Archives For Administrative Law

A White House administration typically announces major new antitrust initiatives in the fall and spring, and this year is no exception. Senior Biden administration officials kicked off the fall season at Fordham Law School (more on that below) by shedding additional light on their plans to expand the accepted scope of antitrust enforcement.

Their aggressive enforcement statements draw headlines, but will the administration’s neo-Brandeisians actually notch enforcement successes? The prospects are cloudy, to say the least.

The U.S. Justice Department (DOJ) has lost some cartel cases in court this year (what was the last time that happened?) and, on Sept. 19, a federal judge rejected the DOJ’s attempt to enjoin United Health’s $13.8 billion bid for Change Healthcare. The Federal Trade Commission (FTC) recently lost two merger challenges before its in-house administrative law judge. It now faces a challenge to its administrative-enforcement processes before the U.S. Supreme Court (the Axon case, to be argued in November).

(Incidentally, on the other side of the Atlantic, the European Commission has faced some obstacles itself. Despite its recent Google victory, the Commission has effectively lost two abuse of dominance cases this year—the Intel and Qualcomm matters—before the European General Court.)

So, are the U.S. antitrust agencies chastened? Will they now go back to basics? Far from it. They enthusiastically are announcing plans to charge ahead, asserting theories of antitrust violations that have not been taken seriously for decades, if ever. Whether this turns out to be wise enforcement policy remains to be seen, but color me highly skeptical. Let’s take a quick look at some of the big enforcement-policy ideas that are being floated.

Fordham Law’s Antitrust Conference

Admiral David Farragut’s order “Damn the torpedoes, full speed ahead!” was key to the Union Navy’s August 1864 victory in the Battle of Mobile Bay, a decisive Civil War clash. Perhaps inspired by this display of risk-taking, the heads of the two federal antitrust agencies—DOJ Assistant Attorney General (AAG) Jonathan Kanter and FTC Chair Lina Khan—took a “damn the economics, full speed ahead” attitude in remarks at the Sept. 16 session of Fordham Law School’s 49th Annual Conference on International Antitrust Law and Policy. Special Assistant to the President Tim Wu was also on hand and emphasized the “all of government” approach to competition policy adopted by the Biden administration.

In his remarks, AAG Kanter seemed to be endorsing a “monopoly broth” argument in decrying the current “Whac-a-Mole” approach to monopolization cases. The intent may be to lessen the burden of proof of anticompetitive effects, or to bring together a string of actions taken jointly as evidence of a Section 2 violation. In taking such an approach, however, there is a serious risk that efficiency-seeking actions may be mistaken for exclusionary tactics and incorrectly included in the broth. (Notably, the U.S. Court of Appeals for the D.C. Circuit’s 2001 Microsoft opinion avoided the monopoly-broth problem by separately discussing specific company actions and weighing them on their individual merits, not as part of a general course of conduct.)

Kanter also recommended going beyond “our horizontal and vertical framework” in merger assessments, despite the fact that vertical mergers (involving complements) are far less likely to be anticompetitive than horizontal mergers (involving substitutes).

Finally, and perhaps most problematically, Kanter endorsed the American Innovative and Choice Online Act (AICOA), citing the protection it would afford “would-be competitors” (but what about consumers?). In so doing, the AAG ignored the fact that AICOA would prohibit welfare-enhancing business conduct and could be harmfully construed to ban mere harm to rivals (see, for example, Stanford professor Doug Melamed’s trenchant critique).

Chair Khan’s presentation, which called for a far-reaching “course correction” in U.S. antitrust, was even more bold and alarming. She announced plans for a new FTC Act Section 5 “unfair methods of competition” (UMC) policy statement centered on bringing “standalone” cases not reachable under the antitrust laws. Such cases would not consider any potential efficiencies and would not be subject to the rule of reason. Endorsing that approach amounts to an admission that economic analysis will not play a serious role in future FTC UMC assessments (a posture that likely will cause FTC filings to be viewed skeptically by federal judges).

In noting the imminent release of new joint DOJ-FTC merger guidelines, Khan implied that they would be animated by an anti-merger philosophy. She cited “[l]awmakers’ skepticism of mergers” and congressional rejection “of economic debits and credits” in merger law. Khan thus asserted that prior agency merger guidance had departed from the law. I doubt, however, that many courts will be swayed by this “economics free” anti-merger revisionism.

Tim Wu’s remarks closing the Fordham conference had a “big picture” orientation. In an interview with GW Law’s Bill Kovacic, Wu briefly described the Biden administration’s “whole of government” approach, embodied in President Joe Biden’s July 2021 Executive Order on Promoting Competition in the American Economy. While the order’s notion of breaking down existing barriers to competition across the American economy is eminently sound, many of those barriers are caused by government restrictions (not business practices) that are not even alluded to in the order.

Moreover, in many respects, the order seeks to reregulate industries, misdiagnosing many phenomena as business abuses that actually represent efficient free-market practices (as explained by Howard Beales and Mark Jamison in a Sept. 12 Mercatus Center webinar that I moderated). In reality, the order may prove to be on net harmful, rather than beneficial, to competition.

Conclusion

What is one to make of the enforcement officials’ bold interventionist screeds? What seems to be missing in their presentations is a dose of humility and pragmatism, as well as appreciation for consumer welfare (scarcely mentioned in the agency heads’ presentations). It is beyond strange to see agencies that are having problems winning cases under conventional legal theories floating novel far-reaching initiatives that lack a sound economics foundation.

It is also amazing to observe the downplaying of consumer welfare by agency heads, given that, since 1979 (in Reiter v. Sonotone), the U.S. Supreme Court has described antitrust as a “consumer welfare prescription.” Unless there is fundamental change in the makeup of the federal judiciary (and, in particular, the Supreme Court) in the very near future, the new unconventional theories are likely to fail—and fail badly—when tested in court. 

Bringing new sorts of cases to test enforcement boundaries is, of course, an entirely defensible role for U.S. antitrust leadership. But can the same thing be said for bringing “non-boundary” cases based on theories that would have been deemed far beyond the pale by both Republican and Democratic officials just a few years ago? Buckle up: it looks as if we are going to find out. 

[This post from Jonathan M. Barnett, the Torrey H. Webb Professor of Law at the University of Southern California’s Gould School of Law, is an entry in Truth on the Market’s FTC UMC Rulemaking symposium. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

In its Advance Notice for Proposed Rulemaking (ANPR) on Commercial Surveillance and Data Security, the Federal Trade Commission (FTC) has requested public comment on an unprecedented initiative to promulgate and implement wide-ranging rules concerning the gathering and use of consumer data in digital markets. In this contribution, I will assume, for the sake of argument, that the commission has the legal authority to exercise its purported rulemaking powers for this purpose without a specific legislative mandate (a question as to which I recognize there is great uncertainty, which is further heightened by the fact that Congress is concurrently considered legislation in the same policy area).

In considering whether to use these powers for the purposes of adopting and implementing privacy-related regulations in digital markets, the commission would be required to undertake a rigorous assessment of the expected costs and benefits of any such regulation. Any such cost-benefit analysis must comprise at least two critical elements that are omitted from, or addressed in highly incomplete form in, the ANPR.

The Hippocratic Oath of Regulatory Intervention

There is a longstanding consensus that regulatory intervention is warranted only if a market failure can be identified with reasonable confidence. This principle is especially relevant in the case of the FTC, which is entrusted with preserving competitive markets and, therefore, should be hesitant about intervening in market transactions without a compelling evidentiary basis. As a corollary to this proposition, it is also widely agreed that implementing any intervention to correct a market failure would only be warranted to the extent that such intervention would be reasonably expected to correct any such failure at a net social gain.

This prudent approach tracks the “economic effect” analysis that the commission must apply in the rulemaking process contemplated under the Federal Trade Commission Act and the analysis of “projected benefits and … adverse economic effects” of proposed and final rules contemplated by the commission’s rules of practice. Consistent with these requirements, the commission has exhibited a longstanding commitment to thorough cost-benefit analysis. As observed by former Commissioner Julie Brill in 2016, “the FTC conducts its rulemakings with the same level of attention to costs and benefits that is required of other agencies.” Former Commissioner Brill also observed that the “FTC combines our broad mandate to protect consumers with a rigorous, empirical approach to enforcement matters.”

This demanding, fact-based protocol enhances the likelihood that regulatory interventions result in a net improvement relative to the status quo, an uncontroversial goal of any rational public policy. Unfortunately, the ANPR does not make clear that the commission remains committed to this methodology.

Assessing Market Failure in the Use of Consumer Data

To even “get off the ground,” any proposed privacy regulation would be required to identify a market failure arising from a particular use of consumer data. This requires a rigorous and comprehensive assessment of the full range of social costs and benefits that can be reasonably attributed to any such practice.

The ANPR’s Oversights

In contrast to the approach described by former Commissioner Brill, several elements of the ANPR raise significant doubts concerning the current commission’s willingness to assess evidence relevant to the potential necessity of privacy-related regulations in a balanced, rigorous, and comprehensive manner.

First, while the ANPR identifies a plethora of social harms attributable to data-collection practices, it merely acknowledges the possibility that consumers enjoy benefits from such practices “in theory.” This skewed perspective is not empirically serious. Focusing almost entirely on the costs of data collection and dismissing as conjecture any possible gains defies market realities, especially given the fact that (as discussed below) those gains are clearly significant and, in some cases, transformative.

Second, the ANPR’s choice of the normatively charged term “data surveillance” to encompass all uses of consumer data conveys the impression that all data collection through digital services is surreptitious or coerced, whereas (as discussed below) some users may knowingly provide such data to enable certain data-reliant functionalities.

Third, there is no mention in the ANPR that online providers widely provide users with notices concerning certain uses of consumer data and often require users to select among different levels of data collection.

Fourth, the ANPR unusually relies substantially on news websites and non-peer-reviewed publications in the style of policy briefs or advocacy papers, rather than the empirical social-science research on which the commission has historically made policy determinations.

This apparent indifference to analytical balance is particularly exhibited in the ANPR’s failure to address the economic gains generated through the use of consumer data in online markets. As was recognized in a 2014 White House report, many valuable digital services could not function effectively without engaging in some significant level of data collection. The examples are numerous and diverse, including traffic-navigation services that rely on data concerning a user’s geographic location (as well as other users’ geographic location); personalized ad delivery, which relies on data concerning a user’s search history and other disclosed characteristics; and search services, which rely on the ability to use user data to offer search services at no charge while offering targeted advertisements to paying advertisers.

There are equally clear gains on the “supply” side of the market. Data-collection practices can expand market access by enabling smaller vendors to leverage digital intermediaries to attract consumers that are most likely to purchase those vendors’ goods or services. The commission has recognized this point in the past, observing in a 2014 report:

Data brokers provide the information they compile to clients, who can use it to benefit consumers … [C]onsumers may benefit from increased and innovative product offerings fueled by increased competition from small businesses that are able to connect with consumers that they may not have otherwise been able to reach.

Given the commission’s statutory mission under the FTC Act to protect consumers’ interests and preserve competitive markets, these observations should be of special relevance.

Data Protection v. Data-Reliant Functionality

Data-reliant services yield social gains by substantially lowering transaction costs and, in the process, enabling services that would not otherwise be feasible, with favorable effects for consumers and vendors. This observation does not exclude the possibility that specific uses of consumer data may constitute a potential market failure that merits regulatory scrutiny and possible intervention (assuming there is sufficient legal authority for the relevant agency to undertake any such intervention). That depends on whether the social costs reasonably attributable to a particular use of consumer data exceed the social gains reasonably attributable to that use. This basic principle seems to be recognized by the ANPR, which states that the commission can only deem a practice “unfair” under the FTC Act if “it causes or is likely to cause substantial injury” and “the injury is not outweighed by benefits to consumers or competition.”

In implementing this principle, it is important to keep in mind that a market failure could only arise if the costs attributable to any particular use of consumer data are not internalized by the parties to the relevant transaction. This requires showing either that a particular use of consumer data imposes harms on third parties (a plausible scenario in circumstances implicating risks to data security) or consumers are not aware of, or do not adequately assess or foresee, the costs they incur as a result of such use (a plausible scenario in circumstances implicating risks to consumer data). For the sake of brevity, I will focus on the latter scenario.

Many scholars have taken the view that consumers do not meaningfully read privacy notices or consider privacy risks, although the academic literature has also recognized efforts by private entities to develop notice methodologies that can improve consumers’ ability to do so. Even accepting this view, however, it does not necessarily follow (as the ANPR appears to assume) that a more thorough assessment of privacy risks would inevitably lead consumers to elect higher levels of data privacy even where that would degrade functionality or require paying a positive price for certain services. That is a tradeoff that will vary across consumers. It is therefore difficult to predict and easy to get wrong.

As the ANPR indirectly acknowledges in questions 26 and 40, interventions that bar certain uses of consumer data may therefore harm consumers by compelling the modification, positive pricing, or removal from the market of popular data-reliant services. For this reason, some scholars and commentators have favored the informed-consent approach that provides users with the option to bar or limit certain uses of their data. This approach minimizes error costs since it avoids overestimating consumer preferences for privacy. Unlike a flat prohibition of certain uses of consumer data, it also can reflect differences in those preferences across consumers. The ANPR appears to dismiss this concern, asking in question 75 whether certain practices should be made illegal “irrespective of whether consumers consent to them” (my emphasis added).

Addressing the still-uncertain body of evidence concerning the tradeoff between privacy protections on the one hand and data-reliant functionalities on the other (as well as the still-unresolved extent to which users can meaningfully make that tradeoff) lies outside the scope of this discussion. However, the critical observation is that any determination of market failure concerning any particular use of consumer data must identify the costs (and specifically, identify non-internalized costs) attributable to any such use and then offset those costs against the gains attributable to that use.

This balancing analysis is critical. As the commission recognized in a 2015 report, it is essential to strike a balance between safeguarding consumer privacy without suppressing the economic gains that arise from data-reliant services that can benefit consumers and vendors alike. This even-handed approach is largely absent from the ANPR—which, as noted above, focuses almost entirely on costs while largely overlooking the gains associated with the uses of consumer data in online markets. This suggests a one-sided approach to privacy regulation that is incompatible with the cost-benefit analysis that the commission recognizes it must follow in the rulemaking process.

Private-Ordering Approaches to Consumer-Data Regulation

Suppose that a rigorous and balanced cost-benefit analysis determines that a particular use of consumer data would likely yield social costs that exceed social gains. It would still remain to be determined whether and howa regulator should intervene to yield a net social gain. As regulators make this determination, it is critical that they consider the full range of possible mechanisms to address a particular market failure in the use of consumer data.

Consistent with this approach, the FTC Act specifically requires that the commission specify in an ANPR “possible regulatory alternatives under consideration,” a requirement that is replicated at each subsequent stage of the rulemaking process, as provided in the rules of practice. The range of alternatives should include the possibility of taking no action, if no feasible intervention can be identified that would likely yield a net gain.

In selecting among those alternatives, it is imperative that the commission consider the possibility of unnecessary or overly burdensome rules that could impede the efficient development and supply of data-reliant services, either degrading the quality or raising the price of those services. In the past, the commission has emphasized this concern, stating in 2011 that “[t]he FTC actively looks for means to reduce burdens while preserving the effectiveness of a rule.”

This consideration (which appears to be acknowledged in question 24 of the ANPR) is of special importance to privacy-related regulation, given that the estimated annual costs to the U.S. economy (as calculated by the Information Technology and Innovation Foundation) of compliance with the most extensive proposed forms of privacy-related regulations would exceed $100 billion dollars. Those costs would be especially burdensome for smaller entities, effectively raising entry barriers and reducing competition in online markets (a concern that appears to be acknowledged in question 27 of the ANPR).

Given the exceptional breadth of the rules that the ANPR appears to contemplate—cover an ambitious range of activities that would typically be the subject of a landmark piece of federal legislation, rather than administrative rulemaking—it is not clear that the commission has seriously considered this vital point of concern.

In the event that the FTC does move forward with any of these proposed rulemakings (which would be required to rest on a factually supported finding of market failure), it would confront a range of possible interventions in markets for consumer data. That range is typically viewed as being bounded, on the least-interventionist side, by notice and consent requirements to facilitate informed user choice, and on the most interventionist side, by prohibitions that specifically bar certain uses of consumer data.

This is well-traveled ground within the academic and policy literature and the relative advantages and disadvantages of each regulatory approach are well-known (and differ depending on the type of consumer data and other factors). Within the scope of this contribution, I wish to address an alternative regulatory approach that lies outside this conventional range of policy options.

Bottom-Up v. Top-Down Regulation

Any cost-benefit analysis concerning potential interventions to modify or bar a particular use of consumer data, or to mandate notice-and-consent requirements in connection with any such use, must contemplate not only government-implemented solutions but also market-implemented solutions, including hybrid mechanisms in which government action facilitates or complements market-implemented solutions.

This is not a merely theoretical proposal (and is referenced indirectly in questions 36, 51, and 87 of the ANPR). As I have discussed in previously published research, the U.S. economy has a long-established record of having adopted, largely without government intervention, collective solutions to the information asymmetries that can threaten the efficient operation of consumer goods and services markets.

Examples abound: Underwriters Laboratories (UL), which establishes product-safety standards in hundreds of markets; large accounting firms, which confirm compliance with Generally Accepted Accounting Principles (GAAP), which are in turn established and updated by the Financial Accounting Standards Board, a private entity subject to oversight by the Securities and Exchange Commission; and intermediaries in other markets, such as consumer credit, business credit, insurance carriers, bond issuers, and content ratings in the entertainment and gaming industries. Collectively, these markets encompass thousands of providers, hundreds of millions of customers, and billions of dollars in value.

A collective solution is often necessary to resolve information asymmetries efficiently because the benefits from establishing an industrywide standard of product or service quality, together with a trusted mechanism for showing compliance with that standard, generates gains that cannot be fully internalized by any single provider.

Jurisdictions outside the United States have tended to address this collective-action problem through the top-down imposition of standards by government mandate and enforcement by regulatory agencies, as illustrated by the jurisdictions referenced by the ANPR that have imposed restrictions on the use of consumer data through direct regulatory intervention. By contrast, the U.S. economy has tended to favor the bottom-up development of voluntary standards, accompanied by certification and audit services, all accomplished by a mix of industry groups and third-party intermediaries. In certain markets, this may be a preferred model to address the information asymmetries between vendors and customers that are the key sources of potential market failure in the use of consumer data.

Privately organized initiatives to set quality standards and monitor compliance benefit the market by supplying a reliable standard that reduces information asymmetries and transaction costs between consumers and vendors. This, in turn, yields economic gains in the form of increased output, since consumers have reduced uncertainty concerning product quality. These quality standards are generally implemented through certification marks (for example, the “UL” certification mark) or ranking mechanisms (for example, consumer-credit or business-credit scores), which induce adoption and compliance through the opportunity to accrue reputational goodwill that, in turn, translates into economic gains.

These market-implemented voluntary mechanisms are a far less costly means to reduce information asymmetries in consumer-goods markets than regulatory interventions, which require significant investments of public funds in rulemaking, detection, investigation, enforcement, and adjudication activities.

Hybrid Policy Approaches

Private-ordering solutions to collective-action failures in markets that suffer from information asymmetries can sometimes benefit from targeted regulatory action, resulting in a hybrid policy approach. In particular, regulators can sometimes play two supplemental functions in this context.

First, regulators can require that providers in certain markets comply with (or can provide a liability safe harbor for providers that comply with) the quality standards developed by private intermediaries that have developed track records of efficiently establishing those standards and reliably confirming compliance. This mechanism is anticipated by the ANPR, which asks in question 51 whether the commission should “require firms to certify that their commercial surveillance practices meet clear standards concerning collection, use, retention, transfer, or monetization of consumer data” and further asks whether those standards should be set by “the Commission, a third-party organization, or some other entity.”

Other regulatory agencies already follow this model. For example, federal and state regulatory agencies in the fields of health care and education rely on accreditation by designated private entities for purposes of assessing compliance with applicable licensing requirements.

Second, regulators can supervise and review the quality standards implemented, adjusted, and enforced by private intermediaries. This is illustrated by the example of securities markets, in which the major exchanges institute and enforce certain governance, disclosure, and reporting requirements for listed companies but are subject to regulatory oversight by the SEC, which must approve all exchange rules and amendments. Similarly, major accounting firms monitor compliance by public companies with GAAP but must register with, and are subject to oversight by, the Public Company Accounting Oversight Board (PCAOB), a nonprofit entity subject to SEC oversight.

These types of hybrid mechanisms shift to private intermediaries most of the costs involved in developing, updating, and enforcing quality standards (in this context, standards for the use of consumer data) and harness private intermediaries’ expertise, capacities, and incentives to execute these functions efficiently and rapidly, while using targeted forms of regulatory oversight as a complementary policy tool.

Conclusion

Certain uses of consumer data in digital markets may impose net social harms that can be mitigated through appropriately crafted regulation. Assuming, for the sake of argument, that the commission has the legal power to enact regulation to address such harms (again, a point as to which there is great doubt), any specific steps must be grounded in rigorous and balanced cost-benefit analysis.

As a matter of law and sound public policy, it is imperative that the commission meaningfully consider the full range of reliable evidence to identify any potential market failures in the use of consumer data and how to formulate rules to rectify or mitigate such failures at a net social gain. Given the extent to which business models in digital environments rely on the use of consumer data, and the substantial value those business models confer on consumers and businesses, the potential “error costs” of regulatory overreach are high. It is therefore critical to engage in a thorough balancing of costs and gains concerning any such use.

Privacy regulation is a complex and economically consequential policy area that demands careful diagnosis and targeted remedies grounded in analysis and evidence, rather than sweeping interventions accompanied by rhetoric and anecdote.

[This post is an entry in Truth on the Market’s FTC UMC Rulemaking symposium. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

The Federal Trade Commission’s (FTC) Aug. 22 Advance Notice of Proposed Rulemaking on Commercial Surveillance and Data Security (ANPRM) is breathtaking in its scope. For an overview summary, see this Aug. 11 FTC press release.

In their dissenting statements opposing ANPRM’s release, Commissioners Noah Phillips and Christine Wilson expertly lay bare the notice’s serious deficiencies. Phillips’ dissent stresses that the ANPRM illegitimately arrogates to the FTC legislative power that properly belongs to Congress:

[The [A]NPRM] recast[s] the Commission as a legislature, with virtually limitless rulemaking authority where personal data are concerned. It contemplates banning or regulating conduct the Commission has never once identified as unfair or deceptive. At the same time, the ANPR virtually ignores the privacy and security concerns that have animated our [FTC] enforcement regime for decades. … [As such, the ANPRM] is the first step in a plan to go beyond the Commission’s remit and outside its experience to issue rules that fundamentally alter the internet economy without a clear congressional mandate. That’s not “democratizing” the FTC or using all “the tools in the FTC’s toolbox.” It’s a naked power grab.

Wilson’s complementary dissent critically notes that the 2021 changes to FTC rules of practice governing consumer-protection rulemaking decrease opportunities for public input and vest significant authority solely with the FTC chair. She also echoed Phillips’ overarching concern with FTC overreach (footnote citations omitted):

Many practices discussed in this ANPRM are presented as clearly deceptive or unfair despite the fact that they stretch far beyond practices with which we are familiar, given our extensive law enforcement experience. Indeed, the ANPRM wanders far afield of areas for which we have clear evidence of a widespread pattern of unfair or deceptive practices. … [R]egulatory and enforcement overreach increasingly has drawn sharp criticism from courts. Recent Supreme Court decisions indicate FTC rulemaking overreach likely will not fare well when subjected to judicial review.

Phillips and Wilson’s warnings are fully warranted. The ANPRM contemplates a possible Magnuson-Moss rulemaking pursuant to Section 18 of the FTC Act,[1] which authorizes the commission to promulgate rules dealing with “unfair or deceptive acts or practices.” The questions that the ANPRM highlights center primarily on concerns of unfairness.[2] Any unfairness-related rulemaking provisions eventually adopted by the commission will have to satisfy a strict statutory cost-benefit test that defines “unfair” acts, found in Section 5(n) of the FTC Act. As explained below, the FTC will be hard-pressed to justify addressing most of the ANPRM’s concerns in Section 5(n) cost-benefit terms.

Discussion

The requirements imposed by Section 5(n) cost-benefit analysis

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 other words, a practice may be condemned as unfair only if it causes or is likely to cause “(1) substantial injury to consumers (2) which is not reasonably avoidable by consumers themselves and (3) not outweighed by countervailing benefits to consumers or to competition.”

This is a demanding standard. (For scholarly analyses of the standard’s legal and economic implications authored by former top FTC officials, see here, here, and here.)

First, the FTC must demonstrate that a practice imposes a great deal of harm on consumers, which they could not readily have avoided. This requires detailed analysis of the actual effects of a particular practice, not mere theoretical musings about possible harms that may (or may not) flow from such practice. Actual effects analysis, of course, must be based on empiricism: consideration of hard facts.

Second, assuming that this formidable hurdle is overcome, the FTC must then acknowledge and weigh countervailing welfare benefits that might flow from such a practice. In addition to direct consumer-welfare benefits, other benefits include “benefits to competition.” Those may include business efficiencies that reduce a firm’s costs, because such efficiencies are a driver of vigorous competition and, thus, of long-term consumer welfare. As the Organisation for Economic Co-operation and Development has explained (see OECD Background Note on Efficiencies, 2012, at 14), dynamic and transactional business efficiencies are particularly important in driving welfare enhancement.

In sum, under Section 5(n), the FTC must show actual, fact-based, substantial harm to consumers that they could not have escaped, acting reasonably. The commission must also demonstrate that such harm is not outweighed by consumer and (procompetitive) business-efficiency benefits. What’s more, Section 5(n) makes clear that the FTC cannot “pull a rabbit out of a hat” and interject other “public policy” considerations as key factors in the rulemaking  calculus (“[s]uch [other] public policy considerations may not serve as a primary basis for … [a] determination [of unfairness]”).

It ineluctably follows as a matter of law that a Section 18 FTC rulemaking sounding in unfairness must be based on hard empirical cost-benefit assessments, which require data grubbing and detailed evidence-based economic analysis. Mere anecdotal stories of theoretical harm to some consumers that is alleged to have resulted from a practice in certain instances will not suffice.

As such, if an unfairness-based FTC rulemaking fails to adhere to the cost-benefit framework of Section 5(n), it inevitably will be struck down by the courts as beyond the FTC’s statutory authority. This conclusion is buttressed by the tenor of the Supreme Court’s unanimous 2021 opinion in AMG Capital v. FTC, which rejected the FTC’s claim that its statutory injunctive authority included the ability to obtain monetary relief for harmed consumers (see my discussion of this case here).

The ANPRM and Section 5(n)

Regrettably, the tone of the questions posed in the ANPRM indicates a lack of consideration for the constraints imposed by Section 5(n). Accordingly, any future rulemaking that sought to establish “remedies” for many of the theorized abuses found in the ANPRM would stand very little chance of being upheld in litigation.

The Aug. 11 FTC press release cited previously addresses several broad topical sources of harms: harms to consumers; harms to children; regulations; automated systems; discrimination; consumer consent; notice, transparency, and disclosure; remedies; and obsolescence. These categories are chock full of questions that imply the FTC may consider restrictions on business conduct that go far beyond the scope of the commission’s authority under Section 5(n). (The questions are notably silent about the potential consumer benefits and procompetitive efficiencies that may arise from the business practices called here into question.)

A few of the many questions set forth under just four of these topical listings (harms to consumers, harms to children, regulations, and discrimination) are highlighted below, to provide a flavor of the statutory overreach that categorizes all aspects of the ANPRM. Many other examples could be cited. (Phillips’ dissenting statement provides a cogent and critical evaluation of ANPRM questions that embody such overreach.) Furthermore, although there is a short discussion of “costs and benefits” in the ANPRM press release, it is wholly inadequate to the task.

Under the category “harms to consumers,” the ANPRM press release focuses on harm from “lax data security or surveillance practices.” It asks whether FTC enforcement has “adequately addressed indirect pecuniary harms, including potential physical harms, psychological harms, reputational injuries, and unwanted intrusions.” The press release suggests that a rule might consider addressing harms to “different kinds of consumers (e.g., young people, workers, franchisees, small businesses, women, victims of stalking or domestic violence, racial minorities, the elderly) in different sectors (e.g., health, finance, employment) or in different segments or ‘stacks’ of the internet economy.”

These laundry lists invite, at best, anecdotal public responses alleging examples of perceived “harm” falling into the specified categories. Little or no light is likely to be shed on the measurement of such harm, nor on the potential beneficial effects to some consumers from the practices complained of (for example, better targeted ads benefiting certain consumers). As such, a sound Section 5(n) assessment would be infeasible.

Under “harms to children,” the press release suggests possibly extending the limitations of the FTC-administered Children’s Online Privacy Protection Act (COPPA) to older teenagers, thereby in effect rewriting COPPA and usurping the role of Congress (a clear statutory overreach). The press release also asks “[s]hould new rules set out clear limits on personalized advertising to children and teenagers irrespective of parental consent?” It is hard (if not impossible) to understand how this form of overreach, which would displace the supervisory rights of parents (thereby imposing impossible-to-measure harms on them), could be shoe-horned into a defensible Section 5(n) cost-benefit assessment.

Under “regulations,” the press release asks whether “new rules [should] require businesses to implement administrative, technical, and physical data security measures, including encryption techniques, to protect against risks to the security, confidentiality, or integrity of covered data?” Such new regulatory strictures (whose benefits to some consumers appear speculative) would interfere significantly in internal business processes. Specifically, they could substantially diminish the efficiency of business-security measures, diminish business incentives to innovate (for example, in encryption), and reduce dynamic competition among businesses.

Consumers also would be harmed by a related slowdown in innovation. Those costs undoubtedly would be high but hard, if not impossible, to measure. The FTC also asks whether a rule should limit “companies’ collection, use, and retention of consumer data.” This requirement, which would seemingly bypass consumers’ decisions to make their data available, would interfere with companies’ ability to use such data to improve business offerings and thereby enhance consumers’ experiences. Justifying new requirements such as these under Section 5(n) would be well-nigh impossible.

The category “discrimination” is especially problematic. In addressing “algorithmic discrimination,” the ANPRM press release asks whether the FTC should “consider new trade regulation rules that bar or somehow limit the deployment of any system that produces discrimination, irrespective of the data or processes on which those outcomes are based.” In addition, the press release asks “if the Commission [should] consider harms to other underserved groups that current law does not recognize as protected from discrimination (e.g., unhoused people or residents of rural communities)?”

The FTC cites no statutory warrant for the authority to combat such forms of “discrimination.” It is not a civil-rights agency. It clearly is not authorized to issue anti-discrimination rules dealing with “groups that current law does not recognize as protected from discrimination.” Any such rules, if issued, would be summarily struck down in no uncertain terms by the judiciary, even without regard to Section 5(n).

In addition, given the fact that “economic discrimination” often is efficient (and procompetitive) and may be beneficial to consumer welfare (see, for example, here), more limited economic anti-discrimination rules almost certainly would not pass muster under the Section 5(n) cost-benefit framework.     

Finally, while the ANPRM press release does contain a very short section entitled “costs and benefits,” that section lacks any specific reference to the required Section 5(n) evaluation framework. Phillips’ dissent points out that the ANPRM:

…simply fail[s] to provide the detail necessary for commenters to prepare constructive responses” on cost-benefit analysis. He stresses that the broad nature of requests for commenters’ view on costs and benefits renders the inquiry “not conducive to stakeholders submitting data and analysis that can be compared and considered in the context of a specific rule. … Without specific questions about [the costs and benefits of] business practices and potential regulations, the Commission cannot hope for tailored responses providing a full picture of particular practices.

In other words, the ANPRM does not provide the guidance needed to prompt the sorts of responses that might assist the FTC in carrying out an adequate Section 5(n) cost-benefit analysis.

Conclusion

The FTC would face almost certain defeat in court if it promulgated a broad rule addressing many of the perceived unfairness-based “ills” alluded to in the ANPRM. Moreover, although its requirements would (I believe) not come into effect, such a rule nevertheless would impose major economic costs on society.

Prior to final judicial resolution of its status, the rule would disincentivize businesses from engaging in a variety of data-related practices that enhance business efficiency and benefit many consumers. Furthermore, the FTC resources devoted to developing and defending the rule would not be applied to alternative welfare-enhancing FTC activities—a substantial opportunity cost.

The FTC should take heed of these realities and opt not to carry out a rulemaking based on the ANPRM. It should instead devote its scarce consumer protection resources to prosecuting hard core consumer fraud and deception—and, perhaps, to launching empirical studies into the economic-welfare effects of data security and commercial surveillance practices. Such studies, if carried out, should focus on dispassionate economic analysis and avoid policy preconceptions. (For example, studies involving digital platforms should take note of the existing economic literature, such as a paper indicating that digital platforms have generated enormous consumer-welfare benefits not accounted for in gross domestic product.)

One can only hope that a majority of FTC commissioners will apply common sense and realize that far-flung rulemaking exercises lacking in statutory support are bad for the rule of law, bad for the commission’s reputation, bad for the economy, and bad for American consumers.


[1] The FTC states specifically that it “is issuing this ANPR[M] pursuant to Section 18 of the Federal Trade Commission Act”.

[2] Deceptive practices that might be addressed in a Section 18 trade regulation rule would be subject to the “FTC Policy Statement on Deception,” which states that “the Commission will find deception if there is a representation, omission or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer’s detriment.” A court reviewing an FTC Section 18 rule focused on “deceptive acts or practices” undoubtedly would consult this Statement, although it is not clear, in light of recent jurisprudential trends, that the court would defer to the Statement’s analysis in rendering an opinion. In any event, questions of deception, which focus on acts or practices that mislead consumers, would in all likelihood have little relevance to the evaluation of any rule that might be promulgated in light of the ANPRM.    

[TOTM: This guest post from Svetlana S. Gans and Natalie Hausknecht of Gibson Dunn is part of the Truth on the Market FTC UMC Symposium. If you would like to receive this and other posts relating to these topics, subscribe to the RSS feed here. If you have news items you would like to suggest for inclusion, please mail them to us at ghurwitz@laweconcenter.org and/or kfierro@laweconcenter.org.]

The Federal Trade Commission (FTC) launched one of the most ambitious rulemakings in agency history Aug. 11, with its 3-2 vote to initiate Advance Notice of Proposed Rulemaking (ANPRM) on commercial surveillance and data security. The divided vote, which broke down on partisan lines, stands in stark contrast to recent bipartisan efforts on Capitol Hill, particularly on the comprehensive American Data Privacy and Protection Act (ADPPA).  

Although the rulemaking purports to pursue a new “privacy and data security” regime, it targets far more than consumer privacy. The ANPRM lays out a sweeping project to rethink the regulatory landscape governing nearly every facet of the U.S. internet economy, from advertising to anti-discrimination law, and even to labor relations. Any entity that uses the internet (even for internal purposes) is likely to be affected by this latest FTC action, and public participation in the proposed rulemaking will be important to ensure the agency gets it right.

Summary of the ANPRM  

The vague scope of the FTC’s latest ANPRM begins at its title: “Commercial Surveillance and Data Security” Rulemaking. The announcement states the FTC intends to explore rules “cracking down” on the “business of collecting, analyzing, and profiting from information about people.” The ANPRM then defines the scope of “commercial surveillance” to include virtually any data activity. For example, the ANPRM explains that it includes practices used “to set prices, curate newsfeeds, serve advertisements, and conduct research on people’s behavior, among other things.” The ANPRM also goes on to say that it is concerned about practices “outside of the retail consumer setting” that the agency traditionally regulates. Indeed, the ANPRM defines “consumer” to include “businesses and workers, not just individuals who buy or exchange data for retail goods and services.”

Unlike the bipartisan ADPPA, the ANPRM also takes aim at the “consent” model that the FTC has long advocated to ensure consumers make informed choices about their data online. It claims that “consumers may become resigned to” data practices and “have little to no actual control over what happens to their information.” It also suggests that consumers “do not generally understand” data practices, such that their permission could be “meaningful”—making express consumer consent to data practices “irrelevant.”

The ANPRM further lists a disparate set of additional FTC concerns, from “pernicious dark pattern practices” to “lax data security practices” to “sophisticated digital advertising systems” to “stalking apps,” “cyber bullying, cyberstalking, and the distribution of child sexual abuse material,” and the use of “social media” among “kids and teens.” It “finally” wraps up with a reference to “growing reliance on automated systems” that may create “new forms and mechanisms for discrimination” in areas like housing, employment, and healthcare. The issue the agency expresses about these automated systems is with apparent “disparate outcomes” “even when automated systems consider only unprotected consumer traits.”

Having set out these concerns, the ANPRM seeks to justify a new rulemaking via a list of what it describes as “decades” of “consumer data privacy and security” enforcement actions. The rulemaking then requests that the public answer 95 questions, covering many different legal and factual issues. For example, the agency requests the public weigh in on the practices “companies use to surveil consumers,” intangible and unmeasurable “harms” created by such practices, the most harmful practices affecting children and teens, techniques that “manipulate consumers into prolonging online activity,” how the commission should balance costs and benefits from any regulation, biometric data practices, algorithmic errors and disparate impacts, the viability of consumer consent, the opacity of “consumer surveillance practices,” and even potential remedies the agency should consider.  

Commissioner Statements in Support of the ANPR

Every Democratic commissioner issued a separate supporting statement. Chair Lina Khan’s statement justified the rulemaking grounds that the FTC is the “de facto law enforcer in this domain.” She also doubled-down on the decision to address not only consumer privacy, but issues affecting all “opportunities in our economy and society, as well as core civil liberties and civil rights” and described being “especially eager to build a record” related to: the limits of “notice and consent” frameworks, as opposed to withdrawing permission for data collection “in the first place”; how to navigate “information asymmetries” with companies; how to address certain “business models” “premised on” persistent tracking; discrimination in automated processes; and workplace surveillance.   

Commissioner Rebecca Kelly Slaughter’s longer statement more explicitly attacked the agency’s “notice-and-consent regime” as having “failed to protect users.” She expressed hope that the new rules would take on biometric or location tracking, algorithmic decision-making, and lax data security practices as “long overdue.” Commission Slaughter further brushed aside concerns that the rulemaking was inappropriate while Congress considered comprehensive privacy legislation, asserting that the magnitude of the rulemaking was a reason to do it—not shy away. She also expressed interest in data-minimization specifications, discriminatory algorithms, and kids and teens issues.

Commissioner Alvaro Bedoya’s short statement likewise expressed support for acting. However, he noted the public comment period would help the agency “discern whether and how to proceed.” Like his colleagues, he identified his particular interest in “emerging discrimination issues”: the mental health of kids and teens; the protection of non-English speaking communities; and biometric data. On the pending privacy legislation, he noted that:

[ADPPA] is the strongest privacy bill that has ever been this close to passing. I hope it does pass. I hope it passes soon…. This ANPRM will not interfere with that effort. I want to be clear: Should the ADPPA pass, I will not vote for any rule that overlaps with it.

Commissioner Statements Opposed to the ANPRM

Both Republican commissioners published dissents. Commissioner Christine S. Wilson’s urged deference to Congress as it considers a comprehensive privacy law. Yet she also expressed broader concern about the FTC’s recent changes to its Section 18 rulemaking process that “decrease opportunities for public input and vest significant authority for the rulemaking proceedings solely with the Chair” and the unjustified targeting of practices not subject to prior enforcement action. Notably, Commissioner Wilson also worried the rulemaking was unlikely to survive judicial scrutiny, indicating that Chair Khan’s statements give her “no basis to believe that she will seek to ensure that proposed rule provisions fit within the Congressionally circumscribed jurisdiction of the FTC.”  

Commissioner Noah Phillips’ dissent criticized the ANPRM for failing to provide “notice of anything” and thus stripping the public of its participation rights. He argued that the ANPRM’s “myriad” questions appear to be a “mechanism to fish for legal theories that might justify outlandish regulatory ambition outside our jurisdiction.” He further noted that the rulemaking positions the FTC as a legislature to regulate in areas outside of its expertise (e.g., labor law) with potentially disastrous economic costs that it is ill-equipped to understand.

Commissioner Phillips further argued the ANPRM attacks disparate practices based on an “amalgam of cases concerning very different business models and conduct” that cannot show the prevalence of misconduct required for Section 18 rulemaking. He also criticized the FTC for abandoning its own informed-consent model based on paternalistic musings about individuals’ ability to decide for themselves. And finally, he criticized the FTC’s apparent overreach in claiming the mantle of “civil rights enforcer” when it was never given that explicit authority by Congress to declare discrimination or disparate impacts unlawful in this space. 

Implications for Regulated Entities and Others Concerned with Potential Agency Overreach

The sheer breadth of the ANPRM demands the avid attention of potentially regulated entities or those concerned with the FTC’s aggressive rulemaking agenda. The public should seek to meaningfully participate in the rulemaking process to ensure the FTC considers a broad array of viewpoints and has the facts before it necessary to properly define the scope of its own authority and the consequences of any proposed privacy regulation. For example, the FTC may issue a notice of proposed rulemaking defining acts or practices as unfair or deceptive “only where it has reason to believe that the unfair or deceptive acts or practices which are the subject of the proposed rulemaking are prevalent.”(emphasis added).

15 U.S. Code § 57a also states that the FTC may make a determination that unfair or deceptive acts or practices are prevalent only if:  “(A) it has issued cease and desist orders regarding such acts or practices, or (B) any other information available to the Commission indicates a widespread pattern of unfair or deceptive acts or practices.” That means that, under the Magnuson-Moss Section 18 rulemaking that the FTC must use here, the agency must show (1) the prevalence of the practices (2) how they are unfair or deceptive, and (3) the economic effect of the rule, including on small businesses and consumers. Any final regulatory analysis also must assess the rule’s costs and benefits and why it was chosen over alternatives. On each count, effective advocacy supported by empirical and sound economic analysis by the public may prove dispositive.

The FTC may have a particularly difficult time meeting this burden of proof with many of the innocuous (and currently permitted) practices identified in the ANPRM. For example, modern online commerce like automated decision-making is a part of the engine that has powered a decade of innovation, lowered logistical and opportunity costs, and opened up amazing new possibilities for small businesses seeking to serve local consumers and their communities. Commissioner Wilson makes this point well:

Many practices discussed in this ANPRM are presented as clearly deceptive or unfair despite the fact that they stretch far beyond practices with which we are familiar, given our extensive law enforcement experience. Indeed, the ANPRM wanders far afield of areas for which we have clear evidence of a widespread pattern of unfair or deceptive practices. 

The FTC also may be setting itself on an imminent collision course with the “major questions” doctrine, in particular. On the last day of its term this year, the Supreme Court handed down West Virginia v. Environmental Protection Agency, which applied the “major questions doctrine” to rule that the EPA can’t base its controversial Clean Power Plan on a novel interpretation of a relatively obscure provision of the Clean Air Act. An agency rule of such vast “economic and political significance,” Chief Justice John Roberts wrote, requires “clear congressional authorization.” (See “The FTC Heads for Legal Trouble” by Svetlana Gans and Eugene Scalia.) Parties are likely to argue the same holds true here with regard to the FTC’s potential regulatory extension into areas like anti-discrimination and labor law. If the FTC remains on this aggressive course, any final privacy rulemaking could also be a tempting target for a reinvigorated nondelegation doctrine.  

Some members of Congress also may question the wisdom of the ANPRM venturing into the privacy realm at all right now, a point advanced by several of the commissioners. Shortly after the FTC’s announcement, House Energy and Commerce Committee Chairman Frank Pallone Jr. (D-N.J.) stated:

I appreciate the FTC’s effort to use the tools it has to protect consumers, but Congress has a responsibility to pass comprehensive federal privacy legislation to better equip the agency, and others, to protect consumers to the greatest extent.

Sen. Roger Wicker (R-Miss.), the ranking member on the Senate Commerce Committee and a leading GOP supporter of the bipartisan legislation, likewise said that the FTC’s move helps “underscore the urgency for the House to bring [ADPPA]  to the floor and for the Senate Commerce Committee to advance it through committee.”  

The FTC’s ANPRM will likely have broad implications for the U.S. economy. Stakeholders can participate in the rulemaking in several ways, including registering by Aug. 31 to speak at the FTC’s Sept. 8 public forum. Stakeholders should also consider submitting public comments and empirical evidence within 60-days of the ANPRM’s publication in the Federal Register, and insist that the FTC hold informal hearings as required under the Magnuson-Moss Act.

While the FTC is rightfully the nation’s top consumer cop, an advanced notice of this scope demands active public awareness and participation to ensure the agency gets it right.  

 

[On Monday, June 27, Concurrences hosted a conference on the Rulemaking Authority of the Federal Trade Commission. This conference featured the work of contributors to a new book on the subject edited by Professor Dan Crane. Several of these authors have previously contributed to the Truth on the Market FTC UMC Symposium. We are pleased to be able to share with you excerpts or condensed versions of chapters from this book prepared by authors of of those chapters. Our thanks and compliments to Dan and Concurrences for bringing together an outstanding event and set of contributors and for supporting our sharing them with you here.]

[The post below was authored by former Federal Trade Commission Acting Chair Maureen K. Ohlhausen and former FTC Senior Attorney Ben Rossen.]

Introduction

The Federal Trade Commission (FTC) has long steered the direction of competition law by engaging in case-by-case enforcement of the FTC Act’s prohibition on unfair methods of competition (UMC). Recently, some have argued that the FTC’s exclusive reliance on case-by-case adjudication is too long and arduous a route and have urged the commission to take a shortcut by invoking its purported authority to promulgate UMC rules under Section 6(g) of the Federal Trade Commission Act.

Proponents of UMC rulemaking rely on National Petroleum Refiners Association v. FTC, a 1973 decision by the U.S. Court of Appeals for the D.C. Circuit that upheld the commission’s authority to issue broad legislative rules under the FTC Act. They argue that the case provides a clear path to UMC rules and that Congress effectively ratified the D.C. Circuit’s decision when it enacted detailed rulemaking procedures governing unfair or deceptive acts or practices (UDAP) in the Magnuson Moss Warranty-Federal Trade Commission Improvement Act of 1975 (Magnuson-Moss).

The premise of this argument is fundamentally incorrect, because modern courts reject the type of permissive statutory analysis applied in National Petroleum Refiners. Moreover, contemporaneous congressional reaction to National Petroleum Refiners was not to embrace broad FTC rulemaking, but rather to put in strong guardrails on FTC UDAP rulemaking. Further, the congressional history of the particular FTC rule at issue—the Octane Ratings Rule—also points in the direction of a lack of broad UMC rulemaking, as Congress eventually adopted the rule solely as a UDAP provision, with heightened restrictions on FTC rulemaking.

Thus, the road to UMC rulemaking, which the agency wisely never tried to travel down in the almost 50 years since National Petroleum Refiners, is essentially a dead end. If the agency tries to go that route, it will be an unfortunate detour from its clear statutory direction to engage in case-by-case enforcement of Section 5.

Broad UMC-Rulemaking Authority Contradicts the History and Evolution of the FTC’s Authority

The FTC Act grants the commission broad authority to investigate unfair methods of competition and unfair and deceptive acts or practices across much of the American economy. The FTC’s administrative adjudicative authority under “Part 3” is central to the FTC’s mission of preserving fair competition and protecting consumers, as reflected by the comprehensive adjudicative framework established in Section 5 of the FTC Act. Section 6, meanwhile, details the commission’s investigative powers to collect confidential business information and conduct industry studies.

The original FTC Act contained only one sentence describing the agency’s ability to make rules, buried inconspicuously among various other provisions. Section 6(g) provided that the FTC would have authority “[f]rom time to time [to] classify corporations and . . . to make rules and regulations for the purpose of carrying out the provisions of this [Act].”[1] Unlike the detailed administrative scheme in Section 5, the FTC Act fails to provide for any sanctions for violations of rules promulgated under Section 6 or to otherwise specify that such rules would carry the force of law. This minimal delegation of power arguably conferred the right to issue procedural but not substantive rules.

Consistent with the understanding that Congress did not authorize substantive rulemaking, the FTC made no attempt to promulgate rules with the force of law for nearly 50 years after it was created, and at various times indicated that it lacked the authority to do so.

In 1962, the agency for the first time began to promulgate consumer-protection trade-regulation rules (TRRs), citing its authority under Section 6(g). Although these early TRRs plainly addressed consumer-protection matters, the agency frequently described violations of the rule as both an unfair method of competition and an unfair or deceptive trade practice. As the commission itself has observed, “[n]early all of the rules that the Commission actually promulgated under Section 6(g) were consumer protection rules.”

In fact, in the more than 100 years of the FTC Act, the agency has only once issued a solely competition rule. In 1967, the commission promulgated the Men and Boys’ Tailored Clothing Rule pursuant to authority under the Clayton Act, which prohibited apparel suppliers from granting discriminatory-advertising allowances that limited small retailers’ ability to compete. However, the rule was never enforced or subject to challenge and was subsequently repealed.

Soon after, the FTC promulgated the octane-ratings rule at issue in National Petroleum Refiners. Proponents of UMC rulemaking, such as former FTC Commissioner Rohit Chopra and current Chair Lina Khan, point to the case as evidence that the commission retains the power to promulgate substantive competition rules, governed only by the Administrative Procedure Act (APA) and, with respect to interpretations of UMC, entitled to Chevron deference. They argue that UMC rulemaking would provide significant benefits by providing clear notice to market participants about what the law requires, relieving the steep expert costs and prolonged trials common to antitrust adjudications, and fostering a “transparent and participatory process” that would provide meaningful public participation.

With Khan at the helm of the FTC, the agency has already begun to pave the way for new UMC rulemakings. For example, President Joe Biden’s Executive Order on promoting competition called on the commission to promulgate UMC rules to address noncompete clauses and pay-for-delay settlements, among other issues. Further, as one of Khan’s first actions as chair, the commission rescinded—without replacing—its bipartisan Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act. More recently, the commission’s Statement of Regulatory Priorities stated that the FTC “will consider developing both unfair-methods-of-competition rulemakings as well as rulemakings to define with specificity unfair or deceptive acts or practices.” This foray into UMC rulemaking is likely to take the FTC down a dead-end road.

The Signs Are Clear: National Petroleum Refiners Does Not Comport with Modern Principles of Statutory Interpretation

The FTC’s authority to conduct rulemaking under Section 6(g) has been tested in court only once, in National Petroleum Refiners, where the D.C. Circuit upheld the commission’s authority to promulgate a UDAP and UMC rule requiring the disclosure of octane ratings on gasoline pumps. The court found that Section 6(g) “clearly states that the Commission ‘may’ make rules and regulations for the purpose of carrying out the provisions of Section 5” and liberally construed the term ‘rules and regulations’ based on the background and purpose of the FTC Act.” The court’s opinion rested, in part, on pragmatic concerns about the benefits that rulemaking provides to fulfilling the agency’s mission, emphasizing the “invaluable resource-saving flexibility” it provides and extolling the benefits of rulemaking over case-by-case adjudication when developing agency policy.

National Petroleum Refiners reads today like an anachronism. Few modern courts would agree that an ambiguous grant of rulemaking authority should be construed to give agencies the broadest possible powers so that they will have flexibility in determining how to effectuate their statutory mandates. The Supreme Court has never adopted this approach and recent decisions strongly suggest it would decline to do so if presented the opportunity.

The D.C. Circuit’s opinion is in clear tension with the “elephants-in-mouseholes” doctrine first described by the U.S. Supreme Court in Whitman v. Am. Trucking Ass’n, because it largely ignored the significance of the FTC Act’s detailed adjudicative framework. The D.C. Circuit’s reasoning—that Congress buried sweeping legislative-rulemaking authority in a vague, ancillary provision, alongside the ability to “classify corporations”—stands in direct conflict with the Supreme Court’s admonition in Whitman.

Modern courts would also look to interpret the structure of the FTC Act to produce a coherent enforcement scheme. For instance, in AMG Capital Management v. FTC, the Supreme Court struck down the FTC’s use of Section 13(b) to obtain equitable monetary relief, in part, because the FTC Act elsewhere imposes specific limitations on the commission’s authority to obtain monetary relief. Unlike National Petroleum Refiners, which lauded the benefits and efficiencies of rulemaking for the agency’s mission, the AMG court reasoned: “Our task here is not to decide whether [the FTC’s] substitution of § 13(b) for the administrative procedure contained in § 5 and the consumer redress available under § 19 is desirable. Rather, it is to answer a more purely legal question” of whether Congress granted authority or not. The same rationale applies to UMC rulemaking.

The unanimous AMG decision was no judicial detour, and the Supreme Court has routinely posted clear road signs that Congress is expected “to speak clearly when authorizing an agency to exercise powers of vast economic and political significance,” as UMC rulemaking would do. Since 2000, the Court has increasingly applied the “major questions doctrine” to limit the scope of congressional delegation to the administrative state in areas of major political or economic importance. For example, in FDA v. Brown & Williamson, the Supreme Court declined to grant Chevron deference to an FDA rule permitting the agency to regulate nicotine and cigarettes. Crucial to the Court’s analysis was that the FDA’s rule contradicted the agency’s own view of its authority dating back to 1914, while asserting jurisdiction over a significant portion of the American economy. In Utility Air Regulatory Group v. EPA, the Court invoked the major questions doctrine to strike down the Environmental Protection Agency’s greenhouse-gas emissions standards as an impermissible interpretation of the Clean Air Act, finding that “EPA’s interpretation is [] unreasonable because it would bring about an enormous and transformative expansion in [the] EPA’s regulatory authority without clear congressional authorization.”

Most recently, in West Virginia v. EPAthe Court relied on the major questions doctrine to strike down EPA emissions rules that would have imposed billions of dollars in compliance costs on power plants, concluding that Congress had not provided “clear congressional authorization” for the rules despite explicitly authorizing the agency to set emissions levels for existing plants.  Because broad UMC-rulemaking authority under Section 6(g) is similarly a question of potentially “vast economic and political significance,” and would also represent a significant departure from past agency precedent, the FTC’s efforts to promulgate such rules would likely be met by a flashing red light.

Finally, while National Petroleum Refiners lauded the benefits of rulemaking authority and emphasized its usefulness for carrying out the FTC’s mission, the Supreme Court has since clarified that “[h]owever sensible (or not)” an interpretation may be, “a reviewing court’s task is to apply the text of the statute, not to improve upon it.” Whatever benefits rulemaking authority may confer on the FTC, they cannot justify departure from the text of the FTC Act.

The Road Not Taken: Congress Did Not Ratify UMC-Rulemaking Authority and the FTC Did Not Assert It

Two years after National Petroleum Refiners, Congress enacted the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act of 1975 (Magnuson-Moss). Section 202(a) of Magnuson-Moss amended the FTC Act to add a new Section 18 that, for the first time, gave the FTC express authority to issue UDAP rules, while imposing heightened procedural requirements for such rulemaking. Magnuson-Moss does not expressly address UMC rulemaking. Instead, it says only that Section 18 “shall not affect any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce.” Section 6(g) currently authorizes the FTC “(except as provided in [section 18] of this title) to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”

UMC-rulemaking proponents argue Magnuson-Moss effectively ratified National Petroleum Refiners and affirmed the commission’s authority with respect to substantive UMC rules. This revisionist interpretation is incorrect. The savings provision in Section 18(a)(2) that preserves “any authority” (as opposed to “the” authority) of the commission to prescribe UMC rules reflects, at most, an agnostic view on whether the FTC, in fact, possesses such authority. Rather, it suggests that whatever authority may exist for UMC rulemaking was unchanged by Section 18 and that Congress left the question open for the courts to resolve. The FTC itself appears to have recognized this uncertainty, as evidenced by the fact that it has never even attempted to promulgate a UMC rule in the nearly 50 years following the enactment of Magnuson-Moss.

Congressional silence on UMC hardly endorses the commission’s authority and is not likely to persuade an appellate court today. To rely on congressional acquiescence to a judicial interpretation, there must be “overwhelming evidence” that Congress considered and rejected the “precise issue” before the court. Although Congress considered adopting National Petroleum Refiners, it ultimately took no action on the FTC’s UMC-rulemaking authority. Hardly the “overwhelming evidence” required to read National Petroleum Refiners into the law.

The Forgotten Journey: The History of the Octane-Ratings Rule Reinforces the FTC’s Lack of UMC Rulemaking Authority

Those who argue that National Petroleum Refiners is still good law and that Congress silently endorsed UMC rulemaking have shown no interest in how the journey of the octane-ratings rule eventually ended. The FTC’s 1971 octane-ratings rule declared the failure to post octane disclosures on gasoline pumps both an unfair method of competition and an unfair or deceptive practice. But what has remained unexplored in the debate over FTC UMC rulemaking is what happened to the rule after the D.C. Circuit’s decision upheld rulemaking under Section 6(g), and what that tells us about congressional and agency views on UMC authority.

The octane-ratings rule upheld by the D.C. Circuit never took effect and was ultimately replaced when Congress enacted the Petroleum Marketing Practices Act (PMPA), Title II of which addressed octane-disclosure requirements and directed the FTC to issue new rules under the PMPA. But despite previous claims by the FTC that the rule drew on both UDAP and UMC authority, Congress declined to provide any authority beyond UDAP. While it is impossible to say whether Congress concluded that UMC rulemaking was unwise, illegal, or simply unnecessary, the PMPA—passed just two years after Magnuson-Moss—suggests that UMC rulemaking did not survive the enactment of Section 18. A brief summary of the rule’s meandering journey follows.

After the D.C. Circuit remanded National Petroleum Refiners, the district court ordered the FTC to complete an environmental-impact statement. While that analysis was pending, Congress began consideration of the PMPA. After its enactment, the commission understood Congress to have intended the requirements of Title II of the PMPA to replace those of the original octane-ratings rule. The FTC treated the enactment of the PMPA as effectively repealing the rule.

Section 203(a) of the PMPA gave the FTC rulemaking power to enforce compliance with Title II of the PMPA. Testimony in House subcommittee hearings centered on whether the legislation should direct the FTC to enact a TRR on octane ratings under expedited procedures that would be authorized by the legislation, or whether Congress should enact its own statutory requirements. Ultimately, Congress adopted a statutory definition of octane ratings (identical to the method adopted by the FTC in its 1971 rule) and granted the FTC rulemaking authority under the APA to update definitions and prescribe different procedures for determining fuel-octane ratings. Congress also specified that certain rules—such as those requiring manufacturers to display octane requirements on motor vehicles—would have heightened rulemaking procedures, such as rulemaking on the record after a hearing.

Notably, the PMPA specifically provides that violations of the statute, or any rule promulgated under the statute, “shall be an unfair or deceptive act or practice in or affecting commerce.” Although Section 203(d)(3) of the PMPA specifically exempts the FTC from the procedural requirements under Section 18, it does not simply revert to Section 6(g) or otherwise leave open a path for UMC rulemaking.

The record makes clear, however, that Congress was aware of FTC’s desire to claim UMC authority in connection with the octane-ratings rule, as FTC officials testified in legislative hearings that UMC authority was necessary to regulate octane ratings. After Magnuson-Moss was enacted, however, neither Congress nor the FTC tried to include UMC rulemaking in the PMPA. In a written statement reflecting the FTC’s views on the PMPA incorporated in the House report, the FTC described its original octane-ratings rule as UDAP only.[2] While not dispositive, the FTC’s apparent abandonment of its request for UMC authority after Magnuson-Moss, and Congress’ decision to limit the PMPA exclusively to UDAP, certainly suggests that UMC did not survive National Petroleum Refiners and that Congress did not endorse FTC UMC rulemaking.

Conclusion

The FTC appears poised to embark on a journey of broad, legislative-style competition rulemaking under Section 6(g) of the FTC Act. This would be a dead end. UMC rulemaking, rather than advancing clarity and certainty about what types of conduct constitute unfair methods of competition, would very likely be viewed by the courts as an illegal left turn. It would also be a detour for the agency from its core mission of case-by-case expert adjudication of the FTC Act—which, given limited agency resources, could result in a years-long escapade that significantly detracts from overall enforcement. The FTC should instead seek to build on the considerable success it has seen in recent years with administrative adjudications, both in terms of winning on appeal and in shaping the development of antitrust law overall by creating citable precedent in key areas.


[1]     H. Rep. No. 95-161, at 45, Appendix II, Federal Trade Commission—Agency Views, Statement of Federal Trade Commission by Christian S. White, Asst. Director for Special Statutes (Feb. 23, 1977).

[2]     38 Stat. 722 § 6(g), codified as amended at 15 U.S.C. §  46(g).


Happy Independence Day Week! Having started off with the holiday, this has been a relatively slow week on the antitrust front in the United States. But never fear, Europe is here to help fill out the weekly news roundup. And, even on a slow week there is plenty in the news domestically. Perhaps more important: everyone working on FTC and antitrust issues should take advantage of these respites when the come – any calm most likely is a harbinger of a storm to come.

This week’s headline is the passage of the Digital Markets Act (DMA) and Digital Services Act (DSA) by the European Parliament. The DMA has often been compared to the American Innovation and Choice Online Act (AICOA) – as of this week their biggest difference is that the DMA now is law while AICOA’s fate continues to appear fraught. For more details on the substance the DMA, we’ve discussed it on here on Truth on the Market, and both Axios and the Chamber of Commerce offer overviews.

Also on the European front, Europeans are beginning to reckon with the fact that soon Facebook may cease operations in Europe due to the bloc’s privacy rules. For pro-privacy regulators this may be viewed as a win. The rest of Europe was unavailable for comment (likely due to European privacy laws).

Back in the states the biggest news continues to be fallout from the Supreme Court’s embrace of the major questions doctrine. After a few days of misreporting on the opinion in West Virginia v. EPA as preventing the EPA from regulating greenhouse gasses, the media is now realizing that the import of the opinion goes to broader questions of the administrative state – and that it could impact tech regulation in particular.

Sophisticated thinkers have seen the potential impact of the case since before it was decided. In the days since they have been exploring the scope of the ruling and how the lower courts will implement it, discussing its implications for big tech, debating whether it will or will not limit the FCC’s net neutrality authority (answer: it will). And as numerous posts made as part of this TOTM FTC UMC Symposium have argued, it will likely substantially limit the FTC’s UMC rulemaking authority.

One thing I have wondered is how agencies will respond to the MQD in their rulemaking. Agencies often discuss the importance of their rules in an effort to justify them. Tom Wheeler was fond of discussing the Internet as the “most important network in the history of Man.” Arguing that the costs of regulatory action are very high helps to sell the benefits of regulation as substantial. But now, arguing that the costs of inaction are high might also make it easier to argue that the question being addressed in a major one – of vast political or economic significance. Will we start to see agencies downplay the importance of their work?

As usual, we can’t not have some updates on AICOA. The most salient update may be the lack of update. While Senator Klobuchar (D-MN) continues to push the bill forward, Leader Schumer (D-NY) has no apparent interest in bringing it to the floor. And even if it gets through the Senate, there may be trouble waiting in the House? Beyond that, this week saw both Zach Graves get off the fence and speak out against AICOA.

Quick hits: Protocol reports the CFPB is hoping to hire 25 technologists to help it wage war on the tech industry. Bloomberg reports the FTC is toying with the Robinson-Patman Act. And the FTC brings another right-to-repair action, this time against Weber, to prohibit warranties that are voided by independent repairs.

What you missed, What to watch? Last week’s Federalist Society discussion of Biden’s Antitrust Agenda: Mission Creep or Mission Achieved was a must-watch. Hope you didn’t miss it! If you did, you can redeem yourself by making it to AEI’s discussion with FTC Commissioner Noah Phillips on Crossing the Consumer Welfare Rubicon.

[On Monday, June 27, Concurrences hosted a conference on the Rulemaking Authority of the Federal Trade Commission. This conference featured the work of contributors to a new book on the subject edited by Professor Dan Crane. Several of these authors have previously contributed to the Truth on the Market FTC UMC Symposium. We are pleased to be able to share with you excerpts or condensed versions of chapters from this book prepared by authors of of those chapters. Our thanks and compliments to Dan and Concurrences for bringing together an outstanding event and set of contributors and for supporting our sharing them with you here.]

[The post below was authored by former Federal Trade Commission Acting Chair Maureen K. Ohlhausen and former Assistant U.S. Attorney General James F. Rill.]

Since its founding in 1914, the Federal Trade Commission (FTC) has held a unique and multifaceted role in the U.S. administrative state and the economy. It possesses powerful investigative and information-gathering powers, including through compulsory processes; a multi-layered administrative-adjudication process to prosecute “unfair methods of competition (UMC)” (and later, “unfair and deceptive acts and practices (UDAP),” as well); and an important role in educating and informing the business community and the public. What the FTC cannot be, however, is a legislature with broad authority to expand, contract, or alter the laws that Congress has tasked it with enforcing.

Recent proposals for aggressive UMC rulemaking, predicated on Section 6(g) of the FTC Act, would have the effect of claiming just this sort of quasi-legislative power for the commission based on a thin statutory reed authorizing “rules and regulations for the purpose of carrying out the provisions of” that act. This usurpation of power would distract the agency from its core mission of case-by-case expert application of the FTC Act through administrative adjudication. It would also be inconsistent with the explicit grants of rulemaking authority that Congress has given the FTC and run afoul of the congressional and constitutional “guard rails” that cabin the commission’s authority.

FTC’s Unique Role as an Administrative Adjudicator

The FTC’s Part III adjudication authority is central to its mission of preserving fair competition in the U.S. economy. The FTC has enjoyed considerable success in recent years with its administrative adjudications, both in terms of winning on appeal and in shaping the development of antitrust law overall (not simply a separate category of UMC law) by creating citable precedent in key areas. However, as a result of its July 1, 2021, open meeting and President Joe Biden’s “Promoting Competition in the American Economy” executive order, the FTC appears to be headed for another misadventure in response to calls to claim authority for broad, legislative-style “unfair methods of competition” rulemaking out of Section 6(g) of the FTC Act. The commission recently took a significant and misguided step toward this goal by rescinding—without replacing—its bipartisan Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, divorcing (at least in the commission majority’s view) Section 5 from prevailing antitrust-law principles and leaving the business community without any current guidance as to what the commission considers “unfair.”

FTC’s Rulemaking Authority Was Meant to Complement its Case-by-Case Adjudicatory Authority, Not Supplant It

As described below, broad rulemaking of this sort would likely encounter stiff resistance in the courts, due to its tenuous statutory basis and the myriad constitutional and institutional problems it creates. But even aside from the issue of legality, such a move would distract the FTC from its fundamental function as an expert case-by-case adjudicator of competition issues. It would be far too tempting for the commission to simply regulate its way to the desired outcome, bypassing all neutral arbiters along the way. And by seeking to promulgate such rules through abbreviated notice-and-comment rulemaking, the FTC would be claiming extremely broad substantive authority to directly regulate business conduct across the economy with relatively few of the procedural protections that Congress felt necessary for the FTC’s trade-regulation rules in the consumer-protection context. This approach risks not only a diversion of scarce agency resources from meaningful adjudication opportunities, but also potentially a loss of public legitimacy for the commission should it try to exempt itself from these important rulemaking safeguards.

FTC Lacks Authority to Promulgate Legislative-Style Competition Rules

The FTC has historically been hesitant to exercise UMC rulemaking authority under Section 6(g) of the FTC Act, which simply states that FTC shall have power “[f]rom time to time to classify corporations and … to make rules and regulations for the purpose of carrying out the provisions” of the FTC Act. Current proponents of UMC rulemaking argue for a broad interpretation of this clause, allowing for legally binding rulemaking on any issue subject to the FTC’s jurisdiction. But the FTC’s past reticence to exercise such sweeping powers is likely due to the existence of significant and unresolved questions of the FTC’s UMC rulemaking authority from both a statutory and constitutional perspective.

Absence of Statutory Authority

The FTC’s authority to conduct rulemaking under Section 6(g) has been tested in court only once, in National Petroleum Refiners Association v. FTC. In that case, the FTC succeeded in classifying the failure to post octane ratings on gasoline pumps as “an unfair method of competition.” The U.S. Court of Appeals for the D.C. Circuit found that Section 6(g) did confer this rulemaking authority. But Congress responded two years later with the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act of 1975, which created a new rulemaking scheme that applied exclusively to the FTC’s consumer-protection rules. This act expressly excluded rulemaking on unfair methods of competition from its authority. The statute’s provision that UMC rulemaking is unaffected by the legislation manifests strong congressional design that such rules would be governed not by Magnuson-Moss, but by the FTC Act itself. The reference in Magnuson-Moss to the statute not affecting “any authority” of the FTC to engage in UMC rulemaking—as opposed to “the authority”— reflects Congress’ agnostic view on whether the FTC possessed any such authority. It simply means that whatever authority exists for UMC rulemaking, the Magnuson-Moss provisions do not affect it, and Congress left the question open for the courts to resolve.

Proponents of UMC rulemaking argue that Magnuson-Moss left the FTC’s competition-rulemaking authority intact and entitled to Chevron deference. But, as has been pointed out by many commentators over the decades, that would be highly incongruous, given that National Petroleum Refiners dealt with both UMC and UDAP authority under Section 6(g), yet Congress’ reaction was to provide specific UDAP rulemaking authority and expressly take no position on UMC rulemaking. As further evidenced by the fact that the FTC has never attempted to promulgate a UMC rule in the years following enactment of Magnuson-Moss, the act is best read as declining to endorse the FTC’s UMC rulemaking authority. Instead, it leaves the question open for future consideration by the courts.

Turning to the terms of the FTC Act, modern statutory interpretation takes a far different approach than the court in National Petroleum Refiners, which discounted the significance of Section 5’s enumeration of adjudication as the means for restraining UMC and UDAP, reasoning that Section 5(b) did not use limiting language and that Section 6(g) provides a source of substantive rulemaking authority. This approach is in clear tension with the elephants-in-mouseholes doctrine developed by the Supreme Court in recent years. The FTC’s recent claim of broad substantive UMC rulemaking authority based on the absence of limiting language and a vague, ancillary provision authorizing rulemaking alongside the ability to “classify corporations” stands in conflict with the Court’s admonition in Whitman v. American Trucking Association. The Court in AMG Capital Management, LLC v. FTC recently applied similar principles in the context of the FTC’s authority under the FTC Act. Here,the Court emphasized “the historical importance of administrative proceedings” and declined to give the FTC a shortcut to desirable outcomes in federal court. Similarly, granting broad UMC-rulemaking authority to the FTC would permit it to circumvent the FTC Act’s defining feature of case-by-case adjudications. Applying the principles enunciated in Whitman and AMG, Section 5 is best read as specifying the sole means of UMC enforcement (adjudication), and Section 6(g) is best understood as permitting the FTC to specify how it will carry out its adjudicative, investigative, and informative functions. Thus, Section 6(g) grants ministerial, not legislative, rulemaking authority.

Notably, this reading of the FTC Act would accord with how the FTC viewed its authority until 1962, a fact that the D.C. Circuit found insignificant, but that later doctrine would weigh heavily. Courts should consider an agency’s “past approach” toward its interpretation of a statute, and an agency’s longstanding view that it lacks the authority to take a certain action is a “rather telling” clue that the agency’s newfound claim to such authority is incorrect. Conversely, even widespread judicial acceptance of an interpretation of an agency’s authority does not necessarily mean the construction of the statute is correct. In AMG, the Court gave little weight to the FTC’s argument that appellate courts “have, until recently, consistently accepted its interpretation.” It also rejected the FTC’s argument that “Congress has in effect twice ratified that interpretation in subsequent amendments to the Act.” Because the amendments did not address the scope of Section 13(b), they did not convince the Court in AMG that Congress had acquiesced in the lower courts’ interpretation.

The court in National Petroleum Refiners also lauded the benefits of rulemaking authority and emphasized that the ability to promulgate rules would allow the FTC to carry out the purpose of the act. But the Supreme Court has emphasized that “however sensible (or not)” an interpretation may be, “a reviewing court’s task is to apply the text of the statute, not to improve upon it.” Whatever benefits UMC-rulemaking authority may confer on the FTC, they cannot justify departure from the text of the FTC Act.

In sum, even Chevron requires the agency to rely on a “permissible construction” of the statute, and it is doubtful that the current Supreme Court would see a broad assertion of substantive antitrust rulemaking as “permissible” under the vague language of Section 6(g).

Constitutional Vulnerabilities

The shaky foundation supporting the FTC’s claimed authority for UMC rulemaking is belied by both the potential breadth of such rules and the lack of clear guidance in Section 6(g) itself. The presence of either of these factors increases the likelihood that any rule promulgated under Section 6 runs afoul of the constitutional nondelegation doctrine.

The nondelegation doctrine requires Congress to provide “an intelligible principle” to assist the agency to which it has delegated legislative discretion. Although long considered moribund, the doctrine was recently addressed by the U.S. Supreme Court in Gundy v. United States, which underscored the current relevance of limitations on Congress’ ability to transfer unfettered legislative-like powers to federal agencies. Although the statute in that case was ruled permissible by a plurality of justices, most of the Court’s current members have expressed concerns that the Court has long been too quick to reject nondelegation arguments, arguing for stricter controls in this area. In a concurrence, Justice Samuel Alito lamented that the Court has “uniformly rejected nondelegation arguments and has upheld provisions that authorized agencies to adopt important rules pursuant to extraordinarily capacious standards,” while Justices Neil Gorsuch and Clarence Thomas and Chief Justice John Roberts dissented, decrying the “unbounded policy choices” Congress had bestowed, stating that it “is delegation running riot” to “hand off to the nation’s chief prosecutor the power to write his own criminal code.”

The Gundy dissent cited to A.L.A. Schechter Poultry Corp. v. United States, where the Supreme Court struck down Congress’ delegation of authority based on language very similar to Section 5 of the FTC Act. Schechter Poultry examined whether the authority that Congress granted to the president under the National Industrial Recovery Act (NIRA) violated the nondelegation clause. The offending NIRA provision gave the president authority to approve “codes of fair competition,” which comes uncomfortably close to the FTC Act’s “unfair methods of competition” grant of authority. Notably, Schechter Poultry expressly differentiated NIRA from the FTC Act based on distinctions that do not apply in the rulemaking context. Specifically, the Court stated that, despite the similar delegation of authority, unlike NIRA, actions under the FTC Act are subject to an adjudicative process. The Court observed that the commission serves as “a quasi judicial body” and assesses what constitutes unfair methods of competition “in particular instances, upon evidence, in light of particular competitive conditions.” That essential distinction disappears in the case of rulemaking, where the commission acts in a quasi-legislative role and promulgates rules of broad application.

It appears that the nondelegation doctrine may be poised for a revival and may play a significant role in the Supreme Court’s evaluation of expansive attempts by the Biden administration to exercise legislative-type authority without explicit congressional authorization and guidance. This would create a challenging backdrop for the FTC to attempt aggressive new UMC rulemaking.

Antitrust Rulemaking by FTC Is Likely to Lead to Inefficient Outcomes and Institutional Conflicts

Aside from the doubts raised by these significant statutory and constitutional issues as to the legality of competition rulemaking by the FTC, there are also several policy and institutional factors counseling against legislative-style antitrust rulemaking.

Legislative Rulemaking on Competition Issues Runs Contrary to the Purpose of Antitrust Law

The core of U.S. antitrust law is based on broadly drafted statutes that, at least for violations outside the criminal-conspiracy context, leave determinations of likely anticompetitive effects, procompetitive justifications, and ultimate liability up to factfinders charged with highly detailed, case-specific determinations. Although no factfinder is infallible, this requirement for highly fact-bound analysis helps to ensure that each case’s outcome has a high likelihood of preserving or increasing consumer welfare.

Legislative rulemaking would replace this quintessential fact-based process with one-size-fits-all bright-line rules. Competition rules would function like per se prohibitions, but based on notice-and-comment procedures, rather than the broad and longstanding legal and economic consensus usually required for per se condemnation under the Sherman Act. Past experience with similar regulatory regimes should give reason for pause here: the Interstate Commerce Commission, for example, failed to efficiently regulate the railroad industry before being abolished with bipartisan consensus in 1996, costing consumers, by some estimates, as much as several billion (in today’s) dollars annually in lost competitive benefits. As FTC Commissioner Christine Wilson observes, regulatory rules “frequently stifle innovation, raise prices, and lower output and quality without producing concomitant health, safety, and other benefits for consumers.” By sacrificing the precision of case-by-case adjudication, rulemaking advocates are also losing one of the best tools we have to account for “market dynamics, new sources of competition, and consumer preferences.”

Potential for Institutional Conflict with DOJ

In addition to these substantive concerns, UMC rulemaking by the FTC would also create institutional conflicts between the FTC and DOJ and lead to divergence between the legal standards applicable to the FTC Act, on the one hand, and the Sherman and Clayton acts, on the other. At present, courts have interpreted the FTC Act to be generally coextensive with the prohibitions on unlawful mergers and anticompetitive conduct under the Sherman and Clayton acts, with the limited exception of invitations to collude. But because the FTC alone has the authority to enforce the FTC Act, and rulemaking by the FTC would be limited to interpretations of that act (and could not directly affect or repeal caselaw interpreting the Sherman and Clayton acts), it would create two separate standards of liability. Given that the FTC and DOJ historically have divided enforcement between the agencies based on the industry at issue, this could result in different rules of conduct, depending on the industry involved. Types of conduct that have the potential for anticompetitive effects under certain circumstances but generally pass a rule-of-reason analysis could nonetheless be banned outright if the industry is subject to FTC oversight. Dissonance between the two federal enforcement agencies would be even more difficult for companies not falling firmly within either agency’s purview; those entities would lack certainty as to which guidelines to follow: rule-of-reason precedent or FTC rules.

Conclusion

Following its rebuke at the Supreme Court in the AMG Capital Management case, now is the time for the FTC to focus on its core, case-by-case administrative mission, taking full advantage of its unique adjudicative expertise. Broad unfair methods of competition rulemaking, however, would be an aggressive step in the wrong direction—away from FTC’s core mission and toward a no-man’s-land far afield from the FTC’s governing statutes.

States seeking broadband-deployment grants under the federal Broadband Equity, Access, and Deployment (BEAD) program created by last year’s infrastructure bill now have some guidance as to what will be required of them, with the National Telecommunications and Information Administration (NTIA) issuing details last week in a new notice of funding opportunity (NOFO).

All things considered, the NOFO could be worse. It is broadly in line with congressional intent, insofar as the requirements aim to direct the bulk of the funding toward connecting the unconnected. It declares that the BEAD program’s principal focus will be to deploy service to “unserved” areas that lack any broadband service or that can only access service with download speeds of less than 25 Mbps and upload speeds of less than 3 Mbps, as well as to “underserved” areas with speeds of less than 100/20 Mbps. One may quibble with the definition of “underserved,” but these guidelines are within the reasonable range of deployment benchmarks.

There are, however, also some subtle (and not-so-subtle) mandates the NTIA would introduce that could work at cross-purposes with the BEAD program’s larger goals and create damaging precedent that could harm deployment over the long term.

Some NOFO Requirements May Impinge Broadband Deployment

The infrastructure bill’s statutory text declares that:

Access to affordable, reliable, high-speed broadband is essential to full participation in modern life in the United States.

In keeping with that commitment, the bill established the BEAD program to finance the buildout of as much high-speed broadband access as possible for as many people as possible. This is necessarily an exercise in economizing and managing tradeoffs. There are many unserved consumers who need to be connected or underserved consumers who need access to faster connections, but resources are finite.

It is a relevant background fact to note that broadband speeds have grown consistently faster in recent decades, while quality-adjusted prices for broadband service have fallen. This context is important to consider given the prevailing inflationary environment into which BEAD funds will be deployed. The broadband industry is healthy, but it is certainly subject to distortion by well-intentioned but poorly directed federal funds.

This is particularly important given that Congress exempted the BEAD program from review under the Administrative Procedure Act (APA), which otherwise would have required NTIA to undertake much more stringent processes to demonstrate that implementation is effective and aligned with congressional intent.

Which is why it is disconcerting that some of the requirements put forward by NTIA could serve to deplete BEAD funding without producing an appropriate return. In particular, some elements of the NOFO suggest that NTIA may be interested in using BEAD funding as a means to achieve de facto rate regulation on broadband.

The Infrastructure Act requires that each recipient of BEAD funding must offer at least one low-cost broadband service option for eligible low-income consumers. For those low-cost plans, the NOFO bars the use of data caps, also known as “usage-based billing” or UBB. As Geoff Manne and Ian Adams have noted:

In simple terms, UBB allows networks to charge heavy users more, thereby enabling them to recover more costs from these users and to keep prices lower for everyone else. In effect, UBB ensures that the few heaviest users subsidize the vast majority of other users, rather than the other way around.

Thus, data caps enable providers to optimize revenue by tailoring plans to relatively high-usage or low-usage consumers and to build out networks in ways that meet patterns of actual user demand.

While not explicitly a regime to regulate rates, using the inducement of BEAD funds to dictate that providers may not impose data caps would have some of the same substantive effects. Of course, this would apply only to low-cost plans, so one might expect relatively limited impact. The larger concern is the precedent it would establish, whereby regulators could deem it appropriate to impose their preferences on broadband pricing, notwithstanding market forces.

But the actual impact of these de facto price caps could potentially be much larger. In one section, the NOFO notes that each “eligible entity” for BEAD funding (states, U.S. territories, and the District of Columbia) also must include in its initial and final proposals “a middle-class affordability plan to ensure that all consumers have access to affordable high-speed internet.”

The requirement to ensure “all consumers” have access to “affordable high-speed internet” is separate and apart from the requirement that BEAD recipients offer at least one low-cost plan. The NOFO is vague about how such “middle-class affordability plans” will be defined, suggesting that the states will have flexibility to “adopt diverse strategies to achieve this objective.”

For example, some Eligible Entities might require providers receiving BEAD funds to offer low-cost, high-speed plans to all middle-class households using the BEAD-funded network. Others might provide consumer subsidies to defray subscription costs for households not eligible for the Affordable Connectivity Benefit or other federal subsidies. Others may use their regulatory authority to promote structural competition. Some might assign especially high weights to selection criteria relating to affordability and/or open access in selecting BEAD subgrantees. And others might employ a combination of these methods, or other methods not mentioned here.

The concern is that, coupled with the prohibition on data caps for low-cost plans, states are being given a clear instruction: put as many controls on providers as you can get away with. It would not be surprising if many, if not all, state authorities simply imported the data-cap prohibition and other restrictions from the low-cost option onto plans meant to satisfy the “middle-class affordability plan” requirements.

Focusing on the Truly Unserved and Underserved

The “middle-class affordability” requirements underscore another deficiency of the NOFO, which is the extent to which its focus drifts away from the unserved. Given widely available high-speed broadband access and the acknowledged pressing need to connect the roughly 5% of the country (mostly in rural areas) who currently lack that access, it is a complete waste of scarce resources to direct BEAD funds to the middle class.

Some of the document’s other problems, while less dramatic, are deficient in a similar respect. For example, the NOFO requires that states consider government-owned networks (GON) and open-access models on the same terms as private providers; it also encourages states to waive existing laws that bar GONs. The problem, of course, is that GONs are best thought of as a last resort to be deployed only where no other provider is available. By and large, GONs have tended to become utter failures that require constant cross-subsidization from taxpayers and that crowd out private providers.

Similarly, the NOFO heavily prioritizes fiber, both in terms of funding priorities and in the definitions it sets forth to deem a location “unserved.” For instance, it lays out:

For the purposes of the BEAD Program, locations served exclusively by satellite, services using entirely unlicensed spectrum, or a technology not specified by the Commission of the Broadband DATA Maps, do not meet the criteria for Reliable Broadband Service and so will be considered “unserved.”

In many rural locations, wireless internet service providers (WISPs) use unlicensed spectrum to provide fast and reliable broadband. The NOFO could be interpreted as deeming homes served by such WISPs as underserved or underserved, while preferencing the deployment of less cost-efficient fiber. This would be another example of wasteful priorities.

Finally, the BEAD program requires states to forbid “unjust or unreasonable network management practices.” This is obviously a nod to the “Internet conduct standard” and other network-management rules promulgated by the Federal Communications Commission’s since-withdrawn 2015 Open Internet Order. As such, it would serve to provide cover for states to impose costly and inappropriate net-neutrality obligations on providers.

Conclusion

The BEAD program represents a straightforward opportunity to narrow, if not close, the digital divide. If NTIA can restrain itself, these funds could go quite a long way toward solving the hard problem of connecting more Americans to the internet. Unfortunately, as it stands, some of the NOFO’s provisions threaten to lose that proper focus.

Congress opted not to include in the original infrastructure bill these potentially onerous requirements that NTIA now seeks, all without an APA rulemaking. It would be best if the agency returned to the NOFO with clarifications that would fix these deficiencies.

Welcome to the FTC UMC Roundup, our new weekly update of news and events relating to antitrust and, more specifically, to the Federal Trade Commission’s (FTC) newfound interest in “revitalizing” the field. Each week we will bring you a brief recap of the week that was and a preview of the week to come. All with a bit of commentary and news of interest to regular readers of Truth on the Market mixed in.

This week’s headline? Of course it’s that Alvaro Bedoya has been confirmed as the FTC’s fifth commissioner—notably breaking the commission’s 2-2 tie between Democrats and Republicans and giving FTC Chair Lina Khan the majority she has been lacking. Politico and Gibson Dunn both offer some thoughts on what to expect next—though none of the predictions are surprising: more aggressive merger review and litigation; UMC rulemakings on a range of topics, including labor, right-to-repair, and pharmaceuticals; and privacy-related consumer protection. The real question is how quickly and aggressively the FTC will implement this agenda. Will we see a flurry of rulemakings in the next week, or will they be rolled out over a period of months or years? Will the FTC risk major litigation questions with a “go big or go home” attitude, or will it take a more incrementalist approach to boiling the frog?

Much of the rest of this week’s action happened on the Hill. Khan, joined by Securities and Exchange Commission (SEC) Chair Gary Gensler, made the regular trip to Congress to ask for a bigger budget to support more hires. (FTC, Law360) Sen. Mike Lee  (R-Utah) asked for unanimous consent on his State Antitrust Enforcement Venue Act, but met resistance from Sen. Amy Klobuchar (D-Minn.), who wants that bill paired with her own American Innovation and Choice Online Act. This follows reports that Senate Majority Leader Chuck Schumer (D-N.Y.) is pushing Klobuchar to get support in line for both AICOA and the Open App Markets Act to be brought to the Senate floor. Of course, if they had the needed support, we probably wouldn’t be talking so much about whether they have the needed support.

Questions about the climate at the FTC continue following release of the Office of Personnel Management’s (OPM) Federal Employee Viewpoint Survey. Sen. Roger Wicker (R-Miss.) wants to know what has caused staff satisfaction at the agency to fall precipitously. And former senior FTC staffer Eileen Harrington issued a stern rebuke of the agency at this week’s open meeting, saying of the relationship between leadership and staff that: “The FTC is not a failed agency but it’s on the road to becoming one. This is a crisis.”

Perhaps the only thing experiencing greater inflation than the dollar is interest in the FTC doing something about inflation. Alden Abbott and Andrew Mercado remind us that these calls are misplaced. But that won’t stop politicians from demanding the FTC do something about high gas prices. Or beef production. Or utilities. Or baby formula.

A little further afield, the 5th U.S. Circuit Court of Appeals issued an opinion this week in a case involving SEC administrative-law judges that took broad issue with them on delegation, due process, and “take care” grounds. It may come as a surprise that this has led to much overwrought consternation that the opinion would dismantle the administrative state. But given that it is often the case that the SEC and FTC face similar constitutional issues (recall that Kokesh v. SEC was the precursor to AMG Capital), the 5th Circuit case could portend future problems for FTC adjudication. Add this to the queue with the Supreme Court’s pending review of whether federal district courts can consider constitutional challenges to an agency’s structure. The court was already scheduled to consider this question with respect to the FTC this next term in Axon, and agreed this week to hear a similar SEC-focused case next term as well. 

Some Navel-Gazing News! 

Congratulations to recent University of Michigan Law School graduate Kacyn Fujii, winner of our New Voices competition for contributions to our recent symposium on FTC UMC Rulemaking (hey, this post is actually part of that symposium, as well!). Kacyn’s contribution looked at the statutory basis for FTC UMC rulemaking authority and evaluated the use of such authority as a way to address problematic use of non-compete clauses.

And, one for the academics (and others who enjoy writing academic articles): you might be interested in this call for proposals for a research roundtable on Market Structuring Regulation that the International Center for Law & Economics will host in September. If you are interested in writing on topics that include conglomerate business models, market-structuring regulation, vertical integration, or other topics relating to the regulation and economics of contemporary markets, we hope to hear from you!

[This post wraps the initial run of Truth on the Market‘s digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

Over the past three weeks, we have shared contributions from more than a dozen antitrust commentators—including academics, practitioners, students, and a commissioner of the Federal Trade Commission—discussing the potential for the FTC to develop substantive rules using its unfair methods of competition (UMC) authority. This post offers a recap of where we have been so far in this discussion and also discusses what comes next for this symposium and our coverage of these issues.

First, I must express a deep thank you to all who have contributed. Having helped to solicit, review, and edit many of these pieces, it has been a pleasure to engage with and learn from our authors. And second, I am happy to say to everyone: stay tuned! The big news this week is that, after a long wait, Alvaro Bedoya has been confirmed to the commission, likely creating a majority who will support Chair Lina Khan’s agenda. The ideas that we have been discussing as possibilities are likely to be translated into action over the coming weeks and months—and we will be here to continue sharing expert commentary and analysis.

The Symposium Goes On: An Open Call for Contributions

We will continue to run this symposium for the foreseeable future. We will not have daily posts, but we will have regular content: a weekly recap of relevant news, summaries of important FTC activity and new articles and scholarship, and other original content.

In addition, in the spirit of the symposium, we have an open call for contributions: if you would like to submit a piece for publication, please e-mail it to me or Keith Fierro. Submissions should be 1,500-4,000 words and may approach these issues from any perspective. They should be your original work, but may include short-form summaries of longer works published elsewhere, or expanded treatments of shorter publications (e.g., op-eds).

The Symposium So Far

We have covered a lot of ground these past three weeks. Contributors to the symposium have delved deeply into substantive areas where the FTC might try to use its UMC authority; they have engaged with one another over the scope and limits of the FTC’s authority; and they have looked at the FTC’s history, both ancient and recent, to better understand what the FTC may try to do, where it may be successful, and where it may run into a judicial wall.

Over 50,000 words of posts cannot be summarized in a few paragraphs, so I will not try to provide such a summary. The list of contributions to the symposium to date is below and each contribution is worth reading both on its own and in conjunction with others. Instead, I will pull out some themes that have come up across these posts:

Scope of FTC Authority

Unsurprisingly, several authors engaged with the potential scope of FTC UMC-rulemaking authority, with much of the discussion focused on whether the courts are likely to continue to abide the U.S. Court of Appeals for the D.C. Circuit’s 1973 Petroleum Refiners opinion. It is fair to say that “opinions varied.” Discussion included everything from modern trends of judicial interpretation and how they differ from those used in 1973, to close readings of the Magnuson-Moss legislation (adopted in the immediate wake of the Petroleum Refiners opinion), and consideration of how more recent cases such as AMG and the D.C. Circuit’s American Library Association case affect our thinking about Petroleum Refiners.

Likely Judicial Responses

Several contributors also considered how the courts might respond to FTC rulemaking, allowing that the commission may have some level of substantive-rulemaking authority. Several authors invoked the Court’s recent “major questions” jurisprudence. Dick Pierce captures the general sentiment that any broad UMC rulemaking “would be a perfect candidate for application of the major questions doctrine.” But as with any discussion of the “major” questions doctrine, the implicit question is when a question is “major.” There seems to be some comfort with the idea that the FTC can do some rulemaking, assuming that the courts find that it has substantive-rulemaking authority under Section 6(g), but that the Commission faces an uncertain path if it tries to use that authority for more than incremental changes to antitrust law.

Virtues and Vices of Rulemaking

A couple of contributors picked up on themes of the virtues and vices of developing legal norms through rulemaking, as opposed to case-by-case adjudication. Aaron Neilson, for instance, argues that the FTC likely most needs to use rules to make bigger changes to antitrust law than are possible through adjudication, but that such big changes are the ones most likely to face resistance from the courts. And FTC Commissioner Noah Phillips looks at the Court’s move away from per se rules in antitrust cases over the past 50 years, arguing that the same logic that has pushed the courts to embrace a case-by-case approach to antitrust law is likely to create judicial resistance to any effort by the FTC to tack an opposite course.

The Substance of Substantive Rules

Several contributors addressed specific substantive issues that the FTC may seek to address with rules. In some cases, these issues formed the heart of the post; in others, they were used as examples along the way. For instance, Josh Sarnoff evaluated whether the FTC should develop rules around aftermarket parts and to address right-to-repair concerns. Dick Pierce also looked at that issue, along with several others (potential rules to address reverse-payment settlements in the pharmaceutical industry, below-cost pricing, and non-compete clauses involving low-wage workers).

Gaining Perspective

And last, but far from least, several contributors asked questions that help to put any thinking about the FTC into perspective. Jonathan Barnett, for instance, looks at the changes the FTC has made over the past year to its public statements of mission and priorities, alongside its potential rulemaking activity, to discuss the commission’s changing thinking about free markets. Ramsi Woodcock juxtaposes the FTC, the statutory framing of its regulatory authority, with the FOMC and its statutory power to directly affect the value of the dollar. And Bill MacLeod takes us back to 1935 and the National Industrial Recovery Act, reflecting on how the history of rules of “fair competition” might inform our thinking about the FTC’s authority today.

That’s a lot of ground to have covered in three weeks. Of course, the FTC will keep moving, and the ground will keep shifting. We look forward to your continued engagement with Truth on the Market and the authors who have contributed to this discussion.

[The 15th entry in our FTC UMC Rulemaking symposium is a guest post from DePaul University College of Law‘s Josh Sarnoff, a former Thomas A. Edison Distinguished Scholar at the U.S. Patent and Trademark Office. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

We used to have a robust aftermarket for non-original equipment manufacturer (OEM) automobile repair parts and “independent” repair services, but car companies have increasingly resorted to design-patent protection to prevent competition in the supply of cosmetic repair parts such as bumpers, hoods, panels, and mirrors. The predictable and intended consequence has been to raise prices and reduce options for consumers, effectively monopolizing the separate repair parts and services markets through federal intellectual-property control over needed repair products or inputs to service markets.

Because this is a federal legal right, moreover, it preempts state “right to repair” laws that would authorize such products and services, either as a matter of consumer rights or as a remedy for anti-competitive conduct or “unfair or deceptive” acts and practices resulting from tying a monopoly over the original sales market for specific automobiles (protected by those intellectual-property rights) into a monopoly in the repair markets for those automobiles. Existing law under Section 102(c) of the 1975 Magnuson-Moss Warranty Act does not explicitly prohibit such supply-restriction anti-competitive conduct when protecting against warranty requirements that would void warranties based on “tie-in sales” requirements that would void warranties if third-party repair parts or independent repair services are used by consumers. 

Unlike for functional parts of “machines,” which have always been subject to utility-patent rights, non-functional parts of machines were not (and still are not) statutorily authorized as the subject of design-patent rights. However, in 1980, the U.S. Court of Appeals for the Federal Circuit—in an opinion by Judge Giles Rich—held that design patents can protect parts or fragments of “articles of manufacture,” the class of statutory subject matter for which ornamental design-patent rights can be provided.

By reducing the “size” of the thing to which the design-patent right applies—here, a part rather than an entire automobile (leaving aside the question of how machines get protection in the first place, when Congress hasn’t authorized it for design patents)—the historic right to repair a purchased machine without reconstructing it can be effectively overridden. This is because the third-party parts supplier is now constructing an entire part (e.g., a headlight) subject to design-patent rights, whereas they would have been authorized to make a part for use in repairing the entire car (and note that designs are supposed to be understood as a whole, not by assessing only parts of the objects to be protected—the article of manufacture).

In 2019, the Federal Circuit held that consumer desires to purchase and use replacement cosmetic auto parts to repair cars to their original appearance is not a “functional” requirement for which ornamental design-patent rights cannot be provided, and thus design patents protect against competition to supply such ornamental repair parts. As the court stated:

Our precedent gives weight to this language, holding that a de-sign patent must claim an “ornamental” design, not one ‘dictated by function.’…  We hold that, even in this context of a consumer preference for a particular design to match other parts of a whole, the aesthetic appeal of a design to consumers is inadequate to render that design functional.

This decision assures that design patents override both consumers’ “right” to restore the appearance of their products to the original condition and state or insurance-policy requirements that require the use of “must-match” aftermarket parts to do so. If the manufacture or import of aftermarket parts is prohibited by design-patent law, then obviously consumers and independent repair shops cannot use them to repair their vehicles, and insurers cannot control costs by paying for the use such aftermarket parts. This is true even when those aftermarket parts are superior in quality to the OEM parts, at lower prices.

The Federal Trade Commission (FTC) in theory could address the over-extension by the judiciary of design-patent protection for cosmetic auto parts, by finding such repair-restricting practices relying on design-patent protection to be either anticompetitive or unfair to consumers. The FTC has already recognized the need to protect the right to repair products. In 2013, the Supreme Court held in FTC v. Actavis that conduct within the scope of granted patent rights may still constitute an antitrust violation. Using patent rights to tie repair parts and services to the original purchase market may violate either Section 1 or Section 2 of the Sherman Act. 

The FTC might also, in theory, extend antitrust principles beyond what is prohibited under the Sherman Act, using its adjudicatory “unfair methods of competition” (UMC) authority under Section 5(a)(2) & (b) or its rulemaking authority under Section 6(g). Some have argued that the FTC cannot or should not adopt prohibitions on anticompetitive conduct that does not violate other statutory antitrust laws, and that Section 6(g) rulemaking authority is limited to procedural rules and does not authorize substantive antitrust rulemaking, even though the U.S. Court of Appeals for the D.C. Circuit upheld such substantive rulemaking in 1973 (which would now be overruled if the issue reached the Supreme Court). I’ll leave that issue aside for now, even though it is often difficult to distinguish UMC from unfair commercial practices.

Instead, I’ll focus on the clearer and undisputed authority of the FTC to issue (admittedly procedurally burdensome) rules to prohibit “unfair or deceptive commercial practices” (UDCP) using rulemaking authority under Section 18 of the FTC Act. Under that section, subsection (a)(1)(B), the FTC can “prescribe … rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce.” But the rulemaking authority does not define what “practices are unfair, except to refer to Section 5(a)(1)’s legislative declaration that “unfair … commercial practices” are “unlawful.”

In turn, Section 5(n) of the FTC Act defines an “unfair” act or practice as one that must “cause[] 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.”

For the reasons described above, use of design-patent rights (even if they may result in lower upfront sales prices of cars, because manufacturers may obtain additional profits through leveraging those rights to prevent an aftermarket in repair parts) should clearly qualify as “unfair” under this definition, even if Congress (at least according to the Federal Circuit, even if the statutory text doesn’t support that and only activist judicial interpretation is the proximate cause of the authority) is the source of the patent right that is being used “unfairly.”

“Common wisdom,” however, suggests that the FTC will not choose to exercise its “unfairness” authority beyond recognized categories of specifically and legislatively prohibited acts, just like with its antitrust UMC authority, without further legislative enactment. This common wisdom may be belied by the fact that the FTC updated its Section 18 rulemaking procedures in July 2021, and recently requested that the public bring complaints over illegal repair restriction practices to its attention and indicated that it would “prioritize investigations into unlawful repair restrictions under … Section 5….”

More importantly, “common wisdom” suggests that Congress restricted the FTC’s authority to impose broad new rules defining unfair commercial practices when it adopted the Section 18 rules in response to purported overreach by the FTC in the late 1970s under the Carter administration, as well as temporarily defunded the agency. But Section 18 does not substantively modify the FTC’s Section 5(a) authority (to which Section 18 rulemaking applies), and the common wisdom is likely incorrect that the FTC lacks the power to issue such rules (even if it lacks the willpower).

Since the 1980 legislative change to FTC’s UDCP rulemaking requirements, the FTC has been reluctant to engage in broad rulemaking to define unfairness in commercial contexts, although it has continued to enforce more vigorously prohibitions against deception against consumers, including through deceptive advertisements. The FTC has not issued any similar, generally applicable principles as to what constitutes “unfairness” in commercial practices.

Nevertheless, it should be clear that the FTC has the power to do so. But in the current judicial-review context, the FTC may be even more reluctant than during the past four decades to exercise such authority, as it may lead to judicial invalidation of its Section 5(a)&(b) authority to declare what practices are “unfair.”

As many administrative law scholars have noted, the Supreme Court has recently adopted a much more aggressive “major questions” doctrine for refusing deference to agency interpretations of the scope of their regulatory authority. Instead of lack of deference, the Court has imposed a new and restrictive “clear statement” rule, requiring greater legislative specificity before finding that an agency possesses regulatory authority to take challenged actions. Accordingly, should the FTC issue a new, broad unfair commercial practices rule under Section 18 prohibiting the use of design patents to prevent aftermarket parts from being manufactured—on grounds that it is “unfair” to consumers and adversely affects their “right” of repair—then absent significant change to the Court’s composition, that rule will likely be invalidated because Congress did not define “unfairness” with sufficient specificity.

Even more importantly, such a rule would provide a very “good” test case for a Supreme Court itching to revive the non-delegation doctrine and to hamstring the administrative regulatory apparatus. Thus, the FTC might rightly fear outright repeal of its Section 5(a) as well as its Section 18 (and Section 6g substantive rulemaking) authority should it adopt an aggressive consumer-protection approach.

In conclusion, given the likely lack of political will on the FTC—in light of the likely response of the Supreme Court should the FTC exercise its legislatively conferred power in a consumer-friendly fashion—the use of design patents to restrict the right to repair is a problem that Congress should and must fix. Congress should do so both by adopting a right-to-repair law (such as the Fair Repair Act) and by amending the design-patent act to ensure that the consumer right to repair can be effectuated.

Since broad legislation to accomplish this in a general right-to-repair law or in a modification of the design-patent law that overturns partial and fragment protection for machines directly is likely to face significant opposition, Congress should at least act swiftly to pass the pending SMART Act, which provides that manufacture, import, and offer for sale of design-patented cosmetic automobile repair parts is not an act of infringement, and permits sale and use of those parts after a limited period of exclusivity (30 months) that assures more than sufficient returns on investment in such parts-design development. That way, consumers will be protected in regard to the second most valuable purchase they can make (the first being their home) and the one that is most likely to need repair given the continuing, widespread problem of traffic accidents (the subject of different consumer protection measures that are needed).

[The 14th entry in our FTC UMC Rulemaking symposium is a guest post from Bill MacLeod, a former Federal Trade Commission bureau director and currently a partner with Kelley Drye & Warren LLP, where he chairs the firm’s antitrust practice and co-chairs its consumer protection practice. Bill gratefully acknowledges the research and analysis of Jacob Hopkins in preparing this article, which does not represent the views of any firm or client. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

Introduction

In November 2021, the Federal Trade Commission (FTC) published a draft strategic plan for fiscal years 2022-2026 that previewed its vision for enforcement without the rule of reason guiding the analysis and without consumer welfare defining the objective. The draft plan dropped a longstanding commitment from the FTC’s previous strategic plans to foster “vigorous competition” and replaced it with a pledge to police “fair competition.”

The commission also broadened its focus beyond consumers. Instead of dedicating competition enforcement to them, the FTC would see to it that competition would serve the general public. Clues as to the nature of the public interest appeared among the plan’s more specific objectives. For example, to advance “all forms of equity, and support underserved and marginalized communities through the FTC’s competition mission.” The draft plan emphasized an objective to protect employees from unfair competition. Gone from the draft entirely was a previous vow to avoid “unduly burdening legitimate business activity.”

Additional details of the agenda emerged in December 2021, when the commission announced a statement of regulatory priorities describing plans to develop unfair-methods-of-competition (UMC) rulemakings. The annual regulatory plan, also released in December 2021, reiterated the list of practices that could be targeted for competition rules, prompting a dissent from Commissioner Christine S. Wilson, who saw in the plan “the foundation for an avalanche of problematic rulemakings.” Referring to the now-defunct Interstate Commerce Commission and Civil Aeronautics Board, she noted “the disastrous regulatory frameworks in the transportation industry teach the attentive student that rules stifle innovation, increase costs, raise prices, limit choice, and decrease output, frequently harming the very parties they are intended to benefit, and the benefits that flowed to consumers when competition replaced regulation in transportation.”

The Courts on Competition Rulemaking Authority

Whether the FTC has the authority to promulgate the rules it now contemplates has been a 50-year-old debate among legal scholars. Section 6(g) of the FTC Act authorizes the commission: “From time to time to classify corporations and to make rules and regulations for the purpose of carrying out the provisions of sections 41 to 46 and 47 to 58 of this title.”[1] Before 1964, this rulemaking power was directed to the FTC’s administrative functions. Since then, rulemaking has typically addressed consumer-protection concerns, the authority for which was codified in Magnuson-Moss Warranty Act in 1975, incorporated in Section 18 of the FTC Act.

Only once has the commission’s power to promulgate a competition rule under Section 6(g) been tested in the courts. That test played out in 1972 and 1973 in a case involving a rule the FTC issued requiring the posting of octane ratings on pumps at gas stations.[2] Failure to post was declared a UMC and an unfair or deceptive practice (UDAP). Petroleum refiners and retailers challenged various aspects of the rules, including the commission’s authority to issue them, and the case came to Judge Aubrey Robinson in the U.S. District Court for Washington, D.C. He held that the FTC lacked such authority.

The opinion began with a review of the legislative history, which was “clear” to the court.[3] Section 6(g) was intended “only as an authorization for internal rules of organization, practice, and procedure [and] to insure that the FTC had the power to require reports from all corporations.”[4] Buttressing the history were subsequent occasions in which Congress had explicitly granted FTC authority for regulations confined to specific practices, which would have been unnecessary if the power already resided in Section 6(g). That section had not changed since 1914, and the FTC for approximately 50 years had not asserted rulemaking authority under it.

The commission urged the court to apply the definitions of regulation in the Administrative Procedure Act (APA) to the FTC Act. The proposition that words written in 1946 had the same meaning as words written in 1914 was “inconceivable” without any indication that they were related. Further undermining the commission’s argument were amendments to other legislation after APA to authorize rulemaking at other agencies. The absence of a similar amendment to the FTC Act implied that the “rulemaking power in Section 6(g) of the FTCA remains unchanged by Congress to date, and conveys only the authority to make such rules and regulations in connection with its housekeeping chore and investigative responsibilities.”[5] Indeed, Congress considered an amendment that would have authorized the commission to “make, alter, or repeal regulations further defining more particularly unfair trade practices or unfair or oppressive competition.”[6] That legislation died.

Also rejected was the argument that the FTC’s authority under Section 5 to “prevent” UMC includes the power to regulate. The proposition ignored “the very next paragraph of the statute that requires the Commission to conduct adjudicative proceedings.”[7] Until recently, the court noted, the commission itself had repeatedly admitted it possessed no power to promulgate substantive rules,[8] and that the Supreme Court had impliedly rejected the existence of such power.[9] In his conclusion, Judge Robinson quoted Justice Louis Brandeis:

What the Government asks is not a construction of the statute, but, in effect, an enlargement of it by the court, so that what was omitted, presumably by inadvertence, may be included within its scope. To supply omissions transcends the judicial function.[10]

The FTC appealed, and the U.S. Court of Appeals for the D.C. Circuit reversed.[11] In an opinion by Judge J. Skelly Wright, the court cautioned:

Our duty here is not simply to make a policy judgment as to what mode of procedure…best accommodates the need for effective enforcement of the Commission’s mandate…. The extent of its powers can be decided only by considering the powers Congress specifically granted it in the light of the statutory language and background.[12]

But the legislative history that was clear to the lower court became opaque on appeal. Judge Wright acknowledged that Rep. J. Harry Covington (D-Md)—the floor manager of the bill that became the FTC Act—assured his colleagues that Congress was not granting the FTC the power for legislative rulemaking. That would have been unconstitutional, in Covington’s view, although a delegation of administrative rulemaking was not.[13] As he assured his colleagues:

The Federal trade commission will have no power to prescribe the methods of competition to be used in future. In issuing its orders it will not be exercising power of a legislative nature….

The function of the Federal trade commission will be to determine whether an existing method of competition is unfair, and, if it finds it to be unfair, to order the discontinuance of its use. In doing this it will exercise power of a judicial nature….[14]

Supporting Covington was a colloquy between two other congressmen, also quoted by the court:

Mr. SHERLEY. If the gentleman will permit, the Federal trade commission differs from the Interstate Commerce Commission in that it has no affirmative power to say what shall be done in the future?

Mr. STEVENS of Minnesota. Certainly.

Mr. SHERLEY. In other words, it exercises in no sense a legislative function such as is exercised by the Interstate Commerce Commission?

Mr. STEVENS of Minnesota. Yes. The gentleman is entirely right. We desired clearly to exclude that authority from the power of the commission. We did not know as we could grant it anyway. But the time has not arrived to consider or discuss such a question.[15]

But this legislative history, which concededly “carefully differentiated” the FTC’s power from the ICC’s power[16] was “utterly unhelpful” to Judge Wright, who somehow could not square synonymous assurances that the FTC would have “no power to prescribe methods of competition” and would exercise “in no sense a legislative function.” The judge found an easier approach:

If one ignores the “legislative” — “administrative” technical distinction which influenced Covington and utilizes a more practical, broader conception of “legislative” type activity prevalent today, they can be read to support substantive rule-making of the kind asserted by the [FTC].

Freed from the background of the 1914 act, the judge adopted a judicial philosophy popular in the early 1970s. Notions of practicality and fairness allowed courts to realize unexpressed purposes, which in the case of FTC rulemaking meant “specifically the advisability of utilizing the Administrative Procedure Act’s rule-making procedures to provide an agency about to embark on legal innovation with all relevant arguments and information.” Similar decisions supporting rulemaking powers “indisputably flesh out the contemporary legal framework in which both the FTC and this court operate and which we must recognize.”[17] For example, if the National Labor Relations Board (NLRB) could regulate, the FTC should be able to do so, as well. It did not bother the judge that the NLRB and other agencies had received explicit rulemaking authority, or that commission officials had often admitted that they lacked that power. 

The Supreme Court declined to review the Petroleum Refiners holdings, but its interpretation of the FTC Act last year casts serious doubt on the validity of Judge Wright’s decision today. In AMG Capital Management LLC v. Federal Trade Commission, the FTC used many of the same arguments that had worked in 1972. This time, however, the agency was unable to persuade a single justice that the act conferred an unexpressed power.

The question in AMG concerned whether the agency could bypass administrative adjudication and bring a cause of action directly in federal court for monetary relief. Section 13(b) of the FTC Act authorizes the agency to seek injunctions without administrative proceedings, but a different section of the act creates a cause of action for redress. Section 19(b) prescribes the procedure whereby the commission can seek money. An action to do so may commence only after the agency has concluded an administrative proceeding that finds a violation of Section 5. For decades, the commission shunned the cumbersome two-step procedure and resorted almost exclusively to consolidated Section 13(b) actions to obtain monetary relief. And for decades, courts affirmed these cases, but the Supreme Court had never weighed in.

Writing for a unanimous court, Justice Stephen Breyer found it highly unlikely “that Congress, without mentioning the matter, would have granted the Commission authority so readily to circumvent its traditional §5 administrative proceedings.”[18] Other statutes might merit broader construction, but not when the powers granted were as clearly expressed as in the FTC Act. The court rejected the commission’s arguments that Congress had intended to allow the commission to choose between alternative enforcement avenues. Congress had not acquiesced in the commission’s use of both approaches (even though Section 19 preserved “any authority of the Commission under any other provision of law”). Addressing the arguments that violators would keep billions of dollars in ill-gotten gains if the commission had to adjudicate first and litigate afterward, the court responded that the agency could ask Congress for the more efficient power. It appeared nowhere in the text of the FTC Act, and “Congress…does not…hide elephants in mouseholes.”[19]

Rules of Fair Competition Fail in the Supreme Court

Long before AMG, the Supreme Court had addressed the limits of the FTC’s authority. Judge Robinson in Petroleum Refiners cited five decisions dating from 1920 to 1965 supporting his conclusion that the court had impliedly rejected rulemaking power. One of those decisions came on May 27, 1935, when the Supreme Court used the limitations of FTC authority to deal a fatal blow to the National Industrial Recovery Act (NIRA). The centerpiece of the New Deal, NIRA authorized the federal government to adopt regulations intended to achieve “fair competition.” Those regulations normalized working conditions, wages, products, and prices in many trades. Their purpose was to stem the forces that were depressing wages and prices in the early years of the Great Depression. Vigorous competition was regarded as one of those forces.

Appeals of convictions for violating one of the codes gave the Supreme Court the opportunity to opine on the meaning of “fair competition” and the appropriate process by which competition should be assessed.[20] The court sought to reconcile fair competition and unfair methods of competition, as the terms were respectively defined in NIRA and the FTC Act. A provision in NIRA deemed a violation of “fair competition” to constitute an “unfair method of competition” under the FTC Act, but the dichotomy made no sense to the Court. The difference between the concepts “lies not only in procedure, but in subject matter.”

On substance, the court held:

We cannot regard the “fair competition” of the codes as antithetical to the “unfair methods of competition” of the FTCA. The “fair competition” of the codes has a much broader range, and a “new significance….for the protection of consumers, competitors, employees, and others, and in furtherance of the public interest… [21]

Such power was the province of Congress, not a regulatory agency.

The court then examined the procedures prescribed for rulemaking under NIRA and adjudicating under FTC Act. Fair competition codes were proposed by industry associations, reviewed by agencies, and adopted by executive orders. By contrast, the FTC had to prove violations in adjudicatory proceedings:

What are “unfair methods of competition” are thus to be determined in particular instances, upon evidence, in the light of particular competitive conditions and of what is found to be a specific and substantial public interest.…To make this possible, Congress set up a special procedure. A Commission, a quasi-judicial body, was created. Provision was made [for] formal complaint, for notice and hearing, for appropriate findings of fact supported by adequate evidence, and for judicial review to give assurance that the action of the Commission is taken within its statutory authority.[22]

In 1935, Congress could not constitutionally delegate the power to issue rules advancing undefined interests of consumers, competitors, employees, and the public to an agency of general jurisdiction. The Congress that passed the FTC Act was well aware of that constraint. That was why the bill’s floor manager assured his colleagues the FTC “will have no power to prescribe the methods of competition to be used in future [or] power of a legislative nature…it will exercise power of a judicial nature.”

Conclusion

A regulatory regime intended to replace vigorous competition with fair competition, to benefit interest groups other than customers, to be implemented while giving short shrift to costs and benefits is unprecedented (at least since NIRA). The mission that the FTC has previewed anticipates rules that can be expected to impose undue costs on legitimate businesses in markets far larger than the sectors once regulated by the ICC and CAB. If history is any guide, the commission’s agenda could cost U.S. consumers hundreds of billions of dollars.

But first, the agency will have to persuade the courts that Congress gave it the power to do so, and if precedent is any guide, the commission will fail. After AMG, courts will be reluctant to extract a phrase in Section 6(g) from the framework of the FTC Act. The power to prevent UMC is specified in the Act, and adjudication is the sole procedure described to exercise that power. If the commission argues that “rules and regulations for the purpose of carrying out the provisions of” the act include vast powers outside those provisions, the agency will end up asking the courts to find another elephant hiding in a mousehole.


[1] 15 U.S.C. §46 (An amendment excepted section 57a(a)(2) from its scope. The amendment specifically authorized consumer protection rules but declined to “affect any authority” the FTC to promulgate other rules.)

[2] National Petroleum Refiners Association v. FTC, 340 F. Supp. 1343 (D.D.C. 1972) (rev’d National Petroleum Refiners v. FTC, 482 F.2d 672 (D.C. Cir., 1973); cert. denied, 415 U.S. 915 (1974).

[3] 340 F. Supp. at 1345.

[4] Id. (citation omitted).

[5] Id. at 1348-49.

[6] Id. at 1346 (citation omitted).

[7] Id. at 1349.

[8] Id at 1350 (citing Congressional hearings from the 1960s and 1970s).

[9] Id. at 1350 (Federal Trade Commission v. Colgate Palmolive Co., 380 U.S. 374, 385, 85 S.Ct. 1035, 13 L.Ed.2d 904 (1965); Addison v. Holly Hill Fruit Products, Inc., 322 U.S. 607, 617-618, 64 S.Ct. 1215, 88 L.Ed. 1488 (1944); Schechter Poultry Corp. v. United States, 295 U.S. 495, 532-533, 55 S.Ct. 837, 79 L.Ed. 1570 (1935); Federal Trade Commission v. Raladam Co., 283 U.S. 643, 648, 51 S.Ct. 587, 75 L.Ed. 1324 (1931); Federal Trade Commission v. Gratz, 253 U.S. 421, 427, 40 S.Ct. 572, 64 L.Ed. 993 (1920)).

[10] Id. at 1350 (citing Iselin v. United States, 270 U.S. 245, 251 (1926).

[11] National Petroleum Refiners Ass’n v. F.T.C., 482 F.2d 672 (D.C. Cir., 1973) (Since the passage of Section 18, Section 6 no longer authorizes consumer protection rules.).

[12] 482 F.2d at 674.

[13] Id. at 708 (stating, “This view of Congressman Covington’s remarks is buttressed by a reading of one of the cases on which he relied to rebut arguments that the grant of power to the commission to enforce and elaborate the standard of illegality was an unconstitutional delegation of legislative power. United States v. Grimaud, 220 U.S. 506, 55 L. Ed. 563, 31 S.C.t. 480 (1911).”)

[14] Id. (citations omitted).

[15] Id. at 708, n 19 (citations omitted).

[16] Id. at 702 (citations omitted).

[17] Id. at 683.

[18] Id. (citing D. FitzGerald, The Genesis of Consumer Protection Remedies Under Section 13(b) of the FTC Act 1–2, Paper at FTC 90th Anniversary Symposium, Sept. 23, 2004, arguing that, in the mid-1970s, “no one imagined that Section 13(b) of the [FTC] Act would become an important part of the Commission’s consumer protection program”).

[19]  Id. (citing Whitman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2001)).

[20] Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935).

[21] Id at 534 (Citing Title I) (of no help was that the codes could “provide such exceptions to and exemptions from the provisions of such code as the President in his discretion deems necessary to effectuate the policy herein declared.” (quotation marks omitted).)

[22] Id. at 533-344 (citing Federal Trade Comm’n v. Beech-Nut Packing Co., 257 U. S. 441, 257 U. S. 453; Federal Trade Comm’n v. Klesner, 280 U. S. 19, 280 U. S. 27, 280 U. S. 28; Federal Trade Comm’n v. Raladam Co., supra; Federal Trade Comm’n v. Keppel & Bro., supra; Federal Trade Comm’n v. Algoma Lumber Co., 291 U. S. 67, 291 U. S. 73.) Federal Trade Comm’n v. Klesner, supra.)