Archives For Congress

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

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

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

The Unseen of AICOA

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

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

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

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

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

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

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

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

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

A New Robinson-Patman Act?

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

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

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

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

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

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

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

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

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

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

Victory of the Brussels Effect

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

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

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

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

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

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

AICOA and the Boulevard of Broken Dreams

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

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

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

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

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

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

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

Having earlier passed through subcommittee, the American Data Privacy and Protection Act (ADPPA) has now been cleared for floor consideration by the U.S. House Energy and Commerce Committee. Before the markup, we noted that the ADPPA mimics some of the worst flaws found in the European Union’s General Data Protection Regulation (GDPR), while creating new problems that the GDPR had avoided. Alas, the amended version of the legislation approved by the committee not only failed to correct those flaws, but in some cases it actually undid some of the welcome corrections that had been made to made to the original discussion draft.

Is Targeted Advertising ‘Strictly Necessary’?

The ADPPA’s original discussion draft classified “information identifying an individual’s online activities over time or across third party websites” in the broader category of “sensitive covered data,” for which a consumer’s expression of affirmative consent (“cookie consent”) would be required to collect or process. Perhaps noticing the questionable utility of such a rule, the bill’s sponsors removed “individual’s online activities” from the definition of “sensitive covered data” in the version of ADPPA that was ultimately introduced.

The manager’s amendment from Energy and Commerce Committee Chairman Frank Pallone (D-N.J.) reverted that change and “individual’s online activities” are once again deemed to be “sensitive covered data.” However, the marked-up version of the ADPPA doesn’t require express consent to collect sensitive covered data. In fact, it seems not to consider the possibility of user consent; firms will instead be asked to prove that their collection of sensitive data was a “strict necessity.”

The new rule for sensitive data—in Section 102(2)—is that collecting or processing such data is allowed “where such collection or processing is strictly necessary to provide or maintain a specific product or service requested by the individual to whom the covered data pertains, or is strictly necessary to effect a purpose enumerated” in Section 101(b) (though with exceptions—notably for first-party advertising and targeted advertising).

This raises the question of whether, e.g., the use of targeted advertising based on a user’s online activities is “strictly necessary” to provide or maintain Facebook’s social network? Even if the courts eventually decide, in some cases, that it is necessary, we can expect a good deal of litigation on this point. This litigation risk will impose significant burdens on providers of ad-supported online services. Moreover, it would effectively invite judges to make business decisions, a role for which they are profoundly ill-suited.

Given that the ADPPA includes the “right to opt-out of targeted advertising”—in Section 204(c)) and a special targeted advertising “permissible purpose” in Section 101(b)(17)—this implies that it must be possible for businesses to engage in targeted advertising. And if it is possible, then collecting and processing the information needed for targeted advertising—including information on an “individual’s online activities,” e.g., unique identifiers – Section 2(39)—must be capable of being “strictly necessary to provide or maintain a specific product or service requested by the individual.” (Alternatively, it could have been strictly necessary for one of the other permissible purposes from Section 101(b), but none of them appear to apply to collecting data for the purpose of targeted advertising).

The ADPPA itself thus provides for the possibility of targeted advertising. Therefore, there should be no reason for legal ambiguity about when collecting “individual’s online activities” is “strictly necessary to provide or maintain a specific product or service requested by the individual.” Do we want judges or other government officials to decide which ad-supported services “strictly” require targeted advertising? Choosing business models for private enterprises is hardly an appropriate role for the government. The easiest way out of this conundrum would be simply to revert back to the ill-considered extension of “sensitive covered data” in the ADPPA version that was initially introduced.

Developing New Products and Services

As noted previously, the original ADPPA discussion draft allowed first-party use of personal data to “provide or maintain a specific product or service requested by an individual” (Section 101(a)(1)). What about using the data to develop new products and services? Can a business even request user consent for that? Under the GDPR, that is possible. Under the ADPPA, it may not be.

The general limitation on data use (“provide or maintain a specific product or service requested by an individual”) was retained from the ADPPA original discussion in the version approved by the committee. As originally introduced, the bill included an exception that could have partially addressed the concern in Section 101(b)(2) (emphasis added):

With respect to covered data previously collected in accordance with this Act, notwithstanding this exception, to process such data as necessary to perform system maintenance or diagnostics, to maintain a product or service for which such data was collected, to conduct internal research or analytics, to improve a product or service for which such data was collected …

Arguably, developing new products and services largely involves “internal research or analytics,” which would be covered under this exception. If the business later wanted to invite users of an old service to use a new service, the business could contact them based on a separate exception for first-party marketing and advertising (Section 101(b)(11) of the introduced bill).

This welcome development was reversed in the manager’s amendment. The new text of the exception (now Section 101(b)(2)(C)) is narrower in a key way (emphasis added): “to conduct internal research or analytics to improve a product or service for which such data was collected.” Hence, it still looks like businesses will find it difficult to use first-party data to develop new products or services.

‘De-Identified Data’ Remains Unclear

Our earlier analysis noted significant confusion in the ADPPA’s concept of “de-identified data.” Neither the introduced version nor the markup amendments addressed those concerns, so it seems worthwhile to repeat and update the criticism here. The drafters seemed to be aiming for a partial exemption from the default data-protection regime for datasets that no longer contain personally identifying information, but that are derived from datasets that once did. Instead of providing such an exemption, however, the rules for de-identified data essentially extend the ADPPA’s scope to nonpersonal data, while also creating a whole new set of problems.

The basic problem is that the definition of “de-identified data” in the ADPPA is not limited to data derived from identifiable data. In the marked-up version, the definition covers: “information that does not identify and is not linked or reasonably linkable to a distinct individual or a device, regardless of whether the information is aggregated.” In other words, it is the converse of “covered data” (personal data): whatever is not “covered data” is “de-identified data.” Even if some data are not personally identifiable and are not a result of a transformation of data that was personally identifiable, they still count as “de-identified data.” If this reading is correct, it creates an absurd result that sweeps all information into the scope of the ADPPA.

For the sake of argument, let’s assume that this confusion can be fixed and that the definition of “de-identified data” is limited to data that is:

  1. derived from identifiable data but
  2. that hold a possibility of re-identification (weaker than “reasonably linkable”) and
  3. are processed by the entity that previously processed the original identifiable data.

Remember that we are talking about data that are not “reasonably linkable to an individual.” Hence, the intent appears to be that the rules on de-identified data would apply to nonpersonal data that would otherwise not be covered by the ADPPA.

The rationale for this may be that it is difficult, legally and practically, to differentiate between personally identifiable data and data that are not personally identifiable. A good deal of seemingly “anonymous” data may be linked to an individual—e.g., by connecting the dataset at hand with some other dataset.

The case for regulation in an example where a firm clearly dealt with personal data, and then derived some apparently de-identified data from them, may actually be stronger than in the case of a dataset that was never directly derived from personal data. But is that case sufficient to justify the ADPPA’s proposed rules?

The ADPPA imposes several duties on entities dealing with “de-identified data” in Section 2(12) of the marked-up version:

  1. To take “reasonable technical measures to ensure that the information cannot, at any point, be used to re-identify any individual or device that identifies or is linked or reasonably linkable to an individual”;
  2. To publicly commit “in a clear and conspicuous manner—
    1. to process and transfer the information solely in a de-identified form without any reasonable means for re-identification; and
    1. to not attempt to re-identify the information with any individual or device that identifies or is linked or reasonably linkable to an individual;”
  3. To “contractually obligate[] any person or entity that receives the information from the covered entity or service provider” to comply with all of the same rules and to include such an obligation “in all subsequent instances for which the data may be received.”

The first duty is superfluous and adds interpretative confusion, given that de-identified data, by definition, are not “reasonably linkable” with individuals.

The second duty — public commitment — unreasonably restricts what can be done with nonpersonal data. Firms may have many legitimate reasons to de-identify data and then to re-identify them later. This provision would effectively prohibit firms from attempts at data minimization (resulting in de-identification) if those firms may at any point in the future need to link the data with individuals. It seems that the drafters had some very specific (and likely rare) mischief in mind here, but ended up prohibiting a vast sphere of innocuous activity.

Note that, for data to become “de-identified data,” they must first be collected and processed as “covered data” in conformity with the ADPPA and then transformed (de-identified) in such a way as to no longer meet the definition of “covered data.” If someone then re-identifies the data, this will again constitute “collection” of “covered data” under the ADPPA. At every point of the process, personally identifiable data is covered by the ADPPA rules on “covered data.”

Finally, the third duty—“share alike” (to “contractually obligate[] any person or entity that receives the information from the covered entity to comply”)—faces a very similar problem as the second duty. Under this provision, the only way to preserve the option for a third party to identify the individuals linked to the data will be for the third party to receive the data in a personally identifiable form. In other words, this provision makes it impossible to share data in a de-identified form while preserving the possibility of re-identification.

Logically speaking, we would have expected a possibility to share the data in a de-identified form; this would align with the principle of data minimization. What the ADPPA does instead is to effectively impose a duty to share de-identified personal data together with identifying information. This is a truly bizarre result, directly contrary to the principle of data minimization.

Fundamental Issues with Enforcement

One of the most important problems with the ADPPA is its enforcement provisions. Most notably, the private right of action creates pernicious incentives for excessive litigation by providing for both compensatory damages and open-ended injunctive relief. Small businesses have a right to cure before damages can be sought, but many larger firms are not given a similar entitlement. Given such open-ended provisions as whether using web-browsing behavior is “strictly necessary” to improve a product or service, the litigation incentives become obvious. At the very least, there should be a general opportunity to cure, particularly given the broad restrictions placed on essentially all data use.

The bill also creates multiple overlapping power centers for enforcement (as we have previously noted):

The bill carves out numerous categories of state law that would be excluded from pre-emption… as well as several specific state laws that would be explicitly excluded, including Illinois’ Genetic Information Privacy Act and elements of the California Consumer Privacy Act. These broad carve-outs practically ensure that ADPPA will not create a uniform and workable system, and could potentially render the entire pre-emption section a dead letter. As written, it offers the worst of both worlds: a very strict federal baseline that also permits states to experiment with additional data-privacy laws.

Unfortunately, the marked-up version appears to double down on these problems. For example, the bill pre-empts the Federal Communication Commission (FCC) from enforcing sections 222, 338(i), and 631 of the Communications Act, which pertain to privacy and data security. An amendment was offered that would have pre-empted the FCC from enforcing any provisions of the Communications Act (e.g., sections 201 and 202) for data-security and privacy purposes, but it was withdrawn. Keeping two federal regulators on the beat for a single subject area creates an inefficient regime. The FCC should be completely pre-empted from regulating privacy issues for covered entities.

The amended bill also includes an ambiguous provision that appears to serve as a partial carveout for enforcement by the California Privacy Protection Agency (CCPA). Some members of the California delegation—notably, committee members Anna Eshoo and Doris Matsui (both D-Calif.)—have expressed concern that the bill would pre-empt California’s own California Privacy Rights Act. A proposed amendment by Eshoo to clarify that the bill was merely a federal “floor” and that state laws may go beyond ADPPA’s requirements failed in a 48-8 roll call vote. However, the marked-up version of the legislation does explicitly specify that the CPPA “may enforce this Act, in the same manner, it would otherwise enforce the California Consumer Privacy Act.” How courts might interpret this language should the CPPA seek to enforce provisions of the CCPA that otherwise conflict with the ADPPA is unclear, thus magnifying the problem of compliance with multiple regulators.

Conclusion

As originally conceived, the basic conceptual structure of the ADPPA was, to a very significant extent, both confused and confusing. Not much, if anything, has since improved—especially in the marked-up version that regressed the ADPPA to some of the notably bad features of the original discussion draft. The rules on de-identified data are also very puzzling: their effect contradicts the basic principle of data minimization that the ADPPA purports to uphold. Those examples strongly suggest that the ADPPA is still far from being a properly considered candidate for a comprehensive federal privacy legislation.

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

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

Introduction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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


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

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


A highly competitive economy is characterized by strong, legally respected property rights. A failure to afford legal protection to certain types of property will reduce individual incentives to participate in market transactions, thereby reducing the effectiveness of market competition. As the great economist Armen Alchian put it, “[w]ell-defined and well-protected property rights replace competition by violence with competition by peaceful means.”

In particular, strong and well-defined intellectual-property rights complement and enhance market competition, thereby promoting innovation. As the U.S. Justice Department’s (DOJ) Antitrust Division put it in 2012: “[t]he successful promotion of innovation and creativity requires a [sic] both competitive markets and strong intellectual property rights.”

In the realm of intellectual property, patent rights are particularly effective in driving innovation by supporting a market for invention in several critical ways, as Northwestern University’s Daniel F. Spulber has explained:

Patents support the establishment of the market [for invention] in several key ways. First, patents provide a system of intellectual property (IP) rights that increases transaction efficiencies and stimulates competition by offering exclusion, transferability, disclosure, certification, standardization, and divisibility. Second, patents provide efficient incentives for invention, innovation, and investment in complementary assets so that the market for inventions is a market for innovative control. Third, patents as intangible real assets promote the financing of invention and innovation.

It thus follows that weak, ill-defined patent rights create confusion, thereby undermining effective competition and innovation.

The Supreme Court’s Undermining of Patentability

Regrettably, the U.S. Supreme Court has, of late, been oblivious to this reality. Over roughly the past decade, several Court decisions have weakened incentives to patent by engendering confusion regarding the core question of what subject matter is patentable. Those decisions represent an abrupt retreat from decades of textually based case law that recognized the broad scope of patentable subject matter.

As I explained in a 2019 Speech to the IP Watchdog Institute Patent Masters Symposium (footnotes omitted):

Confusion about what is patentable lies at the heart of recent discussions of reform to Section 101 of the Patent Act [35 U.S. Code § 101] – the statutory provision that describes patentable subject matter. Section 101 plainly states that “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the [other] conditions and requirements of this title.” This language basically says that patentable subject matter covers everything new and useful that is invented or discovered. For many years, however, the Supreme Court has recognized three judicially created exceptions to patent eligibility, providing that you cannot patent: (1) laws of nature, (2) natural phenomena, or (3) abstract ideas. Even with these exceptions, the scope for patentability was quite broad from 1952 (when the modern version of the Patent Act was codified) until roughly 2010.

But over the past decade, the Supreme Court has cut back significantly on what it deems patent eligible, particularly in such areas as biotechnology, computer-implemented inventions, and software. As a result, today “there are many other parts of the world that have more expansive views of what can be patented, including Europe, Australia, and even China.” A key feature of the changes has been the engrafting of case law requirements that patentable eligible subject matter meet before a patent is granted, found in other sections of the Patent Act, onto the previously very broad language of Section 101.

As IPWatchdog President and CEO Gene Quinn explained in a 2019 article, “the real mischief” of recent Supreme Court case law (and, in particular, the 2012 Mayo Collaborative Services v. Prometheus decision) is that it reads requirements of other Patent Act provisions (dealing with novelty, obviousness, and description) into Section 101. That approach defies the plain expansive language of Section 101 and is at odds with earlier Supreme Court case law, which had deemed such an approach totally inappropriate. As such, according to Quinn:

Today, thanks to Mayo, decision makers consider whether claims are new, nonobvious and even properly described all under a Section 101 patent eligibility analysis, which makes the remainder of the patentability sections of the statute superfluous. Indeed, with Mayo, the Supreme Court has usurped Congressional authority over patentability; an authority that is explicitly granted to Congress in the Constitution itself. This usurpation of power is not only wreaking havoc on American innovation, but it has wrought havoc on the delicate balance of power between the Supreme Court and Congress.

Another Supreme Court decision on Section 101 deserves mention. In Alice Corp. v. CLS Bank (2014), the Court construed Mayo as establishing a two-part Section 101 test for patentable subject matter, which involved:

  1. Determining whether the patent claims are directed to a patent-ineligible concept; and
  2. Determining whether the claim’s elements, considered both individually and as an ordered combination, transform the nature of the claims into a patent-eligible application.

This “test,” which was pulled out of thin air, went far beyond the text of Section 101, and involved considerations properly assigned to other provisions of the Patent Act.

Flash forward to last week. The  Supreme Court on June 30 denied certiorari in American Axle & Mfg. Inc. v. Neapco Holdings, a case raising the question whether  a patent that claims a process for manufacturing an automobile driveshaft that simultaneously reduces two types of driveshaft vibration is patent-eligible under Section 101. Underlying the uncertainty (one might say vacuity) of the Mayo-Alice “principle,” a divided U.S. Court of Appeals for the Federal Circuit (with six judges unsuccessfully voting in favor of rehearing en banc) had found the patent claim ineligible, given the Supreme Court’s Mayo and Alice decisions. Amazingly, a classic type of mechanical invention, at the very heart of traditional notions of patenting, somehow had failed the patent-eligibility test, a result no patent-law observer would have dreamed of prior to the Mayo-Alice duet.

Commendably, Solicitor General Elizabeth Prelogar in May 2022 filed a brief in support of the grant of certiorari in American Axle. In short:

The SG’s brief sa[id] that inventions like the one at issue in American Axle have “[h]istorically…long been viewed as paradigmatic examples of the ‘arts’ or ‘processes’ that may receive patent protection if other statutory criteria are satisfied” and that the U.S. Court of Appeals for the Federal Circuit “erred in reading this Court’s precedents to dictate a contrary conclusion.”

The brief explain[ed] in no uncertain terms that claim 22 of the patent at issue in the case does not “simply describe or recite” a natural law and ultimately should have been held patent eligible.

In light of Solicitor General Prelogar’s filing, the Supreme Court’s denial of certiorari in American Axle can only be read as a clear signal to the bar that it does not intend to back down from or clarify the application of Mayo and Alice. This has serious negative ramifications for the health of the U.S. patent system. As Michael Borella—a computer scientist and chair of the Software and Business Methods Practice Group at McDonnell Boehnen Hulbert & Berghoff LLP—explains:

In denying certiorari in American Axle & Mfg. Inc. v. Neapco Holdings LLC, the Supreme Court has in essence told the patent community to “deal with it.” That operative ‘it’ is the obtuse and uncertain state of patent-eligibility, where even tangible inventions like garage door openers, electric vehicle charging stations, and mobile phones are too abstract for patenting. The Court has created a system that favors large companies over startups and individual inventors by making the fundamental decision of whether even to seek patent protection akin to shaking a Magic 8 Ball for guidance.

The solution, according to former Federal Circuit Chief Judge Paul Michel, is prompt congressional action:

The Supreme Court’s decisions in the last decade have confused and distorted the law of eligibility. … From 1981 to 2012 … the law was stable and yielded good outcomes in specific cases. Then came Mayo and later, Alice. Now, it is a mess: illogical, unpredictable, chaotic. Bad policy for important innovation including for promoting human health. Congress needs to rescue the innovation economy from the courts which have left it a disaster. Let’s hope Congress rises to the need and acts before China and other nations surpass US technology.

Conclusion

It is most unfortunate that the Supreme Court continues to miss the mark on patent rights. Its failure to heed the clearly expressed statutory language on patent eligibility is badly out of synch with the respect for textualism that it has shown in handing down recent landmark decisions on the free exercise of religion, the right to bear arms, and limitations on the administrative state. Given the sad reality that the Court is unlikely to change its tune, Congress should act promptly to amend Section 101 and thereby reaffirm the clear and broad patent-eligibility standard that had stood our country in good stead from the mid-20th century to a decade ago. Such an outcome would strengthen the U.S. patent system, thereby promoting innovation and competition.  

Welcome to the FTC UMC Roundup for June 10, 2022. This is a week of headlines! One would be forgiven for assuming that our focus, once again, would on the American Innovation and Choice Online Act (AICOA). I heard on the radio yesterday that it’s champion, Sen. Amy Klobuchar (D-MN), has the 60 votes it needs to pass, and we are told the vote will be “quite soon.” Yet that is not our headline this week. So it goes in a busy week of news. 

This week’s headline is FTC Chair Lina Khan’s press tour–a clear sign of big things on the horizon. This past week she spoke with the AP, Axios, CNN, The Hill, Politico, Protocol, New York Times, Vox, Wall Street Journal, and Washington Post, and probably more. Almost a year to the day into her term as Chair, it seems she may have something to say? Yes: “There are [sic] a whole set of major policy initiatives that we have underway that we’re expecting will come to fruition over this next year.” 

The Chair’s press tour consistently struck several chords. She emphasized three priorities: merger guidelines and enforcement, regulating non-compete compete agreements, and privacy and security. In several interviews she discussed the use of both enforcement and rulemaking. It seems clear that a proposal for rules targeting non-compete agreements using the FTC’s unfair methods of competition (UMC) authority is imminent. It also seems likely that these rules will be modest. In several of the interviews Khan emphasized proceeding cautiously with respect to process. This speaks to one of the questions everyone has been asking: will Khan approach UMC rulemaking slowly, using modest initial rules to lay the groundwork to support more ambitious future rules but risking the clock on her term as Chair running out before much can be accomplished–or will she instead take a more aggressive approach, for instance by pushing ahead with a slate of proposed rules right out of the gate. We seem to have at least an initial answer: she hopes slow and steady will in the race.

Slow and steady doesn’t mean not aggressive. Khan’s interviews clearly suggest more aggressive merger enforcement moving forward–including potential challenges to mergers that have cleared the HSR review period. While not new news, Khan also made clear her preference to block transactions outright instead of allowing firms to cure potentially problematic parts of proposed deals. And she also discussed potential rulemaking relating to mergers. Perhaps most noteworthy was her discussion of “user privacy and commercial surveillance” in several interviews–including some in which it was unclear whether these concerns sounded in consumer protection or competition. The inclusion of “commercial surveillance” suggests a broader focus than traditional privacy concerns–perhaps including business models or competition in the advertising space.

Another theme was Khan’s blurred distinction between merely enforcing existing law and transforming the FTC. Her view is probably best described as neither and both: technology has transformed the economy and the FTC’s existing law is flexible enough to adapt to those changes. That, surely, will frame the central questions–likely to ultimately be answered by the courts–as the FTC charts a course across this sea of change: whether Congress empowered the FTC to regulate wherever the market took it and, if so, whether such power is too broad for Congress to have given to an agency.

That brings us to Congress. AICOA’s uncertain future remains uncertain. We can say with certainty that the bill has entered the proxy war phase. Supporters of the bill, having already played the “exclude favored industries from the bill” hand, are now targeting leadership directly. And industry still covered by the bill–if you can call a small number of individual firms an industry–is pulling out the lobbying stops, including getting the message out directly to consumers

If AICOA is to pass, it will do so upon a fragile coalition–at least 10 Republicans will need to cross party lines to support the legislation. Several Republicans seem poised to support the bill today, but will that be true tomorrow? Conservative voices including the Wall Street Journal are urging them not to. Not-so-conservative voices like Mike Masnick also raise concerns about the strange bedfellows needed to make the AICOA dream real. Both sides make the same point: Republican support for the bill comes from a belief that the bill addresses Republican concerns about censorship by BigTech. The Wall Street Journal argues that states are already addressing censorship concerns through narrower legislation that doesn’t risk the harm to innovation that AICOA could bring; Masnick warns Democrats that the Republican belief that AICOA could worsen the content moderation landscape is non-frivolous. 

With Republican support for the bill built on so soft a foundation–clearly not based on antitrust concerns–it is quite possible for it to shift quickly. Indeed, one wonders whether this fragile bipartisan coalition will survive the January 6th Committee hearings started this week.

Some quick hits before we leave. This was a busy week for the FTC in healthcare. Continuing its focus on PBMs in recent weeks, the FTC has now opened a probe of PBMs. And the Commission has sued to block multiple hospital mergers in New Jersey and Utah. There were several reminders that Elon Musk’s proposed acquisition of Twitter has passed the HSR’s review period without challenge–perhaps someone should remind reporters on the Elon beat that that won’t prevent the FTC from challenging the merger? And in case anyone is wondering whether a settlement is on the table for Facebook, Khan has made clear that the FTC will gladly settle with Facebook–Facebook just needs to accept all the FTC’s terms.  

A closing note: If you’re reading this on a lazy Friday afternoon in June and could use a good listen during lunch or on the commute home, you could do worse than listening to Richard Pierce, professor and Administrative Law guru, discuss whether administrative law allows the FTC to use rulemaking to change antitrust law.  

The FTC UMC Roundup, part of the Truth on the Market FTC UMC Symposium, is a weekly roundup of news relating to the Federal Trade Commission’s antitrust and Unfair Methods of Competition authority. If you would like to receive this and other posts relating to these topics, subscribe to the RSS feed here. If you have news items you would like to suggest for inclusion, please mail them to us at ghurwitz@laweconcenter.org and/or kfierro@laweconcenter.org.

 

Welcome to the FTC UMC Roundup for June 3, 2023–Memorial Day week. The holiday meant we had a short week, but we still have plenty of news to share. It also means we’re now in meteorological summer, a reminder that the sands of legislative time run quickly through the hourglass. So it’s perhaps unsurprising that things continue to heat up on the legislative front, from antitrust to privacy and even some saber-rattling on remedies. Plus a fair bit of traditional-feeling action coming out of the FTC. Let’s jump in

At the Top

This week’s headline isn’t quite UMC- or even antitrust-related, but it’s headline-worthy nonetheless: after 14 years as COO of Facebook/Meta, Sheryl Sandberg has decided it’s time to lean her way out of the role. There aren’t obvious lines to read between with this departure–but it nonetheless marks a significant change to the organization and comes at a challenging time for the organization.

On the Hill

Turning to Congress, our first topic is Sen. Amy Klobuchar’s (D-MN) continued efforts to wrangle up enough support for the American Innovation and Choice Online Act (AICOA). The hold-up appears to be on the Democrat’s side of the aisle. Republican co-sponsor of the bill, Sen. Josh Hawley (R-Mo.), says of Democratic efforts to rally support that “they don’t think they have the votes.” Also on the topic of AICOA, the International Center for Law and Economics hosted a discussion about the legislation this past week. Lazar Radic offered a recap here, complete with a link to the recording. 

Reuters reports that Big Tech is ramping up efforts against AICOA. A spokesperson for Senator Klobuchar responded to a statement released by Amazon by asking “Who do you trust?” Well, Big Tech over Congress by a 2.5-to-1 margin, with a majority of Americans disfavoring increased regulation of Big Tech. The “who do you trust” question was actually focusing on concerns that some small businesses have shared about Amazon. How would AICOA affect small business? Geoff Manne weighs in, discussing the harm that AICOA could bring to the startup and venture capital markets.

AICOA isn’t the only bill making the rounds this week. A bipartisan privacy bill came out of left field, which is also where it seems likely to stay, with Sen. Brain Schatz (D-Hawaii) sending a letter to the Senate Commerce Committee “begging them to pump the brakes” on the bill. What’s the concern? Well, the bill is a compromise–one side agreed to preempt state privacy legislation in exchange for getting a private right of action. Sen. Schatz, likely along with many others, isn’t willing to lose existing state legislation. The bill is likely DOA in this Congress; probably even more DOA post-2022. 

Other legislative news includes another bipartisan bill that would streamline permitting for certain tech industries. Ultimately proposed in the interest of supply-chain resilience and on-shoring critical industries, this seems to set the stage for future “left hand vs. right hand” industrial policy. (D-Georgia) has 

At the Agencies

While most of this week’s news has been focused on Congress, the FTC and DOJ have been busy as well. Bloomberg reports on the increased attention the FTC is giving to Amazon, including some details about how resources allocated to the investigation have changed and that John Newman is leading the charge within the agency. And there are rumblings that the FTC could still challenge the Amazon-MGM deal, even post-closing. 

DOJ and the FTC have announced a June 14/15 workshop “to explore new approaches to enforcing the antitrust laws in the pharmaceutical industry.” Despite the curious phrasing (there aren’t that many ways to enforce a law!) this event could provide insight into the FTC’s thinking about potential UMC rulemaking. 

Binyamin Applebaum has an interesting NY Times opinion piece arguing that President Biden needs to appoint more judges with antitrust expertise to the bench. The lack of antitrust and regulatory expertise among Biden’s appointees to date is notable. Of course, Applebaum likely has a different sort of “antitrust expertise” in mind than most antitrust experts do. As Brian Albrecht writes in his own National Review op-ed, “Antitrust is Easy (When you Think You Know All the Answers).”

The “we need more judges” argument juxtaposes with AAG Kanter’s recent comments that he wants to bring cases, lots and lots of cases. “If we don’t go to court, then we’re regulators, not enforcers,” he recently commented at a University of Chicago conference. That is his approach to “the need to update and adapt our antitrust enforcement to address new market realities.” It remains to be seen how the courts will respond. Regardless, it is refreshing to see a preference for the antitrust laws to be enforced through the Article III courts.

Closing Notes

If you’re looking for some distraction on your commute home, we have two recommendations this week. The top choice is the Tech Policy Podcast discussion with FTC Commissioner Noah Phillips. And when you’re done with that, Mark Jamison will point you to an AEI discussion with Howard Beales, former FTC Chair Tim Muris, and former FTC Commissioner and Acting Chair Maureen K. Ohlhausen.

The FTC UMC Roundup, part of the Truth on the Market FTC UMC Symposium, is a weekly roundup of news relating to the Federal Trade Commission’s antitrust and Unfair Methods of Competition authority. If you would like to receive this and other posts relating to these topics, subscribe to the RSS feed here. If you have news items you would like to suggest for inclusion, please mail them to us at ghurwitz@laweconcenter.org and/or kfierro@laweconcenter.org.

We will learn more in the coming weeks about the fate of the proposed American Innovation and Choice Online Act (AICOA), legislation sponsored by Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa) that would, among other things, prohibit “self-preferencing” by large digital platforms like Google, Amazon, Facebook, Apple, and Microsoft. But while the bill has already been subject to significant scrutiny, a crucially important topic has been absent from that debate: the measure’s likely effect on startup acquisitions. 

Of course, AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.

This would be a significant loss. As Dirk Auer, Sam Bowman, and I discuss in a recent article in the Missouri Law Review, acquisitions are arguably the most important component in providing vitality to the overall venture ecosystem:  

Startups generally have two methods for achieving liquidity for their shareholders: IPOs or acquisitions. According to the latest data from Orrick and Crunchbase, between 2010 and 2018 there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion. By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. As venture capitalist Scott Kupor said in his testimony during the FTC’s hearings on “Competition and Consumer Protection in the 21st Century,” “these large players play a significant role as acquirers of venture-backed startup companies, which is an important part of the overall health of the venture ecosystem.”

Moreover, acquisitions by large incumbents are known to provide a crucial channel for liquidity in the venture capital and startup communities: While at one time the source of the “liquidity events” required to yield sufficient returns to fuel venture capital was evenly divided between IPOs and mergers, “[t]oday that math is closer to about 80 percent M&A and about 20 percent IPOs—[with important implications for any] potential actions that [antitrust enforcers] might be considering with respect to the large platform players in this industry.” As investor and serial entrepreneur Leonard Speiser said recently, “if the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.” (emphasis added)

Going after self-preferencing may have exactly the same harmful effect on venture investors and competition. 

It’s unclear exactly how the legislation would be applied in any given context (indeed, this uncertainty is one of the most significant problems with the bill, as the ABA Antitrust Section has argued at length). But AICOA is designed, at least in part, to keep large online platforms in their own lanes—to keep them from “leveraging their dominance” to compete against more politically favored competitors in ancillary markets. Indeed, while covered platforms potentially could defend against application of the law by demonstrating that self-preferencing is necessary to “maintain or substantially enhance the core functionality” of the service, no such defense exists for non-core (whatever that means…) functionality, the enhancement of which through self-preferencing is strictly off limits under AICOA.

As I have written (and so have many, many, many, many others), this is terrible policy on its face. But it is also likely to have significant, adverse, indirect consequences for startup acquisitions, given the enormous number of such acquisitions that are outside the covered platforms’ “core functionality.” 

Just take a quick look at a sample of the largest acquisitions made by Apple, Microsoft, Amazon, and Alphabet, for example. (These are screenshots of the first several acquisitions by size drawn from imperfect lists collected by Wikipedia, but for purposes of casual empiricism they are well-suited to give an idea of the diversity of acquisitions at issue):

Apple:

Microsoft:

Amazon:

Alphabet (Google):

Vanishingly few of these acquisitions go to the “core functionalities” of these platforms. Alphabet’s acquisitions, for example, involve (among many other things) cybersecurity; home automation; cloud computing; wearables, smart glasses, and AR hardware; GPS navigation software; communications security; satellite technology; and social gaming. Microsoft’s acquisitions include companies specializing in video games; social networking; software versioning; drawing software; cable television; cybersecurity; employee engagement; and e-commerce. The technologies and applications involved in acquisitions by Apple and Amazon are similarly varied.

Drilling down a bit, consider the companies Alphabet acquired and put to use in the service of Google Maps:

Which, if any, of these companies would Google have purchased if it knew it would be unable to prioritize Maps in its search results? Would Google have invested more than $1 billion in these companies—and likely significantly more in internal R&D to develop Maps—if it had to speculate whether it would be required (or even be able) to prove someday in the future that prioritizing Google Maps results would enhance its core functionality?

What about Xbox? As noted, AICOA’s terms aren’t perfectly clear, so I’m not certain it would apply to Xbox (is Xbox a “website, online or mobile application, operating system, digital assistant, or online service”?). Here are Microsoft’s video-gaming-related purchases:

The vast majority of these (and all of the acquisitions for which Wikipedia has purchase-price information, totaling some $80 billion of investment) involve video games, not the development of hardware or the functionality of the Xbox platform. Would Microsoft have made these investments if it knew it would be prohibited from prioritizing its own games or exclusively using data gleaned through these games to improve its platform? No one can say for certain, but, at the margin, it is absolutely certain that these self-preferencing bills would make such acquisitions less likely.

Perhaps the most obvious—and concerning—example of the problem arises in the context of Google’s Android platform. Google famously gives Android away for free, of course, and makes its operating system significantly open for bespoke use by all comers. In exchange, Google requires that implementers of the Android OS provide some modicum of favoritism to Google’s revenue-generating products, like Search. For all its uncertainty, there is no question that AICOA’s terms would prohibit this self-preferencing. Intentionally or not, it would thus prohibit the way in which Google monetizes Android and thus hopes to recoup some of the—literally—billions of dollars it has invested in the development and maintenance of Android. 

Here are Google’s Android-related acquisitions:

Would Google have bought Android in the first place (to say nothing of subsequent acquisitions and its massive ongoing investment in Android) if it had been foreclosed from adopting its preferred business model to monetize its investment? In the absence of Google bidding for these companies, would they have earned as much from other potential bidders? Would they even have come into existence at all?

Of course, AICOA wouldn’t preclude Google charging device makers for Android and thus raising the price of mobile devices. But that mechanism may not have been sufficient to support Google’s investment in Android, and it would certainly constrain its ability to compete. Even if rules like those proposed by AICOA didn’t undermine Google’s initial purchase of and investment in Android, it is manifestly unclear how forcing Google to adopt a business model that increases consumer prices and constrains its ability to compete head-to-head with Apple’s iOS ecosystem would benefit consumers. (This excellent series of posts—1, 2, 3, 4—by Dirk Auer on the European Commission’s misguided Android decision discusses in detail the significant costs of prohibiting self-preferencing on Android.)

There are innumerable further examples, as well. In all of these cases, it seems clear not only that an AICOA-like regime would diminish competition and reduce consumer welfare across important dimensions, but also that it would impoverish the startup ecosystem more broadly. 

And that may be an even bigger problem. Even if you think, in the abstract, that it would be better for “Big Tech” not to own these startups, there is a real danger that putting that presumption into force would drive down acquisition prices, kill at least some tech-startup exits, and ultimately imperil the initial financing of tech startups. It should go without saying that this would be a troubling outcome. Yet there is no evidence to suggest that AICOA’s proponents have even considered whether the presumed benefits of the bill would be worth this immense cost.

Welcome to the Truth on the Market FTC UMC Roundup for May 27, 2022. This week we have (Hail Mary?) revisions to Sen. Amy Klobuchar’s (D-Minn.) American Innovation and Choice Online Act, initiatives that can’t decide whether they belong in Congress or the Federal Trade Commission, and yet more commentary on inflation and antitrust, along with a twist ending.

This Week’s Headline

Sen. Klobuchar has shared a revised version of her proposed American Innovation and Choice Online Act. What’s different? Not much. The main change is that several industries—banks and telecom, notably—are excluded from coverage. That was probably an effort to win some Republican votes for the bill. But headed into the midterms. it appears some congressional Democrats view this more as a poison pill than a good bill—one they don’t think their constituents are willing to swallow.

Back at the FTC, the commission has announced that it will investigate the recent shortage of infant formula. This could focus on both consumer protection and competition issues. The market for infant formula in the United States is both fairly concentrated and also highly regulated. There are lots of interesting issues here (reminder to any academics reading this, we have an open call for papers for research relating to market-structuring regulation). 

The blurry line between FTC and Congress remains blurry. The FTC’s call for comments relating to pharmacy benefit managers (PBMs) closed this week, with more than 500 comments, at the same time that bipartisan legislation relating to PBMs has been introduced. And Sens. Mike Rounds (R-S.D.) and Elizabeth Warren (D-Mass.) want the FTC to investigate price fixing in the beef industry.

Concentrating a bit on big-picture policy issues, the number of friends Larry Summers has in the White House is shrinking faster than the dollar, as he worries about the embrace of “hipster antitrust,” including that the administration’s antitrust policy is driving inflation. On the other side of the inflation-antitrust ledger, economists at the Boston Federal Reserve Bank released a paper arguing that high concentration increases inflation. Among others, ICLE Chief Economist Brian Albrecht calls foul. Still on the inflation beat, it’s no secret that the biggest tech companies hold a lot of cash. Some may wonder, with the cost of holding cash so high, is a buying spree on the horizon? (Answer: not if the FTC keeps holding up mergers!)

A Few Quick Hits

Former FTC Commissioner Josh Wright and former commission staffer Derek Moore reflect on FTC morale. And Howard Beales and former FTC Chair Tim Muris wonder whether the “national nanny” is back on the beat.

It’s consumer protection, not antitrust, news but Twitter has been hit with a $150 million fine for doing bad stuff with user data between 2013 and 2019. Perhaps DuckDuckGo will be up next for the FTC. It turns out that the browser built on promises that it doesn’t track you has a deal with Microsoft to let Microsoft track you. That gives us an excuse to mention the FTC’s call for presentations for PrivacyCon 2022.

In international news, the United Kingdom’s Competition and Markets Authority has opened a second investigation into Google’s AdTech practices. And Shane Tewes of the American Enterprise Institute has a nice discussion with Peter Brown from the European Paliament’s liaison office about American versus European approaches to technology policy.

We close with a twist ending: One of the concerns that critics of the FTC’s newfound embrace of its UMC authority have is that expansive vague authority given to regulators enables a flabby useless government that is paradoxically too powerful. Which is why it’s interesting to see Matt Stoller of the American Economic Liberties Project, of all people, express that concern. Strange bedfellows indeed!

The FTC UMC Roundup, part of the Truth on the Market FTC UMC Symposium, is a weekly roundup of news relating to the Federal Trade Commission’s antitrust and Unfair Methods of Competition authority. If you would like to receive this and other posts relating to these topics, subscribe to the RSS feed here. If you have news items you would like to suggest for inclusion, please mail them to us at ghurwitz@laweconcenter.org and/or kfierro@laweconcenter.org.

Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa)—cosponsors of the American Innovation Online and Choice Act, which seeks to “rein in” tech companies like Apple, Google, Meta, and Amazon—contend that “everyone acknowledges the problems posed by dominant online platforms.”

In their framing, it is simply an acknowledged fact that U.S. antitrust law has not kept pace with developments in the digital sector, allowing a handful of Big Tech firms to exploit consumers and foreclose competitors from the market. To address the issue, the senators’ bill would bar “covered platforms” from engaging in a raft of conduct, including self-preferencing, tying, and limiting interoperability with competitors’ products.

That’s what makes the open letter to Congress published late last month by the usually staid American Bar Association’s (ABA) Antitrust Law Section so eye-opening. The letter is nothing short of a searing critique of the legislation, which the section finds to be poorly written, vague, and departing from established antitrust-law principles.

The ABA, of course, has a reputation as an independent, highly professional, and heterogenous group. The antitrust section’s membership includes not only in-house corporate counsel, but lawyers from nonprofits, consulting firms, federal and state agencies, judges, and legal academics. Given this context, the comments must be read as a high-level judgment that recent legislative and regulatory efforts to “discipline” tech fall outside the legal mainstream and would come at the cost of established antitrust principles, legal precedent, transparency, sound economic analysis, and ultimately consumer welfare.

The Antitrust Section’s Comments

As the ABA Antitrust Law Section observes:

The Section has long supported the evolution of antitrust law to keep pace with evolving circumstances, economic theory, and empirical evidence. Here, however, the Section is concerned that the Bill, as written, departs in some respects from accepted principles of competition law and in so doing risks causing unpredicted and unintended consequences.

Broadly speaking, the section’s criticisms fall into two interrelated categories. The first relates to deviations from antitrust orthodoxy and the principles that guide enforcement. The second is a critique of the AICOA’s overly broad language and ambiguous terminology.

Departing from established antitrust-law principles

Substantively, the overarching concern expressed by the ABA Antitrust Law Section is that AICOA departs from the traditional role of antitrust law, which is to protect the competitive process, rather than choosing to favor some competitors at the expense of others. Indeed, the section’s open letter observes that, out of the 10 categories of prohibited conduct spelled out in the legislation, only three require a “material harm to competition.”

Take, for instance, the prohibition on “discriminatory” conduct. As it stands, the bill’s language does not require a showing of harm to the competitive process. It instead appears to enshrine a freestanding prohibition of discrimination. The bill targets tying practices that are already prohibited by U.S. antitrust law, but while similarly eschewing the traditional required showings of market power and harm to the competitive process. The same can be said, mutatis mutandis, for “self-preferencing” and the “unfair” treatment of competitors.

The problem, the section’s letter to Congress argues, is not only that this increases the teleological chasm between AICOA and the overarching goals and principles of antitrust law, but that it can also easily lead to harmful unintended consequences. For instance, as the ABA Antitrust Law Section previously observed in comments to the Australian Competition and Consumer Commission, a prohibition of pricing discrimination can limit the extent of discounting generally. Similarly, self-preferencing conduct on a platform can be welfare-enhancing, while forced interoperability—which is also contemplated by AICOA—can increase prices for consumers and dampen incentives to innovate. Furthermore, some of these blanket prohibitions are arguably at loggerheads with established antitrust doctrine, such as in, e.g., Trinko, which established that even monopolists are generally free to decide with whom they will deal.

Arguably, the reason why the Klobuchar-Grassley bill can so seamlessly exclude or redraw such a central element of antitrust law as competitive harm is because it deliberately chooses to ignore another, preceding one. Namely, the bill omits market power as a requirement for a finding of infringement or for the legislation’s equally crucial designation as a “covered platform.” It instead prescribes size metrics—number of users, market capitalization—to define which platforms are subject to intervention. Such definitions cast an overly wide net that can potentially capture consumer-facing conduct that doesn’t have the potential to harm competition at all.

It is precisely for this reason that existing antitrust laws are tethered to market power—i.e., because it long has been recognized that only companies with market power can harm competition. As John B. Kirkwood of Seattle University School of Law has written:

Market power’s pivotal role is clear…This concept is central to antitrust because it distinguishes firms that can harm competition and consumers from those that cannot.

In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.

Opaque language for opaque ideas

Another underlying issue is that the Klobuchar-Grassley bill is shot through with indeterminate language and fuzzy concepts that have no clear limiting principles. For instance, in order either to establish liability or to mount a successful defense to an alleged violation, the bill relies heavily on inherently amorphous terms such as “fairness,” “preferencing,” and “materiality,” or the “intrinsic” value of a product. But as the ABA Antitrust Law Section letter rightly observes, these concepts are not defined in the bill, nor by existing antitrust case law. As such, they inject variability and indeterminacy into how the legislation would be administered.

Moreover, it is also unclear how some incommensurable concepts will be weighed against each other. For example, how would concerns about safety and security be weighed against prohibitions on self-preferencing or requirements for interoperability? What is a “core function” and when would the law determine it has been sufficiently “enhanced” or “maintained”—requirements the law sets out to exempt certain otherwise prohibited behavior? The lack of linguistic and conceptual clarity not only explodes legal certainty, but also invites judicial second-guessing into the operation of business decisions, something against which the U.S. Supreme Court has long warned.

Finally, the bill’s choice of language and recent amendments to its terminology seem to confirm the dynamic discussed in the previous section. Most notably, the latest version of AICOA replaces earlier language invoking “harm to the competitive process” with “material harm to competition.” As the ABA Antitrust Law Section observes, this “suggests a shift away from protecting the competitive process towards protecting individual competitors.” Indeed, “material harm to competition” deviates from established categories such as “undue restraint of trade” or “substantial lessening of competition,” which have a clear focus on the competitive process. As a result, it is not unreasonable to expect that the new terminology might be interpreted as meaning that the actionable standard is material harm to competitors.

In its letter, the antitrust section urges Congress not only to define more clearly the novel terminology used in the bill, but also to do so in a manner consistent with existing antitrust law. Indeed:

The Section further recommends that these definitions direct attention to analysis consistent with antitrust principles: effects-based inquiries concerned with harm to the competitive process, not merely harm to particular competitors

Conclusion

The AICOA is a poorly written, misguided, and rushed piece of regulation that contravenes both basic antitrust-law principles and mainstream economic insights in the pursuit of a pre-established populist political goal: punishing the success of tech companies. If left uncorrected by Congress, these mistakes could have potentially far-reaching consequences for innovation in digital markets and for consumer welfare. They could also set antitrust law on a regressive course back toward a policy of picking winners and losers.

[Closing out Week Two of our FTC UMC Rulemaking symposium is a contribution from a very special guest: Commissioner Noah J. Phillips of the Federal Trade Commission. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

In his July Executive Order, President Joe Biden called on the Federal Trade Commission (FTC) to consider making a series of rules under its purported authority to regulate “unfair methods of competition.”[1] Chair Lina Khan has previously voiced her support for doing so.[2] My view is that the Commission has no such rulemaking powers, and that the scope of the authority asserted would amount to an unconstitutional delegation of power by the Congress.[3] Others have written about those issues, and we can leave them for another day.[4] Professors Richard Pierce and Gus Hurwitz have each written that, if FTC rulemaking is to survive judicial scrutiny, it must apply to conduct that is covered by the antitrust laws.[5]

That idea raises an inherent tension between the concept of rulemaking and the underlying law. Proponents of rulemaking advocate “clear” rules to, in their view, reduce ambiguity, ensure predictability, promote administrability, and conserve resources otherwise spent on ex post, case-by-case adjudication.[6] To the extent they mean administrative adoption of per se illegality standards by rulemaking, it flies in the face of contemporary antitrust jurisprudence, which has been moving from per se standards back to the historical “rule of reason.”

Recognizing that the Sherman Act could be read to bar all contracts, federal courts for over a century have interpreted the 1890 antitrust law only to apply to “unreasonable” restraints of trade.[7] The Supreme Court first adopted this concept in its landmark 1911 decision in Standard Oil, upholding the lower court’s dissolution of John D. Rockefeller’s Standard Oil Company.[8] Just four years after the Federal Trade Commission Act was enacted, the Supreme Courtestablished the “the prevailing standard of analysis” for determining whether an agreement constitutes an unreasonable restraint of trade under Section 1 of the Sherman Act.[9] Justice Louis Brandeis, who as an adviser to President Woodrow Wilson was instrumental in creating the FTC, described the scope of this “rule of reason” inquiry in the Chicago Board of Trade case:

The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.[10]

The rule of reason was and remains today a fact-specific inquiry, but the Court also determined from early on that certain restraints invited a different analytical approach: per se prohibitions. The per se rule involves no weighing of the restraint’s procompetitive effects. Once proven, a restraint subject to the per se rule is presumed to be unreasonable and illegal.In the 1911 Dr. Miles case, the Court held that resale minimum price fixing was illegal per se under Section 1.[11] It found horizontal price-fixing agreements to be per se illegal in Socony Vacuum.[12] Since Socony Vacuum, the Court has limited the application of per se illegality to bid rigging (a form of horizontal price fixing),[13] horizontal market divisions,[14] tying,[15] and group boycotts[16].

Starting in the 1970s, especially following research demonstrating the benefits to consumers of a number of business arrangements and contracts previously condemned by courts as per se illegal, the Court began to limit the categories of conduct that received per se treatment. In 1977, in GTE Sylvania, the Courtheld that vertical customer and territorial restraints should be judged under the rule of reason.[17] In 1979, in BMI, it held that a blanket license issued by a clearinghouse of copyright owners that set a uniform price and prevented individual negotiation with licensees was a necessary precondition for the product and was thus subject to the rule of reason.[18] In 1984, in Jefferson Parish, the Court rejected automatic application of the per se rule to tying.[19] A year later, the Court held that the per se rule did not apply to all group boycotts.[20] In 1997, in State Oil Company v. Khan, it held that maximum resale price fixing is not per se illegal.[21] And, in 2007, the Court held that minimum resale price fixing should also be assessed under the rule of reason. In Leegin, the Court made clear that the per se rule is not the norm for analyzing the reasonableness of restraints; rather, the rule of reason is the “accepted standard for testing” whether a practice is unreasonable.[22]

More recent Court decisions reflect the Court’s refusal to expand the scope of “quick look” analysis, an application of the rule of reason that nonetheless truncates the necessary fact-finding for liability where “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.”[23] In 2013, the Supreme Court rejected an FTC request to require courts to apply the “quick look” approach to reverse-payment settlement agreements.[24] The Court has also backed away from presumptive rules of legality. In American Needle, the Court stripped the National Football League of Section 1 immunity by holding that the NFL is not entitled to the single entity defense under Copperweld and instead, its conduct must be analyzed under the “flexible” rule of reason.[25] And last year, in NCAA v. Alston, the Court rejected the National Collegiate Athletic Association’s argument that it should have benefited from a “quick look”, restating that “most restraints challenged under the Sherman Act” are subject to the rule of reason.[26]

The message from the Court is clear: rules are the exception, not the norm. It “presumptively applies rule of reason analysis”[27] and applies the per se rule only to restraints that “lack any redeeming virtue.”[28] Per se rules are reserved for “conduct that is manifestly anticompetitive” and that “would always or almost always tend to restrict competition and decrease output.”[29] And that’s a short list.  What is more, the Leegin Court made clear that administrative convenience—part of the justification for administrative rules[30]—cannot in and of itself be sufficient to justify application of the per se rule.[31]

The Court’s warnings about per se rules ring just as true for rules that could be promulgated under the Commission’s purported UMC rulemaking authority, which would function just as a per se rule would. Proof of the conduct ends the inquiry. No need to demonstrate anticompetitive effects. No procompetitive justifications. No efficiencies. No balancing.

But if the Commission attempts administratively to adopt per se rules, it will run up against precedents making clear that the antitrust laws do not abide such rules. This is not simply a matter of the—already controversial[32]—historical attempts by the agency to define under Section 5 conduct that goes outside the Sherman Act. Rather, establishing per se rules about conduct covered under the rule of reason effectively overrules Supreme Court precedent. For example, the Executive Order contemplates the FTC promulgating a rule concerning pay-for-delay settlements.[33] But, to the extent it can fashion rules, the agency can only prohibit by rule that which is illegal. To adopt a per se ban on conduct covered by the rule of reason is to take out of the analysis the justifications for and benefits of the conduct in question. And while the FTC Act enables the agency some authority to prohibit conduct outside the scope of the Sherman Act,[34] it does not do away with consideration of justifications or benefits when determining whether a practice is an “unfair method of competition.” As a result, the FTC cannot condemn categorically via rulemaking conduct that the courts have refused to condemn as per se illegal, and instead have analyzed under the rule of reason.[35] Last year, the FTC docketed a petition filed by the Open Markets Institute and others to ban “exclusionary contracts” by monopolists and other “dominant firms” under the agency’s unfair methods of competition authority.[36] The precise scope is not entirely clear from the filing, but courts have held consistently that some conduct clearly covered (e.g., exclusive dealing) is properly evaluated under the rule of reason.[37]

The Supreme Court has been loath to bless per se rules by courts. Rules are blunt instruments and not appropriately applied to conduct that the effect of which is not so clearly negative. Except for the “obvious,” an analysis of whether a restraint is unreasonable is not a “simple matter” and “easy labels do not always supply ready answers.” [38] Over the decades, the Court has rebuked lower courts attempting to apply rules to conduct properly evaluated under the rule of reason.[39] Should the Commission attempt the same administratively, or if it attempts administratively to rewrite judicial precedents, it would be rewriting the antitrust law itself and tempting a similar fate.


[1] Promoting Competition in the American Economy, Exec. Order No. 14036, 86 Fed. Reg. 36987, 36993 (July 9, 2021), https://www.govinfo.gov/content/pkg/FR-2021-07-14/pdf/2021-15069.pdf (hereinafter “Biden Executive Order”).

[2]  Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. Chi. L. Rev. 357 (2020) (hereinafter “Chopra & Khan”).

[3]  Prepared Remarks of Commissioner Noah Joshua Phillips at FTC Non-Compete Clauses in the Workplace Workshop (Jan. 9, 2020, https://www.ftc.gov/system/files/documents/public_statements/1561697/phillips_-_remarks_at_ftc_nca_workshop_1-9-20.pdf).

[4] See e.g., Maureen K. Ohlhausen & James Rill, Pushing the Limits? A Primer on FTC Competition Rulemaking, U.S. Chamber of Commerce (Aug. 12, 2021), https://www.uschamber.com/assets/archived/images/ftc_rulemaking_white_paper_aug12.pdf.

[5]  Richard J. Pierce Jr., Can the FTC Use Rulemaking to Change Antitrust Law?, Truth on the Market FTC UMC Rulemaking Symposium (April 28, 2022), https://truthonthemarket.com/2022/04/28/can-the-ftc-use-rulemaking-to-change-antitrust-law; Gus Hurwitz, Chevron and Administrative Antitrust, Redux, Truth on the Market FTC UMC Rulemaking Symposium (April 29, 2022), https://truthonthemarket.com/2022/04/29/chevron-and-administrative-antitrust-redux.

[6] See Chopra & Khan, supra n. 2, at 368.

[7] See e.g., Bd. of Trade v. United States, 246 U.S. 231, 238 (1918) (explaining that “the legality of an agreement . . . cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade … restrains. To bind, to restrain, is of their very essence”); Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 687-88 (1978) (“restraint is the very essence of every contract; read literally, § 1 would outlaw the entire body of private contract law”).

[8] Standard Oil Co., v. United States, 221 U.S. 1 (1911).

[9] See Continental T.V. v. GTE Sylvania, 433 U.S. 36, 49 (1977) (“Since the early years of this century a judicial gloss on this statutory language has established the “rule of reason” as the prevailing standard of analysis…”). See also State Oil Co. v. Khan, 522 U.S. 3, 10 (1997) (“most antitrust claims are analyzed under a ‘rule of reason’ ”); Arizona v. Maricopa Cty. Med. Soc’y, 457 U.S. 332, 343 (1982) (“we have analyzed most restraints under the so-called ‘rule of reason’ ”).

[10] Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918).

[11] Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

[12]  United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).

[13]  See e.g., United States v. Joyce, 895 F.3d 673, 677 (9th Cir. 2018); United States v. Bensinger, 430 F.2d 584, 589 (8th Cir. 1970).

[14]  United States v. Sealy, Inc., 388 U.S. 350 (1967).

[15]  Northern P. R. Co. v. United States, 356 U.S. 1 (1958).

[16]  NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998).

[17]  Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977).

[18]  Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. 441 U.S. 1 (1979).

[19] Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).

[20]  Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985).

[21] State Oil Company v. Khan, 522 U.S. 3 (1997).

[22] Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 885 (2007).

[23]  California Dental Association v. FTC, 526 U.S. 756, 770 (1999).

[24]  FTC v. Actavis, Inc., 570 U.S. 136 (2013).

[25] Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 187 (2010).

[26] Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2155, 2021 WL 2519036 (2021).

[27] Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006).

[28]  Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 885 (2007).

[29] Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988).

[30]  Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. Chi. L. Rev. 357 (2020).

[31]  Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 886-87 (2007).

[32] The FTC’s attempts to bring cases condemning conduct as a standalone Section 5 violation were not successful. See e.g., Boise Cascade Corp. v. FTC, 637 F.2d 573 (9th Cir. 1980); Airline Guides, Inc. v. FTC, 630 F.2d 920 (2d Cir. 1980); E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984).

[33] Biden Executive order, Section 5(h)(iii).

[34] Supreme Court precedent confirms that Section 5 of the FTC Act does not limit “unfair methods of competition” to practices that violate other antitrust laws (i.e., Sherman Act, Clayton Act). See e.g., FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 454 (1986); FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972); FTC v. Brown Shoe Co., 384 U.S. 316, 321 (1966); FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 394-95 (1953); FTC v. R.F. Keppel & Bros., Inc., 291 U.S. 304, 309-310 (1934).

[35] The agency also has recognized recently that such agreements are subject to the Rule of Reason under the FTC Act, which decisions was upheld by the U.S. Court of Appeals for the Fifth Circuit. Impax Labs., Inc. v. FTC, No. 19-60394 (5th Cir. 2021).

[36] Petition for Rulemaking to Prohibit Exclusionary Contracts by Open Market Institute et al., (July 21, 2021), https://www.regulations.gov/document/FTC-2021-0036-0002 (hereinafter “OMI Petition). 

[37] OMI Petition at 71 (“Given the real evidence of harm from certain exclusionary contracts and the specious justifications presented in their favor, the FTC should ban exclusivity with customers, distributors, or suppliers that results in substantial market foreclosure as per se illegal under the FTC Act. The present rule of reason governing exclusive dealing by all firms is infirm on multiple grounds.”) But see e.g., ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 271 (3d Cir. 2012) (“Due to the potentially procompetitive benefits of exclusive dealing agreements, their legality is judged under the rule of reason.”).

[38]  Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. 441 U.S. 1, 8-9 (1979).

[39] See e.g., Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977) (holding that nonprice vertical restraints have redeeming value and potential procompetitive justification and therefore are unsuitable for per se review); United States Steel Corp. v. Fortner Enters., Inc., 429 U.S. 610 (1977) (rejecting the assumption that tying lacked any purpose other than suppressing competition and recognized tying could be procompetitive); FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) (declining to apply the per se rule even though the conduct at issue resembled a group boycott).

In recent years, a diverse cross-section of advocates and politicians have leveled criticisms at Section 230 of the Communications Decency Act and its grant of legal immunity to interactive computer services. Proposed legislative changes to the law have been put forward by both Republicans and Democrats.

It remains unclear whether Congress (or the courts) will amend Section 230, but any changes are bound to expand the scope, uncertainty, and expense of content risks. That’s why it’s important that such changes be developed and implemented in ways that minimize their potential to significantly disrupt and harm online activity. This piece focuses on those insurable content risks that most frequently result in litigation and considers the effect of the direct and indirect costs caused by frivolous suits and lawfare, not just the ultimate potential for a court to find liability. The experience of the 1980s asbestos-litigation crisis offers a warning of what could go wrong.

Enacted in 1996, Section 230 was intended to promote the Internet as a diverse medium for discourse, cultural development, and intellectual activity by shielding interactive computer services from legal liability when blocking or filtering access to obscene, harassing, or otherwise objectionable content. Absent such immunity, a platform hosting content produced by third parties could be held equally responsible as the creator for claims alleging defamation or invasion of privacy.

In the current legislative debates, Section 230’s critics on the left argue that the law does not go far enough to combat hate speech and misinformation. Critics on the right claim the law protects censorship of dissenting opinions. Legal challenges to the current wording of Section 230 arise primarily from what constitutes an “interactive computer service,” “good faith” restriction of content, and the grant of legal immunity, regardless of whether the restricted material is constitutionally protected. 

While Congress and various stakeholders debate various alternate statutory frameworks, several test cases simultaneously have been working their way through the judicial system and some states have either passed or are considering legislation to address complaints with Section 230. Some have suggested passing new federal legislation classifying online platforms as common carriers as an alternate approach that does not involve amending or repealing Section 230. Regardless of the form it may take, change to the status quo is likely to increase the risk of litigation and liability for those hosting or publishing third-party content.

The Nature of Content Risk

The class of individuals and organizations exposed to content risk has never been broader. Any information, content, or communication that is created, gathered, compiled, or amended can be considered “material” which, when disseminated to third parties, may be deemed “publishing.” Liability can arise from any step in that process. Those who republish material are generally held to the same standard of liability as if they were the original publisher. (See, e.g., Rest. (2d) of Torts § 578 with respect to defamation.)

Digitization has simultaneously reduced the cost and expertise required to publish material and increased the potential reach of that material. Where it was once limited to books, newspapers, and periodicals, “publishing” now encompasses such activities as creating and updating a website; creating a podcast or blog post; or even posting to social media. Much of this activity is performed by individuals and businesses who have only limited experience with the legal risks associated with publishing.

This is especially true regarding the use of third-party material, which is used extensively by both sophisticated and unsophisticated platforms. Platforms that host third-party-generated content—e.g., social media or websites with comment sections—have historically engaged in only limited vetting of that content, although this is changing. When combined with the potential to reach consumers far beyond the original platform and target audience—lasting digital traces that are difficult to identify and remove—and the need to comply with privacy and other statutory requirements, the potential for all manner of “publishers” to incur legal liability has never been higher.

Even sophisticated legacy publishers struggle with managing the litigation that arises from these risks. There are a limited number of specialist counsel, which results in higher hourly rates. Oversight of legal bills is not always effective, as internal counsel often have limited resources to manage their daily responsibilities and litigation. As a result, legal fees often make up as much as two-thirds of the average claims cost. Accordingly, defense spending and litigation management are indirect, but important, risks associated with content claims.

Effective risk management is any publisher’s first line of defense. The type and complexity of content risk management varies significantly by organization, based on its size, resources, activities, risk appetite, and sophistication. Traditional publishers typically have a formal set of editorial guidelines specifying policies governing the creation of content, pre-publication review, editorial-approval authority, and referral to internal and external legal counsel. They often maintain a library of standardized contracts; have a process to periodically review and update those wordings; and a process to verify the validity of a potential licensor’s rights. Most have formal controls to respond to complaints and to retraction/takedown requests.

Insuring Content Risks

Insurance is integral to most publishers’ risk-management plans. Content coverage is present, to some degree, in most general liability policies (i.e., for “advertising liability”). Specialized coverage—commonly referred to as “media” or “media E&O”—is available on a standalone basis or may be packaged with cyber-liability coverage. Terms of specialized coverage can vary significantly, but generally provides at least basic coverage for the three primary content risks of defamation, copyright infringement, and invasion of privacy.

Insureds typically retain the first dollar loss up to a specific dollar threshold. They may also retain a coinsurance percentage of every dollar thereafter in partnership with their insurer. For example, an insured may be responsible for the first $25,000 of loss, and for 10% of loss above that threshold. Such coinsurance structures often are used by insurers as a non-monetary tool to help control legal spending and to incentivize an organization to employ effective oversight of counsel’s billing practices.

The type and amount of loss retained will depend on the insured’s size, resources, risk profile, risk appetite, and insurance budget. Generally, but not always, increases in an insured’s retention or an insurer’s attachment (e.g., raising the threshold to $50,000, or raising the insured’s coinsurance to 15%) will result in lower premiums. Most insureds will seek the smallest retention feasible within their budget. 

Contract limits (the maximum coverage payout available) will vary based on the same factors. Larger policyholders often build a “tower” of insurance made up of multiple layers of the same or similar coverage issued by different insurers. Two or more insurers may partner on the same “quota share” layer and split any loss incurred within that layer on a pre-agreed proportional basis.  

Navigating the strategic choices involved in developing an insurance program can be complex, depending on an organization’s risks. Policyholders often use commercial brokers to aide them in developing an appropriate risk-management and insurance strategy that maximizes coverage within their budget and to assist with claims recoveries. This is particularly important for small and mid-sized insureds who may lack the sophistication or budget of larger organizations. Policyholders and brokers try to minimize the gaps in coverage between layers and among quota-share participants, but such gaps can occur, leaving a policyholder partially self-insured.

An organization’s options to insure its content risk may also be influenced by the dynamics of the overall insurance market or within specific content lines. Underwriters are not all created equal; it is a challenging responsibility requiring a level of prediction, and some underwriters may fail to adequately identify and account for certain risks. It can also be challenging to accurately measure risk aggregation and set appropriate reserves. An insurer’s appetite for certain lines and the availability of supporting reinsurance can fluctuate based on trends in the general capital markets. Specialty media/content coverage is a small niche within the global commercial insurance market, which makes insurers in this line more sensitive to these general trends.

Litigation Risks from Changes to Section 230

A full repeal or judicial invalidation of Section 230 generally would make every platform responsible for all the content they disseminate, regardless of who created the material requiring at least some additional editorial review. This would significantly disadvantage those platforms that host a significant volume of third-party content. Internet service providers, cable companies, social media, and product/service review companies would be put under tremendous strain, given the daily volume of content produced. To reduce the risk that they serve as a “deep pocket” target for plaintiffs, they would likely adopt more robust pre-publication screening of content and authorized third-parties; limit public interfaces; require registration before a user may publish content; employ more reactive complaint response/takedown policies; and ban problem users more frequently. Small and mid-sized enterprises (SMEs), as well as those not focused primarily on the business of publishing, would likely avoid many interactive functions altogether. 

A full repeal would be, in many ways, a blunderbuss approach to dealing with criticisms of Section 230, and would cause as many or more problems as it solves. In the current polarized environment, it also appears unlikely that Congress will reach bipartisan agreement on amended language for Section 230, or to classify interactive computer services as common carriers, given that the changes desired by the political left and right are so divergent. What may be more likely is that courts encounter a test case that prompts them to clarify the application of the existing statutory language—i.e., whether an entity was acting as a neutral platform or a content creator, whether its conduct was in “good faith,” and whether the material is “objectionable” within the meaning of the statute.

A relatively greater frequency of litigation is almost inevitable in the wake of any changes to the status quo, whether made by Congress or the courts. Major litigation would likely focus on those social-media platforms at the center of the Section 230 controversy, such as Facebook and Twitter, given their active role in these issues, deep pockets and, potentially, various admissions against interest helpful to plaintiffs regarding their level of editorial judgment. SMEs could also be affected in the immediate wake of a change to the statute or its interpretation. While SMEs are likely to be implicated on a smaller scale, the impact of litigation could be even more damaging to their viability if they are not adequately insured.

Over time, the boundaries of an amended Section 230’s application and any consequential effects should become clearer as courts develop application criteria and precedent is established for different fact patterns. Exposed platforms will likely make changes to their activities and risk-management strategies consistent with such developments. Operationally, some interactive features—such as comment sections or product and service reviews—may become less common.

In the short and medium term, however, a period of increased and unforeseen litigation to resolve these issues is likely to prove expensive and damaging. Insurers of content risks are likely to bear the brunt of any changes to Section 230, because these risks and their financial costs would be new, uncertain, and not incorporated into historical pricing of content risk. 

Remembering the Asbestos Crisis

The introduction of a new exposure or legal risk can have significant financial effects on commercial insurance carriers. New and revised risks must be accounted for in the assumptions, probabilities, and load factors used in insurance pricing and reserving models. Even small changes in those values can have large aggregate effects, which may undermine confidence in those models, complicate obtaining reinsurance, or harm an insurer’s overall financial health.

For example, in the 1980s, certain courts adopted the triple-trigger and continuous trigger methods[1] of determining when a policyholder could access coverage under an “occurrence” policy for asbestos claims. As a result, insurers paid claims under policies dating back to the early 1900s and, in some cases, under all policies from that date until the date of the claim. Such policies were written when mesothelioma related to asbestos was unknown and not incorporated into the policy pricing.

Insurers had long-since released reserves from the decades-old policy years, so those resources were not available to pay claims. Nor could underwriters retroactively increase premiums for the intervening years and smooth out the cost of these claims. This created extreme financial stress for impacted insurers and reinsurers, with some ultimately rendered insolvent. Surviving carriers responded by drastically reducing coverage and increasing prices, which resulted in a major capacity shortage that resolved only after the creation of the Bermuda insurance and reinsurance market. 

The asbestos-related liability crisis represented a perfect storm that is unlikely to be replicated. Given the ubiquitous nature of digital content, however, any drastic or misconceived changes to Section 230 protections could still cause significant disruption to the commercial insurance market. 

Content risk is covered, at least in part, by general liability and many cyber policies, but it is not currently a primary focus for underwriters. Specialty media underwriters are more likely to be monitoring Section 230 risk, but the highly competitive market will make it difficult for them to respond to any changes with significant price increases. In addition, the current market environment for U.S. property and casualty insurance generally is in the midst of correcting for years of inadequate pricing, expanding coverage, developing exposures, and claims inflation. It would be extremely difficult to charge an adequate premium increase if the potential severity of content risk were to increase suddenly.

In the face of such risk uncertainty and challenges to adequately increasing premiums, underwriters would likely seek to reduce their exposure to online content risks, i.e., by reducing the scope of coverage, reducing limits, and increasing retentions. How these changes would manifest, and the pain for all involved, would likely depend on how quickly such changes in policyholders’ risk profiles manifest. 

Small or specialty carriers caught unprepared could be forced to exit the market if they experienced a sharp spike in claims or unexpected increase in needed reserves. Larger, multiline carriers may respond by voluntarily reducing or withdrawing their participation in this space. Insurers exposed to ancillary content risk may simply exclude it from cover if adequate price increases are impractical. Such reactions could result in content coverage becoming harder to obtain or unavailable altogether. This, in turn, would incentivize organizations to limit or avoid certain digital activities.

Finding a More Thoughtful Approach

The tension between calls for reform of Section 230 and the potential for disrupting online activity does not mean that political leaders and courts should ignore these issues. Rather, it means that what’s required is a thoughtful, clear, and predictable approach to any changes, with the goal of maximizing the clarity of the changes and their application and minimizing any resulting litigation. Regardless of whether accomplished through legislation or the judicial process, addressing the following issues could minimize the duration and severity of any period of harmful disruption regarding content-risk:

  1. Presumptive immunity – Including an express statement in the definition of “interactive computer service,” or inferring one judicially, to clarify that platforms hosting third-party content enjoy a rebuttable presumption that statutory immunity applies would discourage frivolous litigation as courts establish precedent defining the applicability of any other revisions. 
  1. Specify the grounds for losing immunity – Clarify, at a minimum, what constitutes “good faith” with respect to content restrictions and further clarify what material is or is not “objectionable,” as it relates to newsworthy content or actions that trigger loss of immunity.
  1. Specify the scope and duration of any loss of immunity – Clarify whether the loss of immunity is total, categorical, or specific to the situation under review and the duration of that loss of immunity, if applicable.
  1. Reinstatement of immunity, subject to burden-shifting – Clarify what a platform must do to reinstate statutory immunity on a go-forward basis and clarify that it bears the burden of proving its go-forward conduct entitled it to statutory protection.
  1. Address associated issues – Any clarification or interpretation should address other issues likely to arise, such as the effect and weight to be given to a platform’s application of its community standards, adherence to neutral takedown/complain procedures, etc. Care should be taken to avoid overcorrecting and creating a “heckler’s veto.” 
  1. Deferred effect – If change is made legislatively, the effective date should be deferred for a reasonable time to allow platforms sufficient opportunity to adjust their current risk-management policies, contractual arrangements, content publishing and storage practices, and insurance arrangements in a thoughtful, orderly fashion that accounts for the new rules.

Ultimately, legislative and judicial stakeholders will chart their own course to address the widespread dissatisfaction with Section 230. More important than any of these specific policy suggestions is the principle underpins them: that any changes incorporate due consideration for the potential direct and downstream harm that can be caused if policy is not clear, comprehensive, and designed to minimize unnecessary litigation. 

It is no surprise that, in the years since Section 230 of the Communications Decency Act was passed, the environment and risks associated with digital platforms have evolved or that those changes have created a certain amount of friction in the law’s application. Policymakers should employ a holistic approach when evaluating their legislative and judicial options to revise or clarify the application of Section 230. Doing so in a targeted, predictable fashion should help to mitigate or avoid the risk of increased litigation and other unintended consequences that might otherwise prove harmful to online platforms in the commercial insurance market.

Aaron Tilley is a senior insurance executive with more than 16 years of commercial insurance experience in executive management, underwriting, legal, and claims working in or with the U.S., Bermuda, and London markets. He has served as chief underwriting officer of a specialty media E&O and cyber-liability insurer and as coverage counsel representing international insurers with respect to a variety of E&O and advertising liability claims


[1] The triple-trigger method allowed a policy to be accessed based on the date of the injury-in-fact, manifestation of injury, or exposure to substances known to cause injury. The continuous trigger allowed all policies issued by an insurer, not just one, to be accessed if a triggering event could be established during the policy period.

The U.S. House this week passed H.R. 2668, the Consumer Protection and Recovery Act (CPRA), which authorizes the Federal Trade Commission (FTC) to seek monetary relief in federal courts for injunctions brought under Section 13(b) of the Federal Trade Commission Act.

Potential relief under the CPRA is comprehensive. It includes “restitution for losses, rescission or reformation of contracts, refund of money, return of property … and disgorgement of any unjust enrichment that a person, partnership, or corporation obtained as a result of the violation that gives rise to the suit.” What’s more, under the CPRA, monetary relief may be obtained for violations that occurred up to 10 years before the filing of the suit in which relief is requested by the FTC.

The Senate should reject the House version of the CPRA. Its monetary-recovery provisions require substantial narrowing if it is to pass cost-benefit muster.

The CPRA is a response to the Supreme Court’s April 22 decision in AMG Capital Management v. FTC, which held that Section 13(b) of the FTC Act does not authorize the commission to obtain court-ordered equitable monetary relief. As I explained in an April 22 Truth on the Market post, Congress’ response to the court’s holding should not be to grant the FTC carte blanche authority to obtain broad monetary exactions for any and all FTC Act violations. I argued that “[i]f Congress adopts a cost-beneficial error-cost framework in shaping targeted legislation, it should limit FTC monetary relief authority (recoupment and disgorgement) to situations of consumer fraud or dishonesty arising under the FTC’s authority to pursue unfair or deceptive acts or practices.”

Error cost and difficulties of calculation counsel against pursuing monetary recovery in FTC unfair methods of competition cases. As I explained in my post:

Consumer redress actions are problematic for a large proportion of FTC antitrust enforcement (“unfair methods of competition”) initiatives. Many of these antitrust cases are “cutting edge” matters involving novel theories and complex fact patterns that pose a significant threat of type I [false positives] error. (In comparison, type I error is low in hardcore collusion cases brought by the U.S. Justice Department where the existence, nature, and effects of cartel activity are plain). What’s more, they generally raise extremely difficult if not impossible problems in estimating the degree of consumer harm. (Even DOJ price-fixing cases raise non-trivial measurement difficulties.)

These error-cost and calculation difficulties became even more pronounced as of July 1. On that date, the FTC unwisely voted 3-2 to withdraw a bipartisan 2015 policy statement providing that the commission would apply consumer welfare and rule-of-reason (weighing efficiencies against anticompetitive harm) considerations in exercising its unfair methods of competition authority (see my commentary here). This means that, going forward, the FTC will arrogate to itself unbounded discretion to decide what competitive practices are “unfair.” Business uncertainty, and the costly risk aversion it engenders, would be expected to grow enormously if the FTC could extract monies from firms due to competitive behavior deemed “unfair,” based on no discernible neutral principle.

Error costs and calculation problems also strongly suggest that monetary relief in FTC consumer-protection matters should be limited to cases of fraud or clear deception. As I noted:

[M]atters involving a higher likelihood of error and severe measurement problems should be the weakest candidates for consumer redress in the consumer protection sphere. For example, cases involve allegedly misleading advertising regarding the nature of goods, or allegedly insufficient advertising substantiation, may generate high false positives and intractable difficulties in estimating consumer harm. As a matter of judgment, given resource constraints, seeking financial recoveries solely in cases of fraud or clear deception where consumer losses are apparent and readily measurable makes the most sense from a cost-benefit perspective.

In short, the Senate should rewrite its Section 13(b) amendments to authorize FTC monetary recoveries only when consumer fraud and dishonesty is shown.

Finally, the Senate would be wise to sharply pare back the House language that allows the FTC to seek monetary exactions based on conduct that is a decade old. Serious problems of making accurate factual determinations of economic effects and specific-damage calculations would arise after such a long period of time. Allowing retroactive determinations based on a shorter “look-back” period prior to the filing of a complaint (three years, perhaps) would appear to strike a better balance in allowing reasonable redress while controlling error costs.