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The leading contribution to sound competition policy made by former Assistant U.S. Attorney General Makan Delrahim was his enunciation of the “New Madison Approach” to patent-antitrust enforcement—and, in particular, to the antitrust treatment of standard essential patent licensing (see, for example, here, here, and here). In short (citations omitted):

The New Madison Approach (“NMA”) advanced by former Assistant Attorney General for Antitrust Makan Delrahim is a simple analytical framework for understanding the interplay between patents and antitrust law arising out of standard setting. A key aspect of the NMA is its rejection of the application of antitrust law to the “hold-up” problem, whereby patent holders demand supposedly supra-competitive licensing fees to grant access to their patents that “read on” a standard – standard essential patents (“SEPs”). This scenario is associated with an SEP holder’s prior commitment to a standard setting organization (“SSO”), that is: if its patented technology is included in a proposed new standard, it will license its patents on fair, reasonable, and non-discriminatory (“FRAND”) terms. “Hold-up” is said to arise subsequently, when the SEP holder reneges on its FRAND commitment and demands that a technology implementer pay higher-than-FRAND licensing fees to access its SEPs.

The NMA has four basic premises that are aimed at ensuring that patent holders have adequate incentives to innovate and create welfare-enhancing new technologies, and that licensees have appropriate incentives to implement those technologies:

1. Hold-up is not an antitrust problem. Accordingly, an antitrust remedy is not the correct tool to resolve patent licensing disputes between SEP-holders and implementers of a standard.

2. SSOs should not allow collective actions by standard-implementers to disfavor patent holders in setting the terms of access to patents that cover a new standard.

3. A fundamental element of patent rights is the right to exclude. As such, SSOs and courts should be hesitant to restrict SEP holders’ right to exclude implementers from access to their patents, by, for example, seeking injunctions.

4. Unilateral and unconditional decisions not to license a patent should be per se legal.

Delrahim emphasizes that the threat of antitrust liability, specifically treble damages, distorts the incentives associated with good faith negotiations with SSOs over patent inclusion. Contract law, he goes on to note, is perfectly capable of providing an ex post solution to licensing disputes between SEP holders and implementers of a standard. Unlike antitrust law, a contract law framework allows all parties equal leverage in licensing negotiations.

As I have explained elsewhere, the NMA is best seen as a set of policies designed to spark dynamic economic growth:

[P]atented technology serves as a catalyst for the wealth-creating diffusion of innovation. This occurs through numerous commercialization methods; in the context of standardized technologies, the development of standards is a process of discovery. At each [SSO], the process of discussion and negotiation between engineers, businesspersons, and all other relevant stakeholders reveals the relative value of alternative technologies and tends to result in the best patents being integrated into a standard.

The NMA supports this process of discovery and implementation of the best patented technology born of the labors of the innovators who created it. As a result, the NMA ensures SEP valuations that allow SEP holders to obtain an appropriate return for the new economic surplus that results from the commercialization of standard-engendered innovations. It recognizes that dynamic economic growth is fostered through the incentivization of innovative activities backed by patents.

In sum, the NMA seeks to promote innovation by offering incentives for SEP-driven technological improvements. As such, it rejects as ill-founded prior Federal Trade Commission (FTC) litigation settlements and Obama-era U.S. Justice Department (DOJ) Antitrust Division policy statements that artificially favored implementor licensees’ interests over those of SEP licensors (see here).

In light of the NMA, DOJ cooperated with the U.S. Patent and Trademark Office and National Institute of Standards and Technology (NIST) in issuing a 2019 SEP Policy Statement clarifying that an SEP holder’s promise to license a patent on fair, reasonable, and non-discriminatory (FRAND) terms does not bar it from seeking any available remedy for patent infringement, including an injunction. This signaled that SEPs and non-SEP patents enjoy equivalent legal status.

DOJ also issued a 2020 supplement to its 2015 Institute of Electrical and Electronics Engineers (IEEE) business review letter. The 2015 letter had found no legal fault with revised IEEE standard-setting policies that implicitly favored implementers of standardized technology over SEP holders. The 2020 supplement characterized key elements of the 2015 letter as “outdated,” and noted that the anti-SEP bias of that document could “harm competition and chill innovation.”   

Furthermore, DOJ issued a July 2019 Statement of Interest before the 9th U.S. Circuit Court of Appeals in FTC v. Qualcomm, explaining that unilateral and unconditional decisions not to license a patent are legal under the antitrust laws. In October 2020, the 9th Circuit reversed a district court decision and rejected the FTC’s monopolization suit against Qualcomm. The circuit court, among other findings, held that Qualcomm had no antitrust duty to license its SEPs to competitors.

Regrettably, the Biden Administration appears to be close to rejecting the NMA and to reinstituting the anti-strong patents SEP-skeptical views of the Obama administration (see here and here). DOJ already has effectively repudiated the 2020 supplement to the 2015 IEEE letter and the 2019 SEP Policy Statement. Furthermore, written responses to Senate Judiciary Committee questions by assistant attorney general nominee Jonathan Kanter suggest support for renewed antitrust scrutiny of SEP licensing. These developments are highly problematic if one supports dynamic economic growth.

Conclusion

The NMA represents a pro-American, pro-growth innovation policy prescription. Its abandonment would reduce incentives to invest in patents and standard-setting activities, to the detriment of the U.S. economy. Such a development would be particularly unfortunate at a time when U.S. Supreme Court decisions have weakened American patent rights (see here); China is taking steps to strengthen Chinese patents and raise incentives to obtain Chinese patents (see here); and China is engaging in litigation to weaken key U.S. patents and undermine American technological leadership (see here).

The rejection of NMA would also be in tension with the logic of the 5th U.S. Circuit Court of Appeals’ 2021 HTC v. Ericsson decision, which held that the non-discrimination portion of the FRAND commitment required Ericsson to give HTC the same licensing terms as given to larger mobile-device manufacturers. Furthermore, recent important European court decisions are generally consistent with NMA principles (see here).

Given the importance of dynamic competition in an increasingly globalized world economy, Biden administration officials may wish to take a closer look at the economic arguments supporting the NMA before taking final action to condemn it. Among other things, the administration might take note that major U.S. digital platforms, which are the subject of multiple U.S. and foreign antitrust enforcement investigations, tend to firmly oppose strong patents rights. As one major innovation economist recently pointed out:

If policymakers and antitrust gurus are so concerned about stemming the rising power of Big Tech platforms, they should start by first stopping the relentless attack on IP. Without the IP system, only the big and powerful have the privilege to innovate[.]

A debate has broken out among the four sitting members of the Federal Trade Commission (FTC) in connection with the recently submitted FTC Report to Congress on Privacy and Security. Chair Lina Khan argues that the commission “must explore using its rulemaking tools to codify baseline protections,” while Commissioner Rebecca Kelly Slaughter has urged the FTC to initiate a broad-based rulemaking proceeding on data privacy and security. By contrast, Commissioners Noah Joshua Phillips and Christine Wilson counsel against a broad-based regulatory initiative on privacy.

Decisions to initiate a rulemaking should be viewed through a cost-benefit lens (See summaries of Thom Lambert’s masterful treatment of regulation, of which rulemaking is a subset, here and here). Unless there is a market failure, rulemaking is not called for. Even in the face of market failure, regulation should not be adopted unless it is more cost-beneficial than reliance on markets (including the ability of public and private litigation to address market-failure problems, such as data theft). For a variety of reasons, it is unlikely that FTC rulemaking directed at privacy and data security would pass a cost-benefit test.

Discussion

As I have previously explained (see here and here), FTC rulemaking pursuant to Section 6(g) of the FTC Act (which authorizes the FTC “to make rules and regulations for the purpose of carrying out the provisions of this subchapter”) is properly read as authorizing mere procedural, not substantive, rules. As such, efforts to enact substantive competition rules would not pass a cost-benefit test. Such rules could well be struck down as beyond the FTC’s authority on constitutional law grounds, and as “arbitrary and capricious” on administrative law grounds. What’s more, they would represent retrograde policy. Competition rules would generate higher error costs than adjudications; could be deemed to undermine the rule of law, because the U.S. Justice Department (DOJ) could not apply such rules; and innovative efficiency-seeking business arrangements would be chilled.

Accordingly, the FTC likely would not pursue 6(g) rulemaking should it decide to address data security and privacy, a topic which best fits under the “consumer protection” category. Rather, the FTC presumably would most likely initiate a “Magnuson-Moss” rulemaking (MMR) under Section 18 of the FTC Act, which authorizes the commission to prescribe “rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce within the meaning of Section 5(a)(1) of the Act.” Among other things, Section 18 requires that the commission’s rulemaking proceedings provide an opportunity for informal hearings at which interested parties are accorded limited rights of cross-examination. Also, before commencing an MMR proceeding, the FTC must have reason to believe the practices addressed by the rulemaking are “prevalent.” 15 U.S.C. Sec. 57a(b)(3).

MMR proceedings, which are not governed under the Administrative Procedure Act (APA), do not present the same degree of legal problems as Section 6(g) rulemakings (see here). The question of legal authority to adopt a substantive rule is not raised; “rule of law” problems are far less serious (the DOJ is not a parallel enforcer of consumer-protection law); and APA issues of “arbitrariness” and “capriciousness” are not directly presented. Indeed, MMR proceedings include a variety of procedures aimed at promoting fairness (see here, for example). An MMR proceeding directed at data privacy predictably would be based on the claim that the failure to adhere to certain data-protection norms is an “unfair act or practice.”

Nevertheless, MMR rules would be subject to two substantial sources of legal risk.

The first of these arises out of federalism. Three states (California, Colorado, and Virginia) recently have enacted comprehensive data-privacy laws, and a large number of other state legislatures are considering data-privacy bills (see here). The proliferation of state data-privacy statutes would raise the risk of inconsistent and duplicative regulatory norms, potentially chilling business innovations addressed at data protection (a severe problem in the Internet Age, when business data-protection programs typically will have interstate effects).

An FTC MMR data-protection regulation that successfully “occupied the field” and preempted such state provisions could eliminate that source of costs. The Magnuson–Moss Warranty Act, however, does not contain an explicit preemption clause, leaving in serious doubt the ability of an FTC rule to displace state regulations (see here for a summary of the murky state of preemption law, including the skepticism of textualist Supreme Court justices toward implied “obstacle preemption”). In particular, the long history of state consumer-protection and antitrust laws that coexist with federal laws suggests that the case for FTC rule-based displacement of state data protection is a weak one. The upshot, then, of a Section 18 FTC data-protection rule enactment could be “the worst of all possible worlds,” with drawn-out litigation leading to competing federal and state norms that multiplied business costs.

The second source of risk arises out of the statutory definition of “unfair practices,” found in Section 5(n) of the FTC Act. Section 5(n) codifies the meaning of unfair practices, and thereby constrains the FTC’s application of rulemakings covering such practices. Section 5(n) states:

The Commission shall have no authority . . . to declare unlawful an act or practice on the grounds that such an 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. In determining whether an act or practice is unfair, 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.

In effect, Section 5(n) implicitly subjects unfair practices to a well-defined cost-benefit framework. Thus, in promulgating a data-privacy MMR, the FTC first would have to demonstrate that specific disfavored data-protection practices caused or were likely to cause substantial harm. What’s more, the commission would have to show that any actual or likely harm would not be outweighed by countervailing benefits to consumers or competition. One would expect that a data-privacy rulemaking record would include submissions that pointed to the efficiencies of existing data-protection policies that would be displaced by a rule.

Moreover, subsequent federal court challenges to a final FTC rule likely would put forth the consumer and competitive benefits sacrificed by rule requirements. For example, rule challengers might point to the added business costs passed on to consumers that would arise from particular rule mandates, and the diminution in competition among data-protection systems generated by specific rule provisions. Litigation uncertainties surrounding these issues could be substantial and would cast into further doubt the legal viability of any final FTC data protection rule.

Apart from these legal risk-based costs, an MMR data privacy predictably would generate error-based costs. Given imperfect information in the hands of government and the impossibility of achieving welfare-maximizing nirvana through regulation (see, for example, here), any MMR data-privacy rule would erroneously condemn some economically inefficient business protocols and disincentivize some efficiency-seeking behavior. The Section 5(n) cost-benefit framework, though helpful, would not eliminate such error. (For example, even bureaucratic efforts to accommodate some business suggestions during the rulemaking process might tilt the post-rule market in favor of certain business models, thereby distorting competition.) In the abstract, it is difficult to say whether the welfare benefits of a final MMA data-privacy rule (measured by reductions in data-privacy-related consumer harm) would outweigh the costs, even before taking legal costs into account.

Conclusion

At least two FTC commissioners (and likely a third, assuming that President Joe Biden’s highly credentialed nominee Alvaro Bedoya will be confirmed by the U.S. Senate) appear to support FTC data-privacy regulation, even in the absence of new federal legislation. Such regulation, which presumably would be adopted as an MMR pursuant to Section 18 of the FTC Act, would probably not prove cost-beneficial. Not only would adoption of a final data-privacy rule generate substantial litigation costs and uncertainty, it would quite possibly add an additional layer of regulatory burdens above and beyond the requirements of proliferating state privacy rules. Furthermore, it is impossible to say whether the consumer-privacy benefits stemming from such an FTC rule would outweigh the error costs (manifested through competitive distortions and consumer harm) stemming from the inevitable imperfections of the rule’s requirements. All told, these considerations counsel against the allocation of scarce FTC resources to a Section 18 data-privacy rulemaking initiative.

But what about legislation? New federal privacy legislation that explicitly preempted state law would eliminate costs arising from inconsistencies among state privacy rules. Ideally, if such legislation were to be pursued, it should to the extent possible embody a cost-benefit framework designed to minimize the sum of administrative (including litigation) and error costs. The nature of such a possible law, and the role the FTC might play in administering it, however, is a topic for another day.

The American Choice and Innovation Online Act (previously called the Platform Anti-Monopoly Act), introduced earlier this summer by U.S. Rep. David Cicilline (D-R.I.), would significantly change the nature of digital platforms and, with them, the internet itself. Taken together, the bill’s provisions would turn platforms into passive intermediaries, undermining many of the features that make them valuable to consumers. This seems likely to remain the case even after potential revisions intended to minimize the bill’s unintended consequences.

In its current form, the bill is split into two parts that each is dangerous in its own right. The first, Section 2(a), would prohibit almost any kind of “discrimination” by platforms. Because it is so open-ended, lawmakers might end up removing it in favor of the nominally more focused provisions of Section 2(b), which prohibit certain named conduct. But despite being more specific, this section of the bill is incredibly far-reaching and would effectively ban swaths of essential services.

I will address the potential effects of these sections point-by-point, but both elements of the bill suffer from the same problem: a misguided assumption that “discrimination” by platforms is necessarily bad from a competition and consumer welfare point of view. On the contrary, this conduct is often exactly what consumers want from platforms, since it helps to bring order and legibility to otherwise-unwieldy parts of the Internet. Prohibiting it, as both main parts of the bill do, would make the Internet harder to use and less competitive.

Section 2(a)

Section 2(a) essentially prohibits any behavior by a covered platform that would advantage that platform’s services over any others that also uses that platform; it characterizes this preferencing as “discrimination.”

As we wrote when the House Judiciary Committee’s antitrust bills were first announced, this prohibition on “discrimination” is so broad that, if it made it into law, it would prevent platforms from excluding or disadvantaging any product of another business that uses the platform or advantaging their own products over those of their competitors.

The underlying assumption here is that platforms should be like telephone networks: providing a way for different sides of a market to communicate with each other, but doing little more than that. When platforms do do more—for example, manipulating search results to favor certain businesses or to give their own products prominence —it is seen as exploitative “leveraging.”

But consumers often want platforms to be more than just a telephone network or directory, because digital markets would be very difficult to navigate without some degree of “discrimination” between sellers. The Internet is so vast and sellers are often so anonymous that any assistance which helps you choose among options can serve to make it more navigable. As John Gruber put it:

From what I’ve seen over the last few decades, the quality of the user experience of every computing platform is directly correlated to the amount of control exerted by its platform owner. The current state of the ownerless world wide web speaks for itself.

Sometimes, this manifests itself as “self-preferencing” of another service, to reduce additional time spent searching for the information you want. When you search for a restaurant on Google, it can be very useful to get information like user reviews, the restaurant’s phone number, a button on mobile to phone them directly, estimates of how busy it is, and a link to a Maps page to see how to actually get there.

This is, undoubtedly, frustrating for competitors like Yelp, who would like this information not to be there and for users to have to click on either a link to Yelp or a link to Google Maps. But whether it is good or bad for Yelp isn’t relevant to whether it is good for users—and it is at least arguable that it is, which makes a blanket prohibition on this kind of behavior almost inevitably harmful.

If it isn’t obvious why removing this kind of feature would be harmful for users, ask yourself why some users search in Yelp’s app directly for this kind of result. The answer, I think, is that Yelp gives you all the information above that Google does (and sometimes is better, although I tend to trust Google Maps’ reviews over Yelp’s), and it’s really convenient to have all that on the same page. If Google could not provide this kind of “rich” result, many users would probably stop using Google Search to look for restaurant information in the first place, because a new friction would have been added that made the experience meaningfully worse. Removing that option would be good for Yelp, but mainly because it removes a competitor.

If all this feels like stating the obvious, then it should highlight a significant problem with Section 2(a) in the Cicilline bill: it prohibits conduct that is directly value-adding for consumers, and that creates competition for dedicated services like Yelp that object to having to compete with this kind of conduct.

This is true across all the platforms the legislation proposes to regulate. Amazon prioritizes some third-party products over others on the basis of user reviews, rates of returns and complaints, and so on; Amazon provides private label products to fill gaps in certain product lines where existing offerings are expensive or unreliable; Apple pre-installs a Camera app on the iPhone that, obviously, enjoys an advantage over rival apps like Halide.

Some or all of this behavior would be prohibited under Section 2(a) of the Cicilline bill. Combined with the bill’s presumption that conduct must be defended affirmatively—that is, the platform is presumed guilty unless it can prove that the challenged conduct is pro-competitive, which may be very difficult to do—and the bill could prospectively eliminate a huge range of socially valuable behavior.

Supporters of the bill have already been left arguing that the law simply wouldn’t be enforced in these cases of benign discrimination. But this would hardly be an improvement. It would mean the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) have tremendous control over how these platforms are built, since they could challenge conduct in virtually any case. The regulatory uncertainty alone would complicate the calculus for these firms as they refine, develop, and deploy new products and capabilities. 

So one potential compromise might be to do away with this broad-based rule and proscribe specific kinds of “discriminatory” conduct instead. This approach would involve removing Section 2(a) from the bill but retaining Section 2(b), which enumerates 10 practices it deems to be “other discriminatory conduct.” This may seem appealing, as it would potentially avoid the worst abuses of the broad-based prohibition. In practice, however, it would carry many of the same problems. In fact, many of 2(b)’s provisions appear to go even further than 2(a), and would proscribe even more procompetitive conduct that consumers want.

Sections 2(b)(1) and 2(b)(9)

The wording of these provisions is extremely broad and, as drafted, would seem to challenge even the existence of vertically integrated products. As such, these prohibitions are potentially even more extensive and invasive than Section 2(a) would have been. Even a narrower reading here would seem to preclude safety and privacy features that are valuable to many users. iOS’s sandboxing of apps, for example, serves to limit the damage that a malware app can do on a user’s device precisely because of the limitations it imposes on what other features and hardware the app can access.

Section 2(b)(2)

This provision would preclude a firm from conditioning preferred status on use of another service from that firm. This would likely undermine the purpose of platforms, which is to absorb and counter some of the risks involved in doing business online. An example of this is Amazon’s tying eligibility for its Prime program to sellers that use Amazon’s delivery service (FBA – Fulfilled By Amazon). The bill seems to presume in an example like this that Amazon is leveraging its power in the market—in the form of the value of the Prime label—to profit from delivery. But Amazon could, and already does, charge directly for listing positions; it’s unclear why it would benefit from charging via FBA when it could just charge for the Prime label.

An alternate, simpler explanation is that FBA improves the quality of the service, by granting customers greater assurance that a Prime product will arrive when Amazon says it will. Platforms add value by setting out rules and providing services that reduce the uncertainties between buyers and sellers they’d otherwise experience if they transacted directly with each other. This section’s prohibition—which, as written, would seem to prevent any kind of quality assurance—likely would bar labelling by a platform, even where customers explicitly want it.

Section 2(b)(3)

As written, this would prohibit platforms from using aggregated data to improve their services at all. If Apple found that 99% of its users uninstalled an app immediately after it was installed, it would be reasonable to conclude that the app may be harmful or broken in some way, and that Apple should investigate. This provision would ban that.

Sections 2(b)(4) and 2(b)(6)

These two provisions effectively prohibit a platform from using information it does not also provide to sellers. Such prohibitions ignore the fact that it is often good for sellers to lack certain information, since withholding information can prevent abuse by malicious users. For example, a seller may sometimes try to bribe their customers to post positive reviews of their products, or even threaten customers who have posted negative ones. Part of the role of a platform is to combat that kind of behavior by acting as a middleman and forcing both consumer users and business users to comply with the platform’s own mechanisms to control that kind of behavior.

If this seems overly generous to platforms—since, obviously, it gives them a lot of leverage over business users—ask yourself why people use platforms at all. It is not a coincidence that people often prefer Amazon to dealing with third-party merchants and having to navigate those merchants’ sites themselves. The assurance that Amazon provides is extremely valuable for users. Much of it comes from the company’s ability to act as a middleman in this way, lowering the transaction costs between buyers and sellers.

Section 2(b)(5)

This provision restricts the treatment of defaults. It is, however, relatively restrained when compared to, for example, the DOJ’s lawsuit against Google, which treats as anticompetitive even payment for defaults that can be changed. Still, many of the arguments that apply in that case also apply here: default status for apps can be a way to recoup income foregone elsewhere (e.g., a browser provided for free that makes its money by selling the right to be the default search engine).

Section 2(b)(7)

This section gets to the heart of why “discrimination” can often be procompetitive: that it facilitates competition between platforms. The kind of self-preferencing that this provision would prohibit can allow firms that have a presence in one market to extend that position into another, increasing competition in the process. Both Apple and Amazon have used their customer bases in smartphones and e-commerce, respectively, to grow their customer bases for video streaming, in competition with Netflix, Google’s YouTube, cable television, and each other. If Apple designed a search engine to compete with Google, it would do exactly the same thing, and we would be better off because of it. Restricting this kind of behavior is, perversely, exactly what you would do if you wanted to shield these incumbents from competition.

Section 2(b)(8)

As with other provisions, this one would preclude one of the mechanisms by which platforms add value: creating assurance for customers about the products they can expect if they visit the platform. Some of this relates to child protection; some of the most frustrating stories involve children being overcharged when they use an iPhone or Android app, and effectively being ripped off because of poor policing of the app (or insufficiently strict pricing rules by Apple or Google). This may also relate to rules that state that the seller cannot offer a cheaper product elsewhere (Amazon’s “General Pricing Rule” does this, for example). Prohibiting this would simply impose a tax on customers who cannot shop around and would prefer to use a platform that they trust has the lowest prices for the item they want.

Section 2(b)(10)

Ostensibly a “whistleblower” provision, this section could leave platforms with no recourse, not even removing a user from its platform, in response to spurious complaints intended purely to extract value for the complaining business rather than to promote competition. On its own, this sort of provision may be fairly harmless, but combined with the provisions above, it allows the bill to add up to a rent-seekers’ charter.

Conclusion

In each case above, it’s vital to remember that a reversed burden of proof applies. So, there is a high chance that the law will side against the defendant business, and a large downside for conduct that ends up being found to violate these provisions. That means that platforms will likely err on the side of caution in many cases, avoiding conduct that is ambiguous, and society will probably lose a lot of beneficial behavior in the process.

Put together, the provisions undermine much of what has become an Internet platform’s role: to act as an intermediary, de-risk transactions between customers and merchants who don’t know each other, and tweak the rules of the market to maximize its attractiveness as a place to do business. The “discrimination” that the bill would outlaw is, in practice, behavior that makes it easier for consumers to navigate marketplaces of extreme complexity and uncertainty, in which they often know little or nothing about the firms with whom they are trying to transact business.

Customers do not want platforms to be neutral, open utilities. They can choose platforms that are like that already, such as eBay. They generally tend to prefer ones like Amazon, which are not neutral and which carefully cultivate their service to be as streamlined, managed, and “discriminatory” as possible. Indeed, many of people’s biggest complaints with digital platforms relate to their openness: the fake reviews, counterfeit products, malware, and spam that come with letting more unknown businesses use your service. While these may be unavoidable by-products of running a platform, platforms compete on their ability to ferret them out. Customers are unlikely to thank legislators for regulating Amazon into being another eBay.

The language of the federal antitrust laws is extremely general. Over more than a century, the federal courts have applied common-law techniques to construe this general language to provide guidance to the private sector as to what does or does not run afoul of the law. The interpretive process has been fraught with some uncertainty, as judicial approaches to antitrust analysis have changed several times over the past century. Nevertheless, until very recently, judges and enforcers had converged toward relying on a consumer welfare standard as the touchstone for antitrust evaluations (see my antitrust primer here, for an overview).

While imperfect and subject to potential error in application—a problem of legal interpretation generally—the consumer welfare principle has worked rather well as the focus both for antitrust-enforcement guidance and judicial decision-making. The general stability and predictability of antitrust under a consumer welfare framework has advanced the rule of law. It has given businesses sufficient information to plan transactions in a manner likely to avoid antitrust liability. It thereby has cabined uncertainty and increased the probability that private parties would enter welfare-enhancing commercial arrangements, to the benefit of society.

In a very thoughtful 2017 speech, then Acting Assistant Attorney General for Antitrust Andrew Finch commented on the importance of the rule of law to principled antitrust enforcement. He noted:

[H]ow do we administer the antitrust laws more rationally, accurately, expeditiously, and efficiently? … Law enforcement requires stability and continuity both in rules and in their application to specific cases.

Indeed, stability and continuity in enforcement are fundamental to the rule of law. The rule of law is about notice and reliance. When it is impossible to make reasonable predictions about how a law will be applied, or what the legal consequences of conduct will be, these important values are diminished. To call our antitrust regime a “rule of law” regime, we must enforce the law as written and as interpreted by the courts and advance change with careful thought.

The reliance fostered by stability and continuity has obvious economic benefits. Businesses invest, not only in innovation but in facilities, marketing, and personnel, and they do so based on the economic and legal environment they expect to face.

Of course, we want businesses to make those investments—and shape their overall conduct—in accordance with the antitrust laws. But to do so, they need to be able to rely on future application of those laws being largely consistent with their expectations. An antitrust enforcement regime with frequent changes is one that businesses cannot plan for, or one that they will plan for by avoiding certain kinds of investments.

That is certainly not to say there has not been positive change in the antitrust laws in the past, or that we would have been better off without those changes. U.S. antitrust law has been refined, and occasionally recalibrated, with the courts playing their appropriate interpretive role. And enforcers must always be on the watch for new or evolving threats to competition.  As markets evolve and products develop over time, our analysis adapts. But as those changes occur, we pursue reliability and consistency in application in the antitrust laws as much as possible.

Indeed, we have enjoyed remarkable continuity and consensus for many years. Antitrust law in the U.S. has not been a “paradox” for quite some time, but rather a stable and valuable law enforcement regime with appropriately widespread support.

Unfortunately, policy decisions taken by the new Federal Trade Commission (FTC) leadership in recent weeks have rejected antitrust continuity and consensus. They have injected substantial uncertainty into the application of competition-law enforcement by the FTC. This abrupt change in emphasis undermines the rule of law and threatens to reduce economic welfare.

As of now, the FTC’s departure from the rule of law has been notable in two areas:

  1. Its rejection of previous guidance on the agency’s “unfair methods of competition” authority, the FTC’s primary non-merger-related enforcement tool; and
  2. Its new advice rejecting time limits for the review of generally routine proposed mergers.

In addition, potential FTC rulemakings directed at “unfair methods of competition” would, if pursued, prove highly problematic.

Rescission of the Unfair Methods of Competition Policy Statement

The FTC on July 1 voted 3-2 to rescind the 2015 FTC Policy Statement Regarding Unfair Methods of Competition under Section 5 of the FTC Act (UMC Policy Statement).

The bipartisan UMC Policy Statement has originally been supported by all three Democratic commissioners, including then-Chairwoman Edith Ramirez. The policy statement generally respected and promoted the rule of law by emphasizing that, in applying the facially broad “unfair methods of competition” (UMC) language, the FTC would be guided by the well-established principles of the antitrust rule of reason (including considering any associated cognizable efficiencies and business justifications) and the consumer welfare standard. The FTC also explained that it would not apply “standalone” Section 5 theories to conduct that would violate the Sherman or Clayton Acts.

In short, the UMC Policy Statement sent a strong signal that the commission would apply UMC in a manner fully consistent with accepted and well-understood antitrust policy principles. As in the past, the vast bulk of FTC Section 5 prosecutions would be brought against conduct that violated the core antitrust laws. Standalone Section 5 cases would be directed solely at those few practices that harmed consumer welfare and competition, but somehow fell into a narrow crack in the basic antitrust statutes (such as, perhaps, “invitations to collude” that lack plausible efficiency justifications). Although the UMC Statement did not answer all questions regarding what specific practices would justify standalone UMC challenges, it substantially limited business uncertainty by bringing Section 5 within the boundaries of settled antitrust doctrine.

The FTC’s announcement of the UMC Policy Statement rescission unhelpfully proclaimed that “the time is right for the Commission to rethink its approach and to recommit to its mandate to police unfair methods of competition even if they are outside the ambit of the Sherman or Clayton Acts.” As a dissenting statement by Commissioner Christine S. Wilson warned, consumers would be harmed by the commission’s decision to prioritize other unnamed interests. And as Commissioner Noah Joshua Phillips stressed in his dissent, the end result would be reduced guidance and greater uncertainty.

In sum, by suddenly leaving private parties in the dark as to how to conform themselves to Section 5’s UMC requirements, the FTC’s rescission offends the rule of law.

New Guidance to Parties Considering Mergers

For decades, parties proposing mergers that are subject to statutory Hart-Scott-Rodino (HSR) Act pre-merger notification requirements have operated under the understanding that:

  1. The FTC and U.S. Justice Department (DOJ) will routinely grant “early termination” of review (before the end of the initial 30-day statutory review period) to those transactions posing no plausible competitive threat; and
  2. An enforcement agency’s decision not to request more detailed documents (“second requests”) after an initial 30-day pre-merger review effectively serves as an antitrust “green light” for the proposed acquisition to proceed.

Those understandings, though not statutorily mandated, have significantly reduced antitrust uncertainty and related costs in the planning of routine merger transactions. The rule of law has been advanced through an effective assurance that business combinations that appear presumptively lawful will not be the target of future government legal harassment. This has advanced efficiency in government, as well; it is a cost-beneficial optimal use of resources for DOJ and the FTC to focus exclusively on those proposed mergers that present a substantial potential threat to consumer welfare.

Two recent FTC pronouncements (one in tandem with DOJ), however, have generated great uncertainty by disavowing (at least temporarily) those two welfare-promoting review policies. Joined by DOJ, the FTC on Feb. 4 announced that the agencies would temporarily suspend early terminations, citing an “unprecedented volume of filings” and a transition to new leadership. More than six months later, this “temporary” suspension remains in effect.

Citing “capacity constraints” and a “tidal wave of merger filings,” the FTC subsequently published an Aug. 3 blog post that effectively abrogated the 30-day “green lighting” of mergers not subject to a second request. It announced that it was sending “warning letters” to firms reminding them that FTC investigations remain open after the initial 30-day period, and that “[c]ompanies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk.”

The FTC’s actions interject unwarranted uncertainty into merger planning and undermine the rule of law. Preventing early termination on transactions that have been approved routinely not only imposes additional costs on business; it hints that some transactions might be subject to novel theories of liability that fall outside the antitrust consensus.

Perhaps more significantly, as three prominent antitrust practitioners point out, the FTC’s warning letters states that:

[T]he FTC may challenge deals that “threaten to reduce competition and harm consumers, workers, and honest businesses.” Adding in harm to both “workers and honest businesses” implies that the FTC may be considering more ways that transactions can have an adverse impact other than just harm to competition and consumers [citation omitted].

Because consensus antitrust merger analysis centers on consumer welfare, not the protection of labor or business interests, any suggestion that the FTC may be extending its reach to these new areas is inconsistent with established legal principles and generates new business-planning risks.

More generally, the Aug. 6 FTC “blog post could be viewed as an attempt to modify the temporal framework of the HSR Act”—in effect, an effort to displace an implicit statutory understanding in favor of an agency diktat, contrary to the rule of law. Commissioner Wilson sees the blog post as a means to keep investigations open indefinitely and, thus, an attack on the decades-old HSR framework for handling most merger reviews in an expeditious fashion (see here). Commissioner Phillips is concerned about an attempt to chill legal M&A transactions across the board, particularly unfortunate when there is no reason to conclude that particular transactions are illegal (see here).

Finally, the historical record raises serious questions about the “resource constraint” justification for the FTC’s new merger review policies:

Through the end of July 2021, more than 2,900 transactions were reported to the FTC. It is not clear, however, whether these record-breaking HSR filing numbers have led (or will lead) to more deals being investigated. Historically, only about 13 percent of all deals reported are investigated in some fashion, and roughly 3 percent of all deals reported receive a more thorough, substantive review through the issuance of a Second Request. Even if more deals are being reported, for the majority of transactions, the HSR process is purely administrative, raising no antitrust concerns, and, theoretically, uses few, if any, agency resources. [Citations omitted.]

Proposed FTC Competition Rulemakings

The new FTC leadership is strongly considering competition rulemakings. As I explained in a recent Truth on the Market post, such rulemakings would fail a cost-benefit test. They raise serious legal risks for the commission and could impose wasted resource costs on the FTC and on private parties. More significantly, they would raise two very serious economic policy concerns:

First, competition rules would generate higher error costs than adjudications. Adjudications cabin error costs by allowing for case-specific analysis of likely competitive harms and procompetitive benefits. In contrast, competition rules inherently would be overbroad and would suffer from a very high rate of false positives. By characterizing certain practices as inherently anticompetitive without allowing for consideration of case-specific facts bearing on actual competitive effects, findings of rule violations inevitably would condemn some (perhaps many) efficient arrangements.

Second, competition rules would undermine the rule of law and thereby reduce economic welfare. FTC-only competition rules could lead to disparate legal treatment of a firm’s business practices, depending upon whether the FTC or the U.S. Justice Department was the investigating agency. Also, economic efficiency gains could be lost due to the chilling of aggressive efficiency-seeking business arrangements in those sectors subject to rules. [Emphasis added.]

In short, common law antitrust adjudication, focused on the consumer welfare standard, has done a good job of promoting a vibrant competitive economy in an efficient fashion. FTC competition rulemaking would not.

Conclusion

Recent FTC actions have undermined consensus antitrust-enforcement standards and have departed from established merger-review procedures with respect to seemingly uncontroversial consolidations. Those decisions have imposed costly uncertainty on the business sector and are thereby likely to disincentivize efficiency-seeking arrangements. What’s more, by implicitly rejecting consensus antitrust principles, they denigrate the primacy of the rule of law in antitrust enforcement. The FTC’s pursuit of competition rulemaking would further damage the rule of law by imposing arbitrary strictures that ignore matter-specific considerations bearing on the justifications for particular business decisions.

Fortunately, these are early days in the Biden administration. The problematic initial policy decisions delineated in this comment could be reversed based on further reflection and deliberation within the commission. Chairwoman Lina Khan and her fellow Democratic commissioners would benefit by consulting more closely with Commissioners Wilson and Phillips to reach agreement on substantive and procedural enforcement policies that are better tailored to promote consumer welfare and enhance vibrant competition. Such policies would benefit the U.S. economy in a manner consistent with the rule of law.

The U.S. House this week passed H.R. 2668, the Consumer Protection and Recovery Act (CPRA), which authorizes the Federal Trade Commission (FTC) to seek monetary relief in federal courts for injunctions brought under Section 13(b) of the Federal Trade Commission Act.

Potential relief under the CPRA is comprehensive. It includes “restitution for losses, rescission or reformation of contracts, refund of money, return of property … and disgorgement of any unjust enrichment that a person, partnership, or corporation obtained as a result of the violation that gives rise to the suit.” What’s more, under the CPRA, monetary relief may be obtained for violations that occurred up to 10 years before the filing of the suit in which relief is requested by the FTC.

The Senate should reject the House version of the CPRA. Its monetary-recovery provisions require substantial narrowing if it is to pass cost-benefit muster.

The CPRA is a response to the Supreme Court’s April 22 decision in AMG Capital Management v. FTC, which held that Section 13(b) of the FTC Act does not authorize the commission to obtain court-ordered equitable monetary relief. As I explained in an April 22 Truth on the Market post, Congress’ response to the court’s holding should not be to grant the FTC carte blanche authority to obtain broad monetary exactions for any and all FTC Act violations. I argued that “[i]f Congress adopts a cost-beneficial error-cost framework in shaping targeted legislation, it should limit FTC monetary relief authority (recoupment and disgorgement) to situations of consumer fraud or dishonesty arising under the FTC’s authority to pursue unfair or deceptive acts or practices.”

Error cost and difficulties of calculation counsel against pursuing monetary recovery in FTC unfair methods of competition cases. As I explained in my post:

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

These error-cost and calculation difficulties became even more pronounced as of July 1. On that date, the FTC unwisely voted 3-2 to withdraw a bipartisan 2015 policy statement providing that the commission would apply consumer welfare and rule-of-reason (weighing efficiencies against anticompetitive harm) considerations in exercising its unfair methods of competition authority (see my commentary here). This means that, going forward, the FTC will arrogate to itself unbounded discretion to decide what competitive practices are “unfair.” Business uncertainty, and the costly risk aversion it engenders, would be expected to grow enormously if the FTC could extract monies from firms due to competitive behavior deemed “unfair,” based on no discernible neutral principle.

Error costs and calculation problems also strongly suggest that monetary relief in FTC consumer-protection matters should be limited to cases of fraud or clear deception. As I noted:

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

In short, the Senate should rewrite its Section 13(b) amendments to authorize FTC monetary recoveries only when consumer fraud and dishonesty is shown.

Finally, the Senate would be wise to sharply pare back the House language that allows the FTC to seek monetary exactions based on conduct that is a decade old. Serious problems of making accurate factual determinations of economic effects and specific-damage calculations would arise after such a long period of time. Allowing retroactive determinations based on a shorter “look-back” period prior to the filing of a complaint (three years, perhaps) would appear to strike a better balance in allowing reasonable redress while controlling error costs.

In a recent op-ed, Robert Bork Jr. laments the Biden administration’s drive to jettison the Consumer Welfare Standard that has formed nearly half a century of antitrust jurisprudence. The move can be seen in the near-revolution at the Federal Trade Commission, in the president’s executive order on competition enforcement, and in several of the major antitrust bills currently before Congress.

Bork notes the Competition and Antitrust Law Enforcement Reform Act, introduced by Sen. Amy Klobuchar (D-Minn.), would “outlaw any mergers or acquisitions for the more than 80 large U.S. companies valued over $100 billion.”

Bork is correct that it will be more than 80 companies, but it is likely to be way more. While the Klobuchar bill does not explicitly outlaw such mergers, under certain circumstances, it shifts the burden of proof to the merging parties, who must demonstrate that the benefits of the transaction outweigh the potential risks. Under current law, the burden is on the government to demonstrate the potential costs outweigh the potential benefits.

One of the measure’s specific triggers for this burden-shifting is if the acquiring party has a market capitalization, assets, or annual net revenue of more than $100 billion and seeks a merger or acquisition valued at $50 million or more. About 120 or more U.S. companies satisfy at least one of these conditions. The end of this post provides a list of publicly traded companies, according to Zacks’ stock screener, that would likely be subject to the shift in burden of proof.

If the goal is to go after Big Tech, the Klobuchar bill hits the mark. All of the FAANG companies—Facebook, Amazon, Apple, Netflix, and Alphabet (formerly known as Google)—satisfy one or more of the criteria. So do Microsoft and PayPal.

But even some smaller tech firms will be subject to the shift in burden of proof. Zoom and Square have market caps that would trigger under Klobuchar’s bill and Snap is hovering around $100 billion in market cap. Twitter and eBay, however, are well under any of the thresholds. Likewise, privately owned Advance Communications, owner of Reddit, would also likely fall short of any of the triggers.

Snapchat has a little more than 300 million monthly active users. Twitter and Reddit each have about 330 million monthly active users. Nevertheless, under the Klobuchar bill, Snapchat is presumed to have more market power than either Twitter or Reddit, simply because the market assigns a higher valuation to Snap.

But this bill is about more than Big Tech. Tesla, which sold its first car only 13 years ago, is now considered big enough that it will face the same antitrust scrutiny as the Big 3 automakers. Walmart, Costco, and Kroger would be subject to the shifted burden of proof, while Safeway and Publix would escape such scrutiny. An acquisition by U.S.-based Nike would be put under the microscope, but a similar acquisition by Germany’s Adidas would not fall under the Klobuchar bill’s thresholds.

Tesla accounts for less than 2% of the vehicles sold in the United States. I have no idea what Walmart, Costco, Kroger, or Nike’s market share is, or even what comprises “the” market these companies compete in. What we do know is that the U.S. Department of Justice and Federal Trade Commission excel at narrowly crafting market definitions so that just about any company can be defined as dominant.

So much of the recent interest in antitrust has focused on Big Tech. But even the biggest of Big Tech firms operate in dynamic and competitive markets. None of my four children use Facebook or Twitter. My wife and I don’t use Snapchat. We all use Netflix, but we also use Hulu, Disney+, HBO Max, YouTube, and Amazon Prime Video. None of these services have a monopoly on our eyeballs, our attention, or our pocketbooks.

The antitrust bills currently working their way through Congress abandon the long-standing balancing of pro- versus anti-competitive effects of mergers in favor of a “big is bad” approach. While the Klobuchar bill appears to provide clear guidance on the thresholds triggering a shift in the burden of proof, the arbitrary nature of the thresholds will result in arbitrary application of the burden of proof. If passed, we will soon be faced with a case in which two firms who differ only in market cap, assets, or sales will be subject to very different antitrust scrutiny, resulting in regulatory chaos.

Publicly traded companies with more than $100 billion in market capitalization

3MDanaher Corp.PepsiCo
Abbott LaboratoriesDeere & Co.Pfizer
AbbVieEli Lilly and Co.Philip Morris International
Adobe Inc.ExxonMobilProcter & Gamble
Advanced Micro DevicesFacebook Inc.Qualcomm
Alphabet Inc.General Electric Co.Raytheon Technologies
AmazonGoldman SachsSalesforce
American ExpressHoneywellServiceNow
American TowerIBMSquare Inc.
AmgenIntelStarbucks
Apple Inc.IntuitTarget Corp.
Applied MaterialsIntuitive SurgicalTesla Inc.
AT&TJohnson & JohnsonTexas Instruments
Bank of AmericaJPMorgan ChaseThe Coca-Cola Co.
Berkshire HathawayLockheed MartinThe Estée Lauder Cos.
BlackRockLowe’sThe Home Depot
BoeingMastercardThe Walt Disney Co.
Bristol Myers SquibbMcDonald’sThermo Fisher Scientific
Broadcom Inc.MedtronicT-Mobile US
Caterpillar Inc.Merck & Co.Union Pacific Corp.
Charles Schwab Corp.MicrosoftUnited Parcel Service
Charter CommunicationsMorgan StanleyUnitedHealth Group
Chevron Corp.NetflixVerizon Communications
Cisco SystemsNextEra EnergyVisa Inc.
CitigroupNike Inc.Walmart
ComcastNvidiaWells Fargo
CostcoOracle Corp.Zoom Video Communications
CVS HealthPayPal

Publicly traded companies with more than $100 billion in current assets

Ally FinancialFreddie Mac
American International GroupKeyBank
BNY MellonM&T Bank
Capital OneNorthern Trust
Citizens Financial GroupPNC Financial Services
Fannie MaeRegions Financial Corp.
Fifth Third BankState Street Corp.
First Republic BankTruist Financial
Ford Motor Co.U.S. Bancorp

Publicly traded companies with more than $100 billion in sales

AmerisourceBergenDell Technologies
AnthemGeneral Motors
Cardinal HealthKroger
Centene Corp.McKesson Corp.
CignaWalgreens Boots Alliance

[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Nicolas Petit himself, the Joint Chair in Competition Law at the Department of Law at European University Institute in Fiesole, Italy, and at EUI’s Robert Schuman Centre for Advanced Studies. He is also invited professor at the College of Europe in Bruges
.]

A lot of water has gone under the bridge since my book was published last year. To close this symposium, I thought I would discuss the new phase of antirust statutorification taking place before our eyes. In the United States, Congress is working on five antitrust bills that propose to subject platforms to stringent obligations, including a ban on mergers and acquisitions, required data portability and interoperability, and line-of-business restrictions. In the European Union (EU), lawmakers are examining the proposed Digital Markets Act (“DMA”) that sets out a complicated regulatory system for digital “gatekeepers,” with per se behavioral limitations of their freedom over contractual terms, technological design, monetization, and ecosystem leadership.

Proponents of legislative reform on both sides of the Atlantic appear to share the common view that ongoing antitrust adjudication efforts are both instrumental and irrelevant. They are instrumental because government (or plaintiff) losses build the evidence needed to support the view that antitrust doctrine is exceedingly conservative, and that legal reform is needed. Two weeks ago, antitrust reform activists ran to Twitter to point out that the U.S. District Court dismissal of the Federal Trade Commission’s (FTC) complaint against Facebook was one more piece of evidence supporting the view that the antitrust pendulum needed to swing. They are instrumental because, again, government (or plaintiffs) wins will support scaling antitrust enforcement in the marginal case by adoption of governmental regulation. In the EU, antitrust cases follow each other almost like night the day, lending credence to the view that regulation will bring much needed coordination and economies of scale.

But both instrumentalities are, at the end of the line, irrelevant, because they lead to the same conclusion: legislative reform is long overdue. With this in mind, the logic of lawmakers is that they need not await the courts, and they can advance with haste and confidence toward the promulgation of new antitrust statutes.

The antitrust reform process that is unfolding is a cause for questioning. The issue is not legal reform in itself. There is no suggestion here that statutory reform is necessarily inferior, and no correlative reification of the judge-made-law method. Legislative intervention can occur for good reason, like when it breaks judicial inertia caused by ideological logjam.

The issue is rather one of precipitation. There is a lot of learning in the cases. The point, simply put, is that a supplementary court-legislative dialogue would yield additional information—or what Guido Calabresi has called “starting points” for regulation—that premature legislative intervention is sweeping under the rug. This issue is important because specification errors (see Doug Melamed’s symposium piece on this) in statutory legislation are not uncommon. Feedback from court cases create a factual record that will often be missing when lawmakers act too precipitously.

Moreover, a court-legislative iteration is useful when the issues in discussion are cross-cutting. The digital economy brings an abundance of them. As tech analysist Ben Evans has observed, data-sharing obligations raise tradeoffs between contestability and privacy. Chapter VI of my book shows that breakups of social networks or search engines might promote rivalry and, at the same time, increase the leverage of advertisers to extract more user data and conduct more targeted advertising. In such cases, Calabresi said, judges who know the legal topography are well-placed to elicit the preferences of society. He added that they are better placed than government agencies’ officials or delegated experts, who often attend to the immediate problem without the big picture in mind (all the more when officials are denied opportunities to engage with civil society and the press, as per the policy announced by the new FTC leadership).

Of course, there are three objections to this. The first consists of arguing that statutes are needed now because courts are too slow to deal with problems. The argument is not dissimilar to Frank Easterbrook’s concerns about irreversible harms to the economy, though with a tweak. Where Easterbook’s concern was one of ossification of Type I errors due to stare decisis, the concern here is one of entrenchment of durable monopoly power in the digital sector due to Type II errors. The concern, however, fails the test of evidence. The available data in both the United States and Europe shows unprecedented vitality in the digital sector. Venture capital funding cruises at historical heights, fueling new firm entry, business creation, and economic dynamism in the U.S. and EU digital sectors, topping all other industries. Unless we require higher levels of entry from digital markets than from other industries—or discount the social value of entry in the digital sector—this should give us reason to push pause on lawmaking efforts.

The second objection is that following an incremental process of updating the law through the courts creates intolerable uncertainty. But this objection, too, is unconvincing, at best. One may ask which of an abrupt legislative change of the law after decades of legal stability or of an experimental process of judicial renovation brings more uncertainty.

Besides, ad hoc statutes, such as the ones in discussion, are likely to pose quickly and dramatically the problem of their own legal obsolescence. Detailed and technical statutes specify rights, requirements, and procedures that often do not stand the test of time. For example, the DMA likely captures Windows as a core platform service subject to gatekeeping. But is the market power of Microsoft over Windows still relevant today, and isn’t it constrained in effect by existing antitrust rules?  In antitrust, vagueness in critical statutory terms allows room for change.[1] The best way to give meaning to buzzwords like “smart” or “future-proof” regulation consists of building in first principles, not in creating discretionary opportunities for permanent adaptation of the law. In reality, it is hard to see how the methods of future-proof regulation currently discussed in the EU creates less uncertainty than a court process.

The third objection is that we do not need more information, because we now benefit from economic knowledge showing that existing antitrust laws are too permissive of anticompetitive business conduct. But is the economic literature actually supportive of stricter rules against defendants than the rule-of-reason framework that applies in many unilateral conduct cases and in merger law? The answer is surely no. The theoretical economic literature has travelled a lot in the past 50 years. Of particular interest are works on network externalities, switching costs, and multi-sided markets. But the progress achieved in the economic understanding of markets is more descriptive than normative.

Take the celebrated multi-sided market theory. The main contribution of the theory is its advice to decision-makers to take the periscope out, so as to consider all possible welfare tradeoffs, not to be more or less defendant friendly. Payment cards provide a good example. Economic research suggests that any antitrust or regulatory intervention on prices affect tradeoffs between, and payoffs to, cardholders and merchants, cardholders and cash users, cardholders and banks, and banks and card systems. Equally numerous tradeoffs arise in many sectors of the digital economy, like ridesharing, targeted advertisement, or social networks. Multi-sided market theory renders these tradeoffs visible. But it does not come with a clear recipe for how to solve them. For that, one needs to follow first principles. A system of measurement that is flexible and welfare-based helps, as Kelly Fayne observed in her critical symposium piece on the book.

Another example might be worth considering. The theory of increasing returns suggests that markets subject to network effects tend to converge around the selection of a single technology standard, and it is not a given that the selected technology is the best one. One policy implication is that social planners might be justified in keeping a second option on the table. As I discuss in Chapter V of my book, the theory may support an M&A ban against platforms in tipped markets, on the conjecture that the assets of fringe firms might be efficiently repositioned to offer product differentiation to consumers. But the theory of increasing returns does not say under what conditions we can know that the selected technology is suboptimal. Moreover, if the selected technology is the optimal one, or if the suboptimal technology quickly obsolesces, are policy efforts at all needed?

Last, as Bo Heiden’s thought provoking symposium piece argues, it is not a given that antitrust enforcement of rivalry in markets is the best way to maintain an alternative technology alive, let alone to supply the innovation needed to deliver economic prosperity. Government procurement, science and technology policy, and intellectual-property policy might be equally effective (note that the fathers of the theory, like Brian Arthur or Paul David, have been very silent on antitrust reform).

There are, of course, exceptions to the limited normative content of modern economic theory. In some areas, economic theory is more predictive of consumer harms, like in relation to algorithmic collusion, interlocking directorates, or “killer” acquisitions. But the applications are discrete and industry-specific. All are insufficient to declare that the antitrust apparatus is dated and that it requires a full overhaul. When modern economic research turns normative, it is often way more subtle in its implications than some wild policy claims derived from it. For example, the emerging studies that claim to identify broad patterns of rising market power in the economy in no way lead to an implication that there are no pro-competitive mergers.

Similarly, the empirical picture of digital markets is incomplete. The past few years have seen a proliferation of qualitative research reports on industry structure in the digital sectors. Most suggest that industry concentration has risen, particularly in the digital sector. As with any research exercise, these reports’ findings deserve to be subject to critical examination before they can be deemed supportive of a claim of “sufficient experience.” Moreover, there is no reason to subject these reports to a lower standard of accountability on grounds that they have often been drafted by experts upon demand from antitrust agencies. After all, we academics are ethically obliged to be at least equally exacting with policy-based research as we are with science-based research.

Now, with healthy skepticism at the back of one’s mind, one can see immediately that the findings of expert reports to date have tended to downplay behavioral observations that counterbalance findings of monopoly power—such as intense business anxiety, technological innovation, and demand-expansion investments in digital markets. This was, I believe, the main takeaway from Chapter IV of my book. And less than six months ago, The Economist ran its leading story on the new marketplace reality of “Tech’s Big Dust-Up.”

More importantly, the findings of the various expert reports never seriously contemplate the possibility of competition by differentiation in business models among the platforms. Take privacy, for example. As Peter Klein reasonably writes in his symposium article, we should not be quick to assume market failure. After all, we might have more choice than meets the eye, with Google free but ad-based, and Apple pricy but less-targeted. More generally, Richard Langlois makes a very convincing point that diversification is at the heart of competition between the large digital gatekeepers. We might just be too short-termist—here, digital communications technology might help create a false sense of urgency—to wait for the end state of the Big Tech moligopoly.

Similarly, the expert reports did not really question the real possibility of competition for the purchase of regulation. As in the classic George Stigler paper, where the railroad industry fought motor-trucking competition with state regulation, the businesses that stand to lose most from the digital transformation might be rationally jockeying to convince lawmakers that not all business models are equal, and to steer regulation toward specific business models. Again, though we do not know how to consider this issue, there are signs that a coalition of large news corporations and the publishing oligopoly are behind many antitrust initiatives against digital firms.

Now, as is now clear from these few lines, my cautionary note against antitrust statutorification might be more relevant to the U.S. market. In the EU, sunk investments have been made, expectations have been created, and regulation has now become inevitable. The United States, however, has a chance to get this right. Court cases are the way to go. And unlike what the popular coverage suggests, the recent District Court dismissal of the FTC case far from ruled out the applicability of U.S. antitrust laws to Facebook’s alleged killer acquisitions. On the contrary, the ruling actually contains an invitation to rework a rushed complaint. Perhaps, as Shane Greenstein observed in his retrospective analysis of the U.S. Microsoft case, we would all benefit if we studied more carefully the learning that lies in the cases, rather than haste to produce instant antitrust analysis on Twitter that fits within 280 characters.


[1] But some threshold conditions like agreement or dominance might also become dated. 

The Biden Administration’s July 9 Executive Order on Promoting Competition in the American Economy is very much a mixed bag—some positive aspects, but many negative ones.

It will have some positive effects on economic welfare, to the extent it succeeds in lifting artificial barriers to competition that harm consumers and workers—such as allowing direct sales of hearing aids in drug stores—and helping to eliminate unnecessary occupational licensing restrictions, to name just two of several examples.

But it will likely have substantial negative effects on economic welfare as well. Many aspects of the order appear to emphasize new regulation—such as Net Neutrality requirements that may reduce investment in broadband by internet service providers—and imposing new regulatory requirements on airlines, pharmaceutical companies, digital platforms, banks, railways, shipping, and meat packers, among others. Arbitrarily imposing new rules in these areas, without a cost-beneficial appraisal and a showing of a market failure, threatens to reduce innovation and slow economic growth, hurting producers and consumer. (A careful review of specific regulatory proposals may shed greater light on the justifications for particular regulations.)

Antitrust-related proposals to challenge previously cleared mergers, and to impose new antitrust rulemaking, are likely to raise costly business uncertainty, to the detriment of businesses and consumers. They are a recipe for slower economic growth, not for vibrant competition.

An underlying problem with the order is that it is based on the false premise that competition has diminished significantly in recent decades and that “big is bad.” Economic analysis found in the February 2020 Economic Report of the President, and in other economic studies, debunks this flawed assumption.

In short, the order commits the fundamental mistake of proposing intrusive regulatory solutions for a largely nonexistent problem. Competitive issues are best handled through traditional well-accepted antitrust analysis, which centers on promoting consumer welfare and on weighing procompetitive efficiencies against anticompetitive harm on a case-by-case basis. This approach:

  1. Deals effectively with serious competitive problems; while at the same time
  2. Cabining error costs by taking into account all economically relevant considerations on a case-specific basis.

Rather than using an executive order to direct very specific regulatory approaches without a strong economic and factual basis, the Biden administration would have been better served by raising a host of competitive issues that merit possible study and investigation by expert agencies. Such an approach would have avoided imposing the costs of unwarranted regulation that unfortunately are likely to stem from the new order.

Finally, the order’s call for new regulations and the elimination of various existing legal policies will spawn matter-specific legal challenges, and may, in many cases, not succeed in court. This will impose unnecessary business uncertainty in addition to public and private resources wasted on litigation.

Advocates of legislative action to “reform” antitrust law have already pointed to the U.S. District Court for the District of Columbia’s dismissal of the state attorneys general’s case and the “conditional” dismissal of the Federal Trade Commission’s case against Facebook as evidence that federal antitrust case law is lax and demands correction. In fact, the court’s decisions support the opposite implication. 

The Risks of Antitrust by Anecdote

The failure of a well-resourced federal regulator, and more than 45 state attorney-general offices, to avoid dismissal at an early stage of the litigation testifies to the dangers posed by a conclusory approach toward antitrust enforcement that seeks to unravel acquisitions consummated almost a decade ago without even demonstrating the factual predicates to support consideration of such far-reaching interventions. The dangers to the rule of law are self-evident. Irrespective of one’s views on the appropriate direction of antitrust law, this shortcut approach would substitute prosecutorial fiat, ideological predilection, and popular sentiment for decades of case law and agency guidelines grounded in the rigorous consideration of potential evidence of competitive harm. 

The paucity of empirical support for the exceptional remedial action sought by the FTC is notable. As the district court observed, there was little systematic effort made to define the economically relevant market or provide objective evidence of market power, beyond the assertion that Facebook has a market share of “in excess of 60%.” Remarkably, the denominator behind that 60%-plus assertion is not precisely defined, since the FTC’s brief does not supply any clear metric by which to measure market share. As the court pointed out, this is a nontrivial task in multi-sided environments in which one side of the potentially relevant market delivers services to users at no charge.  

While the point may seem uncontroversial, it is important to re-appreciate why insisting on a rigorous demonstration of market power is critical to preserving a coherent body of law that provides the market with a basis for reasonably anticipating the likelihood of antitrust intervention. At least since the late 1970s, courts have recognized that “big is not always bad” and can often yield cost savings that ultimately redound to consumers’ benefit. That is: firm size and consumer welfare do not stand in inherent opposition. If courts were to abandon safeguards against suits that cannot sufficiently define the relevant market and plausibly show market power, antitrust litigation could easily be used as a tool to punish successful firms that prevail over competitors simply by being more efficient. In other words: antitrust law could become a tool to preserve competitor welfare at the expense of consumer welfare.

The Specter of No-Fault Antitrust Liability

The absence of any specific demonstration of market power suggests deficient lawyering or the inability to gather supporting evidence. Giving the FTC litigation team the benefit of the doubt, the latter becomes the stronger possibility. If that is the case, this implies an effort to persuade courts to adopt a de facto rule of per se illegality for any firm that achieves a certain market share. (The same concept lies behind legislative proposals to bar acquisitions for firms that cross a certain revenue or market capitalization threshold.) Effectively, any firm that reached a certain size would operate under the presumption that it has market power and has secured or maintained such power due to anticompetitive practices, rather than business prowess. This would effectively convert leading digital platforms into quasi-public utilities subject to continuous regulatory intervention. Such an approach runs counter to antitrust law’s mission to preserve, rather than displace, private ordering by market forces.  

Even at the high-water point of post-World War II antitrust zealotry (a period that ultimately ended in economic malaise), proposals to adopt a rule of no-fault liability for alleged monopolization were rejected. This was for good reason. Any such rule would likely injure consumers by precluding them from enjoying the cost savings that result from the “sweet spot” scenario in which the scale and scope economies of large firms are combined with sufficiently competitive conditions to yield reduced prices and increased convenience for consumers. Additionally, any such rule would eliminate incumbents’ incentives to work harder to offer consumers reduced prices and increased convenience, since any market share preserved or acquired as a result would simply invite antitrust scrutiny as a reward.

Remembering Why Market Power Matters

To be clear, this is not to say that “Big Tech” does not deserve close antitrust scrutiny, does not wield market power in certain segments, or has not potentially engaged in anticompetitive practices.  The fundamental point is that assertions of market power and anticompetitive conduct must be demonstrated, rather than being assumed or “proved” based largely on suggestive anecdotes.  

Perhaps market power will be shown sufficiently in Facebook’s case if the FTC elects to respond to the court’s invitation to resubmit its brief with a plausible definition of the relevant market and indication of market power at this stage of the litigation. If that threshold is satisfied, then thorough consideration of the allegedly anticompetitive effect of Facebook’s WhatsApp and Instagram acquisitions may be merited. However, given the policy interest in preserving the market’s confidence in relying on the merger-review process under the Hart-Scott-Rodino Act, the burden of proof on the government should be appropriately enhanced to reflect the significant time that has elapsed since regulatory decisions not to intervene in those transactions.  

It would once have seemed mundane to reiterate that market power must be reasonably demonstrated to support a monopolization claim that could lead to a major divestiture remedy. Given the populist thinking that now leads much of the legislative and regulatory discussion on antitrust policy, it is imperative to reiterate the rationale behind this elementary principle. 

This principle reflects the fact that, outside collusion scenarios, antitrust law is typically engaged in a complex exercise to balance the advantages of scale against the risks of anticompetitive conduct. At its best, antitrust law weighs competing facts in a good faith effort to assess the net competitive harm posed by a particular practice. While this exercise can be challenging in digital markets that naturally converge upon a handful of leading platforms or multi-dimensional markets that can have offsetting pro- and anti-competitive effects, these are not reasons to treat such an exercise as an anachronistic nuisance. Antitrust cases are inherently challenging and proposed reforms to make them easier to win are likely to endanger, rather than preserve, competitive markets.

There is little doubt that Federal Trade Commission (FTC) unfair methods of competition rulemaking proceedings are in the offing. Newly named FTC Chair Lina Khan and Commissioner Rohit Chopra both have extolled the benefits of competition rulemaking in a major law review article. What’s more, in May, Commissioner Rebecca Slaughter (during her stint as acting chair) established a rulemaking unit in the commission’s Office of General Counsel empowered to “explore new rulemakings to prohibit unfair or deceptive practices and unfair methods of competition” (emphasis added).

In short, a majority of sitting FTC commissioners apparently endorse competition rulemaking proceedings. As such, it is timely to ask whether FTC competition rules would promote consumer welfare, the paramount goal of competition policy.

In a recently published Mercatus Center research paper, I assess the case for competition rulemaking from a competition perspective and find it wanting. I conclude that, before proceeding, the FTC should carefully consider whether such rulemakings would be cost-beneficial. I explain that any cost-benefit appraisal should weigh both the legal risks and the potential economic policy concerns (error costs and “rule of law” harms). Based on these considerations, competition rulemaking is inappropriate. The FTC should stick with antitrust enforcement as its primary tool for strengthening the competitive process and thereby promoting consumer welfare.

A summary of my paper follows.

Section 6(g) of the original Federal Trade Commission Act authorizes the FTC “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” Section 6(g) rules are enacted pursuant to the “informal rulemaking” requirements of Section 553 of the Administrative Procedures Act (APA), which apply to the vast majority of federal agency rulemaking proceedings.

Before launching Section 6(g) competition rulemakings, however, the FTC would be well-advised first to weigh the legal risks and policy concerns associated with such an endeavor. Rulemakings are resource-intensive proceedings and should not lightly be undertaken without an eye to their feasibility and implications for FTC enforcement policy.

Only one appeals court decision addresses the scope of Section 6(g) rulemaking. In 1971, the FTC enacted a Section 6(g) rule stating that it was both an “unfair method of competition” and an “unfair act or practice” for refiners or others who sell to gasoline retailers “to fail to disclose clearly and conspicuously in a permanent manner on the pumps the minimum octane number or numbers of the motor gasoline being dispensed.” In 1973, in the National Petroleum Refiners case, the U.S. Court of Appeals for the D.C. Circuit upheld the FTC’s authority to promulgate this and other binding substantive rules. The court rejected the argument that Section 6(g) authorized only non-substantive regulations concerning regarding the FTC’s non-adjudicatory, investigative, and informative functions, spelled out elsewhere in Section 6.

In 1975, two years after National Petroleum Refiners was decided, Congress granted the FTC specific consumer-protection rulemaking authority (authorizing enactment of trade regulation rules dealing with unfair or deceptive acts or practices) through Section 202 of the Magnuson-Moss Warranty Act, which added Section 18 to the FTC Act. Magnuson-Moss rulemakings impose adjudicatory-type hearings and other specific requirements on the FTC, unlike more flexible section 6(g) APA informal rulemakings. However, the FTC can obtain civil penalties for violation of Magnuson-Moss rules, something it cannot do if 6(g) rules are violated.

In a recent set of public comments filed with the FTC, the Antitrust Section of the American Bar Association stated:

[T]he Commission’s [6(g)] rulemaking authority is buried in within an enumerated list of investigative powers, such as the power to require reports from corporations and partnerships, for example. Furthermore, the [FTC] Act fails to provide any sanctions for violating any rule adopted pursuant to Section 6(g). These two features strongly suggest that Congress did not intend to give the agency substantive rulemaking powers when it passed the Federal Trade Commission Act.

Rephrased, this argument suggests that the structure of the FTC Act indicates that the rulemaking referenced in Section 6(g) is best understood as an aid to FTC processes and investigations, not a source of substantive policymaking. Although the National Petroleum Refiners decision rejected such a reading, that ruling came at a time of significant judicial deference to federal agency activism, and may be dated.

The U.S. Supreme Court’s April 2021 decision in AMG Capital Management v. FTC further bolsters the “statutory structure” argument that Section 6(g) does not authorize substantive rulemaking. In AMG, the U.S. Supreme Court unanimously held that Section 13(b) of the FTC Act, which empowers the FTC to seek a “permanent injunction” to restrain an FTC Act violation, does not authorize the FTC to seek monetary relief from wrongdoers. The court’s opinion rejected the FTC’s argument that the term “permanent injunction” had historically been understood to include monetary relief. The court explained that the injunctive language was “buried” in a lengthy provision that focuses on injunctive, not monetary relief (note that the term “rules” is similarly “buried” within 6(g) language dealing with unrelated issues). The court also pointed to the structure of the FTC Act, with detailed and specific monetary-relief provisions found in Sections 5(l) and 19, as “confirm[ing] the conclusion” that Section 13(b) does not grant monetary relief.

By analogy, a court could point to Congress’ detailed enumeration of substantive rulemaking provisions in Section 18 (a mere two years after National Petroleum Refiners) as cutting against the claim that Section 6(g) can also be invoked to support substantive rulemaking. Finally, the Supreme Court in AMG flatly rejected several relatively recent appeals court decisions that upheld Section 13(b) monetary-relief authority. It follows that the FTC cannot confidently rely on judicial precedent (stemming from one arguably dated court decision, National Petroleum Refiners) to uphold its competition rulemaking authority.

In sum, the FTC will have to overcome serious fundamental legal challenges to its section 6(g) competition rulemaking authority if it seeks to promulgate competition rules.

Even if the FTC’s 6(g) authority is upheld, it faces three other types of litigation-related risks.

First, applying the nondelegation doctrine, courts might hold that the broad term “unfair methods of competition” does not provide the FTC “an intelligible principle” to guide the FTC’s exercise of discretion in rulemaking. Such a judicial holding would mean the FTC could not issue competition rules.

Second, a reviewing court might strike down individual proposed rules as “arbitrary and capricious” if, say, the court found that the FTC rulemaking record did not sufficiently take into account potentially procompetitive manifestations of a condemned practice.

Third, even if a final competition rule passes initial legal muster, applying its terms to individual businesses charged with rule violations may prove difficult. Individual businesses may seek to structure their conduct to evade the particular strictures of a rule, and changes in commercial practices may render less common the specific acts targeted by a rule’s language.

Economic Policy Concerns Raised by Competition Rulemaking

In addition to legal risks, any cost-benefit appraisal of FTC competition rulemaking should consider the economic policy concerns raised by competition rulemaking. These fall into two broad categories.

First, competition rules would generate higher error costs than adjudications. Adjudications cabin error costs by allowing for case-specific analysis of likely competitive harms and procompetitive benefits. In contrast, competition rules inherently would be overbroad and would suffer from a very high rate of false positives. By characterizing certain practices as inherently anticompetitive without allowing for consideration of case-specific facts bearing on actual competitive effects, findings of rule violations inevitably would condemn some (perhaps many) efficient arrangements.

Second, competition rules would undermine the rule of law and thereby reduce economic welfare. FTC-only competition rules could lead to disparate legal treatment of a firm’s business practices, depending upon whether the FTC or the U.S. Justice Department was the investigating agency. Also, economic efficiency gains could be lost due to the chilling of aggressive efficiency-seeking business arrangements in those sectors subject to rules.

Conclusion

A combination of legal risks and economic policy harms strongly counsels against the FTC’s promulgation of substantive competition rules.

First, litigation issues would consume FTC resources and add to the costly delays inherent in developing competition rules in the first place. The compounding of separate serious litigation risks suggests a significant probability that costs would be incurred in support of rules that ultimately would fail to be applied.

Second, even assuming competition rules were to be upheld, their application would raise serious economic policy questions. The inherent inflexibility of rule-based norms is ill-suited to deal with dynamic evolving market conditions, compared with matter-specific antitrust litigation that flexibly applies the latest economic thinking to particular circumstances. New competition rules would also exacerbate costly policy inconsistencies stemming from the existence of dual federal antitrust enforcement agencies, the FTC and the Justice Department.

In conclusion, an evaluation of rule-related legal risks and economic policy concerns demonstrates that a reallocation of some FTC enforcement resources to the development of competition rules would not be cost-effective. Continued sole reliance on case-by-case antitrust litigation would generate greater economic welfare than a mixture of litigation and competition rules.

The recent launch of the international Multilateral Pharmaceutical Merger Task Force (MPMTF) is just the latest example of burgeoning cooperative efforts by leading competition agencies to promote convergence in antitrust enforcement. (See my recent paper on the globalization of antitrust, which assesses multinational cooperation and convergence initiatives in greater detail.) In what is a first, the U.S. Federal Trade Commission (FTC), the U.S. Justice Department’s (DOJ) Antitrust Division, offices of state Attorneys General, the European Commission’s Competition Directorate, Canada’s Competition Bureau, and the U.K.’s Competition and Market Authority (CMA) jointly created the MPMTF in March 2021 “to update their approach to analyzing the effects of pharmaceutical mergers.”

To help inform its analysis, in May 2021 the MPMTF requested public comments concerning the effects of pharmaceutical mergers. The MPMTF sought submissions regarding (among other issues) seven sets of questions:   

  1. What theories of harm should enforcement agencies consider when evaluating pharmaceutical mergers, including theories of harm beyond those currently considered?
  2. What is the full range of a pharmaceutical merger’s effects on innovation? What challenges arise when mergers involve proprietary drug discovery and manufacturing platforms?
  3. In pharmaceutical merger review, how should we consider the risks or effects of conduct such as price-setting practices, reverse payments, and other ways in which pharmaceutical companies respond to or rely on regulatory processes?
  4. How should we approach market definition in pharmaceutical mergers, and how is that implicated by new or evolving theories of harm?
  5. What evidence may be relevant or necessary to assess and, if applicable, challenge a pharmaceutical merger based on any new or expanded theories of harm?
  6. What types of remedies would work in the cases to which those theories are applied?
  7. What factors, such as the scope of assets and characteristics of divestiture buyers, influence the likelihood and success of pharmaceutical divestitures to resolve competitive concerns?

My research assistant Andrew Mercado and I recently submitted comments for the record addressing the questions posed by the MPMTF. We concluded:

Federal merger enforcement in general and FTC pharmaceutical merger enforcement in particular have been effective in promoting competition and consumer welfare. Proposed statutory amendments to strengthen merger enforcement not only are unnecessary, but also would, if enacted, tend to undermine welfare and would thus be poor public policy. A brief analysis of seven questions propounded by the Multilateral Pharmaceutical Merger Task Force suggests that: (a) significant changes in enforcement policies are not warranted; and (b) investigators should employ sound law and economics analysis, taking full account of merger-related efficiencies, when evaluating pharmaceutical mergers. 

While we leave it to interested readers to review our specific comments, this commentary highlights one key issue which we stressed—the importance of giving due weight to efficiencies (and, in particular, dynamic efficiencies) in evaluating pharma mergers. We also note an important critique by FTC Commissioner Christine Wilson of the treatment accorded merger-related efficiencies by U.S. antitrust enforcers.   

Discussion

Innovation in pharmaceuticals and vaccines has immensely significant economic and social consequences, as demonstrated most recently in the handling of the COVID-19 pandemic. As such, it is particularly important that public policy not stand in the way of realizing efficiencies that promote innovation in these markets. This observation applies directly, of course, to pharmaceutical antitrust enforcement, in general, and to pharma merger enforcement, in particular.

Regrettably, however, though general merger-enforcement policy has been generally sound, it has somewhat undervalued merger-related efficiencies.

Although U.S. antitrust enforcers give lip service to their serious consideration of efficiencies in merger reviews, the reality appears to be quite different, as documented by Commissioner Wilson in a 2020 speech.

Wilson’s General Merger-Efficiencies Critique: According to Wilson, the combination of finding narrow markets and refusing to weigh out-of-market efficiencies has created major “legal and evidentiary hurdles a defendant must clear when seeking to prove offsetting procompetitive efficiencies.” What’s more, the “courts [have] largely continue[d] to follow the Agencies’ lead in minimizing the importance of efficiencies.” Wilson shows that “the Horizontal Merger Guidelines text and case law appear to set different standards for demonstrating harms and efficiencies,” and argues that this “asymmetric approach has the obvious potential consequence of preventing some procompetitive mergers that increase consumer welfare.” Wilson concludes on a more positive note that this problem can be addressed by having enforcers: (1) treat harms and efficiencies symmetrically; and (2) establish clear and reasonable expectations for what types of efficiency analysis will and will not pass muster.

While our filing with the MPMTF did not discuss Wilson’s general treatment of merger efficiencies, one would hope that the task force will appropriately weigh it in its deliberations. Our filing instead briefly addressed two “informational efficiencies” that may arise in the context of pharmaceutical mergers. These include:

More Efficient Resource Reallocation: The theory of the firm teaches that mergers may be motivated by the underutilization or misallocation of assets, or the opportunity to create welfare-enhancing synergies. In the pharmaceutical industry, these synergies may come from joining complementary research and development programs, combining diverse and specialized expertise that may be leveraged for better, faster drug development and more innovation.

Enhanced R&D: Currently, much of the R&D for large pharmaceutical companies is achieved through partnerships or investment in small biotechnology and research firms specializing in a single type of therapy. Whereas large pharmaceutical companies have expertise in marketing, navigating regulation, and undertaking trials of new drugs, small, research-focused firms can achieve greater advancements in medicine with smaller budgets. Furthermore, changes within firms brought about by a merger may increase innovation.

With increases in intellectual property and proprietary data that come from the merging of two companies, smaller research firms that work with the merged entity may have access to greater pools of information, enhancing the potential for innovation without increasing spending. This change not only raises the efficiency of the research being conducted in these small firms, but also increases the probability of a breakthrough without an increase in risk.

Conclusion

U.S. pharmaceutical merger enforcement has been fairly effective in forestalling anticompetitive combinations while allowing consumer welfare-enhancing transactions to go forward. Policy in this area should remain generally the same. Enforcers should continue to base enforcement decisions on sound economic theory fully supported by case-specific facts. Enforcement agencies could benefit, however, by placing a greater emphasis on efficiencies analysis. In particular, they should treat harms and efficiencies symmetrically (as recommend by Commissioner Wilson), and fully take into account likely resource reallocation and innovation-related efficiencies. 

PHOTO: C-Span

Lina Khan’s appointment as chair of the Federal Trade Commission (FTC) is a remarkable accomplishment. At 32 years old, she is the youngest chair ever. Her longstanding criticisms of the Consumer Welfare Standard and alignment with the neo-Brandeisean school of thought make her appointment a significant achievement for proponents of those viewpoints. 

Her appointment also comes as House Democrats are preparing to mark up five bills designed to regulate Big Tech and, in the process, vastly expand the FTC’s powers. This expansion may combine with Khan’s appointment in ways that lawmakers considering the bills have not yet considered.

This is a critical time for the FTC. It has lost a number of high-profile lawsuits and is preparing to expand its rulemaking powers to regulate things like employment contracts and businesses’ use of data. Khan has also argued in favor of additional rulemaking powers around “unfair methods of competition.”

As things stand, the FTC under Khan’s leadership is likely to push for more extensive regulatory powers, akin to those held by the Federal Communications Commission (FCC). But these expansions would be trivial compared to what is proposed by many of the bills currently being prepared for a June 23 mark-up in the House Judiciary Committee. 

The flagship bill—Rep. David Cicilline’s (D-R.I.) American Innovation and Choice Online Act—is described as a platform “non-discrimination” bill. I have already discussed what the real-world effects of this bill would likely be. Briefly, it would restrict platforms’ ability to offer richer, more integrated services at all, since those integrations could be challenged as “discrimination” at the cost of would-be competitors’ offerings. Things like free shipping on Amazon Prime, pre-installed apps on iPhones, or even including links to Gmail and Google Calendar at the top of a Google Search page could be precluded under the bill’s terms; in each case, there is a potential competitor being undermined. 

In fact, the bill’s scope is so broad that some have argued that the FTC simply would not challenge “innocuous self-preferencing” like, say, Apple pre-installing Apple Music on iPhones. Economist Hal Singer has defended the proposals on the grounds that, “Due to limited resources, not all platform integration will be challenged.” 

But this shifts the focus to the FTC itself, and implies that it would have potentially enormous discretionary power under these proposals to enforce the law selectively. 

Companies found guilty of breaching the bill’s terms would be liable for civil penalties of up to 15 percent of annual U.S. revenue, a potentially significant sum. And though the Supreme Court recently ruled unanimously against the FTC’s powers to levy civil fines unilaterally—which the FTC opposed vociferously, and may get restored by other means—there are two scenarios through which it could end up getting extraordinarily extensive control over the platforms covered by the bill.

The first course is through selective enforcement. What Singer above describes as a positive—the fact that enforcers would just let “benign” violations of the law be—would mean that the FTC itself would have tremendous scope to choose which cases it brings, and might do so for idiosyncratic, politicized reasons.

This approach is common in countries with weak rule of law. Anti-corruption laws are frequently used to punish opponents of the regime in China, who probably are also corrupt, but are prosecuted because they have challenged the regime in some way. Hong Kong’s National Security law has also been used to target peaceful protestors and critical media thanks to its vague and overly broad drafting. 

Obviously, that’s far more sinister than what we’re talking about here. But these examples highlight how excessively broad laws applied at the enforcer’s discretion give broad powers to the enforcer to penalize defendants for other, unrelated things. Or, to quote Jay-Z: “Am I under arrest or should I guess some more? / ‘Well, you was doing 55 in a 54.’

The second path would be to use these powers as leverage to get broad consent decrees to govern the conduct of covered platforms. These occur when a lawsuit is settled, with the defendant company agreeing to change its business practices under supervision of the plaintiff agency (in this case, the FTC). The Cambridge Analytica lawsuit ended this way, with Facebook agreeing to change its data-sharing practices under the supervision of the FTC. 

This path would mean the FTC creating bespoke, open-ended regulation for each covered platform. Like the first path, this could create significant scope for discretionary decision-making by the FTC and potentially allow FTC officials to impose their own, non-economic goals on these firms. And it would require costly monitoring of each firm subject to bespoke regulation to ensure that no breaches of that regulation occurred.

Khan, as a critic of the Consumer Welfare Standard, believes that antitrust ought to be used to pursue non-economic objectives, including “the dispersion of political and economic control.” She, and the FTC under her, may wish to use this discretionary power to prosecute firms that she feels are hurting society for unrelated reasons, such as because of political stances they have (or have not) taken.

Khan’s fellow commissioner, Rebecca Kelly Slaughter, has argued that antitrust should be “antiracist”; that “as long as Black-owned businesses and Black consumers are systematically underrepresented and disadvantaged, we know our markets are not fair”; and that the FTC should consider using its existing rulemaking powers to address racist practices. These may be desirable goals, but their application would require contentious value judgements that lawmakers may not want the FTC to make.

Khan herself has been less explicit about the goals she has in mind, but has given some hints. In her essay “The Ideological Roots of America’s Market Power Problem”, Khan highlights approvingly former Associate Justice William O. Douglas’s account of:

“economic power as inextricably political. Power in industry is the power to steer outcomes. It grants outsized control to a few, subjecting the public to unaccountable private power—and thereby threatening democratic order. The account also offers a positive vision of how economic power should be organized (decentralized and dispersed), a recognition that forms of economic power are not inevitable and instead can be restructured.” [italics added]

Though I have focused on Cicilline’s flagship bill, others grant significant new powers to the FTC, as well. The data portability and interoperability bill doesn’t actually define what “data” is; it leaves it to the FTC to “define the term ‘data’ for the purpose of implementing and enforcing this Act.” And, as I’ve written elsewhere, data interoperability needs significant ongoing regulatory oversight to work at all, a responsibility that this bill also hands to the FTC. Even a move as apparently narrow as data portability will involve a significant expansion of the FTC’s powers and give it a greater role as an ongoing economic regulator.

It is concerning enough that this legislative package would prohibit conduct that is good for consumers, and that actually increases the competition faced by Big Tech firms. Congress should understand that it also gives extensive discretionary powers to an agency intent on using them to pursue broad, political goals. If Khan’s appointment as chair was a surprise, what her FTC does with the new powers given to her by Congress should not be.