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In the world of video games, the process by which players train themselves or their characters in order to overcome a difficult “boss battle” is called “leveling up.” I find that the phrase also serves as a useful metaphor in the context of corporate mergers. Here, “leveling up” can be thought of as acquiring another firm in order to enter or reinforce one’s presence in an adjacent market where a larger and more successful incumbent is already active.

In video-game terminology, that incumbent would be the “boss.” Acquiring firms choose to level up when they recognize that building internal capacity to compete with the “boss” is too slow, too expensive, or is simply infeasible. An acquisition thus becomes the only way “to beat the boss” (or, at least, to maximize the odds of doing so).

Alas, this behavior is often mischaracterized as a “killer acquisition” or “reverse killer acquisition.” What separates leveling up from killer acquisitions is that the former serve to turn the merged entity into a more powerful competitor, while the latter attempt to weaken competition. In the case of “reverse killer acquisitions,” the assumption is that the acquiring firm would have entered the adjacent market regardless absent the merger, leaving even more firms competing in that market.

In other words, the distinction ultimately boils down to a simple (though hard to answer) question: could both the acquiring and target firms have effectively competed with the “boss” without a merger?

Because they are ubiquitous in the tech sector, these mergers—sometimes also referred to as acquisitions of nascent competitors—have drawn tremendous attention from antitrust authorities and policymakers. All too often, policymakers fail to adequately consider the realistic counterfactual to a merger and mistake leveling up for a killer acquisition. The most recent high-profile example is Meta’s acquisition of the virtual-reality fitness app Within. But in what may be a hopeful sign of a turning of the tide, a federal court appears set to clear that deal over objections from the Federal Trade Commission (FTC).

Some Recent ‘Boss Battles’

The canonical example of leveling up in tech markets is likely Google’s acquisition of Android back in 2005. While Apple had not yet launched the iPhone, it was already clear by 2005 that mobile would become an important way to access the internet (including Google’s search services). Rumors were swirling that Apple, following its tremendously successful iPod, had started developing a phone, and Microsoft had been working on Windows Mobile for a long time.

In short, there was a serious risk that Google would be reliant on a single mobile gatekeeper (i.e., Apple) if it did not move quickly into mobile. Purchasing Android was seen as the best way to do so. (Indeed, averting an analogous sort of threat appears to be driving Meta’s move into virtual reality today.)

The natural next question is whether Google or Android could have succeeded in the mobile market absent the merger. My guess is that the answer is no. In 2005, Google did not produce any consumer hardware. Quickly and successfully making the leap would have been daunting. As for Android:

Google had significant advantages that helped it to make demands from carriers and OEMs that Android would not have been able to make. In other words, Google was uniquely situated to solve the collective action problem stemming from OEMs’ desire to modify Android according to their own idiosyncratic preferences. It used the appeal of its app bundle as leverage to get OEMs and carriers to commit to support Android devices for longer with OS updates. The popularity of its apps meant that OEMs and carriers would have great difficulty in going it alone without them, and so had to engage in some contractual arrangements with Google to sell Android phones that customers wanted. Google was better resourced than Android likely would have been and may have been able to hold out for better terms with a more recognizable and desirable brand name than a hypothetical Google-less Android. In short, though it is of course possible that Android could have succeeded despite the deal having been blocked, it is also plausible that Android became so successful only because of its combination with Google. (citations omitted)

In short, everything suggests that Google’s purchase of Android was a good example of leveling up. Note that much the same could be said about the company’s decision to purchase Fitbit in order to compete against Apple and its Apple Watch (which quickly dominated the market after its launch in 2015).

A more recent example of leveling up is Microsoft’s planned acquisition of Activision Blizzard. In this case, the merger appears to be about improving Microsoft’s competitive position in the platform market for game consoles, rather than in the adjacent market for games.

At the time of writing, Microsoft is staring down the barrel of a gun: Sony is on the cusp of becoming the runaway winner of yet another console generation. Microsoft’s executives appear to have concluded that this is partly due to a lack of exclusive titles on the Xbox platform. Hence, they are seeking to purchase Activision Blizzard, one of the most successful game studios, known among other things for its acclaimed Call of Duty series.

Again, the question is whether Microsoft could challenge Sony by improving its internal game-publishing branch (known as Xbox Game Studios) or whether it needs to acquire a whole new division. This is obviously a hard question to answer, but a cursory glance at the titles shipped by Microsoft’s publishing studio suggest that the issues it faces could not simply be resolved by throwing more money at its existing capacities. Indeed, Microsoft Game Studios seems to be plagued by organizational failings that might only be solved by creating more competition within the Microsoft company. As one gaming journalist summarized:

The current predicament of these titles goes beyond the amount of money invested or the buzzwords used to market them – it’s about Microsoft’s plan to effectively manage its studios. Encouraging independence isn’t an excuse for such a blatantly hands-off approach which allows titles to fester for years in development hell, with some fostering mistreatment to occur. On the surface, it’s just baffling how a company that’s been ranked as one of the top 10 most reputable companies eight times in 11 years (as per RepTrak) could have such problems with its gaming division.

The upshot is that Microsoft appears to have recognized that its own game-development branch is failing, and that acquiring a well-functioning rival is the only way to rapidly compete with Sony. There is thus a strong case to be made that competition authorities and courts should approach the merger with caution, as it has at least the potential to significantly increase competition in the game-console industry.

Finally, leveling up is sometimes a way for smaller firms to try and move faster than incumbents into a burgeoning and promising segment. The best example of this is arguably Meta’s effort to acquire Within, a developer of VR fitness apps. Rather than being an attempt to thwart competition from a competitor in the VR app market, the goal of the merger appears to be to compete with the likes of Google, Apple, and Sony at the platform level. As Mark Zuckerberg wrote back in 2015, when Meta’s VR/AR strategy was still in its infancy:

Our vision is that VR/AR will be the next major computing platform after mobile in about 10 years… The strategic goal is clearest. We are vulnerable on mobile to Google and Apple because they make major mobile platforms. We would like a stronger strategic position in the next wave of computing….

Over the next few years, we’re going to need to make major new investments in apps, platform services, development / graphics and AR. Some of these will be acquisitions and some can be built in house. If we try to build them all in house from scratch, then we risk that several will take too long or fail and put our overall strategy at serious risk. To derisk this, we should acquire some of these pieces from leading companies.

In short, many of the tech mergers that critics portray as killer acquisitions are just as likely to be attempts by firms to compete head-on with incumbents. This “leveling up” is precisely the sort of beneficial outcome that antitrust laws were designed to promote.

Building Products Is Hard

Critics are often quick to apply the “killer acquisition” label to any merger where a large platform is seeking to enter or reinforce its presence in an adjacent market. The preceding paragraphs demonstrate that it’s not that simple, as these mergers often enable firms to improve their competitive position in the adjacent market. For obvious reasons, antitrust authorities and policymakers should be careful not to thwart this competition.

The harder part is how to separate the wheat from the chaff. While I don’t have a definitive answer, an easy first step would be for authorities to more seriously consider the supply side of the equation.

Building a new product is incredibly hard, even for the most successful tech firms. Microsoft famously failed with its Zune music player and Windows Phone. The Google+ social network never gained any traction. Meta’s foray into the cryptocurrency industry was a sobering experience. Amazon’s Fire Phone bombed. Even Apple, which usually epitomizes Silicon Valley firms’ ability to enter new markets, has had its share of dramatic failures: Apple Maps, its Ping social network, and the first Home Pod, to name a few.

To put it differently, policymakers should not assume that internal growth is always a realistic alternative to a merger. Instead, they should carefully examine whether such a strategy is timely, cost-effective, and likely to succeed.

This is obviously a daunting task. Firms will struggle to dispositively show that they need to acquire the target firm in order to effectively compete against an incumbent. The question essentially hinges on the quality of the firm’s existing management, engineers, and capabilities. All of these are difficult—perhaps even impossible—to measure. At the very least, policymakers can improve the odds of reaching a correct decision by approaching these mergers with an open mind.

Under Chair Lina Khan’s tenure, the FTC has opted for the opposite approach and taken a decidedly hostile view of tech acquisitions. The commission sued to block both Meta’s purchase of Within and Microsoft’s acquisition of Activision Blizzard. Likewise, several economists—notably Tommasso Valletti—have called for policymakers to reverse the burden of proof in merger proceedings, and opined that all mergers should be viewed with suspicion because, absent efficiencies, they always reduce competition.

Unfortunately, this skeptical approach is something of a self-fulfilling prophecy: when authorities view mergers with suspicion, they are likely to be dismissive of the benefits discussed above. Mergers will be blocked and entry into adjacent markets will occur via internal growth. 

Large tech companies’ many failed attempts to enter adjacent markets via internal growth suggest that such an outcome would ultimately harm the digital economy. Too many “boss battles” will needlessly be lost, depriving consumers of precious competition and destroying startup companies’ exit strategies.

At the Jan. 26 Policy in Transition forum—the Mercatus Center at George Mason University’s second annual antitrust forum—various former and current antitrust practitioners, scholars, judges, and agency officials held forth on the near-term prospects for the neo-Brandeisian experiment undertaken in recent years by both the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ). In conjunction with the forum, Mercatus also released a policy brief on 2022’s significant antitrust developments.

Below, I summarize some of the forum’s noteworthy takeaways, followed by concluding comments on the current state of the antitrust enterprise, as reflected in forum panelists’ remarks.

Takeaways

    1. The consumer welfare standard is neither a recent nor an arbitrary antitrust-enforcement construct, and it should not be abandoned in order to promote a more “enlightened” interventionist antitrust.

George Mason University’s Donald Boudreaux emphasized in his introductory remarks that the standard goes back to Adam Smith, who noted in “The Wealth of Nations” nearly 250 years ago that the appropriate end of production is the consumer’s benefit. Moreover, American Antitrust Institute President Diana Moss, a leading proponent of more aggressive antitrust enforcement, argued in standalone remarks against abandoning the consumer welfare standard, as it is sufficiently flexible to justify a more interventionist agenda.

    1. The purported economic justifications for a far more aggressive antitrust-enforcement policy on mergers remain unconvincing.

Moss’ presentation expressed skepticism about vertical-merger efficiencies and called for more aggressive challenges to such consolidations. But Boudreaux skewered those arguments in a recent four-point rebuttal at Café Hayek. As he explains, Moss’ call for more vertical-merger enforcement ignores the fact that “no one has stronger incentives than do the owners and managers of firms to detect and achieve possible improvements in operating efficiencies – and to avoid inefficiencies.”

Moss’ complaint about chronic underenforcement mistakes by overly cautious agencies also ignores the fact that there will always be mistakes, and there is no reason to believe “that antitrust bureaucrats and courts are in a position to better predict the future [regarding which efficiencies claims will be realized] than are firm owners and managers.” Moreover, Moss provided “no substantive demonstration or evidence that vertical mergers often lead to monopolization of markets – that is, to industry structures and practices that harm consumers. And so even if vertical mergers never generate efficiencies, there is no good argument to use antitrust to police such mergers.”

And finally, Boudreaux considers Moss’ complaint that a court refused to condemn the AT&T-Time Warner merger, arguing that this does not demonstrate that antitrust enforcement is deficient:

[A]s soon as the  . . . merger proved to be inefficient, the parties themselves undid it. This merger was undone by competitive market forces and not by antitrust! (Emphasis in the original.)

    1. The agencies, however, remain adamant in arguing that merger law has been badly unenforced. As such, the new leadership plans to charge ahead and be willing to challenge more mergers based on mere market structure, paying little heed to efficiency arguments or actual showings of likely future competitive harm.

In her afternoon remarks at the forum, Principal Deputy Assistant U.S. Attorney General for Antitrust Doha Mekki highlighted five major planks of Biden administration merger enforcement going forward.

  • Clayton Act Section 7 is an incipiency statute. Thus, “[w]hen a [mere] change in market structure suggests that a firm will have an incentive to reduce competition, that should be enough [to justify a challenge].”
  • “Once we see that a merger may lead to, or increase, a firm’s market power, only in very rare circumstances should we think that a firm will not exercise that power.”
  • A structural presumption “also helps businesses conform their conduct to the law with more confidence about how the agencies will view a proposed merger or conduct.”
  • Efficiencies defenses will be given short shrift, and perhaps ignored altogether. This is because “[t]he Clayton Act does not ask whether a merger creates a more or less efficient firm—it asks about the effect of the merger on competition. The Supreme Court has never recognized efficiencies as a defense to an otherwise illegal merger.”
  • Merger settlements have often failed to preserve competition, and they will be highly disfavored. Therefore, expect a lot more court challenges to mergers than in recent decades. In short, “[w]e must be willing to litigate. . . . [W]e need to acknowledge the possibility that sometimes a court might not agree with us—and yet go to court anyway.”

Mekki’s comments suggest to me that the soon-to-be-released new draft merger guidelines may emphasize structural market-share tests, generally reject efficiencies justifications, and eschew the economic subtleties found in the current guidelines.

    1. The agencies—and the FTC, in particular—have serious institutional problems that undermine their effectiveness, and risk a loss of credibility before the courts in the near future.

In his address to the forum, former FTC Chairman Bill Kovacic lamented the inefficient limitations on reasoned FTC deliberations imposed by the Sunshine Act, which chills informal communications among commissioners. He also pointed to our peculiarly unique global status of having two enforcers with duplicative antitrust authority, and lamented the lack of policy coherence, which reflects imperfect coordination between the agencies.

Perhaps most importantly, Kovacic raised the specter of the FTC losing credibility in a possible world where Humphrey’s Executor is overturned (see here) and the commission is granted little judicial deference. He suggested taking lessons on policy planning and formulation from foreign enforcers—the United Kingdom’s Competition and Markets Authority, in particular. He also decried agency officials’ decisions to belittle prior administrations’ enforcement efforts, seeing it as detracting from the international credibility of U.S. enforcement.

    1. The FTC is embarking on a novel interventionist path at odds with decades of enforcement policy.

In luncheon remarks, Commissioner Christine S. Wilson lamented the lack of collegiality and consultation within the FTC. She warned that far-reaching rulemakings and other new interventionist initiatives may yield a backlash that undermines the institution.

Following her presentation, a panel of FTC experts discussed several aspects of the commission’s “new interventionism.” According to one panelist, the FTC’s new Section 5 Policy Statement on Unfair Methods of Competition (which ties “unfairness” to arbitrary and subjective terms) “will not survive in” (presumably, will be given no judicial deference by) the courts. Another panelist bemoaned rule-of-law problems arising from FTC actions, called for consistency in FTC and DOJ enforcement policies, and warned that the new merger guidelines will represent a “paradigm shift” that generates more business uncertainty.

The panel expressed doubts about the legal prospects for a proposed FTC rule on noncompete agreements, and noted that constitutional challenges to the agency’s authority may engender additional difficulties for the commission.

    1. The DOJ is greatly expanding its willingness to litigate, and is taking actions that may undermine its credibility in court.

Assistant U.S. Attorney General for Antitrust Jonathan Kanter has signaled a disinclination to settle, as well as an eagerness to litigate large numbers of cases (toward that end, he has hired a huge number of litigators). One panelist noted that, given this posture from the DOJ, there is a risk that judges may come to believe that the department’s litigation decisions are not well-grounded in the law and the facts. The business community may also have a reduced willingness to “buy in” to DOJ guidance.

Panelists also expressed doubts about the wisdom of DOJ bringing more “criminal Sherman Act Section 2” cases. The Sherman Act is a criminal statute, but the “beyond a reasonable doubt” standard of criminal law and Due Process concerns may arise. Panelists also warned that, if new merger guidelines are ”unsound,” they may detract from the DOJ’s credibility in federal court.

    1. International antitrust developments have introduced costly new ex ante competition-regulation and enforcement-coordination problems.

As one panelist explained, the European Union’s implementation of the new Digital Markets Act (DMA) will harmfully undermine market forces. The DMA is a form of ex ante regulation—primarily applicable to large U.S. digital platforms—that will harmfully interject bureaucrats into network planning and design. The DMA will lead to inefficiencies, market fragmentation, and harm to consumers, and will inevitably have spillover effects outside Europe.

Even worse, the DMA will not displace the application of EU antitrust law, but merely add to its burdens. Regrettably, the DMA’s ex ante approach is being imitated by many other enforcement regimes, and the U.S. government tacitly supports it. The DMA has not been included in the U.S.-EU joint competition dialogue, which risks failure. Canada and the U.K. should also be added to the dialogue.

Other International Concerns

The international panelists also noted that there is an unfortunate lack of convergence on antitrust procedures. Furthermore, different jurisdictions manifest substantial inconsistencies in their approaches to multinational merger analysis, where better coordination is needed. There is a special problem in the areas of merger review and of criminal leniency for price fixers: when multiple jurisdictions need to “sign off” on an enforcement matter, the “most restrictive” jurisdiction has an effective veto.

Finally, former Assistant U.S. Attorney General for Antitrust James Rill—perhaps the most influential promoter of the adoption of sound antitrust laws worldwide—closed the international panel with a call for enhanced transnational cooperation. He highlighted the importance of global convergence on sound antitrust procedures, emphasizing due process. He also advocated bolstering International Competition Network (ICN) and OECD Competition Committee convergence initiatives, and explained that greater transparency in agency-enforcement actions is warranted. In that regard, Rill said, ICN nongovernmental advisers should be given a greater role.

Conclusion

Taken as a whole, the forum’s various presentations painted a rather gloomy picture of the short-term prospects for sound, empirically based, economics-centric antitrust enforcement.

In the United States, the enforcement agencies are committed to far more aggressive antitrust enforcement, particularly with respect to mergers. The agencies’ new approach downplays efficiencies and they will be quick to presume broad categories of business conduct are anticompetitive, relying far less closely on case-specific economic analysis.

The outlook is also bad overseas, as European Union enforcers are poised to implement new ex ante regulation of competition by large platforms as an addition to—not a substitute for—established burdensome antitrust enforcement. Most foreign jurisdictions appear to be following the European lead, and the U.S. agencies are doing nothing to discourage them. Indeed, they appear to fully support the European approach.

The consumer welfare standard, which until recently was the stated touchstone of American antitrust enforcement—and was given at least lip service in Europe—has more or less been set aside. The one saving grace in the United States is that the federal courts may put a halt to the agencies’ overweening ambitions, but that will take years. In the meantime, consumer welfare will suffer and welfare-enhancing business conduct will be disincentivized. The EU courts also may place a minor brake on European antitrust expansionism, but that is less certain.

Recall, however, that when evils flew out of Pandora’s box, hope remained. Let us hope, then, that the proverbial worm will turn, and that new leadership—inspired by hopeful and enlightened policy advocates—will restore principled antitrust grounded in the promotion of consumer welfare.

In a prior post, I made the important if wholly unoriginal point that the Federal Trade Commission’s (FTC) recent policy statement regarding unfair methods of competition (UMC)—perhaps a form of “soft law”—has neither legal force nor precedential value. Gus Hurwitz offers a more thorough discussion of the issue here

But policy statements may still have value as guidance documents for industry and the bar. They can also inform the courts, providing a framework for the commission’s approach to the specific facts and circumstances that underlie a controversy. That is, as the 12th century sage Maimonides endeavored in his own “Guide for the Perplexed,” they can elucidate rationales for particular principles and decisions of law. 

I also pointed out (also unoriginally) that the statement’s guidance value might be undermined by its own vagueness. Or as former FTC Commissioner and Acting Chairman Maureen Ohlhausen put it:

While ostensibly intended to provide such guidance, the new Policy Statement contains few specifics about the particular conduct that the Commission might deem to be unfair, and suggests that the FTC has broad discretion to challenge nearly any conduct with which it disagrees.

There’s so much going on at (or being announced by) my old agency that it’s hard to keep up. One recent development reaches back into FTC history—all the way to late 2021—to find an initiative at the boundary of soft and hard law: that is, the issuance to more than 700 U.S. firms of notices of penalty offenses about “fake reviews and other misleading endorsements.” 

A notice of penalty offenses is supposed to provide a sort of firm-specific guidance: a recipient is informed that certain sorts of conduct have been deemed to violate the FTC Act. It’s not a decision or even an allegation that the firm has engaged in such prohibited conduct. In that way, it’s like soft law. 

On the other hand, it’s not entirely anemic. In AMG Capital, the Supreme Court held that the FTC cannot obtain equitable monetary remedies for violations of the FTC Act in the first instance—at least, not under Section 13b of the FTC Act. But there are circumstances under which the FTC can get statutory penalties (up to just over $50,000 per violation, and a given course of conduct might entail many violations) for, e.g., violating a regulation that implements Section 5.

That serves as useful background to observe that, among the FTC’s recent advanced notices of proposed rulemakings (ANPRs) is one about regulating fake reviews. (Commissioner Christine S. Wilson’s dissent in the matter is here.) 

Here it should be noted that Section 5(m) of the FTC Act also permits monetary penalties if “the Commission determines in a proceeding . . . that any act or practice is unfair or deceptive, and issues a final cease and desist order” and the firm has “actual knowledge that such act or practice is unfair or deceptive and is unlawful.”  

What does that mean? In brief, if there’s an agency decision (not a consent order, but not a federal court decision either) that a certain type of conduct by one firm is “unfair or deceptive” under Section 5, then another firm can be assessed statutory monetary penalties if the Commission determines that it has undertaken the same type of conduct and if, because the firm has received a notice of penalty offenses, it has “actual knowledge that such act or practice is unfair or deceptive.” 

So, now we’re back to monetary penalties for violations of Section 5 in the first instance if a very special form of mens rea can be established. A notice of penalty offenses provides guidance, but it also carries real legal risk. 

Back to pesky questions and details. Do the letters provide notice? What might 700-plus disparate contemporary firms all do that fits a given course of unlawful conduct (at least as determined by administrative process)? To grab just a few examples among companies that begin with the letter “A”: what problematic conduct might be common to, e.g., Abbott Labs, Abercrombie & Fitch, Adidas, Adobe, Albertson’s, Altria, Amazon, and Annie’s (the organic-food company)?

Well, the letter (or the sample posted) points to all sorts of potentially helpful guidance about not running afoul of the law. But more specifically, the FTC points to eight administrative decisions that model the conduct (by other firms) already found to be unfair or deceptive. That, surely, is where the rubber hits the road and the details are specified. Or is it? 

The eight administrative decisions are an odd lot. Most of the matters have to do with manufacturers or packagers (or service providers) making materially false or misleading statements in advertising their products or services. 

The most recent case is In the Matter of Cliffdale Associates, a complaint filed in 1981 and decided by the commission in 1984. For those unfamiliar with Cliffdale (nearly everyone?), the defendant sold something “variously known as the Ball-Matic, the Ball-Matic Gas Saver Valve and the Gas Saver Valve.” The oldest decision, Wilbert W. Haase, was filed in 1939 and decided in 1941 (one of two decided during World War II).

The decisions make for interesting reading. For example, in R.J. Reynolds, we learn that:

…while as a general proposition the smoking of cigarettes in moderation by individuals not allergic nor hypersensitive to cigarette smoking, who are accustomed to smoking and are in normal good health, with no existing pathology of any of the bodily systems, is not appreciably harmful-what is normal for one person may be excessive for another.

I’ll confess: In my misspent youth, I did some research at the National Institutes of Health (NIH), but I did not know that.

Interesting reading but, dare I suggest, not super helpful from the standpoint of notice or guidance. R.J. Reynolds manufactured, advertised, and sold cigarettes and other tobacco products; and they advertised that “the effect that the smoking of its cigarettes was either beneficial to or not injurious to a particular bodily system.” So, “not appreciably harmful,” but that doesn’t mean therapeutic.

A few things stand out. First, all of the complaints were brought prior to the birth of the internet. Second, five of the eight complaints were brought before the 1975 Magnuson-Moss Act amendments to the FTC Act that, among other things, revised the standards for finding conduct “unfair or deceptive” under Section 5.  Third, having read the cases, I have no idea how the old cases are supposed to provide notice to the myriad recipients of these letters. 

Section 5 provides that “unfair methods of competition” and “unfair or deceptive acts or practices in or affecting commerce” are unlawful. Section 5(n)—courtesy of the 1975 amendments—qualifies the prohibition: 

The Commission shall have no authority under this section … to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. … the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

As Geoff Manne and I have noted, the amendment was adopted by a Congress that thought the FTC had been overreaching in its application of Section 5. Others have made (and expanded upon) the same observation: former FTC Chairman William Kovacic’s 2010 Senate testimony is one excellent example among many. Continued congressional frustration actually briefly led to a shutdown of the FTC. 

Here’s my take on the notice provided by the Notices of Penalty Authority: they might as well tell firms that the FTC has found that violating Section 5’s prohibition of unfair or deceptive acts or practices violates Section 5’s prohibition of unfair or deceptive acts or practices and (b) we’re not saying you violated Section 5, and we’re not saying you didn’t, but if you do violate Section 5, you’re subject to statutory monetary penalties, statutory and judicial impediments to monetary penalties notwithstanding.     

What sort of notice is that? Might the federal courts see this as an attempt at an end-run around statutory limits on the FTC’s authority? Might Congress? If you’re perplexed by the FTC’s mass notice action, which authority will provide you a guide?     

Under a recently proposed rule, the Federal Trade Commission (FTC) would ban the use of noncompete terms in employment agreements nationwide. Noncompetes are contracts that workers sign saying they agree to not work for the employer’s competitors for a certain period. The FTC’s rule would be a major policy change, regulating future contracts and retroactively voiding current ones. With limited exceptions, it would cover everyone in the United States.

When I scan academic economists’ public commentary on the ban over the past few weeks (which basically means people on Twitter), I see almost universal support for the FTC’s proposed ban. You see similar support if you expand to general econ commentary, like Timothy Lee at Full Stack Economics. Where you see pushback, it is from people at think tanks (like me) or hushed skepticism, compared to the kind of open disagreement you see on most policy issues.

The proposed rule grew out of an executive order by President Joe Biden in 2021, which I wrote about at the time. My argument was that there is a simple economic rationale for the contract: noncompetes encourage both parties to invest in the employee-employer relationship, just like marriage contracts encourage spouses to invest in each other.

Somehow, reposting my newsletter on the economic rationale for noncompetes has turned me into a “pro-noncompete guy” on Twitter.

The discussions have been disorienting. I feel like I’m taking crazy pills! If you ask me, “what new thing should policymakers do to address labor market power?” I would probably say something about noncompetes! Employers abuse them. The stories are devastating about people unable to find a new job because noncompetes bind them.

Yet, while recognizing the problems with noncompetes, I do not support the complete ban.

That puts me out of step with most vocal economics commentators. Where does this disagreement come from? How do I think about policy generally, and why am I the odd one out?

My Interpretation of the Research

One possibility is that I’m not such a lonely voice, and that the sample of vocal Twitter users is biased toward particular policy views. The University of Chicago Booth School of Business’ Initiative on Global Markets recently conducted a poll of academic economists  about noncompetes, which mostly finds differing opinions and levels of certainty about the effects of a ban. For example, 43% were uncertain that a ban would generate a “substantial increase in wages in the affected industries.” However, maybe that is because the word substantial is unclear. That’s a problem with these surveys.

Still, more economists surveyed agreed than disagreed. I would answer “disagree” to that statement, as worded.

Why do I differ? One cynical response would be that I don’t know the recent literature, and my views are outdated. From the research I’ve done for a paper that I’m writing on labor-market power, I’m fairly well-versed in the noncompete literature. I don’t know it better than the active researchers in the field, but better than the average economists responding to the FTC’s proposal and definitely better than most lawyers. My disagreement also isn’t about me being some free-market fanatic. I’m not, and some other free-market types are skeptical of noncompetes. My priors are more complicated (critics might say “confused”) than that, as I will explain below.

After much soul-searching, I’ve concluded that the disagreement is real and results from my—possibly weird—understanding of how we should go from the science of economics to the art of policy. That’s what I want to explain today and get us to think more about.

Let’s start with the literature and the science of economics. First, we need to know “the facts.” The original papers focused a lot on collecting data and facts about noncompetes. We don’t have amazing data on the prevalence of noncompetes, but we know something, which is more than we could say a decade ago. For example, Evan Starr, J.J. Prescott, & Norman Bishara (2021) conducted a large survey in which they found that “18 percent of labor force participants are bound by noncompetes, with 38 percent having agreed to at least one in the past.”[1] We need to know these things and thank the researchers for collecting data.

With these facts, we can start running regressions. In addition to the paper above, many papers develop indices of noncompete “enforceability” by state. Then we can regress things like wages on an enforceability index. Many papers—like Starr, Prescott, & Bishara above—run cross-state regressions and find that wages are higher in states with higher noncompete enforceability. They also find more training with noncompete enforceability. But that kind of correlation is littered with selection issues. High-income workers are more likely to sign noncompetes. That’s not causal. The authors carefully explain this, but sometimes correlations are the best we have—e.g., if we want to study noncompetes on doctors’ wages and their poaching of clients.

Some people will simply point to California (which has banned noncompetes for decades) and say, “see, noncompete bans don’t destroy an economy.” Unfortunately, many things make California unique, so while that is evidence, it’s hardly causal.

The most credible results come from recent changes in state policy. These allow us to run simple difference-in-difference types of analysis to uncover causal estimates. These results are reasonably transparent and easy to understand.

Michael Lipsitz & Evan Starr (2021) (are you starting to recognize that Starr name?) study a 2008 Oregon ban on noncompetes for hourly workers. They find the ban increased hourly wages overall by 2 to 3%, which implies that those signing noncompetes may have seen wages rise as much as 14 to 21%. This 3% number is what the FTC assumes will apply to the whole economy when they estimate a $300 billion increase in wages per year under their ban. It’s a linear extrapolation.

Similarly, in 2015, Hawaii banned noncompetes for new hires within tech industries. Natarajan Balasubramanian et al. (2022) find that the ban increased new-hire wages by 4%. They also estimate that the ban increased worker mobility by 11%. Labor economists generally think of worker turnover as a good thing. Still, it is tricky here when the whole benefit of the agreement is to reduce turnover and encourage a better relationship between workers and firms.

The FTC also points to three studies that find that banning noncompetes increases innovation, according to a few different measures. I won’t say anything about these because you can infer my reaction based on what I will say below on wage studies. If anything, I’m more skeptical of innovation studies, simply because I don’t think we have a good understanding of what causes innovation generally, let alone how to measure the impact of noncompetes on innovation. You can read what the FTC cites on innovation and make up your own mind.

From Academic Research to an FTC Ban

Now that we understand some of the papers, how do we move to policy?

Let’s assume I read the evidence basically as the FTC does. I don’t, and will explain as much in a future paper, but that’s not the debate for this post. How do we think about the optimal policy response, given the evidence?

There are two main reasons I am not ready to extrapolate from the research to the proposed ban. Every economist knows them: the dreaded pests of external validity and general equilibrium effects.

Let’s consider external validity through the Oregon ban paper and the Hawaii tech ban paper. Again, these are not critiques of the papers, but of how the FTC wants to move from them to a national ban.

Notice above that I said the Oregon ban went into effect in 2008, which means it happened as the whole country was entering a major recession and financial crisis. The authors do their best to deal with differential responses to the recession, but every state in their data went through a recession. Did the recession matter for the results? It seems plausible to me.

Another important detail about the Oregon ban is that it only applied to hourly workers, while the FTC rule would apply to all workers. You can’t just confidently assume hourly workers are just like salaried workers. Hourly workers who sign noncompetes are less likely to read them, less likely to consult with their family about them, and less likely to negotiate over them. If part of the problem with noncompetes is that people don’t understand them until it is too late, you will overstate the harm if you just look at hourly workers who understand noncompetes even less than salaried workers. Also, with a partial ban, Lipsitz & Starr recognize that spillovers matter and firms respond in different ways, such as converting workers to salaried to keep the noncompete, which won’t exist with a national ban. It’s not the same experiment at a national scale. Which way will it change? How confident are we?

The effects of the Hawaii ban are likely not the same as the FTC one would be. First of all, Hawaii is weird. It has a small population, and tech is a small part of the state’s economy. The ban even excluded telecom from within the tech sector. We are talking about a targeted ban. What does the Hawaii experiment tell us about a ban on noncompetes for tech workers in a non-island location like Boston? What does it tell us about a national ban on all noncompetes, like the FTC is proposing? Maybe these things do not matter. To further complicate things, the policy change included a ban on nonsolicitation clauses. Maybe the nonsolicitation clause was unimportant. But I’d want more research and more policy experimentation to tease out these details.

As you dig into these papers, you find more and more of these issues. That’s not a knock on the papers but an inherent difficulty in moving from research to policy. It’s further compounded by the fact that this empirical literature is still relatively new.

What will happen when we scale these bans up to the national level? That’s a huge question for any policy change, especially one as large as a national ban. The FTC seems confident in what will happen, but moving from micro to macro is not trivial. Macroeconomists are starting to really get serious about how the micro adds up to the macro, but it takes work.

I want to know more. Which effects are amplified when scaled? Which effects drop off? What’s the full National Income and Product Accounts (NIPA) accounting? I don’t know. No one does, because we don’t have any of that sort of price-theoretic, general equilibrium research. There are lots of margins that firms will adjust on. There’s always another margin that firms will adjust that we are not capturing. Instead, what the FTC did is a simple linear extrapolation from the state studies to a national ban. Studies find a 3% wage effect here. Multiply that by the number of workers.

When we are doing policy work, we would also like some sort of welfare analysis. It’s not just about measuring workers in isolation. We need a way to think about the costs and benefits and how to trade them off. All the diff-in-diff regressions in the world won’t get at it; we need a model.

Luckily, we have one paper that blends empirics and theory to do welfare analysis.[2] Liyan Shi has a paper forthcoming in Econometrica—which is no joke to publish in—titled “Optimal Regulation of Noncompete Contracts.” In it, she studies a model meant to capture the tradeoff between encouraging a firm’s investment in workers and reducing labor mobility. To bring the theory to data, she scrapes data on U.S. public firms from Securities and Exchange Commission filings and merges those with firm-level data from Compustat, plus some others, to get measures of firm investment in intangibles. She finds that when she brings her model to the data and calibrates it, the optimal policy is roughly a ban on noncompetes.

It’s an impressive paper. Again, I’m unsure how much to take from it to extrapolate to a ban on all workers. First, as I’ve written before, we know publicly traded firms are different from private firms, and that difference has changed over time. Second, it’s plausible that CEOs are different from other workers, and the relationship between CEO noncompetes and firm-level intangible investment isn’t identical to the relationship between mid-level engineers and investment in that worker.

Beyond particular issues of generalizing Shi’s paper, the larger concern is that this is the paper that does a welfare analysis. That’s troubling to me as a basis for a major policy change.

I think an analogy to taxation is helpful here. I’ve published a few papers about optimal taxation, so it’s an area I’ve thought more about. Within optimal taxation, you see this type of paper a lot. Here’s a formal model that captures something that theorists find interesting. Here’s a simple approach that takes the model to the data.

My favorite optimal-taxation papers take this approach. Take this paper that I absolutely love, “Optimal Taxation with Endogenous Insurance Markets” by Mikhail Golosov & Aleh Tsyvinski.[3] It is not a price-theory paper; it is a Theory—with a capital T—paper. I’m talking lemmas and theorems type of stuff. A bunch of QEDs and then calibrate their model to U.S. data.

How seriously should we take their quantitative exercise? After all, it was in the Quarterly Journal of Economics and my professors were assigning it, so it must be an important paper. But people who know this literature will quickly recognize that it’s not the quantitative result that makes that paper worthy of the QJE.

I was very confused by this early in my career. If we find the best paper, why not take the result completely seriously? My first publication, which was in the Journal of Economic Methodology, grew out of my confusion about how economists were evaluating optimal tax models. Why did professors think some models were good? How were the authors justifying that their paper was good? Sometimes papers are good because they closely match the data. Sometimes papers are good because they quantify an interesting normative issue. Sometimes papers are good because they expose an interesting means-ends analysis. Most of the time, papers do all three blended together, and it’s up to the reader to be sufficiently steeped in the literature to understand what the paper is really doing. Maybe I read the Shi paper wrong, but I read it mostly as a theory paper.

One difference between the optimal-taxation literature and the optimal-noncompete policy world is that the Golosov & Tsyvinski paper is situated within 100 years of formal optimal-taxation models. The knowledgeable scholar of public economics can compare and contrast. The paper has a lot of value because it does one particular thing differently than everything else in the literature.

Or think about patent policies, which was what I compared noncompetes to in my original post. There is a tradeoff between encouraging innovation and restricting monopoly. This takes a model and data to quantify the trade-off. Rafael Guthmann & David Rahman have a new paper on the optimal length of patents that Rafael summarized at Rafael’s Commentary. The basic structure is very similar to the Shi or Golosov &Tsyvinski papers: interesting models supplemented with a calibration exercise to put a number on the optimal policy. Guthmann & Rahman find four to eight years, instead of the current system of 20 years.

Is that true? I don’t know. I certainly wouldn’t want the FTC to unilaterally put the number at four years because of the paper. But I am certainly glad for their contribution to the literature and our understanding of the tradeoffs and that I can position that number in a literature asking similar questions.

I’m sorry to all the people doing great research on noncompetes, but we are just not there yet with them, by my reading. For studying optimal-noncompete policy in a model, we have one paper. It was groundbreaking to tie this theory to novel data, but it is still one welfare analysis.

My Priors: What’s Holding Me Back from the Revolution

In a world where you start without any thoughts about which direction is optimal (a uniform prior) and you observe one paper that says bans are net positive, you should think that bans are net positive. Some information is better than none and now you have some information. Make a choice.

But that’s not the world we live in. We all come to a policy question with prior beliefs that affect how much we update our beliefs.

For me, I have three slightly weird priors that I will argue you should also have but currently place me out of step with most economists.

First, I place more weight on theoretical arguments than most. No one sits back and just absorbs the data without using theory; that’s impossible. All data requires theory. Still, I think it is meaningful to say some people place more weight on theory. I’m one of those people.

To be clear, I also care deeply about data. But I write theory papers and a theory-heavy newsletter. And I think these theories matter for how we think about data. The theoretical justification for noncompetes has been around for a long time, as I discussed in my original post, so I won’t say more.

The second way that I differ from most economists is even weirder. I place weight on the benefits of existing agreements or institutions. The longer they have been in place, the more weight I place on the benefits. Josh Hendrickson and I have a paper with Alex Salter that basically formalized the argument from George Stigler that “every long-lasting institution is efficient.” When there are feedback mechanisms, such as with markets or democracy, the resulting institutions are the result of an evolutionary process that slowly selects more and more gains from trade. If they were so bad, people would get rid of them eventually. That’s not a free-market bias, since it also means that I think something like the Medicare system is likely an efficient form of social insurance and intertemporal bargaining for people in the United States.

Back to noncompetes, many companies use noncompetes in many different contexts. Many workers sign them. My prior is that they do so because a noncompete is a mutually beneficial contract that allows them to make trades in a world with transaction costs. As I explained in a recent post, Yoram Barzel taught us that, in a world with transaction costs, people will “erect social institutions to impose and enforce the restraints.”

One possible rebuttal is that noncompetes, while existing for a long time, have only become common in the past few decades. That is not very long-lasting, and so the FTC ban is a natural policy response to a new challenge that arose and the discovery that these contracts are actually bad. That response would persuade me more if this were a policy response brought about by a democratic bargain instead of an ideological agenda pushed by the chair of the FTC, which I think is closer to reality. That is Earl Thompson and Charlie Hickson’s spin on Stigler’s efficient institutions point. Ideology gets in the way.

Finally, relative to most economists, I place more weight on experimentation and feedback mechanisms. Most economists still think of the world through the lens of the benevolent planner doing a cost-benefit analysis. I do that sometimes, too, but I also think we need to really take our own informational limitations seriously. That’s why we talk about limited information all the time on my newsletter. Again, if we started completely agnostic, this wouldn’t point one way or another. We recognize that we don’t know much, but a slight signal pushes us either way. But when paired with my previous point about evolution, it means I’m hesitant about a national ban.

I don’t think the science is settled on lots of things that people want to tell us the science is settled on. For example, I’m not convinced we know markups are rising. I’m not convinced market concentration has skyrocketed, as others want to claim.

It’s not a free-market bias, either. I’m not convinced the Jones Act is bad. I’m not convinced it’s good, but Josh has convinced me that the question is complicated.

Because I’m not ready to easily say the science is settled, I want to know how we will learn if we are wrong. In a prior Truth on the Market post about the FTC rule, I quoted Thomas Sowell’s Knowledge and Decisions:

In a world where people are preoccupied with arguing about what decision should be made on a sweeping range of issues, this book argues that the most fundamental question is not what decision to make but who is to make it—through what processes and under what incentives and constraints, and with what feedback mechanisms to correct the decision if it proves to be wrong.

A national ban bypasses this and severely cuts off our ability to learn if we are wrong. That worries me.

Maybe this all means that I am too conservative and need to be more open to changing my mind. Maybe I’m inconsistent in how I apply these ideas. After all, “there’s always another margin” also means that the harm of a policy will be smaller than anticipated since people will adjust to avoid the policy. I buy that. There are a lot more questions to sort through on this topic.

Unfortunately, the discussion around noncompetes has been short-circuited by the FTC. Hopefully, this post gave you tools to think about a variety of policies going forward.


[1] The U.S. Bureau of Labor Statistics now collects data on noncompetes. Since 2017, we’ve had one question on noncompetes in the National Longitudinal Survey of Youth 1997. Donna S. Rothstein and Evan Starr (2021) also find that noncompetes cover around 18% of workers. It is very plausible this is an understatement, since noncompetes are complex legal documents, and workers may not understand that they have one.

[2] Other papers combine theory and empirics. Kurt Lavetti, Carol Simon, & William D. White (2023), build a model to derive testable implications about holdups. They use data on doctors and find noncompetes raise returns to tenure and lower turnover.

[3] It’s not exactly the same. The Golosov & Tsyvinski paper doesn’t even take the calibration seriously enough to include the details in the published version. Shi’s paper is a more serious quantitative exercise.

Former U.S. Labor Secretary Gene Scalia games out the future of the Federal Trade Commission’s (FTC) recently proposed rule that would ban the use of most noncompete clauses in today’s Wall Street Journal. He writes that: 

The Federal Trade Commission’s ban on noncompete agreements may be the most audacious federal rule ever proposed. If finalized, it would outlaw terms in 30 million contracts and pre-empt laws in virtually every state. It would also, by the FTC’s own account, reduce capital investment, worker training and possibly job growth, while increasing the wage gap. The commission says the rule would deliver a meager 2.3% wage increase for hourly workers, versus a 9.4% increase for CEOs.

Three phases lie ahead for the proposal: rule-making, litigation and compliance. … The FTC is likely to finalize the rule within a year, to ensure the Biden administration can begin the task of defending it in the litigation phase. The proposal’s legal vulnerabilities are legion. …

Sketching the likely future of the proposed rule in this way is helpful. Most of those affected by this rule are unlikely to be familiar with the rulemaking process or the judicial process for reviewing agency rules; indeed, many are likely to hear coverage of the proposed rule and mistake it for a regulation that’s already in effect. The cost of that confusion is made clear by Scalia’s ultimate takeaway: that the courts are very likely to reject the rule (and perhaps the FTC’s authority to adopt these types of competition rules), but only after a protracted and lengthy judicial review process (including, quite possibly, a trip to the U.S. Supreme Court).

As Scalia explains, many employers will act upon this likely ill-fated rule out of fear or confusion, altering their employment contacts in ways that will be hard to later amend: 

Unfortunately, some employers may now reduce the benefits they offer in exchange for noncompetes, for fear the rule may eventually render the agreement unenforceable. But because the FTC may change aspects of the rule—and because the courts are likely to invalidate it—American businesses don’t need to invest now in complying with this deeply flawed proposal.

This should raise serious concern about the FTC’s approach to this issue. It is very likely that the Commission is aware of the rocky shoals that lie ahead. But it is also likely that the Commission knows that its posturing will affect the conduct of the business community. It’s not much of a leap to conclude that the Commission—that is, its three-member majority—is using its rulemaking process, not its substantive legal authority, as a norm entrepreneur, to jawbone the business community and move the Overton window that frames discussion of noncompete clauses. I feel dirty writing a sentence as jargon-filled as that one, but no dirtier than the Commission should feel for abusing rulemaking procedures to achieve substantive ends beyond its legal authority.

This concern resembles an issue currently before the Supreme Court: Axon Enterprises v. FTC, another case that involves the FTC. Generally, agency actions cannot be challenged in federal court until the agency has finalized its action and affected parties have exhausted their appeals before the agency. Indeed, the statutes that govern some agencies (including the FTC) have provisions that have been interpreted as preventing challenges to the agency’s authority from being brought before a federal district court.

In Axon, the Supreme Court is considering whether a company subject to administrative proceedings before the Commission can challenge the constitutionality of those proceedings in district court prior to their completion. Oral arguments were heard this past November and, while reading tea leaves based upon oral arguments is a fraught endeavor, those arguments did not seem to go well for the FTC. It seems likely that the Court will allow firms to raise such challenges prior to final agency action in adjudication, precisely because not allowing them allows the Commission to cause non-redressable harms to the firms it investigates; several years of unconstitutional litigation can be devastating to a business.

The Axon case involves adjudication against a single firm, which raises some different issues from those raised when an agency is developing rules that will affect an entire industry. Most notably, constitutional Due Process protections are implicated when the government takes action against a single firm. It is unlikely that the outcome in Axon—even if as adverse to the FTC as foreseeably possible—would extend to allow firms to challenge an agency rulemaking process on the ground that it exceeds the agency’s statutory (not even constitutional) authority.

But the Commission should nonetheless take the concerns at issue in Axon to heart. If the Supreme Court rules against the Commission in Axon, it will be a strong signal that the Court has concerns about how the Commission is using the authority that Congress has given it. One could even say that it will be the latest in a series of such signals, given that the Court recently struck down the Commission’s Section 13(b) civil-penalty authority. As Scalia notes, the Commission is already pushing the outermost limits of its statutory authority with the rule that it has proposed. The extent of the coming judicial (or congressional) rebuke will be greatly expanded if the courts feel that the agency has abused the rulemaking process to achieve substantive goals that exceed that outermost limit.

Happy New Year? Right, Happy New Year! 

The big news from the Federal Trade Commission (FTC) is all about noncompetes. From what were once the realms of labor and contract law, noncompetes are terms in employment contracts that limit in various ways the ability of an employee to work at a competing firm after separation from the signatory firm. They’ve been a matter of increasing interest to economists, policymakers, and enforcers for several reasons. For one, there have been prominent news reports of noncompetes used in dubious places; the traditional justifications for noncompetes seem strained when applied to low-wage workers, so why are we reading about noncompetes binding sandwich-makers at Jimmy John’s? 

For another, there’s been increased interest in the application of antitrust to labor markets more generally. One example among many: a joint FTC/U.S. Justice Department workshop in December 2021.

Common-law cases involving one or another form of noncompete go back several hundred years. So, what’s new? First, on Jan. 4, the FTC announced settlements with three firms regarding their use of noncompetes, which the FTC had alleged to violate Section 5. These are consent orders, not precedential decisions. The complaints were, presumably, based on rule-of-reason analyses of facts, circumstances, and effects. On the other hand, the Commission’s recent Section 5 policy statement seemed to disavow the time-honored (and Supreme-Court-affirmed) application of the rule of reason. I wrote about it here, and with Gus Hurwitz here. My ICLE colleagues Dirk Auer, Brian Albrecht, and Jonathan Barnett did too, among others. 

The Commission’s press release seemed awfully general:

Noncompete restrictions harm both workers and competing businesses. For workers, noncompete restrictions lead to lower wages and salaries, reduced benefits, and less favorable working conditions. For businesses, these restrictions block competitors from entering and expanding their businesses.

Always? Distinct facts and circumstances? Commissioner Christine Wilson noted the brevity of the statement in her dissent

…each Complaint runs three pages, with a large percentage of the text devoted to boilerplate language. Given how brief they are, it is not surprising that the complaints are woefully devoid of details that would support the Commission’s allegations. In short, I have seen no evidence of anticompetitive effects that would give me reason to believe that respondents have violated Section 5 of the FTC Act. 

She did not say that the noncompetes were fine. In a separate statement regarding one of the matters, she noted that various aspects of noncompetes imposed on security guards (running two years from termination of employment, with $10,000 liquidated damages for breach) had been found unreasonable by a state court, and therefore unenforceable under Michigan law. That seemed to her “reasonable.” I’m no expert on Michigan state law, but those terms seem to me suspect under general standards of reasonability. Whether there was a federal antitrust violation is far less clear.    

One more clue–and even bigger news–came the very next day: the Commission published a notice of proposed rulemaking (NPRM) proposing to ban the use of noncompetes in general. Subject to a limited exception for the sale of a business, noncompetes would be deemed violative of Section 5 across occupations, income levels, and industries. That is, the FTC proposed to regulate the terms of employment agreements for nearly the whole of the U.S. labor force. Step aside federal and state labor law (and the U.S. Labor Department and Congress); and step aside ongoing and active statutory experimentation on noncompete enforcement in the states. 

So many questions. There are reasons to wonder about many noncompetes. They do have the potential to solve holdup problems for firms that might otherwise underinvest in employee training and might undershare trade secrets or other proprietary information. But that’s not much of an explanation for restrictions on a counter person at a sub shop, and I’m pretty suspicious of the liquidated damages provision in the security-guards matter. Credible economic studies raise concerns, as well. 

Still, this is an emerging area of study, and many positive contributions to it (like the one linked just now, and this) illustrate research challenges that remain. An FTC Bureau of Economics working paper (oddly not cited in the 215-page NPRM) reviews the body of literature, observing that results are mixed, and that many of the extant studies have shortcomings. 

For similar reasons, comments submitted to an FTC workshop on noncompetes by the Antitrust Section of the American Bar Association said that cross-state variations in noncompete law “are seemingly justified, as the views and literature on non-compete clauses (and restrictive covenants in employment contracts generally) are mixed.”

So here are a few more questions that cannot possibly be resolved in a single blog post:

  1. Does the FTC have the authority to issue substantive (“legislative”) competition regulations? 
  2. Would a regulation restricting a common contracting practice across all occupations, industries, and income levels raise the major questions doctrine? (Ok, skipping ahead: Yes.)
  3. Does it matter, for the major questions doctrine or otherwise, that there’s a substantial body of federal statutory law regarding labor and employment and a federal agency (a good deal larger than the FTC) charged to enforce the law?
  4. Does it matter that the FTC simply doesn’t have the personnel (or congressionally appropriated budget) to enforce such a sweeping regulation?
    • Is the number of experienced labor lawyers currently employed as staff in the FTC’s Bureau of Competition nonzero? If so, what is it? 
  5. Does it matter that this is an active area of state-level legislation and enforcement?
  6. Do the effects of noncompetes vary as the terms of noncompetes vary, as suggested in the ABA comments linked above? And if so, on what dimensions?
    • Do the effects vary according to the market power of the employer in local (or other geographically relevant) labor markets and, if so, should that matter to an antitrust enforcer?
    • If the effects vary significantly, is a one-size-fits-all regulation the best path forward?
  7. Many published studies seem to report average effects of policy changes on, e.g., wages or worker mobility for some class of workers. Should we know more about the distribution of those effects before the FTC (or anyone else) adopts uniform federal regulations? 
  8. How well do we know the answer to the myriad questions raised by noncompetes? As the FTC working paper observes, many published studies seem to rely heavily on survey evidence on the incidence of noncompetes. Prior to adopting  a sweeping competition regulation, should the FTC use its 6b subpoena authority to gather direct evidence? Why hasn’t it?
  9. The FTC’s Bureau of Economics employs a large expert staff of research economists. Given the questions raised by the FTC Working Paper, how else might the FTC contribute to the state of knowledge of noncompete usage and effects before adopting a sweeping, nationwide prohibition? Are there lacunae in the literature that the FTC could fill? For example, there seem to be very few papers regarding the downstream effects on consumers, which might matter to consumers. And while we’re in labor markets, what about the relationship between noncompetes and employment? 

Well, that’s a lot. In my defense, I’ll  note that the FTC’s November 2022 Advance Notice of Proposed Rulemaking on “commercial surveillance” enumerated 95 complex questions for public comment. Which is more than nine. 

I didn’t even get to the once-again dismal ratings of FTC’s senior agency leadership in the 2022 OPM Federal Employee Viewpoint Survey. Last year’s results were terrible—a precipitous drop from 2020. This year’s results were worse. Worse yet, they show that last year’s results were not mere transient deflation in morale. But a discussion will have to wait for another blog post.

The Federal Trade Commission’s (FTC) Jan. 5 “Notice of Proposed Rulemaking on Non-Compete Clauses” (NPRMNCC) is the first substantive FTC Act Section 6(g) “unfair methods of competition” rulemaking initiative following the release of the FTC’s November 2022 Section 5 Unfair Methods of Competition Policy Statement. Any final rule based on the NPRMNCC stands virtually no chance of survival before the courts. What’s more, this FTC initiative also threatens to have a major negative economic-policy impact. It also poses an institutional threat to the Commission itself. Accordingly, the NPRMNCC should be withdrawn, or as a “second worst” option, substantially pared back and recast.

The NPRMNCC is succinctly described, and its legal risks ably summarized, in a recent commentary by Gibson Dunn attorneys: The proposal is sweeping in its scope. The NPRMNCC states that it “would, among other things, provide that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”

The Gibson Dunn commentary adds that it “would require employers to rescind all existing non-compete provisions within 180 days of publication of the final rule, and to provide current and former employees notice of the rescission.‎ If employers comply with these two requirements, the rule would provide a safe harbor from enforcement.”‎

As I have explained previously, any FTC Section 6(g) rulemaking is likely to fail as a matter of law. Specifically, the structure of the FTC Act indicates that Section 6(g) is best understood as authorizing procedural regulations, not substantive rules. What’s more, Section 6(g) rules raise serious questions under the U.S. Supreme Court’s nondelegation and major questions doctrines (given the breadth and ill-defined nature of “unfair methods of competition”) and under administrative law (very broad unfair methods of competition rules may be deemed “arbitrary and capricious” and raise due process concerns). The cumulative weight of these legal concerns “makes it highly improbable that substantive UMC rules will ultimately be upheld.

The legal concerns raised by Section 6(g) rulemaking are particularly acute in the case of the NPRMNCC, which is exceedingly broad and deals with a topic—employment-related noncompete clauses—with which the FTC has almost no experience. FTC Commissioner Christine Wilson highlights this legal vulnerability in her dissenting statement opposing issuance of the NPRMNCC.

As Andrew Mercado and I explained in our commentary on potential FTC noncompete rulemaking: “[a] review of studies conducted in the past two decades yields no uniform, replicable results as to whether such agreements benefit or harm workers.” In a comprehensive literature review made available online at the end of 2019, FTC economist John McAdams concluded that “[t]here is little evidence on the likely effects of broad prohibitions of non-compete agreements.” McAdams also commented on the lack of knowledge regarding the effects that noncompetes may have on ultimate consumers. Given these realities, the FTC would be particularly vulnerable to having a court hold that a final noncompete rule (even assuming that it somehow surmounted other legal obstacles) lacked an adequate factual basis, and thus was arbitrary and capricious.

The poor legal case for proceeding with the NPRMNCC is rendered even weaker by the existence of robust state-law provisions concerning noncompetes in almost every state (see here for a chart comparing state laws). Differences in state jurisprudence may enable “natural experimentation,” whereby changes made to state law that differ across jurisdictions facilitate comparisons of the effects of different approaches to noncompetes. Furthermore, changes to noncompete laws in particular states that are seen to cause harm, or generate benefits, may allow “best practices” to emerge and thereby drive welfare-enhancing reforms in multiple jurisdictions.

The Gibson Dunn commentary points out that, “[a]s a practical matter, the proposed [FTC noncompete] rule would override existing non-compete requirements and practices in the vast majority of states.” Unfortunately, then, the NPRMNCC would largely do away with the potential benefits of competitive federalism in the area of noncompetes. In light of that, federal courts might well ask whether Congress meant to give the FTC preemptive authority over a legal field traditionally left to the states, merely by making a passing reference to “mak[ing] rules and regulations” in Section 6(g) of the FTC Act. Federal judges would likely conclude that the answer to this question is “no.”

Economic Policy Harms

How much economic harm could an FTC rule on noncompetes cause, if the courts almost certainly would strike it down? Plenty.

The affront to competitive federalism, which would prevent optimal noncompete legal regimes from developing (see above), could reduce the efficiency of employment contracts and harm consumer welfare. It would be exceedingly difficult (if not impossible) to measure such harms, however, because there would be no alternative “but-for” worlds with differing rules that could be studied.

The broad ban on noncompetes predictably will prevent—or at least chill—the use of noncompete clauses to protect business-property interests (including trade secrets and other intellectual-property rights) and to protect value-enhancing investments in worker training. (See here for a 2016 U.S. Treasury Department Office of Economic Policy Report that lists some of the potential benefits of noncompetes.) The NPRMNCC fails to account for those and other efficiencies, which may be key to value-generating business-process improvements that help drive dynamic economic growth. Once again, however, it would be difficult to demonstrate the nature or extent of such foregone benefits, in the absence of “but-for” world comparisons.

Business-litigation costs would also inevitably arise, as uncertainties in the language of a final noncompete rule were worked out in court (prior to the rule’s legal demise). The opportunity cost of firm resources directed toward rule-related issues, rather than to business-improvement activities, could be substantial. The opportunity cost of directing FTC resources to wasteful noncompete-related rulemaking work, rather than potential welfare-enhancing endeavors (such as anti-fraud enforcement activity), also should not be neglected.

Finally, the substantial error costs that would attend designing and seeking to enforce a final FTC noncompete rule, and the affront to the rule of law that would result from creating a substantial new gap between FTC and U.S. Justice Department competition-enforcement regimes, merits note (see here for my discussion of these costs in the general context of UMC rulemaking).

Conclusion

What, then, should the FTC do? It should withdraw the NPRMNCC.

If the FTC is concerned about the effects of noncompete clauses, it should commission appropriate economic research, and perhaps conduct targeted FTC Act Section 6(b) studies directed at noncompetes (focused on industries where noncompetes are common or ubiquitous). In light of that research, it might be in position to address legal policy toward noncompetes in competition advocacy before the states, or in testimony before Congress.

If the FTC still wishes to engage in some rulemaking directed at noncompete clauses, it should consider a targeted FTC Act Section 18 consumer-protection rulemaking (see my discussion of this possibility, here). Unlike Section 6(g), the legality of Section 18 substantive rulemaking (which is directed at “unfair or deceptive acts or practices”) is well-established. Categorizing noncompete-clause-related practices as “deceptive” is plainly a nonstarter, so the Commission would have to bases its rulemaking on defining and condemning specified “unfair acts or practices.”

Section 5(n) of the FTC Act specifies that the Commission may not declare an act or practice to be unfair unless it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” This is a cost-benefit test that plainly does not justify a general ban on noncompetes, based on the previous discussion. It probably could, however, justify a properly crafted narrower rule, such as a requirement that an employer notify its employees of a noncompete agreement before they accept a job offer (see my analysis here).  

Should the FTC nonetheless charge forward and release a final competition rule based on the NPRMNCC, it will face serious negative institutional consequences. In the previous Congress, Sens. Mike Lee (R-Utah) and Chuck Grassley (R-Iowa) have introduced legislation that would strip the FTC of its antitrust authority (leaving all federal antitrust enforcement in DOJ hands). Such legislation could gain traction if the FTC were perceived as engaging in massive institutional overreach. An unprecedented Commission effort to regulate one aspect of labor contracts (noncompete clauses) nationwide surely could be viewed by Congress as a prime example of such overreach. The FTC should keep that in mind if it values maintaining its longstanding role in American antitrust-policy development and enforcement.

One of my favorite books is Thomas Sowell’s Knowledge and Decisions, in which he builds on Friedrich Hayek’s insight that knowledge is dispersed throughout society. Hayek’s insight that markets can bring dispersed but important knowledge to bear with substantial effectiveness is one that many of us, especially economists, pay lip service to, but it often gets lost in day-to-day debates about policy. Sowell uses Hayek’s insight to understand and critique social, economic, and political institutions, which he judges in terms of “what kinds of knowledge can be brought to bear and with what effectiveness.” 

I’m reminded of Sowell in witnessing the current debate surrounding the Federal Trade Commission’s (FTC) proposed rule to enact a nationwide ban on noncompetes in employment agreements. A major policy change like this obviously sets off debate. Among economists, the discussion surrounds economic arguments and empirical evidence on the effects of noncompetes. Among lawyers, it largely centers on the legality of the rule.

But all of the discussion seems to ignore Sowell’s insights. He writes:

In a world where people are preoccupied with arguing about what decision should be made on a sweeping range of issues, this book argues that the most fundamental question is not what decision to make but who is to make it—through what processes and under what incentives and constraints, and with what feedback mechanisms to correct the decision if it proves to be wrong. (emphasis added)

Once we recognize that knowledge doesn’t simply exist out in the ether for us all to grab, but depends instead on the institutions within which we operate, the outcome is going to hinge on who gets to decide and how their knowledge evolves. How easily can the decision maker respond to new information and update their beliefs? How easily can they make incremental changes to incremental information?

To take two extremes, stock markets are institutions where decision makers take account of new information by the minute, allowing for rapid and marginal changes in decisions. At the other extreme is the Supreme Court, where precedents take years or decades to overturn if they are based on information that becomes outdated.

Let’s accept for the sake of argument that all of the best experts today agree that noncompetes are a net negative for society. We have to deal with the fact that we can be proven wrong in the future, and different regimes will deal with that future change differently.

If implemented, the FTC’s total ban of noncompetes replaces the decision making of businesses and workers, as well as the oversight of state governments, with a one-size-fits-all approach. Under that new regime, we need to ask: How quickly will they respond to new information—for example, that it had destructive implications? How easily can they make incremental changes?

One may hope the FTC, as an expert-led agency, could easily adjust to incoming evidence. They will just follow the science! But that response would be self-contradictory here. The FTC just showed that it is happy to go from 0 to 100 with its rules. It went from doing hardly any work on noncompetes to a total ban. In no optimal policy model where the benevolent regulator is responding to information is that how a regulator would process and act on information.

This is part of a long-run trend in politics. Sowell again:

Even within democratic nations, the locus of decision making has drifted away from the individual, the family, and voluntary associations of various sorts, and toward government. And within government, it has moved away from elected officials subject to voter feedback, and toward more insulated governmental institutions, such as bureaucracies and the appointed judiciary.

We may want that. Not every decision should be left up to the individual. We have rights and policies that constrain individuals. The U.S. Constitution, for example, doesn’t allow states to regulate interstate commerce. But the takeaway is not that decentralization is always better. Rather, the point is that we need to consider the tradeoff.

[The following was prepared as a Gibson Dunn client alert by Rachel Brass, Svetlana Gans, Kristen Limarzi, Ilissa Samplin, Katherine V. A. Smith, Stephen Weissman, Chris Wilson, Jamie France, and Connor Leydecker. It is reprinted with permission here.]

On Jan. 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) to prohibit employers from entering non-compete clauses with workers.[1] The proposed rule would extend to all workers, whether paid or unpaid, and would require companies to rescind existing non-compete agreements within 180 days of publication of the final rule.[2] The FTC will soon publish the NPRM in the Federal Register, triggering a 60-day public comment period.‎ The rule could be finalized by the end of the year; court challenges to the final rule are likely to follow.

The rule proposal follows recent FTC settlements with three companies and two individuals for allegedly illegal non-compete agreements imposed on workers—the first time the FTC has claimed that non-compete agreements constitute unfair methods of competition (UMC) under Section 5 of the FTC Act.‎

The Proposed Rule Would Broadly Ban Non-Compete Agreements

The proposed rule provides:

(a) Unfair methods of competition.  It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.‎[5]

The proposed rule broadly defines non-compete agreements as: “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”‎ It proposes a functional test to determine if a clause is a non-compete provision: to qualify, the provision would have “the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.”‎ The proposed rule identifies two types of agreements that would constitute impermissible “non-competes”:

  • A nondisclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer; and
  • A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.‎

While the proposed rule would not expressly prohibit nondisclosure and intellectual-property agreements with employees, those agreements could be deemed impermissible non-competes if, pursuant to the provision excerpted above, they are deemed to be written “so broadly” that they “effectively preclude[ ] the worker from working in the same field.”‎ Further, the term “worker” would be defined as “a natural person who works, whether paid or unpaid, for an employer,” but would not include a franchisee in a franchisee/franchisor relationship.‎

Rescission Requirement, Safe Harbors, and Federal Preemption

The proposed rule would require employers to rescind all existing non-compete provisions within 180 days of publication of the final rule, and to provide current and former employees notice of the rescission.‎ If employers comply with these two requirements, the rule would provide a safe harbor from enforcement.‎ Further, the proposed rule would exempt from its scope certain non-competes entered in connection with the sale of businesses.‎ This exception also applies under California law, recognizing the need to protect the goodwill of a business.‎

The proposed rule would preempt all state and local rules inconsistent with its provisions, but not preempt State laws or regulations that provide greater protections.‎ As a practical matter, the proposed rule would override existing non-compete requirements and practices in the vast majority of states.

Concerned Parties Should Submit Public Comments

A 60-day public comment period will begin once the FTC publishes the NPRM in the Federal Register. After the notice-and-comment period concludes, the FTC will consider the comments and then publish a final version of the rule. Enforcement may begin 180 days after publication of the final rule (although, as discussed below, the final rule is likely to be challenged in court).

The final rule’s terms will depend in part on the FTC’s response to comments submitted by interested parties during this notice-and-comment period, including legal and practical objections raised to the rule. Thus, concerned parties are advised to submit robust comments thoroughly explaining their concerns, including potential costs and adverse effects.

Legal Challenges to the Rule Are Likely Once It Is Finalized

The proposed rule represents a significant expansion of the FTC’s regulatory reach in two respects: First, the Commission had not previously held non-compete agreements to be unfair methods of competition under the Federal Trade Commission Act, until its recently announced settlements. Second, substantial doubt exists that the FTC possesses rulemaking authority in this area.‎ As Gibson Dunn partners have explained and Commissioner Christine S. Wilson notes in her statement dissenting to the Notice of Proposed Rulemaking, any final rule is likely subject to several potentially significant legal challenges.  Commissioner Wilson notes three concerns:

  1. Congress did not intend to grant authority to promulgate substantive competition rules under the FTC Act provisions on which the FTC purports to rely to promulgate the proposed rule.‎
  2. The rule may exceed the limits imposed by the Supreme Court’s major questions‎ doctrine.
  3. The rule may exceed the limits imposed by the Supreme Court’s nondelegation doctrine.

Takeaways

This new proposed rule is part of a larger trend toward more vigorous federal regulation of the employment relationship, including by the FTC, National Labor Relations Board, and the U.S. Department of Labor (DOL), as we have noted in previous client alerts addressing the FTC’s approach to no-poach and nonsolicit agreements, the DOL’s rulemaking on who qualifies as an independent contractor under the Fair Labor Standards Act (FLSA), and the FTC’s broader vision of its authority to address unfair methods of competition under Section 5.


[1] See also, the joint statement of Chair Lina Khan and Commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya, and the dissenting statement of Commissioner Christine S. Wilson.

[2] Notably, prior FTC workshops on this subject focused on low-wage employees, but this proposed rule goes beyond that scope. 

As 2023 draws to a close, we wanted to reflect on a year that saw jurisdictions around the world proposing, debating, and (occasionally) enacting digital regulations. Some of these initiatives amended existing ex-post competition laws. Others were more ambitious, contemplating entirely new regulatory regimes from the ground up.

With everything going on, it can be overwhelming even for hardcore antitrust enthusiasts to keep pace with the latest developments. If you have the high-brow interests of a scholar but the jam-packed schedule of a CEO, you have come to the right place. This post is intended to summarize who is doing what, where, and what to make of it.

Status of Tech Regulation Around the World

European Union

In the European Union—the patient zero of tech regulation—two crucial pieces of legislation passed this year: the Digital Markets Act (DMA) and the Digital Services Act (DSA).

But notably, the EU is just now—i.e., six months before the act is set to apply in full to all digital “gatekeepers”—launching a consultation on the DMA’s procedural rules (a draft is available here). Many of those procedural questions remain exceedingly fuzzy (substantive ones, too), such as, e.g.—the role of the advisory committee, the role of third parties in proceedings, national authorities’ access to data gathered by the Commission, and the role to be played (if any) by the European Competition Network. Further, only now is a DMA enforcement unit being created within the Commission, although it is also unclear whether it will have the staffing capacity to satisfy the tight deadlines.

Whether or not the implementing regulation ultimately resolves all of these questions, they should have been settled much sooner. But as is becoming customary in tech regulation, it seems that the political urge to “do something” has once again prevailed over careful consideration and foresight.

United Kingdom

In the United Kingdom, legislation to empower the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) is set to be brought to Parliament this term, meaning that it may be discussed in the next two months. Of all the “pending” antitrust bills around the world, this is probably the most likely to be adopted. Although it dropped an earlier dubious proposal on mergers, there remain several significant concerns with the DMU (see here and here for previous commentary). For example, the DMU’s standard of review is surprisingly truncated, considering the expansive powers that would be bestowed on the agency. The DMU would apply the strategic market significance (SMS) tag to entire firms and not just to those operations where the firm may have market power. Moreover, the DMU proposal shows little concern for due process.

One looming question is whether the UK will learn from the EU’s example, and resolve substantive and procedural questions well ahead of imposing any obligations on SMS companies. In the end, whatever the UK does or doesn’t do will have reverberations around the globe, as many countries appear to be adopting a DMA-style designation process for gatekeepers but imposing “code of conduct” obligations inspired by the DMU.

United States

Across the pond, the major antitrust tech bills introduced in Congress have come to a standstill. Despite some 11th hour efforts by their sponsors, neither the American Innovation and Choice Online Act, nor the Open App Markets Act, nor the Journalism Competition and Preservation Act made the cut to be included in the $1.7 trillion, 4,155-page omnibus bill that will be the last vote taken by the 117th Congress. With divided power in the 118th Congress, it’s possible that the push to regulate tech might fizzle out.

What went wrong for antitrust reformers? Republicans and Democrats have always sought different things from the bills. Democrats want to “tame” big tech, hold it accountable for the proliferation of “harmful” content online, and redistribute rents toward competitors and other businesses across the supply chain (e.g., app developers, media organizations, etc.). Republicans, on the other hand, seek to limit platforms’ ability to “censor conservative views” and to punish them for supposedly having done so in the past. The difficulty of aligning these two visions has obstructed decisive movement on the bills. But, more broadly, it also goes to show that the logic for tech regulation is far from homogenous, and that wildly different aims can be pursued under the umbrella of “choice,” “contestability,” and “fairness.”

South Africa

As my colleague Dirk Auer covered yesterday, South Africa has launched a sectoral inquiry into online-intermediation platforms, which has produced a provisional report (see here for a brief overview). The provisional report identifies Apple, Google, Airbnb, Uber Eats, and South Africa’s own Takealot, among others, as “leading online platforms” and offers suggestions to make the markets in which these companies compete more “contestable.” This includes a potential ex ante regulatory regime.

But as Dirk noted, there are certain considerations the developing countries must bear in mind when contemplating ex ante regimes that developed countries do not (or, at least, not to the same extent). Most importantly, these countries are typically highly dependent on foreign investment, which might sidestep those jurisdictions that impose draconian DMA-style laws.

This could be the case with Amazon, which is planning to launch its marketplace in South Africa in February 2023 (the same month the sectoral inquiry is due). The degree and duration of Amazon’s presence might hinge on the country’s regulatory regime for online platforms. If unfavorable or exceedingly ambiguous, the new rules might prompt Amazon and other companies to relocate elsewhere. It is notable that local platform Takealot has, to date, demonstrated market dominance in South Africa, which most observers doubt that Amazon will be able to displace.

India

No one can be quite sure what is going on in India. There has been some agitation for a DMA-style ex ante regulatory regime within the Parliament of India, which is currently debating an amendment to the Competition Act that would, among other things, lower merger thresholds.

More drastically, however, a standing committee on e-commerce (where e-commerce is taken to mean all online commerce, not just retail) issued a report that recommended identifying “gatekeepers” for more stringent supervision under an ex ante regime that would, e.g., bar companies from selling goods on the platforms they own. At its core, the approach appears to assume that the DMA constitutes “best practices” in online competition law, despite the fact that the DMA’s ultimate effects and costs remain a mystery. As such, “best practices” in this area of law may not be very good at all.

Australia

The Australian Competition and Consumer Commission (ACCC) has been conducting a five-year inquiry into digital-platform services, which is due in March 2025. In its recently published fifth interim report, the ACCC recommended codes of conduct (similar to the DMU) for “designated” digital platforms. Questions surrounding the proposed regime include whether the ACCC will have to demonstrate effects; the availability of objective justifications (the latest report mentions security and privacy); and what thresholds would be used to “designate” a company (so far, turnover seems likely).

On the whole, Australia’s strategy has been to follow closely in the footsteps of the EU and the United States. Given this influence from international developments, the current freeze on U.S. tech regulation might have taken some of the wind out of the sails of similar regulatory efforts down under.

China

China appears to be playing a waiting game. On the one hand, it has ramped up antitrust enforcement under the Anti-Monopoly Law (AML). On the other, in August 2022, it introduced the first major amendment since the enactment of the AML, which included a new prohibition on the use of “technology, algorithms and platform rules” to engage in monopolistic behavior. This is clearly aimed at strengthening enforcement against digital platforms. Numerous other digital-specific regulations are also under consideration (with uncertain timelines). These include a platform-classification regime that would subject online platforms to different obligations in the areas of data protection, fair competition, and labor treatment, and a data-security regulation that would prohibit online-platform operators from taking advantage of data for unfair discriminatory practices against the platform’s users or vendors.

South Korea

Seoul was one of the first jurisdictions to pass legislation targeting app stores (see here and here). Other legislative proposals include rules on price-transparency obligations and the use of platform-generated data, as well as a proposed obligation for online news services to remunerate news publishers. With the government’s new emphasis on self-regulation as an alternative to prescriptive regulation, however, it remains unclear whether or when these laws will be adopted.

Germany

Germany recently implemented a reform to its Competition Act that allows the Bundeskartellamt to prohibit certain forms of conduct (such as self-preferencing) without the need to prove anticompetitive harm and that extends the essential-facility doctrine to cover data. The Federal Ministry for Economic Affairs and Climate Action (BMWK) is now considering further amendments that would, e.g., allow the Bundeskartellamt to impose structural remedies following a sectoral inquiry, independent of an abuse; and introduce a presumption that anticompetitive conduct has resulted in profits for the infringing company (this is relevant for the purpose of calculating fines and, especially, for proving damages in private enforcement).

Canada

Earlier this year, Canada reformed its abuse-of-dominance provisions to bolster fines and introduce a private right of access to tribunals. It also recently opened a consultation on the future of competition policy, which invites input about the objectives of antitrust, the enforcement powers of the Competition Bureau, and the effectiveness of private remedies, and raises the question of whether digital markets require special rules (see this report). Although an ex-ante regime doesn’t currently appear to be in the cards, Canada’s strategy has been to wait and see how existing regulatory proposals play out in other countries.

Turkey

Turkey is considering a DMA-inspired amendment to the Competition Act that would, however, go beyond even the EU’s ex-ante regulatory regime in that it would not allow for any objective justifications or defenses.

Japan

In 2020, Japan introduced the Act on Improving Transparency and Fairness of Digital Platforms, which stipulates that designated platforms should take voluntary and proactive steps to ensure transparency and “fairness” vis-a-vis businesses. This “co-regulation” approach differs from other regulations in that it stipulates the general framework and leaves details to businesses’ voluntary efforts. Japan is now, however, also contemplating DMA-like ex-ante regulations for mobile ecosystems, voice assistants, and wearable devices.

Six Hasty Conclusions from the Even Hastier Global Wave of Tech Regulation

  • Most of these regimes are still in the making. Some have just been proposed and have a long way to go until they become law. The U.S. example shows how lack of consensus can derail even the most apparently imminent tech bill.
  • Even if every single country covered in this post were to adopt tech legislation, we have seen that the goals pursued and the obligations imposed can be wildly different and possibly contradictory. Even within a given jurisdiction, lawmakers may not agree what the purpose of the law should be (see, e.g., the United States). And, after all, it should probably be alarming if the Chinese Communist Party and the EU had the same definition of “fairness.”
  • Should self-preferencing bans, interoperability mandates, and similar rules that target online platforms be included under the banner of antitrust? In some countries, like Turkey, rules copied and pasted from the DMA have been proposed as amendments to the national competition act. But the EU itself insists that competition law and the DMA are separate things. Which is it? At this stage, shouldn’t the first principles of digital regulation be clearer?
  • In the EU, in particular, multiple overlapping ex-ante regimes can lead to double and even triple jeopardy, especially given their proximity to antitrust law. In other words, there is a risk that the same conduct will be punished at both the national and EU level, and under the DMA and EU competition rules.
  • In light of the above, global ex-ante regulatory compliance is going to impose mind-boggling costs on targeted companies, especially considering the opacity of some provisions and the substantial differences among countries (think, e.g., of Turkey, where there is no space for objective justifications).
  • There are always complex tradeoffs to be made and sensitive considerations to keep in mind when deciding whether and how to regulate the most successful tech companies. The potential for costly errors is multiplied, however, in the case of developing countries, where there is a realistic risk of repelling “dominant” companies before they even enter the market (see South Africa).

Some of the above issues could be addressed with some foresight. That, however, seems to be sorely lacking in the race to push tech regulation through the door at any cost. As distinguished scholars like Fred Jenny have warned, caving to the political pressure of economic populism can come at the expense of competition and innovation. Let’s hope that is not the case here, there, or anywhere.

The lame duck is not yet dead, and the Federal Trade Commission (FTC) is supposed to be an independent agency. Work continues. The Commission has announced a partly open oral argument in the Illumina-Grail matter.  That is, parts of the argument will be open to the public, via webcast, and parts won’t. This is what’s known as translucency in government.

Enquiring minds: I have several questions about Illumina-Grail. First, for anyone reading this column, am I the only one who cannot think of the case without thinking of Monty Python’s grail-shaped beacon? Asking for a friend who worries about me.

Second, why seek to unwind this merger? My ICLE colleagues Geoff Manne and Gus Hurwitz are members of a distinguished group of law & economics scholars who filed a motion for leave to file an amicus brief in the matter. They question the merits of the case on a number of grounds.

Pertinent, not dispositive: this is a vertical merger. Certainly, it’s possible for vertical mergers to harm competition but theory suggests that they entail at least some efficiencies, and the empirical evidence from Francine Lafontaine and others tends to suggest that most have been beneficial for firms and consumers alike. One might wonder about the extent to which this case is built on analysis of the facts and circumstances rather than on Chair Lina Khan’s well-publicized antipathy to vertical mergers.

Recall that the FTC and U.S. Justice Department (DOJ) jointly issued updated vertical-merger guidelines in June 2020. (The Global Antitrust Institute’s 2018 comments are worth review). The FTC—but not DOJ—promptly withdrew them in 2021, with a new majority, a partisan vote, and a questionable rationale for going it alone. Carl Shapiro and Herbert Hovenkamp minced no words, saying that the Commission’s justification rested on “specious economic arguments.”

There’s also a question of whether FTC’s likely foreclosure argument is all that likely. Illumina, which created Grail and had retained a substantial interest in it all along, would have strong commercial incentives against barring Grail’s future competitors from its platform. Moreover, Illumina made an open offer—contractually binding—to continue providing access for 12 years to its NGS platform and other products, on terms substantially similar to those available pre-merger. That would seem to undercut the possibility of foreclosure. Complaint counsel discounts this as a remedy (with behavioral remedies disfavored), but it is relatively straightforward and not really a remedy at all, with terms both private parties and the FTC might enforce. Thom Lambert and Jonathan Barnett both have interesting posts on the matter.

This is about a future market and potential (presumed) competitors. And it’s an area of biologics commerce where the deep pockets and regulatory sophistication necessary for development and approval frequently militate in favor of acquisition of a small innovator by a larger, established firm. As I noted in a prior column, “[p]otential competition cases are viable given the right facts, and in areas where good grounds to predict significant entry are well-established.” It can be hard to second-guess rule-of-reason cases from the outside, but there are reasons to think this is one of those matters where the preconditions to a strong potential competition argument are absent, but merger-related efficiencies real.  

What else is going on at the FTC? Law360 reports on a staff brief urging the Commission not to pitch a new standard of review in Altria-Juul on what look to be sensible grounds, independent of the merits of their Section I case. The Commission had asked to be briefed on the possibility of switching to a claim of a per se violation or, in the alternative, quick look, and the staff brief recommends maintaining the rule-of-reason approach that the Commission’s ALJ found unpersuasive in dismissing the Commission’s case, which will now be heard by the Commission itself. I have no non-public information on the matter. There’s a question of whether this signals any real tension between the staff’s analysis and the Commission’s preferred approach or simply the Commission’s interest in asking questions about pushing boundaries and the staff providing good counsel. I don’t know, but it could be business as usual.

And just this week, FTC announced that it is bringing a case to block Microsoft’s acquisition of Activision. More on that to follow.

What’s pressing is not so clear. The Commission announced the agenda for a Dec. 14 open meeting. On it is a vote on regulatory review of the “green guides,” which provide guidance on environmental-marketing claims. But there’s nothing further on the various ANPRs announced in September, or about rulemaking that the Chair has hinted at for noncompete clauses in employment contracts. And, of course, we’re still waiting for merger guidelines to replace the ones that have been withdrawn—likely joint FTC/DOJ guidelines that will likely range over both horizontal and vertical mergers.

There’s the Altria matter, Meta, Meta-Within, the forthcoming Supreme Court opinion in Axon, etc. The FTC’s request for an injunction in Meta-Within will be heard in federal district court in California over the next couple of weeks. It’s a novel (read, speculative) complaint. I had a few paragraphs on Meta-Within in my first roundup column; Gus Hurwitz covered it, as well. We shall see. 

Wandering up Pennsylvania Avenue onto the Hill, various bills seem not so much lame ducks as dead ones. But perhaps one or more is not dead yet. The Journalism Competition and Preservation Act (JCPA) might be one such bill, its conspicuous defects notwithstanding. “Might be.” First, a bit of FTC history. Way back in 2010, the FTC held a series of workshops on the Future of Journalism. There were many interesting issues there, if no obvious room for antitrust. I reveal no secrets in saying THOSE WORKSHOPS WERE NOT THE STAFF’S IDEA. We failed to recommend any intervention, although the staff did publish a clarification of its discussion draft:

The FTC has not endorsed the idea of making any policy recommendation or recommended any of the proposals in the discussion draft

My own take at the time: many newspapers were struggling, and that was unfortunate, but much of the struggle had to do with the papers’ loss of local print-advertising monopolies, which tended to offer high advertising prices but not high quality. Remember the price of classified ads? For decades, many of the holders of market power happened to turn large portions of their rents over to their news divisions. Then came the internet, then Craigslist, etc., etc., and down went the rents. Antitrust intervention seemed no answer at all.

Back to the bill. In brief, as currently drafted, the JCPA would permit certain “digital journalism providers” to form cartels to negotiate prices with large online platforms, and to engage in group boycotts, without being liable to the federal antitrust laws, at least for four years. Dirk Auer and Ben Sperry have an overview here.

This would be an exemption for some sources of journalism, but not all, and its benefits would not be equally distributed. I am a paying consumer of digital (and even print) journalism. On the one hand, I enjoy it when others subsidize my preferences. On the other, I’m not sure why they should. As I said in a prior column, “antitrust exemptions help the special interests receiving them but not a living soul besides those special interests. That’s it, full stop.”  

Moreover, as Brian Albrecht points out, the bill’s mandatory final arbitration provision is likely to lead to a form of price regulation.

England v. France on Saturday. Allez les bleus or we few, we happy few? Cheers.  

[The final post in Truth on the Market‘s digital symposium “FTC Rulemaking on Unfair Methods of Competition” comes from Joshua Wright, the executive director of the Global Antitrust Institute at George Mason University and the architect, in his time as a member of the Federal Trade Commission, of the FTC’s prior 2015 UMC statement. You can find all of the posts in this series at the symposium page here.]

The Federal Trade Commission’s (FTC) recently released Policy Statement on unfair methods of competition (UMC) has a number of profound problems, which I will detail below. But first, some praise: if the FTC does indeed plan to bring many lawsuits challenging conduct as a standalone UMC (I am dubious it will), then the public ought to have notice about the change. Providing such notice is good government, and the new Statement surely provides that notice. And providing notice in this way was costly to the FTC: the contents of the statement make surviving judicial review harder, not easier (I will explain my reasons for this view below). Incurring that cost to provide notice deserves some praise.

Now onto the problems. I see four major ones.

First, the Statement seems to exist in a fantasy world; the FTC majority appears to wish away the past problems associated with UMC enforcement. Those problems have not, in fact, gone away and pretending they don’t exist—as this Statement does—is unlikely to help the Commission’s prospects for success in court.

Second, the Statement provides no guidance whatsoever about how a potential respondent might avoid UMC liability, which stands in sharp contrast to other statements and guidance documents issued by the Commission.

Third, the entire foundation of the statement is that, in 1914, Congress intended the FTC Act to have broader coverage than the Sherman Act. Fair enough. But the coverage of the Sherman Act isn’t fixed to what the Supreme Court thought it was in 1914: It’s a moving target that, in fact, has moved dramatically over the last 108 years. Congress in 1914 could not have intended UMC to be broader than how the courts would interpret the Sherman Act in the future (whether that future is 1918, much less 1970 or 2023).

And fourth, Congress has passed other statutes since it passed the FTC Act in 1914, one of which is the Administrative Procedure Act. The APA unambiguously and explicitly directs administrative agencies to engage in reasoned decision making. In a nutshell, this means that the actions of such agencies must be supported by substantial record evidence and can be set aside by a court on judicial review if they are arbitrary and capricious. “Congress intended to give the FTC broad authority in 1914” is not an argument to address the fact that, 32 years later, Congress also intended to limit the FTC’s authority (as well as other agencies’) by requiring reasoned decision making.

Each of these problems on its own would be enough to doom almost any case the Commission might bring to apply the statement. Together, they are a death knell.

A Record of Failure

As I have explained elsewhere, there are a number of reasons the FTC has pursued few standalone UMC cases in recent decades. The late-1970s effort to reinvigorate UMC enforcement via bringing cases was a total failure: the Commission did not lose the game on a last-second buzzer beater; it got blown out by 40 points. According to William Kovacic and Mark Winerman, in each of those UMC cases, “the tribunal recognized that Section 5 allows the FTC to challenge behavior beyond the reach of the other antitrust laws. In each instance, the court found that the Commission had failed to make a compelling case for condemning the conduct in question.”

Since these losses, the Commission hasn’t successfully litigated a UMC case in federal court. This, in my view, is because of a (very plausible) concern that, when presented with such a case, Article III courts would either define the Commission’s UMC authority on their own terms—i.e., restricting the Commission’s authority—or ultimately decide that the space beyond the Sherman Act that Congress in 1914 intended Section 5 to occupy exists only in theory and not in the real world, and declare the two statutes functionally equivalent. Those reasons—and not Chair Lina Khan’s preferred view that the Commission has been feckless, weak, or captured by special interests since 1981—explain why Section 5 has been used so sparingly over the last 40 years (and mostly just to extract settlements from parties under investigation). The majority’s effort to put all its eggs in the “1914 legislative history” basket simply ignores this reality.

Undefined Harms

The second problem is evident when one compares this statement with other policy statements or guidance documents issued by the Commission over the years. On the antitrust side of the house, these include the Horizontal Merger Guidelines, the (now-withdrawn by the FTC) Vertical Merger Guidelines, the Guidelines for Collaboration Among Competitors, the IP Licensing Guidelines, the Health Care Policy Statement, and the Antitrust Guidance for Human Resources Professionals.

Each of these documents is designed (at least in part) to help market participants understand what conduct might or might not violate one or more laws enforced by the FTC, and for that reason, each document provides specific examples of conduct that would violate the law, and conduct that would not.

The new UMC Policy Statement provides no such examples. Instead, we are left with the conclusory statement that, if the Commission can characterize the conduct as “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power” or “otherwise restrictive or exclusionary,” then the conduct can be a UMC.

What does this salad of words mean? I have no idea, and the Commission doesn’t even bother to try and define them. If a lawyer is asked, “based upon the Commission’s new UMC Statement, what conduct might be a violation?” the only defensible advice to give is “anything three Commissioners think.”

Ahistorical Jurisprudence

The third problem is the majority’s fictitious belief that Sherman Act jurisprudence is frozen in 1914—the year Congress passed the FTC Act. The Statement states that “Congress passed the FTC Act to push back against the judiciary’s open-ended rule of reason for analyzing Sherman Act claims” and cites the Supreme Court’s opinion in Standard Oil Co. of New Jersey v. United States from 1911.

It’s easy to understand why Congress in 1914 was dissatisfied with the opinion in Standard Oil; reading Standard Oil in 2022 is also a dissatisfying experience. The opinion takes up 106 pages in the U.S. Reporter, and individual paragraphs are routinely three pages long; it meanders between analyzing Section 1 and Section 2 of the Sherman Act without telling the reader; and is generally inscrutable. I have taught antitrust for almost 20 years and, though we cover Standard Oil because of its historical importance, I don’t teach the opinion, because the opinion does not help modern students understand how to practice antitrust law.

This stands in sharp contrast to Justice Louis Brandeis’s opinion in Chicago Board of Trade (issued four years after Congress passed the FTC Act), which I do teach consistently, because it articulates the beginning of the modern rule of reason. Although the majority of the FTC is on solid ground when it points out that Congress in 1914 intended the FTC’s UMC authority to have broader coverage than the Sherman Act, the coverage of the Sherman Act has changed since 1914.

This point is well-known, of course: Kovacic and Winerman explain that “[p]robably the most important” reason “Section 5 has played so small a role in the development of U.S. competition policy principles” “is that the Sherman Act proved to be a far more flexible tool for setting antitrust rules than Congress expected in the early 20th century.” The 10 pages in the Statement devoted to century-old legislative history just pretend like Sherman Act jurisprudence hasn’t changed in that same amount of time. The federal courts are going to see right through that.

What About the APA?

The fourth problem with the majority’s trip back to 1914 is that, since then, Congress has passed other statutes limiting the Commission’s authority. The most prominent of these is the Administrative Procedure Act, which was passed in 1946 (for those counting, 1946 is more than 30 years after 1914).

There are hundreds of opinions interpreting the APA, and indeed, an entire body of law has developed pursuant to those cases. These cases produce many lessons, but one of them is that it is not enough for an agency to have the legal authority to act: “Congress gave me this power. I am exercising this power. Therefore, my exercise of this power is lawful,” is, by definition, insufficient justification under the APA. An agency has the obligation to engage in reasoned decision making and must base its actions on substantial evidence. Its enforcement efforts will be set aside on judicial review if they are arbitrary and capricious.

By failing to explain how a company can avoid UMC liability—other than by avoiding conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power” or “otherwise restrictive or exclusionary,” without defining those terms—the majority is basically shouting to the federal courts that its UMC enforcement program is going to be arbitrary and capricious. That’s going to fail for many reasons. A simple one is that 1946 is later in time than 1914, which is why the Commission putting all its eggs in the 1914 legislative history basket is not going to work once its actions are challenged in federal court.

Conclusion

These problems with the majority’s statement are so significant, so obvious, and so unlikely to be overcome, that I don’t anticipate that the Commission will pursue many UMC enforcement actions. Instead, I suspect UMC rulemaking is on the agenda, which has its own set of problems (not to mention the fact that the 1914 legislative history points away from Congress intending that the Commission has legislative rulemaking authority). Rather, I think the value of this statement is symbolic for Chair Khan and her supporters.

When one considers the record of the Khan Commission—many policy statements, few enforcement actions, and even fewer successful enforcement actions—it all makes more sense. The audience for this Statement is Chair Khan’s friends working on Capitol Hill and at think tanks, as well as her followers on Twitter. They might be impressed by it. The audience she should be concerned about is Article III judges, who surely won’t be.