Archives For Symposia

We’re back for another biweekly roundup – and what a biweekly it’s been! The JCPA rode, died, and rides again. Yet AICOA is AWOL. FTC Chair Lina Khan went to Congress and back to (Fordham) law school, making waves wherever she went. DOJ added to the agencies’ roster of recently lost cases. And the FTC is here to help gig workers get real jobs. All that and more, in this edition of the FTC UMC Roundup.

This week’s headline is, without a doubt, FTC’s Chair Lina Khan’s remarks at Fordham Law School’s Conference on International Antitrust Law & Policy, where she announced that the Commission is currently considering a new policy statement on use of the Commission’s Unfair Methods of Competition authority.

It comes as no surprise that the Commission will be issuing this statement, though the details and exact timing have yet to be disclosed. Khan’s remarks do shed some light on what can be expected – though again there are no surprises. She “believe[s] it is clear that respect for the rule of law requires [the Commission] to reactivate [its] standalone Section 5 enforcement program,” and that the statement must “reflect[] the statutory text, our institutional structure, the history of the statute, and the case law.” 

Earlier in her remarks, Khan points to standalone UMC claims the Commission litigated in the 1940s through 1970s – “invitations to collude; price discrimination claims against buyers not covered by the Clayton Act; de facto bundling, tying, and exclusive dealing; and a host of other practices.” This reads like a menu of claims that will be embraced by the new statement, for which she has found support in the history of the statute and case law.

In addition to her trip to New York, back home Khan also visited the Senate for an antitrust oversight hearing. Khan’s statement champions the Commission’s departure from longstanding antitrust principles and celebrates its more active enforcement efforts. Very unusually, her statement prompted a dissenting statement from Commissioners Phillips and Wilson. Phillips and Wilson note that under Khan the Commission has actually seen less enforcement activity, call out the myriad inaccurate factual assertions in Khan’s statement, and raise concern about too-aggressive efforts to push the Commission beyond its statutory authority.

Cristiano Lima has more coverage of the oversight hearing. After a bit over a year at the helm of the agency this was Khan’s first oversight hearing. From the tone of the questioning, she may wish that it was her last. But in the likely event that Republicans take the House in the midterms, it will likely just be the first, and the easiest, of many future trips to Congress.

In other news, Senators Amy Klobuchar (D-MN) and Ted Cruz (R-TX) show us that strange bedfellows do weird things in bed. That’s right, I’m talking about the Journalism Competition and Preservation Act (JCPA), sponsored by Klobuchar. The JCPA is an attempt to preserve competition in media markets by allowing cartelization in media markets. A couple of weeks ago, Sen. Klobuchar abruptly withdrew the JCPA (her own bill) from committee consideration after a surprise amendment from Sen. Cruz that was intended to limit platforms content moderation practices. In a legitimately surprising turn of events, Senators Klobuchar and Cruz agreed to compromise language that allows news outlets to collectively bargain with platforms and will “bar the tech firms from throttling, filtering, suppressing or curating content.”

Back on the FTC front, the Commission released a new Policy Statement on Enforcement Related to Gig Work. The statement explains that “Protecting these workers from unfair, deceptive, and anticompetitive practices is a priority, and the Federal Trade Commission will use its full authority to do so.” It is a curious policy statement for a number of reasons, not least of which is the purported use of the Commission’s consumer protection authority for employee protection – we have a National Labor Relations Board for that. More subtle, the statement refers throughout to “unfair, deceptive, and anticompetitive practices,” suggesting a hybrid approach to these issues that draws separately from the Commission’s consumer protection and antitrust authorities. This move is increasingly common in the Commission’s recent regulatory efforts.

Time for some quick hits. This week’s puzzler has got to be Commissioner Bedoya calling for a revitalization of the Robinson-Patman Act. But as with all things FTC, these days the new ideas seem to be the ones found in the back seat of a Delorean.

Alden Abbott draws our attention to the upcoming Axon case. To be argued in the Supreme Court on November 7th, this case raises both procedural and substantive challenges to the Commission’s constitutional structure. Abbott notes in passing the Commission’s recent losses before its ALJ in the Altria-JUUL  and Illumina-Grail mergers – and we can add the DOJ’s recent loss in its effort to block UnitedHealth’s acquisition of Change Healthcare to the agencies’ growing list of recent losses.

Charles Sauer takes a look at ongoing discussion of potential Republican nominees to fill Commissioner Phillip’s seat when he steps down from the FTC, asking Why Are Conservatives Intent On Cloning Lina Khan? He rightly argues that Republicans should not consider nominating someone who shares Khan’s disregard for the rule of law and sound economics, or who would embrace unchecked administrative power. Even if used to pursue valid goals, such abuses of regulatory authority are anathema to good government and basic conservative principles. Any Commissioner should put faithful execution of the Commission’s statutory mandate above their own policy preferences, including a commitment to acting pursuant to clearly expressed Congressional intent instead of through constitutionally-dubious administrative fiat.

What’s on tap for next week? The White House is convening its Competition Council on Monday. And for those wondering whether I forgot to discuss AICOA after mentioning it in the opening graf, no need to worry. It got just as much attention as needed.

[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.

Welcome back to the FTC UMC Roundup! The Senate is back in session and bills are dying. FTC is holding hearings and faith in the agency is dying. The more things change the more they stay the same. Which is a fancy way of saying that despite all the talk of change, little change seems likely. This is never more true than when midterm elections are on the horizon – this is high season for talk of change that will not happen.

This week’s headline is the unexpected death of the Journalism Competition and Preservation Act (JCPA), which seems to have met its fate in committee on Thursday. The JCPA sought to save “local journalism” by allowing select legacy media entities to form cartels to monopolistically negotiate with tech platforms. The expectation yesterday morning was that the bill would sail through committee. Enter Sen. Ted Cruz (R-TX), with an amendment to further help local journalism by limiting platforms’ use of content moderation – leading one of the bill’s chief sponsors, Sen. Amy Klobuchar (D-MN) to withdraw the bill from consideration.

The story here is partly about a bad bill meeting its timely demise – one does not bring “more cartels” as a solution to a competition fight. But the bigger story is about Senator Klobuchar’s ill-fated competition policy efforts and her failure to appreciate the anti-tech dynamic that she has relied on to bring Republican co-sponsors on board. My colleague Ian Adams captured the essential challenge in memetic form:

We’re a week into September, about 60 days from the midterms and three weeks from the end of the fiscal year. Senate Leader Schumer (D.NY) has bigger fish to fry than pushing legislation that will risk costing any Democrats seats. The demise of the JCPA is an object lesson in the politics of Senator Klobuchar’s American Innovation and Choice Online Act (AICOA) – and a preview of its likely fate.

A close contender for this week’s headline could have been the Commercial Surveillance and Data Security Public Forum hosted by the FTC on Thursday. But this charade doesn’t deserve headline status. The online forum, which was billed as a hearing relating to the FTC’s recently-announced a was plagued by technical difficulties from the start – slides not working, speakers on unstable Internet connections, and consistent “am I muted” problems – that are simply amateurish difficulties two years into the COVID-19 pandemic. 

But the bigger issue with the forum was that nearly three of its five scheduled hours were dedicated to one-sided panels stacked with panelists favoring FTC regulation. Assuming that the APRM ultimately results in the FTC adopting rules, the Commission is assembling a remarkably strong record to support claims of procedural bias. As I have previously discussed, the APRM itself does not meet the requirements of the Magnusson-Moss Act. Now, anyone challenging whatever rules the FTC may ultimately adopt (about which the ANPR has offered no basis for discussion) will readily be able to point to this hearing to demonstrate the the Commission’s rulemaking process is biased in favor of adopting specific regulations, not neutrally obtaining information to inform its rulemaking process.

There has been plenty of other FTC-related news over the past two weeks.

First, congratulations to Svetlana Gans! In addition to being a recent contributor to this ongoing symposium, Svetlana is the subject of a recent article identifying her as a “leading candidate” to take current commissioner Noah Phillips’s seat after he steps down. Of course, the article is critical of her – but that’s the nature of the appointments game. There are few individuals as qualified for this position as Svetlana. And I’m not just saying that because she has contributed to this symposium – she is a longtime FTC practitioner with deep institutional knowledge of the agency and an impeccable record of experience on antitrust and consumer protection matters. 

Second, not many people seem to have noticed this, but: the FTC released its latest five-year plan. The changes between this plan and the previous iteration are subtle but substantial. Most notably, the Commission has replaced its previous focus on protecting “consumers” with a focus on protecting “the public,” and is now focused on “fair competition,” instead of “vibrant competition”. Some agencies, like the Federal Communications Commission, have authority based around a public interest standard. It sounds like FTC Chair Lina Khan is trying to rewrite its UDAP and UMC authority – which Congress and the Courts have long focused on consumer concerns – to focus instead on broader “public interest” standards. One need not invoke major questions to question the propriety of one agency refocusing its strategic priorities around the statutory mandate of its agencies.

Third, Fourth, and Fifth: Walmart is going to war with the FTC; the Senate is going to war with the FTC; and the FTC’s ALJ is going to war with the FTC. Walmart is challenging the FTC’s absurd claim that the company is doing too little to protect consumers from scammers despite the company’s substantial efforts to protect consumers from scammers. With its equal split between Republicans and Democrats and in a preview of what may be to come in a new Congress, the Senate Judiciary Committee is planning to hold a DOJ and FTC oversight hearing. And in a loss for the Commission, the FTC’s ALJ has rejected the FTC’s contention that the Illumina/Grail merger would harm competition – a decision that will likely be appealed to and overturned by the FTC Commissioners, in a nice rebuke the the legitimacy of the agency’s decision-making process (see, inter alia, the pending Axon litigation before the Supreme Court). 

It is not wholly bad news for the FTC over the past two weeks. The Commission has only just started scrutinizing Amazon’s proposed acquisition of iRobot, so that case isn’t faltering yet. On the other hand, Kovacha, a firm that the FTC has accused of providing “precise geolocation data associated with unique persistent identifiers” in a way that establishes a unfair or deceptive acts or practices violation, preemptively brought suit against the FTC arguing that the FTC’s claims were unconstitutional. Kovacha smartly positioned its claims alongside the pending Axon litigation – which will be hear by the Supreme Court on November 7 – positioning its claims alongside the most potent recent challenges to the FTC’s Constitutional structure or authority.

This week’s closing note is that Queen Elizabeth II has passed away. As she moves on to the unknown country, it seems that we have lost one of the last figures of the twentieth century’s global order. To our British friends, God save your King – and may we all take a moment to reflect on the value of stability in our economic and political order tempered by the importance and inevitability of the sea of change.

[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.    

You’d think things would be calm during these last weeks of August – the Senate in recess, folks wrapping up summer vacations or seeing their kids back off to school, and the big news being that coming out of the White House instead of Congress or the agencies. You’d think. We don’t have a single big headline to lead off with this week, but we’ve got some fights to talk about instead.

This week’s mini-headline is Bloomberg’s report that Meta learned of the FTC’s suit to block its acquisition of Within the same way we all did: on Twitter. How rude! Seriously this is a breach of basic norms of civility and professionalism and speaks poorly of the FTC lawyers involved in making this decision. I would emphasize in saying this that it is my understanding that the Chair’s office took control of the complaint process from agency staff – so any criticism should roll uphill. In the Metaverse gravity need not apply. But, perhaps in the realm of greater civility, Mark Zuckerberg has been removed from the complaint in his personal capacity.

The FTC’s ANPR on Commercial Surveillance and Data Security of course deserves its own mini-headline, even though there’s no new news. The FTC will host its public forum on September 8th; you can register to offer comments through August 31 – though last I heard there is a waitlist. In addition, comments responding to the ANPR are open through October 21st. And, as announced last week, we have an open call for contributions relating to the ANPR to this symposium on FTC UMC Rulemaking.

Offering some ANPR-related commentary, Cameron Kerry discusses the ANPR and its relationship to federal legislation on Lawfare. He argues that privacy legislation is preferable to rulemaking noting, among other things, that the FTC hasn’t completed a Mag-Moss rulemaking since the 80s and that the average timeline for completing Mag-Moss rules has been 5.57 years. Also noteworthy, since the ANPR offers to make rules relating to data security: the FTC doesn’t have a great track record when it comes to data security advice.

Next topic? In a preview of what’s to come for the FTC in the likely event that Republicans retake the House, the House Republicans are coming for the FTC.  In this case, they have questions stemming from the recent FTC OIG report that raised concerns about the recent FTCs’ use of unpaid outside consultants. We discussed that report previously. Watch this space for more!

In AICOA news, the only news is no news. There continue to be dueling perspectives, one calling for Senator Amy Klobuchar’s (D-MN) AICOA to get its day in Congress, the other making the now-obvious point that AICOA won’t pass if it does because Democratic support is contingent on changes to address the content-moderation loopholes on which Republican support depends.

Bloomberg has had its own dueling reports on the state of AICOA, as well. In a piece published last week, Bloomberg reporters looked at donations to Sentate Majority Leader Chuck Schumer (D-NY) from big tech. The article clearly means to argue that Sen. Schumer is holding up AICOA (which the article incorrectly calls the American Choice and Innovation Online Act) because big tech is giving him big money. Never mind all those other tech related things going on in Congress right now. Or that their data shows Amazon has decreased its donations over the past year. Or that a lot of folks in big tech are concerned about a lot of things other than straight-up tech policy issues (Inflation, anyone? Dobbs, anyone?). In any event, Brad Stone offered his own report in Bloomberg this week on the political gridlock holding up AICOA. In a polite rebuke aimed at “[his] colleagues in Washington,” he notes that “while it’s tempting to blame surreptitious corporate influence for stymieing attempts to limit tech power, it’s largely questions around content moderation … that have stalled its progress.”

Next topic? Mergers! The Wall Street Journal ran an article discussing the effects that the Khan FTC is having on deals. Protocol discusses potential FTC scrutiny that could be coming for Amazon. The key bit? The authors note that the deals Amazon is considering don’t raise many competition issues but that that may not matter because of “the reality that the FTC seems to be spoiling for a fight.” 

And Fortune decides to run with the Worst. Take. Ever., asking “Corporate breakups are a routine part of capitalism. So why is it deemed an irreparable interference in markets when regulators break up companies”? I actually love the question and think it worth pursuing further. Corporate mergers are also routine parts of capitalism. So why not have more regulatory support for them? The answer to both is damningly simple: because both mergers and breakups can be either good or bad for consumers, so should be evaluated through some standard that considers their effects on consumer welfare.

Wrapping up: here’s a bit of humor as you head off to the last weekend of August. And here’s an interesting read for your commute home. We’ll see everyone in two weeks for the next Biweekly UMC Roundup.

The FTC UMC Roundup, part of the Truth on the Market FTC UMC Symposium, is a weekly roundup of news relating to the Federal Trade Commission’s antitrust and Unfair Methods of Competition authority. 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.

It’s been a busy summer, and promises to be a busier fall. So the UMC Roundup is on hiatus this week.

But because the news doesn’t stop even when we do, we’re using this week’s Roundup to announce a call for submissions relating to the FTC’s ANPR on Commercial Surveillance and Data Security. Submissions relating to various aspects of the ANPR will be considered for publication as part of our ongoing FTC UMC Symposium. We have already previously offered some discussion of the ANPR on Truth on the Market, here and here.

Posts should substantively engage with the ANPR and will generally be between 1,800-4,000 words. We are interested in all topics and perspectives. Given that this is the UMC symposium, we are particularly interested in submissions that explore the competition aspects of the ANPR, including the mysterious Footnote 47 and the procedural and substantive overlaps between the FTC’s UDAP and UMC authorities that run throughout the ANPR.

Submissions should be sent to Keith Fierro (kfierro@laweconcenter.org). To maximize the likelihood that we will publish your submission, we encourage potential authors to submit a brief explanation of the proposed topic prior to writing. Because selected submissions will be published as part of the ongoing UMC Symposium, we anticipate beginning to publish selected submissions immediately and on a rolling basis. For full consideration, contributions should be submitted prior to Sept. 8, 2022.

The FTC UMC Roundup, part of the Truth on the Market FTC UMC Symposium, is a weekly roundup of news relating to the Federal Trade Commission’s antitrust and Unfair Methods of Competition authority. 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.

[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.  

 

I thought this was going to be a slow week. The Senate is in recess and, with so much recent attention focused on the Senate and AICOA – and the FTC’s had only just started things with the Meta/Within suit – it seemed this would be a slow week. We actually considered taking a recess of our own this week. But then Monday happened, and then Tuesday, and then Wednesday, and it was clear a roundup was justified. And then today happened and suddenly we have a privacy rulemaking underway. Or do we? Well, we have a roundup, that’s for sure!

This week’s headline is not, however, the FTC’s Advance Notice of Proposed Rulemaking (ANPR). Rather, it is that Commissioner Noah Phillips has announced that he will be leaving the Commission, just four years into his seven year term. One could speculate that the timing of this announcement is related to the ANPR – but I’ll leave that to others. Commissioner Phillips has been a model of principled antitrust and consumer protection enforcement. He has not shied away from enforcement actions, but has reserved them for cases where agency action is warranted. And his approach has been vindicated by the courts in cases like 1-800 Contacts and Impax, where his views – both as a dissenting Commissioner and as a member of a unanimous Commission – have been embraced by reviewing courts.

He has also expressed caution about FTC Chair Lina Khan’s approach to the power of the agency – an approach that stands in contrast to his efforts to faithfully operate within bounds of the agency’s statutory authority. He discussed his concerns about Khan’s potential broad UMC rulemaking efforts in a recent interview. Invoking concerns about the likelihood today that the courts will find the FTC has substantive rulemaking authority (as the DC Circuit did in Petroleum Refiners (1973)), as well as about what the scope of that authority would enable the Commission to do, he explained:

You can only regulate or ban that which is an unfair method of competition if we have that authority, just like you can only regulate or ban what is an unfair and deceptive act or practice. And as broad as the words may sound, and however much we may have repealed our policy on what the limits of Section 5 are, I don’t think it’s true that courts will just say, whatever you want is what the law means. And so, we have to color within the lines.

Which brings us to what will certainly be the headline for weeks to come: The FTC today issued an ANPR for a rule on “Commercial Surveillance and Data Security.” This sprawling document poses 95 questions relating to a wide range of ways that companies make use of consumer data. Actually, while there are 95 numbered questions, the document contains 233 question marks – so quite a few more questions.

We will have more analysis of this potential rulemaking in coming days, so won’t endeavor to summarize the rule here. But some initial observations are due.

Since this is the “FTC UMC Roundup,” we should start with the statutory basis for the rules. It sounds primarily in the FTC’s consumer protection authority (to prescribe unfair or deceptive acts or practices, or “UDAP”). Under Section 18 of the FTC Act, the FTC is required to use a unique-to-the-FTC rulemaking process when making these rules. This process was put in place in Congress as a check on potential abuses by the Commission of its authority stemming from … well, abuses of that authority by the agency in the 1970s. More on this in a moment.

The ANPR also invokes the Commission’s antitrust, or Unfair Methods of Competition (UMC) authority as a potential avenue for rulemaking. In the grammatically curious footnote 47, the ANPR explains that some of the conduct the Commission is considering under the ANPR might also be relevant in the UMC setting. As such, the ANPR “invites comment on the ways in which existing and emergent commercial surveillance practices harm competition and on any new trade regulation rules that would address such practices. Such rules could arise from the Commission’s authority to protect against unfair methods of competition, so they may be proposed directly without first being subject of an advance notice of proposed rulemaking.” For those reading tea leaves, in other words, the Commission has arranged them to spell out UMC in this ANPR.

The key difference between UDAP and UMC rulemaking goes back to the amendments Congress made in the Magnuson–Moss Warranty Act (often referred to as Mag-Moss). Adopted in response to concern about aggressive agency regulations in the 1970s, Mag-Moss requires the FTC to issue ANPRs for UDAP rules. Importantly, under Mag-Moss this notice doesn’t only get published in the Federal Register, but also gets sent to the House and Senate oversight committees with jurisdiction over the FTC. This is so they can oversee what the FTC is doing.

Section 18 requires that “the Commission shall publish an advance notice of proposed rulemaking,” and specifies that it shall include “a brief description of the area of inquiry under consideration, the objectives which the Commission seeks to achieve, and possible regulatory alternatives under consideration by the Commission.” It also should provide opportunity for public comment, by “invit[ing] the response of interested parties with respect to such proposed rulemaking, including any suggestions or alternative methods for achieving such objectives.”

Note the clear expectation that the ANPR outline the regulatory alternatives that the Commission is considering, and that the public be able to engage with those alternatives. The purpose of the ANPR is not to inform Congress that the Commission might be making rules or to collect information to assist in a rulemaking process. It is precisely to inform Congress and the public about what those rules may be. 

(As a brief historical aside, Mag-Moss was inspired by a concept known as hybrid rulemaking under which ANPRs would be used primarily to provide greater opportunity for public engagement early in the rulemaking process – perhaps even without the benefit of specific proposed rules. But when Congress drafted Mag-Moss, it was more specific in what it expected to be included in the ANPR – again, precisely because of its experiences with FTC overreach in the 1970s. In this sense, the FTC’s ANPR process is notably different than that governing other agencies’ use of ANPRs.)

I would posit that the document circulated by the FTC on Thursday is not, in fact, an ANPR. It provides no indication of the possible rules that the Commission may adopt. Indeed, the document itself makes no claims to articulating proposed rules or possible regulatory alternatives under consideration by the Commission. It explains that

Through this ANPR, the Commission is beginning to consider the potential need for rules and requirements regarding commercial surveillance and lax data security practices. Through this ANPR, the Commission aims to generate a public record about prevalent commercial surveillance practices or lax data security practices that are unfair or deceptive, as well as about efficient, effective, and adaptive regulatory responses. These comments will help to sharpen the Commission’s enforcement work and may inform reform by Congress or other policymakers, even if the Commission does not ultimately promulgate new trade regulation rules.

These concerns echo those raised by Commissioner Phillips in his dissent: “The ANPR provides no clue what rules the FTC might ultimately adopt. In fact, the Commission expressly states that the ANPR does not identify the full scope of approaches it could undertake, does not delineate a boundary on issues on which the public can comment, and in no way constrains the actions it might take in an NPRM or final rule.”

Here it is worth noting that the Commission has myriad other ways of collecting this information. It can study industries and gather information about its own prior activities, issuing its findings in reports. It has the power to conduct studies that can require firms to produce information. It regularly hosts hearings and other workshops. Indeed, as a colleague commented to me, this “ANPR” feels very much like the documents the Commission circulate when it is announcing a workshop – announcing the wide range of questions that it is interested in third parties bringing to the table for discussion and ultimate inclusion in a report (one that the Commission may or may not ultimately issue). 

The language and tone of these questions also bear note. As Commissioner Wilson notes in her dissent from today’s notice, “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.” Despite being presented as several score questions, the notice often seems to assume the answers it expects to find to those questions.

To not beat around the bush, this ANPR seems more like an effort to circumvent the statutory ANPR process, so that the Commission can avoid the required advance notice to Congress of the rules it intends to propose and the concomitant waiting period that that notice triggers. 

I would expect plenty of admin law scholars (hey, that’s me!) gnashing their teeth about this in the coming weeks and months. Is this a satisfactory ANPR? Does the “logical outgrowth test” apply to ANPR? If it does, does this notice satisfy that test? Perhaps these are easily answered by caselaw – I will concede to not yet having spent those hours in Westlaw.

There is also the question of why the Commission has taken this approach. It can only invite scrutiny. One senior agency official suggested to me that I not be too hasty to discount “incompetence” as an explanation. Though I wonder if the agency might not be racing against potential Congressional Review Act review by the next Congress. Again, I concede I have not done the math to see whether it is even viable that rules could be issued soon enough to avoid that window. But it would at least explain the Commission’s apparent haste. 

But that’s enough rampant, wanton, reckless speculation for one day. What else is going on in the UMC and UMC-adjacent world? Commissioner Alvaro Bedoya has come out in support of AICOA. No surprises there. (On a side note, I commend the Commissioner’s comments at today’s press conference announcing the ANPR. He had thoughtful comments throughout and, notably, I believe he was the only of the Democratic commissioners to directly acknowledge the concerns or work of the majority’s Republican colleagues.)

Svetlana Gans and Gene Scalia had an important op-ed about potential pitfalls the FTC may face with its UMC rulemaking efforts in Monday’s Wall Street Journal. I discussed it here. Jonathan Barnett looks at the recent treatment of big tech by the markets, arguing that “If antitrust law is to be based on fact and evidence, rather than rhetoric and narrative, legislators and regulators who are keen to intervene may be wise to hit the pause button. The equity markets have already done so, which reflects new information showing that once-indomitable platforms face new or overlooked competitive threats.”

And, lest we forget, the FTC is suing Meta. Perhaps recognizing that its acquisition of Within will be litigated on the merits no matter the outcome of the FTC’s push to enjoin the deal, Meta has voluntarily agreed to pause that acquisition pending trial. And perhaps feeling excluded by the FTC’s avalanche of recent activity, the Department of Justice is preparing to file suit against Google over its ad business. 

This week was supposed to be a lazy one. But after all its news we deserve a day off. There’s no suggested reading for your commute home. Check out early and go spend the afternoon with someone you love. Now is the time to rest up for the coming storm.

The FTC UMC Roundup, part of the Truth on the Market FTC UMC Symposium, is a weekly roundup of news relating to the Federal Trade Commission’s antitrust and Unfair Methods of Competition authority. 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.

In a recent op-ed for the Wall Street Journal, Svetlana Gans and Eugene Scalia look at three potential traps the Federal Trade Commission (FTC) could trigger if it pursues the aggressive rulemaking agenda many have long been expecting. From their opening:

FTC Chairman Lina Khan has Rooseveltian ambitions for the agency. … Within weeks the FTC is expected to begin a blizzard of rule-makings that will include restrictions on employment noncompete agreements and the practices of technology companies.

If Ms. Khan succeeds, she will transform the FTC’s regulation of American business. But there’s a strong chance this regulatory blitz will fail. The FTC is a textbook case for how federal agencies could be affected by the re-examination of administrative law under way at the Supreme Court.

The first pitfall into which the FTC might fall, Gans and Scalia argue, is the “major questions” doctrine. Recently illuminated in the Supreme Court’s opinion in West Virginia v. EPA decision, the doctrine holds that federal agencies cannot enact regulations of vast economic and political significance without clear congressional authorization. The sorts of rules the FTC appears to be contemplating “would run headlong into” major questions, Gans and Scalia write, a position shared by several contributors to Truth on the Market‘s recent symposium on the potential for FTC rulemakings on unfair methods of competition (UMC).

The second trap the authors expect might trip up an ambitious FTC is the major questions doctrine’s close cousin: the nondelegation doctrine. The nondelegation doctrine holds that there are limits to how much authority Congress can delegate to a federal agency, even if it does so clearly.

Curiously, as Gans and Scalia note, the last time the Supreme Court invoked the nondelegation doctrine involved regulations to implement “codes of fair competition”—nearly identical, on their face, to the commission’s current interest in rules to prohibit unfair methods of competition. That last case, Schechter Poultry Corp. v. United States, is more than 80 years old. The doctrine has since lain dormant for multiple generations. But in recent years, several justice have signaled their openness to reinvigorating the doctrine. As Gans and Scalia note, “[a]n aggressive FTC competition rule could be a tempting target” for them.

Finally, the authors anticipate an overly aggressive FTC may find itself entangled in yet a thorny web wrapped around the very heart of the administrative state: the constitutionality of so-called independent agencies. Again, the relevant constitutional doctrine giving rise to these agencies results from another 1935 case involving the FTC itself: Humphrey’s Executor v. United States. While the Court in that opinion upheld the notion that Congress can create agencies led by officials who operate independently of direct presidential control, conservative justices have long questioned the doctrine’s legitimacy and the Roberts court, in particularly, has trimmed its outer limits. An overly aggressive FTC might present an opportunity to further check the independence of these agencies.

While it remains unclear the precise rules the FTC seek try to develop using its UMC authority, the clearest signs are that it will focus first on labor issues, such as emerging research around labor monopsony and firms’ use of noncompete clauses. Indeed, Eric Posner, who joined the U.S. Justice Department Antitrust Division earlier this year as counsel on these issues, recently acknowledged that: “There is this very close and complicated relationship between labor law and antitrust law that has to be maintained.”

If the FTC were to upset this relationship, such as by using its UMC authority either to circumvent the National Labor Relations Board in addressing competition concerns or to assist the NLRB in exceeding its own statutory authority, it would be unsurprising for the courts to exercise their constitutional role as a check on a rogue agency.

Early August is an unpredictable time in the policy world. With Congress about to go on recess, one never knows if there will be a mad rush to get something done, or what that something may be. And it is, for many, a month of vacations and light schedules. Short staffing may delay work or allow mistakes to be made. And then there’s Alex Jones’s lawyer – for whom the best that can be said is that he will forever be known as “Alex Jones’s lawyer” than by his given name. The Roundup this week is brought to you by the letter unpredictability.

This week’s headline is antitrust labor issues. The week started off with news that a senior Republican staffer is leaving the Senate Judiciary Committee – a staffer who has reportedly been instrumental in drafting the American Innovation and Choice Online Act (AICOA) – to join Amazon as a lobbyist. As Politico suggests, this “move is particularly notable because the legislation he was working on – [AICOA] – is losing steam.” More on that in a moment. 

The next bit of antitrust labor news is word of an FTC Inspector General report stemming from an audit of the FTC’s use of unpaid consultants and experts. As reported by Leah Nylen, the OIG report found that this practice, used in prior administrations by expanded substantially under current FTC Chair Lina Khan, “creat[es] potential legal and compliance risks, including conflicts of interest.” The report expressly notes that the “audit was not designed to determine whether unpaid consultant or experts were involved in activities prohibited by the federal policies … and [makes] no assertions on their involvement in those activities.” It then goes on to lay out various activities they were involved in that clearly violate federal policies. Oh my.

The big antitrust labor news of the week is, of course, that of Tim Wu’s quantum departure from his role as White House central competition czar. The story of his pending return to the ivory tower broke on Tuesday and spread fast to all corners. The next morning, the man himself reported that those reports were “greatly exaggerated.” He has not, however, said whether this means he’s sticking around in his current role for days, weeks, or months – though it bears note that the original report was merely that he would be returning to his teaching position “in the coming months.” One wonders whether his suggestion that he is not leaving is itself a great exaggeration.

Uncertainty over the fate of Wu evokes uncertainty over the state of AICOA – indeed, their fates could be intimately linked. Last week, around the time Wu might have made the decision to leave, it would have seemed AICOA was losing steam. With the Inflation Reduction Act taking all the Big Bill energy during the mad-dash to the August recess, even Senator Klobuchar (D-MN) was forced to admit that AICOA would not get a vote before the recess. Then came the report that Klobuchar has offered to amend the bill to address the concerns that Senator Brian Schatz (D-HI) and other democratic senators have that AICOA could limit platforms’ content moderation practices. (Side note: Ashley Gold is simply killing this beat this week.) This is a remarkable change in stance for Klobuchar, who has steadfastly refused to consider such an amendment – almost certainly because she knows it will cost needed Republican support for the bill. One wonders how many Republicans will be one board after such an amendment is made.

Turning the page, the next day Politico reported that Senate Majority Leader Schumer (D-NY) plans, but also may not plan, to bring AICOA to the floor after the recess. His plans are either more or less clear than Tim Wu’s plans to leave his position. It seems likely that Schumer is supporting Klobuchar’s efforts to get votes for the bill, but his support for bringing it to the floor may yet be contingent. The Politico report suggests that Schumer’s office may have backed off from saying he plans to bring it to the floor – and may even pressured prior reports to remove a statement that he would bring it to the floor.

So what’s going on with AICOA? I stand by my prior assessment that it’s dead. Actually, I think that it’s now worse than dead – it’s now a mere political football. Senator Manchin’s flip on Build Back Better has soured the likelihood of any bipartisan bills moving forward. The fact that Klobuchar is buckling to Schatz’s demand to address the bill’s threat to content moderation – the only thing that really excited Republicans about the bill – suggests that the current maneuver is to put forth a partisan Big Tech bill that will not pass but that may win some voters’ hearts in November. 

This week’s FTC UMC Roundup ends with an FTC UMC question: Where’s the UMC in the Meta-Within challenge? Last week’s complaint alleges vanilla violations of Section 7 of the Clayton Act. While it mentions the FTC’s Section 5 authority, it does so in boilerplate language. The substantive bases alleged to satisfy the agency’s Section 13(b) burden to get an preliminary injunction against the merger all sound in the traditional language of mergers and Section 7 – that the effect of the merger “may be substantially to lessen competition, or tend to create a monopoly.”

This is interesting for a few reasons. Most notably, as many have noted (Ashley Gold again), the case is a real dog under traditional antitrust law. It’s hard to imagine the FTC not losing – likely at the PI stage and even moreso at trial. If the case is so weak under traditional antitrust law, why not argue this case under non-traditional antitrust law? FTC’s UMC authority is recognized to be broader than traditional antitrust law, precisely to enable the Commission to take action against anticompetitive conduct that falls outside the scope of traditional antitrust law.

Indeed, one of Chair Khan’s stated goals has been to explore the boundaries of the Commission’s UMC authority and to use it to reinvigorate antitrust enforcement. The expectation has been that this would come through the agency’s rulemaking authority – but the agency can develop new law through litigation just as much as through rulemaking. There is even a case, post-West Virginia v. EPA, that the case-by-case approach to expanding its UMC authority is a more viable path forward than to risk raising major questions through a rulemaking.

One wonders what the FTC’s calculation here is. It could simply be a case of boilerplate drafting. Perhaps there was some greater fight within the agency over how to draft the complaint. We know there was dissent from the staff over whether to bring the complaint at all – perhaps this left little time or energy to draft anything more than a standard complaint. Or, perhaps more cynically, the winning move is to lose on traditional antitrust grounds – and to use that as an example to demonstrate the FTC’s need to use its UMC authority in cases such as these.

The FTC UMC Roundup, part of the Truth on the Market FTC UMC Symposium, is a weekly roundup of news relating to the Federal Trade Commission’s antitrust and Unfair Methods of Competition authority. 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.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Philip K Dick’s novella “The Minority Report” describes a futuristic world without crime. This state of the world is achieved thanks to the visions of three mutants—so-called “precogs”—who predict crimes before they occur, thereby enabling law enforcement to incarcerate people for crimes they were going to commit.

This utopia unravels when the protagonist—the head of the police Precrime division, who is himself predicted to commit a murder—learns that the precogs often produce “minority reports”: i.e., visions of the future that differ from one another. The existence of these alternate potential futures undermine the very foundations of Precrime. For every crime that is averted, an innocent person may be convicted of a crime they were not going to commit.

You might be wondering what any of this has to do with antitrust and last week’s Truth on the Market symposium on Antitrust’s Uncertain Future. Given the recent adoption of the European Union’s Digital Markets Act (DMA) and the prospect that Congress could soon vote on the American Innovation and Choice Online Act (AICOA), we asked contributors to write short pieces describing what the future might look like—for better or worse—under these digital-market regulations, or in their absence.

The resulting blog posts offer a “minority report” of sorts. Together, they dispel the myth that these regulations would necessarily give rise to a brighter future of intensified competition, innovation, and improved online services. To the contrary, our contributors cautioned—albeit with varying degrees of severity—that these regulations create risks that policymakers should not ignore.

The Majority Report

If policymakers like European Commissioner for Competition Margrethe Vestager, Federal Trade Commission Chair Lina Khan, and Sen. Amy Klobuchar (D-Minn.) are to be believed, a combination of tougher regulations and heightened antitrust enforcement is the only way to revitalize competition in digital markets. As Klobuchar argues on her website:

To ensure our future economic prosperity, America must confront its monopoly power problem and restore competitive markets. … [W]e must update our antitrust laws for the twenty-first century to protect the competitive markets that are the lifeblood of our economy.

Speaking of the recently passed DMA, Vestager suggested the regulation could spark an economic boom, drawing parallels with the Renaissance:

The work we put into preserving and strengthening our Single Market will equip us with the means to show the world that our path based on open trade and fair competition is truly better. After all, Bruges did not become great by conquest and ruthless occupation. It became great through commerce and industry.

Several antitrust scholars have been similarly bullish about the likely benefits of such regulations. For instance, Fiona Scott Morton, Steven Salop, and David Dinielli write that:

It is an appropriate expression of democracy for Congress to enact pro-competitive statutes to maintain the vibrancy of the online economy and allow for continued innovation that benefits non-platform businesses as well as end users.

In short, there is a widespread belief that such regulations would make the online world more competitive and innovative, to the benefit of consumers.

The Minority Reports

To varying degrees, the responses to our symposium suggest proponents of such regulations may be falling prey to what Harold Demsetz called “the nirvana fallacy.” In other words, it is wrong to assume that the resulting enforcement would be costless and painless for consumers.

Even the symposium’s pieces belonging to the literary realms of sci-fi and poetry shed a powerful light on the deep-seated problems that underlie contemporary efforts to make online industries “more contestable and fair.” As several scholars highlighted, such regulations may prevent firms from designing new and improved products, or from maintaining existing ones. Among my favorite passages was this excerpt from Daniel Crane’s fictional piece about a software engineer in Helsinki trying to integrate restaurant and hotel ratings into a vertical search engine:

“We’ve been watching how you’re coding the new walking tour search vertical. It seems that you are designing it to give preference to restaurants, cafès, and hotels that have been highly rated by the Tourism Board.”

 “Yes, that’s right. Restaurants, cafès, and hotels that have been rated by the Tourism Board are cleaner, safer, and more convenient. That’s why they have been rated.”

 “But you are forgetting that the Tourism Board is one of our investors. This will be considered self-preferencing.”

Along similar lines, Thom Lambert observed that:

Even if a covered platform could establish that a challenged practice would maintain or substantially enhance the platform’s core functionality, it would also have to prove that the conduct was “narrowly tailored” and “reasonably necessary” to achieve the desired end, and, for many behaviors, the “le[ast] discriminatory means” of doing so. That is a remarkably heavy burden…. It is likely, then, that AICOA would break existing products and services and discourage future innovation.

Several of our contributors voiced fears that bans on self-preferencing would prevent platforms from acquiring startups that complement their core businesses, thus making it harder to launch new services and deterring startup investment. For instance, in my alternate history post, I argued that such bans might have prevented Google’s purchase of Android, thus reducing competition in the mobile phone industry.

A second important objection was that self-preferencing bans are hard to apply consistently. Policymakers would notably have to draw lines between the different components that make up an economic good. As Ramsi Woodcock wrote in a poem:

You: The meaning of component,
We can always redefine.
From batteries to molecules,
We can draw most any line.

This lack of legal certainty will prove hard to resolve. Geoffrey Manne noted that regulatory guidelines were unlikely to be helpful in this regard:

Indeed, while laws are sometimes purposefully vague—operating as standards rather than prescriptive rules—to allow for more flexibility, the concepts introduced by AICOA don’t even offer any cognizable standards suitable for fine-tuning.

Alden Abbott was similarly concerned about the vague language that underpins AICOA:

There is, however, one inescapable reality—as night follows day, passage of AICOA would usher in an extended period of costly litigation over the meaning of a host of AICOA terms. … The history of antitrust illustrates the difficulties inherent in clarifying the meaning of novel federal statutory language. It was not until 21 years after passage of the Sherman Antitrust Act that the Supreme Court held that Section 1 of the act’s prohibition on contracts, combinations, and conspiracies “in restraint of trade” only covered unreasonable restraints of trade.

Our contributors also argued that bans on self-preferencing and interoperability mandates might be detrimental to users’ online experience. Lazar Radic and Friso Bostoen both wrote pieces taking readers through a typical day in worlds where self-preferencing is prohibited. Neither was particularly utopian. In his satirical piece, Lazar Radic imagined an online shopping experience where all products are given equal display:

“Time to do my part,” I sigh. My eyes—trained by years of practice—dart from left to right and from right to left, carefully scrutinizing each coffee capsule on offer for an equal number of seconds. … After 13 brands and at least as many flavors, I select the platforms own brand, “Basic”… and then answer a series of questions to make sure I have actually given competitors’ products fair consideration.

Closer to the world we live in, Friso Bostoen described how going through a succession of choice screens—a likely outcome of regulations such as AICOA and the DMA—would be tiresome for consumers:

A new fee structure… God, save me from having to tap ‘learn more’ to find out what that means. I’ve had to learn more about the app ecosystem than is good for me already.

Finally, our symposium highlighted several other ways in which poorly designed online regulations may harm consumers. Stephen Dnes concluded that mandatory data-sharing regimes will deter companies from producing valuable data in the first place. Julie Carlson argued that prohibiting platforms from preferencing their own goods would disproportionately harm low-income consumers. And Aurelien Portuese surmised that, if passed into law, AICOA would dampen firms’ incentives to invest in new services. Last, but not least, in a co-authored piece, Filip Lubinski and Lazar Radic joked that self-preferencing bans could be extended to the offline world:

The success of AICOA has opened our eyes to an even more ancient and perverse evil: self-preferencing in offline markets. It revealed to us that—for centuries, if not millennia—companies in various industries—from togas to wine, from cosmetics to insurance—had, in fact, always preferred their own initiatives over those of their rivals!

The Problems of Online Precrime

Online regulations like AICOA and the DMA mark a radical shift from existing antitrust laws. They move competition policy from a paradigm of ex post enforcement, based upon a detailed case-by-case analysis of effects, to one of ex ante prohibitions.

Despite obvious and superficial differences, there are clear parallels between this new paradigm and the world of “The Minority Report: firms would be punished for behavior that has not yet transpired or is not proven to harm consumers.

This might be fine if we knew for certain that the prohibited conduct would harm consumers (i.e., if there were no “minority reports,” to use our previous analogy). But every entry in our symposium suggests things are not that simple. There are a wide range of outcomes and potential harms associated with the regulation of digital markets. This calls for a more calibrated approach to digital-competition policy, as opposed to the precrime of AICOA and the DMA.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Things are heating up in the antitrust world. There is considerable pressure to pass the American Innovation and Choice Online Act (AICOA) before the congressional recess in August—a short legislative window before members of Congress shift their focus almost entirely to campaigning for the mid-term elections. While it would not be impossible to advance the bill after the August recess, it would be a steep uphill climb.

But whether it passes or not, some of the damage from AICOA may already be done. The bill has moved the antitrust dialogue that will harm innovation and consumers. In this post, I will first explain AICOA’s fundamental flaws. Next, I discuss the negative impact that the legislation is likely to have if passed, even if courts and agencies do not aggressively enforce its provisions. Finally, I show how AICOA has already provided an intellectual victory for the approach articulated in the European Union (EU)’s Digital Markets Act (DMA). It has built momentum for a dystopian regulatory framework to break up and break into U.S. superstar firms designated as “gatekeepers” at the expense of innovation and consumers.

The Unseen of AICOA

AICOA’s drafters argue that, once passed, it will deliver numerous economic benefits. Sen. Amy Klobuchar (D-Minn.)—the bill’s main sponsor—has stated that it will “ensure small businesses and entrepreneurs still have the opportunity to succeed in the digital marketplace. This bill will do just that while also providing consumers with the benefit of greater choice online.”

Section 3 of the bill would provide “business users” of the designated “covered platforms” with a wide range of entitlements. This includes preventing the covered platform from offering any services or products that a business user could provide (the so-called “self-preferencing” prohibition); allowing a business user access to the covered platform’s proprietary data; and an entitlement for business users to have “preferred placement” on a covered platform without having to use any of that platform’s services.

These entitlements would provide non-platform businesses what are effectively claims on the platform’s proprietary assets, notwithstanding the covered platform’s own investments to collect data, create services, and invent products—in short, the platform’s innovative efforts. As such, AICOA is redistributive legislation that creates the conditions for unfair competition in the name of “fair” and “open” competition. It treats the behavior of “covered platforms” differently than identical behavior by their competitors, without considering the deterrent effect such a framework will have on consumers and innovation. Thus, AICOA offers rent-seeking rivals a formidable avenue to reap considerable benefits at the expense of the innovators thanks to the weaponization of antitrust to subvert, not improve, competition.

In mandating that covered platforms make their data and proprietary assets freely available to “business users” and rivals, AICOA undermines the underpinning of free markets to pursue the misguided goal of “open markets.” The inevitable result will be the tragedy of the commons. Absent the covered platforms having the ability to benefit from their entrepreneurial endeavors, the law no longer encourages innovation. As Joseph Schumpeter seminally predicted: “perfect competition implies free entry into every industry … But perfectly free entry into a new field may make it impossible to enter it at all.”

To illustrate, if business users can freely access, say, a special status on the covered platforms’ ancillary services without having to use any of the covered platform’s services (as required under Section 3(a)(5)), then platforms are disincentivized from inventing zero-priced services, since they cannot cross-monetize these services with existing services. Similarly, if, under Section 3(a)(1) of the bill, business users can stop covered platforms from pre-installing or preferencing an app whenever they happen to offer a similar app, then covered platforms will be discouraged from investing in or creating new apps. Thus, the bill would generate a considerable deterrent effect for covered platforms to invest, invent, and innovate.

AICOA’s most detrimental consequences may not be immediately apparent; they could instead manifest in larger and broader downstream impacts that will be difficult to undo. As the 19th century French economist Frederic Bastiat wrote: “a law gives birth not only to an effect but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen it is well for, if they are foreseen … it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come,—at the risk of a small present evil.”

To paraphrase Bastiat, AICOA offers ill-intentioned rivals a “small present good”–i.e., unconditional access to the platforms’ proprietary assets–while society suffers the loss of a greater good–i.e., incentives to innovate and welfare gains to consumers. The logic is akin to those who advocate the abolition of intellectual-property rights: The immediate (and seen) gain is obvious, concerning the dissemination of innovation and a reduction of the price of innovation, while the subsequent (and unseen) evil remains opaque, as the destruction of the institutional premises for innovation will generate considerable long-term innovation costs.

Fundamentally, AICOA weakens the benefits of scale by pursuing vertical disintegration of the covered platforms to the benefit of short-term static competition. In the long term, however, the bill would dampen dynamic competition, ultimately harming consumer welfare and the capacity for innovation. The measure’s opportunity costs will prevent covered platforms’ innovations from benefiting other business users or consumers. They personify the “unseen,” as Bastiat put it: “[they are] always in the shadow, and who, personifying what is not seen, [are] an essential element of the problem. [They make] us understand how absurd it is to see a profit in destruction.”

The costs could well amount to hundreds of billions of dollars for the U.S. economy, even before accounting for the costs of deterred innovation. The unseen is costly, the seen is cheap.

A New Robinson-Patman Act?

Most antitrust laws are terse, vague, and old: The Sherman Act of 1890, the Federal Trade Commission Act, and the Clayton Act of 1914 deal largely in generalities, with considerable deference for courts to elaborate in a common-law tradition on the specificities of what “restraints of trade,” “monopolization,” or “unfair methods of competition” mean.

In 1936, Congress passed the Robinson-Patman Act, designed to protect competitors from the then-disruptive competition of large firms who—thanks to scale and practices such as price differentiation—upended traditional incumbents to the benefit of consumers. Passed after “Congress made no factual investigation of its own, and ignored evidence that conflicted with accepted rhetoric,” the law prohibits price differentials that would benefit buyers, and ultimately consumers, in the name of less vigorous competition from more efficient, more productive firms. Indeed, under the Robinson-Patman Act, manufacturers cannot give a bigger discount to a distributor who would pass these savings onto consumers, even if the distributor performs extra services relative to others.

Former President Gerald Ford declared in 1975 that the Robinson-Patman Act “is a leading example of [a law] which restrain[s] competition and den[ies] buyers’ substantial savings…It discourages both large and small firms from cutting prices, making it harder for them to expand into new markets and pass on to customers the cost-savings on large orders.” Despite this, calls to amend or repeal the Robinson-Patman Act—supported by, among others, competition scholars like Herbert Hovenkamp and Robert Bork—have failed.

In the 1983 Abbott decision, Justice Lewis Powell wrote: “The Robinson-Patman Act has been widely criticized, both for its effects and for the policies that it seeks to promote. Although Congress is aware of these criticisms, the Act has remained in effect for almost half a century.”

Nonetheless, the act’s enforcement dwindled, thanks to wise reactions from antitrust agencies and the courts. While it is seldom enforced today, the act continues to create considerable legal uncertainty, as it raises regulatory risks for companies who engage in behavior that may conflict with its provisions. Indeed, many of the same so-called “neo-Brandeisians” who support passage of AICOA also advocate reinvigorating Robinson-Patman. More specifically, the new FTC majority has expressed that it is eager to revitalize Robinson-Patman, even as the law protects less efficient competitors. In other words, the Robinson-Patman Act is a zombie law: dead, but still moving.

Even if the antitrust agencies and courts ultimately follow the same path of regulatory and judicial restraint on AICOA that they have on Robinson-Patman, the legal uncertainty its existence will engender will act as a powerful deterrent on disruptive competition that dynamically benefits consumers and innovation. In short, like the Robinson-Patman Act, antitrust agencies and courts will either enforce AICOA–thus, generating the law’s adverse effects on consumers and innovation–or they will refrain from enforcing AICOA–but then, the legal uncertainty shall lead to unseen, harmful effects on innovation and consumers.

For instance, the bill’s prohibition on “self-preferencing” in Section 3(a)(1) will prevent covered platforms from offering consumers new products and services that happen to compete with incumbents’ products and services. Self-preferencing often is a pro-competitive, pro-efficiency practice that companies widely adopt—a reality that AICOA seems to ignore.

Would AICOA prevent, e.g., Apple from offering a bundled subscription to Apple One, which includes Apple Music, so that the company can effectively compete with incumbents like Spotify? As with Robinson-Patman, antitrust agencies and courts will have to choose whether to enforce a productivity-decreasing law, or to ignore congressional intent but, in the process, generate significant legal uncertainties.

Judge Bork once wrote that Robinson-Patman was “antitrust’s least glorious hour” because, rather than improving competition and innovation, it reduced competition from firms who happen to be more productive, innovative, and efficient than their rivals. The law infamously protected inefficient competitors rather than competition. But from the perspective of legislative history perspective, AICOA may be antitrust’s new “least glorious hour.” If adopted, it will adversely affect innovation and consumers, as opportunistic rivals will be able to prevent cost-saving practices by the covered platforms.

As with Robinson-Patman, calls to amend or repeal AICOA may follow its passage. But Robinson-Patman Act illustrates the path dependency of bad antitrust laws. However costly and damaging, AICOA would likely stay in place, with regular calls for either stronger or weaker enforcement, depending on whether the momentum shifts from populist antitrust or antitrust more consistent with dynamic competition.

Victory of the Brussels Effect

The future of AICOA does not bode well for markets, either from a historical perspective or from a comparative-law perspective. The EU’s DMA similarly targets a few large tech platforms but it is broader, harsher, and swifter. In the competition between these two examples of self-inflicted techlash, AICOA will pale in comparison with the DMA. Covered platforms will be forced to align with the DMA’s obligations and prohibitions.

Consequently, AICOA is a victory of the DMA and of the Brussels effect in general. AICOA effectively crowns the DMA as the all-encompassing regulatory assault on digital gatekeepers. While members of Congress have introduced numerous antitrust bills aimed at targeting gatekeepers, the DMA is the one-stop-shop regulation that encompasses multiple antitrust bills and imposes broader prohibitions and stronger obligations on gatekeepers. In other words, the DMA outcompetes AICOA.

Commentators seldom lament the extraterritorial impact of European regulations. Regarding regulating digital gatekeepers, U.S. officials should have pushed back against the innovation-stifling, welfare-decreasing effects of the DMA on U.S. tech companies, in particular, and on U.S. technological innovation, in general. To be fair, a few U.S. officials, such as Commerce Secretary Gina Raimundo, did voice opposition to the DMA. Indeed, well-aware of the DMA’s protectionist intent and its potential to break up and break into tech platforms, Raimundo expressed concerns that antitrust should not be about protecting competitors and deterring innovation but rather about protecting the process of competition, however disruptive may be.

The influential neo-Brandeisians and radical antitrust reformers, however, lashed out at Raimundo and effectively shamed the Biden administration into embracing the DMA (and its sister regulation, AICOA). Brussels did not have to exert its regulatory overreach; the U.S. administration happily imports and emulates European overregulation. There is no better way for European officials to see their dreams come true: a techlash against U.S. digital platforms that enjoys the support of local officials.

In that regard, AICOA has already played a significant role in shaping the intellectual mood in Washington and in altering the course of U.S. antitrust. Members of Congress designed AICOA along the lines pioneered by the DMA. Sen. Klobuchar has argued that America should emulate European competition policy regarding tech platforms. Lina Khan, now chair of the FTC, co-authored the U.S. House Antitrust Subcommittee report, which recommended adopting the European concept of “abuse of dominant position” in U.S. antitrust. In her current position, Khan now praises the DMA. Tim Wu, competition counsel for the White House, has praised European competition policy and officials. Indeed, the neo-Brandeisians’ have not only praised the European Commission’s fines against U.S. tech platforms (despite early criticisms from former President Barack Obama) but have more dramatically called for the United States to imitate the European regulatory framework.

In this regulatory race to inefficiency, the standard is set in Brussels with the blessings of U.S. officials. Not even the precedent set by the EU’s General Data Protection Regulation (GDPR) fully captures the effects the DMA will have. Privacy laws passed by U.S. states’ privacy have mostly reacted to the reality of the GDPR. With AICOA, Congress is proactively anticipating, emulating, and welcoming the DMA before it has even been adopted. The intellectual and policy shift is historical, and so is the policy error.

AICOA and the Boulevard of Broken Dreams

AICOA is a failure similar to the Robinson-Patman Act and a victory for the Brussels effect and the DMA. Consumers will be the collateral damages, and the unseen effects on innovation will take years before they materialize. Calls for amendments and repeals of AICOA are likely to fail, so that the inevitable costs will forever bear upon consumers and innovation dynamics.

AICOA illustrates the neo-Brandeisian opposition to large innovative companies. Joseph Schumpeter warned against such hostility and its effect on disincentivizing entrepreneurs to innovate when he wrote:

Faced by the increasing hostility of the environment and by the legislative, administrative, and judicial practice born of that hostility, entrepreneurs and capitalists—in fact the whole stratum that accepts the bourgeois scheme of life—will eventually cease to function. Their standard aims are rapidly becoming unattainable, their efforts futile.

President William Howard Taft once said, “the world is not going to be saved by legislation.” AICOA will not save antitrust, nor will consumers. To paraphrase Schumpeter, the bill’s drafters “walked into our future as we walked into the war, blindfolded.” AICOA’s intentions to deliver greater competition, a fairer marketplace, greater consumer choice, and more consumer benefits will ultimately scatter across the boulevard of broken dreams.

The Baron de Montesquieu once wrote that legislators should only change laws with a “trembling hand”:

It is sometimes necessary to change certain laws. But the case is rare, and when it happens, they should be touched only with a trembling hand: such solemnities should be observed, and such precautions are taken that the people will naturally conclude that the laws are indeed sacred since it takes so many formalities to abrogate them.

AICOA’s drafters had a clumsy hand, coupled with what Friedrich Hayek would call “a pretense of knowledge.” They were certain to do social good and incapable of thinking of doing social harm. The future will remember AICOA as the new antitrust’s least glorious hour, where consumers and innovation were sacrificed on the altar of a revitalized populist view of antitrust.