Welcome to the Truth on the Market FTC UMC Roundup for May 27, 2022. This week we have (Hail Mary?) revisions to Sen. Amy Klobuchar’s (D-Minn.) American Innovation and Choice Online Act, initiatives that can’t decide whether they belong in Congress or the Federal Trade Commission, and yet more commentary on inflation and antitrust, along with a twist ending.
This Week’s Headline
Sen. Klobuchar has shared a revised version of her proposed American Innovation and Choice Online Act. What’s different? Not much. The main change is that several industries—banks and telecom, notably—are excluded from coverage. That was probably an effort to win some Republican votes for the bill. But headed into the midterms. it appears some congressional Democrats view this more as a poison pill than a good bill—one they don’t think their constituents are willing to swallow.
Back at the FTC, the commission has announced that itwill investigate the recent shortage of infant formula. This could focus on both consumer protection and competition issues. The market for infant formula in the United States is both fairly concentrated and also highly regulated. There are lots ofinteresting issues here (reminder to any academics reading this, we have an open call for papers for research relating to market-structuring regulation).
The blurry line between FTC and Congress remains blurry. The FTC’s call for comments relating to Pharmacy Benefit Managers (PBMs) closed this week, with more than 500 comments, at the same time that bipartisan legislation relating to PBMs has been introduced. And Sens. Mike Rounds (R-S.D.) and Elizabeth Warren (D-Mass.) want the FTC to investigate price fixing in the beef industry.
Concentrating a bit on big-picture policy issues, the number of friends Larry Summers has in the White House is shrinking faster than the dollar, as he worries about the embrace of “hipster antitrust” including that the administration’s antitrust policy is driving inflation. On the other side of the inflation-antitrust ledger, economists at the Boston Federal Reserve Bank released a paper arguing that high concentration increases inflation. Among others, ICLE Chief Economist Brian Albrecht calls foul. Still on the inflation beat, it’s no secret that the biggest tech companies hold a lot of cash. Some may wonder, with the cost of holding cash so high, is a buying spree on the horizon? (Answer: not if the FTC keeps holding up mergers!)
A Few Quick Hits
Former FTC Commissioner Josh Wright and former commission staffer Derek Moore reflect on FTC morale.
It’s consumer protection, not antitrust, news but Twitter has been hit with a $150 million fine for doing bad stuff with user data between 2013 and 2019. That gives us an excuse to mention the FTC’s call for presentations for PrivacyCon 2022.
We close with a twist ending: One of the concerns that critics of the FTC’s newfound embrace of its UMC authority have is that expansive vague authority given to regulators enables a flabby useless government that is paradoxically too powerful. Which is why it’s interesting to see Matt Stoller of the American Economic Liberties Project, of all people,express that concern. Strange bedfellows indeed!
The FTC UMC Roundup, part of the Truth on the Market FTC UMC Symposium, is a weekly roundup of news relating to the Federal Trade Commission’s antitrust and Unfair Methods of Competition authority. If you would like to receive this and other posts relating to these topics, subscribe to the RSS feed here. If you have news items you would like to suggest for inclusion, please mail them to us at email@example.com and/or firstname.lastname@example.org.
Welcome to the FTC UMC Roundup, our new weekly update of news and events relating to antitrust and, more specifically, to the Federal Trade Commission’s (FTC) newfound interest in “revitalizing” the field. Each week we will bring you a brief recap of the week that was and a preview of the week to come. All with a bit of commentary and news of interest to regular readers of Truth on the Market mixed in.
This week’s headline? Of course it’s that Alvaro Bedoya has been confirmed as the FTC’s fifth commissioner—notably breaking the commission’s 2-2 tie between Democrats and Republicans and giving FTC Chair Lina Khan the majority she has been lacking. Politico and Gibson Dunn both offer some thoughts on what to expect next—though none of the predictions are surprising: more aggressive merger review and litigation; UMC rulemakings on a range of topics, including labor, right-to-repair, and pharmaceuticals; and privacy-related consumer protection. The real question is how quickly and aggressively the FTC will implement this agenda. Will we see a flurry of rulemakings in the next week, or will they be rolled out over a period of months or years? Will the FTC risk major litigation questions with a “go big or go home” attitude, or will it take a more incrementalist approach to boiling the frog?
Questions about the climate at the FTC continue following release of the Office of Personnel Management’s (OPM) Federal Employee Viewpoint Survey. Sen. Roger Wicker (R-Miss.) wants to know what has caused staff satisfaction at the agency to fall precipitously. And former senior FTC staffer Eileen Harrington issued a stern rebuke of the agency at this week’s open meeting, saying of the relationship between leadership and staff that: “The FTC is not a failed agency but it’s on the road to becoming one. This is a crisis.”
A little further afield, the 5th U.S. Circuit Court of Appealsissued an opinion this week in a case involving SEC administrative-law judges that took broad issue with them on delegation, due process, and “take care” grounds. It may come as a surprise that this has led to much overwroughtconsternation that the opinion would dismantle the administrative state. But given that it is often the case that the SEC and FTC face similar constitutional issues (recall that Kokesh v. SEC was the precursor to AMG Capital), the 5th Circuit case could portend future problems for FTC adjudication. Add this to the queue with the Supreme Court’s pending review of whether federal district courts can consider constitutional challenges to an agency’s structure. The court was already scheduled to consider this question with respect to the FTC this next term in Axon, and agreed this week to hear a similar SEC-focused case next term as well.
Some Navel-Gazing News!
Congratulations to recent University of Michigan Law School graduate Kacyn Fujii, winner of our New Voices competition for contributions to our recent symposium on FTC UMC Rulemaking (hey, this post is actually part of that symposium, as well!). Kacyn’s contribution looked at the statutory basis for FTC UMC rulemaking authority and evaluated the use of such authority as a way to address problematic use of non-compete clauses.
And, one for the academics (and others who enjoy writing academic articles): you might be interested in this call for proposals for a research roundtable on Market Structuring Regulation that the International Center for Law & Economics will host in September. If you are interested in writing on topics that include conglomerate business models, market-structuring regulation, vertical integration, or other topics relating to the regulation and economics of contemporary markets, we hope to hear from you!
[This post wraps the initial run of Truth on the Market‘s digital symposium “FTC Rulemaking on Unfair Methods of Competition.”You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
Over the past three weeks, we have shared contributions from more than a dozen antitrust commentators—including academics, practitioners, students, and a commissioner of the Federal Trade Commission—discussing the potential for the FTC to develop substantive rules using its unfair methods of competition (UMC) authority. This post offers a recap of where we have been so far in this discussion and also discusses what comes next for this symposium and our coverage of these issues.
First, I must express a deep thank you to all who have contributed. Having helped to solicit, review, and edit many of these pieces, it has been a pleasure to engage with and learn from our authors. And second, I am happy to say to everyone: stay tuned! The big news this week is that, after a long wait, Alvaro Bedoya has been confirmed to the commission, likely creating a majority who will support Chair Lina Khan’s agenda. The ideas that we have been discussing as possibilities are likely to be translated into action over the coming weeks and months—and we will be here to continue sharing expert commentary and analysis.
The Symposium Goes On: An Open Call for Contributions
We will continue to run this symposium for the foreseeable future. We will not have daily posts, but we will have regular content: a weekly recap of relevant news, summaries of important FTC activity and new articles and scholarship, and other original content.
In addition, in the spirit of the symposium, we have an open call for contributions: if you would like to submit a piece for publication, please e-mail it to me or Keith Fierro. Submissions should be 1,500-4,000 words and may approach these issues from any perspective. They should be your original work, but may include short-form summaries of longer works published elsewhere, or expanded treatments of shorter publications (e.g., op-eds).
The Symposium So Far
We have covered a lot of ground these past three weeks. Contributors to the symposium have delved deeply into substantive areas where the FTC might try to use its UMC authority; they have engaged with one another over the scope and limits of the FTC’s authority; and they have looked at the FTC’s history, both ancient and recent, to better understand what the FTC may try to do, where it may be successful, and where it may run into a judicial wall.
Over 50,000 words of posts cannot be summarized in a few paragraphs, so I will not try to provide such a summary. The list of contributions to the symposium to date is below and each contribution is worth reading both on its own and in conjunction with others. Instead, I will pull out some themes that have come up across these posts:
Scope of FTC Authority
Unsurprisingly, several authors engaged with the potential scope of FTC UMC-rulemaking authority, with much of the discussion focused on whether the courts are likely to continue to abide the U.S. Court of Appeals for the D.C. Circuit’s 1973 Petroleum Refiners opinion. It is fair to say that “opinions varied.” Discussion included everything from modern trends of judicial interpretation and how they differ from those used in 1973, to close readings of the Magnuson-Moss legislation (adopted in the immediate wake of the Petroleum Refiners opinion), and consideration of how more recent cases such as AMG and the D.C. Circuit’s American Library Association case affect our thinking about Petroleum Refiners.
Likely Judicial Responses
Several contributors also considered how the courts might respond to FTC rulemaking, allowing that the commission may have some level of substantive-rulemaking authority. Several authors invoked the Court’s recent “major questions” jurisprudence. Dick Pierce captures the general sentiment that any broad UMC rulemaking “would be a perfect candidate for application of the major questions doctrine.” But as with any discussion of the “major” questions doctrine, the implicit question is when a question is “major.” There seems to be some comfort with the idea that the FTC can do some rulemaking, assuming that the courts find that it has substantive-rulemaking authority under Section 6(g), but that the Commission faces an uncertain path if it tries to use that authority for more than incremental changes to antitrust law.
Virtues and Vices of Rulemaking
A couple of contributors picked up on themes of the virtues and vices of developing legal norms through rulemaking, as opposed to case-by-case adjudication. Aaron Neilson, for instance, argues that the FTC likely most needs to use rules to make bigger changes to antitrust law than are possible through adjudication, but that such big changes are the ones most likely to face resistance from the courts. And FTC Commissioner Noah Phillips looks at the Court’s move away from per se rules in antitrust cases over the past 50 years, arguing that the same logic that has pushed the courts to embrace a case-by-case approach to antitrust law is likely to create judicial resistance to any effort by the FTC to tack an opposite course.
The Substance of Substantive Rules
Several contributors addressed specific substantive issues that the FTC may seek to address with rules. In some cases, these issues formed the heart of the post; in others, they were used as examples along the way. For instance, Josh Sarnoff evaluated whether the FTC should develop rules around aftermarket parts and to address right-to-repair concerns. Dick Pierce also looked at that issue, along with several others (potential rules to address reverse-payment settlements in the pharmaceutical industry, below-cost pricing, and non-compete clauses involving low-wage workers).
And last, but far from least, several contributors asked questions that help to put any thinking about the FTC into perspective. Jonathan Barnett, for instance, looks at the changes the FTC has made over the past year to its public statements of mission and priorities, alongside its potential rulemaking activity, to discuss the commission’s changing thinking about free markets. Ramsi Woodcock juxtaposes the FTC, the statutory framing of its regulatory authority, with the FOMC and its statutory power to directly affect the value of the dollar. And Bill MacLeod takes us back to 1935 and the National Industrial Recovery Act, reflecting on how the history of rules of “fair competition” might inform our thinking about the FTC’s authority today.
That’s a lot of ground to have covered in three weeks. Of course, the FTC will keep moving, and the ground will keep shifting. We look forward to your continued engagement with Truth on the Market and the authors who have contributed to this discussion.
Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa)—cosponsors of the American Innovation Online and Choice Act, which seeks to “rein in” tech companies like Apple, Google, Meta, and Amazon—contend that “everyone acknowledges the problems posed by dominant online platforms.”
In their framing, it is simply an acknowledged fact that U.S. antitrust law has not kept pace with developments in the digital sector, allowing a handful of Big Tech firms to exploit consumers and foreclose competitors from the market. To address the issue, the senators’ bill would bar “covered platforms” from engaging in a raft of conduct, including self-preferencing, tying, and limiting interoperability with competitors’ products.
That’s what makes the open letter to Congress published late last month by the usually staid American Bar Association’s (ABA) Antitrust Law Section so eye-opening. The letter is nothing short of a searing critique of the legislation, which the section finds to be poorly written, vague, and departing from established antitrust-law principles.
The ABA, of course, has a reputation as an independent, highly professional, and heterogenous group. The antitrust section’s membership includes not only in-house corporate counsel, but lawyers from nonprofits, consulting firms, federal and state agencies, judges, and legal academics. Given this context, the comments must be read as a high-level judgment that recent legislative and regulatory efforts to “discipline” tech fall outside the legal mainstream and would come at the cost of established antitrust principles, legal precedent, transparency, sound economic analysis, and ultimately consumer welfare.
The Antitrust Section’s Comments
As the ABA Antitrust Law Section observes:
The Section has long supported the evolution of antitrust law to keep pace with evolving circumstances, economic theory, and empirical evidence. Here, however, the Section is concerned that the Bill, as written, departs in some respects from accepted principles of competition law and in so doing risks causing unpredicted and unintended consequences.
Broadly speaking, the section’s criticisms fall into two interrelated categories. The first relates to deviations from antitrust orthodoxy and the principles that guide enforcement. The second is a critique of the AICOA’s overly broad language and ambiguous terminology.
Departing from established antitrust-law principles
Substantively, the overarching concern expressed by the ABA Antitrust Law Section is that AICOA departs from the traditional role of antitrust law, which is to protect the competitive process, rather than choosing to favor some competitors at the expense of others. Indeed, the section’s open letter observes that, out of the 10 categories of prohibited conduct spelled out in the legislation, only three require a “material harm to competition.”
Take, for instance, the prohibition on “discriminatory” conduct. As it stands, the bill’s language does not require a showing of harm to the competitive process. It instead appears to enshrine a freestanding prohibition of discrimination. The bill targets tying practices that are already prohibited by U.S. antitrust law, but while similarly eschewing the traditional required showings of market power and harm to the competitive process. The same can be said, mutatis mutandis, for “self-preferencing” and the “unfair” treatment of competitors.
The problem, the section’s letter to Congress argues, is not only that this increases the teleological chasm between AICOA and the overarching goals and principles of antitrust law, but that it can also easily lead to harmful unintended consequences. For instance, as the ABA Antitrust Law Section previously observed in comments to the Australian Competition and Consumer Commission, a prohibition of pricing discrimination can limit the extent of discounting generally. Similarly, self-preferencing conduct on a platform can be welfare-enhancing, while forced interoperability—which is also contemplated by AICOA—can increase prices for consumers and dampen incentives to innovate. Furthermore, some of these blanket prohibitions are arguably at loggerheads with established antitrust doctrine, such as in, e.g., Trinko, which established that even monopolists are generally free to decide with whom they will deal.
In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.
Arguably, the reason why the Klobuchar-Grassley bill can so seamlessly exclude or redraw such a central element of antitrust law as competitive harm is because it deliberately chooses to ignore another, preceding one. Namely, the bill omits market power as a requirement for a finding of infringement or for the legislation’s equally crucial designation as a “covered platform.” It instead prescribes size metrics—number of users, market capitalization—to define which platforms are subject to intervention. Such definitions cast an overly wide net that can potentially capture consumer-facing conduct that doesn’t have the potential to harm competition at all.
It is precisely for this reason that existing antitrust laws are tethered to market power—i.e., because it long has been recognized that only companies with market power can harm competition. As John B. Kirkwood of Seattle University School of Law has written:
Market power’s pivotal role is clear…This concept is central to antitrust because it distinguishes firms that can harm competition and consumers from those that cannot.
In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.
Opaque language for opaque ideas
Another underlying issue is that the Klobuchar-Grassley bill is shot through with indeterminate language and fuzzy concepts that have no clear limiting principles. For instance, in order either to establish liability or to mount a successful defense to an alleged violation, the bill relies heavily on inherently amorphous terms such as “fairness,” “preferencing,” and “materiality,” or the “intrinsic” value of a product. But as the ABA Antitrust Law Section letter rightly observes, these concepts are not defined in the bill, nor by existing antitrust case law. As such, they inject variability and indeterminacy into how the legislation would be administered.
Moreover, it is also unclear how some incommensurable concepts will be weighed against each other. For example, how would concerns about safety and security be weighed against prohibitions on self-preferencing or requirements for interoperability? What is a “core function” and when would the law determine it has been sufficiently “enhanced” or “maintained”—requirements the law sets out to exempt certain otherwise prohibited behavior? The lack of linguistic and conceptual clarity not only explodes legal certainty, but also invites judicial second-guessing into the operation of business decisions, something against which the U.S. Supreme Court has long warned.
Finally, the bill’s choice of language and recent amendments to its terminology seem to confirm the dynamic discussed in the previous section. Most notably, the latest version of AICOA replaces earlier language invoking “harm to the competitive process” with “material harm to competition.” As the ABA Antitrust Law Section observes, this “suggests a shift away from protecting the competitive process towards protecting individual competitors.” Indeed, “material harm to competition” deviates from established categories such as “undue restraint of trade” or “substantial lessening of competition,” which have a clear focus on the competitive process. As a result, it is not unreasonable to expect that the new terminology might be interpreted as meaning that the actionable standard is material harm to competitors.
In its letter, the antitrust section urges Congress not only to define more clearly the novel terminology used in the bill, but also to do so in a manner consistent with existing antitrust law. Indeed:
The Section further recommends that these definitions direct attention to analysis consistent with antitrust principles: effects-based inquiries concerned with harm to the competitive process, not merely harm to particular competitors
The AICOA is a poorly written, misguided, and rushed piece of regulation that contravenes both basic antitrust-law principles and mainstream economic insights in the pursuit of a pre-established populist political goal: punishing the success of tech companies. If left uncorrected by Congress, these mistakes could have potentially far-reaching consequences for innovation in digital markets and for consumer welfare. They could also set antitrust law on a regressive course back toward a policy of picking winners and losers.
Biden administration enforcers at the U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) have prioritized labor-market monopsony issues for antitrust scrutiny (see, for example, here and here). This heightened interest comes in light of claims that labor markets are highly concentrated and are rife with largely neglected competitive problems that depress workers’ income. Such concerns are reflected in a March 2022 U.S. Treasury Department report on “The State of Labor Market Competition.”
Monopsony is the “flip side” of monopoly and U.S. antitrust law clearly condemns agreements designed to undermine the “buyer side” competitive process (see, for example, this U.S. government submission to the OECD). But is a special new emphasis on labor markets warranted, given that antitrust enforcers ideally should seek to allocate their scarce resources to the most pressing (highest valued) areas of competitive concern?
A May 2022 Information Technology & Innovation (ITIF) study from ITIF Associate Director (and former FTC economist) Julie Carlson indicates that the degree of emphasis the administration’s antitrust enforcers are placing on labor issues may be misplaced. In particular, the ITIF study debunks the Treasury report’s findings of high levels of labor-market concentration and the claim that workers face a “decrease in wages [due to labor market power] at roughly 20 percent relative to the level in a fully competitive market.” Furthermore, while noting the importance of DOJ antitrust prosecutions of hard-core anticompetitive agreements among employers (wage-fixing and no-poach agreements), the ITIF report emphasizes policy reforms unrelated to antitrust as key to improving workers’ lot.
Key takeaways from the ITIF report include:
Labor markets are not highly concentrated. Local labor-market concentration has been declining for decades, with the most concentrated markets seeing the largest declines.
Labor-market power is largely due to labor-market frictions, such as worker preferences, search costs, bargaining, and occupational licensing, rather than concentration.
As a case study, changes in concentration in the labor market for nurses have little to no effect on wages, whereas nurses’ preferences over job location are estimated to lead to wage markdowns of 50%.
Firms are not profiting at the expense of workers. The decline in the labor share of national income is primarily due to rising home values, not increased labor-market concentration.
Policy reform should focus on reducing labor-market frictions and strengthening workers’ ability to collectively bargain. Policies targeting concentration are misguided and will be ineffective at improving outcomes for workers.
Introducing the evaluation of labor market effects unnecessarily complicates merger review and needlessly ties up agency resources at a time when the agencies are facing severe resource constraints.48 As discussed previously, labor markets are not highly concentrated, nor is labor market concentration a key factor driving down wages.
A proposed merger that is reportable to the agencies under the Hart-Scott-Rodino Act and likely to have an anticompetitive effect in a relevant labor market is also likely to have an anticompetitive effect in a relevant product market. … Evaluating mergers for labor market effects is unnecessary and costly for both firms and the agencies. The current merger guidelines adequately address competition concerns in input markets, so any contemplated revision to the guidelines should not incorporate a “framework to analyze mergers that may lessen competition in labor markets.” [Citation to Request for Information on Merger Enforcement omitted.]
In sum, the administration’s recent pronouncements about highly anticompetitive labor markets that have resulted in severely underpaid workers—used as the basis to justify heightened antitrust emphasis on labor issues—appear to be based on false premises. As such, they are a species of government misinformation, which, if acted upon, threatens to misallocate scarce enforcement resources and thereby undermine efficient government antitrust enforcement. What’s more, an unnecessary overemphasis on labor-market antitrust questions could impose unwarranted investigative costs on companies and chill potentially efficient business transactions. (Think of a proposed merger that would reduce production costs and benefit consumers but result in a workforce reduction by the merged firm.)
Perhaps the administration will take heed of the ITIF report and rethink its plans to ramp up labor-market antitrust-enforcement initiatives. Promoting pro-market regulatory reforms that benefit both labor and consumers (for instance, excessive occupational-licensing restrictions) would be a welfare-superior and cheaper alternative to misbegotten antitrust actions.
[The ideas in this post from Truth on the Market regular Jonathan M. Barnett of USC Gould School of Law—the eighth entry in our FTC UMC Rulemaking symposium—are developed in greater detail in “Regulatory Rents: An Agency-Cost Analysis of the FTC Rulemaking Initiative,” a chapter in the forthcoming book FTC’s Rulemaking Authority, which will be published by Concurrences later this year. This is the first of two posts we are publishing today; see also this related post from Aaron Nielsen of BYU Law.You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
In December 2021, the Federal Trade Commission (FTC) released its statement of regulatory priorities for 2022, which describes its intention to expand the agency’s rulemaking activities to target “unfair methods of competition” (UMC) under Section 5 of the Federal Trade Commission Act (FTC Act), in addition to (and in some cases, presumably in place of) the conventional mechanism of case-by-case adjudication. Agency leadership (meaning, the FTC chair and the majority commissioners) largely characterizes the rulemaking initiative as a logistical improvement to enable the agency to more efficiently execute its statutory commitment to preserve competitive markets. Unburdened by the costs and delays inherent to the adjudicative process (which, in the antitrust context, typically requires evidence of actual or likely competitive harm), the agency will be able to take expedited action against UMCs based on rules preemptively set forth by the agency.
This shift from enforcement by adjudication to enforcement by rulemaking is far from a mechanical adjustment. Rather, it is best understood as part of an initiative to make fundamental changes to the substance and methodology of antitrust enforcement. Substantively, the initiative appears to be part of a broader effort to alter the goals of antitrust enforcement so that it promotes what are deemed to be “equitable” market outcomes, rather than preserving the competitive process through which outcomes are determined by market forces. Methodologically, the initiative appears to be part of a broader effort to displace rule-of-reason treatment with the practical equivalent of per se prohibitions in a wide range of putatively “unfair” practices. Both steps would be inconsistent with the agency’s statutory mission to safeguard the competitive process or a meaningful commitment to a market-driven economy and the rule of law.
Abandoning Competitive Markets
Little steps sometimes portend bigger changes.
In July 2021, FTC leadership removed the following words from the mission description of the agency’s Bureau of Competition: “The Bureau’s work aims to preserve the free market system and assure the unfettered operation of the forces of supply and demand.” This omitted statement had tracked what remains the standard characterization by federal courts and agency guidelines of the core objective of the antitrust laws. Following this characterization, the antitrust laws seek to preserve the “rules of the game” for market competition, while remaining indifferent to the outcomes of such competition in any particular market. It is the competitive process, not the fortunes of particular competitors, that matters.
Other statements by FTC leadership suggest that they seek to abandon this outcome-agnostic perspective. A memo from the FTC chair to staff, distributed in September 2021, states that the agency’s actions “shape the distribution of power and opportunity” and encourages staff “to take a holistic approach to identifying harms, recognizing that antitrust and consumer protection violations harm workers and independent businesses as well as consumers.” In a draft strategic plan distributed by FTC leadership in October 2021, the agency described its mission as promoting “fair competition” for the “benefit of the public.” In contrast, the agency’s previously released strategic plan had described the agency’s mission as promoting “competition” for the benefit of consumers, consistent with the case law’s commitment to protecting consumer welfare, dating at least to the Supreme Court’s 1979 decision in Reiter v. Sonotone Corp. et al.The change in language suggests that the agency’s objectives encompass a broad range of stakeholders and policies (including distributive objectives) that extends beyond, and could conflict with, its commitment to preserve the integrity of the competitive process.
These little steps are part of a broader package of “big steps” undertaken during 2021 by FTC leadership.
In July 2021, the agency abandoned decades of federal case law and agency guidelines by rejecting the consumer-welfare standard for purposes of enforcement of Section 5 of the FTC Act against UMCs. Relatedly, FTC leadership asserted in the same statement that Congress had delegated to the agency authority under Section 5 “to determine which practices fell into the category of ‘unfair methods of competition’”. Remarkably, the agency’s claimed ambit of prosecutorial discretion to identify “unfair” practices is apparently only limited by a commitment to exercise such power “responsibly.”
This largely unbounded redefinition of the scope of Section 5 divorces the FTC’s enforcement authority from the concepts and methods as embodied in decades of federal case law and agency guidelines interpreting the Sherman and Clayton Acts. Those concepts and methods are in turn anchored in the consumer-welfare principle, which ensures that regulatory and judicial actions promote the public interest in the competitive process, rather than the private interests of any particular competitor or other policy goals not contemplated by the antitrust laws. Effectively, agency leadership has unilaterally converted Section 5 into an empty vessel into which enforcers may insert a fluid range of business practices that are deemed by fiat to pose a risk to “fair” competition.
Abandoning the Rule of Reason
In the same statement in which FTC leadership rejected the consumer-welfare principle for purposes of Section 5 enforcement, it rejected the relevance of the rule of reason for these same purposes. In that statement, agency leadership castigated the rule of reason as a standard that “leads to soaring enforcement costs” and asserted that it is incompatible with Section 5 of the FTC Act. In March 2021 remarks delivered to the House Judiciary Committee’s Antitrust Subcommittee, Commissioner Rebecca Kelly Slaughter similarly lamented “[t]he effect of cramped case law,” specifically viewing as problematic the fact that “[u]nder current Section 5 jurisprudence, courts have to consider conduct under the ‘rule of reason,’ a fact-intensive investigation into whether the anticompetitive effects of the conduct outweigh the procompetitive justifications.” Hence, it appears that the FTC, in exercising its purported rulemaking powers against UMCs under Section 5, does not intend to undertake the balancing of competitive harms and gains that is the signature element of rule-of-reason analysis. Tellingly, the agency’s draft strategic plan, released in October 2021, omits language that it would execute its enforcement mission “without unduly burdening legitimate business activity” (language that had appeared in the previously released strategic plan)—again, suggesting that it plans to take littleaccount of the offsetting competitive gains attributable to a particular business practice.
This change in methodology has two profound and concerning implications.
First, it means that any “unfair” practice targeted by the agency under Section 5 is effectively subject to a per se prohibition—that is, the agency can prevail merely by identifying that the defendant engaged in a particular practice, rather than having to show competitive harm. Note that this would represent a significant step beyond the per se rule that Sherman Act case law applies to certain cases of horizontal collusion. In those cases, a per se rule has been adopted because economic analysis indicates that these types of practices in general pose such a high risk of net anticompetitive harm that a rule-of-reason inquiry is likely to fail a cost-benefit test almost all of the time. By contrast, there is no indication that FTC leadership plans to confine its rulemaking activities to practices that systematically pose an especially high risk of anticompetitive harm, in part because it is not clear that agency leadership still views harm to the competitive process as being the determinative criterion in antitrust analysis.
Second, without further clarification from agency leadership, this means that the agency appears to place substantially reduced weight on the possibility of “false positive” error costs. This would be a dramatic departure from the conventional approach to error costs as reflected in federal antitrust case law. Antitrust scholars have long argued, and many courts have adopted the view, that “false positive” costs should be weighted more heavily relative to “false negative” error costs, principally on the ground that, as Judge Richard Posner once put it, “a cartel . . . carries within it the seeds of its own destruction.” To be clear, this weighted approach should still meaningfully assess the false-negative error costs that arise from mistaken failures to intervene. By contrast, the agency’s blanket rejection of the rule of reason in all circumstances for Section 5 purposes raises doubt as to whether it would assign any material weight to false-positive error costs in exercising its purported rulemaking power under Section 5 against UMCs. Consistent with this possibility, the agency’s July 2021 statement—which rejected the rule of reason specifically—adopted the view that Section 5 enforcement should target business practices in their “incipiency,” even absent evidence of a “likely” anticompetitive effect.
While there may be reasonable arguments in favor of an equal weighting of false-positive and false-negative error costs (on the grounds that markets are sometimes slow to correct anticompetitive conduct, as compared to the speed with which courts correct false-positive interventions), it is hard to fathom a reasonable policy argument in favor of placing no material weight on the former cost category. Under conditions of uncertainty, the net economic effect of any particular enforcement action, or failure to take such action, gives rise to a mix of probability-adjusted false-positive and false-negative error costs. Hence, any sound policy framework seeks to minimize the sum of those costs. Moreover, the wholesale rejection of a balancing analysis overlooks extensive scholarship identifying cases in which federal courts, especially during the period prior to the Supreme Court’s landmark 1977 decision in Continental TV Inc. v. GTE Sylvania Inc., applied per se rules that erroneously targeted business practices that were almost certainly generating net-positive competitive gains. Any such mistaken intervention counterproductively penalizes the efforts and ingenuity of the most efficient firms, which then harms consumers, who are compelled to suffer higher prices, lower quality, or fewer innovations than would otherwise have been the case.
The dismissal of efficiency considerations and false-positive error costs is difficult to reconcile with an economically informed approach that seeks to take enforcement actions only where there is a high likelihood of improving economic welfare based on available evidence. On this point, it is worth quoting Oliver Williamson’s well-known critique of 1960s-era antitrust: “[I]f neither the courts nor the enforcement agencies are sensitive to these [efficiency] considerations, the system fails to meet a basic test of economic rationality. And without this the whole enforcement system lacks defensible standards and becomes suspect.”
Abandoning the Rule of Law
In a liberal democratic system of government, the market relies on the state’s commitment to set forth governing laws with adequate notice and specificity, and then to enforce those laws in a manner that is reasonably amenable to judicial challenge in case of prosecutorial error or malfeasance. Without that commitment, investors are exposed to arbitrary enforcement and would be reluctant to place capital at stake. In light of the agency’s concurrent rejection of the consumer-welfare and rule-of-reason principles, any future attempt by the FTC to exercise its purported Section 5 rulemaking powers against UMCs under what currently appears to be a regime of largely unbounded regulatory discretion is likely to violate these elementary conditions for a rule-of-law jurisdiction.
Having dismissed decades of learning and precedent embodied in federal case law and agency guidelines, FTC leadership has declined to adopt any substitute guidelines to govern its actions under Section 5 and, instead, has stated (in its July 2021 statement rejecting the consumer-welfare principle) that there are few bounds on its authority to specify and target practices that it deems to be “unfair.” This blunt approach contrasts sharply with the measured approach reflected in existing agency guidelines and federal case law, which seek to delineate reasonably objective standards to govern enforcers’ and courts’ decision making when evaluating the competitive merits of a particular business practice.
This approach can be observed, even if imperfectly, in the application of the Herfindahl-Hirschman Index (HHI) metric in the merger-review process and the use of “safety zones” (defined principally by reference to market-share thresholds) in the agencies’ Antitrust Guidelines for the Licensing of Intellectual Property, Horizontal Merger Guidelines, and Antitrust Guidelines for Collaborations Among Competitors. This nuanced and evidence-based approach can also be observed in a decision such as California Dental Association v. FTC(1999), which provides a framework for calibrating the intensity of a rule-of-reason inquiry based on a preliminary assessment of the likely net competitive effect of a particular practice. In making these efforts to develop reasonably objective thresholds for triggering closer scrutiny, regulators and courts have sought to reconcile the open-ended language of the offenses described in the antitrust statutes—“restraint of trade” (Sherman Act Section 1) or “monopolization” (Sherman Act Section 2)—with a meaningful commitment to providing the market with adequate notice of the inherently fuzzy boundary between competitive and anti-competitive practices in most cases (and especially, in cases involving single-firm conduct that is most likely to be targeted by the agency under its Section 5 authority).
It does not appear that agency leadership intends to adopt this calibrated approach in implementing its rulemaking initiative, in light of its largely unbounded understanding of its Section 5 enforcement authority and wholesale rejection of the rule-of-reason methodology. If Section 5 is understood to encompass a broad and fluid set of social goals, including distributive objectives that can conflict with a commitment to the competitive process, then there is no analytical reference point by which markets can reliably assess the likelihood of antitrust liability and plan transactions accordingly. If enforcement under Section 5, including exercise of any purported rulemaking powers, does not require the agency to consider offsetting efficiencies attributable to any particular practice, then a chilling effect on everyday business activity and, more broadly, economic growth can easily ensue. In particular, firms may abstain from practices that may have mostly or even entirely procompetitive effects simply because there is some material likelihood that any such practice will be subject to investigation and enforcement under the agency’s understanding of its Section 5 authority and its adoption of a per se approach for which even strong evidence of predominantly procompetitive effects would be moot.
From Free Markets to Administered Markets
The FTC’s proposed rulemaking initiative, when placed within the context of other fundamental changes in substance and methodology adopted by agency leadership, is not easily reconciled with a market-driven economy in which resources are principally directed by the competitive forces of supply and demand. FTC leadership has reserved for the agency discretion to deem a business practice as “unfair,” while defining fairness by reference to an agglomeration of loosely described policy goals that include—but go beyond, and in some cases may conflict with—the agency’s commitment to preserve market competition. Concurrently, FTC leadership has rejected the rule-of-reason balancing approach and, by implication, may place no material weight on (or even fail to consider entirely) the efficiencies attributable to a particular business practice.
In the aggregate, any rulemaking activity undertaken within this unstructured framework would make it challenging for firms and investors to assess whether any particular action is likely to trigger agency scrutiny. Faced with this predicament, firms could only substantially reduce exposure to antitrust liability by seeking various forms of preclearance with FTC staff, who would in turn be led to issue supplemental guidance, rules, and regulations to handle the high volume of firm inquiries. Contrary to the advertised advantages of enforcement by rulemaking, this unavoidable cycle of rule interpretation and adjustment would likely increase substantially aggregate transaction and compliance costs as compared to enforcement by adjudication. While enforcement by adjudication occurs only periodically and impacts a limited number of firms, enforcement by rulemaking is a continuous activity that impacts all firms. The ultimate result: the free play of the forces of supply and demand would be replaced by a continuously regulated environment where market outcomes are constantly being reviewed through the administrative process, rather than being worked out through the competitive process.
This is a state of affairs substantially removed from the “free market system” to which the FTC’s Bureau of Competition had once been committed. Of course, that may be exactly what current agency leadership has in mind.
[Continuing our FTC UMC Rulemaking symposium, today’s first guest post is from Richard J. Pierce Jr., the Lyle T. Alverson Professor of Law at George Washington University Law School. We are also publishing a related post today from Andrew K. Magloughlin and Randolph J. May of the Free State Foundation. 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.]
FTC Rulemaking Power
In 2021, President Joe Biden appointed a prolific young scholar, Lina Khan, to chair the Federal Trade Commission (FTC). Khan strongly dislikes almost every element of antitrust law. She has stated her intention to use notice and comment rulemaking to change antitrust law in many ways. She was unable to begin this process for almost a year because the FTC was evenly divided between Democratic and Republican appointees, and she has not been able to elicit any support for her agenda from the Republican members. She will finally get the majority she needs to act in the next few days, as the U.S. Senate appears set to confirm Alvaro Bedoya to the fifth spot on the commission.
Chair Khan has argued that the FTC has the power to use notice-and-comment rulemaking to define the term “unfair methods of competition” as that term is used in Section 5 of the Federal Trade Commission Act. Section 5 authorizes the FTC to define and to prohibit both “unfair acts” and “unfair methods of competition.” For more than 50 years after the 1914 enactment of the statute, the FTC, Congress, courts, and scholars interpreted it to empower the FTC to use adjudication to implement Section 5, but not to use rulemaking for that purpose.
In 1973, the U.S. Court of Appeals for the D.C. Circuit held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. Congress responded by amending the statute in 1975 and 1980 to add many time-consuming and burdensome procedures to the notice-and-comment process. Those added procedures had the effect of making the rulemaking process so long that the FTC gave up on its attempts to use rulemaking to implement Section 5.
Khan claims that the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it must use the extremely burdensome procedures that Congress added in 1975 and 1980 to define “unfair acts.” Her claim is based on a combination of her belief that the current U.S. Supreme Court would uphold the 1973 D.C. Circuit decision that held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5 and her belief that a peculiarly worded provision of the 1975 amendment to the FTC Act allows the FTC to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it requires the FTC to use the extremely burdensome procedure to issue rules that define “unfair acts.” The FTC has not attempted to use notice-and-comment rulemaking to define “unfair methods of competition” since Congress amended the statute in 1975.
I am skeptical of Khan’s argument. I doubt that the Supreme Court would uphold the 1973 D.C. Circuit opinion, because the D.C. Circuit used a method of statutory interpretation that no modern court uses and that is inconsistent with the methods of statutory interpretation that the Supreme Court uses today. I also doubt that the Supreme Court would interpret the 1975 statutory amendment to distinguish between “unfair acts” and “unfair methods of competition” for purposes of the procedures that the FTC is required to use to issue rules to implement Section 5.
Even if the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” I am confident that the Supreme Court would not uphold an exercise of that power that has the effect of making a significant change in antitrust law. That would be a perfect candidate for application of the major questions doctrine. The court will not uphold an “unprecedented” action of “vast economic or political significance” unless it has “unmistakable legislative support.” I will now describe four hypothetical exercises of the rulemaking power that Khan believes that the FTC possesses to illustrate my point.
Hypothetical Exercises of FTC Rulemaking Power
Creation of a Right to Repair
President Biden has urged the FTC to create a right for an owner of any product to repair the product or to have it repaired by an independent service organization (ISO). The Supreme Court’s 1992 opinion in Eastman Kodak v. Image Technical Services tells us all we need to know about the likelihood that it would uphold a rule that confers a right to repair. When Kodak took actions that made it impossible for ISOs to repair Kodak photocopiers, the ISOs argued that Kodak’s action violated both Section 1 and Section 2 of the Sherman Act. The Court held that Kodak could prevail only if it could persuade a jury that its view of the facts was accurate. The Court remanded the case for a jury trial to address three contested issues of fact.
The Court’s reasoning in Kodak is inconsistent with any version of a right to repair that the FTC might attempt to create through rulemaking. The Court expressed its view that allowing an ISO to repair a product sometimes has good effects and sometimes has bad effects. It concluded that it could not decide whether Kodak’s new policy was good or bad without first resolving the three issues of fact on which the parties disagreed. In a 2021 report to Congress, the FTC agreed with the Supreme Court. It identified seven factual contingencies that can cause a prohibition on repair of a product by an ISO to have good effects or bad effects. It is naïve to expect the Supreme Court to change its approach to repair rights in response to a rule in which the FTC attempts to create a right to repair, particularly when the FTC told Congress that it agrees with the Court’s approach immediately prior to Khan’s arrival at the agency.
Prohibition of Reverse-Payment Settlements of Patent Disputes Involving Prescription Drugs
Some people believe that settlements of patent-infringement disputes in which the manufacturer of a generic drug agrees not to market the drug in return for a cash payment from the manufacturer of the brand-name drug are thinly disguised agreements to create a monopoly and to share the monopoly rents. Khan has argued that the FTC could issue a rule that prohibits such reverse-payment settlements. Her belief that a court would uphold such a rule is contradicted by the Supreme Court’s 2013 opinion in FTC v. Actavis. The Court unanimously rejected the FTC’s argument in support of a rebuttable presumption that reverse payments are illegal. Four justices argued that reverse-payment settlements can never be illegal if they are within the scope of the patent. The five-justice majority held that a court can determine that a reverse-payment settlement is illegal only after a hearing in which it applies the rule of reason to determine whether the payment was reasonable.
A Prohibition on Below-Cost Pricing When the Firm Cannot Recoup Its Losses
Khan believes that illegal predatory pricing by dominant firms is widespread and extremely harmful to competition. She particularly dislikes the Supreme Court’s test for identifying predatory pricing. That test requires proof that a firm that engages in below-cost pricing has a reasonable prospect of recouping its losses. She wants the FTC to issue a rule in which it defines predatory pricing as below-cost pricing without any prospect that the firm will be able to recoup its losses.
The history of the Court’s predatory-pricing test shows how unrealistic it is to expect the Court to uphold such a rule. The Court first announced the test in a Sherman Act case in 1986. Plaintiffs attempted to avoid the precedential effect of that decision by filing complaints based on predatory pricing under the Robinson-Patman Act. The Court rejected that attempt in a 1993 opinion. The Court made it clear that the test for determining whether a firm is engaged in illegal predatory pricing is the same no matter whether the case arises under the Sherman Act or the Robinson-Patman Act. The Court undoubtedly would reject the FTC’s effort to change the definition of predatory pricing by relying on the FTC Act instead of the Sherman Act or the Robinson-Patman Act.
A Prohibition of Noncompete Clauses in Contracts to Employ Low-Wage Employees
President Biden has expressed concern about the increasing prevalence of noncompete clauses in employment contracts applicable to low wage employees. He wants the FTC to issue a rule that prohibits inclusion of noncompete clauses in contracts to employ low-wage employees. The Supreme Court would be likely to uphold such a rule.
A rule that prohibits inclusion of noncompete clauses in employment contracts applicable to low-wage employees would differ from the other three rules I discussed in many respects. First, it has long been the law that noncompete clauses can be included in employment contracts only in narrow circumstances, none of which have any conceivable application to low-wage contracts. The only reason that competition authorities did not bring actions against firms that include noncompete clauses in low-wage employment contracts was their belief that state labor law would be effective in deterring firms from engaging in that practice. Thus, the rule would be entirely consistent with existing antitrust law.
Second, there are many studies that have found that state labor law has not been effective in deterring firms from including noncompete clauses in low-wage employment contracts and many studies that have found that the increasing use of noncompete clauses in low-wage contracts is causing a lot of damage to the performance of labor markets. Thus, the FTC would be able to support its rule with high-quality evidence.
Third, the Supreme Court’s unanimous 2021 opinion in NCAA v. Alstom indicates that the Court is receptive to claims that a practice that harms the performance of labor markets is illegal. Thus, I predict that the Court would uphold a rule that prohibits noncompete clauses in employment contracts applicable to low-wage employees if it holds that the FTC can use notice-and-comment rulemaking to define “unfair methods of competition,” as that term is used in Section 5 of the FTC Act. That caveat is important, however. As I indicated at the beginning of this essay, I doubt that the FTC has that power.
I would urge the FTC not to use notice-and comment rulemaking to address the problems that are caused by the increasing use of noncompete clauses in low-wage contracts. There is no reason for the FTC to put a lot of time and effort into a notice-and-comment rulemaking in the hope that the Court will conclude that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. The FTC can implement an effective prohibition on the inclusion of noncompete clauses in employment contracts applicable to low-wage employees by using a combination of legal tools that it has long used and that it clearly has the power to use—issuance of interpretive rules and policy statements coupled with a few well-chosen enforcement actions.
Alternative Ways to Improve Antitrust Law
There are many other ways in which Khan can move antitrust law in the directions that she prefers. She can make common cause with the many mainstream antitrust scholars who have urged incremental changes in antitrust law and who have conducted the studies needed to support those proposed changes. Thus, for instance, she can move aggressively against other practices that harm the performance of labor markets, change the criteria that the FTC uses to decide whether to challenge proposed mergers and acquisitions, and initiate actions against large platform firms that favor their products over the products of third parties that they sell on their platforms.
[This guest post from Yale Law Schoolstudent Leah Samuel—the third post in our FTC UMC Rulemaking symposium—is a condensed version of a full-length paper. Please reach out to Leah at email@example.com if you would like a copy of the full draft. It is the first of two contributions to the symposium posted today, along with this related post from Corbin K. Barthold of TechFreedom. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
The Federal Trade Commission’s (FTC) ability to conduct substantive rulemaking under both its “unfair methods of competition” (UMC) and “unfair and deceptive practices” (UDAP) mandates was upheld by the U.S. Court of Appeals for the D.C. Circuit in 1973’s National Petroleum Refiners Association v. FTC. Nonetheless, the FTC has seldom exercised this authority with respect to UMC—its antitrust authority. And various scholars and commentators have suggested that such an attempt would quickly be rejected by the U.S. Supreme Court.
I argue that the plain text and procedural history of the 1975 Magnuson–Moss Warranty Act demonstrate that Congress implicitly ratified the National Petroleum decision as it applied to UMC rulemaking. The scholarly focus on the intentions of the framers of the 1914 Federal Trade Commission Act with respect to substantive rulemaking is therefore misplaced—whether the FTC has exercised its UMC rulemaking powers in recent decades, its ability to do so was affirmed by Congress in 1974.
When the FTC first began to promulgate substantive rules under Section 5, neither the agency nor reviewing courts readily distinguished between UMC and UDAP authority. In 1973, the D.C. Circuit determined that the FTC was empowered to promulgate a legally binding trade regulation rule that required the posting of octane numbers at gas stations as a valid legislative rule under both UMC and UDAP. The given trade regulation rule was not clearly categorized as consumer protection or antitrust by the court. In 1975, Congress passed the Magnuson-Moss Act, which added procedural requirements to UDAP rulemaking without changing the processes applicable to UMC rulemaking as it stood after National Petroleum. In 1980, Congress added additional cumbersome procedural hurdles, as well as certain outright prohibitions to so-called Magnuson-Moss rulemaking with the Federal Trade Commission Improvements Act (FTCIA), still leaving UMC untouched.
A textualist reading of the Magnuson-Moss Act should lead to the conclusion that the FTC has the power to conduct substantive UMC rulemaking. Because Congress was actively aware of and responding to the National Petroleum decision and the FTC’s Octane Rule, the Magnuson-Moss Act should be read to leave UMC rulemaking intact under the Administrative Procedure Act (APA).
Interpreting Magnuson-Moss to acknowledge the existence of, and therefore validate, UMC rulemaking does the least violence to the text, in keeping with the supremacy-of-text principle, as described by Justice Antonin Scalia and Bryan A. Garner in “Reading Law: The Interpretation of Legal Texts.” Absent any express statement eliminating or bracketing that authority, the contextual meaning of Magnuson-Moss § 202(a)(2)—“[t]he preceding sentence shall not affect any authority of the Commission to prescribe rules…with respect to unfair methods of competition”—is most clearly understood as protecting the existence of UMC rulemaking as it existed in law at the moment of the bill’s passage. In his famous concurrence in Green v. Bock Laundry Machine Co., Justice Scalia explained that:
The meaning of terms on the statute books ought to be determined, not on the basis of which meaning can be shown to have been understood by a larger handful of the Members of Congress; but rather on the basis of which meaning is . . . most compatible with the surrounding body of law into which the provision must be integrated—a compatibility which, by a benign fiction, we assume Congress always has in mind.
In Branch v. Smith, Scalia applied this method to the Voting Rights Act, reasoning that Congress has a constructive awareness of lower-court decisions when it amends a statute. While that constructive awareness, and the statutory meaning that it implies, cannot trump the plain text of the amended statute, it is an important aid to interpretation. Here, the benign fiction of constructive awareness is actually a demonstrable fact: Congress was aware of National Petroleum and took it to be the legal default. Where the lower court decision-making process and the legislative process were closely intertwined, the presumption that Congress knew and adopted the D.C. Circuit’s reasoning is more defensible from a textualist perspective than any other reading of Section 202.
This is not an argument derived from legislative silence or inaction, canons disfavored by today’s textualists. Here, Congress definitively acted, amending the FTC Act multiple times over the decade. To read into the text of the Magnuson-Moss Act a provision stripping the FTC of its UMC rulemaking authority and overturning National Petroleum would be to violate the omitted case canon, as Scalia and Garner put it: “The absent provision cannot be supplied by the courts. What the legislature ‘would have wanted’ it did not provide, and that is the end of the matter.” In sum, the Congresses of 1974 and 1980 affirmed the existence of UMC rulemaking under APA procedures.
FTC Rulemaking Before the Octane Rule
During its first 50 years, the FTC carried out its mandate exclusively through nonbinding recommendations called “trade practice rules” (TPRs), alongside case-by-case adjudications. TPRs emerged from FTC-facilitated “trade practice conferences,” where industry participants formulated rules around what constituted unfair practices within their industry. In the early 1960s, Kennedy-appointed FTC Chair Phil Elman began to push the agency to shift away from a reactive “mailbag approach” based on individual complaints and toward a systematic approach based on binding agency rules. The result was the promulgation of “trade regulation rules” (TRRs) through notice-and-comment rulemaking, which the FTC initiated by amending its procedural rules to permit binding rulemaking in 1962. The FTC’s first TRR, promulgated in 1964, explicitly relied upon the agency’s UDAP authority. However, its statement of basis and purpose contained a full-throated defense of FTC rulemaking in general, including UMC rulemaking. The history of these early rulemaking efforts has been documented comprehensively by Luke Herrine.
Of the TRRs that the FTC promulgated before the Octane Rule, only one appears to have been explicitly identified as an exercise of antitrust rulemaking under Section 6(g) of the FTC Act. That rule, promulgated in 1968, identified its authority as sections 2(d) and 2(e) of the Clayton Act, rather than UMC under Section 5 of the FTC Act. The agency itself, upon repealing the rule, found that no enforcement actions were ever brought under it. Given the existence, however underutilized, of the 1968 rule—alongside the 1971 Octane Rule described below—it is clear that FTC personnel during the 1960s and 1970s did not understand TRRs to mean only consumer protection rules under UDAP. Furthermore, the Congress that enacted the Magnuson-Moss Act was aware of and legislating against the background fact that the FTC had already promulgated two final rules drawing on antitrust authority.
The National Petroleum Decision
In December 1971, the FTC promulgated a TRR through APA notice-and-comment rulemaking declaring that the failure to post octane ratings on gas pumps constituted a violation of Section 5 of the FTC Act, citing both UMC and UDAP as its authorizing provisions. Quoting from the statement of base and purpose of the 1964 Cigarette Rule, the FTC declared that it was empowered to promulgate the TRR under the “general grant of rulemaking authority in section 6(g) (of the Federal Trade Commission Act), and authority to promulgate it is in any event, implicit in section 5(a) (6) (of the Act) and in the purpose and design of the Trade Commission Act as a whole.”
Like the Octane Rule itself, Judge J. Skelly Wright’s 1973 National Petroleum decision affirming the FTC’s authority to promulgate the rule did not distinguish between UMC and UDAP rulemaking and did not limit its holding to one or the other.
Wright’s opinion rested first on a plain language reading of 15 U.S.C. § 46(g), which provides that the FTC may “[f]rom time to time … classify corporations and … make rules and regulations for the purpose of carrying out the provisions of sections 41 to 46 and 47 to 58 of this title.” He rejected appellees’ claim that the placement of § 6(g) in the section of the FTC Act that empowers the commission to systematically investigate and collect industry reports (colloquially referred to as 6(b) orders) manifests Congress’s intent to limit 6(g) rulemaking to the FTC’s “nonadjudicatory, investigative and informative functions.” As he pointed out, the text of 6(g) as adopted applied to section 45, which corresponds to § 5 of the FTC Act.
Wright acknowledged, however, that in theory 6(g) could be limited to rules of procedure and practice—such was the holding of the district court. Wright declined to follow the district court, holding instead that, “while the legislative history of Section 5 and Section 6(g) is ambiguous, it certainly does not compel the conclusion that the Commission was not meant to exercise the power to make substantive rules with binding effect in Section 5(a) adjudications. We also believe that the plain language of Section 6(g)…confirms the framers’ intent to allow exercise of the power claimed here.”Finding the legislative history “cryptic” and inconclusive, Wright argued that “the need to rely on the section’s language is obvious.”
He resolved the matter in the FTC’s favor by focusing on the agency’s need for effective tools to carry out its mandate; to force the agency to proceed solely by adjudication “would render the Commission ineffective to do the job assigned it by Congress. Such a result is not required by the legislative history of the Act.”
While contemporary skeptics of the administrative state might take issue with Wright’s statutory interpretation, it is difficult to argue with his textualist premise: nothing in the text of 6(g) limits the provision to procedural rulemaking.
More importantly, the Magnuson-Moss Act was passed Dec. 19, 1974, only a year and a half after the National Petroleum decision. The text and history of the Magnuson-Moss Act evinces an awareness of and attentiveness to the National Petroleum decision—the proposed legislation and the National Petroleum case were both pending during the early 1970s. The text of Magnuson-Moss canonizes Wright’s authorization of FTC rulemaking powers under both UMC and UDAP, while specifying a more rigorous set of procedural hurdles for UDAP rulemaking.
Legislative History of the Magnuson-Moss Act
Some commentators have suggested that the general purpose of Magnuson-Moss with respect to FTC rulemaking must have been to bog down the rule-promulgation process, because the act added procedural requirements like cross-examination to UDAP rulemaking. From that premise, it may be argued that a Congress hostile to FTC rulemaking would not have simultaneously sandbagged UDAP rulemaking while validating UMC rulemaking under the APA. That logical jump oversimplifies the process of negotiation and compromise that typifies any legislative process, and here it leads to the wrong conclusion. Magnuson-Moss was the result of consumer-protection advocates’ painstaking efforts to strengthen the FTC across many dimensions. The addition of trial-type procedures was a concession that they ultimately offered to business interests to move the bill out of the hostile U.S. House Commerce and Finance Subcommittee. However, the bill moved out of conference committee and to the President Gerald Ford’s desk only after its champions were assured that, in the immediate aftermath of National Petroleum, UMC rulemaking would be unimpaired.
Sen. Warren Magnuson’s (D-Wash.) strategy from the beginning was to marry together the popular and relatively easy-to-understand warranty provisions with a revitalization of the FTC. As early as 1971, President Richard Nixon publicized his support for a watered-down version of a warranty-FTC bill. Notwithstanding the political cover from Nixon, House Republicans were reluctant to move any bill forward. Michael Lemov, counsel to Rep. John E. Moss (D-Calif.) during this period, wrote that the House Commerce Committee in the early 70s was increasingly attentive to business interests and hostile to consumer-protection legislation. It ultimately took Moss’ deal-brokering to make Magnuson’s consumer-protection legacy a reality by unsticking multiple consumer-protection bills from the House “graveyard of consumer bills.” While Magnuson succeeded in passing the Magnuson-Moss draft to a full Senate vote three times in between 1970 and 1974, Moss spent years (and 12 full days of hearings) trying to get the bill out of his Commerce and Finance Subcommittee.
What finally unstuck the bill on the House side, according to Lemov, was the participation of the Nixon-appointed but surprisingly vigorous FTC Chair Lewis Engman. Engman testified before the subcommittee on March 19, 1973, that if the cross-examination provisions couldn’t be cut out of the bill, then all of the rulemaking provisions of the bill should be stripped out. By this time, the National Petroleum Refiners decision was pending, and Engman evidently felt that the FTC could do better with the rulemaking authority that might be left to it by Wright’s decision, rather than the burdensome procedure set out in the House draft. The National Petroleum decision came down June 28, 1973, and by Feb. 25, 1974, the U.S. Supreme Court had denied certiorari, such that Congress could and did consider Wright’s decision to be the state of the law. According to Lemov, Moss was upset that Engman blindsided him with his demand to leave the entirety of Section 5 rulemaking under the National Petroleum standard. In response, he doubled down and brokered a deal with key Republican committee member Rep. Jim Broyhill (R-N.C.), which would keep cross-examination but limit it to material issues of fact, not policy or minutia. After being further weakened in the full House Commerce Committee, the bill made it to a floor vote and along to the conference committee on Sept. 19, 1974, to be reconciled with the stronger Senate version.
In conference, the bill was somewhat resuscitated. It made it out of the House and Senate in December 1974 and was signed by Ford in January 1975. The House’s industry-influenced version of cross-examination made it into law, since the Senate version would have left the entirety of FTC rulemaking power under the National Petroleum holding. In short, the burdensome procedures included in the Magnuson-Moss Act, particularly cross-examination, were either devised by or advocated for by industry-friendly interests intending to tie the FTC’s hands. However, at the urging of Engman, both the Senate and House were attentive to the progress of the National Petroleum decision, and ultimately conferred on a bill that deliberately left UMC rulemaking under the simpler APA process permitted by that decision’s precedent.
The Plain Meaning of Magnuson-Moss
The text of the critical passage of the Magnuson-Moss Act, as codified at 15 U.S.C. § 57a, has not been substantially changed since 1975, though two modifications appear in italics:
(a) Authority of Commission to prescribe rules and general statements of policy
(1) Except as provided in subsection (h), the Commission may prescribe–
(A) interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices […] and
(B) rules which define with specificity acts or practices which are unfair or deceptive acts or practices […], except that the Commission shall not develop or promulgate any trade rule or regulation with regard to the regulation of the development and utilization of the standards and certification activities pursuant to this section.Rules under this subparagraph may include requirements prescribed for the purpose of preventing such acts or practices.
(2) The Commission shall have no authority under this subchapter, other than its authority under this section, to prescribe any rule with respect to unfair or deceptive acts or practices […]. The preceding sentence shall not affect any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition…
Both of the two changes in italics were the result of the 1980 FTCIA, which is discussed in more depth below. An uncodified section of the bill, labeled “15 USC 57a Note,” reads as follows:
(C)(1) The amendment made by subsections (a) and (b) of this section shall not affect the validity of any rule which was promulgated under section 6(g) of the Federal Trade Commission act prior to the date of enactment of this section. Any proposed rule under section 6(g) of such act with respect to which presentation of data, views, and arguments was substantially completed before such date may be promulgated in the same manner and with the same validity as such rule could have been promulgated had this section not been enacted.
Taken together, the language of Section 202 and 202(c) display a consciousness of the FTC’s prior norms of rulemaking authorized by Section 6(g), and an intent to bifurcate the treatment of UDAP and UMC rulemaking. Section 202 (a)(2) limits UDAP rulemaking, whether interpretive or legislative, to the new boundaries established in the bill, while explicitly leaving UMC rulemaking, including, but not limited to, interpretative rules and statements of policy, outside the new constraints and tethered to Section 6(g).
Clearly UMC is subject to the residual of FTC rulemaking authority—but the interpreter is left to determine whether that residual:
eliminates UMC rulemaking altogether;
leaves UMC rulemaking viable under 6(g) and the APA procedures as established in National Petroleum; or
is agnostic to UMC rulemaking but repudiates National Petroleum, thereby leaving UMC rulemaking open to interpretation based on the meaning of the 1914 FTCA.
Without reference to legislative history, a textualist approach to determining which of the three possibilities is most plausible is to ask what an enacting Congress with a clear preference would have done (see, e.g., Scalia’s majority opinion in Edmond v. United States). Congress could, with even greater parsimony and clarity in drafting, have limited all rulemaking to the Magnuson-Moss procedures by simply referencing Section 5 in the first sentence of (a)(2), or in the first sentences of (a)(1)(A) and (B). Alternately, if the objective was to prohibit UMC rulemaking while allowing a more procedurally limited form of UDAP rulemaking, Congress could have written the second sentence of (a)(2) as: “The preceding sentence shall not authorize the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce” or “The preceding sentence shall not authorize the Commission to prescribe rules, except interpretive rules and general statements of policy, with respect to unfair methods of competition in or affecting commerce.”
We presume that Congress enacted the Magnuson-Moss Act with, as Scalia put it in Bock Laundry, a meaning “most compatible with the surrounding body of law into which the provision must be integrated—a compatibility which, by a benign fiction, we assume Congress always has in mind.” Therefore, while a textualist would not admit the legislative history and administrative history of the FTC to this interpretation, the history is relevant inasmuch as we presume that Congress legislates against the existing state of the law as it understands it. The foregoing history demonstrates conclusively that Congress was aware of and accounting for the National Petroleum decision at multiple stages of the legislative process. The FTC’s UMC rulemaking history further lends support to the fact that Congress and the agency understood UMC rulemaking power to exist before and after the enactment of Magnuson-Moss.
Rulemaking After the Magnuson-Moss Act and the 1980 FTCIA
Returning to the current statutory text, both of the changes in italics were the result of the 1980 FTCIA, which was designed to rein in perceived FTC overreach in the consumer-protection space. The reference to Subsection (h) incorporates an explicit halt to the FTC’s then-pending consumer-protection rulemaking relating to advertising directed at children. The exception codified at (a)(1)(B) targeted the FTC’s ongoing rulemaking in standards and certification.
The Standards and Certifications Rule was the most significant attempt at competition rulemaking after the Octane Rule, although it was never finalized. Two staff reports indicate that FTC staff in both 1978 and 1983 believed that the agency’s authority to make rules under UMC authority was not abrogated by Magnuson-Moss, nor by the FTCIA. The proposed rule would have authorized the FTC to define situations in which the process of developing standards and certifications for a wide variety of industries may give rise to competitive injuries in violation of Section 5. The 1978 proposed rule and staff teport drew on both UMC and UDAP authority, noting that, in the years since National Petroleum, Magnuson-Moss had codified the FTC’s rulemaking authority and added procedural requirements, but that the act, by its own terms, applied only to UDAP rulemaking. Accordingly, the FTC’s “authority to promulgate rules relating to unfair methods of competition was expressly left unchanged by the Act.” Because of the bifurcation in UMC and UDAP rulemaking procedures, Bureau of Consumer Protection (BCP) staff opted to proceed with the standards and certification rulemaking under the new Magnuson-Moss procedures, on the understanding that meeting the higher procedural bar of Magnuson-Moss would also satisfy the requirements of § 553 of the APA.
By 1983, however, BCP staff had shifted gears. The standards and certification final staff report of April 1983, which would have been delivered to the FTC commissioners for a vote on whether to promulgate the rule or not, recommended UMC rulemaking under 6(g). In drawing on its 6(g) authority, BCP staff acknowledged that the 1980 FTCIA had explicitly removed commission authority to promulgate a standards and certification rule under Section 18 of the FTC Act, referring to the new UDAP section.
Clearly, the 1980 FTCIA was intended as a rebuke to the FTC’s efforts at consumer-protection rulemaking. However, the fact that earlier House and Senate drafts contemplated removing all FTC rulemaking authority, or removing standards and certification rulemaking authority for both UMC and UDAP, strongly suggests that Congress understood that the two rulemaking powers existed, had been affirmed by Magnuson-Moss, and continued to be legally viable, even as their exercise became politically infeasible.
BCP staff was bolstered in this interpretation by the D.C. District Court, which granted summary judgment in February 1982 against the American National Standards Institute, which brought suit against the commission claiming that the proposed Standards and Certification Rule proceeding under 6(g) violated the FTCIA of 1980.In an unpublished opinion, the court held that “the text and legislative history of the FTCIA belie Plaintiffs’ claims,” while also defending the continuing dispositivity of National Petroleum on the question of § 6(g) rulemaking. ANSI did not appeal the district court’s decision.
BCP staff forged ahead with the final report in April 1983, acknowledging that, to the extent that certain substantive requirements around disclosures from the 1978 proposed rule were directed at preventing “deception,” the FTC was no longer able to proceed with such rules. To the extent that such disclosures “would have alleviated unfair methods of competition,” the final rule could “provide similar relief.” The Standards and Certifications Rule was never adopted, however, because by 1983, FTC leadership was actively hostile to regulation. The only mentions of “unfair methods of competition” in the rulemaking context in the Federal Register after the Standards and Certification Rule appears to be in the context of repeals.
The Magnuson-Moss Act explicitly left UMC rulemaking unchanged when establishing an additional set of procedural hurdles for UDAP rulemaking. Congress in 1974 both constructively and demonstrably knew that the legal default against which these changes were made was Judge Wright’s National Petroleum decision, as well as the final agency action embodied in the Octane Rule. A textualist reading of the Magnuson-Moss Act must begin with this background legal context to avoid doing violence to the text of the statute. This interpretation is further reinforced by the FTCIA, which also left UMC rulemaking intact, while banning specific instances of UDAP rulemaking. In short, the FTC has substantive UMC rulemaking authority under FTC Act Section 5.
The International Center for Law & Economics (ICLE) filed an amicus brief on behalf of itself and 26 distinguished law & economics scholars with the 9th U.S. Circuit Court of Appeals in the hotly anticipated and intensely important Epic Games v Apple case.
A fantastic group of attorneys from White & Case generously assisted us with the writing and filing of the brief, including George Paul, Jack Pace, Gina Chiapetta, and Nicholas McGuire. The scholars who signed the brief are listed at the end of this post. A summary of the brief’s arguments follows. For some of our previous writings on the case, see here, here, here, and here.
In Epic Games v. Apple, Epic challenged Apple’s prohibition of third-party app stores and in-app payments (IAP) systems from operating on its proprietary iOS platform as a violation of antitrust law. The U.S. District Court for the Northern District of California ruled against Epic, finding that Epic’s real concern is its own business interests in the face of Apple’s business model—in particular, the commission Apple charges for use of its IAP system—rather than harm to consumers and to competition more broadly.
Epic appealed to the 9th Circuit on several grounds. Our brief primarily addresses two of Epic’s arguments:
First, Epic takes issue with the district court’s proper finding that Apple’s procompetitive justifications outweigh the anticompetitive effects of Apple’s business model. But Epic’s case fails at step one of the rule-of-reason analysis, as it didn’t demonstrate that Apple’s app distribution and IAP practices caused the significant, market-wide, anticompetitive effects that the Supreme Court, in 2018’sOhio v. American Express (“Amex”), deemed necessary to show anticompetitive harm in cases involving two-sided transaction markets (like Apple’s App Store).
Second, Epic argues that the theoretical existence of less restrictive alternatives (“LRA”) to Apple’s business model is sufficient to meet its burden under the rule of reason. But the reliance on LRA in this case is misplaced. Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition and improperly permit antitrust plaintiffs to commandeer the judiciary to modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice—irrespective of whether the practice promotes consumer welfare. This is especially true in the context of two-sided platform businesses, where such an approach would sacrifice interbrand, systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.
Competitive Effects in Two-Sided Markets
Two-sided markets connect distinct sets of users whose demands for the platform are interdependent—i.e., consumers’ demand for a platform increases as more products are available, and conversely, product developers’ demand for a platform increases as additional consumers use the platform, increasing the overall potential for transactions. As a result of these complex dynamics, conduct that may appear anticompetitive when considering the effects on only one set of customers may be entirely consistent with—and actually promote—healthy competition when examining the effects on both sides.
That’s why the Supreme Court recognized in Amex that it was improper to focus on only one side of a two-sided platform. And this holding doesn’t require adherence to the Court’s contentious finding of a two-sided relevant market in Amex. Indeed, even scholars highly critical of the Amex decision recognize the importance of considering effects on both sides of a two-sided platform.
While the district court did find that Epic demonstrated some anticompetitive effects, Epic’s evidence focused only on the effects that Apple’s conduct had on certain app developers; it failed to appropriately examine whether consumers were harmed overall. As Geoffrey Manne has observed, in two-sided markets, “some harm” is not the same thing as “competitively relevant harm.” Supracompetitive prices on one side do not tell us much about the existence or exercise of (harmful) market power in two-sided markets. As the Supreme Court held in Amex:
The fact that two-sided platforms charge one side a price that is below or above cost reflects differences in the two sides’ demand elasticity, not market power or anticompetitive pricing. Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.
Without further evidence of the effect of Apple’s practices on consumers, no conclusions can be drawn about the competitive effects of Apple’s conduct.
Nor can an appropriate examination of anticompetitive effects ignore output. The ability to restrict output, after all, is what allows a monopolist to increase prices. Whereas price effects alone might appear predatory on one side of the market and supra-competitive on the other, output reflects what is happening in the market as a whole. It is therefore the most appropriate measure for antitrust law generally, and it is especially useful in two-sided markets, where asymmetrical price changes are of little use in determining anticompetitive effects.
Ultimately, the question before the court must be whether Apple’s overall pricing structure and business model reduces output, either by deterring app developers from participating in the market or by deterring users from purchasing apps (or iOS devices) as a consequence of the app-developer commission. The district court here noted that it could not ascertain whether Apple’s alleged restrictions had a “positive or negative impact on game transaction volume.”
Thus, Epic’s case fails at step one of the rule of reason analysis because it simply hasn’t demonstrated the requisite harm to competition.
Less Restrictive Alternatives and the Rule of Reason
But even if that weren’t the case, Epic’s claims also don’t make it past step three of the rule of reason analysis.
Epic’s appeal relies on theoretical “less restrictive alternatives” (LRA) to Apple’s business model, which highlights longstanding questions about the role and limits of LRA analysis under the rule of reason.
According to Epic, because the district court identified some anticompetitive effects on one side of the market, and because alternative business models could, in theory, be implemented to achieve the same procompetitive benefits as Apple’s current business model, the court should have ruled in Epic’s favor at step three.
There are several problems with this.
First, the existence of an LRA is irrelevant if anticompetitive harm has not been established, of course (as is the case here).
Nor does the fact that some hypothetically less restrictive alternative exists automatically render the conduct under consideration anticompetitive. As the Court held in Trinko, antitrust laws do not “give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition.”
While, following the Supreme Court’s recent Alston decision, LRA analysis may well be appropriate in some contexts to identify anticompetitive conduct in the face of procompetitive justifications, there is no holding (in either the 9th Circuit or the Supreme Court) requiring it in the context of two-sided markets. (Amex refers to LRA analysis as constituting step three, but because that case was resolved at step one, it must be viewed as mere dictum).And for good reason. In the context of two-sided platforms, an LRA approach would inevitably require courts to second guess the particular allocation of costs, prices, and product attributes across platform users. As Tom Nachbar writes:
Platform defendants, even if they are able to establish the general procompetitive justifications for charging above and below cost prices on the two sides of their platforms, will have to defend the precise combination of prices they have chosen [under an LRA approach] . . . . The relative difficulty of defending any particular allocation of costs will present considerable risk of destabilizing platform markets.
Moreover, LRAs—like the ones proposed by Epic—that are based on maximizing competitor effectiveness by “opening” an incumbent’s platform would convert the rule of reason into a regulatory tool that may not promote competition at all. As Alan Devlin deftly puts it:
This construction of antitrust law—that dominant companies must affirmatively support their fringe rivals’ ability to compete effectively—adopts a perspective of antitrust that is regulatory in nature. . . . [I]f one adopts the increasingly prevalent view that antitrust must facilitate unfettered access to markets, thus spurring free entry and expansion by incumbent rivals, the Sherman Act goes from being a prophylactic device aimed at protecting consumers against welfare-reducing acts to being a misplaced regulatory tool that potentially sacrifices both consumer welfare and efficiency in a misguided pursuit of more of both.
Open Platforms Are not Necessarily Less Restrictive Platforms
It is also important to note that Epic’s claimed LRAs are neither viable alternatives nor actually “less restrictive.” Epic’s proposal would essentially turn Apple’s iOS into an open platform more similar to Google’s Android, its largest market competitor.
“Open” and “closed” platforms both have distinct benefits and drawbacks; one is not inherently superior to the other. Closed proprietary platforms like Apple’s iOS create incentives for companies to internalize positive indirect network effects, which can lead to higher levels of product variety, user adoption, and total social welfare. As Andrei Hagiu has written:
A proprietary platform may in fact induce more developer entry (i.e., product variety), user adoption and higher total social welfare than an open platform.
For example, by filtering which apps can access the App Store and precluding some transactions from taking place on it, a closed or semi-closed platform like Apple’s may ultimately increase the number of apps and transactions on its platform, where doing so makes the iOS ecosystem more attractive to both consumers and developers.
Any analysis of a supposedly less restrictive alternative to Apple’s “walled garden” model thus needs to account for the tradeoffs between open and closed platforms, and not merely assume that “open” equates to “good,” and “closed” to “bad.”
Further, such analysis also must consider tradeoffs among consumers and among developers. More vigilant users might be better served by an “open” platform because they find it easier to avoid harmful content; less vigilant ones may want more active assistance in screening for malware, spyware, or software that simply isn’t optimized for the user’s device. There are similar tradeoffs on the developer side: Apple’s model lowers the cost to join the App store, which particularly benefits smaller developers and those whose apps fall outside the popular gaming sector. In a nutshell, the IAP fee cross-subsidizes the delivery of services to the approximately 80% of apps on the App Store that are free and pay no IAP fees.
In fact, the overwhelming irony of Epic’s proposed approach is that Apple could avoid condemnation if it made its overall platform more restrictive. If, for example, Apple had not adopted an App Store model and offered a completely closed and fully integrated device, there would be no question of relative costs and benefits imposed on independent app developers; there would be no independent developers on the iOS platform at all.
Thus, Epic’s proposed LRA approach, which amounts to converting iOS to an open platform, proves too much. It would enable any contractual or employment relationship for a complementary product or service to be challenged because it could be offered through a “less restrictive” open market mechanism—in other words, that any integrated firm should be converted into an open platform.
At least since the Supreme Court’s seminal 1977 Sylvania ruling, U.S. antitrust law has been unequivocal in its preference for interbrand over intrabrand competition. Paradoxically, turning a closed platform into an open one (as Epic intends) would, under the guise of protecting competition, actually destroy competition where it matters most: at the interbrand, systems level.
Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition among platform providers. It would also more broadly allow antitrust plaintiffs to insist the courts modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice, regardless of whether that practice nevertheless promotes consumer welfare. In the context of two-sided platform businesses, this would mean sacrificing systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.
The bottom line is that an order compelling Apple to allow competing app stores would require the company to change the way in which it monetizes the App Store. This might have far-reaching distributional consequences for both groups— consumers and distributors. Courts (and, obviously, competitors) are ill-suited to act as social planners and to balance out such complex tradeoffs, especially in the absence of clear anticompetitive harm and the presence of plausible procompetitive benefits.
Amici Scholars Signing on to the Brief
(The ICLE brief presents the views of the individual signers listed below. Institutions are listed for identification purposes only.)
Alden Abbott Senior Research Fellow, Mercatus Center, George Mason University Former General Counsel, U.S. Federal Trade Commission
Ben Klein Professor of Economics Emeritus, University of California Los Angeles
Thomas C. Arthur L. Q. C. Lamar Professor of Law, Emory University School of Law
Peter Klein Professor of Entrepreneurship and Corporate Innovation, Baylor University, Hankamer School of Business
Dirk Auer Director of Competition Policy, International Center for Law & Economics Adjunct Professor, University of Liège (Belgium)
Jonathan Klick Charles A. Heimbold, Jr. Professor of Law, University of Pennsylvania Carey Law School
Jonathan M. Barnett Torrey H. Webb Professor of Law, University of Southern California, Gould School of Law
Daniel Lyons Professor of Law, Boston College Law School
Donald J. Boudreaux Professor of Economics, former Economics Department Chair, George Mason University
Geoffrey A. Manne President and Founder, International Center for Law & Economics Distinguished Fellow, Northwestern University Center on Law, Business & Economics
Giuseppe Colangelo Jean Monnet Chair in European Innovation Policy and Associate Professor of Competition Law and Economics, University of Basilicata and Libera Università Internazionale degli Studi Sociali
Francisco Marcos Associate Professor of Law, IE University Law School (Spain)
Anthony Dukes Chair and Professor of Marketing, University of Southern California, Marshall School of Business
Scott E. Masten Professor of Business Economics and Public Policy, University of Michigan, Ross Business School
Richard A. Epstein Laurence A. Tisch Professor of Law, New York University, School of Law James Parker Hall Distinguished Service Professor of Law Emeritus, University of Chicago Law School
Alan J. Meese Ball Professor of Law, College of William & Mary Law School
Vivek Ghosal Economics Department Chair and Virginia and Lloyd W. Rittenhouse Professor of Economics, Rensselaer Polytechnic Institute
Igor Nikolic Research Fellow, Robert Schuman Centre for Advanced Studies, European University Institute (Italy)
Janice Hauge Professor of Economics, University of North Texas
Paul H. Rubin Samuel Candler Dobbs Professor of Economics Emeritus, Emory University
Justin (Gus) Hurwitz Professor of Law, University of Nebraska College of Law
Vernon L. Smith George L. Argyros Endowed Chair in Finance and Economics and Professor of Economics and Law, Chapman University Nobel Laureate in Economics (2002)
Michael S. Jacobs Distinguished Research Professor of Law Emeritus, DePaul University College of Law
Michael Sykuta Associate Professor of Economics, University of Missouri
Mark A. Jamison Gerald Gunter Professor of the Public Utility Research Center, University of Florida, Warrington College of Business
Alexander “Sasha” Volokh Associate Professor of Law, Emory University School of Law
First, some background for readers who haven’t followed the case.
Epic, maker of the popular Fortnite video game, brought antitrust challenges against two policies Apple enforces against developers of third-party apps that run on iOS, the mobile operating system for Apple’s popular iPhones and iPads. One policy requires that all iOS apps be distributed through Apple’s own App Store. The other requires that any purchases of digital goods made while using an iOS app utilize Apple’s In App Purchase system (IAP). Apple collects a share of the revenue from sales made through its App Store and using IAP, so these two policies provide a way for it to monetize its innovative app platform.
Epic maintains that Apple’s app policies violate the federal antitrust laws. Following a trial, the district court disagreed, though it condemned another of Apple’s policies under California state law. Epic has appealed the antitrust rulings against it.
My fellow amici and I submitted our brief in support of Apple to draw the Ninth Circuit’s attention to a distinction that is crucial to ensuring that antitrust promotes long-term consumer welfare: the distinction between the mere extraction of surplus through the exercise of market power and the enhancement of market power via the weakening of competitive constraints.
The central claim of our brief is that Epic’s antitrust challenges to Apple’s app store policies should fail because Epic has not shown that the policies enhance Apple’s market power in any market. Moreover, condemnation of the practices would likely induce Apple to use its legitimately obtained market power to extract surplus in a different way that would leave consumers worse off than they are under the status quo.
Mere Surplus Extraction vs. Market Power Extension
As the Supreme Court has observed, “Congress designed the Sherman Act as a ‘consumer welfare prescription.’” The Act endeavors to protect consumers from harm resulting from “market power,” which is the ability of a firm lacking competitive constraints to enhance its profits by reducing its output—either quantitively or qualitatively—from the level that would persist if the firm faced vigorous competition. A monopolist, for example, might cut back on the quantity it produces (to drive up market price) or it might skimp on quality (to enhance its per-unit profit margin). A firm facing vigorous competition, by contrast, couldn’t raise market price simply by reducing its own production, and it would lose significant sales to rivals if it raised its own price or unilaterally cut back on product quality. Market power thus stems from deficient competition.
As Dennis Carlton and Ken Heyer have observed, two different types of market power-related business behavior may injure consumers and are thus candidates for antitrust prohibition. One is an exercise of market power: an action whereby a firm lacking competitive constraints increases its returns by constricting its output so as to raise price or otherwise earn higher profit margins. When a firm engages in this sort of conduct, it extracts a greater proportion of the wealth, or “surplus,” generated by its transactions with its customers.
Every voluntary transaction between a buyer and seller creates surplus, which is the difference between the subjective value the consumer attaches to an item produced and the cost of producing and distributing it. Price and other contract terms determine how that surplus is allocated between the buyer and the seller. When a firm lacking competitive constraints exercises its market power by, say, raising price, it extracts for itself a greater proportion of the surplus generated by its sale.
The other sort of market power-related business behavior involves an effort by a firm to enhance its market power by weakening competitive constraints. For example, when a firm engages in unreasonably exclusionary conduct that drives its rivals from the market or increases their costs so as to render them less formidable competitors, its market power grows.
U.S. antitrust law treats these two types of market power-related conduct differently. It forbids behavior that enhances market power and injures consumers, but it permits actions that merely exercise legitimately obtained market power without somehow enhancing it. For example, while charging a monopoly price creates immediate consumer harm by extracting for the monopolist a greater share of the surplus created by the transaction, the Supreme Court observed in Trinko that “[t]he mere possession of monopoly power, and the concomitant charging of monopoly prices, is not . . . unlawful.” (See also linkLine: “Simply possessing monopoly power and charging monopoly prices does not violate [Sherman Act] § 2….”)
Courts have similarly refused to condemn mere exercises of market power in cases involving surplus-extractive arrangements more complicated than simple monopoly pricing. For example, in its Independent Ink decision, the U.S. Supreme Court expressly declined to adopt a rule that would have effectively banned “metering” tie-ins.
In a metering tie-in, a seller with market power on some unique product that is used with a competitively supplied complement that is consumed in varying amounts—say, a highly unique printer that uses standard ink—reduces the price of its unique product (the printer), requires buyers to also purchase from it their requirements of the complement (the ink), and then charges a supracompetitive price for the latter product. This allows the seller to charge higher effective prices to high-volume users of its unique tying product (buyers who use lots of ink) and lower prices to lower-volume users.
Assuming buyers’ use of the unique product correlates with the value they ascribe to it, a metering tie-in allows the seller to price discriminate, charging higher prices to buyers who value its unique product more. This allows the seller to extract more of the surplus generated by sales of its product, but it in no way extends the seller’s market power.
In refusing to adopt a rule that would have condemned most metering tie-ins, the Independent Ink Court observed that “it is generally recognized that [price discrimination] . . . occurs in fully competitive markets” and that tying arrangements involving requirements ties may be “fully consistent with a free, competitive market.” The Court thus reasoned that mere price discrimination and surplus extraction, even when accomplished through some sort of contractual arrangement like a tie-in, are not by themselves anticompetitive harms warranting antitrust’s condemnation.
The Ninth Circuit has similarly recognized that conduct that exercises market power to extract surplus but does not somehow enhance that power does not create antitrust liability. In Qualcomm, the court refused to condemn the chipmaker’s “no license, no chips” policy, which enabled it to enhance its profits by earning royalties on original equipment manufacturers’ sales of their high-priced products.
In reversing the district court’s judgment in favor of the FTC, the Ninth Circuit conceded that Qualcomm’s policies were novel and that they allowed it to enhance its profits by extracting greater surplus. The court refused to condemn the policies, however, because they did not injure competition by weakening competitive constraints:
This is not to say that Qualcomm’s “no license, no chips” policy is not “unique in the industry” (it is), or that the policy is not designed to maximize Qualcomm’s profits (Qualcomm has admitted as much). But profit-seeking behavior alone is insufficient to establish antitrust liability. As the Supreme Court stated in Trinko, the opportunity to charge monopoly prices “is an important element of the free-market system” and “is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.”
The Qualcomm court’s reference to Trinko highlights one reason courts should not condemn exercises of market power that merely extract surplus without enhancing market power: allowing such surplus extraction furthers dynamic efficiency—welfare gain that accrues over time from the development of new and improved products and services.
Dynamic efficiency results from innovation, which entails costs and risks. Firms are more willing to incur those costs and risks if their potential payoff is higher, and an innovative firm’s ability to earn supracompetitive profits off its “better mousetrap” enhances its payoff.
Allowing innovators to extract such profits also helps address the fact most of the benefits of product innovation inure to people other than the innovator. Private actors often engage in suboptimal levels of behaviors that produce such benefit spillovers, or “positive externalities,” because they bear all the costs of those behaviors but capture just a fraction of the benefit produced. By enhancing the benefits innovators capture from their innovative efforts, allowing non-power-enhancing surplus extraction helps generate a closer-to-optimal level of innovative activity.
Not only do supracompetitive profits extracted through the exercise of legitimately obtained market power motivate innovation, they also enable it by helping to fund innovative efforts. Whereas businesses that are forced by competition to charge prices near their incremental cost must secure external funding for significant research and development (R&D) efforts, firms collecting supracompetitive returns can finance R&D internally. Indeed, of the top fifteen global spenders on R&D in 2018, eleven were either technology firms accused of possessing monopoly power (#1 Apple, #2 Alphabet/Google, #5 Intel, #6 Microsoft, #7 Apple, and #14 Facebook) or pharmaceutical companies whose patent protections insulate their products from competition and enable supracompetitive pricing (#8 Roche, #9 Johnson & Johnson, #10 Merck, #12 Novartis, and #15 Pfizer).
In addition to fostering dynamic efficiency by motivating and enabling innovative efforts, a policy acquitting non-power-enhancing exercises of market power allows courts to avoid an intractable question: which instances of mere surplus extraction should be precluded?
Precluding all instances of surplus extraction by firms with market power would conflict with precedents like Trinko and linkLine (which say that legitimate monopolists may legally charge monopoly prices) and would be impracticable given the ubiquity of above-cost pricing in niche and brand-differentiated markets.
A rule precluding surplus extraction when accomplished by a practice more complicated that simple monopoly pricing—say, some practice that allows price discrimination against buyers who highly value a product—would be both arbitrary and backward. The rule would be arbitrary because allowing supracompetitive profits from legitimately obtained market power motivates and enables innovation regardless of the means used to extract surplus. The rule would be backward because, while simple monopoly pricing always reduces overall market output (as output-reduction is the very means by which the producer causes price to rise), more complicated methods of extracting surplus, such as metering tie-ins, often enhance market output and overall social welfare.
A third possibility would be to preclude exercising market power to extract more surplus than is necessary to motivate and enable innovation. That position, however, would require courts to determine how much surplus extraction is required to induce innovative efforts. Courts are poorly positioned to perform such a task, and their inevitable mistakes could significantly chill entrepreneurial activity.
Consider, for example, a firm contemplating a $5 million investment that might return up to $50 million. Suppose the managers of the firm weighed expected costs and benefits and decided the risky gamble was just worth taking. If the gamble paid off but a court stepped in and capped the firm’s returns at $20 million—a seemingly generous quadrupling of the firm’s investment—future firms in the same position would not make similar investments. After all, the firm here thought this gamble was just barely worth taking, given the high risk of failure, when available returns were $50 million.
In the end, then, the best policy is to draw the line as both the U.S. Supreme Court and the Ninth Circuit have done: Whereas enhancements of market power are forbidden, merely exercising legitimately obtained market power to extract surplus is permitted.
Apple’s Policies Do Not Enhance Its Market Power
Under the legal approach described above, the two Apple policies Epic has challenged do not give rise to antitrust liability. While the policies may boost Apple’s profits by facilitating its extraction of surplus from app transactions on its mobile devices, they do not enhance Apple’s market power in any conceivable market.
As the creator and custodian of the iOS operating system, Apple has the ability to control which applications will run on its iPhones and iPads. Developers cannot produce operable iOS apps unless Apple grants them access to the Application Programming Interfaces (APIs) required to enable the functionality of the operating system and hardware. In addition, Apple can require developers to obtain digital certificates that will enable their iOS apps to operate. As the district court observed, “no certificate means the code will not run.”
Because Apple controls which apps will work on the operating system it created and maintains, Apple could collect the same proportion of surplus it currently extracts from iOS app sales and in-app purchases on iOS apps even without the policies Epic is challenging. It could simply withhold access to the APIs or digital certificates needed to run iOS apps unless developers promised to pay it 30% of their revenues from app sales and in-app purchases of digital goods.
This means that the challenged policies do not give Apple any power it doesn’t already possess in the putative markets Epic identified: the markets for “iOS app distribution” and “iOS in-app payment processing.”
The district court rejected those market definitions on the ground that Epic had not established cognizable aftermarkets for iOS-specific services. It defined the relevant market instead as “mobile gaming transactions.” But no matter. The challenged policies would not enhance Apple’s market power in that broader market either.
In “mobile gaming transactions” involving non-iOS (e.g., Android) mobile apps, Apple’s policies give it no power at all. Apple doesn’t distribute non-iOS apps or process in-app payments on such apps. Moreover, even if Apple were to being doing so—say, by distributing Android apps in its App Store or allowing producers of Android apps to include IAP as their in-app payment system—it is implausible that Apple’s policies would allow it to gain new market power. There are giant, formidable competitors in non-iOS app distribution (e.g., Google’s Play Store) and in payment processing for non-iOS in-app purchases (e.g., Google Play Billing). It is inconceivable that Apple’s policies would allow it to usurp so much scale from those rivals that Apple could gain market power over non-iOS mobile gaming transactions.
That leaves only the iOS segment of the mobile gaming transactions market. And, as we have just seen, Apple’s policies give it no new power to extract surplus from those transactions; because it controls access to iOS, it could do so using other means.
Nor do the challenged policies enable Apple to maintain its market power in any conceivable market. This is not a situation like Microsoft where a firm in a market adjacent to a monopolist’s could somehow pose a challenge to that monopolist, and the monopolist nips the potential competition in the bud by reducing the potential rival’s scale. There is no evidence in the record to support the (implausible) notion that rival iOS app stores or in-app payment processing systems could ever evolve in a manner that would pose a challenge to Apple’s position in mobile devices, mobile operating systems, or any other market in which it conceivably has market power.
Epic might retort that but for the challenged policies, rivals could challenge Apple’s market share in iOS app distribution and in-app purchase processing. Rivals could not, however, challenge Apple’s market power in such markets, as that power stems from its control of iOS. The challenged policies therefore do not enable Apple to shore up any existing market power.
Alternative Means of Extracting Surplus Would Likely Reduce Consumer Welfare
Because the policies Epic has challenged are not the source of Apple’s ability to extract surplus from iOS app transactions, judicial condemnation of the policies would likely induce Apple to extract surplus using different means. Changing how it earns profits off iOS app usage, however, would likely leave consumers worse off than they are under the status quo.
Apple could simply charge third-party app developers a flat fee for access to the APIs needed to produce operable iOS apps but then allow them to distribute their apps and process in-app payments however they choose. Such an approach would allow Apple to monetize its innovative app platform while permitting competition among providers of iOS app distribution and in-app payment processing services. Relative to the status quo, though, such a model would likely reduce consumer welfare by:
Reducing the number of free and niche apps,as app developers could no longer avoid a fee to Apple by adopting a free (likely ad-supported) business model, and producers of niche apps may not generate enough revenue to justify Apple’s flat fee;
Raising business risks for app developers, who, if Apple cannot earn incremental revenue off sales and use of their apps, may face a greater likelihood that the functionality of those apps will be incorporated into future versions of iOS;
Reducing Apple’s incentive to improve iOS and its mobile devices, as eliminating Apple’s incremental revenue from app usage reduces its motivation to make costly enhancements that keep users on their iPhones and iPads;
Raising the price of iPhones and iPadsand generating deadweight loss, as Apple could no longer charge higher effective prices to people who use apps more heavily and would thus likely hike up its device prices, driving marginal consumers from the market; and
Reducing user privacy and security, as jettisoning a closed app distribution model (App Store only) would impair Apple’s ability to screen iOS apps for features and bugs that create security and privacy risks.
An alternative approach—one that would avoid many of the downsides just stated by allowing Apple to continue earning incremental revenue off iOS app usage—would be for Apple to charge app developers a revenue-based fee for access to the APIs and other amenities needed to produce operable iOS apps. That approach, however, would create other costs that would likely leave consumers worse off than they are under the status quo.
The policies Epic has challenged allow Apple to collect a share of revenues from iOS app transactions immediately at the point of sale. Replacing those policies with a revenue-based API license system would require Apple to incur additional costs of collecting revenues and ensuring that app developers are accurately reporting them. In order to extract the same surplus it currently collects—and to which it is entitled given its legitimately obtained market power—Apple would have to raise its revenue-sharing percentage above its current commission rate to cover its added collection and auditing costs.
The fact that Apple has elected not to adopt this alternative means of collecting the revenues to which it is entitled suggests that the added costs of moving to the alternative approach (extra collection and auditing costs) would exceed any additional consumer benefit such a move would produce. Because Apple can collect the same revenue percentage from app transactions two different ways, it has an incentive to select the approach that maximizes iOS app transaction revenues. That is the approach that creates the greatest value for consumers and also for Apple.
If Apple believed that the benefits to app users of competition in app distribution and in-app payment processing would exceed the extra costs of collection and auditing, it would have every incentive to switch to a revenue-based licensing regime and increase its revenue share enough to cover its added collection and auditing costs. As such an approach would enhance the net value consumers receive when buying apps and making in-app purchases, it would raise overall app revenues, boosting Apple’s bottom line. The fact that Apple has not gone in this direction, then, suggests that it does not believe consumers would receive greater benefit under the alternative system. Apple might be wrong, of course. But it has a strong motivation to make the consumer welfare-enhancing decision here, as doing so maximizes its own profits.
The policies Epic has challenged do not enhance or shore up Apple’s market power, a salutary pre-requisite to antitrust liability. Furthermore, condemning the policies would likely lead Apple to monetize its innovative app platform in a manner that would reduce consumer welfare relative to the status quo. The Ninth Circuit should therefore affirm the district court’s rejection of Epic’s antitrust claims.
The Biden administration finally has taken a public position on parallel House (H.R. 3816) and Senate (S. 2992) bills that would impose new welfare-reducing regulatory constraints on the ability of large digital platforms to engage in innovative business practices that benefit consumers and the economy.
The administration’s articulation of its position—set forth in a March 28 U.S. Justice Department (DOJ letter to House and Senate Judiciary Committee leadership—is a fine example of draftsmanship. With just a few very minor redline edits, which I suggest below, the letter would advance sound and enlightened procompetitive policy.
I hope the DOJ will accept my modest redlines and incorporate them into a new letter to Congress, superseding the March 28 draft. My edited redline and clean revisions of the current draft follow (redline draft is in italics, clean draft in bold italics):
Dear Chairman Nadler, Chairman Cicilline, Representative Jordan, and Representative Buck:
The Department of Justice (Department) appreciates the considerable attention and resources devoted by the House and Senate Committees on the Judiciary over the past several years to ensuring the competitiveness of our digital economy, and writes today to express support for the American Innovation and Choice Online Act, Senate bill S. 2992, and the American Innovation and Choice Online Act, House bill H.R. 3816, which contain similar prohibitions on discriminatory conduct by dominant platforms (the “bills”).
The Department views the rise of dominant platforms as presenting a threat to open markets and competition, withrisks for consumers, businesses, innovation, resiliency, global competitiveness, and our democracy. By controlling key arteries of the nation’s commerce and communications, such platforms can exercise outsized market power in our modern economy. Vesting the power to pick winners and losers across markets in a small number of corporations contravenes the foundations of our capitalist system, and given the increasing importance of these markets, the power of such platformsis likely to continue to grow unless checked. This puts at risk the nation’s economic progress and prosperity, ultimately threatening the economic liberty that undergirds our democracy.
The legislation, if enacted, would emphasize causes of action prohibiting the largest digital platforms from discriminating in favor of their own products or services, or among third parties. In so doing, it would provide important clarification from Congress on types of discriminatory conductthat can materially harm competition. This would improve upon the system of ex ante enforcement through which the United States maintains competitive markets with legal prohibitions on harmful corporate conduct. By confirming the illegality of behaviors that reduce incentives for smaller or newer firms to innovate and compete, the legislation would supplement the existing antitrust laws in preventing the largest digital companies from abusing and exploiting their dominant positions to the detriment of competition and the competitive process. The Department is strongly supportive of these objectives and encourages both the Committee and Congress to work to finalize this legislation and pass it into law.
The Department views the legislation’s new prohibitions on discrimination as a helpful complement to, and clarification of, existing antitrust authority. In our view, the most significant benefits would arise where the legislation elucidates Congress’ views of anticompetitive conduct—particularly with respect to harmful types of discrimination and self-preferencing by dominant platforms. Enumerating discriminatory and self-preferencing conduct that Congress views as anticompetitive and therefore illegal would clarify the antitrust laws and supplement the available causes of action and legal frameworks to pursue that conduct. Doing so would enhance the ability of the DOJ and FTC to challenge that conduct efficiently and effectively and better enable them to promote competition in digital markets. The legislation also has the potential to effectively harmonize broad prohibitions with the particularized needs and business practices of individual platforms over time.
If enacted, we believe that this legislation has the potential to have a positive effect on dynamism in digital markets going forward. Our future global competitiveness depends on innovators and entrepreneurs having the ability to access markets free from dominant incumbents that impede innovation, competition, resiliency, and widespread prosperity. Discriminatory conduct by dominant platforms can sap the rewards from other innovators and entrepreneurs, reducing the incentives for entrepreneurship and innovation. Even more importantly, the legislation may support the growth of new tech businesses adjacent to the platforms,which may ultimately pose a critically needed competitive check to the covered platforms themselves. We view these benefitsas significant. For these reasons, the Department strongly supports the principles and goals animatingthe legislation and looks forward to working with Congress to ensure that the final legislation enacted meets these goals.
Thank you for the opportunity to present our views. We hope this information is helpful. Please do not hesitate to contact this office if we may be of additional assistance to you.
As members continue to revise the legislation, the Department will provide under separate cover additional assistance to ensure that the bills achieve their goals.
Clean Version (incorporating all redline edits)
Dear Chairman Nadler, Chairman Cicilline, Representative Jordan, and Representative Buck:
The Department of Justice (Department) appreciates the considerable attention and resources devoted by the House and Senate Committees on the Judiciary over the past several years to ensuring the competitiveness of our digital economy, and writes today to oppose the American Innovation and Choice Online Act, Senate bill S. 2992, and the American Innovation and Choice Online Act, House bill H.R. 3816, which contain similar prohibitions on discriminatory conduct by dominant platforms (the “bills”). Unfortunately, the legislative efforts expended on these bills have been a waste of time.
The Department views the rise of major digital platforms as presenting a great boon to open markets and competition, bestowing benefits on consumers, businesses, innovation, resiliency, global competitiveness, and our democracy. By enhancing value transmitted through key arteries of the nation’s commerce and communications, such platforms have promoted a more vibrant and innovative modern economy. Vesting in government the power to pick winners and losers across markets through legislative regulation as found in the bills contravenes the foundations of our capitalist system, and given the increasing importance of these markets, the economic benefits flowing from platform activity are likely to be curtailed if the bills are passed. Enactment of the bills would put at risk the nation’s economic progress and prosperity, ultimately threatening the economic liberty that undergirds our democracy.
The legislation, if enacted, would emphasize causes of action prohibiting the largest digital platforms from “discriminating” in favor of their own products or services, or among third parties. In so doing, it would eliminate and disincentivize many efficient business arrangements that can materially enhance competition. This would thereby undermine the system of ex ante enforcement through which the United States maintains competitive markets with legal prohibitions on competitively harmful corporate conduct. By mistakenly characterizing as anticompetitive platform behaviors that in reality enhance incentives for vigorous innovation and dynamic competition, the legislation would undermine the existing antitrust laws. Specifically, the legislation would prevent the largest digital companies from managing their business transactions in an efficient welfare-enhancing manner, to the detriment of competition and the competitive process. The Department is strongly concerned about these harmful effects. As such, it encourages both the Committees and Congress to abandon all efforts to finalize this legislation and pass it into law.
The Department views the legislation’s new prohibitions on discrimination as a harmful detriment to, and interference with, existing antitrust authority. In our view, the most significant harm would arise where the legislation seeks to elucidate Congress’ views of anticompetitive conduct—particularly with respect to harmful types of discrimination and self-preferencing by dominant platforms. Enumerating specific “discriminatory” and “self-preferencing” conduct that Congress views as anticompetitive and therefore illegal would undermine the economically informed, fact-specific evaluation of business conduct that lies at the heart of modern antitrust analysis, centered on consumer welfare. Modern economic analysis demonstrates that a great deal of superficially “discriminatory” and “self-preferencing” conduct often represents consumer welfare-enhancing behavior that adds to economic surplus. Deciding whether such conduct is procompetitive (welfare-enhancing) or anticompetitive in a particular instance is the role of existing case-by-case antitrust enforcement. This approach vindicates competition while avoiding the wrongful condemnation of economically beneficial behavior. In contrast, by creating a new class of antitrust “wrongs,” the bills would lead to the incorrect condemnation of many business practices that enhance market efficiency and strengthen the economy.
If enacted, we believe that this legislation has the potential to have a major negative effect on dynamism in digital markets going forward. Our future global competitiveness depends on innovators and entrepreneurs having the ability to access markets, free from counterproductive inflexible government market regulation that impede innovation, competition, resiliency, and widespread prosperity. “Discriminatory” conduct by major platforms, properly understood, often benefits innovators and entrepreneurs, increasing the incentives for entrepreneurship and innovation. Even more importantly, the legislation may undercut the creation and growth of new tech businesses adjacent to the platforms. Such an unfortunate result would reduce the welfare-enhancing initiatives of new businesses that are complementary to the economically beneficial activity (to consumers and producers) generated by the platforms. We view reduction of these new business initiatives as a significant harm that would stem from passage of the bills. For these reasons, the Department strongly opposes the legislation and looks forward to working with Congress to further explain why this undoubtedly well-meaning legislative initiative is detrimental to vigorous competition and a strong American economy.
Thank you for the opportunity to present our views. We hope this information is helpful. Please do not hesitate to contact this office if we may be of additional assistance to you.
 In other words, the Department respectfully recommends that members of Congress stop wasting time seeking to revise and enact this legislation.
For decades, consumer-welfare enhancement appeared to be a key enforcement goal of competition policy (antitrust, in the U.S. usage) in most jurisdictions:
The U.S. Supreme Court famously proclaimed American antitrust law to be a “consumer welfare prescription” in Reiter v. Sonotone Corp. (1979).
A study by the current adviser to the European Competition Commission’s chief economist found that that there are “many statements indicating that, seen from the European Commission, modern EU competition policy to a large extent is about protecting consumer welfare.”
A comprehensive international survey presented at the 2011 Annual International Competition Network Conference, found that a majority of competition authorities state that “their national [competition] legislation refers either directly or indirectly to consumer welfare,” and that most competition authorities “base their enforcement efforts on the premise that they enlarge consumer welfare.”
Recently, however, the notion that a consumer welfare standard (CWS) should guide antitrust enforcement has come under attack (see here). In the United States, this movement has been led by populist “neo-Brandeisians” who have “call[ed] instead for enforcement that takes into account firm size, fairness, labor rights, and the protection of smaller enterprises.” (Interestingly, there appear to be more direct and strident published attacks on the CWS from American critics than from European commentators, perhaps reflecting an unspoken European assumption that “ordoliberal” strong government oversight of markets advances the welfare of consumers and society in general.) The neo-Brandeisian critique is badly flawed and should be rejected.
Assuming that the focus on consumer welfare in U.S. antitrust enforcement survives this latest populist challenge, what considerations should inform the design and application of a CWS? Before considering this question, one must confront the context in which it arises—the claim that the U.S. economy has become far less competitive in recent decades and that antitrust enforcement has been ineffective at addressing this problem. After dispatching with this flawed claim, I advance four principles aimed at properly incorporating consumer-welfare considerations into antitrust-enforcement analysis.
Does the US Suffer from Poor Antitrust Enforcement and Declining Competition?
Antitrust interventionists assert that lax U.S. antitrust enforcement has coincided with a serious decline in competition—a claim deployed to argue that, even if one assumes that promoting consumer welfare remains an overarching goal, U.S. antitrust policy nonetheless requires a course correction. After all, basic price theory indicates that a reduction in market competition raises deadweight loss and reduces consumers’ relative share of total surplus. As such, it might seem to follow that “ramping up antitrust” would lead to more vigorously competitive markets, featuring less deadweight loss and relatively more consumer surplus.
This argument, of course, avoids error cost, rent seeking, and public choice issues that raise serious questions about the welfare effects of more aggressive “invigorated” enforcement (see here, for example). But more fundamentally, the argument is based on two incorrect premises:
That competition has declined; and
That U.S. trustbusters have applied the CWS in a narrow manner ineffective to address competitive problems.
In a recent article in the Stigler Center journal Promarket, Yale University economics professor Fiona Scott-Morton and Yale Law student Leah Samuel accepted those premises in complaining about poor antitrust enforcement and substandard competition (hyperlinks omitted and emphasis in the original):
In recent years, the [CWS] term itself has become the target of vocal criticism in light of mounting evidence that recent enforcement—and what many call the “consumer welfare standard era” of antitrust enforcement—has been a failure. …
This strategy of non-enforcement has harmed markets and consumers. Today we see the evidence of this under-enforcement in a range of macroeconomic measures, studies of markups, as well as in merger post-mortems and studies of anticompetitive behavior that agencies have not pursued. Non-economist observers– journalists, advocates, and lawyers – who have noticed the lack of enforcement and the pernicious results have learned to blame “economics” and the CWS. They are correct that using CWS, as defined and warped by Chicago-era jurists and economists, has been a failure. That kind of enforcement—namely, insufficient enforcement—does not protect competition. But we argue that the “economics” at fault are the corporate-sponsored Chicago School assumptions, which are at best outdated, generally unjustified, and usually incorrect.
While the Chicago School caused the “consumer welfare standard” to become associated with an anti-enforcement philosophy in the legal community, it has never changed its meaning among PhD-trained economists.
To an economist, consumer welfare is a well-defined concept. Price, quality, and innovation are all part of the demand curve and all form the basis for the standard academic definition of consumer welfare. CW is the area under the demand curve and above the quality-adjusted price paid. … Quality-adjusted price represents all the value consumers get from the product less the price they paid, and therefore encapsulates the role of quality of any kind, innovation, and price on the welfare of the consumer.
In my published response to Scott-Morton and Samuel, I summarized recent economic literature that contradicts the “competition is declining” claim. I also demonstrated that antitrust enforcement has been robust and successful, refuting the authors’ claim to the contrary (cross links to economic literature omitted):
There are only two problems with the [authors’] argument. First, it is not clear at all that competition has declined during the reign of this supposedly misused [CWS] concept. Second, the consumer welfare standard has not been misapplied at all. Indeed, as antitrust scholars and enforcement officials have demonstrated … modern antitrust enforcement has not adopted a narrow “Chicago School” view of the world. To the contrary, it has incorporated the more sophisticated analysis the authors advocate, and enforcement initiatives have been vigorous and largely successful. Accordingly, the authors’ call for an adjustment in antitrust enforcement is a solution in search of a non-existent problem.
In short, competitive conditions in U.S. markets are robust and have not been declining. Moreover, U.S. antitrust enforcement has been sophisticated and aggressive, fully attuned to considerations of quality and innovation.
A Suggested Framework for Consumer Welfare Analysis
Although recent claims of “weak” U.S. antitrust enforcement are baseless, they do, nevertheless, raise “front and center” the nature of the CWS. The CWS is a worthwhile concept, but it eludes a precise definition. That is as it should be. In our common law system, fact-specific analyses of particular competitive practices are key to determining whether welfare is or is not being advanced in the case at hand. There is no simple talismanic CWS formula that is readily applicable to diverse cases.
While Scott-Morton argues that the area under the demand curve (consumer surplus) is essentially coincident with the CWS, other leading commentators take account of the interests of producers as well. For example, the leading antitrust treatise writer, Herbert Hovenkamp, suggests thinking about consumer welfare in terms of “maxim[izing] output that is consistent with sustainable competition. Output includes quantity, quality, and improvements in innovation. As an aside, it is worth noting that high output favors suppliers, including labor, as well as consumers because job opportunities increase when output is higher.” (Hovenkamp, Federal Antitrust Policy 102 (6th ed. 2020).)
Federal Trade Commission (FTC) Commissioner Christine Wilson (like Ken Heyer and other scholars) advocates a “total welfare standard” (consumer plus producer surplus). She stresses that it would beneficially:
Make efficiencies more broadly cognizable, capturing cost reductions not passed through in the short run;
Better enable the agencies to consider multi-market effects (whether consumer welfare gains in one market swamp consumer welfare losses in another market); and
Better capture dynamic efficiencies (such as firm-specific efficiencies that are emulated by other “copycat” firms in the market).
Hovenkamp and Wilson point to the fact that efficiency-enhancing business conduct often has positive ramifications for both consumers and producers. As such, a CWS that focuses narrowly on short-term consumer surplus may prompt antitrust challenges to conduct that, properly understood, will prove beneficial to both consumers and producers over time.
With this in mind, I will now suggest four general “framework principles” to inform a CWS analysis that properly accounts for innovation and dynamic factors. These principles are tentative and merely suggestive, intended to prompt a further dialogue on CWS among interested commentators. (Also, many practical details will need to be filled in, based on further analysis.)
Enforcers should consider all effects on consumer welfare in evaluating a transaction. Under the rule of reason, a reduction in surplus to particular defined consumers should not condemn a business practice (merger or non-merger) if other consumers are likely to enjoy accretions to surplus and if aggregate consumer surplus appears unlikely to decline, on net, due to the practice. Surplus need not be quantified—the likely direction of change in surplus is all that is required. In other words, “actual welfare balancing” is not required, consistent with the practical impossibility of quantifying new welfare effects in almost all cases (see, e.g., Hovenkamp, here). This principle is unaffected by market definition—all affected consumers should be assessed, whether they are “in” or “out” of a hypothesized market.
Vertical intellectual-property-licensing contracts should not be subject to antitrust scrutiny unless there is substantial evidence that they are being used to facilitate horizontal collusion. This principle draws on the “New Madison Approach” associated with former Assistant Attorney General for Antitrust Makan Delrahim. It applies to a set of practices that further the interests of both consumers and producers. Vertical IP licensing (particularly patent licensing) “is highly important to the dynamic and efficient dissemination of new technologies throughout the economy, which, in turn, promotes innovation and increased welfare (consumer and producer surplus).” (See here, for example.) The 9th U.S. Circuit Court of Appeals’ refusal to condemn Qualcomm’s patent-licensing contracts (which had been challenged by the FTC) is consistent with this principle; it “evinces a refusal to find anticompetitive harm in licensing markets without hard empirical support.” (See here.)
Furthermore, enforcers should carefully assess the ability of “non-standard” commercial contracts—horizontal and vertical—to overcome market failures, as described by transaction-cost economics (see here, and here, for example). Non-standard contracts may be designed to deal with problems (for instance) of contractual incompleteness and opportunism that stymie efforts to advance new commercial opportunities. To the extent that such contracts create opportunities for transactions that expand or enhance market offerings, they generate new consumer surplus (new or “shifted out” demand curves) and enhance consumer welfare. Thus, they should enjoy a general (though rebuttable) presumption of legality.
Fourth, and most fundamentally, enforcers should take account of cost-benefit analysis, rooted in error-cost considerations, in their enforcement initiatives, in order to further consumer welfare. As I have previously written:
Assuming that one views modern antitrust enforcement as an exercise in consumer welfare maximization, what does that tell us about optimal antitrust enforcement policy design? In order to maximize welfare, enforcers must have an understanding of – and seek to maximize the difference between – the aggregate costs and benefits that are likely to flow from their policies. It therefore follows that cost-benefit analysis should be applied to antitrust enforcement design. Specifically, antitrust enforcers first should ensure that the rules they propagate create net welfare benefits. Next, they should (to the extent possible) seek to calibrate those rules so as to maximize net welfare. (Significantly, Federal Trade Commissioner Josh Wright also has highlighted the merits of utilizing cost-benefit analysis in the work of the FTC.) [Eight specific suggestions for implementing cost-beneficial antitrust evaluations are then put forth in this article.]
One must hope that efforts to eliminate consumer welfare as the focal point of U.S. antitrust will fail. But even if they do, market-oriented commentators should be alert to any efforts to “hijack” the CWS by interventionist market-skeptical scholars. A particular threat may involve efforts to define the CWS as merely involving short-term consumer surplus maximization in narrowly defined markets. Such efforts could, if successful, justify highly interventionist enforcement protocols deployed against a wide variety of efficient (though too often mischaracterized) business practices.
To counter interventionist antitrust proposals, it is important to demonstrate that claims of faltering competition and inadequate antitrust enforcement under current norms simply are inaccurate. Such an effort, though necessary, is not enough.
In order to win the day, it will be important for market mavens to explain that novel business practices aimed at promoting producer surplus tend to increase consumer surplus as well. That is because efficiency-enhancing stratagems (often embodied in restrictive IP-licensing agreements and non-standard contracts) that further innovation and overcome transaction-cost difficulties frequently pave the way for innovation and the dissemination of new technologies throughout the economy. Those effects, in turn, expand and create new market opportunities, yielding huge additions to consumer surplus—accretions that swamp short-term static effects.
Enlightened enforcers should apply enforcement protocols that allow such benefits to be taken into account. They should also focus on the interests of all consumers affected by a practice, not just a narrow subset of targeted potentially “harmed” consumers. Finally, public officials should view their enforcement mission through a cost-benefit lens, which is designed to promote welfare.