencies could not have been achieved through alternative means asks the impossible. Theoreticians may be able to dream up alternative means by which efficiencies might have been achieved (say, through convoluted contracts), but such constructs may not be practical in real-world settings. Requiring businesses to follow dubious theoretical approaches to achieve legitimate business ends, rather than allowing them to enter into arrangements they favor that appear efficient, would manifest inappropriate government interference in markets. (It would be just another example of the “pretense of knowledge” that Friedrich Hayek brilliantly described in his 1974 Nobel Prize lecture.)

Other questions under heading 14 raise concerns about the lack of discussion of possible “inefficiencies” in current guidelines, and speculate about possible losses of “product or service quality” due to otherwise efficient reductions in physical capacity and employment. Such theoretical musings offer little guidance to the private sector, and further cast in a negative light potential real resource savings.

Rather than incorporate the unhelpful theoretical efficiencies critiques under heading 14, the agencies should consider a more helpful approach to clarifying the evaluation of efficiencies in new guidelines. Such a clarification could be based on Commissioner Christine Wilson’s helpful discussion of merger efficiencies in recent writings (see, for example, here and here). Wilson has appropriately called for the symmetric treatment of both the potential harms and benefits arising from mergers, explaining that “the agencies readily credit harms but consistently approach potential benefits with extreme skepticism.”

She and Joshua Wright have also explained (see here, here, and here) that overly narrow product-market definitions may sometimes preclude consideration of substantial “out-of-market” efficiencies that arise from certain mergers. The consideration of offsetting “out-of-market” efficiencies that greatly outweigh competitive harms might warrant inclusion in new guidelines.

The FTC and DOJ could be heading for a merger-enforcement train wreck if they adopt new guidelines that incorporate the merger-skeptical tone and excruciating level of detail found in the RFI. This approach would yield a lengthy and uninformative laundry list of potential competitive problems that would allow the agencies to selectively pick competitive harm “stories” best adapted to oppose particular mergers, in tension with the rule of law.

Far from “strengthening” merger enforcement, such new guidelines would lead to economically harmful business uncertainty and would severely undermine judicial respect for the federal merger-enforcement process. The end result would be a “lose-lose” for businesses, for enforcers, and for the American economy.

Conclusion

If the agencies enact new guidelines, they should be relatively short and straightforward, designed to give private parties the clearest possible picture of general agency enforcement intentions. In particular, new guidelines should:

  1. Eschew references to dated and discredited case law;
  2. Adopt a neutral tone that acknowledges the beneficial aspects of mergers;
  3. Recognize the duty to challenge anticompetitive mergers, while at the same time noting the public interest in avoiding unnecessary interference with non-anticompetitive mergers (consistent with the 2010 Horizontal Merger Guidelines); and
  4. Acknowledge the importance of efficiencies, treating them symmetrically with competitive harm and according appropriate weight to countervailing out-of-market efficiencies (a distinct improvement over existing enforcement policy).

Merger enforcement should continue to be based on fact-based case-specific evaluations, informed by sound economics. Populist nostrums that treat mergers with suspicion and that ignore their beneficial aspects should be rejected. Such ideas are at odds with current scholarly thinking and judicial analysis, and should be relegated to the scrap heap of outmoded and bad public policies.