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[This post adapts elements of “Should ASEAN Antitrust Laws Emulate European Competition Policy?”, published in the Singapore Economic Review (2021). Open access working paper here.]

U.S. and European competition laws diverge in numerous ways that have important real-world effects. Understanding these differences is vital, particularly as lawmakers in the United States, and the rest of the world, consider adopting a more “European” approach to competition.

In broad terms, the European approach is more centralized and political. The European Commission’s Directorate General for Competition (DG Comp) has significant de facto discretion over how the law is enforced. This contrasts with the common law approach of the United States, in which courts elaborate upon open-ended statutes through an iterative process of case law. In other words, the European system was built from the top down, while U.S. antitrust relies on a bottom-up approach, derived from arguments made by litigants (including the government antitrust agencies) and defendants (usually businesses).

This procedural divergence has significant ramifications for substantive law. European competition law includes more provisions akin to de facto regulation. This is notably the case for the “abuse of dominance” standard, in which a “dominant” business can be prosecuted for “abusing” its position by charging high prices or refusing to deal with competitors. By contrast, the U.S. system places more emphasis on actual consumer outcomes, rather than the nature or “fairness” of an underlying practice.

The American system thus affords firms more leeway to exclude their rivals, so long as this entails superior benefits for consumers. This may make the U.S. system more hospitable to innovation, since there is no built-in regulation of conduct for innovators who acquire a successful market position fairly and through normal competition.

In this post, we discuss some key differences between the two systems—including in areas like predatory pricing and refusals to deal—as well as the discretionary power the European Commission enjoys under the European model.

Exploitative Abuses

U.S. antitrust is, by and large, unconcerned with companies charging what some might consider “excessive” prices. The late Associate Justice Antonin Scalia, writing for the Supreme Court majority in the 2003 case Verizon v. Trinko, observed that:

The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth.

This contrasts with European competition-law cases, where firms may be found to have infringed competition law because they charged excessive prices. As the European Court of Justice (ECJ) held in 1978’s United Brands case: “In this case charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be such an abuse.”

While United Brands was the EU’s foundational case for excessive pricing, and the European Commission reiterated that these allegedly exploitative abuses were possible when it published its guidance paper on abuse of dominance cases in 2009, the commission had for some time demonstrated apparent disinterest in bringing such cases. In recent years, however, both the European Commission and some national authorities have shown renewed interest in excessive-pricing cases, most notably in the pharmaceutical sector.

European competition law also penalizes so-called “margin squeeze” abuses, in which a dominant upstream supplier charges a price to distributors that is too high for them to compete effectively with that same dominant firm downstream:

[I]t is for the referring court to examine, in essence, whether the pricing practice introduced by TeliaSonera is unfair in so far as it squeezes the margins of its competitors on the retail market for broadband connection services to end users. (Konkurrensverket v TeliaSonera Sverige, 2011)

As Scalia observed in Trinko, forcing firms to charge prices that are below a market’s natural equilibrium affects firms’ incentives to enter markets, notably with innovative products and more efficient means of production. But the problem is not just one of market entry and innovation.  Also relevant is the degree to which competition authorities are competent to determine the “right” prices or margins.

As Friedrich Hayek demonstrated in his influential 1945 essay The Use of Knowledge in Society, economic agents use information gleaned from prices to guide their business decisions. It is this distributed activity of thousands or millions of economic actors that enables markets to put resources to their most valuable uses, thereby leading to more efficient societies. By comparison, the efforts of central regulators to set prices and margins is necessarily inferior; there is simply no reasonable way for competition regulators to make such judgments in a consistent and reliable manner.

Given the substantial risk that investigations into purportedly excessive prices will deter market entry, such investigations should be circumscribed. But the court’s precedents, with their myopic focus on ex post prices, do not impose such constraints on the commission. The temptation to “correct” high prices—especially in the politically contentious pharmaceutical industry—may thus induce economically unjustified and ultimately deleterious intervention.

Predatory Pricing

A second important area of divergence concerns predatory-pricing cases. U.S. antitrust law subjects allegations of predatory pricing to two strict conditions:

  1. Monopolists must charge prices that are below some measure of their incremental costs; and
  2. There must be a realistic prospect that they will able to recoup these initial losses.

In laying out its approach to predatory pricing, the U.S. Supreme Court has identified the risk of false positives and the clear cost of such errors to consumers. It thus has particularly stressed the importance of the recoupment requirement. As the court found in 1993’s Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., without recoupment, “predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced.”

Accordingly, U.S. authorities must prove that there are constraints that prevent rival firms from entering the market after the predation scheme, or that the scheme itself would effectively foreclose rivals from entering the market in the first place. Otherwise, the predator would be undercut by competitors as soon as it attempts to recoup its losses by charging supra-competitive prices.

Without the strong likelihood that a monopolist will be able to recoup lost revenue from underpricing, the overwhelming weight of economic evidence (to say nothing of simple logic) is that predatory pricing is not a rational business strategy. Thus, apparent cases of predatory pricing are most likely not, in fact, predatory; deterring or punishing them would actually harm consumers.

By contrast, the EU employs a more expansive legal standard to define predatory pricing, and almost certainly risks injuring consumers as a result. Authorities must prove only that a company has charged a price below its average variable cost, in which case its behavior is presumed to be predatory. Even when a firm charges prices that are between its average variable and average total cost, it can be found guilty of predatory pricing if authorities show that its behavior was part of a plan to eliminate a competitor. Most significantly, in neither case is it necessary for authorities to show that the scheme would allow the monopolist to recoup its losses.

[I]t does not follow from the case‑law of the Court that proof of the possibility of recoupment of losses suffered by the application, by an undertaking in a dominant position, of prices lower than a certain level of costs constitutes a necessary precondition to establishing that such a pricing policy is abusive. (France Télécom v Commission, 2009).

This aspect of the legal standard has no basis in economic theory or evidence—not even in the “strategic” economic theory that arguably challenges the dominant Chicago School understanding of predatory pricing. Indeed, strategic predatory pricing still requires some form of recoupment, and the refutation of any convincing business justification offered in response. For example, ​​in a 2017 piece for the Antitrust Law Journal, Steven Salop lays out the “raising rivals’ costs” analysis of predation and notes that recoupment still occurs, just at the same time as predation:

[T]he anticompetitive conditional pricing practice does not involve discrete predatory and recoupment periods, as in the case of classical predatory pricing. Instead, the recoupment occurs simultaneously with the conduct. This is because the monopolist is able to maintain its current monopoly power through the exclusionary conduct.

The case of predatory pricing illustrates a crucial distinction between European and American competition law. The recoupment requirement embodied in American antitrust law serves to differentiate aggressive pricing behavior that improves consumer welfare—because it leads to overall price decreases—from predatory pricing that reduces welfare with higher prices. It is, in other words, entirely focused on the welfare of consumers.

The European approach, by contrast, reflects structuralist considerations far removed from a concern for consumer welfare. Its underlying fear is that dominant companies could use aggressive pricing to engender more concentrated markets. It is simply presumed that these more concentrated markets are invariably detrimental to consumers. Both the Tetra Pak and France Télécom cases offer clear illustrations of the ECJ’s reasoning on this point:

[I]t would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated… The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors. (Tetra Pak v Commission, 1996).

Similarly:

[T]he lack of any possibility of recoupment of losses is not sufficient to prevent the undertaking concerned reinforcing its dominant position, in particular, following the withdrawal from the market of one or a number of its competitors, so that the degree of competition existing on the market, already weakened precisely because of the presence of the undertaking concerned, is further reduced and customers suffer loss as a result of the limitation of the choices available to them.  (France Télécom v Commission, 2009).

In short, the European approach leaves less room to analyze the concrete effects of a given pricing scheme, leaving it more prone to false positives than the U.S. standard explicated in the Brooke Group decision. Worse still, the European approach ignores not only the benefits that consumers may derive from lower prices, but also the chilling effect that broad predatory pricing standards may exert on firms that would otherwise seek to use aggressive pricing schemes to attract consumers.

Refusals to Deal

U.S. and EU antitrust law also differ greatly when it comes to refusals to deal. While the United States has limited the ability of either enforcement authorities or rivals to bring such cases, EU competition law sets a far lower threshold for liability.

As Justice Scalia wrote in Trinko:

Aspen Skiing is at or near the outer boundary of §2 liability. The Court there found significance in the defendant’s decision to cease participation in a cooperative venture. The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggested a willingness to forsake short-term profits to achieve an anticompetitive end. (Verizon v Trinko, 2003.)

This highlights two key features of American antitrust law with regard to refusals to deal. To start, U.S. antitrust law generally does not apply the “essential facilities” doctrine. Accordingly, in the absence of exceptional facts, upstream monopolists are rarely required to supply their product to downstream rivals, even if that supply is “essential” for effective competition in the downstream market. Moreover, as Justice Scalia observed in Trinko, the Aspen Skiing case appears to concern only those limited instances where a firm’s refusal to deal stems from the termination of a preexisting and profitable business relationship.

While even this is not likely the economically appropriate limitation on liability, its impetus—ensuring that liability is found only in situations where procompetitive explanations for the challenged conduct are unlikely—is completely appropriate for a regime concerned with minimizing the cost to consumers of erroneous enforcement decisions.

As in most areas of antitrust policy, EU competition law is much more interventionist. Refusals to deal are a central theme of EU enforcement efforts, and there is a relatively low threshold for liability.

In theory, for a refusal to deal to infringe EU competition law, it must meet a set of fairly stringent conditions: the input must be indispensable, the refusal must eliminate all competition in the downstream market, and there must not be objective reasons that justify the refusal. Moreover, if the refusal to deal involves intellectual property, it must also prevent the appearance of a new good.

In practice, however, all of these conditions have been relaxed significantly by EU courts and the commission’s decisional practice. This is best evidenced by the lower court’s Microsoft ruling where, as John Vickers notes:

[T]he Court found easily in favor of the Commission on the IMS Health criteria, which it interpreted surprisingly elastically, and without relying on the special factors emphasized by the Commission. For example, to meet the “new product” condition it was unnecessary to identify a particular new product… thwarted by the refusal to supply but sufficient merely to show limitation of technical development in terms of less incentive for competitors to innovate.

EU competition law thus shows far less concern for its potential chilling effect on firms’ investments than does U.S. antitrust law.

Vertical Restraints

There are vast differences between U.S. and EU competition law relating to vertical restraints—that is, contractual restraints between firms that operate at different levels of the production process.

On the one hand, since the Supreme Court’s Leegin ruling in 2006, even price-related vertical restraints (such as resale price maintenance (RPM), under which a manufacturer can stipulate the prices at which retailers must sell its products) are assessed under the rule of reason in the United States. Some commentators have gone so far as to say that, in practice, U.S. case law on RPM almost amounts to per se legality.

Conversely, EU competition law treats RPM as severely as it treats cartels. Both RPM and cartels are considered to be restrictions of competition “by object”—the EU’s equivalent of a per se prohibition. This severe treatment also applies to non-price vertical restraints that tend to partition the European internal market.

Furthermore, in the Consten and Grundig ruling, the ECJ rejected the consequentialist, and economically grounded, principle that inter-brand competition is the appropriate framework to assess vertical restraints:

Although competition between producers is generally more noticeable than that between distributors of products of the same make, it does not thereby follow that an agreement tending to restrict the latter kind of competition should escape the prohibition of Article 85(1) merely because it might increase the former. (Consten SARL & Grundig-Verkaufs-GMBH v. Commission of the European Economic Community, 1966).

This treatment of vertical restrictions flies in the face of longstanding mainstream economic analysis of the subject. As Patrick Rey and Jean Tirole conclude:

Another major contribution of the earlier literature on vertical restraints is to have shown that per se illegality of such restraints has no economic foundations.

Unlike the EU, the U.S. Supreme Court in Leegin took account of the weight of the economic literature, and changed its approach to RPM to ensure that the law no longer simply precluded its arguable consumer benefits, writing: “Though each side of the debate can find sources to support its position, it suffices to say here that economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance.” Further, the court found that the prior approach to resale price maintenance restraints “hinders competition and consumer welfare because manufacturers are forced to engage in second-best alternatives and because consumers are required to shoulder the increased expense of the inferior practices.”

The EU’s continued per se treatment of RPM, by contrast, strongly reflects its “precautionary principle” approach to antitrust. European regulators and courts readily condemn conduct that could conceivably injure consumers, even where such injury is, according to the best economic understanding, exceedingly unlikely. The U.S. approach, which rests on likelihood rather than mere possibility, is far less likely to condemn beneficial conduct erroneously.

Political Discretion in European Competition Law

EU competition law lacks a coherent analytical framework like that found in U.S. law’s reliance on the consumer welfare standard. The EU process is driven by a number of laterally equivalent—and sometimes mutually exclusive—goals, including industrial policy and the perceived need to counteract foreign state ownership and subsidies. Such a wide array of conflicting aims produces lack of clarity for firms seeking to conduct business. Moreover, the discretion that attends this fluid arrangement of goals yields an even larger problem.

The Microsoft case illustrates this problem well. In Microsoft, the commission could have chosen to base its decision on various potential objectives. It notably chose to base its findings on the fact that Microsoft’s behavior reduced “consumer choice.”

The commission, in fact, discounted arguments that economic efficiency may lead to consumer welfare gains, because it determined “consumer choice” among media players was more important:

Another argument relating to reduced transaction costs consists in saying that the economies made by a tied sale of two products saves resources otherwise spent for maintaining a separate distribution system for the second product. These economies would then be passed on to customers who could save costs related to a second purchasing act, including selection and installation of the product. Irrespective of the accuracy of the assumption that distributive efficiency gains are necessarily passed on to consumers, such savings cannot possibly outweigh the distortion of competition in this case. This is because distribution costs in software licensing are insignificant; a copy of a software programme can be duplicated and distributed at no substantial effort. In contrast, the importance of consumer choice and innovation regarding applications such as media players is high. (Commission Decision No. COMP. 37792 (Microsoft)).

It may be true that tying the products in question was unnecessary. But merely dismissing this decision because distribution costs are near-zero is hardly an analytically satisfactory response. There are many more costs involved in creating and distributing complementary software than those associated with hosting and downloading. The commission also simply asserts that consumer choice among some arbitrary number of competing products is necessarily a benefit. This, too, is not necessarily true, and the decision’s implication that any marginal increase in choice is more valuable than any gains from product design or innovation is analytically incoherent.

The Court of First Instance was only too happy to give the commission a pass in its breezy analysis; it saw no objection to these findings. With little substantive reasoning to support its findings, the court fully endorsed the commission’s assessment:

As the Commission correctly observes (see paragraph 1130 above), by such an argument Microsoft is in fact claiming that the integration of Windows Media Player in Windows and the marketing of Windows in that form alone lead to the de facto standardisation of the Windows Media Player platform, which has beneficial effects on the market. Although, generally, standardisation may effectively present certain advantages, it cannot be allowed to be imposed unilaterally by an undertaking in a dominant position by means of tying.

The Court further notes that it cannot be ruled out that third parties will not want the de facto standardisation advocated by Microsoft but will prefer it if different platforms continue to compete, on the ground that that will stimulate innovation between the various platforms. (Microsoft Corp. v Commission, 2007)

Pointing to these conflicting effects of Microsoft’s bundling decision, without weighing either, is a weak basis to uphold the commission’s decision that consumer choice outweighs the benefits of standardization. Moreover, actions undertaken by other firms to enhance consumer choice at the expense of standardization are, on these terms, potentially just as problematic. The dividing line becomes solely which theory the commission prefers to pursue.

What such a practice does is vest the commission with immense discretionary power. Any given case sets up a “heads, I win; tails, you lose” situation in which defendants are easily outflanked by a commission that can change the rules of its analysis as it sees fit. Defendants can play only the cards that they are dealt. Accordingly, Microsoft could not successfully challenge a conclusion that its behavior harmed consumers’ choice by arguing that it improved consumer welfare, on net.

By selecting, in this instance, “consumer choice” as the standard to be judged, the commission was able to evade the constraints that might have been imposed by a more robust welfare standard. Thus, the commission can essentially pick and choose the objectives that best serve its interests in each case. This vastly enlarges the scope of potential antitrust liability, while also substantially decreasing the ability of firms to predict when their behavior may be viewed as problematic. It leads to what, in U.S. courts, would be regarded as an untenable risk of false positives that chill innovative behavior and create nearly unwinnable battles for targeted firms.

From Sen. Elizabeth Warren (D-Mass.) to Sen. Josh Hawley (R-Mo.), populist calls to “fix” our antitrust laws and the underlying Consumer Welfare Standard have found a foothold on Capitol Hill. At the same time, there are calls to “fix” the Supreme Court by packing it with new justices. The court’s unanimous decision in NCAA v. Alston demonstrates that neither needs repair. To the contrary, clearly anti-competitive conduct—like the NCAA’s compensation rules—is proscribed under the Consumer Welfare Standard, and every justice from Samuel Alito to Sonia Sotomayor can agree on that.

In 1984, the court in NCAA v. Board of Regents suggested that “courts should take care when assessing the NCAA’s restraints on student-athlete compensation.” After all, joint ventures like sports leagues are entitled to rule-of-reason treatment. But while times change, the Consumer Welfare Standard is sufficiently flexible to meet those changes.

Where a competitive restraint exists primarily to ensure that “enormous sums of money flow to seemingly everyone except the student athletes,” the court rightly calls it out for what it is. As Associate Justice Brett Kavanaugh wrote in his concurrence:

Nowhere else in America can businesses get away with agreeing not to pay their workers a fair market rate on the theory that their product is defined by not paying their workers a fair market rate.  And under ordinary principles of antitrust law, it is not evident why college sports should be any different.  The NCAA is not above the law.

Disturbing these “ordinary principles”—whether through legislation, administrative rulemaking, or the common law—is simply unnecessary. For example, the Open Markets Institute filed an amicus brief arguing that the rule of reason should be “bounded” and willfully blind to the pro-competitive benefits some joint ventures can create (an argument that has been used, unsuccessfully, to attack ridesharing services like Uber and Lyft). Sen. Amy Klobuchar (D-Minn.) has proposed shifting the burden of proof so that merging parties are guilty until proven innocent. Sen. Warren would go further, deeming Amazon’s acquisition of Whole Foods anti-competitive simply because the company is “big,” and ignoring the merger’s myriad pro-competitive benefits. Sen. Hawley has gone further still: calling on Amazon to be investigated criminally for the crime of being innovative and successful.

Several of the current proposals, including those from Sens. Klobuchar and Hawley (and those recently introduced in the House that essentially single out firms for disfavored treatment), would replace the Consumer Welfare Standard that has underpinned antitrust law for decades with a policy that effectively punishes firms for being politically unpopular.

These examples demonstrate we should be wary when those in power assert that things are so irreparably broken that they need a complete overhaul. The “solutions” peddled usually increase politicians’ power by enabling them to pick winners and losers through top-down approaches that stifle the bottom-up innovations that make consumers’ lives better.

Are antitrust law and the Supreme Court perfect? Hardly. But in a 9-0 decision, the court proved this week that there’s nothing broken about either.

In its June 21 opinion in NCAA v. Alston, a unanimous U.S. Supreme Court affirmed the 9th U.S. Circuit Court of Appeals and thereby upheld a district court injunction finding unlawful certain National Collegiate Athletic Association (NCAA) rules limiting the education-related benefits schools may make available to student athletes. The decision will come as no surprise to antitrust lawyers who heard the oral argument; the NCAA was portrayed as a monopsony cartel whose rules undermined competition by restricting compensation paid to athletes.

Alas, however, Alston demonstrates that seemingly “good facts” (including an apparently Scrooge-like defendant) can make very bad law. While superficially appearing to be a relatively straightforward application of Sherman Act rule of reason principles, the decision fails to come to grips with the relationship of the restraints before it to the successful provision of the NCAA’s joint venture product – amateur intercollegiate sports. What’s worse, Associate Justice Brett Kavanaugh’s concurring opinion further muddies the court’s murky jurisprudential waters by signaling his view that the NCAA’s remaining compensation rules are anticompetitive and could be struck down in an appropriate case (“it is not clear how the NCAA can defend its remaining compensation rules”). Prospective plaintiffs may be expected to take the hint.

The Court’s Flawed Analysis

I previously commented on this then-pending case a few months ago:

In sum, the claim that antitrust may properly be applied to combat the alleged “exploitation” of college athletes by NCAA compensation regulations does not stand up to scrutiny. The NCAA’s rules that define the scope of amateurism may be imperfect, but there is no reason to think that empowering federal judges to second guess and reformulate NCAA athletic compensation rules would yield a more socially beneficial (let alone optimal) outcome. (Believing that the federal judiciary can optimally reengineer core NCAA amateurism rules is a prime example of the Nirvana fallacy at work.)  Furthermore, a Supreme Court decision affirming the 9th Circuit could do broad mischief by undermining case law that has accorded joint venturers substantial latitude to design the core features of their collective enterprise without judicial second-guessing.

Unfortunately, my concerns about a Supreme Court affirmance of the 9th Circuit were realized. Associate Justice Neil Gorsuch’s opinion for the court in Alston manifests a blinkered approach to the NCAA “monopsony” joint venture. To be sure, it cites and briefly discusses key Supreme Court joint venture holdings, including 2006’s Texaco v. Dagher. Nonetheless, it gives short shrift to the efficiency-based considerations that counsel presumptive deference to joint venture design rules that are key to the nature of a joint venture’s product.  

As a legal matter, the court felt obliged to defer to key district court findings not contested by the NCAA—including that the NCAA enjoys “monopsony power” in the student athlete labor market, and that the NCAA’s restrictions in fact decrease student athlete compensation “below the competitive level.”

However, even conceding these points, the court could have, but did not, take note of and assess the role of the restrictions under review in helping engender the enormous consumer benefits the NCAA confers upon consumers of its collegiate sports product. There is good reason to view those restrictions as an effort by the NCAA to address a negative externality that could diminish the attractiveness of the NCAA’s product for ultimate consumers, a result that would in turn reduce inter-brand competition.

As the amicus brief by antitrust economists (“Antitrust Economists Brief”) pointed out:

[T]he NCAA’s consistent and growing popularity reflects a product—”amateur sports” played by students and identified with the academic tradition—that continues to generate enormous consumer interest. Moreover, it appears without dispute that the NCAA, while in control of the design of its own athletic products, has preserved their integrity as amateur sports, notwithstanding the commercial success of some of them, particularly Division I basketball and Football Subdivision football. . . . Over many years, the NCAA has continually adjusted its eligibility and participation rules to prevent colleges from pursuing their own interests—which certainly can involve “pay to play”—in ways that would conflict with the procompetitive aims of the collaboration. In this sense, the NCAA’s amateurism rules are a classic example of addressing negative externalities and free riding that often are inherent or arise in the collaboration context.

The use of contractual restrictions (vertical restraints) to counteract free riding and other negative externalities generated in manufacturer-distributor interactions are well-recognized by antitrust courts. Although the restraints at issue in NCAA (and many other joint venture situations) are horizontal in nature, not vertical, they may be just as important as other nonstandard contracts in aligning the incentives of member institutions to best satisfy ultimate consumers. Satisfying consumers, in turn, enhances inter-brand competition between the NCAA’s product and other rival forms of entertainment, including professional sports offerings.

Alan Meese made a similar point in a recent paper (discussing a possible analytical framework for the court’s then-imminent Alston analysis):

[U]nchecked bidding for the services of student athletes could result in a market failure and suboptimal product quality, proof that the restraint reduces student athlete compensation below what an unbridled market would produce should not itself establish a prima facie case. Such evidence would instead be equally consistent with a conclusion that the restraint eliminates this market failure and restores compensation to optimal levels.

The court’s failure to address the externality justification was compounded by its handling of the rule of reason. First, in rejecting a truncated rule of reason with an initial presumption that the NCAA’s restraints involving student compensation are procompetitive, the court accepted that the NCAA’s monopsony power showed that its restraints “can (and in fact do) harm competition.” This assertion ignored the efficiency justification discussed above. As the Antitrust Economists’ Brief emphasized: 

[A]cting more like regulators, the lower courts treated the NCAA’s basic product design as inherently anticompetitive [so did the Supreme Court], pushing forward with a full rule of reason that sent the parties into a morass of inquiries that were not (and were never intended to be) structured to scrutinize basic product design decisions and their hypothetical alternatives. Because that inquiry was unrestrained and untethered to any input or output restraint, the application of the rule of reason in this case necessarily devolved into a quasi-regulatory inquiry, which antitrust law eschews.

Having decided that a “full” rule of reason analysis is appropriate, the Supreme Court, in effect, imposed a “least restrictive means” test on the restrictions under review, while purporting not to do so. (“We agree with the NCAA’s premise that antitrust law does not require businesses to use anything like the least restrictive means of achieving legitimate business purposes.”) The court concluded that “it was only after finding the NCAA’s restraints ‘patently and inexplicably stricter than is necessary’ to achieve the procompetitive benefits the league had demonstrated that the district court proceeded to declare a violation of the Sherman Act.” Effectively, however, this statement deferred to the lower court’s second-guessing of the means employed by the NCAA to preserve consumer demand, which the lower court did without any empirical basis.

The Supreme Court also approved the district court’s rejection of the NCAA’s view of what amateurism requires. It stressed the district court’s findings that “the NCAA’s rules and restrictions on compensation have shifted markedly over time” (seemingly a reasonable reaction to changes in market conditions) and that the NCAA developed the restrictions at issue without any reference to “considerations of consumer demand” (a de facto regulatory mandate directed at the NCAA). The Supreme Court inexplicably dubbed these lower court actions “a straightforward application of the rule of reason.” These actions seem more like blind deference to rather arbitrary judicial second-guessing of the expert party with the greatest interest in satisfying consumer demand.

The Supreme Court ended its misbegotten commentary on “less restrictive alternatives” by first claiming that it agreed that “antitrust courts must give wide berth to business judgments before finding liability.” The court asserted that the district court honored this and other principles of judicial humility because it enjoined restraints on education-related benefits “only after finding that relaxing these restrictions would not blur the distinction between college and professional sports and thus impair demand – and only finding that this course represented a significantly (not marginally) less restrictive means of achieving the same procompetitive benefits as the NCAA’s current rules.” This lower court finding once again was not based on an empirical analysis of procompetitive benefits under different sets of rules. It was little more than the personal opinion of a judge, who lacked the NCAA’s knowledge of relevant markets and expertise. That the Supreme Court accepted it as an exercise in restrained judicial analysis is well nigh inexplicable.

The Antitrust Economists’ Brief, unlike the Supreme Court, enunciated the correct approach to judicial rewriting of core NCAA joint venture rules:

The institutions that are members of the NCAA want to offer a particular type of athletic product—an amateur athletic product that they believe is consonant with their primary academic missions. By doing so, as th[e] [Supreme] Court has [previously] recognized [in its 1984 NCAA v. Board of Regents decision], they create a differentiated offering that widens consumer choice and enhances opportunities for student-athletes. NCAA, 468 U.S. at 102. These same institutions have drawn lines that they believe balance their desire to foster intercollegiate athletic competition with their overarching academic missions. Both the district court and the Ninth Circuit have now said that they may not do so, unless they draw those lines differently. Yet neither the district court nor the Ninth Circuit determined that the lines drawn reduce the output of intercollegiate athletics or ascertained whether their judicially-created lines would expand that output. That is not the function of antitrust courts, but of legislatures.                                                                                                   

Other Harms the Court Failed to Consider                    

Finally, the court failed to consider other harms that stem from a presumptive suspicion of NCAA restrictions on athletic compensation in general. The elimination of compensation rules should favor large well-funded athletic programs over others, potentially undermining “competitive balance” among schools. (Think of an NCAA March Madness tournament where “Cinderella stories” are eliminated, as virtually all the talented players have been snapped up by big name schools.) It could also, through the reallocation of income to “big name big sports” athletes who command a bidding premium, potentially reduce funding support for “minor college sports” that provide opportunities to a wide variety of student-athletes. This would disadvantage those athletes, undermine the future of “minor” sports, and quite possibly contribute to consumer disillusionment and unhappiness (think of the millions of parents of “minor sports” athletes).

What’s more, the existing rules allow many promising but non-superstar athletes to develop their skills over time, enhancing their ability to eventually compete at the professional level. (This may even be the case for some superstars, who may obtain greater long-term financial rewards by refining their talents and showcasing their skills for a year or two in college.) In addition, the current rules climate allows many student athletes who do not turn professional to develop personal connections that serve them well in their professional and personal lives, including connections derived from the “brand” of their university. (Think of wealthy and well-connected alumni who are ardent fans of their colleges’ athletic programs.) In a world without NCAA amateurism rules, the value of these experiences and connections could wither, to the detriment of athletes and consumers alike. (Consistent with my conclusion, economists Richard McKenzie and Dwight Lee have argued against the proposition that “college athletes are materially ‘underpaid’ and are ‘exploited’”.)   

This “parade of horribles” might appear unlikely in the short term. Nevertheless, in the course of time, the inability of the NCAA to control the attributes of its product, due to a changed legal climate, make it all too real. This is especially the case in light of Justice Kavanaugh’s strong warning that other NCAA compensation restrictions are likely indefensible. (As he bluntly put it, venerable college sports “traditions alone cannot justify the NCAA’s decision to build a massive money-raising enterprise on the backs of student athletes who are not fairly compensated. . . . The NCAA is not above the law.”)

Conclusion

The Supreme Court’s misguided Alston decision fails to weigh the powerful efficiency justifications for the NCAA’s amateurism rules. This holding virtually invites other lower courts to ignore efficiencies and to second guess decisions that go to the heart of the NCAA’s joint venture product offering. The end result is likely to reduce consumer welfare and, quite possibly, the welfare of many student athletes as well. One would hope that Congress, if it chooses to address NCAA rules, will keep these dangers well in mind. A statutory change not directed solely at the NCAA, creating a rebuttable presumption of legality for restraints that go to the heart of a lawful joint venture, may merit serious consideration.   

In his recent concurrence in Biden v. Knight, Justice Clarence Thomas sketched a roadmap for how to regulate social-media platforms. The animating factor for Thomas, much like for other conservatives, appears to be a sense that Big Tech has exhibited anti-conservative bias in its moderation decisions, most prominently by excluding former President Donald Trump from Twitter and Facebook. The opinion has predictably been greeted warmly by conservative champions of social-media regulation, who believe it shows how states and the federal government can proceed on this front.

While much of the commentary to date has been on whether Thomas got the legal analysis right, or on the uncomfortable fit of common-carriage law to social media, the deeper question of the First Amendment’s protection of private ordering has received relatively short shrift.

Conservatives’ main argument has been that Big Tech needs to be reined in because it is restricting the speech of private individuals. While conservatives traditionally have defended the state-action doctrine and the right to editorial discretion, they now readily find exceptions to both in order to justify regulating social-media companies. But those two First Amendment doctrines have long enshrined an important general principle: private actors can set the rules for speech on their own property. I intend to analyze this principle from a law & economics perspective and show how it benefits society.

Who Balances the Benefits and Costs of Speech?

Like virtually any other human activity, there are benefits and costs to speech and it is ultimately subjective individual preference that determines the value that speech has. The First Amendment protects speech from governmental regulation, with only limited exceptions, but that does not mean all speech is acceptable or must be tolerated. Under the state-action doctrine, the First Amendment only prevents the government from restricting speech.

Some purported defenders of the principle of free speech no longer appear to see a distinction between restraints on speech imposed by the government and those imposed by private actors. But this is surely mistaken, as no one truly believes all speech protected by the First Amendment should be without consequence. In truth, most regulation of speech has always come by informal means—social mores enforced by dirty looks or responsive speech from others.

Moreover, property rights have long played a crucial role in determining speech rules within any given space. If a man were to come into my house and start calling my wife racial epithets, I would not only ask that person to leave but would exercise my right as a property owner to eject the trespasser—if necessary, calling the police to assist me. I similarly could not expect to go to a restaurant and yell at the top of my lungs about political issues and expect them—even as “common carriers” or places of public accommodation—to allow me to continue.

As Thomas Sowell wrote in Knowledge and Decisions:

The fact that different costs and benefits must be balanced does not in itself imply who must balance them―or even that there must be a single balance for all, or a unitary viewpoint (one “we”) from which the issue is categorically resolved.

Knowledge and Decisions, p. 240

When it comes to speech, the balance that must be struck is between one individual’s desire for an audience and that prospective audience’s willingness to play the role. Asking government to use regulation to make categorical decisions for all of society is substituting centralized evaluation of the costs and benefits of access to communications for the individual decisions of many actors. Rather than incremental decisions regarding how and under what terms individuals may relate to one another—which can evolve over time in response to changes in what individuals find acceptable—government by its nature can only hand down categorical guidelines: “you must allow x, y, and z speech.”

This is particularly relevant in the sphere of social media. Social-media companies are multi-sided platforms. They are profit-seeking, to be sure, but the way they generate profits is by acting as intermediaries between users and advertisers. If they fail to serve their users well, those users could abandon the platform. Without users, advertisers would have no interest in buying ads. And without advertisers, there is no profit to be made. Social-media companies thus need to maximize the value of their platform by setting rules that keep users engaged.

In the cases of Facebook, Twitter, and YouTube, the platforms have set content-moderation standards that restrict many kinds of speech that are generally viewed negatively by users, even if the First Amendment would foreclose the government from regulating those same types of content. This is a good thing. Social-media companies balance the speech interests of different kinds of users to maximize the value of the platform and, in turn, to maximize benefits to all.

Herein lies the fundamental difference between private action and state action: one is voluntary, and the other based on coercion. If Facebook or Twitter suspends a user for violating community rules, it represents termination of a previously voluntary association. If the government kicks someone out of a public forum for expressing legal speech, that is coercion. The state-action doctrine recognizes this fundamental difference and creates a bright-line rule that courts may police when it comes to speech claims. As Sowell put it:

The courts’ role as watchdogs patrolling the boundaries of governmental power is essential in order that others may be secure and free on the other side of those boundaries. But what makes watchdogs valuable is precisely their ability to distinguish those people who are to be kept at bay and those who are to be left alone. A watchdog who could not make that distinction would not be a watchdog at all, but simply a general menace.

Knowledge and Decisions, p. 244

Markets Produce the Best Moderation Policies

The First Amendment also protects the right of editorial discretion, which means publishers, platforms, and other speakers are free from carrying or transmitting government-compelled speech. Even a newspaper with near-monopoly power cannot be compelled by a right-of-reply statute to carry responses by political candidates to editorials it has published. In other words, not only is private regulation of speech not state action, but in many cases, private regulation is protected by the First Amendment.

There is no reason to think that social-media companies today are in a different position than was the newspaper in Miami Herald v. Tornillo. These companies must determine what, how, and where content is presented within their platform. While this right of editorial discretion protects the moderation decisions of social-media companies, its benefits accrue to society at-large.

Social-media companies’ abilities to differentiate themselves based on functionality and moderation policies are important aspects of competition among them. How each platform is used may differ depending on those factors. In fact, many consumers use multiple social-media platforms throughout the day for different purposes. Market competition, not government power, has enabled internet users (including conservatives!) to have more avenues than ever to get their message out.

Many conservatives remain unpersuaded by the power of markets in this case. They see multiple platforms all engaging in very similar content-moderation policies when it comes to certain touchpoint issues, and thus allege widespread anti-conservative bias and collusion. Neither of those claims have much factual support, but more importantly, the similarity of content-moderation standards may simply be common responses to similar demand structures—not some nefarious and conspiratorial plot.

In other words, if social-media users demand less of the kinds of content commonly considered to be hate speech, or less misinformation on certain important issues, platforms will do their best to weed those things out. Platforms won’t always get these determinations right, but it is by no means clear that forcing them to carry all “legal” speech—which would include not just misinformation and hate speech, but pornographic material, as well—would better serve social-media users. There are always alternative means to debate contestable issues of the day, even if it may be more costly to access them.

Indeed, that content-moderation policies make it more difficult to communicate some messages is precisely the point of having them. There is a subset of protected speech to which many users do not wish to be subject. Moreover, there is no inherent right to have an audience on a social-media platform.

Conclusion

Much of the First Amendment’s economic value lies in how it defines roles in the market for speech. As a general matter, it is not the government’s place to determine what speech should be allowed in private spaces. Instead, the private ordering of speech emerges through the application of social mores and property rights. This benefits society, as it allows individuals to create voluntary relationships built on marginal decisions about what speech is acceptable when and where, rather than centralized decisions made by a governing few and that are difficult to change over time.

The U.S. Supreme Court’s just-published unanimous decision in AMG Capital Management LLC v. FTC—holding that Section 13(b) of the Federal Trade Commission Act does not authorize the commission to obtain court-ordered equitable monetary relief (such as restitution or disgorgement)—is not surprising. Moreover, by dissipating the cloud of litigation uncertainty that has surrounded the FTC’s recent efforts to seek such relief, the court cleared the way for consideration of targeted congressional legislation to address the issue.

But what should such legislation provide? After briefly summarizing the court’s holding, I will turn to the appropriate standards for optimal FTC consumer redress actions, which inform a welfare-enhancing legislative fix.

The Court’s Opinion

Justice Stephen Breyer’s opinion for the court is straightforward, centering on the structure and history of the FTC Act. Section 13(b) makes no direct reference to monetary relief. Its plain language merely authorizes the FTC to seek a “permanent injunction” in federal court against “any person, partnership, or corporation” that it believes “is violating, or is about to violate, any provision of law” that the commission enforces. In addition, by its terms, Section 13(b) is forward-looking, focusing on relief that is prospective, not retrospective (this cuts against the argument that payments for prior harm may be recouped from wrongdoers).

Furthermore, the FTC Act provisions that specifically authorize conditioned and limited forms of monetary relief (Section 5(l) and Section 19) are in the context of commission cease and desist orders, involving FTC administrative proceedings, unlike Section 13(b) actions that avoid the administrative route. In sum, the court concludes that:

[T]o read §13(b) to mean what it says, as authorizing injunctive but not monetary relief, produces a coherent enforcement scheme: The Commission may obtain monetary relief by first invoking its administrative procedures and then §19’s redress provisions (which include limitations). And the Commission may use §13(b) to obtain injunctive relief while administrative proceedings are foreseen or in progress, or when it seeks only injunctive relief. By contrast, the Commission’s broad reading would allow it to use §13(b) as a substitute for §5 and §19. For the reasons we have just stated, that could not have been Congress’ intent.

The court’s opinion concludes by succinctly rejecting the FTC’s arguments to the contrary.

What Comes Next

The Supreme Court’s decision has been anticipated by informed observers. All four sitting FTC Commissioners have already called for a Section 13(b) “legislative fix,” and in an April 20 hearing of Senate Commerce Committee, Chairwoman Maria Cantwell (D-Wash.) emphasized that, “[w]e have to do everything we can to protect this authority and, if necessary, pass new legislation to do so.”

What, however, should be the contours of such legislation? In considering alternative statutory rules, legislators should keep in mind not only the possible consumer benefits of monetary relief, but the costs of error, as well. Error costs are a ubiquitous element of public law enforcement, and this is particularly true in the case of FTC actions. Ideally, enforcers should seek to minimize the sum of the costs attributable to false positives (type I error), false negatives (type II error), administrative costs, and disincentive costs imposed on third parties, which may also be viewed as a subset of false positives. (See my 2014 piece “A Cost-Benefit Framework for Antitrust Enforcement Policy.”

Monetary relief is most appropriate in cases where error costs are minimal, and the quantum of harm is relatively easy to measure. This suggests a spectrum of FTC enforcement actions that may be candidates for monetary relief. Ideally, selection of targets for FTC consumer redress actions should be calibrated to yield the highest return to scarce enforcement resources, with an eye to optimal enforcement criteria.

Consider consumer protection enforcement. The strongest cases involve hardcore consumer fraud (where fraudulent purpose is clear and error is almost nil); they best satisfy accuracy in measurement and error-cost criteria. Next along the spectrum are cases of non-fraudulent but unfair or deceptive acts or practices that potentially involve some degree of error. In this category, situations involving easily measurable consumer losses (e.g., systematic failure to deliver particular goods requested or poor quality control yielding shipments of ruined goods) would appear to be the best candidates for monetary relief.

Moving along the spectrum, matters involving a higher likelihood of error and severe measurement problems should be the weakest candidates for consumer redress in the consumer protection sphere. For example, cases involve allegedly misleading advertising regarding the nature of goods, or allegedly insufficient advertising substantiation, may generate high false positives and intractable difficulties in estimating consumer harm. As a matter of judgment, given resource constraints, seeking financial recoveries solely in cases of fraud or clear deception where consumer losses are apparent and readily measurable makes the most sense from a cost-benefit perspective.

Consumer redress actions are problematic for a large proportion of FTC antitrust enforcement (“unfair methods of competition”) initiatives. Many of these antitrust cases are “cutting edge” matters involving novel theories and complex fact patterns that pose a significant threat of type I error. (In comparison, type I error is low in hardcore collusion cases brought by the U.S. Justice Department where the existence, nature, and effects of cartel activity are plain). What’s more, they generally raise extremely difficult if not impossible problems in estimating the degree of consumer harm. (Even DOJ price-fixing cases raise non-trivial measurement difficulties.)

For example, consider assigning a consumer welfare loss number to a patent antitrust settlement that may or may not have delayed entry of a generic drug by some length of time (depending upon the strength of the patent) or to a decision by a drug company to modify a drug slightly just before patent expiration in order to obtain a new patent period (raising questions of valuing potential product improvements). These and other examples suggest that only rarely should the FTC pursue requests for disgorgement or restitution in antitrust cases, if error-cost-centric enforcement criteria are to be honored.

Unfortunately, the FTC currently has nothing to say about when it will seek monetary relief in antitrust matters. Commendably, in 2003, the commission issued a Policy Statement on Monetary Equitable Remedies in Competition Cases specifying that it would only seek monetary relief in “exceptional cases” involving a “[c]lear [v]iolation” of the antitrust laws. Regrettably, in 2012, a majority of the FTC (with Commissioner Maureen Ohlhausen dissenting) withdrew that policy statement and the limitations it imposed. As I concluded in a 2012 article:

This action, which was taken without the benefit of advance notice and public comment, raises troubling questions. By increasing business uncertainty, the withdrawal may substantially chill efficient business practices that are not well understood by enforcers. In addition, it raises the specter of substantial error costs in the FTC’s pursuit of monetary sanctions. In short, it appears to represent a move away from, rather than towards, an economically enlightened antitrust enforcement policy.

In a 2013 speech, then-FTC Commissioner Josh Wright also lamented the withdrawal of the 2003 Statement, and stated that he would limit:

… the FTC’s ability to pursue disgorgement only against naked price fixing agreements among competitors or, in the case of single firm conduct, only if the monopolist’s conduct has no plausible efficiency justification. This latter category would include fraudulent or deceptive conduct, or tortious activity such as burning down a competitor’s plant.

As a practical matter, the FTC does not bring cases of this sort. The DOJ brings naked price-fixing cases and the unilateral conduct cases noted are as scarce as unicorns. Given that fact, Wright’s recommendation may rightly be seen as a rejection of monetary relief in FTC antitrust cases. Based on the previously discussed serious error-cost and measurement problems associated with monetary remedies in FTC antitrust cases, one may also conclude that the Wright approach is right on the money.

Finally, a recent article by former FTC Chairman Tim Muris, Howard Beales, and Benjamin Mundel opined that Section 13(b) should be construed to “limit[] the FTC’s ability to obtain monetary relief to conduct that a reasonable person would know was dishonest or fraudulent.” Although such a statutory reading is now precluded by the Supreme Court’s decision, its incorporation in a new statutory “fix” would appear ideal. It would allow for consumer redress in appropriate cases, while avoiding the likely net welfare losses arising from a more expansive approach to monetary remedies.

 Conclusion

The AMG Capital decision is sure to generate legislative proposals to restore the FTC’s ability to secure monetary relief in federal court. If Congress adopts a cost-beneficial error-cost framework in shaping targeted legislation, it should limit FTC monetary relief authority (recoupment and disgorgement) to situations of consumer fraud or dishonesty arising under the FTC’s authority to pursue unfair or deceptive acts or practices. Giving the FTC carte blanche to obtain financial recoveries in the full spectrum of antitrust and consumer protection cases would spawn uncertainty and could chill a great deal of innovative business behavior, to the ultimate detriment of consumer welfare.


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Amazingly enough, at a time when legislative proposals for new antitrust restrictions are rapidly multiplying—see the Competition and Antitrust Law Enforcement Reform Act (CALERA), for example—Congress simultaneously is seriously considering granting antitrust immunity to a price-fixing cartel among members of the newsmedia. This would thereby authorize what the late Justice Antonin Scalia termed “the supreme evil of antitrust: collusion.” What accounts for this bizarre development?

Discussion

The antitrust exemption in question, embodied in the Journalism Competition and Preservation Act of 2021, was introduced March 10 simultaneously in the U.S. House and Senate. The press release announcing the bill’s introduction portrayed it as a “good government” effort to help struggling newspapers in their negotiations with large digital platforms, and thereby strengthen American democracy:

We must enable news organizations to negotiate on a level playing field with the big tech companies if we want to preserve a strong and independent press[.] …

A strong, diverse, free press is critical for any successful democracy. …

Nearly 90 percent of Americans now get news while on a smartphone, computer, or tablet, according to a Pew Research Center survey conducted last year, dwarfing the number of Americans who get news via television, radio, or print media. Facebook and Google now account for the vast majority of online referrals to news sources, with the two companies also enjoying control of a majority of the online advertising market. This digital ad duopoly has directly contributed to layoffs and consolidation in the news industry, particularly for local news.

This legislation would address this imbalance by providing a safe harbor from antitrust laws so publishers can band together to negotiate with large platforms. It provides a 48-month window for companies to negotiate fair terms that would flow subscription and advertising dollars back to publishers, while protecting and preserving Americans’ right to access quality news. These negotiations would strictly benefit Americans and news publishers at-large; not just one or a few publishers.

The Journalism Competition and Preservation Act only allows coordination by news publishers if it (1) directly relates to the quality, accuracy, attribution or branding, and interoperability of news; (2) benefits the entire industry, rather than just a few publishers, and are non-discriminatory to other news publishers; and (3) is directly related to and reasonably necessary for these negotiations.

Lurking behind this public-spirited rhetoric, however, is the specter of special interest rent seeking by powerful media groups, as discussed in an insightful article by Thom Lambert. The newspaper industry is indeed struggling, but that is true overseas as well as in the United States. Competition from internet websites has greatly reduced revenues from classified and non-classified advertising. As Lambert notes, in “light of the challenges the internet has created for their advertising-focused funding model, newspapers have sought to employ the government’s coercive power to increase their revenues.”

In particular, media groups have successfully lobbied various foreign governments to impose rules requiring that Google and Facebook pay newspapers licensing fees to display content. The Australian government went even further by mandating that digital platforms share their advertising revenue with news publishers and give the publishers advance notice of any algorithm changes that could affect page rankings and displays. Media rent-seeking efforts took a different form in the United States, as Lambert explains (citations omitted):

In the United States, news publishers have sought to extract rents from digital platforms by lobbying for an exemption from the antitrust laws. Their efforts culminated in the introduction of the Journalism Competition and Preservation Act of 2018. According to a press release announcing the bill, it would allow “small publishers to band together to negotiate with dominant online platforms to improve the access to and the quality of news online.” In reality, the bill would create a four-year safe harbor for “any print or digital news organization” to jointly negotiate terms of trade with Google and Facebook. It would not apply merely to “small publishers” but would instead immunize collusive conduct by such major conglomerates as Murdoch’s News Corporation, the Walt Disney Corporation, the New York Times, Gannet Company, Bloomberg, Viacom, AT&T, and the Fox Corporation. The bill would permit news organizations to fix prices charged to digital platforms as long as negotiations with the platforms were not limited to price, were not discriminatory toward similarly situated news organizations, and somehow related to “the quality, accuracy, attribution or branding, and interoperability of news.” Given the ease of meeting that test—since news organizations could always claim that higher payments were necessary to ensure journalistic quality—the bill would enable news publishers in the United States to extract rents via collusion rather than via direct government coercion, as in Australia.

The 2021 version of the JCPA is nearly identical to the 2018 version discussed by Thom. The only substantive change is that the 2021 version strengthens the pro-cartel coalition by adding broadcasters (it applies to “any print, broadcast, or news organization”). While the JCPA plainly targets Facebook and Google (“online content distributors” with “not fewer than 1,000,000,000 monthly active users, in the aggregate, on its website”), Microsoft President Brad Smith noted in a March 12 House Antitrust Subcommittee Hearing on the bill that his company would also come under its collective-bargaining terms. Other online distributors could eventually become subject to the proposed law as well.

Purported justifications for the proposal were skillfully skewered by John Yun in a 2019 article on the substantively identical 2018 JCPA. Yun makes several salient points. First, the bill clearly shields price fixing. Second, the claim that all news organizations (in particular, small newspapers) would receive the same benefit from the bill rings hollow. The bill’s requirement that negotiations be “nondiscriminatory as to similarly situated news content creators” (emphasis added) would allow the cartel to negotiate different terms of trade for different “tiers” of organizations. Thus The New York Times and The Washington Post, say, might be part of a top tier getting the most favorable terms of trade. Third, the evidence does not support the assertion that Facebook and Google are monopolistic gateways for news outlets.

Yun concludes by summarizing the case against this legislation (citations omitted):

Put simply, the impact of the bill is to legalize a media cartel. The bill expressly allows the cartel to fix the price and set the terms of trade for all market participants. The clear goal is to transfer surplus from online platforms to news organizations, which will likely result in higher content costs for these platforms, as well as provisions that will stifle the ability to innovate. In turn, this could negatively impact quality for the users of these platforms.

Furthermore, a stated goal of the bill is to promote “quality” news and to “highlight trusted brands.” These are usually antitrust code words for favoring one group, e.g., those that are part of the News Media Alliance, while foreclosing others who are not “similarly situated.” What about the non-discrimination clause? Will it protect non-members from foreclosure? Again, a careful reading of the bill raises serious questions as to whether it will actually offer protection. The bill only ensures that the terms of the negotiations are available to all “similarly situated” news organizations. It is very easy to carve out provisions that would favor top tier members of the media cartel.

Additionally, an unintended consequence of antitrust exemptions can be that it makes the beneficiaries lax by insulating them from market competition and, ultimately, can harm the industry by delaying inevitable and difficult, but necessary, choices. There is evidence that this is what occurred with the Newspaper Preservation Act of 1970, which provided antitrust exemption to geographically proximate newspapers for joint operations.

There are very good reasons why antitrust jurisprudence reserves per se condemnation to the most egregious anticompetitive acts including the formation of cartels. Legislative attempts to circumvent the federal antitrust laws should be reserved solely for the most compelling justifications. There is little evidence that this level of justification has been met in this present circumstance.

Conclusion

Statutory exemptions to the antitrust laws have long been disfavored, and with good reason. As I explained in my 2005 testimony before the Antitrust Modernization Commission, such exemptions tend to foster welfare-reducing output restrictions. Also, empirical research suggests that industries sheltered from competition perform less well than those subject to competitive forces. In short, both economic theory and real-world data support a standard that requires proponents of an exemption to bear the burden of demonstrating that the exemption will benefit consumers.

This conclusion applies most strongly when an exemption would specifically authorize hard-core price fixing, as in the case with the JCPA. What’s more, the bill’s proponents have not borne the burden of justifying their pro-cartel proposal in economic welfare terms—quite the opposite. Lambert’s analysis exposes this legislation as the product of special interest rent seeking that has nothing to do with consumer welfare. And Yun’s evaluation of the bill clarifies that, not only would the JCPA foster harmful collusive pricing, but it would also harm its beneficiaries by allowing them to avoid taking steps to modernize and render themselves more efficient competitors.

In sum, though the JCPA claims to fly a “public interest” flag, it is just another private interest bill promoted by well-organized rent seekers would harm consumer welfare and undermine innovation.

The U.S. Supreme Court will hear a challenge next month to the 9th U.S. Circuit Court of Appeals’ 2020 decision in NCAA v. Alston. Alston affirmed a district court decision that enjoined the National Collegiate Athletic Association (NCAA) from enforcing rules that restrict the education-related benefits its member institutions may offer students who play Football Bowl Subdivision football and Division I basketball.

This will be the first Supreme Court review of NCAA practices since NCAA v. Board of Regents in 1984, which applied the antitrust rule of reason in striking down the NCAA’s “artificial limit” on the quantity of televised college football games, but also recognized that “this case involves an industry in which horizontal restraints on competition are essential if the product [intercollegiate athletic contests] is to be available at all.” Significantly, in commenting on the nature of appropriate, competition-enhancing NCAA restrictions, the court in Board of Regents stated that:

[I]n order to preserve the character and quality of the [NCAA] ‘product,’ athletes must not be paid, must be required to attend class, and the like. And the integrity of the ‘product’ cannot be preserved except by mutual agreement; if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the playing field might soon be destroyed. Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as a result enables a product to be marketed which might otherwise be unavailable. In performing this role, its actions widen consumer choice – not only the choices available to sports fans but also those available to athletes – and hence can be viewed as procompetitive. [footnote citation omitted]

One’s view of the Alston case may be shaped by one’s priors regarding the true nature of the NCAA. Is the NCAA a benevolent Dr. Jekyll, which seeks to promote amateurism and fairness in college sports to the benefit of student athletes and the general public?  Or is its benevolent façade a charade?  Although perhaps a force for good in its early years, has the NCAA transformed itself into an evil Mr. Hyde, using restrictive rules to maintain welfare-inimical monopoly power as a seller cartel of athletic events and a monopsony employer cartel that suppresses athletes’ wages? I will return to this question—and its bearing on the appropriate resolution of this legal dispute—after addressing key contentions by both sides in Alston.

Summarizing the Arguments in NCAA v Alston

The Alston class-action case followed in the wake of the 9th Circuit’s decision in O’Bannon v. NCAA (2015). O’Bannon affirmed in large part a district court’s ruling that the NCAA illegally restrained trade, in violation of Section 1 of the Sherman Act, by preventing football and men’s basketball players from receiving compensation for the use of their names, images, and likenesses. It also affirmed the district court’s injunction insofar as it required the NCAA to implement the less restrictive alternative of permitting athletic scholarships for the full cost of attendance. (I commented approvingly on the 9th Circuit’s decision in a previous TOTM post.) 

Subsequent antitrust actions by student-athletes were consolidated in the district court. After a bench trial, the district court entered judgment for the student-athletes, concluding in part that NCAA limits on education-related benefits were unreasonable restraints of trade. It enjoined those limits but declined to hold that other NCAA limits on compensation unrelated to education likewise violated Section 1.

In May 2020, a 9th Circuit panel held that the district court properly applied the three-step Sherman Act Section 1 rule of reason analysis in determining that the enjoined rules were unlawful restraints of trade.

First, the panel concluded that the student-athletes carried their burden at step one by showing that the restraints produced significant anticompetitive effects within the relevant market for student-athletes’ labor.

At step two, the NCAA was required to come forward with evidence of the restraints’ procompetitive effects. The panel endorsed the district court’s conclusion that only some of the challenged NCAA rules served the procompetitive purpose of preserving amateurism and thus improving consumer choice by maintaining a distinction between college and professional sports. Those rules were limits on above-cost-of-attendance payments unrelated to education, the cost-of-attendance cap on athletic scholarships, and certain restrictions on cash academic or graduation awards and incentives. The panel affirmed the district court’s conclusion that the remaining rules—restricting non-cash education-related benefits—did nothing to foster or preserve consumer demand. The panel held that the record amply supported the findings of the district court, which relied on demand analysis, survey evidence, and NCAA testimony.

The panel also affirmed the district court’s conclusion that, at step three, the student-athletes showed that any legitimate objectives could be achieved in a substantially less restrictive manner. The district court identified a less restrictive alternative of prohibiting the NCAA from capping certain education-related benefits and limiting academic or graduation awards or incentives below the maximum amount that an individual athlete may receive in athletic participation awards, while permitting individual conferences to set limits on education-related benefits. The panel held that the district court did not clearly err in determining that this alternative would be virtually as effective in serving the procompetitive purposes of the NCAA’s current rules and could be implemented without significantly increased cost.

Finally, the panel held that the district court’s injunction was not impermissibly vague and did not usurp the NCAA’s role as the superintendent of college sports. The panel also declined to broaden the injunction to include all NCAA compensation limits, including those on payments untethered to education. The panel concluded that the district court struck the right balance in crafting a remedy that both prevented anticompetitive harm to student-athletes while serving the procompetitive purpose of preserving the popularity of college sports.

The NCAA appealed to the Supreme Court, which granted the NCAA’s petition for certiorari Dec. 16, 2020. The NCAA contends that under Board of Regents, the NCAA rules regarding student-athlete compensation are reasonably related to preserving amateurism in college sports, are procompetitive, and should have been upheld after a short deferential review, rather than the full three-step rule of reason. According to the NCAA’s petition for certiorari, even under the detailed rule of reason, the 9th Circuit’s decision was defective. Specifically:

The Ninth Circuit … relieved plaintiffs of their burden to prove that the challenged rules unreasonably restrain trade, instead placing a “heavy burden” on the NCAA … to prove that each category of its rules is procompetitive and that an alternative compensation regime created by the district court could not preserve the procompetitive distinction between college and professional sports. That alternative regime—under which the NCAA must permit student-athletes to receive unlimited “education-related benefits,” including post-eligibility internships that pay unlimited amounts in cash and can be used for recruiting or retention—will vitiate the distinction between college and professional sports. And via the permanent injunction the Ninth Circuit upheld, the alternative regime will also effectively make a single judge in California the superintendent of a significant component of college sports. The Ninth Circuit’s approval of this judicial micromanagement of the NCAA denies the NCAA the latitude this Court has said it needs, and endorses unduly stringent scrutiny of agreements that define the central features of sports leagues’ and other joint ventures’ products. The decision thus twists the rule of reason into a tool to punish (and thereby deter) procompetitive activity.

Two amicus briefs support the NCAA’s position. One, filed on behalf of “antitrust law and business school professors,” stresses that the 9th Circuit’s decision misapplied the third step of the rule of reason by requiring defendants to show that their conduct was the least restrictive means available (instead of requiring plaintiff to prove the existence of an equally effective but less restrictive rule). More broadly:

[This approach] permits antitrust plaintiffs to commandeer the judiciary and use it to regulate and modify routine business conduct, so long as that conduct is not the least restrictive conduct imaginable by a plaintiff’s attorney or district judge. In turn, the risk that procompetitive ventures may be deemed unlawful and subject to treble damages liability simply because they could have operated in a marginally less restrictive manner is likely to chill beneficial business conduct.

A second brief, filed on behalf of “antitrust economists,” emphasizes that the NCAA has adapted the rules governing design of its product (college amateur sports) over time to meet consumer demand and to prevent colleges from pursuing their own interests (such as “pay to  play”) in ways that would conflict with the overall procompetitive aims of the collaboration. While acknowledging that antitrust courts are free to scrutinize collaborations’ rules that go beyond the design of the product itself (such as the NCAA’s broadcast restrictions), the brief cites key Supreme Court decisions (NCAA v. Board of Regents and Texaco Inc. v. Dagher), for the proposition that courts should stay out of restrictions on the core activity of the joint venture itself. It then summarizes the policy justification for such judicial non-interference:

Permitting judges and juries to apply the Sherman Act to such decisions [regarding core joint venture activity] will inevitably create uncertainty that undermines innovation and investment incentives across any number of industries and collaborative ventures. In these circumstances, antitrust courts would be making public policy regarding the desirability of a product with particular features, as opposed to ferreting out agreements or unilateral conduct that restricts output, raises prices, or reduces innovation to the detriment of consumers.

In their brief opposing certiorari, counsel for Alston take the position that, in reality, the NCAA is seeking a special antitrust exemption for its competitively restrictive conduct—an issue that should be determined by Congress, not courts. Their brief notes that the concept of “amateurism” has changed over the years and that some increases in athletes’ compensation have been allowed over time. Thus, in the context of big-time college football and basketball:

[A]mateurism is little more than a pretext. It is certainly not a Sherman Act concept, much less a get-out-of-jail-free card that insulates any particular set of NCAA restraints from scrutiny.

Who Has the Better Case?

The NCAA’s position is a strong one. Association rules touching on compensation for college athletes are part of the core nature of the NCAA’s “amateur sports” product, as the Supreme Court stated (albeit in dictum) in Board of Regents. Furthermore, subsequent Supreme Court jurisprudence (see 2010’s American Needle Inc. v. NFL) has eschewed second-guessing of joint-venture product design decisions—which, in the case of the NCAA, involve formulating the restrictions (such as whether and how to compensate athletes) that are deemed key to defining amateurism.

The Alston amicus curiae briefs ably set forth the strong policy considerations that support this approach, centered on preserving incentives for the development of efficient welfare-generating joint ventures. Requiring joint venturers to provide “least restrictive means” justifications for design decisions discourages innovative activity and generates costly uncertainty for joint-venture planners, to the detriment of producers and consumers (who benefit from joint-venture innovations) alike. Claims by defendant Alston that the NCAA is in effect seeking to obtain a judicial antitrust exemption miss the mark; rather, the NCAA merely appears to be arguing that antitrust should be limited to evaluating restrictions that fall outside the scope of the association’s core mission. Significantly, as discussed in the NCAA’s brief petitioning for certiorari, other federal courts of appeals decisions in the 3rd, 5th, and 7th Circuits have treated NCAA bylaws going to the definition of amateurism in college sports as presumptively procompetitive and not subject to close scrutiny. Thus, based on the arguments set forth by litigants, a Supreme Court victory for the NCAA in Alston would appear sound as a matter of law and economics.

There may, however, be a catch. Some popular commentary has portrayed the NCAA as a malign organization that benefits affluent universities (and their well-compensated coaches) while allowing member colleges to exploit athletes by denying them fair pay—in effect, an institutional Mr. Hyde.

What’s more, consistent with the Mr. Hyde story, a number of major free-market economists (including, among others, Nobel laureate Gary Becker) have portrayed the NCAA as an anticompetitive monopsony employer cartel that has suppressed the labor market demand for student athletes, thereby limiting their wages, fringe benefits, and employment opportunities. (In a similar vein, the NCAA is seen as a monopolist seller cartel in the market for athletic events.) Consistent with this perspective, promoting the public good of amateurism (the Dr. Jekyll story) is merely a pretextual façade (a cover story, if you will) for welfare-inimical naked cartel conduct. If one buys this alternative story, all core product restrictions adopted by the NCAA should be fair game for close antitrust scrutiny—and thus, the 9th Circuit’s decision in Alston merits affirmation as a matter of antitrust policy.

There is, however, a persuasive response to the cartel story, set forth in Richard McKenzie and Dwight Lee’s essay “The NCAA:  A Case Study of the Misuse of the Monopsony and Monopoly Models” (Chapter 8 of their 2008 book “In Defense of Monopoly:  How Market Power Fosters Creative Production”). McKenzie and Lee examine the evidence bearing on economists’ monopsony cartel assertions (and, in particular, the evidence presented in a 1992 study by Arthur Fleischer, Brian Goff, and Richard Tollison) and find it wanting:

Our analysis leads inexorably to the conclusion that the conventional economic wisdom regarding the intent and consequences of NCAA restrictions is hardly as solid, on conceptual grounds, as the NCAA critics assert, often without citing relevant court cases. We have argued that the conventional wisdom is wrong in suggesting that, as a general proposition,

• college athletes are materially “underpaid” and are “exploited”;

• cheating on NCAA rules is prima facie evidence of a cartel intending to restrict employment and suppress athletes’ wages;

• NCAA rules violate conventional antitrust doctrine;          

• barriers to entry ensure the continuance of the NCAA’s monopsony powers over athletes.

No such entry barriers (other than normal organizational costs, which need to be covered to meet any known efficiency test for new entrants) exist. In addition, the Supreme Court’s decision in NCAA indicates that the NCAA would be unable to prevent through the courts the emergence of competing athletic associations. The actual existence of other athletic associations indicates that entry would be not only possible but also practical if athletes’ wages were materially suppressed.

Conventional economic analysis of NCAA rules that we have challenged also is misleading in suggesting that collegiate sports would necessarily be improved if the NCAA were denied the authority to regulate the payment of athletes. Given the absence of legal barriers to entry into the athletic association market, it appears that if athletes’ wages were materially suppressed (or as grossly suppressed as the critics claim), alternative sports associations would form or expand, and the NCAA would be unable to maintain its presumed monopsony market position. The incentive for colleges and universities to break with the NCAA would be overwhelming.

From our interpretation of NCAA rules, it does not follow necessarily that athletes should not receive any more compensation than they do currently. Clearly, market conditions change, and NCAA rules often must be adjusted to accommodate those changes. In the absence of entry barriers, we can expect the NCAA to adjust, as it has adjusted, in a competitive manner its rules of play, recruitment, and retention of athletes. Our central point is that contrary to the proponents of the monopsony thesis, the collegiate athletic market is subject to the self-correcting mechanism of market pressures. We have reason to believe that the proposed extension of the antitrust enforcement to the NCAA rules or proposed changes in sports law explicitly or implicitly recommended by the proponents of the cartel thesis would be not only unnecessary but also counterproductive.

Although a closer examination of the McKenzie and Lee’s critique of the economists’ cartel story is beyond the scope of this comment, I find it compelling.

Conclusion

In sum, the claim that antitrust may properly be applied to combat the alleged “exploitation” of college athletes by NCAA compensation regulations does not stand up to scrutiny. The NCAA’s rules that define the scope of amateurism may be imperfect, but there is no reason to think that empowering federal judges to second guess and reformulate NCAA athletic compensation rules would yield a more socially beneficial (let alone optimal) outcome. (Believing that the federal judiciary can optimally reengineer core NCAA amateurism rules is a prime example of the Nirvana fallacy at work.)  Furthermore, a Supreme Court decision affirming the 9th Circuit could do broad mischief by undermining case law that has accorded joint venturers substantial latitude to design the core features of their collective enterprise without judicial second-guessing. It is to be hoped that the Supreme Court will do the right thing and strongly reaffirm the NCAA’s authority to design and reformulate its core athletic amateurism product as it sees fit.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Kristian Stout is director of innovation policy for the International Center for Law & Economics.]

One of the themes that has run throughout this symposium has been that, throughout his tenure as both a commissioner and as chairman, Ajit Pai has brought consistency and careful analysis to the Federal Communications Commission (McDowell, Wright). The reflections offered by the various authors in this symposium make one thing clear: the next administration would do well to learn from the considered, bipartisan, and transparent approach to policy that characterized Chairman Pai’s tenure at the FCC.

The following are some of the more specific lessons that can be learned from Chairman Pai. In an important sense, he laid the groundwork for his successful chairmanship when he was still a minority commissioner. His thoughtful dissents were rooted in consistent, clear policy arguments—a practice that both charted how he would look at future issues as chairman and would help the public to understand exactly how he would approach new challenges before the FCC (McDowell, Wright).

One of the most public instances of Chairman Pai’s consistency (and, as it turns out, his bravery) was with respect to net neutrality. From his dissent in the Title II Order, through his commission’s Restoring Internet Freedom Order, Chairman Pai focused on the actual welfare of consumers and the factors that drive network growth and adoption. As Brent Skorup noted, “Chairman Pai and the Republican commissioners recognized the threat that Title II posed, not only to free speech, but to the FCC’s goals of expanding telecommunications services and competition.” The result of giving in to the Title II advocates would have been to draw the FCC into a quagmire of mass-media regulation that would ultimately harm free expression and broadband deployment in the United States.

Chairman Pai’s vision worked out (Skorup, May, Manne, Hazlett). Despite prognostications of the “death of the internet” because of the Restoring Internet Freedom Order, available evidence suggests that industry investment grew over Chairman Pai’s term. More Americans are connected to broadband than ever before.

Relatedly, Chairman Pai was a strong supporter of liberalizing media-ownership rules that long had been rooted in 20th century notions of competition (Manne). Such rules systematically make it harder for smaller media outlets to compete with large news aggregators and social-media platforms. As Geoffrey Manne notes: 

Consistent with his unwavering commitment to promote media competition… Chairman Pai put forward a proposal substantially updating the media-ownership rules to reflect the dramatically changed market realities facing traditional broadcasters and newspapers.

This was a bold move for Chairman Pai—in essence, he permitted more local concentration by, e.g., allowing the purchase of a newspaper by a local television station that previously would have been forbidden. By allowing such combinations, the FCC enabled failing local news outlets to shore up their losses and continue to compete against larger, better-resourced organizations. The rule changes are in a case pending before the Supreme Court; should the court find for the FCC, the competitive outlook for local media looks much better thanks to Chairman Pai’s vision.

Chairman Pai’s record on spectrum is likewise impressive (Cooper, Hazlett). The FCC’s auctions under Chairman Pai raised more money and freed more spectrum for higher value uses than any previous commission (Feld, Hazlett). But there is also a lesson in how subsequent administrations can continue what Chairman Pai started. Unlicensed use, for instance, is not free or costless in its maintenance, and Tom Hazlett believes that there is more work to be done in further liberalizing access to the related spectrum—liberalizing in the sense of allowing property rights and market processes to guide spectrum to its highest use:

The basic theme is that regulators do better when they seek to create new rights that enable social coordination and entrepreneurial innovation, rather than enacting rules that specify what they find to be the “best” technologies or business models.

And to a large extent this is the model that Chairman Pai set down, from the issuance of the 12 GHZ NPRM to consider whether those spectrum bands could be opened up for wireless use, to the L-Band Order, where the commission worked hard to reallocate spectrum rights in ways that would facilitate more productive uses.

The controversial L-Band Order was another example of where Chairman Pai displayed both political acumen as well as an apolitical focus on improving spectrum policy (Cooper). Political opposition was sharp and focused after the commission finalized its order in April 2020. Nonetheless, Chairman Pai was deftly able to shepherd the L-Band Order and guarantee that important spectrum was made available for commercial wireless use.

As a native of Kansas, rural broadband rollout ranked highly in the list of priorities at the Pai FCC, and his work over the last four years is demonstrative of this pride of place (Hurwitz, Wright). As Gus Hurwitz notes, “the commission completed the Connect America Fund Phase II Auction. More importantly, it initiated the Rural Digital Opportunity Fund (RDOF) and the 5G Fund for Rural America, both expressly targeting rural connectivity.”

Further, other work, like the recently completed Rural Digital Opportunity Fund auction and the 5G fund provide the necessary policy framework with which to extend greater connectivity to rural America. As Josh Wright notes, “Ajit has also made sure to keep an eye out for the little guy, and communities that have been historically left behind.” This focus on closing the digital divide yielded gains in connectivity in places outside of traditional rural American settings, such as tribal lands, the U.S. Virgin Islands, and Puerto Rico (Wright).

But perhaps one of Chairman Pai’s best and (hopefully) most lasting contributions will be de-politicizing the FCC and increasing the transparency with which it operated. In contrast to previous administrations, the Pai FCC had an overwhelmingly bipartisan nature, with many bipartisan votes being regularly taken at monthly meetings (Jamison). In important respects, it was this bipartisan (or nonpartisan) nature that was directly implicated by Chairman Pai championing the Office of Economics and Analytics at the commission. As many of the commentators have noted (Jamison, Hazlett, Wright, Ellig) the OEA was a step forward in nonpolitical, careful cost-benefit analysis at the commission. As Wright notes, Chairman Pai was careful to not just hire a bunch of economists, but rather to learn from other agencies that have better integrated economics, and to establish a structure that would enable the commission’s economists to materially contribute to better policy.

We were honored to receive a post from Jerry Ellig just a day before he tragically passed away. As chief economist at the FCC from 2017-2018, he was in a unique position to evaluate past practice and participate in the creation of the OEA. According to Ellig, past practice tended to treat the work of the commission’s economists as a post-hoc gloss on the work of the agency’s attorneys. Once conclusions were reached, economics would often be backfilled in to support those conclusions. With the establishment of the OEA, economics took a front-seat role, with staff of that office becoming a primary source for information and policy analysis before conclusions were reached. As Wright noted, the Federal Trade Commission had adopted this approach. With the FCC moving to do this as well, communications policy in the United States is on much sounder footing thanks to Chairman Pai.

Not only did Chairman Pai push the commission in the direction of nonpolitical, sound economic analysis but, as many commentators note, he significantly improved the process at the commission (Cooper, Jamison, Lyons). Chief among his contributions was making it a practice to publish proposed orders weeks in advance, breaking with past traditions of secrecy around draft orders, and thereby giving the public an opportunity to see what the commission intended to do.

Critics of Chairman Pai’s approach to transparency feared that allowing more public view into the process would chill negotiations between the commissioners behind the scenes. But as Daniel Lyons notes, the chairman’s approach was a smashing success:

The Pai era proved to be the most productive in recent memory, averaging just over six items per month, which is double the average number under Pai’s immediate predecessors. Moreover, deliberations were more bipartisan than in years past: Nathan Leamer notes that 61.4% of the items adopted by the Pai FCC were unanimous and 92.1% were bipartisan compared to 33% and 69.9%, respectively, under Chairman Wheeler.

Other reforms from Chairman Pai helped open the FCC to greater scrutiny and a more transparent process, including limiting editorial privileges on staff on an order’s text, and by introducing the use of a simple “fact sheet” to explain orders (Lyons).

I found one of the most interesting insights into the character of Chairman Pai, was his willingness to reverse course and take risks to ensure that the FCC promoted innovation instead of obstructing it by relying on received wisdom (Nachbar). For instance, although he was initially skeptical of the prospects of Space X to introduce broadband through its low-Earth-orbit satellite systems, under Chairman Pai, the Starlink beta program was included in the RDOF auction. It is not clear whether this was a good bet, Thomas Nachbar notes, but it was a statement both of the chairman’s willingness to change his mind, as well as to not allow policy to remain in a comfortable zone that excludes potential innovation.

The next chair has an awfully big pair of shoes (or one oversized coffee mug) to fill. Chairman Pai established an important legacy of transparency and process improvement, as well as commitment to careful, economic analysis in the business of the agency. We will all be well-served if future commissions follow in his footsteps.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Geoffrey A. Manne is the president and founder of the International Center for Law and Economics.]

I’m delighted to add my comments to the chorus of voices honoring Ajit Pai’s remarkable tenure at the Federal Communications Commission. I’ve known Ajit longer than most. We were classmates in law school … let’s just say “many” years ago. Among the other symposium contributors I know of only one—fellow classmate, Tom Nachbar—who can make a similar claim. I wish I could say this gives me special insight into his motivations, his actions, and the significance of his accomplishments, but really it means only that I have endured his dad jokes and interminable pop-culture references longer than most. 

But I can say this: Ajit has always stood out as a genuinely humble, unfailingly gregarious, relentlessly curious, and remarkably intelligent human being, and he deployed these characteristics to great success at the FCC.   

Ajit’s tenure at the FCC was marked by an abiding appreciation for the importance of competition, both as a guiding principle for new regulations and as a touchstone to determine when to challenge existing ones. As others have noted (and as we have written elsewhere), that approach was reflected significantly in the commission’s Restoring Internet Freedom Order, which made competition—and competition enforcement by the antitrust agencies—the centerpiece of the agency’s approach to net neutrality. But I would argue that perhaps Chairman Pai’s greatest contribution to bringing competition to the forefront of the FCC’s mandate came in his work on media modernization.

Fairly early in his tenure at the commission, Ajit raised concerns with the FCC’s failure to modernize its media-ownership rules. In response to the FCC’s belated effort to initiate the required 2010 and 2014 Quadrennial Reviews of those rules, then-Commissioner Pai noted that the commission had abdicated its responsibility under the statute to promote competition. Not only was the FCC proposing to maintain a host of outdated existing rules, but it was also moving to impose further constraints (through new limitations on the use of Joint Sales Agreements (JSAs)). As Ajit noted, such an approach was antithetical to competition:

In smaller markets, the choice is not between two stations entering into a JSA and those same two stations flourishing while operating completely independently. Rather, the choice is between two stations entering into a JSA and at least one of those stations’ viability being threatened. If stations in these smaller markets are to survive and provide many of the same services as television stations in larger markets, they must cut costs. And JSAs are a vital mechanism for doing that.

The efficiencies created by JSAs are not a luxury in today’s digital age. They are necessary, as local broadcasters face fierce competition for viewers and advertisers.

Under then-Chairman Tom Wheeler, the commission voted to adopt the Quadrennial Review in 2016, issuing rules that largely maintained the status quo and, at best, paid tepid lip service to the massive changes in the competitive landscape. As Ajit wrote in dissent:

The changes to the media marketplace since the FCC adopted the Newspaper-Broadcast Cross-Ownership Rule in 1975 have been revolutionary…. Yet, instead of repealing the Newspaper-Broadcast Cross-Ownership Rule to account for the massive changes in how Americans receive news and information, we cling to it.

And over the near-decade since the FCC last finished a “quadrennial” review, the video marketplace has transformed dramatically…. Yet, instead of loosening the Local Television Ownership Rule to account for the increasing competition to broadcast television stations, we actually tighten that regulation.

And instead of updating the Local Radio Ownership Rule, the Radio-Television Cross-Ownership Rule, and the Dual Network Rule, we merely rubber-stamp them.

The more the media marketplace changes, the more the FCC’s media regulations stay the same.

As Ajit also accurately noted at the time:

Soon, I expect outside parties to deliver us to the denouement: a decisive round of judicial review. I hope that the court that reviews this sad and total abdication of the administrative function finds, once and for all, that our media ownership rules can no longer stay stuck in the 1970s consistent with the Administrative Procedure Act, the Communications Act, and common sense. The regulations discussed above are as timely as “rabbit ears,” and it’s about time they go the way of those relics of the broadcast world. I am hopeful that the intervention of the judicial branch will bring us into the digital age.

And, indeed, just this week the case was argued before the Supreme Court.

In the interim, however, Ajit became Chairman of the FCC. And in his first year in that capacity, he took up a reconsideration of the 2016 Order. This 2017 Order on Reconsideration is the one that finally came before the Supreme Court. 

Consistent with his unwavering commitment to promote media competition—and no longer a minority commissioner shouting into the wind—Chairman Pai put forward a proposal substantially updating the media-ownership rules to reflect the dramatically changed market realities facing traditional broadcasters and newspapers:

Today we end the 2010/2014 Quadrennial Review proceeding. In doing so, the Commission not only acknowledges the dynamic nature of the media marketplace, but takes concrete steps to update its broadcast ownership rules to reflect reality…. In this Order on Reconsideration, we refuse to ignore the changed landscape and the mandates of Section 202(h), and we deliver on the Commission’s promise to adopt broadcast ownership rules that reflect the present, not the past. Because of our actions today to relax and eliminate outdated rules, broadcasters and local newspapers will at last be given a greater opportunity to compete and thrive in the vibrant and fast-changing media marketplace. And in the end, it is consumers that will benefit, as broadcast stations and newspapers—those media outlets most committed to serving their local communities—will be better able to invest in local news and public interest programming and improve their overall service to those communities.

Ajit’s approach was certainly deregulatory. But more importantly, it was realistic, well-reasoned, and responsive to changing economic circumstances. Unlike most of his predecessors, Ajit was unwilling to accede to the torpor of repeated judicial remands (on dubious legal grounds, as we noted in our amicus brief urging the Court to grant certiorari in the case), permitting facially and wildly outdated rules to persist in the face of massive and obvious economic change. 

Like Ajit, I am not one to advocate regulatory action lightly, especially in the (all-too-rare) face of judicial review that suggests an agency has exceeded its discretion. But in this case, the need for dramatic rule change—here, to deregulate—was undeniable. The only abuse of discretion was on the part of the court, not the agency. As we put it in our amicus brief:

[T]he panel vacated these vital reforms based on mere speculation that they would hinder minority and female ownership, rather than grounding its action on any record evidence of such an effect. In fact, the 2017 Reconsideration Order makes clear that the FCC found no evidence in the record supporting the court’s speculative concern.

…In rejecting the FCC’s stated reasons for repealing or modifying the rules, absent any evidence in the record to the contrary, the panel substituted its own speculative concerns for the judgment of the FCC, notwithstanding the FCC’s decades of experience regulating the broadcast and newspaper industries. By so doing, the panel exceeded the bounds of its judicial review powers under the APA.

Key to Ajit’s conclusion that competition in local media markets could be furthered by permitting more concentration was his awareness that the relevant market for analysis couldn’t be limited to traditional media outlets like broadcasters and newspapers; it must include the likes of cable networks, streaming video providers, and social-media platforms, as well. As Ajit put it in a recent speech:

The problem is a fundamental refusal to grapple with today’s marketplace: what the service market is, who the competitors are, and the like. When assessing competition, some in Washington are so obsessed with the numerator, so to speak—the size of a particular company, for instance—that they’ve completely ignored the explosion of the denominator—the full range of alternatives in media today, many of which didn’t exist a few years ago.

When determining a particular company’s market share, a candid assessment of the denominator should include far more than just broadcast networks or cable channels. From any perspective (economic, legal, or policy), it should include any kinds of media consumption that consumers consider to be substitutes. That could be TV. It could be radio. It could be cable. It could be streaming. It could be social media. It could be gaming. It could be still something else. The touchstone of that denominator should be “what content do people choose today?”, not “what content did people choose in 1975 or 1992, and how can we artificially constrict our inquiry today to match that?”

For some reason, this simple and seemingly undeniable conception of the market escapes virtually all critics of Ajit’s media-modernization agenda. Indeed, even Justice Stephen Breyer in this week’s oral argument seemed baffled by the notion that more concentration could entail more competition:

JUSTICE BREYER: I’m thinking of it solely as a — the anti-merger part, in — in anti-merger law, merger law generally, I think, has a theory, and the theory is, beyond a certain point and other things being equal, you have fewer companies in a market, the harder it is to enter, and it’s particularly harder for smaller firms. And, here, smaller firms are heavily correlated or more likely to be correlated with women and minorities. All right?

The opposite view, which is what the FCC has now chosen, is — is they want to move or allow to be moved towards more concentration. So what’s the theory that that wouldn’t hurt the minorities and women or smaller businesses? What’s the theory the opposite way, in other words? I’m not asking for data. I’m asking for a theory.

Of course, as Justice Breyer should surely know—and as I know Ajit Pai knows—counting the number of firms in a market is a horrible way to determine its competitiveness. In this case, the competition from internet media platforms, particularly for advertising dollars, is immense. A regulatory regime that prohibits traditional local-media outlets from forging efficient joint ventures or from obtaining the scale necessary to compete with those platforms does not further competition. Even if such a rule might temporarily result in more media outlets, eventually it would result in no media outlets, other than the large online platforms. The basic theory behind the Reconsideration Order—to answer Justice Breyer—is that outdated government regulation imposes artificial constraints on the ability of local media to adopt the organizational structures necessary to compete. Removing those constraints may not prove a magic bullet that saves local broadcasters and newspapers, but allowing the rules to remain absolutely ensures their demise. 

Ajit’s commitment to furthering competition in telecommunications markets remained steadfast throughout his tenure at the FCC. From opposing restrictive revisions to the agency’s spectrum screen to dissenting from the effort to impose a poorly conceived and retrograde regulatory regime on set-top boxes, to challenging the agency’s abuse of its merger review authority to impose ultra vires regulations, to, of course, rolling back his predecessor’s unsupportable Title II approach to net neutrality—and on virtually every issue in between—Ajit sought at every turn to create a regulatory backdrop conducive to competition.

Tom Wheeler, Pai’s predecessor at the FCC, claimed that his personal mantra was “competition, competition, competition.” His greatest legacy, in that regard, was in turning over the agency to Ajit.

With the passing of Justice Ruth Bader Ginsburg, many have already noted her impact on the law as an advocate for gender equality and women’s rights, her importance as a role model for women, and her civility. Indeed, a key piece of her legacy is that she was a jurist in the classic sense of the word: she believed in using coherent legal reasoning to reach a result. And that meant Justice Ginsburg’s decisions sometimes cut against partisan political expectations. 

This is clearly demonstrated in our little corner of the law: RBG frequently voted in the majority on antitrust cases in a manner that—to populist leftwing observers—would be surprising. Moreover, she authored an important case on price discrimination that likewise cuts against the expectation of populist antitrust critics and demonstrates her nuanced jurisprudence.

RBG’s record on the Court shows a respect for the evolving nature of antitrust law

In the absence of written opinions of her own, it is difficult to discern what was actually in Justice Ginsburg’s mind as she encountered antitrust issues. But, her voting record represents at least a willingness to approach antitrust in an apolitical manner. 

Over the last several decades, Justice Ginsburg joined the Supreme Court majority in many cases dealing with a wide variety of antitrust issues, including the duty to deal doctrine, vertical restraints, joint ventures, and mergers. In many of these cases, RBG aligned herself with judgments of the type that the antitrust populists criticize.

The following are major consumer welfare standard cases that helped shape the current state of antitrust law in which she joined the majority or issued a concurrence: 

  • Verizon Commc’ns Inc. v. Law Offices of Curtis Trinko, LLP, 540 U.S. 398 (2004) (unanimous opinion heightening the standard for finding a duty to deal)
  • Pacific Bell Tel. Co v. linkLine Commc’ns, Inc.,  555 U.S. 438 (2009) (Justice Ginsburg joined the concurrence finding there was no “price squeeze” but suggesting the predatory pricing claim should be remanded)
  • Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 549 U.S. 312 (2007) (unanimous opinion finding predatory buying claims are still subject to the dangerous probability of recoupment test from Brooke Group)
  • Apple, Inc. v. Robert Pepper, 139 S.Ct. 1514 (2019) (part of majority written by Justice Kavanaugh finding that iPhone owners were direct purchasers under Illinois Brick that may sue Apple for alleged monopolization)
  • State Oil Co. v. Khan, 522 U.S. 3 (1997) (unanimous opinion overturning per se treatment of vertical maximum price fixing under Albrecht and applying rule of reason standard)
  • Texaco Inc. v. Dagher, 547 U.S. 1 (2006) (unanimous opinion finding it is not per se illegal under §1 of the Sherman Act for a lawful, economically integrated joint venture to set the prices at which it sells its products)
  • Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) (unanimous opinion finding a patent does not necessarily confer market power upon the patentee, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product)
  • U.S. v. Baker Hughes, Inc., 908 F. 2d 981 (D.C. Cir. 1990) (unanimous opinion written by then-Judge Clarence Thomas while both were on the D.C. Circuit of Appeals finding against the government’s argument that the defendant in a Section 7 merger challenge can rebut a prima facie case only by a clear showing that entry into the market by competitors would be quick and effective)

Even where she joined the dissent in antitrust cases, she did so within the ambit of the consumer welfare standard. Thus, while she was part of the dissent in cases like Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), Bell Atlantic Corp v. Twombly, 550 U.S. 544 (2007), and Ohio v. American Express Co., 138 S.Ct. 2274 (2018), she still left a legacy of supporting modern antitrust jurisprudence. In those cases, RBG simply  had a different vision for how best to optimize consumer welfare. 

Justice Ginsburg’s Volvo Opinion

The 2006 decision Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc. was one of the few antitrust decisions authored by RBG and shows her appreciation for the consumer welfare standard. In particular, Justice Ginsburg affirmed the notion that antitrust law is designed to protect competition not competitors—a lesson that, as of late, needs to be refreshed. 

Volvo, a 7-2 decision, dealt with the Robinson-Patman Act’s prohibition on price discimination. Reeder-Simco, a retail car dealer that sold Volvos, alleged that Volvo Inc. was violating the Robinson-Patman Act by selling cars to them at different prices than to other Volvo dealers.

The Robinson-Patman Act is frequently cited by antitrust populists as a way to return antitrust law to its former glory. A main argument of Lina Khan’s Amazon’s Antitrust Paradox was that the Chicago School had distorted the law on vertical restraints generally, and price discrimination in particular. One source of this distortion in Khan’s opinion has been the Supreme Court’s mishandling of the Robinson-Patman Act.

Yet, in Volvo we see Justice Ginsburg wrestling with the Robinson-Patman Act in a way to give effect to the law as written, which may run counter to some of the contemporary populist impulse to revise the Court’s interpretation of antitrust laws. Justice Ginsburg, citing Brown & Williamson, first noted that: 

Mindful of the purposes of the Act and of the antitrust laws generally, we have explained that Robinson-Patman does not “ban all price differences charged to different purchasers of commodities of like grade and quality.”

Instead, the Robinson-Patman Act was aimed at a particular class of harms that Congress believed existed when large chain-stores were able to exert something like monopsony buying power. Moreover, Justice Ginsburg noted, the Act “proscribes ‘price discrimination only to the extent that it threatens to injure competition’[.]”

Under the Act, plaintiffs needed to demonstrate evidence of Volvo Inc. systematically treating plaintiffs as “disfavored” purchasers as against another set of “favored” purchasers. Instead, all plaintiffs could produce was anecdotal and inconsistent evidence of Volvo Inc. disfavoring them. Thus, the plaintiffs— and theoretically other similarly situated Volvo dealers— were in fact harmed in a sense by Volvo Inc. Yet, Justice Ginsburg was unwilling to rewrite the Act on Congress’s behalf to incorporate new harms later discovered (a fact which would not earn her accolades in populist circles these days). 

Instead, Justice Ginsburg wrote that:

Interbrand competition, our opinions affirm, is the “primary concern of antitrust law.”… The Robinson-Patman Act signals no large departure from that main concern. Even if the Act’s text could be construed in the manner urged by [plaintiffs], we would resist interpretation geared more to the protection of existing competitors than to the stimulation of competition. In the case before us, there is no evidence that any favored purchaser possesses market power, the allegedly favored purchasers are dealers with little resemblance to large independent department stores or chain operations, and the supplier’s selective price discounting fosters competition among suppliers of different brands… By declining to extend Robinson-Patman’s governance to such cases, we continue to construe the Act “consistently with broader policies of the antitrust laws.” Brooke Group, 509 U.S., at 220… (cautioning against Robinson-Patman constructions that “extend beyond the prohibitions of the Act and, in doing so, help give rise to a price uniformity and rigidity in open conflict with the purposes of other antitrust legislation”).

Thus, interested in the soundness of her jurisprudence in the face of a well-developed body of antitrust law, Justice Ginsburg chose to continue to develop that body of law rather than engage in judicial policymaking in favor of a sympathetic plaintiff. 

It must surely be tempting for a justice on the Court to adopt less principled approaches to the law in any given case, and it is equally as impressive that Justice Ginsburg consistently stuck to her principles. We can only hope her successor takes note of Justice Ginsburg’s example.

Apple’s legal team will be relieved that “you reap what you sow” is just a proverb. After a long-running antitrust battle against Qualcomm unsurprisingly ended in failure, Apple now faces antitrust accusations of its own (most notably from Epic Games). Somewhat paradoxically, this turn of events might cause Apple to see its previous defeat in a new light. Indeed, the well-established antitrust principles that scuppered Apple’s challenge against Qualcomm will now be the rock upon which it builds its legal defense.

But while Apple’s reversal of fortunes might seem anecdotal, it neatly illustrates a fundamental – and often overlooked – principle of antitrust policy: Antitrust law is about maximizing consumer welfare. Accordingly, the allocation of surplus between two companies is only incidentally relevant to antitrust proceedings, and it certainly is not a goal in and of itself. In other words, antitrust law is not about protecting David from Goliath.

Jockeying over the distribution of surplus

Or at least that is the theory. In practice, however, most antitrust cases are but small parts of much wider battles where corporations use courts and regulators in order to jockey for market position and/or tilt the distribution of surplus in their favor. The Microsoft competition suits brought by the DOJ and the European commission (in the EU and US) partly originated from complaints, and lobbying, by Sun Microsystems, Novell, and Netscape. Likewise, the European Commission’s case against Google was prompted by accusations from Microsoft and Oracle, among others. The European Intel case was initiated following a complaint by AMD. The list goes on.

The last couple of years have witnessed a proliferation of antitrust suits that are emblematic of this type of power tussle. For instance, Apple has been notoriously industrious in using the court system to lower the royalties that it pays to Qualcomm for LTE chips. One of the focal points of Apple’s discontent was Qualcomm’s policy of basing royalties on the end-price of devices (Qualcomm charged iPhone manufacturers a 5% royalty rate on their handset sales – and Apple received further rebates):

“The whole idea of a percentage of the cost of the phone didn’t make sense to us,” [Apple COO Jeff Williams] said. “It struck at our very core of fairness. At the time we were making something really really different.”

This pricing dispute not only gave rise to high-profile court cases, it also led Apple to lobby Standard Developing Organizations (“SDOs”) in a partly successful attempt to make them amend their patent policies, so as to prevent this type of pricing. 

However, in a highly ironic turn of events, Apple now finds itself on the receiving end of strikingly similar allegations. At issue is the 30% commission that Apple charges for in app purchases on the iPhone and iPad. These “high” commissions led several companies to lodge complaints with competition authorities (Spotify and Facebook, in the EU) and file antitrust suits against Apple (Epic Games, in the US).

Of course, these complaints are couched in more sophisticated, and antitrust-relevant, reasoning. But that doesn’t alter the fact that these disputes are ultimately driven by firms trying to tilt the allocation of surplus in their favor (for a more detailed explanation, see Apple and Qualcomm).

Pushback from courts: The Qualcomm case

Against this backdrop, a string of recent cases sends a clear message to would-be plaintiffs: antitrust courts will not be drawn into rent allocation disputes that have no bearing on consumer welfare. 

The best example of this judicial trend is Qualcomm’s victory before the United States Court of Appeal for the 9th Circuit. The case centered on the royalties that Qualcomm charged to OEMs for its Standard Essential Patents (SEPs). Both the district court and the FTC found that Qualcomm had deployed a series of tactics (rebates, refusals to deal, etc) that enabled it to circumvent its FRAND pledges. 

However, the Court of Appeal was not convinced. It failed to find any consumer harm, or recognizable antitrust infringement. Instead, it held that the dispute at hand was essentially a matter of contract law:

To the extent Qualcomm has breached any of its FRAND commitments, a conclusion we need not and do not reach, the remedy for such a breach lies in contract and patent law. 

This is not surprising. From the outset, numerous critics pointed that the case lied well beyond the narrow confines of antitrust law. The scathing dissenting statement written by Commissioner Maureen Olhaussen is revealing:

[I]n the Commission’s 2-1 decision to sue Qualcomm, I face an extraordinary situation: an enforcement action based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide. These extreme circumstances compel me to voice my objections. 

In reaching its conclusion, the Court notably rejected the notion that SEP royalties should be systematically based upon the “Smallest Saleable Patent Practicing Unit” (or SSPPU):

Even if we accept that the modem chip in a cellphone is the cellphone’s SSPPU, the district court’s analysis is still fundamentally flawed. No court has held that the SSPPU concept is a per se rule for “reasonable royalty” calculations; instead, the concept is used as a tool in jury cases to minimize potential jury confusion when the jury is weighing complex expert testimony about patent damages.

Similarly, it saw no objection to Qualcomm licensing its technology at the OEM level (rather than the component level):

Qualcomm’s rationale for “switching” to OEM-level licensing was not “to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition,” the second element of the Aspen Skiing exception. Aerotec Int’l, 836 F.3d at 1184 (internal quotation marks and citation omitted). Instead, Qualcomm responded to the change in patent-exhaustion law by choosing the path that was “far more lucrative,” both in the short term and the long term, regardless of any impacts on competition. 

Finally, the Court concluded that a firm breaching its FRAND pledges did not automatically amount to anticompetitive conduct: 

We decline to adopt a theory of antitrust liability that would presume anticompetitive conduct any time a company could not prove that the “fair value” of its SEP portfolios corresponds to the prices the market appears willing to pay for those SEPs in the form of licensing royalty rates.

Taken together, these findings paint a very clear picture. The Qualcomm Court repeatedly rejected the radical idea that US antitrust law should concern itself with the prices charged by monopolists — as opposed to practices that allow firms to illegally acquire or maintain a monopoly position. The words of Learned Hand and those of Antonin Scalia (respectively, below) loom large:

The successful competitor, having been urged to compete, must not be turned upon when he wins. 

And,

To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

Other courts (both in the US and abroad) have reached similar conclusions

For instance, a district court in Texas dismissed a suit brought by Continental Automotive Systems (which supplies electronic systems to the automotive industry) against a group of SEP holders. 

Continental challenged the patent holders’ decision to license their technology at the vehicle rather than component level (the allegation is very similar to the FTC’s complaint that Qualcomm licensed its SEPs at the OEM, rather than chipset level). However, following a forceful intervention by the DOJ, the Court ultimately held that the facts alleged by Continental were not indicative of antitrust injury. It thus dismissed the case.

Likewise, within weeks of the Qualcomm and Continental decisions, the UK Supreme court also ruled in favor of SEP holders. In its Unwired Planet ruling, the Court concluded that discriminatory licenses did not automatically infringe competition law (even though they might breach a firm’s contractual obligations):

[I]t cannot be said that there is any general presumption that differential pricing for licensees is problematic in terms of the public or private interests at stake.

In reaching this conclusion, the UK Supreme Court emphasized that the determination of whether licenses were FRAND, or not, was first and foremost a matter of contract law. In the case at hand, the most important guide to making this determination were the internal rules of the relevant SDO (as opposed to competition case law):

Since price discrimination is the norm as a matter of licensing practice and may promote objectives which the ETSI regime is intended to promote (such as innovation and consumer welfare), it would have required far clearer language in the ETSI FRAND undertaking to indicate an intention to impose the more strict, “hard-edged” non-discrimination obligation for which Huawei contends. Further, in view of the prevalence of competition laws in the major economies around the world, it is to be expected that any anti-competitive effects from differential pricing would be most appropriately addressed by those laws

All of this ultimately led the Court to rule in favor of Unwired Planet, thus dismissing Huawei’s claims that it had infringed competition law by breaching its FRAND pledges. 

In short, courts and antitrust authorities on both sides of the Atlantic have repeatedly, and unambiguously, concluded that pricing disputes (albeit in the specific context of technological standards) are generally a matter of contract law. Antitrust/competition law intercedes only when unfair/excessive/discriminatory prices are both caused by anticompetitive behavior and result in anticompetitive injury.

Apple’s Loss is… Apple’s gain.

Readers might wonder how the above cases relate to Apple’s app store. But, on closer inspection the parallels are numerous. As explained above, courts have repeatedly stressed that antitrust enforcement should not concern itself with the allocation of surplus between commercial partners. Yet that is precisely what Epic Game’s suit against Apple is all about.

Indeed, Epic’s central claim is not that it is somehow foreclosed from Apple’s App Store (for example, because Apple might have agreed to exclusively distribute the games of one of Epic’s rivals). Instead, all of its objections are down to the fact that it would like to access Apple’s store under more favorable terms:

Apple’s conduct denies developers the choice of how best to distribute their apps. Developers are barred from reaching over one billion iOS users unless they go through Apple’s App Store, and on Apple’s terms. […]

Thus, developers are dependent on Apple’s noblesse oblige, as Apple may deny access to the App Store, change the terms of access, or alter the tax it imposes on developers, all in its sole discretion and on the commercially devastating threat of the developer losing access to the entire iOS userbase. […]

By imposing its 30% tax, Apple necessarily forces developers to suffer lower profits, reduce the quantity or quality of their apps, raise prices to consumers, or some combination of the three.

And the parallels with the Qualcomm litigation do not stop there. Epic is effectively asking courts to make Apple monetize its platform at a different level than the one that it chose to maximize its profits (no more monetization at the app store level). Similarly, Epic Games omits any suggestion of profit sacrifice on the part of Apple — even though it is a critical element of most unilateral conduct theories of harm. Finally, Epic is challenging conduct that is both the industry norm and emerged in a highly competitive setting.

In short, all of Epic’s allegations are about monopoly prices, not monopoly maintenance or monopolization. Accordingly, just as the SEP cases discussed above were plainly beyond the outer bounds of antitrust enforcement (something that the DOJ repeatedly stressed with regard to the Qualcomm case), so too is the current wave of antitrust litigation against Apple. When all is said and done, Apple might thus be relieved that Qualcomm was victorious in their antitrust confrontation. Indeed, the legal principles that caused its demise against Qualcomm are precisely the ones that will, likely, enable it to prevail against Epic Games.

[TOTM: The following is part of a symposium by TOTM guests and authors on the 2020 Vertical Merger Guidelines. The entire series of posts is available here.

This post is authored by Jan Rybnicek (Counsel at Freshfields Bruckhaus Deringer US LLP in Washington, D.C. and Senior Fellow and Adjunct Professor at the Global Antitrust Institute at the Antonin Scalia Law School at George Mason University).]

In an area where it may seem that agreement is rare, there is near universal agreement on the benefits of withdrawing the DOJ’s 1984 Non-Horizontal Merger Guidelines. The 1984 Guidelines do not reflect current agency thinking on vertical mergers and are not relied upon by businesses or practitioners to anticipate how the agencies may review a vertical transaction. The more difficult question is whether the agencies should now replace the 1984 Guidelines and, if so, what the modern guidelines should say.

There are several important reasons that counsel against issuing new vertical merger guidelines (VMGs). Most significantly, we likely are better off without new VMGs because they invariably will (1) send the wrong message to agency staff about the relative importance of vertical merger enforcement compared to other agency priorities, (2) create new sufficient conditions that tend to trigger wasteful investigations and erroneous enforcement actions, and (3) add very little, if anything, to our understanding of when the agencies will or will not pursue an in-depth investigation or enforcement action of a vertical merger.

Unfortunately, these problems are magnified rather than mitigated by the draft VMGs. But it is unlikely at this point that the agencies will hit the brakes and not issue new VMGs. The agencies therefore should make several key changes that would help prevent the final VMGs from causing more harm than good.

What is the Purpose of Agency Guidelines? 

Before we can have a meaningful conversation about whether the draft VMGs are good or bad for the world, or how they can be improved to ensure they contribute positively to antitrust law, it is important to identify, and have a shared understanding about, the purpose of guidelines and their potential benefits.

In general, I am supportive of guidelines. In fact, I helped urge the FTC to issue its 2015 Policy Statement articulating the agency’s enforcement principles under its Section 5 Unfair Methods of Competition authority. As I have written before, guidelines can be useful if they accomplish two important goals: (1) provide insight and transparency to businesses and practitioners about the agencies’ analytical approach to an issue and (2) offer agency staff direction as to agency priorities while cabining the agencies’ broad discretion by tethering investigational or enforcement decisions to those guidelines. An additional benefit may be that the guidelines also could prove useful to courts interpreting or applying the antitrust laws.

Transparency is important for the obvious reason that it allows the business community and practitioners to know how the agencies will apply the antitrust laws and thereby allows them to evaluate if a specific merger or business arrangement is likely to receive scrutiny. But guidelines are not only consumed by the public. They also are used by agency staff. As a result, guidelines invariably influence how staff approaches a matter, including whether to open an investigation, how in-depth that investigation is, and whether to recommend an enforcement action. Lastly, for guidelines to be meaningful, they also must accurately reflect agency practice, which requires the agencies’ analysis to be tethered to an analytical framework.

As discussed below, there are many reasons to doubt that the draft VMGs can deliver on these goals.

Draft VMGs Will Lead to Bad Enforcement Policy While Providing Little Benefit

 A chief concern with VMGs is that they will inadvertently usher in a new enforcement regime that treats horizontal and vertical mergers as co-equal enforcement priorities despite the mountain of evidence, not to mention simple logic, that mergers among competitors are a significantly greater threat to competition than are vertical mergers. The draft VMGs exacerbate rather than mitigate this risk by creating a false equivalence between vertical and horizontal merger enforcement and by establishing new minimum conditions that are likely to lead the agencies to pursue wasteful investigations of vertical transactions. And the draft VMGs do all this without meaningfully advancing our understanding of the conditions under which the agencies are likely to pursue investigations and enforcement against vertical mergers.

1. No Recognition of the Differences Between Horizontal and Vertical Mergers

One striking feature of the draft VMGs is that they fail to contextualize vertical mergers in the broader antitrust landscape. As a result, it is easy to walk away from the draft VMGs with the impression that vertical mergers are as likely to lead to anticompetitive harm as are horizontal mergers. That is a position not supported by the economic evidence or logic. It is of course true that vertical mergers can result in competitive harm; that is not a seriously contested point. But it is important to acknowledge and provide background for why that harm is significantly less likely than in horizontal cases. That difference should inform agency enforcement priorities. Potentially due to this the lack of framing, the draft VMGs tend to speak more about when the agencies may identify competitive harm rather than when they will not.

The draft VMGs would benefit greatly from a more comprehensive approach to understanding vertical merger transactions. The agencies should add language explaining that, whereas a consensus exists that eliminating a direct competitor always tends to increase the risk of unilateral effects (although often trivially), there is no such consensus that harm will result from the combination of complementary assets. In fact, the current evidence shows such vertical transactions tend to be procompetitive. Absent such language, the VMGs will over time misguidedly focus more agency resources into investigating vertical mergers where there is unlikely to be harm (with inevitably more enforcement errors) and less time on more important priorities, such as pursuing enforcement of anticompetitive horizontal transactions.

2. The 20% Safe Harbor Provides No Harbor and Will Become a Sufficient Condition

The draft VMGs attempt to provide businesses with guidance about the types of transactions the agencies will not investigate by articulating a market share safe harbor. But that safe harbor does not (1) appear to be grounded in any evidence, (2) is surprisingly low in comparison to the EU vertical merger guidelines, and (3) is likely to become a sufficient condition to trigger an in-depth investigation or enforcement. 

The draft VMGs state:

The Agencies are unlikely to challenge a vertical merger where the parties to the merger have a share in the relevant market of less than 20%, and the related product is used in less than 20% of the relevant market.

But in the very next sentence the draft VMGs render the safe harbor virtually meaningless, stating:

In some circumstance, mergers with shares below the threshold can give rise to competitive concerns.

This caveat comes despite the fact that the 20% threshold is low compared to other jurisdictions. Indeed, the EU’s guidelines create a 30% safe harbor. Nor is it clear what the basis is for the 20% threshold, either in economics or law. While it is important for the agencies to remain flexible, too much flexibility will render the draft VMGs meaningless. The draft VMGs should be less equivocal about the types of mergers that will not receive significant scrutiny and are unlikely to be the subject of enforcement action.

What may be most troubling about the market share safe harbor is the likelihood that it will establish general enforcement norms that did not previously exist. It is likely that agency staff will soon interpret (despite language stating otherwise) the 20% market share as the minimum necessary condition to open an in-depth investigation and to pursue an enforcement action. We have seen other guidelines’ tools have similar effects on agency analysis before (see, GUPPIs). This risk is only exacerbated where the safe harbor is not a true safe harbor that provides businesses with clarity on enforcement priorities.

3. Requirements for Proving EDM and Efficiencies Fails to Recognize Vertical Merger Context

The draft VMGs minimize the significant role of EDM and efficiencies in vertical mergers. The agencies frequently take a skeptical approach to efficiencies in the context of horizontal mergers and it is well-known that the hurdle to substantiate efficiencies is difficult, if not impossible, to meet. The draft VMGs oddly continue this skeptical approach by specifically referencing the standards discussed in the horizontal merger guidelines for efficiencies when discussing EDM and vertical merger efficiencies. The draft VMGs do not recognize that the combination of complementary products is inherently more likely to generate efficiencies than in horizontal mergers between competitors. The draft VMGs also oddly discuss EDM and efficiencies in separate sections and spend a trivial amount of time on what is the core motivating feature of vertical mergers. Even the discussion of EDM is as much about where there may be exceptions to EDM as it is about making clear the uncontroversial view that EDM is frequent in vertical transactions. Without acknowledging the inherent nature of EDM and efficiencies more generally, the final VMGs will send the wrong message that vertical merger enforcement should be on par with horizontal merger enforcement.

4. No New Insights into How Agencies Will Assess Vertical Mergers

Some might argue that the costs associated with the draft VMGs nevertheless are tolerable because the guidelines offer significant benefits that far outweigh their costs. But that is not the case here. The draft VMGs provide no new information about how the agencies will review vertical merger transactions and under what circumstances they are likely to seek enforcement actions. And that is because it is a difficult if not impossible task to identify any such general guiding principles. Indeed, unlike in the context of horizontal transactions where an increase in market power informs our thinking about the likely competitive effects, greater market power in the context of a vertical transaction that combines complements creates downward pricing pressure that often will dominate any potential competitive harm.

The draft VMGs do what they can, though, which is to describe in general terms several theories of harm. But the benefits from that exercise are modest and do not outweigh the significant risks discussed above. The theories described are neither novel or unknown to the public today. Nor do the draft VMGs explain any significant new thinking on vertical mergers, likely because there has been none that can provide insight into general enforcement principles. The draft VMGs also do not clarify changes to statutory text (because it has not changed) or otherwise clarify judicial rulings or past enforcement actions. As a result, the draft VMGs do not offer sufficient benefits that would outweigh their substantial cost.

Conclusion

Despite these concerns, it is worth acknowledging the work the FTC and DOJ have put into preparing the draft VMGs. It is no small task to articulate a unified position between the two agencies on an issue such as vertical merger enforcement where so many have such strong views. To the agencies’ credit, the VMGs are restrained in not including novel or more adventurous theories of harm. I anticipate the DOJ and FTC will engage with commentators and take the feedback seriously as they work to improve the final VMGs.