Archives For Dan Crane

by Dan Crane, Associate Dean for Faculty and Research and Frederick Paul Furth, Sr. Professor of Law, University of Michigan Law School

The FTC was the brain child of Progressive Era technocrats who believed that markets could be made to run more effectively if distinguished experts in industry and economics were just put in charge. Alas, as former FTC Chair Bill Kovacic has chronicled, over the Commission’s first century precious few of the Commissioners have been distinguished economists or business leaders. Rather, the Commissioners have been largely drawn from the ranks of politically connected lawyers, often filling patronage appointments.

How refreshing it’s been to have Josh Wright, highly distinguished both as an economist and as a law professor, serve on the Commission. Much of the media attention to Josh has focused on his bold conservatism in antitrust and consumer protection matters. But Josh has made at least as much of a mark in advocating for the importance of economists and rigorous economic analysis at the Commission.

Josh has long proclaimed that his enforcement philosophy is evidence-based rather than a priori or ideological. He has argued that the Commission should bring enforcement actions when the economic facts show objective harm to consumers, and not bring actions when the facts don’t show harm to consumers. A good example of Josh’s perspective in action is his dissenting statement in the McWane case, where the Commission staff may have had a reasonable theory of foreclosure, but not enough economic evidence to back it up.

Among other things, Josh has eloquently advocated for the institutional importance of the economist’s role in FTC decision making. Just a few weeks ago, he issued a statement on the Bureau of Economics, Independence, and Agency Performance. Josh began with the astute observation that, in disputes within large bureaucratic organizations, the larger group usually wins. He then observed that the lopsided ratio of lawyers in the Bureau of Competition to economists in the Bureau of Economics has led to lawyers holding the whip hand within the organization. This structural bias toward legal rather than economic reasoning has important implications for the substance of Commission decisions. For example, Malcolm Coate and Andrew Heimert’s study of merger efficiencies claims at the FTC showed that economists in BE were far more likely than lawyers in BC to credit efficiencies claims. Josh’s focus on the institutional importance of economists deserves careful consideration in future budgetary and resource allocation discussions.

In considering Josh’s legacy, it’s also important to note that Josh’s prescriptions in favor of economic analysis were not uniformly “conservative” in the trite political or ideological sense. In 2013, Josh gave a speech arguing against the application of the cost-price test in loyalty discount cases. This surprised lots of people in the antitrust community, myself included. The gist of Josh’s argument was that a legalistic cost-price test would be insufficiently attentive to the economic facts of a particular case and potentially immunize exclusionary behavior. I disagreed (and still disagree) with Josh’s analysis and said so at the time. Nonetheless, it’s important to note that Josh was acting consistently with his evidence-based philosophy, asking for proof of economic facts rather than reliance on legal short-cuts. To his great credit, Josh followed his philosophy regardless of whether it supported more or less intervention.

In sum, though his service was relatively short, Josh has left an important mark on the Commission, founded in his distinctive perspective as an economist. It is to be hoped that his appointment and service will set a precedent for more economist Commissioners in the future.

The following post was authored by Dan Crane, the Frederick Paul Furth, Sr. Professor of Law at the University of Michigan Law School and an occasional TOTM contributor.

Last week, I released a public interest group open letter in support of Tesla’s right to distribute its cars directly.   The letter attracted quite a bit of media attention because of its “strange bedfellows” coalition.  Signatories included pro-consumer and pro-competition groups (American Antitrust Institute, Consumer Federation of America, Consumer Action, and Consumers for Auto Reliability and Safety), pro-business or free market groups (Americans for Prosperity, Institute for Justice, and Mackinac Center), environmental groups (Sierra Club and Environment America), and a pro-technology group (The Information Technology & Innovation Foundation).  The diversity of this coalition—joining scores of prominent economists and law professors and the staff of the Federal Trade Commission, among others—in supporting direct distribution, is a powerful testament to the fact that the appeal of the right to engage in direct distribution is not, and should not be, a partisan political issue.  It should have broad appeal whatever one’s political inclinations.

Yesterday, the Media and Public Relations Director for the National Automobile Dealers Association (“NADA”) forwarded me a link to a blog post by Glenn Kessler, a Washington Post blogger who runs a “Fact Checker” blog, entitled Key Report in battle over car dealer sales is bizarrely outdated.  The thrust of Mr. Kessler’s blog is that a 2009 paper on direct distribution published by Gerald Bodisch, then of the DOJ’s Economic Analysis Group, contains an inaccuracy.  Mr. Kessler finds it “astonishing” that the report has nonetheless featured “prominently” in much of the public advocacy in favor of direct distribution.  (One of the places that Mr. Kessler identifies it being featured is in a “Cato Institute Report,” which is actually not a Cato Institute Report, but an article I wrote in Regulation Magazine which is published by the Cato Institute. Kessler mentions the article being cited in a news story, although he omits to mention another news story in which the article was favorably cited . . . perhaps because it was in the Washington Post?).

Here’s the inaccuracy that Kessler reports, quoting from the Bodisch paper: “Since 2000, customers in Brazil can order the Celta over the Internet from a site that links them with GM’s assembly plant and 470 dealers nationwide.”  Kessler’s blog points out that the statement was no longer true in 2009 when the Bodisch paper was published, since GM discontinued online sales in Brazil in 2006, six years after launching the program.

Kessler is well within his rights to correct an inaccuracy in the Bodisch paper.  But the emphasis and tone of his blog post are bizarre.  He seems to suggest that any citation of the Bodisch paper on the possible cost savings from direct distribution is inherently flawed.  That’s way off base for two reasons.

First, the Bodisch paper did not make claims solely based on GM’s Brazilian experience.  It also made claims from general economic principles and from other empirical studies, such as a 2000 Goldman Sachs report on the potential cost savings from direct distribution.  The Kessler blog gives the impression that all of the recent citations to the Bodisch paper are repeating specific claims about GM in Brazil, whereas most of them are simply citing the Bodisch paper for the general proposition that direct distribution could result in cost savings to consumers.

Second, Kessler seems to assume that GM’s discontinuation of the Internet sales program in Brazil in 2006, after running it for six years, disproves all of the ostensible virtues of the program identified by GM at the time.  That Bodisch neglected to mention that GM had discontinued the program after six years would hardly be worth featuring in a “fact checking” blog unless the fact of the discontinuation undermined the reason the GM program was discussed in the first place.  So why did GM discontinue the program?  Kessler cites a GM spokesman who identifies two reasons, “federal and state tax changes in the country” and “the infrastructure costs to maintain distribution centers.”  The blog post then goes on to talk about how “wildly complicated” the Brazilian tax code is, including an obligation of paying a VAT based on the location of the merchant rather than the location of the customer.

I’m certainly no expert on GM’s Brazilian distribution strategy or the Brazilian tax code, but I can’t for the life of me understand Kessler’s point here.  If GM launched a direct distribution model that created the efficiencies cited in the article and was successful for six years (involving hundreds of thousands of Internet sales) until Brazil made changes to its tax code that resulted in unfavorable tax treatment for Internet sales, how does that remotely show that direct distribution doesn’t result in consumer benefits?  To the extent that the Brazilian tax changes killed the Internet distribution model, this would be just one more example of poor regulation killing an efficient model, not the model being inefficient.

Given that his own account of what happened seems to defeat his central point, I’m left perplexed by why Kessler decided to run this “fact-checking” story.  I’m not perplexed by NADA’s use of it—they no doubt see this as somehow undermining the recent momentum in favor of direct distribution.  As I’ve explained above, it does little to the basic thrust of the Bodisch paper.  But it’s also important to understand that argument in favor of the right to engage in direct distribution is by no means predicated on any particular claim in the Bodisch paper.

Here’s a quick recap of the debate.  In the many fora in which I’ve advocated in favor of the right to engage in direct distribution, I’ve never argued that direct distribution is in fact preferable to dealer distribution as a general matter.  Rather, the argument has always been that consumers benefit when manufacturers can choose the most efficient distribution method for them given their position in in the market.  The dealers have repeatedly made the absurd argument that laws mandating dealer distribution are necessary to break the manufacturer’s “monopoly” over distribution of their cars and hence lower prices to consumers.  As scores of outstanding economists have explained many times—without rebuttal from a single credible economist—that argument misunderstands that a manufacturer cannot increase its profits by charging a retail mark-up over and above whatever market power premium it embeds in the wholesale price.

Further, proponents of the right to engage in direct distribution have argued that, if anything, direct distribution would lower rather than increase consumer prices.  The core of this argument is that vertical integration eliminates double marginalization.  A second part of this argument is that there could be marginal cost savings to the manufacturer from direct distribution—as suggested in the Goldman Sachs report and elsewhere.  A third point is that the dealers themselves are fully aware—and have conceded—that the general effect of direct distribution is to lower rather than raise market prices.  When the dealers have sued to block Tesla in places like Massachusetts, they have alleged that direct distribution leads to “inequitable pricing.”  What they mean, of course, is that it leads to prices that are too low.  (If inequitable pricing meant prices that were too high, the dealers wouldn’t suffer injury and therefore wouldn’t have standing).

In sum, let me repeat that Mr. Kessler is well within his rights to “fact check” whatever he wants and to point out any inaccuracies that he observes.  The thrust of his blog post, however, is way off base.  It is his blog post, not citation to the Bodisch article, that is bizarre.

Last Monday, a group of nineteen scholars of antitrust law and economics, including yours truly, urged the U.S. Court of Appeals for the Eleventh Circuit to reverse the Federal Trade Commission’s recent McWane ruling.

McWane, the largest seller of domestically produced iron pipe fittings (DIPF), would sell its products only to distributors that “fully supported” its fittings by carrying them exclusively.  There were two exceptions: where McWane products were not readily available, and where the distributor purchased a McWane rival’s pipe along with its fittings.  A majority of the FTC ruled that McWane’s policy constituted illegal exclusive dealing.

Commissioner Josh Wright agreed that the policy amounted to exclusive dealing, but he concluded that complaint counsel had failed to prove that the exclusive dealing constituted unreasonably exclusionary conduct in violation of Sherman Act Section 2.  Commissioner Wright emphasized that complaint counsel had produced no direct evidence of anticompetitive harm (i.e., an actual increase in prices or decrease in output), even though McWane’s conduct had already run its course.  Indeed, the direct evidence suggested an absence of anticompetitive effect, as McWane’s chief rival, Star, grew in market share at exactly the same rate during and after the time of McWane’s exclusive dealing.

Instead of focusing on direct evidence of competitive effect, complaint counsel pointed to a theoretical anticompetitive harm: that McWane’s exclusive dealing may have usurped so many sales from Star that Star could not achieve minimum efficient scale.  The only evidence as to what constitutes minimum efficient scale in the industry, though, was Star’s self-serving statement that it would have had lower average costs had it operated at a scale sufficient to warrant ownership of its own foundry.  As Commissioner Wright observed, evidence in the record showed that other pipe fitting producers had successfully entered the market and grown market share substantially without owning their own foundry.  Thus, actual market experience seemed to undermine Star’s self-serving testimony.

Commissioner Wright also observed that complaint counsel produced no evidence showing what percentage of McWane’s sales of DIPF might have gone to other sellers absent McWane’s exclusive dealing policy.  Only those “contestable” sales – not all of McWane’s sales to distributors subject to the full support policy – should be deemed foreclosed by McWane’s exclusive dealing.  Complaint counsel also failed to quantify sales made to McWane’s rivals under the generous exceptions to its policy.  These deficiencies prevented complaint counsel from adequately establishing the degree of market foreclosure caused by McWane’s policy – the first (but not last!) step in establishing the alleged anticompetitive harm.

In our amicus brief, we antitrust scholars take Commissioner Wright’s side on these matters.  We also observe that the Commission failed to account for an important procompetitive benefit of McWane’s policy:  it prevented rival DIPF sellers from “cherry-picking” the most popular, highest margin fittings and selling only those at prices that could be lower than McWane’s because the cherry-pickers didn’t bear the costs of producing the full line of fittings.  Such cherry-picking is a form of free-riding because every producer’s fittings are more highly valued if a full line is available.  McWane’s policy prevented the sort of free-riding that would have made its production of a full line uneconomical.

In short, the FTC’s decision made it far too easy to successfully challenge exclusive dealing arrangements, which are usually procompetitive, and calls into question all sorts of procompetitive full-line forcing arrangements.  Hopefully, the Eleventh Circuit will correct the Commission’s mistake.

Other professors signing the brief include:

  • Tom Arthur, Emory Law
  • Roger Blair, Florida Business
  • Don Boudreaux, George Mason Economics (and Café Hayek)
  • Henry Butler, George Mason Law
  • Dan Crane, Michigan Law (and occasional TOTM contributor)
  • Richard Epstein, NYU and Chicago Law
  • Ken Elzinga, Virginia Economics
  • Damien Geradin, George Mason Law
  • Gus Hurwitz, Nebraska Law (and TOTM)
  • Keith Hylton, Boston University Law
  • Geoff Manne, International Center for Law and Economics (and TOTM)
  • Fred McChesney, Miami Law
  • Tom Morgan, George Washington Law
  • Barack Orbach, Arizona Law
  • Bill Page, Florida Law
  • Paul Rubin, Emory Economics (and TOTM)
  • Mike Sykuta, Missouri Economics (and TOTM)
  • Todd Zywicki, George Mason Law (and Volokh Conspiracy)

The brief’s “Summary of Argument” follows the jump. Continue Reading…

Debates among modern antitrust experts focus primarily on the appropriate indicia of anticompetitive behavior, the particular methodologies that should be applied in assessing such conduct, and the best combination and calibration of antitrust sanctions (fines, jail terms, injunctive relief, cease and desist orders).  Given a broad consensus that antitrust rules should promote consumer welfare (albeit some disagreement about the meaning of the term), discussions tend (not surprisingly) to emphasize the welfare effects of particular practices (and, relatedly, appropriate analytic techniques and procedural rules).  Less attention tends to be paid, however, to whether the overall structure of enforcement policy enhances welfare.

Assuming that one views modern antitrust enforcement as an exercise in consumer welfare maximization, what does that tell us about optimal antitrust enforcement policy design?  In order to maximize welfare, enforcers must have an understanding of – and seek to maximize the difference between – the aggregate costs and benefits that are likely to flow from their policies.  It therefore follows that cost-benefit analysis should be applied to antitrust enforcement design.  Specifically, antitrust enforcers first should ensure that the rules they propagate create net welfare benefits.  Next, they should (to the extent possible) seek to calibrate those rules so as to maximize net welfare.  (Significantly, Federal Trade Commissioner Josh Wright also has highlighted the merits of utilizing cost-benefit analysis in the work of the FTC.)

Importantly, while antitrust analysis is different in nature from agency regulation, cost-benefit analysis also has been the centerpiece of Executive Branch regulatory review since the Reagan Administration, winning bipartisan acceptance.  (Cass Sunstein has termed it “part of the informal constitution of the U.S. regulatory state.”)  Indeed, an examination of general Executive Branch guidance on cost-benefit regulatory assessments, and, in particular, on the evaluation of old policies, is quite instructive.  As stated by the Obama Administration in the context of Office of Management regulatory review, pursuant to Executive Order 13563, retrospective analysis allows an agency to identify “rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.”  Although Justice Department and FTC antitrust policy formulation is not covered by this Executive Order, its principled focus on assessments of preexisting as well as proposed regulations should remind federal antitrust enforcers that scrutinizing the actual effects of past enforcement initiatives is key to improving antitrust enforcement policy.  (Commendably, FTC Chairwoman Edith Ramirez and former FTC Chairman William Kovacic have emphasized the value of retrospective reviews.)

What should underlie cost-benefit analysis of antitrust enforcement policy?  The best approach is an error cost (decision theoretic) framework, which tends toward welfare maximization by seeking to minimize the sum of the costs attributable to false positives, false negatives, antitrust administrative costs, and disincentive costs imposed on third parties (the latter may also be viewed as a subset of false positives).  Josh Wright has provided an excellent treatment of this topic in touting the merits of evidence-based antitrust enforcement.  As Wright points out, such an approach places a premium on hard evidence of actual anticompetitive harm and empirical analysis, rather than mere theorizing about anticompetitive harm (which too often may lead to a misidentification of novel yet efficient business practices).

How should antitrust enforcers implement an error cost framework in establishing enforcement policy protocols?  Below I suggest eight principles that, I submit, would align antitrust enforcement policy much more closely with an error cost-based, cost-benefit approach.  These suggestions are preliminary tentative thoughts, put forth solely to stimulate future debate.  I fully recognize that convincing public officials to implement a cost-benefit framework for antitrust enforcement (which inherently limits bureaucratic discretion) will be exceedingly difficult, to say the least.  Generating support for such an approach is a long term project.  It must proceed in light of the political economy of antitrust and more specifically the institutional structure of antitrust enforcement (which Dan Crane has addressed in impressive fashion), topics that merit separate exploration.

First, antitrust enforcers should seek to identify and expound simple rules they will follow in both case selection and evaluation of business conduct, in order to rein in administrative costs.

Second, borrowing from Frank Easterbrook, they should place a greater emphasize on avoiding false positives than false negatives, particularly in the area of unilateral conduct (since false positives may send cautionary signals to third party businesses that the market cannot easily correct).

Third, they should pursue cases based on hard empirically-based indications of likely anticompetitive harm, rather than theoretical constructs that are hard to verify.

Fourth, they should avoid behavioral remedies in merger cases (and, indeed, other cases) to the greatest extent possible, given inherent problems of monitoring and administration posed by such requirements.  (See the trenchant critique of merger behavioral remedies by John Kwoka and Diana Moss.)

Fifth, they should emphasize giving full consideration to efficiencies (including dynamic efficiencies), given their importance to innovation and economic welfare gains.

Sixth, they should announce their positions in public pronouncements and guidelines that are as simple and straightforward as possible.  Agency guidance should be “tweaked” in light of compelling new empirical evidence, but “pendulum swing” changes should be minimized to avoid costly uncertainty.

Seventh, in non per se matters, they should pledge that they will only bring cases when (1) they have substantial evidence for the facts on which they rely and (2) that reasoning from those facts makes their prediction of harm to future competition more plausible than the defendant’s alternative account of the future.  (Doug Ginsburg and Josh Wright recommend that such a standard be applied to judicial review of antitrust enforcement action.)

Eighth, in the area of cartel conduct, they should adjust leniency and other enforcement policies based on the latest empirical findings and economic theory, seeking to pursue optimal detection and deterrence in light of “real world” evidence (see, for example, Greg Werden, Scott Hammond, and Belinda Barnett).

Admittedly, these suggestions bear little resemblance to recent federal antitrust enforcement initiatives.  Indeed, Obama Administration antitrust enforcers appear to me to have been moving farther away from an approach rooted in cost-benefit analysis.  The 2010 Horizontal Merger Guidelines, although more sophisticated than prior versions, give relatively short shrift to efficiencies (as Josh Wright has pointed out).  The Obama Justice Department’s withdrawal in 2009 of its predecessor’s Sherman Act Section Two Report (which had emphasized error costs and proposed simple rules for assessing monopolization cases) highlighted a desire for “aggressive enforcement,” without providing specific guidance for the private sector.  More generally, an assessment by William Shughart and Diana Thomas of antitrust enforcement in the Obama Administration’s first term concluded that antitrust agency activity had moved away from structural remedies and toward intrusive behavioral remedies “in an unprecedented fashion,” yielding suboptimal regulation – a far cry from cost-beneficial norms.

One may only hope (which after all makes “all the difference in the world”) that Federal Trade Commission and Justice Department officials, inspired by their teams of highly qualified economists, may consider according greater weight to cost-benefit considerations and error cost approaches as they move forward.

Earlier this week the New Jersey Assembly unanimously passed a bill to allow direct sales of Tesla cars in New Jersey. (H/T Marina Lao). The bill

Allows a manufacturer (“franchisor,” as defined in P.L.1985, c.361 (C.56:10-26 et seq.)) to directly buy from or sell to consumers a zero emission vehicle (ZEV) at a maximum of four locations in New Jersey.  In addition, the bill requires a manufacturer to own or operate at least one retail facility in New Jersey for the servicing of its vehicles. The manufacturer’s direct sale locations are not required to also serve as a retail service facility.

The bill amends current law to allow any ZEV manufacturer to directly or indirectly buy from and directly sell, offer to sell, or deal to a consumer a ZEV if the manufacturer was licensed by the New Jersey Motor Vehicle Commission (MVC) on or prior to January 1, 2014.  This bill provides that ZEVs may be directly sold by certain manufacturers, like Tesla Motors, and preempts any rule or regulation that restricts sales exclusively to franchised dealerships.  The provisions of the bill would not prevent a licensed franchisor from operating under an existing license issued by the MVC.

At first cut, it seems good that the legislature is responding to the lunacy of the Christie administration’s previous decision to enforce a rule prohibiting direct sales of automobiles in New Jersey. We have previously discussed that decision at length in previous posts here, here, here and here. And Thom and Mike have taken on a similar rule in their home state of Missouri here and here.

In response to New Jersey’s decision to prohibit direct sales, the International Center for Law & Economics organized an open letter to Governor Christie based in large part on Dan Crane’s writings on the topic here at TOTM and discussing the faulty economics of such a ban. The letter was signed by more than 70 law professors and economists.

But it turns out that the legislative response is nearly as bad as the underlying ban itself.

First, a quick recap.

In our letter we noted that

The Motor Vehicle Commission’s regulation was aimed specifically at stopping one company, Tesla Motors, from directly distributing its electric cars. But the regulation would apply equally to any other innovative manufacturer trying to bring a new automobile to market, as well. There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of its auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple.

While enforcement of the New Jersey ban was clearly aimed directly at Tesla, it has broader effects. And, of course, its underlying logic is simply indefensible, regardless of which particular manufacturer it affects. The letter explains at length the economics of retail distribution and the misguided, anti-consumer logic of the regulation, and concludes by noting that

In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies. It is discouraging to see this ban being used to block a company that is bringing dynamic and environmentally friendly products to market. We strongly encourage you to repeal it, by new legislation if necessary.

Thus it seems heartening that the legislature did, indeed, take up our challenge to repeal the ban.

Except that, in doing so, the legislature managed to write a bill that reflects no understanding whatever of the underlying economic issues at stake. Instead, the legislative response appears largely to be the product of rent seeking,pure and simple, offering only a limited response to Tesla’s squeaky wheel (no pun intended) and leaving the core defects of the ban completely undisturbed.

Instead of acknowledging the underlying absurdity of the limit on direct sales, the bill keeps the ban in place and simply offers a limited exception for Tesla (or other zero emission cars). While the innovative and beneficial nature of Tesla’s cars was an additional reason to oppose banning their direct sale, the specific characteristics of the cars is a minor and ancillary reason to oppose the ban. But the New Jersey legislative response is all about the cars’ emissions characteristics, and in no way does it reflect an appreciation for the fundamental economic defects of the underlying rule.

Moreover, the bill permits direct sales at only four locations (why four? No good reason whatever — presumably it was a political compromise, never the stuff of economic reason) and requires Tesla to operate a service center for its cars in the state. In other words, the regulators are still arbitrarily dictating aspects of car manufacturers’ business organization from on high.

Even worse, however, the bill is constructed to be nothing more than a payoff for a specific firm’s lobbying efforts, thus ensuring that the next (non-zero-emission) Tesla to come along will have to undertake the same efforts to pander to the state.

Far from addressing the serious concerns with the direct sales ban, the bill just perpetuates the culture of political rent seeking such regulations create.

Perhaps it’s better than nothing. Certainly it’s better than nothing for Tesla. But overall, I’d say it’s about the worst possible sort of response, short of nothing.

Our TOTM colleague Dan Crane has written a few posts here over the past year or so about attempts by the automobile dealers lobby (and General Motors itself) to restrict the ability of Tesla Motors to sell its vehicles directly to consumers (see here, here and here). Following New Jersey’s adoption of an anti-Tesla direct distribution ban, more than 70 lawyers and economists–including yours truly and several here at TOTM–submitted an open letter to Gov. Chris Christie explaining why the ban is bad policy.

Now it seems my own state of Missouri is getting caught up in the auto dealers’ ploy to thwart pro-consumer innovation and competition. Legislation (HB1124) that was intended to simply update statutes governing the definition, licensing and use of off-road and utility vehicles got co-opted at the last minute in the state Senate. Language was inserted to redefine the term “franchisor” to include any automobile manufacturer, regardless whether they have any franchise agreements–in direct contradiction to the definition used throughout the rest of the surrounding statues. The bill defines a “franchisor” as:

“any manufacturer of new motor vehicles which establishes any business location or facility within the state of Missouri, when such facilities are used by the manufacturer to inform, entice, or otherwise market to potential customers, or where customer orders for the manufacturer’s new motor vehicles are placed, received, or processed, whether or not any sales of such vehicles are finally consummated, and whether or not any such vehicles are actually delivered to the retail customer, at such business location or facility.”

In other words, it defines a franchisor as a company that chooses to open it’s own facility and not franchise. The bill then goes on to define any facility or business location meeting the above criteria as a “new motor vehicle dealership,” even though no sales or even distribution may actually take place there. Since “franchisors” are already forbidden from owning a “new motor vehicle dealership” in Missouri (a dubious restriction in itself), these perverted definitions effectively ban a company like Tesla from selling directly to consumers.

The bill still needs to go back to the Missouri House of Representatives, where it started out as addressing “laws regarding ‘all-terrain vehicles,’ ‘recreational off-highway vehicles,’ and ‘utility vehicles’.”

This is classic rent-seeking regulation at its finest, using contrived and contorted legislation–not to mention last-minute, underhanded legislative tactics–to prevent competition and innovation that, as General Motors itself pointed out, is based on a more economically efficient model of distribution that benefits consumers. Hopefully the State House…or the Governor…won’t be asleep at the wheel as this legislation speeds through the final days of the session.

Earlier this month New Jersey became the most recent (but likely not the last) state to ban direct sales of automobiles. Although the rule nominally applies more broadly, it is directly aimed at keeping Tesla Motors (or at least its business model) out of New Jersey. Automobile dealers have offered several arguments why the rule is in the public interest, but a little basic economics reveals that these arguments are meritless.

Today the International Center for Law & Economics sent an open letter to New Jersey Governor Chris Christie, urging reconsideration of the regulation and explaining why the rule is unjustified — except as rent-seeking protectionism by independent auto dealers.

The letter, which was principally written by University of Michigan law professor, Dan Crane, and based in large part on his blog posts here at Truth on the Market (see here and here), was signed by more than 70 economists and law professors.

As the letter notes:

The Motor Vehicle Commission’s regulation was aimed specifically at stopping one company, Tesla Motors, from directly distributing its electric cars. But the regulation would apply equally to any other innovative manufacturer trying to bring a new automobile to market, as well. There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of its auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple.

The letter explains at length the economics of retail distribution and the misguided, anti-consumer logic of the regulation.

The letter concludes:

In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies. It is discouraging to see this ban being used to block a company that is bringing dynamic and environmentally friendly products to market. We strongly encourage you to repeal it, by new legislation if necessary.

Among the letter’s signatories are some of the country’s most prominent legal scholars and economists from across the political spectrum.

Read the letter here:

Open Letter to New Jersey Governor Chris Christie on the Direct Automobile Distribution Ban

Joshua Wright is a Commissioner at the Federal Trade Commission

I’d like to thank Geoff and Thom for organizing this symposium and creating a forum for an open and frank exchange of ideas about the FTC’s unfair methods of competition authority under Section 5.  In offering my own views in a concrete proposed Policy Statement and speech earlier this summer, I hoped to encourage just such a discussion about how the Commission can define its authority to prosecute unfair methods of competition in a way that both strengthens the agency’s ability to target anticompetitive conduct and provides much needed guidance to the business community.  During the course of this symposium, I have enjoyed reading the many thoughtful posts providing feedback on my specific proposal, as well as offering other views on how guidance and limits can be imposed on the Commission’s unfair methods of competition authority.  Through this marketplace of ideas, I believe the Commission can develop a consensus position and finally accomplish the long overdue task of articulating its views on the application of the agency’s signature competition statute.  As this symposium comes to a close, I’d like to make a couple quick observations and respond to a few specific comments about my proposal.

There Exists a Vast Area of Agreement on Section 5

Although conventional wisdom may suggest it will be impossible to reach any meaningful consensus with respect to Section 5, this symposium demonstrates that there actually already exists a vast area of agreement on the subject.  In fact, it appears safe to draw at least two broad conclusions from the contributions that have been offered as part of this symposium.

First, an overwhelming majority of commentators believe that we need guidance on the scope of the FTC’s unfair methods of competition authority.  This is not surprising.  The absence of meaningful limiting principles distinguishing lawful conduct from unlawful conduct under Section 5 and the breadth of the Commission’s authority to prosecute unfair methods of competition creates significant uncertainty among the business community.  Moreover, without a coherent framework for applying Section 5, the Commission cannot possibly hope to fulfill Congress’s vision that Section 5 would play a key role in helping the FTC leverage its unique research and reporting functions to develop evidence-based competition policy.

Second, there is near unanimity that the FTC should challenge only conduct as an unfair method of competition if it results in “harm to competition” as the phrase is understood under the traditional federal antitrust laws.  Harm to competition is a concept that is readily understandable and has been deeply embedded into antitrust jurisprudence.  Incorporating this concept would require that any conduct challenged under Section 5 must both harm the competitive process and harm consumers.  Under this approach, the FTC should not consider non-economic factors, such as whether the practice harms small business or whether it violates public morals, in deciding whether to prosecute conduct as an unfair method of competition.  This is a simple commitment, but one that is not currently enshrined in the law.  By tethering the definition of unfair methods of competition to modern economics and to the understanding of competitive harm articulated in contemporary antitrust jurisprudence, we would ensure Section 5 enforcement focuses upon conduct that actually is anticompetitive.

While it is not surprising that commentators offering a diverse set of perspectives on the appropriate scope of the FTC’s unfair methods of competition authority would agree on these two points, I think it is important to note that this consensus covers much of the Section 5 debate while leaving some room for debate on the margins as to how the FTC can best use its unfair methods of competition authority to complement its mission of protecting competition.

Some Clarifications Regarding My Proposed Policy Statement

In the spirit of furthering the debate along those margins, I also briefly would like to correct the record, or at least provide some clarification, on a few aspects of my proposed Policy Statement.

First, contrary to David Balto’s suggestion, my proposed Policy Statement acknowledges the fact that Congress envisioned Section 5 to be an incipiency statute.  Indeed, the first element of my proposed definition of unfair methods of competition requires the FTC to show that the act or practice in question “harms or is likely to harm competition significantly.”  In fact, it is by prosecuting practices that have not yet resulted in harm to competition, but are likely to result in anticompetitive effects if allowed to continue, that my definition reaches “invitations to collude.”  Paul Denis raises an interesting question about how the FTC should assess the likelihood of harm to competition, and suggests doing so using an expected value test.  My proposed policy statement does just that by requiring the FTC to assess both the magnitude and probability of the competitive harm when determining whether a practice that has not yet harmed competition, but potentially is likely to, is an unfair method of competition under Section 5.  Where the probability of competitive harm is smaller, the Commission should not find an unfair method of competition without reason to believe the conduct poses a substantial harm.  Moreover, by requiring the FTC to show that the conduct in question results in “harm to competition” as that phrase is understood under the traditional federal antitrust laws, my proposal also incorporates all the temporal elements of harm discussed in the antitrust case law and therefore puts the Commission on the same footing as the courts.

Second, both Dan Crane and Marina Lao have suggested that the efficiencies screen I have proposed results in a null (or very small) set of cases because there is virtually no conduct for which some efficiencies cannot be claimed.  This suggestion stems from an apparent misunderstanding of the efficiencies screen.  What these comments fail to recognize is that the efficiencies screen I offer intentionally leverages the Commission’s considerable expertise in identifying the presence of cognizable efficiencies in the merger context and explicitly ties the analysis to the well-developed framework offered in the Horizontal Merger Guidelines.  As any antitrust practitioner can attest, the Commission does not credit “cognizable efficiencies” lightly and requires a rigorous showing that the claimed efficiencies are merger-specific, verifiable, and not derived from an anticompetitive reduction in output or service.  Fears that the efficiencies screen in the Section 5 context would immunize patently anticompetitive conduct because a firm nakedly asserts cost savings arising from the conduct without evidence supporting its claim are unwarranted.  Under this strict standard, the FTC would almost certainly have no trouble demonstrating no cognizable efficiencies exist in Dan’s “blowing up of the competitor’s factory” example because the very act of sabotage amounts to an anticompetitive reduction in output.

Third, Marina Lao further argues that permitting the FTC to challenge conduct as an unfair method of competition only when there are no cognizable efficiencies is too strict a standard and that it would be better to allow the agency to balance the harms against the efficiencies.  The current formulation of the Commission’s unfair methods of competition enforcement has proven unworkable in large part because it lacks clear boundaries and is both malleable and ambiguous.  In my view, in order to make Section 5 a meaningful statute, and one that can contribute productively to the Commission’s competition enforcement mission as envisioned by Congress, the Commission must first confine its unfair methods of competition authority to those areas where it can leverage its unique institutional capabilities to target the conduct most harmful to consumers.  This in no way requires the Commission to let anticompetitive conduct run rampant.  Where the FTC identifies and wants to challenge conduct with both harms and benefits, it is fully capable of doing so successfully in federal court under the traditional antitrust laws.

I cannot think of a contribution the Commission can make to the FTC’s competition mission that is more important than issuing a Policy Statement articulating the appropriate application of Section 5.  I look forward to continuing to exchange ideas with those both inside and outside the agency regarding how the Commission can provide guidance about its unfair methods of competition authority.  Thank you once again to Truth on the Market for organizing and hosting this symposium and to the many participants for their thoughtful contributions.

*The views expressed here are my own and do not reflect those of the Commission or any other Commissioner.

Regulating the Regulators: Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority

August 1, 2013

Truthonthemarket.com

We’ve had a great day considering the possibility, and potential contours, of guidelines for implementing the FTC’s “unfair methods of competition” (UMC) authority.  Many thanks to our invited participants and to TOTM readers who took the time to follow today’s posts.  There’s lots of great stuff here, so be sure to read anything you missed.  And please continue to comment on posts.  A great thing about a blog symposium is that the discussion need not end immediately.  We hope to continue the conversation over the next few days.

I’m tempted to make some observations about general themes, points of (near) consensus, open questions, etc., but I won’t do that because we’re not quite finished.  We’re expecting to receive an additional post or two tomorrow, and to hear a response from Commissioner Josh Wright.  We hope you’ll join us tomorrow for final posts and Commissioner Wright’s response.

Here are links to the posts so far:

Gus Hurwitz is Assistant Professor of Law at University of Nebraska College of Law

Introduction

This post is based upon an in-progress article that explores the applicability of Chevron deference to FTC interpretations of Section 5’s proscription of unfair methods of competition. ( I am happy to circulate a draft of this article to anyone who would like to offer substantive feedback.) The article is prompted by the near-universal belief in the antitrust bar – held by both academics and practitioners – that the FTC is not entitled to Chevron deference.

In my limited space here, I hope to do three things. First, since many readers may not be familiar with Chevron deference, I explain very briefly what it is. Second, I explain why Chevron deference is relevant to Section 5 and to UMC in particular. And third, I debunk three of the most pervasive myths about why the FTC would not receive Chevron deference.

Regardless one’s priors, understanding the relationship between Section 5 and Chevron is essential to understanding the future of FTC-based competition policy. The past 30 years of competition policy debates have addressed the courts as its main audience. The new front – which neither the antitrust hawks or doves has significant experience with – is administrative. Administrative law is very different from the judicially-defined, stare decisis–restrained, common-law venue in which we are all used to playing.

Chevron

Chevron deference is used where a statute enforced by an administrative agency involves an ambiguous legal standard. In such cases, it is unclear whether such ambiguity should be resolved by the courts or by the agency. In its 1984 Chevron opinion, the Court made clear – for various reasons that are hotly debated to this day – that courts should defer to agency interpretations of such ambiguous statutes, provided that the interpretation is permissible within the language of the statute.

It is requisite that any discussion of Chevron cite to the opinion’s famous language:

First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute. Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 842-43 (1984)

This standard is important to the FTC because Section 5 was deliberately designed to be an ambiguous statute (this is made clear in the legislative history, and has been affirmed consistently by the Court). In the context of UMC, each of “unfair,” “method,” and “competition” bears some modicum of ambiguity – “unfair,” in particular drips with it.

Chevron’s relevance to Section 5

This ambiguity has not been an issue for the past 30 years or so, because the FTC has restrained itself to an interpretation of UMC that is concurrent with the judicially-defined antitrust laws (viz., the Sherman and Clayton Acts). But as the fact of this symposium reflects, recent years have seen increasing pressure for the FTC to embrace a more expansive understanding of its UMC authority under Section 5.

What happens when it does this? What happens, for example, when the FTC asserts that “unfair” embraces more than mere aggregate consumer welfare, but extends to distributional effects as well. There is a not-insane argument that some decreases in total welfare is an acceptable cost to secure greater distributional “fairness.” If the courts afford the Commission Chevron deference, the answer is simple: the Commission wins.

Debunking the myth that Chevron does not apply to Section 5

There is a pervasive belief that Chevron does not apply to Section 5. As a result, antitrust scholarship has largely addressed the courts as its audience, framing debates about Section 5 in the same language and theory as has been embraced by the courts in the context of the Sherman Act. That is, discussions have largely been framed in post-Antitrust Paradox consumer welfare understandings of antitrust law.

This view was clear in the FTC’s 2008 workshop on Section 5 of the FTC Act as a Competition Statute. It has also been captured extensively in Dan Crane’s wonderful work on the FTC as an institution. Anecdotally, as I have wondered about this issue over the past several years, I have encountered many antitrust scholars and practitioners who have assured me that Chevron does not apply to Section 5; and I have encountered none who have believed that it does.

A number of reasons have been offered to explain why Chevron does not apply to Section 5. In the remained of this post, I will debunk the three most pervasive explanations offered for this: that the FTC doesn’t have substantive rulemaking authority, that deference doesn’t apply to statutes that are enforced by multiple agencies (e.g., the FTC and DOJ both enforcing the antitrust laws), and that Indiana Federation of Dentists, 476 U.S. 447 (1986) (the Court’s most recent Section 5 UMC case), provides that Section 5 UMC cases are reviewed de novo by the courts.

Myth #1: FTC doesn’t have rulemaking authority

It is widely believed that the FTC doesn’t have substantive UMC rulemaking authority; and folks seem to think that such authority is required for an agency to get Chevron deference. Both of these are beliefs are wrong.

The confusion over the extent of the FTC’s rulemaking authority is somewhat understandable – it has been the subject of much controversy and judicial and Congressional debate for much of the Commission’s existence. This debate has been especially muddled by Congress’s disparate treatment of UMC and UDAP (unfair or deceptive act or practices – a separate offence proscribed by Section 5).

But there really is no question that the FTC has substantive UMC rulemaking authority under Section 6(g). The Supreme Court held so much in National Petroleum Refiners, 482 F.2d 672 (1973) – one of the seminal cases in the administrative law canon. While the FTC Act has been amended several times since National Petroleum Refiners (most notably in 1975, 1980, and 1994), and the Commissions UDAP rulemaking power has been an explicit focus of several of these amendments, none of them has affected the Commission’s UMC rulemaking authority. To the contrary, the amendments and related legislative history expressly preserve the Commission’s UMC rulemaking authority as it existed in 1973.

(The 1975 amendments notes that “The preceding sentence shall not affect any authority of the commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce.” The 1980 Conference report notes that the 1975 amendments “specifically addressed the Commission’s rulemaking authority over ‘unfair or deceptive acts or practices,” and that they expressly declaimed any effect on the Commission’s authority with respect to unfair methods of competition. And the 1994 amendments focused exclusively on unfair acts or practices – omitting both deceptive acts or practices and unfair methods of competition.)

What’s more, substantive rulemaking authority is not the necessary condition for Chevron deference to apply. The necessary condition is that the agency be able to make rules or establish legal norms carrying the force of law. Such rules can be made either through rulemaking or adjudication (and possibly even through other Congressionally-intended mechanisms). See Mead, 533 U.S. 218, 234-35 (2001). There is little, if any, serious question that the FTC was created precisely for this purpose and, to this day, has such power.

Myth #2: Concurrent antitrust jurisdiction means no deference

A second common explanation for why the FTC does not receive the benefit of Chevron deference is that such deference does not extend to statutes enforced by multiple agencies, and that the antitrust laws are enforced by both the DOJ and FTC. Again, this is a misunderstanding of both FTC and administrative law.

On the administrative law front, the question of how concurrent jurisdiction affects deference is handled as a threshold question to be answered by Congressional intent. (For the admin-law geeks among us, this is a step-zero question.) It is possible that Congress intended either, neither, or both agencies with concurrent jurisdiction to be given deference. Whatever Congress intended, is what controls – not a mythical rule that concurrent jurisdiction negates deference.

But this explanation suffers a more basic flaw: the only reason that the FTC and DOJ have concurrent jurisdiction over the antitrust laws is because the FTC has interpreted Section 5 to be concurrent with the antitrust laws enforced by the DOJ. Section 5 (and the FTC itself) was created precisely to be broader than the antitrust laws – and nothing in Section 5 even references the “antitrust laws.” Section 5 may be coextensive with the DOJ-enforced antitrust laws – but only because it encompasses and is broader than them. The FTC does not share jurisdiction over that part of Section 5 that is broader than those laws that the DOJ enforces.

Myth #3: Indiana Federation of Dentists holds Section 5 UMC cases are reviewed de novo

The final myth that I will consider is that Indiana Federation of Dentists requires courts to conduct de novo review of FTC legal determinations under Section 5. This explanation really is quite fascinating as a demonstration of how myths can propagate through the bar – and the importance of interfacing with experts from other specialty areas of the law.

The typically-cited passage from Indiana Federation of Dentists explains that:

The legal issues presented — that is, the identification of governing legal standards and their application to the facts found — are, by contrast, for the courts to resolve, although even in considering such issues the courts are to give some deference to the Commission’s informed judgment that a particular commercial practice is to be condemned as “unfair.”

This language has been cited as requiring do novo review of all legal questions, including the legal meaning of Section 5. Dan Crane has called this an “odd standard,” noting that ordinarily “this is technically a question of Chevron deference, although the courts have not articulated it that way in the antitrust space.” Indeed, it seems remarkable that Indiana Federation of Dentists (decided in 1986) does not even mention Chevron (decided in 1984) – a fact that has led antitrust commentators to believe “One cannot explain judicial posture in the antitrust arena in Chevron terms.”

But this is a misreading of Indiana Federation of Dentists, which is in fact entirely in line with Chevron; and it is a misunderstanding of Chevron’s history. First, it is unsurprising that Indiana Federation of Dentists did not cite to Chevron. The Indiana Federation of Dentists petitioned for cert from a 7th Circuit that had been argued before Chevron was decided, and the Commission was arguing for an uncontroversial interpretation of Section 5 as applying Section 1 of the Sherman Act. The Commission had never structured its case to seek deference, and before the Supreme Court it had no need to argue for any deference.

Moreover, it took several years for the importance of Chevron to become understood, and to filter its way into judicial review of agency statutory interpretation. Over the next several years, the Circuit Courts regularly used Indiana Federation of Dentists to explain the standard of review for various agencies’ interpretations of their organic statutes (including, e.g., HHS, INS Labor, and OSHA). Importantly, these cases recognized that there was some confusion as to the changing standard of review; framed their analysis in terms of Skidmore (the precursor Chevron in this line of cases); and largely reached Chevron-like conclusions, despite Indiana Federation of Dentists’s suggestion of a lower level of deference. Today, Chevron, not Indiana Federation of Dentists, is the law of the land – at least, for every regulatory agency other than the FTC.

Indeed, a close reading of Indiana Federation of Dentists finds that it is in accord with Chevron. The continuation of the paragraph quoted above explains that:

The standard of “unfairness” under the FTC Act is, by necessity, an elusive one, encompassing not only practices that violate the Sherman Act and the other antitrust laws, but also practices that the Commission determines are against public policy for other reasons. Once the Commission has chosen a particular legal rationale for holding a practice to be unfair, however, familiar principles of administrative law dictate that its decision must stand or fall on that basis, and a reviewing court may not consider other reasons why the practice might be deemed unfair. In the case now before us, the sole basis of the FTC’s finding of an unfair method of competition was the Commission’s conclusion that the [alleged conduct] was an unreasonable and conspiratorial restraint of trade in violation of § 1 of the Sherman Act. Accordingly, the legal question before us is whether the Commission’s factual findings, if supported by evidence, make out a violation of Sherman Act § 1. (emphasis added)

This language critically alters the paragraph’s initial proposition that the legal issues are for determination by the courts. Rather, the Court recognizes that Section 5 is inherently ambiguous. It is therefore to the Commission to choose the legal standard under which that conduct will be reviewed – “a reviewing court may not consider other reasons why the practice might be deemed unfair.”

This is precisely the standard established by Chevron: first, the courts determine whether the statute is ambiguous and, if it is not, the court’s reading of the statute is binding; but if it is ambiguous, the court defers to the agency’s construction. Part of why Chevron is a difficult test is that both parts of this analysis do, in fact, present legal questions for the court. The first step is purely legal, with the court determining on its own whether the statute is ambiguous. Then, at step two, the legal question is whether the agency correctly applied the facts to its declared legal standard – as the Court recognizes in Indiana Federation of Dentists, “the legal question before us is whether the Commission’s factual findings make out a violation of Sherman Act § 1.” Thus, the opening, oft-quoted, first sentence of the paragraph is correct, and is in accord with Chevron: the legal issues presented are for the courts to resolve.

Conclusion

The long-standing belief that FTC interpretations of UMC under Section 5 are not entitled to Chevron deference are almost certainly wrong. I’ve addressed three of the most pervasive myths about this above – there are a couple more, but you’ll need to read the full paper to learn about them and why they are wrong.

Two important questions follow, which we will likely take up in this symposium, and I take up a bit in my article: normatively, should the FTC receive such deference, and, if not, what restraints exist on the scope of the Commission’s Section 5’s UMC power? I’ll conclude with what I believe is the most important takeaway from this post: however we proceed, we must do so with an understanding of both antitrust and administrative law. The relevant audiences for our discussions about these issues are the FTC and Congress – not the courts; and the relevant language is that of policy and statute, not judicial precedent and stare decisis. Administrative law is the unique, beautiful, and scary beast that governs the FTC – those who fail to respect its nuances do so at their own peril.

Dan Crane is Sr. Professor of Law and Associate Dean for Faculty and Research at the University of Michigan Law School

I’m delighted that Josh and Maureen have launched a concerted effort to have the FTC articulate clear principles for Section 5 enforcement.  My own views on the proper scope of Section 5 are articulated in my book The Institutional Structure of Antitrust EnforcementI won’t attempt a comprehensive regurgitation here, but just offer three quick observations that may be relevant to the present debate.

First, the most important reason for the articulation of clear Section 5 principles is not to give greater guidance to the business community, although that’s important too.  The most important reason is to articulate principles of self-restraint that Article III courts can invoke in reviewing Commission decisions applying Section 5 in spaces that Sections 1 and 2 of the Sherman Act would not apply under current judicial doctrine.  History suggests that courts jealously guard their interpretations of the Sherman Act and are reluctant to allow the FTC to effectively override them based on assertions of Section 5 independence.  The courts rejected FTC efforts to wield an independent Section 5 in the late 70s and early 80s.  They will be inclined to do so again if the FTC merely asserts “Section 5 is a prophylactic statute; trust us to wield it to good ends.”  By articulating principles that delimit how far the FTC can go under Section 5, the FTC would provide courts assurances that meaningful judicial review can still occur.

Second, and in the same vein, the Commission needs to articulate principles not just about how far it can go under Section 5 but also about how far it cannot go.  It needs to say, in effect, “courts, here is how you will know if we crossed the line.”  These limitation principles need to be concrete enough that defendants have a reasonable opportunity to show through objective evidence that their conduct does not contravene the statute.  In other words, the Commission needs to explain how its view of Section 5 independence is not a plea for greater administrative discretion, which courts will be unlikely to afford, but for an expanded scope of antitrust coverage under principles that can be fairly contested in litigation.

Shifting to the substance of these limitation principles, my third point concerns one of the criteria proposed by Josh—that the challenged conduct have no cognizable efficiency benefits.  I agree with the thrust of Josh’s suggestion, but would suggest a small qualification.   There is virtually no anticompetitive conduct that doesn’t produce some efficiency.  Heck, even the proverbial blowing up of the competitor’s factory might product some efficiency (the rebuilt factory might be 3% more efficient than the old one and hence might spur greater competition in the long run).  Cartels often have some efficiency benefit—they reduce planning costs, smooth prices to customers, etc.  So if the criterion were that the challenged conduct had to be absolutely devoid of efficiency benefits, that might create a null set of independent Section 5 cases.  I would suggest, as a qualification, that the criterion be akin to that used to justify the per se rule—that the challenged conduct is so unlikely to have redeeming efficiencies that the law is justified in not inquiring into whether there are in fact efficiencies.  This is not to say that Section 5 cases would disallow inquiry into efficiencies, but rather that the Commission would need to show that any claimed efficiencies were so trivial or speculative compared to the clear competitive harms that the conduct was similar in kind to price fixing, market division, or bid rigging.  The paradigmatic Section 5 cases—invitations to collude and fraud—easily fit that bill.

Regulating the Regulators: Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority

August 1, 2013

Truthonthemarket.com

Welcome!

We’re delighted to kick off our one-day blog symposium on the FTC’s unfair methods of competition (UMC) authority under Section 5 of the FTC Act.

Last month, FTC Commissioner Josh Wright began a much-needed conversation on the FTC’s UMC authority by issuing a proposed policy statement attempting to provide some meaningful guidance and limits to the FTC’s authority. Meanwhile, last week Commissioner Maureen Ohlhausen offered her own take on the issue, echoing many of Josh’s points and further extending the conversation. Considerable commentary—and even congressional attention—has been directed to the absence of UMC authority limits, the proper scope of that authority, and its significance for the businesses regulated by the Commission.

Section 5 of the FTC Act permits the agency to take enforcement actions against companies that use “unfair or deceptive acts or practices” or that employ “unfair methods of competition.” The Act doesn’t specify what these terms mean, instead leaving that determination to the FTC itself.  In the 1980s, under intense pressure from Congress, the Commission established limiting principles for its unfairness and deception authorities. But today, coming up on 100 years since the creation of the FTC, the agency still hasn’t defined the scope of its UMC authority, instead pursuing enforcement actions without any significant judicial, congressional or even self-imposed limits. And in recent years the Commission has seemingly expanded its interpretation of its UMC authority, bringing a string of standalone Section 5 cases (including against Intel, Rambus, N-Data, Google and others), alleging traditional antitrust injury but avoiding the difficulties of pursuing such actions under the Sherman Act (or, in a few cases, bringing separate claims under both Section 5 and Section 2).

We hope this symposium will provide important insights and stand as a useful resource for the ongoing discussion.

We’ve lined up an outstanding and diverse group of scholars and practitioners to participate in the symposium.  They include:

  • David Balto, Law Offices of David Balto [1] [2]
  • Terry Calvani, Freshfields [1]
  • James Cooper, GMU Law & Economics Center [1] [2]
  • Dan Crane, Michigan Law [1]
  • Paul Denis, Dechert [1]
  • Angela Diveley, Freshfields [1]
  • Gus Hurwitz, Nebraska Law [1] [2]
  • Thom Lambert, Missouri Law [1]
  • Marina Lao, Seton Hall Law [1]
  • Tad Lipsky, Latham & Watkins [1]
  • Geoffrey Manne, Lewis & Clark Law/ICLE [1]
  • Joe Sims, Jones Day [1]
  • Josh Wright, FTC [1]
  • Tim Wu, Columbia Law [1]

The first of the participants’ initial posts will appear momentarily, with additional posts appearing throughout the day. We hope to generate a lively discussion, and expect some of the participants to offer follow up posts as well as comments on their fellow participants’ posts—please be sure to check back throughout the day and be sure to check the comments. We hope our readers will join us in the comments, as well.

Once again, welcome!