Archives For Common Law

[Wrapping up the first week of our FTC UMC Rulemaking symposium is a post from Truth on the Market’s own Justin (Gus) Hurwitz, director of law & economics programs at the International Center for Law & Economics and an assistant professor of law and co-director of the Space, Cyber, and Telecom Law program at the University of Nebraska College of 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.]

Introduction

In 2014, I published a pair of articles—”Administrative Antitrust” and “Chevron and the Limits of Administrative Antitrust”—that argued that the U.S. Supreme Court’s recent antitrust and administrative-law jurisprudence was pushing antitrust law out of the judicial domain and into the domain of regulatory agencies. The first article focused on the Court’s then-recent antitrust cases, arguing that the Court, which had long since moved away from federal common law, had shown a clear preference that common-law-like antitrust law be handled on a statutory or regulatory basis where possible. The second article evaluated and rejected the FTC’s long-held belief that the Federal Trade Commission’s (FTC) interpretations of the FTC Act do not receive Chevron deference.

Together, these articles made the case (as a descriptive, not normative, matter) that we were moving towards a period of what I called “administrative antitrust.” From today’s perspective, it surely seems that I was right, with the FTC set to embrace Section 5’s broad ambiguities to redefine modern understandings of antitrust law. Indeed, those articles have been cited by both former FTC Commissioner Rohit Chopra and current FTC Chair Lina Khan in speeches and other materials that have led up to our current moment.

This essay revisits those articles, in light of the past decade of Supreme Court precedent. It comes as no surprise to anyone familiar with recent cases that the Court is increasingly viewing the broad deference characteristic of administrative law with what, charitably, can be called skepticism. While I stand by the analysis offered in my previous articles—and, indeed, believe that the Court maintains a preference for administratively defined antitrust law over judicially defined antitrust law—I find it less likely today that the Court would defer to any agency interpretation of antitrust law that represents more than an incremental move away from extant law.

I will approach this discussion in four parts. First, I will offer some reflections on the setting of my prior articles. The piece on Chevron and the FTC, in particular, argued that the FTC had misunderstood how Chevron would apply to its interpretations of the FTC Act because it was beholden to out-of-date understandings of administrative law. I will make the point below that the same thing can be said today. I will then briefly recap the essential elements of the arguments made in both of those prior articles, to the extent needed to evaluate how administrative approaches to antitrust will be viewed by the Court today. The third part of the discussion will then summarize some key elements of administrative law that have changed over roughly the past decade. And, finally, I will bring these elements together to look at the viability of administrative antitrust today, arguing that the FTC’s broad embrace of power anticipated by many is likely to meet an ill fate at the hands of the courts on both antitrust and administrative law grounds.

In reviewing these past articles in light of the past decade’s case law, this essay reaches an important conclusion: for the same reasons that the Court seemed likely in 2013 to embrace an administrative approach to antitrust, today it is likely to view such approaches with great skepticism unless they are undertaken on an incrementalist basis. Others are currently developing arguments that sound primarily in current administrative law: the major questions doctrine and the potential turn away from National Petroleum Refiners. My conclusion is based primarily in the Court’s view that administrative antitrust would prove less indeterminate than judicially defined antitrust law. If the FTC shows that not to be the case, the Court seems likely to close the door on administrative antitrust for reasons sounding in both administrative and antitrust law.

Setting the Stage, Circa 2013

It is useful to start by visiting the stage as it was set when I wrote “Administrative Antitrust” and “Limits of Administrative Antitrust” in 2013. I wrote these articles while doing a fellowship at the University of Pennsylvania Law School, prior to which I had spent several years working at the U.S. Justice Department Antitrust Division’s Telecommunications Section. This was a great time to be involved on the telecom side of antitrust, especially for someone with an interest in administrative law, as well. Recent important antitrust cases included Pacific Bell v. linkLine and Verizon v. Trinko and recent important administrative-law cases included Brand-X, Fox v. FCC, and City of Arlington v. FCC. Telecommunications law was defining the center of both fields.

I started working on “Administrative Antitrust” first, prompted by what I admit today was an overreading of the Court’s 2011 American Electric Power Co. Inc. v. Connecticut opinion, in which the Court held broadly that a decision by Congress to regulate broadly displaces judicial common law. In Trinko and Credit Suisse, the Court had held something similar: roughly, that regulation displaces antitrust law. Indeed, in linkLine,the Court had stated that regulation is preferable to antitrust, known for its vicissitudes and adherence to the extra-judicial development of economic theory. “Administrative Antitrust” tied these strands together, arguing that antitrust law, long-discussed as one of the few remaining bastions of federal common law, would—and in the Court’s eyes, should—be displaced by regulation.

Antitrust and administrative law also came together, and remain together, in the debates over net neutrality. It was this nexus that gave rise to “Limits of Administrative Antitrust,” which I started in 2013 while working on “Administrative Antitrust”and waiting for the U.S. Court of Appeals for the D.C. Circuit’s opinion in Verizon v. FCC.

Some background on the net-neutrality debate is useful. In 2007, the Federal Communications Commission (FCC) attempted to put in place net-neutrality rules by adopting a policy statement on the subject. This approach was rejected by the D.C. Circuit in 2010, on grounds that a mere policy statement lacked the force of law. The FCC then adopted similar rules through a rulemaking process, finding authority to issue those rules in its interpretation of the ambiguous language of Section 706 of the Telecommunications Act. In January 2014, the D.C. Circuit again rejected the specific rules adopted by the FCC, on grounds that those rules violated the Communications Act’s prohibition on treating internet service providers (ISPs) as common carriers. But critically, the court affirmed the FCC’s interpretation of Section 706 as allowing it, in principle, to adopt rules regulating ISPs.

Unsurprisingly, whether the language of Section 706 was either ambiguous or subject to the FCC’s interpretation was a central debate within the regulatory community during 2012 and 2013. The broadest consensus, at least among my peers, was strongly of the view that it was neither: the FCC and industry had long read Section 706 as not giving the FCC authority to regulate ISP conduct and, to the extent that it did confer legislative authority, that authority was expressly deregulatory. I was the lone voice arguing that the D.C. Circuit was likely to find that Chevron applied to Section 706 and that the FCC’s reading was permissible on its own (that is, not taking into account such restrictions as the prohibition on treating non-common carriers as common carriers).

I actually had thought this conclusion quite obvious. The past decade of the Court’s Chevron case law followed a trend of increasing deference. Starting with Mead, then Brand-X, Fox v. FCC, and City of Arlington, the safe money was consistently placed on deference to the agency.

This was the setting in which I started thinking about what became “Chevron and the Limits of Administrative Antitrust.” If my argument in “Administrative Antitrust”was right—that the courts would push development of antitrust law from the courts to regulatory agencies—this would most clearly happen through the FTC’s Section 5 authority over unfair methods of competition (UMC). But there was longstanding debate about the limits of the FTC’s UMC authority. These debates included whether it was necessarily coterminous with the Sherman Act (so limited by the judicially defined federal common law of antitrust).

And there was discussion about whether the FTC would receive Chevron deference to its interpretations of its UMC authority. As with the question of the FCC receiving deference to its interpretation of Section 706, there was widespread understanding that the FTC would not receive Chevron deference to its interpretations of its Section 5 UMC authority. “Chevron and the Limits of Administrative Antitrust” explored that issue, ultimately concluding that the FTC likely would indeed be given the benefit of Chevron deference, tracing the commission’s belief to the contrary back to longstanding institutional memory of pre-Chevron judicial losses.

The Administrative Antitrust Argument

The discussion above is more than mere historical navel-gazing. The context and setting in which those prior articles were written is important to understanding both their arguments and the continual currents that propel us across antitrust’s sea of doubt. But we should also look at the specific arguments from each paper in some detail, as well.

Administrative Antitrust

The opening lines of this paper capture the curious judicial statute of antitrust law:

Antitrust is a peculiar area of law, one that has long been treated as exceptional by the courts. Antitrust cases are uniquely long, complicated, and expensive; individual cases turn on case-specific facts, giving them limited precedential value; and what precedent there is changes on a sea of economic—rather than legal—theory. The principal antitrust statutes are minimalist and have left the courts to develop their meaning. As Professor Thomas Arthur has noted, “in ‘the anti-trust field the courts have been accorded, by common consent, an authority they have in no other branch of enacted law.’” …


This Article argues that the Supreme Court is moving away from this exceptionalist treatment of antitrust law and is working to bring antitrust within a normalized administrative law jurisprudence.

Much of this argument is based in the arguments framed above: Trinko and Credit Suisse prioritize regulation over the federal common law of antitrust, and American Electric Power emphasizes the general displacement of common law by regulation. The article adds, as well, the Court’s focus, at the time, against domain-specific “exceptionalism.” Its opinion in Mayo had rejected the longstanding view that tax law was “exceptional” in some way that excluded it from the Administrative Procedure Act (APA) and other standard administrative law doctrine. And thus, so too must the Court’s longstanding treatment of antitrust as exceptional also fall.

Those arguments can all be characterized as pulling antitrust law toward an administrative approach. But there was a push as well. In his majority opinion, Chief Justice John Roberts expressed substantial concern about the difficulties that antitrust law poses for courts and litigants alike. His opinion for the majority notes that “it is difficult enough for courts to identify and remedy an alleged anticompetitive practice” and laments “[h]ow is a judge or jury to determine a ‘fair price?’” And Justice Stephen Breyer writes in concurrence, that “[w]hen a regulatory structure exists [as it does in this case] to deter and remedy anticompetitive harm, the costs of antitrust enforcement are likely to be greater than the benefits.”

In other words, the argument in “Administrative Antitrust” goes, the Court is motivated both to bring antitrust law into a normalized administrative-law framework and also to remove responsibility for the messiness inherent in antitrust law from the courts’ dockets. This latter point will be of particular importance as we turn to how the Court is likely to think about the FTC’s potential use of its UMC authority to develop new antitrust rules.

Chevron and the Limits of Administrative Antitrust

The core argument in “Limits of Administrative Antitrust” is more doctrinal and institutionally focused. In its simplest statement, I merely applied Chevron as it was understood circa 2013 to the FTC’s UMC authority. There is little argument that “unfair methods of competition” is inherently ambiguous—indeed, the term was used, and the power granted to the FTC, expressly to give the agency flexibility and to avoid the limits the Court was placing on antitrust law in the early 20th century.

There are various arguments against application of Chevron to Section 5; the article goes through and rejects them all. Section 5 has long been recognized as including, but being broader than, the Sherman Act. National Petroleum Refiners has long held that the FTC has substantive-rulemaking authority—a conclusion made even more forceful by the Supreme Court’s more recent opinion in Iowa Utilities Board. Other arguments are (or were) unavailing.

The real puzzle the paper unpacks is why the FTC ever believed it wouldn’t receive the benefit of Chevron deference. The article traces it back to a series of cases the FTC lost in the 1980s, contemporaneous with the development of the Chevron doctrine. The commission had big losses in cases like E.I. Du Pont and Ethyl Corp. Perhaps most important, in its 1986 Indiana Federation of Dentists opinion (two years after Chevron was decided), the Court seemed to adopt a de novo standard for review of Section 5 cases. But, “Limits of Administrative Antitrust” argues, this is a misreading and overreading of Indiana Federation of Dentists (a close reading of which actually suggests that it is entirely in line with Chevron), and it misunderstands the case’s relationship with Chevron (the importance of which did not start to come into focus for another several years).

The curious conclusion of the argument is, in effect, that a generation of FTC lawyers, “shell-shocked by its treatment in the courts,” internalized the lesson that they would not receive the benefits of Chevron deference and that Section 5 was subject to de novo review, but also that this would start to change as a new generation of lawyers, trained in the modern Chevron era, came to practice within the halls of the FTC. Today, that prediction appears to have borne out.

Things Change

The conclusion from “Limits of Administrative Antitrust” that FTC lawyers failed to recognize that the agency would receive Chevron deference because they were half a generation behind the development of administrative-law doctrine is an important one. As much as antitrust law may be adrift in a sea of change, administrative law is even more so. From today’s perspective, it feels as though I wrote those articles at Chevron’s zenith—and watching the FTC consider aggressive use of its UMC authority feels like watching a commission that, once again, is half a generation behind the development of administrative law.

The tide against Chevron’sexpansive deference was already beginning to grow at the time I was writing. City of Arlington, though affirming application of Chevron to agencies’ interpretations of their own jurisdictional statutes in a 6-3 opinion, generated substantial controversy at the time. And a short while later, the Court decided a case that many in the telecom space view as a sea change: Utility Air Regulatory Group (UARG). In UARG, Justice Antonin Scalia, writing for a 9-0 majority, struck down an Environmental Protection Agency (EPA) regulation related to greenhouse gasses. In doing so, he invoked language evocative of what today is being debated as the major questions doctrine—that the Court “expect[s] Congress to speak clearly if it wishes to assign to an agency decisions of vast economic and political significance.” Two years after that, the Court decided Encino Motorcars, in which the Court acted upon a limit expressed in Fox v. FCC that agencies face heightened procedural requirements when changing regulations that “may have engendered serious reliance interests.”

And just like that, the dams holding back concern over the scope of Chevron have burst. Justices Clarence Thomas and Neil Gorsuch have openly expressed their views that Chevron needs to be curtailed or eliminated. Justice Brett Kavanaugh has written extensively in favor of the major questions doctrine. Chief Justice Roberts invoked the major questions doctrine in King v. Burwell. Each term, litigants are more aggressively bringing more aggressive cases to probe and tighten the limits of the Chevron doctrine. As I write this, we await the Court’s opinion in American Hospital Association v. Becerra—which, it is widely believed could dramatically curtail the scope of the Chevron doctrine.

Administrative Antitrust, Redux

The prospects for administrative antitrust look very different today than they did a decade ago. While the basic argument continues to hold—the Court will likely encourage and welcome a transition of antitrust law to a normalized administrative jurisprudence—the Court seems likely to afford administrative agencies (viz., the FTC) much less flexibility in how they administer antitrust law than they would have a decade ago. This includes through both the administrative-law vector, with the Court reconsidering how it views delegation of congressional authority to agencies such as through the major questions doctrine and agency rulemaking authority, as well as through the Court’s thinking about how agencies develop and enforce antitrust law.

Major Questions and Major Rules

Two hotly debated areas where we see this trend: the major questions doctrine and the ongoing vitality of National Petroleum Refiners. These are only briefly recapitulated here. The major questions doctrine is an evolving doctrine, seemingly of great interest to many current justices on the Court, that requires Congress to speak clearly when delegating authority to agencies to address major questions—that is, questions of vast economic and political significance. So, while the Court may allow an agency to develop rules governing mergers when tasked by Congress to prohibit acquisitions likely to substantially lessen competition, it is unlikely to allow that agency to categorically prohibit mergers based upon a general congressional command to prevent unfair methods of competition. The first of those is a narrow rule based upon a specific grant of authority; the other is a very broad rule based upon a very general grant of authority.

The major questions doctrine has been a major topic of discussion in administrative-law circles for the past several years. Interest in the National Petroleum Refiners question has been more muted, mostly confined to those focused on the FTC and FCC. National Petroleum Refiners is a 1973 D.C. Circuit case that found that the FTC Act’s grant of power to make rules to implement the act confers broad rulemaking power relating to the act’s substantive provisions. In 1999, the Supreme Court reached a similar conclusion in Iowa Utilities Board, finding that a provision in Section 202 of the Communications Act allowing the FCC to create rules seemingly for the implementation of that section conferred substantive rulemaking power running throughout the Communications Act.

Both National Petroleum Refiners and Iowa Utilities Board reflect previous generations’ understanding of administrative law—and, in particular, the relationship between the courts and Congress in empowering and policing agency conduct. That understanding is best captured in the evolution of the non-delegation doctrine, and the courts’ broad acceptance of broad delegations of congressional power to agencies in the latter half of the 20th century. National Petroleum Refiners and Iowa Utilities Board are not non-delegation cases-—but, similar to the major questions doctrine, they go to similar issues of how specific Congress must be when delegating broad authority to an agency.

In theory, there is little difference between an agency that can develop legal norms through case-by-case adjudications that are backstopped by substantive and procedural judicial review, on the one hand, and authority to develop substantive rules backstopped by procedural judicial review and by Congress as a check on substantive errors. In practice, there is a world of difference between these approaches. As with the Court’s concerns about the major questions doctrine, were the Court to review National Petroleum Refiners Association or Iowa Utilities Board today, it seems at least possible, if not simply unlikely, that most of the Justices would not so readily find agencies to have such broad rulemaking authority without clear congressional intent supporting such a finding.

Both of these ideas—the major question doctrine and limits on broad rules made using thin grants of rulemaking authority—present potential limits on the potential scope of rules the FTC might make using its UMC authority.

Limits on the Antitrust Side of Administrative Antitrust

The potential limits on FTC UMC rulemaking discussed above sound in administrative-law concerns. But administrative antitrust may also find a tepid judicial reception on antitrust concerns, as well.

Many of the arguments advanced in “Administrative Antitrust” and the Court’s opinions on the antitrust-regulation interface echo traditional administrative-law ideas. For instance, much of the Court’s preference that agencies granted authority to engage in antitrust or antitrust-adjacent regulation take precedence over the application of judicially defined antitrust law track the same separation of powers and expertise concerns that are central to the Chevron doctrine itself.

But the antitrust-focused cases—linkLine, Trinko, Credit Suisse—also express concerns specific to antitrust law. Chief Justice Roberts notes that the justices “have repeatedly emphasized the importance of clear rules in antitrust law,” and the need for antitrust rules to “be clear enough for lawyers to explain them to clients.” And the Court and antitrust scholars have long noted the curiosity that antitrust law has evolved over time following developments in economic theory. This extra-judicial development of the law runs contrary to basic principles of due process and the stability of the law.

The Court’s cases in this area express hope that an administrative approach to antitrust could give a clarity and stability to the law that is currently lacking. These are rules of vast economic significance: they are “the Magna Carta of free enterprise”; our economy organizes itself around them; substantial changes to these rules could have a destabilizing effect that runs far deeper than Congress is likely to have anticipated when tasking an agency with enforcing antitrust law. Empowering agencies to develop these rules could, the Court’s opinions suggest, allow for a more thoughtful, expert, and deliberative approach to incorporating incremental developments in economic knowledge into the law.

If an agency’s administrative implementation of antitrust law does not follow this path—and especially if the agency takes a disruptive approach to antitrust law that deviates substantially from established antitrust norms—this defining rationale for an administrative approach to antitrust would not hold.

The courts could respond to such overreach in several ways. They could invoke the major questions or similar doctrines, as above. They could raise due-process concerns, tracking Fox v. FCC and Encino Motorcars, to argue that any change to antitrust law must not be unduly disruptive to engendered reliance interests. They could argue that the FTC’s UMC authority, while broader than the Sherman Act, must be compatible with the Sherman Act. That is, while the FTC has authority for the larger circle in the antitrust Venn diagram, the courts continue to define the inner core of conduct regulated by the Sherman Act.

A final aspect to the Court’s likely approach to administrative antitrust falls from the Roberts Court’s decision-theoretic approach to antitrust law. First articulated in Judge Frank Easterbrook’s “The Limits of Antitrust,” the decision-theoretic approach to antitrust law focuses on the error costs of incorrect judicial decisions and the likelihood that those decisions will be corrected. The Roberts Court has strongly adhered to this framework in its antitrust decisions. This can be seen, for instance, in Justice Breyer’s statement that: “When a regulatory structure exists to deter and remedy anticompetitive harm, the costs of antitrust enforcement are likely to be greater than the benefits.”

The error-costs framework described by Judge Easterbrook focuses on the relative costs of errors, and correcting those errors, between judicial and market mechanisms. In the administrative-antitrust setting, the relevant comparison is between judicial and administrative error costs. The question on this front is whether an administrative agency, should it get things wrong, is likely to correct. Here there are two models, both of concern. The first is that in which law is policy or political preference. Here, the FCC’s approach to net neutrality and the National Labor Relations Board’s (NLRB) approach to labor law loom large; there have been dramatic swing between binary policy preferences held by different political parties as control of agencies shifts between administrations. The second model is one in which Congress responds to agency rules by refining, rejecting, or replacing them through statute. Here, again, net neutrality and the FCC loom large, with nearly two decades of calls for Congress to clarify the FCC’s authority and statutory mandate, while the agency swings between policies with changing administrations.

Both of these models reflect poorly on the prospects for administrative antitrust and suggest a strong likelihood that the Court would reject any ambitious use of administrative authority to remake antitrust law. The stability of these rules is simply too important to leave to change with changing political wills. And, indeed, concern that Congress no longer does its job of providing agencies with clear direction—that Congress has abdicated its job of making important policy decisions and let them fall instead to agency heads—is one of the animating concerns behind the major questions doctrine.

Conclusion

Writing in 2013, it seemed clear that the Court was pushing antitrust law in an administrative direction, as well as that the FTC would likely receive broad Chevron deference in its interpretations of its UMC authority to shape and implement antitrust law. Roughly a decade later, the sands have shifted and continue to shift. Administrative law is in the midst of a retrenchment, with skepticism of broad deference and agency claims of authority.

Many of the underlying rationales behind the ideas of administrative antitrust remain sound. Indeed, I expect the FTC will play an increasingly large role in defining the contours of antitrust law and that the Court and courts will welcome this role. But that role will be limited. Administrative antitrust is a preferred vehicle for administering antitrust law, not for changing it. Should the FTC use its power aggressively, in ways that disrupt longstanding antitrust principles or seem more grounded in policy better created by Congress, it is likely to find itself on the losing side of the judicial opinion.

Responding to a new draft policy statement from the U.S. Patent & Trademark Office (USPTO), the National Institute of Standards and Technology (NIST), and the U.S. Department of Justice, Antitrust Division (DOJ) regarding remedies for infringement of standard-essential patents (SEPs), a group of 19 distinguished law, economics, and business scholars convened by the International Center for Law & Economics (ICLE) submitted comments arguing that the guidance would improperly tilt the balance of power between implementers and inventors, and could undermine incentives for innovation.

As explained in the scholars’ comments, the draft policy statement misunderstands many aspects of patent and antitrust policy. The draft notably underestimates the value of injunctions and the circumstances in which they are a necessary remedy. It also overlooks important features of the standardization process that make opportunistic behavior much less likely than policymakers typically recognize. These points are discussed in even more detail in previous work by ICLE scholars, including here and here.

These first-order considerations are only the tip of the iceberg, however. Patent policy has a huge range of second-order effects that the draft policy statement and policymakers more generally tend to overlook. Indeed, reducing patent protection has more detrimental effects on economic welfare than the conventional wisdom typically assumes. 

The comments highlight three important areas affected by SEP policy that would be undermined by the draft statement. 

  1. First, SEPs are established through an industry-wide, collaborative process that develops and protects innovations considered essential to an industry’s core functioning. This process enables firms to specialize in various functions throughout an industry, rather than vertically integrate to ensure compatibility. 
  2. Second, strong patent protection, especially of SEPs, boosts startup creation via a broader set of mechanisms than is typically recognized. 
  3. Finally, strong SEP protection is essential to safeguard U.S. technology leadership and sovereignty. 

As explained in the scholars’ comments, the draft policy statement would be detrimental on all three of these dimensions. 

To be clear, the comments do not argue that addressing these secondary effects should be a central focus of patent and antitrust policy. Instead, the point is that policymakers must deal with a far more complex set of issues than is commonly recognized; the effects of SEP policy aren’t limited to the allocation of rents among inventors and implementers (as they are sometimes framed in policy debates). Accordingly, policymakers should proceed with caution and resist the temptation to alter by fiat terms that have emerged through careful negotiation among inventors and implementers, and which have been governed for centuries by the common law of contract. 

Collaborative Standard-Setting and Specialization as Substitutes for Proprietary Standards and Vertical Integration

Intellectual property in general—and patents, more specifically—is often described as a means to increase the monetary returns from the creation and distribution of innovations. While this is undeniably the case, this framing overlooks the essential role that IP also plays in promoting specialization throughout the economy.

As Ronald Coase famously showed in his Nobel-winning work, firms must constantly decide whether to perform functions in-house (by vertically integrating), or contract them out to third parties (via the market mechanism). Coase concluded that these decisions hinge on whether the transaction costs associated with the market mechanism outweigh the cost of organizing production internally. Decades later, Oliver Williamson added a key finding to this insight. He found that among the most important transaction costs that firms encounter are those that stem from incomplete contracts and the scope for opportunistic behavior they entail.

This leads to a simple rule of thumb: as the scope for opportunistic behavior increases, firms are less likely to use the market mechanism and will instead perform tasks in-house, leading to increased vertical integration.

IP plays a key role in this process. Patents drastically reduce the transaction costs associated with the transfer of knowledge. This gives firms the opportunity to develop innovations collaboratively and without fear that trading partners might opportunistically appropriate their inventions. In turn, this leads to increased specialization. As Robert Merges observes

Patents facilitate arms-length trade of a technology-intensive input, leading to entry and specialization.

More specifically, it is worth noting that the development and commercialization of inventions can lead to two important sources of opportunistic behavior: patent holdup and patent holdout. As the assembled scholars explain in their comments, while patent holdup has drawn the lion’s share of policymaker attention, empirical and anecdotal evidence suggest that holdout is the more salient problem.

Policies that reduce these costs—especially patent holdout—in a cost-effective manner are worthwhile, with the immediate result that technologies are more widely distributed than would otherwise be the case. Inventors also see more intense and extensive incentives to produce those technologies in the first place.

The Importance of Intellectual Property Rights for Startup Activity

Strong patent rights are essential to monetize innovation, thus enabling new firms to gain a foothold in the marketplace. As the scholars’ comments explain, this is even more true for startup companies. There are three main reasons for this: 

  1. Patent rights protected by injunctions prevent established companies from simply copying innovative startups, with the expectation that they will be able to afford court-set royalties; 
  2. Patent rights can be the basis for securitization, facilitating access to startup funding; and
  3. Patent rights drive venture capital (VC) investment.

While point (1) is widely acknowledged, many fail to recognize it is particularly important for startup companies. There is abundant literature on firms’ appropriability mechanisms (these are essentially the strategies firms employ to prevent rivals from copying their inventions). The literature tells us that patent protection is far from the only strategy firms use to protect their inventions (see. e.g., here, here and here). 

The alternative appropriability mechanisms identified by these studies tend to be easier to implement for well-established firms. For instance, many firms earn returns on their inventions by incorporating them into physical products that cannot be reverse engineered. This is much easier for firms that already have a large industry presence and advanced manufacturing capabilities.  In contrast, startup companies—almost by definition—must outsource production.

Second, property rights could drive startup activity through the collateralization of IP. By offering security interests in patents, trademarks, and copyrights, startups with little or no tangible assets can obtain funding without surrendering significant equity. As Gaétan de Rassenfosse puts it

SMEs can leverage their IP to facilitate R&D financing…. [P]atents materialize the value of knowledge stock: they codify the knowledge and make it tradable, such that they can be used as collaterals. Recent theoretical evidence by Amable et al. (2010) suggests that a systematic use of patents as collateral would allow a high growth rate of innovations despite financial constraints.

Finally, there is reason to believe intellectual-property protection is an important driver of venture capital activity. Beyond simply enabling firms to earn returns on their investments, patents might signal to potential investors that a company is successful and/or valuable. Empirical research by Hsu and Ziedonis, for instance, supports this hypothesis

[W]e find a statistically significant and economically large effect of patent filings on investor estimates of start-up value…. A doubling in the patent application stock of a new venture [in] this sector is associated with a 28 percent increase in valuation, representing an upward funding-round adjustment of approximately $16.8 million for the average start-up in our sample.

In short, intellectual property can stimulate startup activity through various mechanisms. There is thus a sense that, at the margin, weakening patent protection will make it harder for entrepreneurs to embark on new business ventures.

The Role of Strong SEP Rights in Guarding Against China’s ‘Cyber Great Power’ Ambitions 

The United States, due in large measure to its strong intellectual-property protections, is a nation of innovators, and its production of IP is one of its most important comparative advantages. 

IP and its legal protections become even more important, however, when dealing with international jurisdictions, like China, that don’t offer similar levels of legal protection. By making it harder for patent holders to obtain injunctions, licensees and implementers gain the advantage in the short term, because they are able to use patented technology without having to engage in negotiations to pay the full market price. 

In the case of many SEPs—particularly those in the telecommunications sector—a great many patent holders are U.S.-based, while the lion’s share of implementers are Chinese. The anti-injunction policy espoused in the draft policy statement thus amounts to a subsidy to Chinese infringers of U.S. technology.

At the same time, China routinely undermines U.S. intellectual property protections through its industrial policy. The government’s stated goal is to promote “fair and reasonable” international rules, but it is clear that China stretches its power over intellectual property around the world by granting “anti-suit injunctions” on behalf of Chinese smartphone makers, designed to curtail enforcement of foreign companies’ patent rights.

This is part of the Chinese government’s larger approach to industrial policy, which seeks to expand Chinese power in international trade negotiations and in global standards bodies. As one Chinese Communist Party official put it

Standards are the commanding heights, the right to speak, and the right to control. Therefore, the one who obtains the standards gains the world.

Insufficient protections for intellectual property will hasten China’s objective of dominating collaborative standard development in the medium to long term. Simultaneously, this will engender a switch to greater reliance on proprietary, closed standards rather than collaborative, open standards. These harmful consequences are magnified in the context of the global technology landscape, and in light of China’s strategic effort to shape international technology standards. Chinese companies, directed by their government authorities, will gain significant control of the technologies that will underpin tomorrow’s digital goods and services.

The scholars convened by ICLE were not alone in voicing these fears. David Teece (also a signatory to the ICLE-convened comments), for example, surmises in his comments that: 

The US government, in reviewing competition policy issues that might impact standards, therefore needs to be aware that the issues at hand have tremendous geopolitical consequences and cannot be looked at in isolation…. Success in this regard will promote competition and is our best chance to maintain technological leadership—and, along with it, long-term economic growth and consumer welfare and national security.

Similarly, comments from the Center for Strategic and International Studies (signed by, among others, former USPTO Director Anrei Iancu, former NIST Director Walter Copan, and former Deputy Secretary of Defense John Hamre) argue that the draft policy statement would benefit Chinese firms at U.S. firms’ expense:

What is more, the largest short-term and long-term beneficiaries of the 2021 Draft Policy Statement are firms based in China. Currently, China is the world’s largest consumer of SEP-based technology, so weakening protection of American owned patents directly benefits Chinese manufacturers. The unintended effect of the 2021 Draft Policy Statement will be to support Chinese efforts to dominate critical technology standards and other advanced technologies, such as 5G. Put simply, devaluing U.S. patents is akin to a subsidized tech transfer to China.

With Chinese authorities joining standardization bodies and increasingly claiming jurisdiction over F/RAND disputes, there should be careful reevaluation of the ways the draft policy statement would further weaken the United States’ comparative advantage in IP-dependent technological innovation. 

Conclusion

In short, weakening patent protection could have detrimental ramifications that are routinely overlooked by policymakers. These include increasing inventors’ incentives to vertically integrate rather than develop innovations collaboratively; reducing startup activity (especially when combined with antitrust enforcers’ newfound proclivity to challenge startup acquisitions); and eroding America’s global technology leadership, particularly with respect to China.

For these reasons (and others), the text of the draft policy statement should be reconsidered and either revised substantially to better reflect these concerns or withdrawn entirely. 

The signatories to the comments are:

Alden F. AbbottSenior Research Fellow, Mercatus Center
George Mason University
Former General Counsel, U.S. Federal Trade Commission
Jonathan BarnettTorrey H. Webb Professor of Law
University of Southern California
Ronald A. CassDean Emeritus, School of Law
Boston University
Former Commissioner and Vice-Chairman, U.S. International Trade Commission
Giuseppe ColangeloJean Monnet Chair in European Innovation Policy and Associate Professor of Competition Law & Economics
University of Basilicata and LUISS (Italy)
Richard A. EpsteinLaurence A. Tisch Professor of Law
New York University
Bowman HeidenExecutive Director, Tusher Initiative at the Haas School of Business
University of California, Berkeley
Justin (Gus) HurwitzProfessor of Law
University of Nebraska
Thomas A. LambertWall Chair in Corporate Law and Governance
University of Missouri
Stan J. LiebowitzAshbel Smith Professor of Economics
University of Texas at Dallas
John E. LopatkaA. Robert Noll Distinguished Professor of Law
Penn State University
Keith MallinsonFounder and Managing Partner
WiseHarbor
Geoffrey A. MannePresident and Founder
International Center for Law & Economics
Adam MossoffProfessor of Law
George Mason University
Kristen Osenga Austin E. Owen Research Scholar and Professor of Law
University of Richmond
Vernon L. SmithGeorge L. Argyros Endowed Chair in Finance and Economics
Chapman University
Nobel Laureate in Economics (2002)
Daniel F. SpulberElinor Hobbs Distinguished Professor of International Business
Northwestern University
David J. TeeceThomas W. Tusher Professor in Global Business
University of California, Berkeley
Joshua D. WrightUniversity Professor of Law
George Mason University
Former Commissioner, U.S. Federal Trade Commission
John M. YunAssociate Professor of Law
George Mason University
Former Acting Deputy Assistant Director, Bureau of Economics, U.S. Federal Trade Commission 

In Fleites v. MindGeek—currently before the U.S. District Court for the District of Central California, Southern Division—plaintiffs seek to hold MindGeek subsidiary PornHub liable for alleged instances of human trafficking under the Racketeer Influenced and Corrupt Organizations (RICO) and the Trafficking Victims Protection Reauthorization Act (TVPRA). Writing for the International Center for Law & Economics (ICLE), we have filed a motion for leave to submit an amicus brief regarding whether it is valid to treat co-defendant Visa Inc. as a proper party under principles of collateral liability.

The proposed brief draws on our previous work on the law & economics of collateral liability, and argues that holding Visa liable as a participant under RICO or TVPRA would amount to stretching collateral liability far beyond what is reasonable. Such a move, we posit, would “generate a massive amount of social cost that would outweigh the potential deterrent or compensatory gains sought.”

Collateral liability can make sense when intermediaries are in a position to effectively monitor and control potential harms. That is, it can be appropriate to apply collateral liability to parties who are what is often referred to as a “least cost avoider.” As we write:

In some circumstances it is indeed proper to hold third parties liable even though they are not primary actors directly implicated in wrongdoing. Most significantly, such liability may be appropriate when a collateral actor stands in a relationship to the wrongdoing (or wrongdoers or victims) such that the threat of liability can incentivize it to take action (or refrain from taking action) to prevent or mitigate the wrongdoing. That is to say, collateral liability may be appropriate when the third party has a significant enough degree of control over the primary actors such that its actions can cause them to reduce the risk of harm at reasonable cost. Importantly, however, such liability is appropriate only when direct deterrence is insufficient and/or the third party can prevent harm at lower cost or more effectively than direct enforcement… From an economic perspective, liability should be imposed upon the party or parties best positioned to deter the harms in question, such that the costs of enforcement do not exceed the social gains realized.

The law of negligence under the common law, as well as contributory infringement under copyright law, both help illustrate this principle. Under the common law, collateral actors have a duty in only limited circumstances, when the harms are “reasonably foreseeable” and the actor has special access to particularized information about the victims or the perpetrators, as well as a special ability to control harmful conditions. Under copyright law, collateral liability is similarly limited to circumstances where collateral actors are best positioned to prevent the harm, and the benefits of holding such actors liable exceed the harms. 

Neither of these conditions are true in Fleites v. MindGeek: Visa is not the type of collateral actor that has any access to specialized information or the ability to control actual bad actors. Visa, as a card-payment network, simply processes payments. The only tool at the disposal of Visa is a giant sledgehammer: it can foreclose all transactions to particular sites that run over its network. There is no dispute that the vast majority of content hosted on sites like MindGeek is lawful, however awful one may believe pornography to be. Holding card networks liable here would create incentives to avoid processing payments for such sites altogether in order to avoid legal consequences. 

The potential costs of the theory of liability asserted here stretch far beyond Visa or this particular case. The plaintiffs’ theory would hold anyone liable who provides services that “allow[] the alleged principal actors to continue to do business.” This would mean that Federal Express, for example, would be liable for continuing to deliver packages to MindGeek’s address or that a waste-management company could be liable for providing custodial services to the building where MindGeek has an office. 

According to the plaintiffs, even the mere existence of a newspaper article alleging a company is doing something illegal is sufficient to find that professionals who have provided services to that company “participate” in a conspiracy. This would have ripple effects for professionals from many other industries—from accountants to bankers to insurance—who all would see significantly increased risk of liability.

To read the rest of the brief, see here.

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

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

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

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

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

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

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

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

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

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

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

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

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

Rescission of the Unfair Methods of Competition Policy Statement

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

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

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

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

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

New Guidance to Parties Considering Mergers

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

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

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

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

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

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

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

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

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

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

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

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

Proposed FTC Competition Rulemakings

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

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

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

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

Conclusion

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

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

Admirers of the late Supreme Court Justice Louis Brandeis and other antitrust populists often trace the history of American anti-monopoly sentiments from the Founding Era through the Progressive Era’s passage of laws to fight the scourge of 19th century monopolists. For example, Matt Stoller of the American Economic Liberties Project, both in his book Goliath and in other writings, frames the story of America essentially as a battle between monopolists and anti-monopolists.

According to this reading, it was in the late 20th century that powerful corporations and monied interests ultimately succeeded in winning the battle in favor of monopoly power against antitrust authorities, aided by the scholarship of the “ideological” Chicago school of economics and more moderate law & economics scholars like Herbert Hovenkamp of the University of Pennsylvania Law School.

It is a framing that leaves little room for disagreements about economic theory or evidence. One is either anti-monopoly or pro-monopoly, anti-corporate power or pro-corporate power.

What this story muddles is that the dominant anti-monopoly strain from English common law, which continued well into the late 19th century, was opposed specifically to government-granted monopoly. In contrast, today’s “anti-monopolists” focus myopically on alleged monopolies that often benefit consumers, while largely ignoring monopoly power granted by government. The real monopoly problem antitrust law fails to solve is its immunization of anticompetitive government policies. Recovering the older anti-monopoly tradition would better focus activists today.

Common Law Anti-Monopoly Tradition

Scholars like Timothy Sandefur of the Goldwater Institute have written about the right to earn a living that arose out of English common law and was inherited by the United States. This anti-monopoly stance was aimed at government-granted privileges, not at successful business ventures that gained significant size or scale.

For instance, 1602’s Darcy v. Allein, better known as the “Case of Monopolies,” dealt with a “patent” originally granted by Queen Elizabeth I in 1576 to Ralph Bowes, and later bought by Edward Darcy, to make and sell playing cards. Darcy did not innovate playing cards; he merely had permission to be the sole purveyor. Thomas Allein, who attempted to sell playing cards he created, was sued for violating Darcy’s exclusive rights. Darcy’s monopoly ultimately was held to be invalid by the court, which refused to convict Allein.

Edward Coke, who actually argued on behalf of the patent in Darcy v. Allen, wrote that the case stood for the proposition that:

All trades, as well mechanical as others, which prevent idleness (the bane of the commonwealth) and exercise men and youth in labour, for the maintenance of themselves and their families, and for the increase of their substance, to serve the Queen when occasion shall require, are profitable for the commonwealth, and therefore the grant to the plaintiff to have the sole making of them is against the common law, and the benefit and liberty of the subject. (emphasis added)

In essence, Coke’s argument was more closely linked to a “right to work” than to market structures, business efficiency, or firm conduct.

The courts largely resisted royal monopolies in 17th century England, finding such grants to violate the common law. For instance, in The Case of the Tailors of Ipswich, the court cited Darcy and found:

…at the common law, no man could be prohibited from working in any lawful trade, for the law abhors idleness, the mother of all evil… especially in young men, who ought in their youth, (which is their seed time) to learn lawful sciences and trades, which are profitable to the commonwealth, and whereof they might reap the fruit in their old age, for idle in youth, poor in age; and therefore the common law abhors all monopolies, which prohibit any from working in any lawful trade. (emphasis added)

The principles enunciated in these cases were eventually codified in the Statute of Monopolies, which prohibited the crown from granting monopolies in most circumstances. This was especially the case when the monopoly prevented the right to otherwise lawful work.

This common-law tradition also had disdain for private contracts that created monopoly by restraining the right to work. For instance, the famous Dyer’s case of 1414 held that a contract in which John Dyer promised not to practice his trade in the same town as the plaintiff was void for being an unreasonable restraint on trade.The judge is supposed to have said in response to the plaintiff’s complaint that he would have imprisoned anyone who had claimed such a monopoly on his own authority.

Over time, the common law developed analysis that looked at the reasonableness of restraints on trade, such as the extent to which they were limited in geographic reach and duration, as well as the consideration given in return. This part of the anti-monopoly tradition would later constitute the thread pulled on by the populists and progressives who created the earliest American antitrust laws.

Early American Anti-Monopoly Tradition

American law largely inherited the English common law system. It also inherited the anti-monopoly tradition the common law embodied. The founding generation of American lawyers were trained on Edward Coke’s commentary in “The Institutes of the Laws of England,” wherein he strongly opposed government-granted monopolies.

This sentiment can be found in the 1641 Massachusetts Body of Liberties, which stated: “No monopolies shall be granted or allowed amongst us, but of such new Inventions that are profitable to the Countrie, and that for a short time.” In fact, the Boston Tea Party itself was in part a protest of the monopoly granted to the East India Company, which included a special refund from duties by Parliament that no other tea importers enjoyed.

This anti-monopoly tradition also can be seen in the debates at the Constitutional Convention. A proposal to give the federal government power to grant “charters of incorporation” was voted down on fears it could lead to monopolies. Thomas Jefferson, George Mason, and several Antifederalists expressed concerns about the new national government’s ability to grant monopolies, arguing that an anti-monopoly clause should be added to the Constitution. Six states wanted to include provisions that would ban monopolies and the granting of special privileges in the Constitution.

The American anti-monopoly tradition remained largely an anti-government tradition throughout much of the 19th century, rearing its head in debates about the Bank of the United States, publicly-funded internal improvements, and government-granted monopolies over bridges and seas. Pamphleteer Lysander Spooner even tried to start a rival to the Post Office by appealing to the strong American impulse against monopoly.

Coinciding with the Industrial Revolution, liberalization of corporate law made it easier for private persons to organize firms that were not simply grants of exclusive monopoly. But discontent with industrialization and other social changes contributed to the birth of a populist movement, and later to progressives like Brandeis, who focused on private combinations and corporate power rather than government-granted privileges. This is the strand of anti-monopoly sentiment that continues to dominate the rhetoric today.

What This Means for Today

Modern anti-monopoly advocates have largely forgotten the lessons of the long Anglo-American tradition that found government is often the source of monopoly power. Indeed, American law privileges government’s ability to grant favors to businesses through licensing, the tax code, subsidies, and even regulation. The state action doctrine from Parker v. Brown exempts state and municipal authorities from antitrust lawsuits even where their policies have anticompetitive effects. And the Noerr-Pennington doctrine protects the rights of industry groups to lobby the government to pass anticompetitive laws.

As a result, government is often used to harm competition, with no remedy outside of the political process that created the monopoly. Antitrust law is used instead to target businesses built by serving consumers well in the marketplace.

Recovering this older anti-monopoly tradition would help focus the anti-monopoly movement on a serious problem modern antitrust misses. While the consumer-welfare standard that modern antitrust advocates often decry has helped to focus the law on actual harms to consumers, antitrust more broadly continues to encourage rent-seeking by immunizing state action and lobbying behavior.

Since the LabMD decision, in which the Eleventh Circuit Court of Appeals told the FTC that its orders were unconstitutionally vague, the FTC has been put on notice that it needs to reconsider how it develops and substantiates its claims in data security enforcement actions brought under Section 5. 

Thus, on January 6, the FTC announced on its blog that it will have “New and improved FTC data security orders: Better guidance for companies, better protection for consumers.” However, the changes the Commission highlights only get to a small part of what we have previously criticized when it comes to their “common law” of data security (see here and here). 

While the new orders do list more specific requirements to help explain what the FTC believes is a “comprehensive data security program”, there is still no legal analysis in either the orders or the complaints that would give companies fair notice of what the law requires. Furthermore, nothing about the underlying FTC process has changed, which means there is still enormous pressure for companies to settle rather than litigate the contours of what “reasonable” data security practices look like. Thus, despite the Commission’s optimism, the recent orders and complaints do little to nothing to remedy the problems that plague the Commission’s data security enforcement program.

The changes

In his blog post, the director of the Bureau of Consumer Protection at the FTC describes how new orders in data security enforcement actions are more specific, with one of the main goals being more guidance to businesses trying to follow the law.

Since the early 2000s, our data security orders had contained fairly standard language. For example, these orders typically required a company to implement a comprehensive information security program subject to a biennial outside assessment. As part of the FTC’s Hearings on Competition and Consumer Protection in the 21st Century, we held a hearing in December 2018 that specifically considered how we might improve our data security orders. We were also mindful of the 11th Circuit’s 2018 LabMD decision, which struck down an FTC data security order as unenforceably vague.

Based on this learning, in 2019 the FTC made significant improvements to its data security orders. These improvements are reflected in seven orders announced this year against an array of diverse companies: ClixSense (pay-to-click survey company), i-Dressup (online games for kids), DealerBuilt (car dealer software provider), D-Link (Internet-connected routers and cameras), Equifax (credit bureau), Retina-X (monitoring app), and Infotrax (service provider for multilevel marketers)…

[T]he orders are more specific. They continue to require that the company implement a comprehensive, process-based data security program, and they require the company to implement specific safeguards to address the problems alleged in the complaint. Examples have included yearly employee training, access controls, monitoring systems for data security incidents, patch management systems, and encryption. These requirements not only make the FTC’s expectations clearer to companies, but also improve order enforceability.

Why the FTC’s data security enforcement regime fails to provide fair notice or develop law (and is not like the common law)

While these changes are long overdue, it is just one step in the direction of a much-needed process reform at the FTC in how it prosecutes cases with its unfairness authority, particularly in the realm of data security. It’s helpful to understand exactly why the historical failures of the FTC process are problematic in order to understand why the changes it is undertaking are insufficient.

For instance, Geoffrey Manne and I previously highlighted  the various ways the FTC’s data security consent order regime fails in comparison with the common law: 

In Lord Mansfield’s characterization, “the common law ‘does not consist of particular cases, but of general principles, which are illustrated and explained by those cases.’” Further, the common law is evolutionary in nature, with the outcome of each particular case depending substantially on the precedent laid down in previous cases. The common law thus emerges through the accretion of marginal glosses on general rules, dictated by new circumstances. 

The common law arguably leads to legal rules with at least two substantial benefits—efficiency and predictability or certainty. The repeated adjudication of inefficient or otherwise suboptimal rules results in a system that generally offers marginal improvements to the law. The incentives of parties bringing cases generally means “hard cases,” and thus judicial decisions that have to define both what facts and circumstances violate the law and what facts and circumstances don’t. Thus, a benefit of a “real” common law evolution is that it produces a body of law and analysis that actors can use to determine what conduct they can undertake without risk of liability and what they cannot. 

In the abstract, of course, the FTC’s data security process is neither evolutionary in nature nor does it produce such well-defined rules. Rather, it is a succession of wholly independent cases, without any precedent, narrow in scope, and binding only on the parties to each particular case. Moreover it is generally devoid of analysis of the causal link between conduct and liability and entirely devoid of analysis of which facts do not lead to liability. Like all regulation it tends to be static; the FTC is, after all, an enforcement agency, charged with enforcing the strictures of specific and little-changing pieces of legislation and regulation. For better or worse, much of the FTC’s data security adjudication adheres unerringly to the terms of the regulations it enforces with vanishingly little in the way of gloss or evolution. As such (and, we believe, for worse), the FTC’s process in data security cases tends to reject the ever-evolving “local knowledge” of individual actors and substitutes instead the inherently limited legislative and regulatory pronouncements of the past. 

By contrast, real common law, as a result of its case-by-case, bottom-up process, adapts to changing attributes of society over time, largely absent the knowledge and rent-seeking problems of legislatures or administrative agencies. The mechanism of constant litigation of inefficient rules allows the common law to retain a generally efficient character unmatched by legislation, regulation, or even administrative enforcement. 

Because the common law process depends on the issues selected for litigation and the effects of the decisions resulting from that litigation, both the process by which disputes come to the decision-makers’ attention, as well as (to a lesser extent, because errors will be corrected over time) the incentives and ability of the decision-maker to render welfare-enhancing decisions, determine the value of the common law process. These are decidedly problematic at the FTC.

In our analysis, we found the FTC’s process to be wanting compared to the institution of the common law. The incentives of the administrative complaint process put a relatively larger pressure on companies to settle data security actions brought by the FTC compared to private litigants. This is because the FTC can use its investigatory powers as a public enforcer to bypass the normal discovery process to which private litigants are subject, and over which independent judges have authority. 

In a private court action, plaintiffs can’t engage in discovery unless their complaint survives a motion to dismiss from the defendant. Discovery costs remain a major driver of settlements, so this important judicial review is necessary to make sure there is actually a harm present before putting those costs on defendants. 

Furthermore, the FTC can also bring cases in a Part III adjudicatory process which starts in front of an administrative law judge (ALJ) but is then appealable to the FTC itself. Former Commissioner Joshua Wright noted in 2013 that “in the past nearly twenty years… after the administrative decision was appealed to the Commission, the Commission ruled in favor of FTC staff. In other words, in 100 percent of cases where the ALJ ruled in favor of the FTC, the Commission affirmed; and in 100 percent of the cases in which the ALJ ruled against the FTC, the Commission reversed.” In other words, the FTC nearly always rules in favor of itself on appeal if the ALJ finds there is no case, as it did in LabMD. The combination of investigation costs before any complaint at all and the high likelihood of losing through several stages of litigation makes the intelligent business decision to simply agree to a consent decree.

The results of this asymmetrical process show the FTC has not really been building a common law. In all but two cases (Wyndham and LabMD), the companies who have been targeted for investigation by the FTC on data security enforcement have settled. We also noted how the FTC’s data security orders tended to be nearly identical from case-to-case, reflecting the standards of the FTC’s Safeguards Rule. Since the orders were giving nearly identical—and as LabMD found, vague—remedies in each case, it cannot be said there was a common law developing over time.  

What LabMD addressed and what it didn’t

In its decision, the Eleventh Circuit sidestepped fundamental substantive problems with the FTC’s data security practice (which we have made in both our scholarship and LabMD amicus brief) about notice or substantial injury. Instead, the court decided to assume the FTC had proven its case and focused exclusively on the remedy. 

We will assume arguendo that the Commission is correct and that LabMD’s negligent failure to design and maintain a reasonable data-security program invaded consumers’ right of privacy and thus constituted an unfair act or practice.

What the Eleventh Circuit did address, though, was that the remedies the FTC had been routinely applying to businesses through its data enforcement actions lacked the necessary specificity in order to be enforceable through injunctions or cease and desist orders.

In the case at hand, the cease and desist order contains no prohibitions. It does not instruct LabMD to stop committing a specific act or practice. Rather, it commands LabMD to overhaul and replace its data-security program to meet an indeterminable standard of reasonableness. This command is unenforceable. Its unenforceability is made clear if we imagine what would take place if the Commission sought the order’s enforcement…

The Commission moves the district court for an order requiring LabMD to show cause why it should not be held in contempt for violating the following injunctive provision:

[T]he respondent shall … establish and implement, and thereafter maintain, a comprehensive information security program that is reasonably designed to protect the security, confidentiality, and integrity of personal information collected from or about consumers…. Such program… shall contain administrative, technical, and physical safeguards appropriate to respondent’s size and complexity, the nature and scope of respondent’s activities, and the sensitivity of the personal information collected from or about consumers….

The Commission’s motion alleges that LabMD’s program failed to implement “x” and is therefore not “reasonably designed.” The court concludes that the Commission’s alleged failure is within the provision’s language and orders LabMD to show cause why it should not be held in contempt.

At the show cause hearing, LabMD calls an expert who testifies that the data-security program LabMD implemented complies with the injunctive provision at issue. The expert testifies that “x” is not a necessary component of a reasonably designed data-security program. The Commission, in response, calls an expert who disagrees. At this point, the district court undertakes to determine which of the two equally qualified experts correctly read the injunctive provision. Nothing in the provision, however, indicates which expert is correct. The provision contains no mention of “x” and is devoid of any meaningful standard informing the court of what constitutes a “reasonably designed” data-security program. The court therefore has no choice but to conclude that the Commission has not proven — and indeed cannot prove — LabMD’s alleged violation by clear and convincing evidence.

In other words, the Eleventh Circuit found that an order requiring a reasonable data security program is not specific enough to make it enforceable. This leaves questions as to whether the FTC’s requirement of a “reasonable data security program” is specific enough to survive a motion to dismiss and/or a fair notice challenge going forward.

Under the Federal Rules of Civil Procedure, a plaintiff must provide “a short and plain statement . . . showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), including “enough facts to state a claim . . . that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “[T]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements” will not suffice. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In FTC v. D-Link, for instance, the Northern District of California dismissed the unfairness claims because the FTC did not sufficiently plead injury. 

[T]hey make out a mere possibility of injury at best. The FTC does not identify a single incident where a consumer’s financial, medical or other sensitive personal information has been accessed, exposed or misused in any way, or whose IP camera has been compromised by unauthorized parties, or who has suffered any harm or even simple annoyance and inconvenience from the alleged security flaws in the DLS devices. The absence of any concrete facts makes it just as possible that DLS’s devices are not likely to substantially harm consumers, and the FTC cannot rely on wholly conclusory allegations about potential injury to tilt the balance in its favor. 

The fair notice question wasn’t reached in LabMD, though it was in FTC v. Wyndham. But the Third Circuit did not analyze the FTC’s data security regime under the “ascertainable certainty” standard applied to agency interpretation of a statute.

Wyndham’s position is unmistakable: the FTC has not yet declared that cybersecurity practices can be unfair; there is no relevant FTC rule, adjudication or document that merits deference; and the FTC is asking the federal courts to interpret § 45(a) in the first instance to decide whether it prohibits the alleged conduct here. The implication of this position is similarly clear: if the federal courts are to decide whether Wyndham’s conduct was unfair in the first instance under the statute without deferring to any FTC interpretation, then this case involves ordinary judicial interpretation of a civil statute, and the ascertainable certainty standard does not apply. The relevant question is not whether Wyndham had fair notice of the FTC’s interpretation of the statute, but whether Wyndham had fair notice of what the statute itself requires.

In other words, Wyndham boxed itself into a corner arguing that they did not have fair notice that the FTC could bring a data security enforcement action against the under Section 5 unfairness. LabMD, on the other hand, argued they did not have fair notice as to how the FTC would enforce its data security standards. Cf. ICLE-Techfreedom Amicus Brief at 19. The Third Circuit even suggested that under an “ascertainable certainty” standard, the FTC failed to provide fair notice: “we agree with Wyndham that the guidebook could not, on its own, provide ‘ascertainable certainty’ of the FTC’s interpretation of what specific cybersecurity practices fail § 45(n).” Wyndham, 799 F.3d at 256 n.21

Most importantly, the Eleventh Circuit did not actually get to the issue of whether LabMD actually violated the law under the factual record developed in the case. This means there is still no caselaw (aside from the ALJ decision in this case) which would allow a company to learn what is and what is not reasonable data security, or what counts as a substantial injury for the purposes of Section 5 unfairness in data security cases. 

How FTC’s changes fundamentally fail to address its failures of process

The FTC’s new approach to its orders is billed as directly responsive to what the Eleventh Circuit did reach in the LabMD decision, but it leaves so much of what makes the process insufficient in place.

First, it is notable that while the FTC highlights changes to its orders, there is still a lack of legal analysis in the orders that would allow a company to accurately predict whether its data security practices are enough under the law. A listing of what specific companies under consent orders are required to do is helpful. But these consent decrees do not require companies to admit liability or contain anything close to the reasoning that accompanies court opinions or normal agency guidance on complying with the law. 

For instance, the general formulation in these 2019 orders is that the company must “establish, implement, and maintain a comprehensive information/software security program that is designed to protect the security, confidentiality, and integrity of such personal information. To satisfy this requirement, Respondent/Defendant must, at a minimum…” (emphasis added), followed by a list of pretty similar requirements with variation depending on the business. Even if a company does all of the listed requirements but a breach occurs, the FTC is not obligated to find the data security program was legally sufficient. There is no safe harbor or presumptive reasonableness that attaches even for the business subject to the order, nonetheless companies looking for guidance. 

While the FTC does now require more specific things, like “yearly employee training, access controls, monitoring systems for data security incidents, patch management systems, and encryption,” there is still no analysis on how to meet the standard of reasonableness the FTC relies upon. In other words, it is not clear that this new approach to orders does anything to increase fair notice to companies as to what the FTC requires under Section 5 unfairness.

Second, nothing about the underlying process has really changed. The FTC can still investigate and prosecute cases through administrative law courts with itself as initial court of appeal. This makes the FTC the police, prosecutor, and judge in its own case. In the case of LabMD, who actually won after many appeals, this process ended in bankruptcy. It is no surprise that since the LabMD decision, each of the FTC’s data security enforcement cases have been settled with consent orders, just as they were before the Eleventh Circuit opinion. 

Unfortunately, if the FTC really wants to evolve its data security process like the common law, it needs to engage in an actual common law process. Without caselaw on the facts necessary to establish substantial injury, “unreasonable” data security practices, and causation, there will continue to be more questions than answers about what the law requires. And without changes to the process, the FTC will continue to be able to strong-arm companies into consent decrees.

With thanks to Geoff and everyone else, it’s great to join the cast here at TOTM. Geoff gave a nice introduction, so I won’t use this first post to further that purpose – especially when I have substance to discuss. The only prefatory words I’ll offer are that my work lies at the intersection of law and technology, with a focus on telecommunications and the regulation of technology. Most of my posts here will likely relate to those subjects. But I may occasionally use this forum to write briefly on topics further afield of my research agenda (and to which I therefore cannot dedicate more than blog-post-length musings to develop).

But one paragraph of navel-grazing is enough; on to substance:

The WSJ had a nice piece the other day about the Consumer Product Safety Commission’s (CPSC) ongoing persecution of Craig Zucker. Several years ago, Zucker founded a company that sold small, strong, rare-earth magnets that are a ton of fun to play with. He called them BuckyBalls. In 2011, the CPSC determined that BuckBalls are inherently unsafe because children may swallow them, which can result in serious injury. The CPSC effectively forced the company to shut down in 2012. Unsatisfied with forcing a profitable small firm out of the market, the CPSC is now going after Zucker individually to, at his own expense, recall and refund the purchase price of all BuckyBalls the company sold.

BuckyBalls(Full disclosure: I own a bunch of BuckyBalls. In fact, they’re all over my office. To date, they have not harmed anyone. The photo to the left is of the “BuckyBall decapode” that I have behind my chair. Note: the CPSC is not concerned about BuckyBall decapodes, which could pose a legitimate danger if they became sentient, but about the individual magnets.)

The CPSC’s action is a case study in bad judgment, arguably abusive and vindictive government conduct, and a basic lack of common sense. But I don’t want to focus on common sense here – I want to focus on the common law. My question is why in the world do we need the CPSC protecting consumers from these magnets when the common law clearly offers sufficient protection?

These cases almost always follow a similar pattern. Adults buy BuckyBalls. Adults either give children BuckyBalls or leave BuckyBalls where children can get them. Children, acting as children are wont to act, somehow swallow BuckyBalls.

The CPSC’s complaint identifies 5 specific cases of children ingesting BuckyBalls and notes that “over one dozen” reports have been received. The complaint doesn’t discuss in detail any injuries that resulted, beyond noting that in some cases surgery was required (and in one case, treatment included “monitoring for infection and internal damage”). It doesn’t say whether any of these cases resulted in permanent injury or disability (presumably not, or that would surely be mentioned). There have been no reported deaths or, that I have seen reported, debilitating injuries.

On the flipside, over the few years that Zucker was in business (roughly 2009, when the product became popular, through 2012, when the company closed down), he sold about $75 million worth of BuckyBalls (per the WSJ piece, “’Two and a half million adults spent $30’”). This product wasn’t a mere novelty, but something created substantial economic value for consumers.

So, what do we have? A relatively small number of injuries, with very few disputable facts, and readily identifiable harm. These would be some of the easiest possible cases to bring to court, and would occur in small enough numbers that they wouldn’t burden the court system. After the first of these cases was decided, most of the others – given the similarity of facts – would likely settle. If the harms caused by BuckyBalls were sufficient to outweigh the economic value created by this product, Zucker could have responded by altering the product, seeking insurance, or shutting down. This is exactly the sort of case we have the courts for!

That penultimate sentence should be dwelt upon: the incremental approach of the common law would allow the firm to alter and improve its product, to avoid or reduce future harm. In this way, the law develops along with new products and technologies, supporting a dynamic market. Compare this to the CPSC approach, which was to demand that Zucker comply with the agency’s demands in a short period of time (which he did), and then, the very next day, to bring the administrative suit that forced Zucker to shut the company down. The CPSC could not have reviewed his response to its demands in that timeframe; even if it did and found the response lacking, its next step should have been to engage him to address any problems, with the twain objectives of both remedying any problems but also preserving the business. Rather, the CPSC’s purpose seems to have been from the outset to shut Zucker down. It seems that in its fervor to protect the children from negligent adults, it is willing to harm the consumers who enjoy these products — perhaps we should rechristen it the Children’s Product Safety Commission.

Others have written about the CPSC’s lack of common sense in this matter. My contribution to that discussion would be to say that the CPSC has become the FTC’s successor as the “National Nanny” (not to say the FTC does not deserve the title, as demonstrated by the POM Wonderful case – but today CPSC may be even more deserving of the title).

But the BuckyBalls case raises a more fundamental concern. The CPSC surely should be lambasted for its decision to pursue this matter at all; and even more for persecuting Mr. Zucker. But beyond that, this case raises fundamental questions about the need for, and the basic legitimacy of, the CPSC.