Archives For antitrust

Antitrust at the Agencies Roundup: The Orphan’s Hypothetical Competitor Edition

Daniel J. Gilman —  19 May 2023 — Leave a comment

Some may refer to this as the Roundup Formerly Known as the FTC Roundup. If you recorded yourself while reading out loud, and your name is Dove, that is what it sounds like when doves sigh. 

Maybe He Never Said ‘Never’

The U.S. Justice Department’s (DOJ) Antitrust Division recently agreed to settle its challenge of Swedish conglomerate Assa Abloy’s proposed acquisition of the hardware and home-improvement division of Spectrum Brands.Assa Abloy will divest certain assets as a condition of settling the case and consummating the merger.

That’s of interest to those following residential-door-hardware markets—about which I know very little, although I have purchased such hardware on occasion—but it’s also of interest because Assistant Attorney General Jonathan Kanter, who heads the division, has (like Federal Trade Commission Chair Lina Khan) repeatedly decried settling merger cases. He has said he is “concerned that merger remedies short of blocking a transaction too often miss the mark” and that he believes “[o]ur goal is simple: we must be prepared to try cases to a verdict when we think a violation has taken place.”

More colorfully: “I’m here to declare that we’re not part of the chickenshit club.” À la Groucho Marx, he doesn’t want to belong to any club that will accept him as a member. 

There has, at least sometimes, been a caveat: “[o]ur duty is to litigate, not settle, unless a remedy fully prevents or restrains the violation.” So maybe it was a line in the sand, but not cast in stone. Or maybe it wasn’t exactly a line.

And while I never really followed the “losing is winning” rhetoric (never uttered by a high school coach in any sport anywhere), I do understand that a tie is often preferable to a loss, and that settling can even be a win-win. Perhaps even when you (say, the DOJ, for example) basically agree to the settlement proposed by the other side. 

Of Orphans and Potential Competition

All this reminds me of the “open offer” in the Illumina/Grail matter over at the FTC, which was puzzled over here, there, and nearly everywhere. More recently, the FTC has filed suit to block Amgen’s acquisition of Horizon Therapeutics, which the commission announced with a press release bearing the headline: “FTC Sues to Block Biopharmaceutical Giant Amgen from Acquisition that Would Entrench Monopoly Drugs Used to Treat Two Serious Illnesses.”

Or, as others might call it, “if you think the complaint in Illumina/Grail was speculative, take a look at this.” 

At stake are Horizon’s drugs Tepezza (used to treat thyroid eye disease) and Krystexxa (used to treat chronic refractory gout). Both are designated as “orphan drugs,” which means they treat rare conditions and enjoy various tax and regulatory benefits as a result. And as the FTC correctly notes: “[n]either of these treatments have any competition in the pharmaceutical marketplace.” That is, the patient population for each drug is fairly small, but for those who have thyroid eye disease or chronic refractory gout, there are no substitutes. Patients might well benefit from greater competition.

Given that these are currently monopoly products, the FTC cannot worry about future harm to an otherwise competitive market. Amgen has no drugs in head-to-head competition with either Tepezza or Krystexxa, and neither does any other biologics or pharmaceutical firm. And there’s no allegation of unearned market power—Tepezza and Krystexxa are approved products, and there’s no allegation that their approval or marketing has been anything other than lawful. Market power is not supposed to change with the acquisition. Certainly not on day one, or on any day soon.

Rather, there’s a concern that Amgen will (allegedly) be likely to engage in conduct that harms competition that’s expected to develop, at some time or other. The complaint alleges that Amgen will be likely to leverage its other products in such a way as to “raise… [their] rivals’ barriers to entry or dissuade them from competing as aggressively if and when they gain FDA approval.” The most likely route to this, according to the FTC complaint, would be to exploit bargaining leverage with pharmacy benefit managers (PBMs) to secure favorable placement in the formularies that PBMs design for various health plans.  

Perhaps. The evidence suggests that most vertical mergers are procompetitive, but a vertically integrated firm can have an incentive to foreclose rivals, which may or may not lead to a net loss to competition and consumers, depending on the facts and circumstances.

But then there’s the “if and when” part. We don’t really know what the relevant facts and circumstances are—not from the public documents, at any rate. We are told that the Tepezza and Krystexxa monopolies will “not last forever,” but we’re not told who will enter when. There’s also no clear suggestion as to how a combined Amgen/Horizon could foreclose the development of a would-be competitor. Neither firm controls a critical input, would-be rivals’ clinical trials, or the Food and Drug Administration’s (FDA) approval process.

As for potential future competition, the large PBMs are not unsophisticated bargainers or lacking in leverage of their own. Hence, the FTC’s much-ballyhooed PBM investigations. 
On the one hand, there’s typically some forward-looking aspect to merger analysis: what would competition look like, but for the merger? On the other hand, as Niels Bohr and Yogi Berra have variously observed: “It is hard to make predictions, especially about the future.” Some predictions are harder than others, and some are just shots in the dark. As former FTC Commissioner Joshua Wright observed in his dissent in Nielsen Holdings, grounded…

…predictions about the evolution of a market [are] based upon a fact-intensive analysis …. when assessing whether future entry would counteract a proposed transaction’s competitive concerns, the agencies evaluate a number of facts—such as the history of entry in the relevant market and the costs a future entrant would need to incur to be able to compete effectively—to determine whether entry is “timely, likely, and sufficient.”

That was hard to do in Nielsen. It was hard to do (and the commission failed to do it) in the Meta/Within case. And it’s hard to do when we’re dealing with complex molecule products, when entry must clear significant regulatory hurdles, and when we have no clinical data establishing (or even, based on which, we might estimate) the approval and entry of any particular competing product in some specified timeframe. 

Drugs in late-stage development may be far enough along in the approval process that one can reasonably predict approval and entry in a year or two. Not with any certainty, of course. Things happen. But predictions can be made with some confidence, at least when it comes to simple molecule pharmaceutical drugs (as opposed to biologics) and perhaps with drugs already approved by foreign regulators based on substantial clinical trials. But this is not that. There are potential rivals in the developmental pathway, but there seem to be zero reported results. None. That is, none reported by the FDA, where it reports such things and none mentioned in the FTC’s complaint. So we seem to lack the sort of data that might facilitate a reasonable prediction about the particulars of future entry, should it occur. 

Nobody is poised to enter the market and there is no clear near-term entrant, but for one. As the complaint explains:

Horizon is currently developing a subcutaneously administered version of Tepezza, which it estimates will receive FDA approval. … The planned introduction of this subcutaneous Tepezza formulation promises to further lower Amgen’s logistical and economic barriers to establishing multi-product contracts between its pharmacy benefit products, like Enbrel, and Tepezza. 

Perhaps, but surely that’s a double-edged sword for the FTC’s complaint, at best. Amgen’s stock of blockbusters—the alleged source of their leverage, should push come to shove—would not be affected. And there’s no reason to think (and no allegation) that Amgen would not continue the development of a new form of delivery for Tepezza.

The complaint maintains that “[t]here are no countervailing factors sufficient to offset the likelihood of competitive harm from the Proposed Acquisition.” But we have no idea how to estimate the risk that’s supposed to be offset. Certainly, the complaint doesn’t tell us and the complaint itself hinted at potentially offsetting factors in the very same paragraph: research, development, and marketing efficiencies, as well as the possibility of lower regulatory costs, courtesy of Amgen’s pockets, sophistication, and experience. If the subcutaneous Tepezza product could be brought to market sooner, and/or marketed more effectively, consumers wouldn’t be harmed. They would benefit. 

It seems we really have no idea what future competition might or might not look like two or three years down the road, or four or five. Indeed, it’s not clear when or whether a rival to either drug will be approved for marketing in the United States, whether Amgen (or Horizon) attempts to erect barriers to entry or not. Moreover, there’s no obvious route by which Amgen can impede the development of rival products. Is the FTC estimating a risk of harm to competition or guessing?

Statisticians (and economists) distinguish between Type 1 and Type 2 errors, false positives and false negatives respectively. There’s ongoing debate over the question whether the current state of the law pays too much attention to the risk of false positives, and not enough to the risk of false negatives. Be that as it may, there are very real costs when procompetitive mergers are wrongly identified as anticompetitive and blocked accordingly.

The perfect no-false-negatives strategy of “block all mergers” (or all where there’s a non-zero risk of competitive harm) cannot be adopted for free. That ought to be plain in the case of drug development (and, say, the type of cancer tests at issue in Illumina/Grail). The population of consumers comprises patients and payers; delay the benefits of efficient mergers, and patients are harmed. A complaint is just that, but does the FTC’s complaint show that harm is likely on any particular time frame, or simply possible at some point?

Looking back at the past 25 years, one might view the FTC’s attention to mergers in the health-care sector as a model of research-based enforcement, with important contributions from the Bureau of Economics and the policy shop, in addition to those of enforcers in the Bureau of Competition. That was a nice view; I miss it.

More later, but there was this, too.

In Antitrust & Competition, Antitrust at the Agencies Roundup, Federal Trade Commission, Justice Department, Mergers & Acquisitions, Section 5 , , , , , , , , , , , , ,
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The FTC’s Noncompete Rule: A Bridge Too Far

Daniel J. Gilman —  20 April 2023

As I noted in January, the Federal Trade Commission’s (FTC) proposal to ban nearly all noncompete agreements raises many questions. To be sure, there are contexts—perhaps many contexts—in which noncompete agreements raise legitimate policy concerns. But there also are contexts in which they can serve a useful procompetitive function. A per se ban across all industries and occupations, as the FTC’s notice of proposed rulemaking (NPRM) contemplates, seems at the least overly broad, and potentially a dubious and costly policy initiative. 

Yesterday was the deadline to submit comments on the noncompete NPRM, and the International Center for Law & Economics and 30 distinguished scholars of law & economics—including leading academics and past FTC officials—did just that. I commend the comments to you, and not just because I drafted a good portion of them.

Still, given that we had about 75 pages of things to say about the proposal, an abridged treatment may be in order. The bottom line:

[W]e cannot recommend that the Commission adopt the proposed Non-compete Clause Rule (‘Proposed Rule’). It is not supported by the Commission’s experience, authority, or resources; neither is it supported by the evidence—empirical and otherwise—that is reviewed in the NPRM.    

In no particular order, I will summarize some of our comments on key issues.

Not All Policy Concerns Are Antitrust Concerns

As the NPRM acknowledges, litigation over noncompetes focuses mostly on state labor and contract-law issues. And the federal and state cases that do consider specific noncompetes under the antitrust laws have nearly all found them to be lawful.

That’s not to say that there cannot be specific noncompetes in specific labor markets that run afoul of the Sherman Act (or the FTC Act). But antitrust is not a Swiss Army Knife, and it shouldn’t be twisted to respond to every possible policy concern.

Will Firms Invest Less in Employees?

While the NPRM amply catalogs potential problems associated with non-competes, [non-competes], like other vertical restrictions in labor agreements, are not necessarily inefficient, anticompetitive, or harmful to either labor or consumer welfare; they can be efficiency-enhancing and pro-competitive . . . [and] can solve a range of potential hold-up problems in labor contracting.

For example, there are circumstances in which both firms and their employees might benefit from additional employee training. But employees may lack the resources needed to acquire the right training on their own. Their employers might be better resourced, but might worry about their returns on investments in employee training.

Labor is alienable; that is, employees can walk out the door, and they can do so before firm-sponsored training has paid adequate dividends. Hence, they might renegotiate their compensation before it has paid for itself; or they might bring their enhanced skills to a competing firm. Knowing this, firms might tend to underinvest in employee training, which would lower their productivity. Noncompetes can mitigate this hold-up problem, and there is empirical evidence that they do just that.

The Available Literature Is Decidedly Mixed

A per se ban under the antitrust laws would seem to require considerable case law and a settled, and relatively comprehensive body of literature demonstrating that noncompetes pose significant harms to competition and consumers in nearly all cases. There isn’t.

First, “there appear to be numerous and broad gaps in the literature.” For example, most policy options, industries, and occupations haven’t been studied at all. And there’s only a single paper looking at downstream price effects in goods and services markets—one that doesn’t appear to be at all generalizable.

In addition, the available results don’t all impugn noncompetes; they’re mixed. For example, while some studies suggest certain classes of workers see increased wages, on average, when noncompete “enforceability” is reduced, others report contexts in which enforcement is associated with rising wages, depending on the occupation (there are studies of physicians, CEOs, and financial advisors) or even the timing with which workers are made aware of noncompetes.

It’s complicated. But as a 2019 working paper from the FTC’s own Bureau of Economics observed, the…

more credible empirical studies tend to be narrow in scope, focusing on a limited number of specific occupations . . . or potentially idiosyncratic policy changes with uncertain and hard-to-quantify generalizability.

So, for example, a study of the effects of an idiosyncratic statutory change regarding noncompetes in certain parts of the tech sector, but not others, in Hawaii (which doesn’t have much of a tech sector) might tell us rather little about our policy options more broadly.

Being the Primary Federal Labor Regulator Requires Resources

There are also reasons to question the FTC’s drive to be the federal regulator of noncompetes and other vertical restraints in labor agreements. For one thing, the commission has very little experience with noncompetes, although it did (rush to?) settle three complaints involving noncompetes the day before they issued the NPRM.

All three (plus a fourth settled since) involved very specific facts and circumstances. Three of the four were situated in a single industry: the glass-container industry. And, as recently resigned Commissioner Christine Wilson explained in dissent, the opinions and orders settling the matters did little to explain how the conduct at issue violated the antitrust laws. In one complaint, the alleged restrictions on security guards seemed excessive and unreasonable (as a state court found them to be, under state law), but that doesn’t mean that they violated the FTC Act.

Moreover, this would be a sweeping regulation involving, based on the commission’s own estimates, some 30 million current labor agreements and several hundred billion dollars in annual wage effects. Just this week, the commission once again testified to Congress that it lacks adequate personnel and other resources to execute the laws it plainly is charged to enforce already. So, for example:

 [w]hile we constantly strive to enforce the law to the best of our capabilities, there is no doubt that—despite the much-needed increased appropriations Congress has provided in recent years—we continue to lack sufficient funding.

Given these limitations, it’s hard to understand the pitch to regulate labor terms across the entire economy without any congressional charge to do so. And that’s leaving aside the FTC’s recent and problematic proposal to issue sweeping regulations for digital privacy, as well. Not incidentally, this is an active area of state policy reform, and an issue that’s currently before Congress. 

A Flimsy Basis for Authority

In the end, the FTC’s claimed authority to issue competition regulations under its general “unfair methods of competition” authority (Section 5 of the FTC Act) and a single clause about regulations (for some purpose) in Section 6(g) of the FTC Act is both contentious and dubious.

While it’s not baseless, administrative-law scholars doubt the FTC’s position, which rests on a dated opinion from the U.S. Circuit Court of Appeals for the D.C. Circuit that’s plainly out of step with recent Supreme Court decisions, which show less deference to agency authority (like the Axon decision just last week, or last year’s West Virginia v. EPA), as well as more general trends in statutory construction.  

All in all, the commission’s proposed rule would be a bridge too far—or several of them. The agency isn’t just risking the economic costs of a spectacularly overbroad rule and its own much-needed agency resources. Court challenges to such a rule are inevitable, and place both the substance of a noncompete rule and the FTC’s own authority at risk.  

In Antitrust & Competition, Federal Trade Commission, Section 5, Truth on the Market, Vertical Restraints , , , , ,
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When Bad Antitrust Costs Lives: The Illumina/GRAIL Tragedy

Alden Abbott —  4 April 2023

Regrettably, but not unexpectedly, the Federal Trade Commission (FTC) yesterday threw out a reasoned decision by its administrative law judge and ordered DNA-sequencing provider Illumina Inc. to divest GRAIL Inc., makers of a multi-cancer early detection (MCED) test.

The FTC claims that this vertical merger would stifle competition and innovation in the U.S. market for life-saving cancer tests. The FTC’s decision ignores Illumina’s ability to use its resources to obtain regulatory clearances and bring GRAIL’s test to market more quickly, thereby saving many future lives. Other benefits of the transaction, including the elimination of double marginalization, have been succinctly summarized by Thom Lambert. See also the outstanding critique of the FTC’s case by Bruce Kobayashi, Jessica Melugin, Kent Lassman, and Timothy Muris, and this update by Dan Gilman.

The transaction’s potential boon to consumers and patients has, alas, been sacrificed at the altar of theoretical future harms in a not-yet-existing MCED market, and ignores Illumina’s proffered safeguards (embodied in contractual assurances) that it would make its platform available to third parties in a neutral fashion.

The FTC’s holding comes in tandem with a previous European Commission holding to prohibit Illumina’s acquisition of GRAIL and impose a large fine. These two decisions epitomize antitrust enforcement policy at its worst: the sacrifice of clear and substantial near-term welfare benefits to consumers (including lives saved!) based on highly questionable future harms that cannot be reasonably calibrated at this time. A federal appeals court should quickly and decisively overturn this problematic FTC holding, and a European tribunal should act in similar fashion.

The courts cannot, of course, undo the harm flowing from delays in moving GRAIL’s technology forward. This is a sad day for believers in economically sound, evidence-based antitrust enforcement, as well as for patients and consumers.

In Antitrust & Competition, European Union, Health Care, Merger Guidelines, Pharmaceuticals , , , ,
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Reining in Digital Competition to No Good End: Will AICOA and OAMA Rise from the Grave?

Daniel Gilman & Lazar Radic —  8 March 2023

The 117th Congress closed out without a floor vote on either of the major pieces of antitrust legislation introduced in both chambers: the American Innovation and Choice Online Act (AICOA) and the Open Apps Market Act (OAMA). But it was evident at yesterday’s hearing of the Senate Judiciary Committee’s antitrust subcommittee that at least some advocates—both in academia and among the committee leadership—hope to raise those bills from the dead.

Of the committee’s five carefully chosen witnesses, only New York University School of Law’s Daniel Francis appeared to appreciate the competitive risks posed by AICOA and OAMA—noting, among other things, that the bills’ failure to distinguish between harm to competition and harm to certain competitors was a critical defect.

Yale School of Management’s Fiona Scott Morton acknowledged that ideal antitrust reforms were not on the table, and appeared open to amendments. But she also suggested that current antitrust standards were deficient and, without much explanation or attention to the bills’ particulars, that AICOA and OAMA were both steps in the right direction.

Subcommittee Chair Amy Klobuchar (D-Minn.), who sponsored AICOA in the last Congress, seems keen to reintroduce it without modification. In her introductory remarks, she lamented the power, wealth (if that’s different), and influence of Big Tech in helping to sink her bill last year.

Apparently, firms targeted by anticompetitive legislation would rather they weren’t. Folks outside the Beltway should sit down for this: it seems those firms hire people to help them explain, to Congress and the public, both the fact that they don’t like the bills and why. The people they hire are called “lobbyists.” It appears that, sometimes, that strategy works or is at least an input into a process that sometimes ends, more or less, as they prefer. Dirty pool, indeed. 

There are, of course, other reasons why AICOA and OAMA might have stalled. Had they been enacted, it’s very likely that they would have chilled innovation, harmed consumers, and provided a level of regulatory discretion that would have been very hard, if not impossible, to dial back. If reintroduced and enacted, the bills would be more likely to “rein in” competition and innovation in the American digital sector and, specifically, targeted tech firms’ ability to deliver innovative products and services to tens of millions of (hitherto very satisfied) consumers.

Our colleagues at the International Center for Law & Economics (ICLE) and its affiliated scholars, among others, have explained why. For a selected bit of self-plagiarism, AICOA and OAMA received considerable attention in our symposium on Antitrust’s Uncertain Future; ICLE’s Dirk Auer had a Truth on the Market post on AICOA; and Lazar Radic wrote a piece on OAMA that’s currently up for a Concurrences award.

To revisit just a few critical points:

  1. AICOA and OAMA both suppose that “self-preferencing” is generally harmful. Not so. A firm might invest in developing a successful platform and ecosystem because it expects to recoup some of that investment through, among other means, preferred treatment for some of its own products. Exercising a measure of control over downstream or adjacent products might drive the platform’s development in the first place (see here and here for some potential advantages). To cite just a few examples from the empirical literature, Li and Agarwal (2017) find that Facebook’s integration of Instagram led to a significant increase in user demand, not just for Instagram, but for the entire category of photography apps; Foerderer, et al. (2018) find that Google’s 2015 entry into the market for photography apps on Android created additional user attention and demand for such apps generally; and Cennamo, et al. (2018) find that video games offered by console firms often become blockbusters and expanded the consoles’ installed base. As a result, they increase the potential for independent game developers, even in the face of competition from first-party games.
  2. AICOA and OAMA, in somewhat different ways, favor open systems, interoperability, and/or data portability. All of these have potential advantages but, equally, potential costs or disadvantages. Whether any is procompetitive or anticompetitive depends on particular facts and circumstances. In the abstract, each represents a business model that might well be procompetitive or benign, and that consumers might well favor or disfavor. For example, interoperability has potential benefits and costs, and, as Sam Bowman has observed, those costs sometimes exceed the benefits. For instance, interoperability can be exceedingly costly to implement or maintain, and it can generate vulnerabilities that challenge or undermine data security. Data portability can be handy, but it can also harm the interests of third parties—say, friends willing to be named, or depicted in certain photos on a certain platform, but not just anywhere. And while recent commentary suggests that the absence of “open” systems signals a competition problem, it’s hard to understand why. There are many reasons that consumers might prefer “closed” systems, even when they have to pay a premium for them.
  3. AICOA and OAMA both embody dubious assumptions. For example, underlying AICOA is a supposition that vertical integration is generally (or at least typically) harmful. Critics of established antitrust law can point to a few recent studies that cast doubt on the ubiquity of benefits from vertical integration. And it is, in fact, possible for vertical mergers or other vertical conduct to harm competition. But that possibility, and the findings of these few studies, are routinely overstated. The weight of the empirical evidence shows that vertical integration tends to be competitively benign. For example, widely acclaimed meta-analysis by economists Francine Lafontaine (former director of the Federal Trade Commission’s Bureau of Economics under President Barack Obama) and Margaret Slade led them to conclude:

“[U]nder most circumstances, profit-maximizing vertical integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view. Although there are isolated studies that contradict this claim, the vast majority support it. . . .  We therefore conclude that, faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked.”

  1. Network effects and data advantages are not insurmountable, nor even necessarily harmful. Advantages of scope and scale for data sets vary according to the data at issue; the context and analytic sophistication of those with access to the data and application; and are subject to diminishing returns, in any case. Simple measures of market share or other numerical thresholds may signal very little of competitive import. See, e.g., this on the contestable platform paradox; Carl Shapiro on the putative decline of competition and irrelevance of certain metrics; and, more generally, antitrust’s well-grounded and wholesale repudiation of the Structure-Conduct-Performance paradigm.

These points are not new. As we note above, they’ve been made more carefully, and in more detail, before. What’s new is that the failure of AICOA and OAMA to reach floor votes in the last Congress leaves their sponsors, and many of their advocates, unchastened.

Conclusion

At yesterday’s hearing, Sen. Klobuchar noted that nations around the world are adopting regulatory frameworks aimed at “reining in” American digital platforms. True enough, but that’s exactly what AICOA and OAMA promise; they will not foster competition or competitiveness.

Novel industries may pose novel challenges, not least to antitrust. But it does not follow that the EU’s Digital Markets Act (DMA), proposed policies in Australia and the United Kingdom, or AICOA and OAMA represent beneficial, much less optimal, policy reforms. As Francis noted, the central commitments of OAMA and AICOA, like the DMA and other proposals, aim to help certain firms at the expense of other firms and consumers. This is not procompetitive reform; it is rent-seeking by less-successful competitors.

AICOA and OAMA were laid to rest with the 117th Congress. They should be left to rest in peace.

In Antitrust & Competition, Exclusionary Conduct, Federal Trade Commission, Monopolization, Platforms, Truth on the Market, Tying, Vertical Restraints , , , , , , ,
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Biweekly FTC Roundup: Total Drama Island Edition

Daniel J. Gilman —  17 February 2023

In a Feb. 14 column in the Wall Street Journal, Commissioner Christine Wilson announced her intent to resign her position on the Federal Trade Commission (FTC). For those curious to know why, she beat you to the punch in the title and subtitle of her column: “Why I’m Resigning as an FTC Commissioner: Lina Khan’s disregard for the rule of law and due process make it impossible for me to continue serving.”

This is the seventh FTC roundup I’ve posted to Truth on the Market since joining the International Center for Law & Economics (ICLE) last September, having left the FTC at the end of August. Relentlessly astute readers of this column may have observed that I cited (and linked to) Commissioner Wilson’s dissents in five of my six previous efforts—actually, to three of them in my Nov. 4 post alone.

As anyone might guess, I’ve linked to Wilson’s dissents (and concurrences, etc.) for the same reason I’ve linked to other sources: I found them instructive in some significant regard. Priors and particular conclusions of law aside, I generally found Wilson’s statements to be well-grounded in established principles of antitrust law and economics. I cannot say the same about statements from the current majority.

Commission dissents are not merely the bases for blog posts or venues for venting. They can provide a valuable window into agency matters for lawmakers and, especially, for the courts. And I would suggest that they serve an important institutional role at the FTC, whatever one thinks of the merits of any specific matter. There’s really no point to having a five-member commission if all its votes are unanimous and all its opinions uniform. Moreover, establishing the realistic possibility of dissent can lend credence to those commission opinions that are unanimous. And even in these fractious times, there are such opinions.     

Wilson did not spring forth fully formed from the forehead of the U.S. Senate. She began her FTC career as a Georgetown student, serving as a law clerk in the Bureau of Competition; she returned some years later to serve as chief of staff to Chairman Tim Muris; and she returned again when confirmed as a commissioner in April 2018 (later sworn in in September 2018). In between stints at the FTC, she gained antitrust experience in private practice, both in law firms and as in-house counsel. I would suggest that her agency experience, combined with her work in the private sector, provided a firm foundation for the judgments required of a commissioner.

Daniel Kaufman, former acting director of the FTC’s Bureau of Consumer Protection, reflected on Wilson’s departure here. Personally, with apologies for the platitude, I would like to thank Commissioner Wilson for her service.  And, not incidentally, for her consistent support for agency staff.

Her three Democratic colleagues on the commission also thanked her for her service, if only collectively, and tersely: “While we often disagreed with Commissioner Wilson, we respect her devotion to her beliefs and are grateful for her public service. We wish her well in her next endeavor.” That was that. No doubt heartfelt. Wilson’s departure column was a stern rebuke to the Commission, so there’s that. But then, stern rebukes fly in all directions nowadays.

While I’ve never been a commissioner, I recall a far nicer and more collegial sendoff when I departed from my lowly staff position. Come to think of it, I had a nicer sendoff when I left a large D.C. law firm as a third-year associate bound for a teaching position, way back when.

So, what else is new?

In January, I noted that “the big news at the FTC is all about noncompetes”; that is, about the FTC’s proposed rule to ban the use of noncompetes more-or-less across the board The rule would cover all occupations and all income levels, with a narrow exception for the sale of the business in which the “employee” has at least a 25% ownership stake (why 25%?), and a brief nod to statutory limits on the commission’s regulatory authority with regard to nonprofits, common carriers, and some other entities.

Colleagues Brian Albrecht (and here), Alden Abbott, Gus Hurwitz, and Corbin K. Barthold also have had things to say about it. I suggested that there were legitimate reasons to be concerned about noncompetes in certain contexts—sometimes on antitrust grounds, and sometimes for other reasons. But certain contexts are far from all contexts, and a mixed and developing body of economic literature, coupled with limited FTC experience in the subject, did not militate in favor of nearly so sweeping a regulatory proposal. This is true even before we ask practical questions about staffing for enforcement or, say, whether the FTC Act conferred the requisite jurisdiction on the agency.

This is the first or second FTC competition rulemaking ever, depending on how one counts, and it is the first this century, in any case. Here’s administrative scholar Thomas Merrill on FTC competition rulemaking. Given the Supreme Court’s recent articulation of the major questions doctrine in West Virginia v. EPA, a more modest and bipartisan proposal might have been far more prudent. A bad turn at the court can lose more than the matter at hand. Comments are due March 20, by the way.

Now comes a missive from the House Judiciary Committee, along with multiple subcommittees, about the noncompete NPRM. The letter opens by stating that “The Proposed Rule exceeds its delegated authority and imposes a top-down one-size-fits-all approach that violates basic American principles of federalism and free markets.” And “[t]he Biden FTC’s proposed rule on non-compete clauses shows the radicalness of the so-called ‘hipster’ antitrust movement that values progressive outcomes over long-held legal and economic principles.”

Ouch. Other than that Mr. Jordan, how did you like the play?

There are several single-spaced pages on the “FTC’s power grab” before the letter gets to a specific, and substantial, formal document request in the service of congressional oversight. That does not stop the rulemaking process, but it does not bode well either.

Part of why this matters is that there’s still solid, empirically grounded, pro-consumer work that’s at risk. In my first Truth on the Market post, I applauded FTC staff comments urging New York State to reject a certificate of public advantage (COPA) application. As I noted there, COPAs are rent-seeking mechanisms chiefly aimed at insulating anticompetitive mergers (and sometimes conduct) from federal antitrust scrutiny. Commission and staff opposition to COPAs was developed across several administrations on well-established competition principles and a significant body of research regarding hospital consolidation, health care prices, and quality of care.

Office of Policy Planning (OPP) Director Elizabeth Wilkins has now announced that the parties in question have abandoned their proposed merger. Wilkins thanks the staff of OPP, the Bureau of Economics, and the Bureau of Competition for their work on the matter, and rightly so. There’s no new-fangled notion of Section 5 or mergers at play. The work has developed over decades and it’s the sort of work that should continue. Notwithstanding numerous (if not legion) departures, good and experienced staff and established methods remain, and ought not to be repudiated, much less put at risk.    

Oh, right, Meta/Within. On Jan. 31, U.S. District Court Judge Edward J. Davila denied FTC’s request for a preliminary injunction blocking Meta’s proposed acquisition of Within. On Feb. 9, the commission announced “that this matter in its entirety be and it hereby is withdrawn from adjudication, and that all proceedings before the Administrative Law Judge be and they hereby are stayed.”

So, what happened? Much ink has been spilled on the weakness of the FTC’s case, both within ToTM (you see what I did there?) and without. ToTM posts by Dirk Auer, Alden Abbott, Gus Hurwitz, Gus again, and I enjoyed no monopoly on skepticism. Ashley Gold called the case “a stretch”; Gary Shapiro, in Fortune, called it “laughable.” And as Gus had pointed out, even the New York Times seemed skeptical.

I won’t recapitulate the much-discussed case, but on the somewhat-less-discussed matter of the withdrawal, I’ll consider why the FTC announced that the matter “is withdrawn from adjudication, and that all proceedings before the Administrative Law Judge be and they hereby are stayed.” While the matter was not litigated to its conclusion in federal court, the substantial and workmanlike opinion denying the preliminary injunction made it clear that the FTC had lost on the facts under both of the theories of harm to potential competition that they’d advanced.

“Having reviewed and considered the objective evidence of Meta’s capabilities and incentives, the Court is not persuaded that this evidence establishes that it was ‘reasonably probable’ Meta would enter the relevant market.”

An appeal in the 9th U.S. Circuit Court of Appeals likely seemed fruitless. Stopping short of a final judgment, the FTC could have tried for a do-over in its internal administrative Part 3 process, and might have fared well before itself, but that would have demanded considerable additional resources in a case that, in the long run, was bound to be a loser. Bloomberg had previously reported that the commission voted to proceed with the case against the merger contra the staff’s recommendation. Here, the commission noted that “Complaint Counsel [the Commission’s own staff] has not registered any objection” to Meta’s motion to withdraw proceedings from adjudication.

There are novel approaches to antitrust. And there are the courts and the law. And, as noted above, many among the staff are well-versed in that law and experienced at investigations. You can’t always get what you want, but if you try sometimes, you get what you deserve.

In Antitrust & Competition, Antitrust at the Agencies Roundup, Economic Theory, Facebook, Federal Trade Commission, Platforms, Section 5, Truth on the Market , , , , , , , , ,
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7 Top Takeaways from the 2nd Annual Mercatus Antitrust Forum

Alden Abbott —  1 February 2023

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

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

Takeaways

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other International Concerns

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

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

Conclusion

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

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

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

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

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

In Antitrust & Competition, Antitrust Division, European Union, Federal Trade Commission, International, Justice Department, Mergers & Acquisitions , , , , , , , , , , , , ,
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The FTC’s Noncompete Rule: Shouldn’t Doesn’t Mean Can’t, but Maybe It Should

Gus Hurwitz —  13 January 2023

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

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

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

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

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

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

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

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

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

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

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

In Antitrust & Competition, Federal Trade Commission, Section 5, Truth on the Market , , , , , ,
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Your Definitive End-of-Year Global Tech Regulation Wrap-Up: Who’s Doing What, Where, and What to Make of It

Lazar Radic —  21 December 2022

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

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

Status of Tech Regulation Around the World

European Union

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

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

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

United Kingdom

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

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

United States

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

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

South Africa

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

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

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

India

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

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

Australia

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

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

China

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

South Korea

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

Germany

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

Canada

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

Turkey

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

Japan

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

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

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

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

In Antitrust & Competition, China, European Union, Federal Trade Commission, International, Justice Department, United Kingdom , , , , , , , , , , , , ,
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Brussels Effect or Brussels Defect: Digital Regulation in Emerging Markets

Geoffrey Manne & Dirk Auer —  20 December 2022

The blistering pace at which the European Union put forward and adopted the Digital Markets Act (DMA) has attracted the attention of legislators across the globe. In its wake, countries such as South Africa, India, Brazil, and Turkey have all contemplated digital-market regulations inspired by the DMA (and other models of regulation, such as the United Kingdom’s Digital Markets Unit and Australia’s sectoral codes of conduct).

Racing to be among the first jurisdictions to regulate might intuitively seem like a good idea. By emulating the EU, countries could hope to be perceived as on the cutting edge of competition policy, and hopefully earn a seat at the table when the future direction of such regulations is discussed.

There are, however, tradeoffs involved in regulating digital markets, which are arguably even more salient in the case of emerging markets. Indeed, as we will explain here, these jurisdictions often face challenges that significantly alter the ratio of costs and benefits when it comes to enacting regulation.

Drawing from a paper we wrote with Sam Bowman about competition policy in the Association of Southeast Asian Nations (ASEAN) zone, we highlight below three of the biggest issues these initiatives face.

To Regulate Competition, You First Need to Attract Competition

Perhaps the biggest factor cautioning emerging markets against adoption of DMA-inspired regulations is that such rules would impose heavy compliance costs to doing business in markets that are often anything but mature. It is probably fair to say that, in many (maybe most) emerging markets, the most pressing challenge is to attract investment from international tech firms in the first place, not how to regulate their conduct.

The most salient example comes from South Africa, which has sketched out plans to regulate digital markets. The Competition Commission has announced that Amazon, which is not yet available in the country, would fall under these new rules should it decide to enter—essentially on the presumption that Amazon would overthrow South Africa’s incumbent firms.

It goes without saying that, at the margin, such plans reduce either the likelihood that Amazon will enter the South African market at all, or the extent of its entry should it choose to do so. South African consumers thus risk losing the vast benefits such entry would bring—benefits that dwarf those from whatever marginal increase in competition might be gained from subjecting Amazon to onerous digital-market regulations.

While other tech firms—such as Alphabet, Meta, and Apple—are already active in most emerging jurisdictions, regulation might still have a similar deterrent effect to their further investment. Indeed, the infrastructure deployed by big tech firms in these jurisdictions is nowhere near as extensive as in Western countries. To put it mildly, emerging-market consumers typically only have access to slower versions of these firms’ services. A quick glimpse at Google Cloud’s global content-delivery network illustrates this point well (i.e., that there is far less infrastructure in developing markets):

Ultimately, emerging markets remain relatively underserved compared to those in the West. In such markets, the priority should be to attract tech investment, not to impose regulations that may further slow the deployment of critical internet infrastructure.

Growth Is Key

The potential to boost growth is the most persuasive argument for emerging markets to favor a more restrained approach to competition law and regulation, such as that currently employed in the United States.

Emerging nations may not have the means (or the inclination) to equip digital-market enforcers with resources similar to those of the European Commission. Given these resource constraints, it is essential that such jurisdictions focus their enforcement efforts on those areas that provide the highest return on investment, notably in terms of increased innovation.

This raises an important point. A recent empirical study by Ross Levine, Chen Lin, Lai Wei, and Wensi Xie finds that competition enforcement does, indeed, promote innovation. But among the study’s more surprising findings is that, unlike other areas of competition enforcement, the strength of a jurisdiction’s enforcement of “abuse of dominance” rules does not correlate with increased innovation. Furthermore, jurisdictions that allow for so-called “efficiency defenses” in unilateral-conduct cases also tend to produce more innovation. The authors thus conclude that:

From the perspective of maximizing patent-based innovation, therefore, a legal system that allows firms to exploit their dominant positions based on efficiency considerations could boost innovation.

These findings should give pause to policymakers who seek to emulate the European Union’s DMA—which, among other things, does not allow gatekeepers to put forward so-called “efficiency defenses” that would allow them to demonstrate that their behavior benefits consumers. If growth and innovation are harmed by overinclusive abuse-of-dominance regimes and rules that preclude firms from offering efficiency-based defenses, then this is probably even more true of digital-market regulations that replace case-by-case competition enforcement with per se prohibitions.

In short, the available evidence suggests that, faced with limited enforcement resources, emerging-market jurisdictions should prioritize other areas of competition policy, such as breaking up or mitigating the harmful effects of cartels and exercising appropriate merger controls.

These findings also cut in favor of emphasizing the traditional antitrust goal of maximizing consumer welfare—or, at least, protecting the competitive process. Many of the more recent digital-market regulations—such as the DMA, the UK DMU, and the ACCC sectoral codes of conduct—are instead focused on distributional issues. They seek to ensure that platform users earn a “fair share” of the benefits generated on a platform. In light of Levine et al.’s findings, this approach could be undesirable, as using competition policy to reduce monopoly rents may lead to less innovation.

In short, traditional antitrust law’s focus on consumer welfare and relatively limited enforcement in the area of unilateral conduct may be a good match for emerging nations that want competition regimes that maximize innovation under important resource constraints.

Consider Local Economic and Political Conditions

Emerging jurisdictions have diverse economic and political profiles. These features, in turn, affect the respective costs and benefits of digital-market regulations.

For example, digital-market regulations generally offer very broad discretion to competition enforcers. The DMA details dozens of open-ended prohibitions upon which enforcers can base infringement proceedings. Furthermore, because they are designed to make enforcers’ task easier, these regulations often remove protections traditionally afforded to defendants, such as appeals to the consumer welfare standard or efficiency defenses. The UK’s DMU initiative, for example, would lower the standard of proof that enforcers must meet.

Giving authorities broad powers with limited judicial oversight might be less problematic in jurisdictions where the state has a track record of self-restraint. The consequences of regulatory discretion might, however, be far more problematic in jurisdictions where authorities routinely overstep the mark and where the threat of corruption is very real.

To name but two, countries like South Africa and India rank relatively low in the World Bank’s “ease of doing business index” (84th and 62nd, respectively). They also rank relatively low on the Cato Institute’s “human freedom index” (77th and 119th, respectively—and both score particularly badly in terms of economic freedom). This suggests strongly that authorities in those jurisdictions are prone to misapply powers derived from digital-market regulations in ways that hurt growth and consumers.

To make matters worse, outright corruption is also a real problem in several emerging nations. Returning to South Africa and India, both jurisdictions face significant corruption issues (they rank 70th and 85th, respectively, on Transparency International’s “Corruption Perception Index”).

At a more granular level, an inquiry in South Africa revealed rampant corruption under former President Jacob Zuma, while current President Cyril Ramaphosa also faces significant corruption allegations. Writing in the Financial Times in 2018, Gaurav Dalmia—chair of Delhi-based Dalmia Group Holdings—opined that “India’s anti-corruption battle will take decades to win.”

This specter of corruption thus counsels in favor of establishing competition regimes with sufficient checks and balances, so as to prevent competition authorities from being captured by industry or political forces. But most digital-market regulations are designed precisely to remove those protections in order to streamline enforcement. The risk that they could be mobilized toward nefarious ends are thus anything but trivial. This is of particular concern, given that such regulations are typically mobilized against global firms in order to shield inefficient local firms—raising serious risks of protectionist enforcement that would harm local consumers.

Conclusion

The bottom line is that emerging markets would do well to reconsider the value of regulating digital markets that have yet to reach full maturity. Recent proposals threaten to deter tech investments in these jurisdictions, while raising significant risks of reduced growth, corruption, and consumer-harming protectionism.

In Amazon, Antitrust & Competition, European Union, Google, International, International Trade, Patent, Platforms, Truth on the Market, United Kingdom , , , , , , , , , , , ,
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Biweekly FTC Roundup: Grail-Shaped Beacon Edition

Daniel J. Gilman —  9 December 2022

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In Antitrust & Competition, Antitrust at the Agencies Roundup, Antitrust Division, Federal Trade Commission, Justice Department, Mergers & Acquisitions, Section 5, Truth on the Market , , , , , , , , , , , ,
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Patent Pools, Innovation, and Antitrust Policy

Alden Abbott —  7 December 2022

Late last month, 25 former judges and government officials, legal academics and economists who are experts in antitrust and intellectual property law submitted a letter to Assistant Attorney General Jonathan Kanter in support of the U.S. Justice Department’s (DOJ) July 2020 Avanci business-review letter (ABRL) dealing with patent pools. The pro-Avanci letter was offered in response to an October 2022 letter to Kanter from ABRL critics that called for reconsideration of the ABRL. A good summary account of the “battle of the scholarly letters” may be found here.

The University of Pennsylvania’s Herbert Hovenkamp defines a patent pool as “an arrangement under which patent holders in a common technology or market commit their patents to a single holder, who then licenses them out to the original patentees and perhaps to outsiders.” Although the U.S. antitrust treatment of patent pools might appear a rather arcane topic, it has major implications for U.S. innovation. As AAG Kanter ponders whether to dive into patent-pool policy, a brief review of this timely topic is in order. That review reveals that Kanter should reject the anti-Avanci letter and reaffirm the ABRL.

Background on Patent Pool Analysis

The 2017 DOJ-FTC IP Licensing Guidelines

Section 5.5 of joint DOJ-Federal Trade Commission (FTC) Antitrust Guidelines for the Licensing of Intellectual Property (2017 Guidelines, which revised a prior 1995 version) provides an overview of the agencies’ competitive assessment of patent pools. The 2017 Guidelines explain that, depending on how pools are designed and operated, they may have procompetitive (and efficiency-enhancing) or anticompetitive features.

On the positive side of the ledger, Section 5.5 states:

Cross-licensing and pooling arrangements are agreements of two or more owners of different items of intellectual property to license one another or third parties. These arrangements may provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation. By promoting the dissemination of technology, cross-licensing and pooling arrangements are often procompetitive.

On the negative side of the ledger, Section 5.5 states (citations omitted):

Cross-licensing and pooling arrangements can have anticompetitive effects in certain circumstances. For example, collective price or output restraints in pooling arrangements, such as the joint marketing of pooled intellectual property rights with collective price setting or coordinated output restrictions, may be deemed unlawful if they do not contribute to an efficiency-enhancing integration of economic activity among the participants. When cross-licensing or pooling arrangements are mechanisms to accomplish naked price-fixing or market division, they are subject to challenge under the per se rule.

Other aspects of pool behavior may be either procompetitive or anticompetitive, depending upon the circumstances, as Section 5.5 explains. The antitrust rule of reason would apply to pool restraints that may have both procompetitive and anticompetitive features.  

For example, requirements that pool members grant licenses to each other for current and future technology at minimal cost could disincentivize research and development. Such requirements, however, could also promote competition by exploiting economies of scale and integrating complementary capabilities of the pool members. According to the 2017 Guidelines, such requirements are likely to cause competitive problems only when they include a large fraction of the potential research and development in an R&D market.

Section 5.5 also applies rule-of-reason case-specific treatment to exclusion from pools. It notes that, although pooling arrangements generally need not be open to all who wish to join (indeed, exclusion of certain parties may be designed to prevent potential free riding), they may be anticompetitive under certain circumstances (citations omitted):

[E]xclusion from a pooling or cross-licensing arrangement among competing technologies is unlikely to have anticompetitive effects unless (1) excluded firms cannot effectively compete in the relevant market for the good incorporating the licensed technologies and (2) the pool participants collectively possess market power in the relevant market. If these circumstances exist, the [federal antitrust] [a]gencies will evaluate whether the arrangement’s limitations on participation are reasonably related to the efficient development and exploitation of the pooled technologies and will assess the net effect of those limitations in the relevant market.

The 2017 Guidelines are informed by the analysis of prior agency-enforcement actions and prior DOJ business-review letters. Through the business-review-letter procedure, an organization may submit a proposed action to the DOJ Antitrust Division and receive a statement as to whether the Division currently intends to challenge the action under the antitrust laws, based on the information provided. Historically, DOJ has used these letters as a vehicle to discuss current agency thinking about safeguards that may be included in particular forms of business arrangements to alleviate DOJ competitive concerns.

DOJ patent-pool letters, in particular, have prompted DOJ to highlight specific sorts of provisions in pool agreements that forestalled competitive problems. To this point, DOJ has never commented favorably on patent-pool safeguards in a letter and then subsequently reversed course to find the safeguards inadequate.

Subsequent to issuance of the 2017 Guidelines, DOJ issued two business-review letters on patent pools: the July 2020 ABRL letter and the January 2021 University Technology Licensing Program business-review letter (UTLP letter). Those two letters favorably discussed competitive safeguards proffered by the entities requesting favorable DOJ reviews.

ABRL Letter

The ABRL letter explains (citations omitted):

[Avanci] proposed [a] joint patent-licensing pool . . . to . . . license patent claims that have been declared “essential” to implementing 5G cellular wireless standards for use in automobile vehicles and distribute royalty income among the Platform’s licensors. Avanci currently operates a licensing platform related to 4G cellular standards and offers licenses to 2G, 3G, and 4G standards-essential patents used in vehicles and smart meters.

After consulting telecommunications and automobile-industry stakeholders, conducing an independent review, and considering prior guidance to other patent pools, “DOJ conclude[d] that, on balance, Avanci’s proposed 5G Platform is unlikely to harm competition.” As such, DOJ announced it had no present intention to challenge the platform.

The DOJ press release accompanying the ABRL letter provides additional valuable information on Avanci’s potential procompetitive efficiencies; its plan to charge fair, reasonable, and non-discriminatory (FRAND) rates; and its proposed safeguards:

Avanci’s 5G Platform may make licensing standard essential patents related to vehicle connectivity more efficient by providing automakers with a “one stop shop” for licensing 5G technology. The Platform also has the potential to reduce patent infringement and ensure that patent owners who have made significant contributions to the development of 5G “Release 15” specifications are compensated for their innovation. Avanci represents that the Platform will charge FRAND rates for the patented technologies, with input from both licensors and licensees.

In addition, Avanci has incorporated a number of safeguards into its 5G Platform that can help protect competition, including licensing only technically essential patents; providing for independent evaluation of essential patents; permitting licensing outside the Platform, including in other fields of use, bilateral or multi-lateral licensing by pool members, and the formation of other pools at levels of the automotive supply chain; and by including mechanisms to prevent the sharing of competitively sensitive information.  The Department’s review found that the Platform’s essentiality review may help automakers license the patents they actually need to make connected vehicles.  In addition, the Platform license includes “Have Made” rights that creates new access to cellular standard essential patents for licensed automakers’ third-party component suppliers, permitting them to make non-infringing components for 5G connected vehicles.

UTLP Letter

The United Technology Licensing Program business-review letter (issued less than a year after the ABRL letter, at the end of the Trump administration) discussed a proposal by participating universities to offer licenses to their physical-science patents relating to specified emerging technologies. According to DOJ:

[Fifteen universities agreed to cooperate] in licensing certain complementary patents through UTLP, which will be organized into curated portfolios relating to specific technology applications for autonomous vehicles, the “Internet of Things,” and “Big Data.”  The overarching goal of UTLP is to centralize the administrative costs associated with commercializing university research and help participating universities to overcome the budget, institutional relationship, and other constraints that make licensing in these areas particularly challenging for them.

The UTLP letter concluded, based on representations made in UTLP’s letter request, that the pool was on balance unlikely to harm competition. Specifically:

UTLP has incorporated a number of safeguards into its program to help protect competition, including admitting only non-substitutable patents, with a “safety valve” if a patent to accomplish a particular task is inadvertently included in a portfolio with another, substitutable patent. The program also will allow potential sublicensees to choose an individual patent, a group of patents, or UTLP’s entire portfolio, thereby mitigating the risk that a licensee will be required to license more technology than it needs. The department’s letter notes that UTLP is a mechanism that is intended to address licensing inefficiencies and institutional challenges unique to universities in the physical science context, and makes no assessment about whether this mechanism if set up in another context would have similar procompetitive benefits.

Patent-Pool Guidance in Context

DOJ and FTC patent-pool guidance has been bipartisan. It has remained generally consistent in character from the mid-1990s (when the first 1995 IP licensing guidelines were issued) to early 2021 (the end of the Trump administration, when the UTLP letter was issued). The overarching concern expressed in agency guidance has been to prevent a pool from facilitating collusion among competitors, from discouraging innovation, and from inefficiently excluding competitors.

As technology has advanced over the last quarter century, U.S. antitrust enforcers—and, in particular, DOJ, through a series of business-review letters beginning in 1997 (see the pro-Avanci letter at pages 9-10)—consistently have emphasized the procompetitive efficiencies that pools can generate, while also noting the importance of avoiding anticompetitive harms.

Those letters have “given a pass” to pools whose rules contained safeguards against collusion among pool members (e.g., by limiting pool patents to complementary, not substitute, technologies) and against anticompetitive exclusion (e.g., by protecting pool members’ independence of action outside the pool). In assessing safeguards, DOJ has paid attention to the particular market context in which a pool arises.

Notably, economic research generally supports the conclusion that, in recent decades, patent pools have been an important factor in promoting procompetitive welfare-enhancing innovation and technology diffusion.

For example, a 2015 study by Justus Baron and Tim Pohlmann found that a significant number of pools were created following antitrust authorities’ “more permissive stance toward pooling of patents” beginning in the late 1990s. Studying these new pools, they found “a significant increase in patenting rates after pool announcement” that was “primarily attributable to future members of the pool”.

A 2009 analysis by Richard Gilbert of the University of California, Berkeley (who served as chief economist of the DOJ Antitrust Division during the Clinton administration) concluded that (consistent with the approach adopted in DOJ business-review letters) “antitrust authorities and the courts should encourage policies that promote the formation and durability of beneficial pools that combine complementary patents.”

In a 2014 assessment of the role of patent pools in combatting “patent thickets,” Jonathan Barnett of the USC Gould School of Law concluded:

Using network visualization software, I show that information and communication technology markets rely on patent pools and other cross-licensing structures to mitigate or avoid patent thickets and associated inefficiencies. Based on the composition, structure, terms and pricing of selected leading patent pools in the ICT market, I argue that those pools are best understood as mechanisms by which vertically integrated firms mitigate transactional frictions and reduce the cost of accessing technology inputs.

Admittedly, a few studies of some old patents pools (e.g., the 19th century sewing-machine pool and certain early 20th century New Deal pools) found them to be associated with a decline in patenting. Setting aside possible questions of those studies’ methodologies, the old pooling arrangements bear little resemblance to the carefully crafted pool structures today. In particular, unlike the old pools, the more recent pools embody competitive safeguards (the old pools may have combined substitute patents, for example).   

Business-review letters dealing with pools have provided a degree of legal certainty that has helped encourage their formation, to the benefit of innovation in key industries. The anti-Avanci letter ignores that salient fact, focusing instead on allegedly “abusive” SEP-licensing tactics by the Avanci 5G pool—such as refusal to automatically grant a license to all comers—without considering that the pool may have had legitimate reasons not to license particular parties (who may, for instance, have made bad faith unreasonable licensing demands). In sum, this blinkered approach is wrong as a matter of SEP law and policy (as explained in the pro-Avanci letter) and wrong in its implicit undermining of the socially beneficial patent-pool business-review process.   

The pro-Avanci letter ably describes the serious potential harm generated by the anti-Avanci letter:

In evaluating the carefully crafted Avanci pool structure, the 2020 business review letter appropriately concluded that the pool’s design conformed to the well-established, fact-intensive inquiry concerning actual market practices and efficiencies set forth in previous business review letters. Any reconsideration of the 2020 business review letter, as proposed in the October 17 letter, would give rise to significant uncertainty concerning the Antitrust Division’s commitment to the aforementioned sequence of business review letters that have been issued concerning other patent pools in the information technology industry, as well as the larger group of patent pools that did not specifically seek guidance through the business review letter process but relied on the legal template that had been set forth in those previously issued letters.

This is a point of great consequence. Pooling arrangements in the information technology industry have provided an efficient market-driven solution to the transaction costs that are inherent to patent-intensive industries and, when structured appropriately in light of agency guidance and applicable case law, do not raise undue antitrust concerns. Thanks to pooling and related collective licensing arrangements, the innovations embodied in tens of thousands of patents have been made available to hundreds of device producers and other intermediate users, while innovators have been able to earn a commensurate return on the costs and risks that they undertook to develop new technologies that have transformed entire fields and industries to the benefit of consumers.

Conclusion

President Joe Biden’s 2021 Executive Order on Competition commits the Biden administration to “the promotion of competition and innovation by firms small and large, at home and worldwide.” One factor in promoting competition and innovation has been the legal certainty flowing from well-reasoned DOJ business-review letters on patent pools, issued on a bipartisan basis for more than a quarter of a century.

A DOJ decision to reconsider (in other words, to withdraw) the sound guidance embodied in the ABRL would detract from this certainty and thereby threaten to undermine innovation promoted by patent pools. Accordingly, AAG Kanter should reject the advice proffered by the anti-Avanci letter and publicly reaffirm his support for the ABRL—and, more generally, for the DOJ business-review process.

In Antitrust & Competition, Exclusionary Conduct, Intellectual Property, Patent, Truth on the Market , , , , , , , , , , , , ,
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FTC Section 5 Statement: Less Guidance Than Meets the Eye

Steven J Cernak —  18 November 2022

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

On Nov. 10, the Federal Trade Commission (FTC) issued a new statement explaining how it will exercise its standalone FTC Act Section 5 authority. Despite the length of the statement and the accompanying commentaries from most of the commissioners, there is less guidance than one might expect from so many words. One thing is clear, however: Expect more antitrust enforcement from the FTC in ways we have not seen in years, if ever.

The FTC enforces the antitrust laws through Section 5’s prohibition of unfair methods of competition (UMC). Courts and commentators alike have long agreed that Section 5’s prohibition covers everything covered by the other antitrust laws, such as the Sherman and Clayton Act, plus something more.

How far that extra standalone authority extends has been a point of contention for decades. In the early 1980s, several appellate courts admonished the FTC for an expansive interpretation of that authority, leaving parties uncertain of which actions would be challenged. Or, as the 2nd U.S. Circuit Court of Appeals put it: “the Commission owes a duty to define the conditions under which conduct … would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.”

In recent decades, the FTC has interpreted its authority much more narrowly. In 2015, a bipartisan collection of commissioners approved a short statement saying that the FTC would interpret its standalone authority consistently with the consumer welfare standard of the other antitrust laws and use the well-known rule of reason to judge any actions. Last year, the Democratic majority of commissioners voted to rescind that 2015 statement. Last week’s statement is the replacement.

Antitrust Fun, Little Guidance

The 16 pages of guidance and the accompanying commentary from three commissioners—two Democrats in support, one Republican in opposition—can be a fun read for antitrust geeks. There is plenty of well-written antitrust history. I learned something. Also, there are arguments about old FTC and appellate court cases that I had not read in 30 years.

But that history lesson did not give as much guidance about future enforcement as it should have. Most of the seven pages the guidance spends on its historical review is dedicated to showing that the FTC’s standalone authority extends beyond the Sherman and Clayton Acts. But that contention is in little dispute.

The more helpful historical question for parties today is how this Commission plans to respond to appellate court cases such as Boise Cascade, OAG, and the above-cited Ethyl that criticized the old Commission for, to paraphrase the statement, insufficient facts of unfairness, oppressiveness, or negative effects on the market. Chair Lina Khan’s commentary does mention the “trifecta” of cases, describing them as cases where courts found that the Commission “had not met its factual or evidentiary burden.” What would have been more helpful is some “inkling” of what kinds of facts this Commission will rely on to avoid the same types of “stinging” losses suffered by those earlier Commissions. Instead, we get multiple references to the Commission as a body of experts with the unstated assumption that, in the future, at least three commissioners will offer enough facts of some kind to convince any appellate court.

After the history section, the statement offers plenty of words on what the FTC majority think will be a standalone violation. All of those words add up, however, to much less guidance than the very brief 2015 statement. That prior statement said that the FTC would use its Section 5 standalone authority to pursue a single goal—consumer welfare—and would use a well-known analytical method to pursue it: the rule of reason. While even that statement left some ambiguity for businesses, and freedom for the Commission, at least it pursued only one goal with an analysis used in decades worth of antitrust cases.

The new statement does not list one goal but instead several, namely that it will challenge conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature … that negatively affect[s] competitive conditions [and thereby negatively affects] consumers, workers, or other market participants.”

But mathematically, you cannot maximize more than one variable. Nowhere in this statement is there any attempt to explain the analytical method to be used to balance pursuit of these different goals. What if a challenged action helps workers but harms consumers? What if an action helps workers at some competitors but not others? What if an action helps all competitors but harms workers at some of them? Merely combining all those goals into a single term, “competitive conditions,” does not provide any guidance as to how the FTC will balance all these named (and any unnamed) elements of “competitive conditions.” Again, there is an unstated assumption that three commissioners will expertly balance those competing goals.

Incomplete Lessons from the Past

The new statement does try to provide some guidance at the end of the document when it points to past cases that, perhaps, will be the types of cases that the Commission will now bring under Section 5. One such large category is actions that do not meet the standards for antitrust illegality now but, somehow, violate the “spirit of the antitrust laws.” The statement lists several examples.

To take one, what if a tying case does not meet the standards embodied in Jefferson Parish and its progeny? How will the Commission determine what the statement calls “de facto tying”? Which one or more of the elements expounded in Jefferson Parish will be eased? How? Will the same action by the same parties be subject to different substantive standards if a private plaintiff—or the U.S. Justice Department—is the plaintiff? If so, then parties wanting to avoid any antitrust challenge will need to default to the law of tying laid down by the then-current FTC, not by dozens of court cases over decades. And how will the FTC determine what violates the “spirit” of its own particular law of tying? Again, the unstated assumption is that the decisions of three expert commissioners will set the new law, at least until three new expert commissioners gain control.

Conclusion

To be (slightly) fairer to the new statement, it does confirm what has seemed obvious since the Biden administration started staffing the FTC: this Commission will more aggressively pursue antitrust challenges and will use any tool, including Section 5 standalone authority, to do it. Also, while the statement injects uncertainty into the thinking of businesses, which likely will lead to fewer and less-aggressive business actions, that result would be seen as a feature, not a bug, by the statement’s authors.

Finally, the statement does correctly point out that Section 5 was written at a time when Congress might have thought that the decisions of three expert commissioners would lead to “better” results for the economy, however defined, than decisions of dozens of juries and judges in dozens of cases. That Progressive Era confidence in the decisions of a few government-employed experts has not always worked out for the best, as some would claim from study of the Whiz Kids (Robert McNamara, not Robin Roberts) or recent pandemic policy.

Like it or not, the statement is another step toward a government of men (and women), not laws, and an economy dictated by a handful of experts in Washington, not millions of consumers across the country. Expect aggressive antitrust enforcement from the FTC in ways that many businesses and antitrust practitioners have only read about — about that, the new statement’s guidance is clear.

In Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Section 5, Symposia, Truth on the Market , , , , ,
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