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NEW VOICES: FTC Rulemaking for Noncompetes

Kacyn H. Fujii —  3 May 2022

[The tenth entry in our FTC UMC Rulemaking symposium comes from guest contributor Kacyn H. Fujii, a 2022 J.D. Candidate at the University of Michigan Law School. Kacyn’s entry comes via Truth on the Market‘s “New Voices” competition, open to untenured or aspiring academics (including students and fellows). You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

On July 9, 2021, President Joe Biden issued an executive order asking the Federal Trade Commission (FTC) to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” This executive order raises two questions. First, does the FTC have the authority to issue such a rule? And second, is FTC rulemaking a better solution than adjudication to solve the widespread use of noncompetes? This post contends that the FTC possesses rulemaking authority and that FTC rulemaking is a better solution than adjudication for the problem of noncompete use, especially for low-wage workers.

FTC’s Rulemaking Authority

In 1973, the U.S. Court of Appeals for the D.C. Circuit in National Petroleum Refiners Association v. FTC held that the Federal Trade Commission Act permitted the FTC to promulgate rules under its unfair methods of competition (UMC) authority. Specifically, it interpreted Section 6(g), which gives the FTC the authority “to make rules and regulations for the purpose of carrying out the provisions in this subchapter,” to allow rulemaking to carry out the FTC’s Section 5 authority. In his remarks at the 2020 FTC workshop on noncompetes, Richard Pierce of George Washington University School of Law argued that no court today would follow National Petroleum’s reasoning, even going so far as to call its logic “preposterous.” BYU Law’s Aaron Nielson agreed that some of National Petroleum’s reasoning was outdated but conceded that its judgment might have been correct. Meanwhile, FTC Chair Lina Khan and former FTC Commissioner Rohit Chopra have spoken in favor of the FTC’s competition-rulemaking authority, both from a legal and policy perspective.

National Petroleum’s focus on text is consistent with the approaches that courts today take. The court first addressed appellees’ argument that the FTC may carry out Section 5 only through adjudication, because adjudication was the only form of implementation explicitly mentioned in Section 5. The D.C. Circuit noted that, although Section 5(b) granted the FTC adjudicative authority, nothing in the text limited the FTC only to adjudication as a means to implement Section 5’s substantive protections. It dismissed the appellee’s argument that expressio unius meant that adjudication was the only mechanism the agency had available to implement Section 5. The D.C. Circuit also rejected the district court’s interpretation of the legislative history, because it was too ambiguous to find Congress’s “specific intent.” Similar to the approach courts take today, National Petroleum gave the text primacy over legislative history, putting significant weight on the fact that the language of Sections 5 and 6(g) is broad.

It is true that, as Nielson notes, courts today would not so readily dismiss employing canons like expressio unius. But courts today would not necessarily employ expressio unius either. The language of Section 6(g) authorizing FTC use of rulemaking is clear and broad, expressly including Section 5 among the sections the FTC may implement through rulemaking, so Congress may have not thought it necessary to explicitly mention rulemaking in Section 5. Given how clear the language is, it also does not seem so farfetched that a court today would decide to not apply the expressio unius canon to imply an exception to the language. As the Court has commented in rejecting the expressio unius canon’s implications, “the force of any negative implication [from this canon] depends on context,” and can be negated by indications that an enactment was “not meant to signal any exclusion.”

Others argue that National Petroleum’s interpretation of Sections 5 and 6(g) would not hold up in light of newer interpretive moves deployed by courts. For example, former FTC Commissioner Maureen Ohlhausen and former Assistant Attorney General James Rill contend that the FTC should not have broad competition-rulemaking authority because of the “elephants-in-mouseholes” doctrine articulated in Whitman v. American Trucking. They invoke AMG Capital Management v. FTC as evidence that the Court is wary about “allow[ing] a small statutory tail to wag a very large dog.” The Court in AMG considered whether Section 13(b) of the FTC Act, which expressly authorized the FTC to seek injunctive relief from the federal courts, also permitted the agency to seek monetary damages. The Court concluded that the FTC could not seek monetary damages from courts. Permitting this would allow the FTC to bypass its administrative process altogether, thus contravening Congress’ goals by failing to “produce[] a coherent enforcement scheme.” However, Sections 5 and 6(g) are distinguishable from the statutory provision at issue in AMG. Unlike Section 13(b), which did not explicitly grant the FTC authority to seek monetary damages, Section 6(g) does explicitly give the FTC rulemaking authority to carry out the other provisions of the Act with no limitations on this broad language.  Meanwhile, there is no “coherent enforcement scheme” that would be served by limiting Section 6 only to methods to carry out Section 5’s adjudicative authority. Rulemaking authority does not detract from the FTC’s ability to adjudicate.

One could also argue that, according to the “specific over the general” canon, adjudication should be the FTC’s primary implementation method: Section 5(b), which is very specific in its description of the FTC’s adjudicative authority, should govern over Section 6(g), which discusses rulemaking only in general language. But there is no inherent conflict between the general and specific provisions here. Even if adjudication was intended as the primary implementation method, Section 5 does not explicitly preclude rulemaking as an option in its text. There may be valid functional reasons that Congress would want an agency that acts primarily through adjudication to also have substantive rulemaking authority. National Petroleum itself observed that “the evolution of bright-line rules [through adjudication] is often a slow process” and that “legislative-type” rulemaking procedures allow the agency to consider “broad range of data and argument from all those potentially affected.” In addition, as Emily Bremer of Notre Dame Law School observes, Congress consistently sets more specific guidelines for adjudication to meet individual agency and program needs, resulting in “extraordinary procedural diversity” across adjudication regimes. The greater level of specificity with respect to adjudication in Section 5(b) of the FTC Act may simply reflect Congress’ perceived need to delineate adjudication regimes in further detail than it does for rulemaking.

In addition, some who are doubtful about the FTC’s rulemaking authority have cited legislative context. Specifically, Ohlhausen and Rill argue that the Magnuson-Moss Warranty Act demonstrates Congress’ concern with the FTC having expansive rulemaking power. Thus, broad competition-rulemaking authority would be inconsistent with the approach Congress took in Magnuson-Moss. However, the passage of Magnuson-Moss also implies that Congress thought the FTC had existing rulemaking power that Congress could limit—thus validating National Petroleum’s overall holding that the FTC did have rulemaking authority. In addition, Congress could have also extended Magnuson-Moss’s limits on rulemakings to competition-rulemaking authority but decided to apply it only to the FTC’s consumer-protection authority. This interpretation is supported by the text as well. The Magnuson-Moss provision expressly states that its changes “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.” Congress specifically exempted competition rulemaking from Magnuson-Moss’s additional procedural requirements. If anything, this demonstrates that Congress did not want to interfere with the FTC’s competition authority.

The history of the FTC Act also supports that Congress would not have wanted to create an expert agency limited only to adjudicative authority. The FTC Act was passed during a time of unprecedented business growth, in spite of the passage of the Sherman Act in 1890. More specifically, Congress enacted the FTC Act in response to Standard Oil. Standard Oil established rule-of-reason analysis that some decried as a judicial “power grab.” Even though members of Congress disagreed about the proper scope of the FTC’s authority, all of the proposed plans for the FTC reflected Congress’ deep objections to the existing common law approach to antitrust enforcement. Congress was concerned that the existing approach was “yielding a body of law that was inconsistent, unpredictable, and unmoored from congressional intent.” Its solution was to create the FTC. The legislative context supports interpreting the statute to give the FTC all of the tools—including rulemaking—to respond effectively to nascent antitrust threats.

Finally, the FTC’s historical reliance on adjudication does not mean that it lacks the authority to promulgate rules. Assuming the relevance of historical practice—an assumption AMG cast doubt upon when it spurned the FTC’s longstanding interpretation of the FTC Act—there are reasons that an agency may choose adjudication over rulemaking that have nothing to do with its views of its statutory authority. The FTC’s preference for adjudication may simply have reflected the policy-focused views of its leadership. For example, James Miller, who chaired the FTC from 1981 to 1985, had “fundamental objections to marketplace regulation through rulemaking” because he thought Congress would exert too much pressure on rulemaking efforts. He attempted to thwart ongoing rulemaking efforts and instead vowed to take an “aggressive” approach to enforcement through adjudication. But this does not mean he thought the FTC lacked the authority to promulgate rules at all. Over the past several decades, the courts and federal antitrust enforcers have taken a non-interventionist or laissez-faire approach to enforcement. The FTC’s history of not relying on rulemaking may simply be indicators of the agency’s policy preferences and not its views of its authority.

In short, National Petroleum’s interpretive moves are sound and its conclusion that the FTC possesses UMC-rulemaking authority should stand the test of time. 

Benefits of FTC Rulemaking for Curbing Non-Compete Use

President Biden’s executive order also raised the question of whether FTC rulemaking is the right tool to address the problem of liberal noncompete use. This post argues that FTC rulemaking would have tangible benefits over adjudication, especially for noncompetes that bind low-wage workers.

The Problem with Noncompetes

Noncompete clauses, which restrict where an employee may work after they leave their employer, have been used widely even in contexts divorced from the justifications for noncompetes. Typical justifications for noncompetes include protecting trade secrets and goodwill, increasing employers’ incentives to invest in training, and improving employers’ leverage in negotiations with employees. Despite these justifications, noncompetes are used for workers who have no access to trade secrets or customer lists. According to a survey conducted in 2014, 13.3% of workers that made $40,000 per-year or less were subject to a noncompete, and 33% of those workers reported being subject to a noncompete at some point in the past. Noncompete use reduces worker mobility, even for those workers not themselves bound by noncompetes. It also results in lower wages for those bound by noncompetes. Interestingly, these effects on worker mobility and wages are present even in states where noncompetes are unenforceable.

Although noncompetes are typically governed on the state level, the magnitude of noncompete use could pose an antitrust problem. Noncompetes help employers maintain “high levels of market concentration,” which “reduce[s] competition rather than spur[ring] innovation.” However, it can be very difficult for private parties and state enforcers to challenge noncompete use under antitrust law. One employer’s use of noncompetes is unlikely to have an appreciable difference on the labor market. The harm to labor markets is only detectable in aggregate, making it virtually impossible to succeed on an antitrust challenge against an employer’s use of noncompetes. Indeed, University of Chicago Law’s Eric Posner has observed that, as of 2020, there were “a grand total of zero cases in which an employee noncompete was successfully challenged under the antitrust laws.” According to Posner, courts either claim that noncompetes involve “de minimis” effects on competition or do not create “public” injuries for antitrust law to address.

And while there have been a handful of settlements between state attorneys general and companies that use noncompetes—like the settlement between then-New York Attorney General Barbara D. Underwood and WeWork in 2018—these settlements capture only the most egregious uses of noncompetes. There are likely many other companies who use noncompetes in anticompetitive ways, but they do not operate at such scale as to warrant an investigation. State attorneys general have resource constraints that limit them to challenge only the most harmful restraints on workers. Even if these cases went to trial, instead of settling, their precedential effect would thus set only the upper bound for what is an anticompetitive use of noncompete agreements.

Further, the FTC’s current approach of relying on adjudication is unlikely to be effective in curbing widespread noncompete use. Scholars have critiqued the FTC’s historical reliance on adjudication, saying that it has failed to generate “any meaningful guidance as to what constitutes an unfair method of competition.” Part of this is because antitrust law largely relies on rule-of-reason analysis, which involves a “broad and open-ended inquiry” into the competitive effects of particular conduct. Given the highly fact-specific nature of rule-of-reason analysis, the holding of one case can be difficult to extend to another and thus leads to problems in administrability and efficiency. Even judges “have criticized antitrust standards for being highly difficult to administer.” Reliance on the rule of reason also leads to a lack of predictability, which means that market participants and the public have less notice about what the law is.

In addition, private parties cannot litigate UMC claims under Section 5 of the FTC Act; the agency itself must determine what counts as an unfair method of competition. Perhaps because of resource constraints, the FTC has only brought a “modest number” of cases that “provide an insufficient basis from which to attempt to generate substantive rules defining the Commission’s Section 5 authority.”

Benefits of Rulemaking

FTC rulemaking under its UMC authority would avoid many of the problems of a case-by-case approach. First, rulemaking would provide clarity and efficiency. For example, a rule could declare it illegal for employers to use noncompetes for employees making under the median national income. Such a rule clearly articulates the FTC’s policy and is easy to apply. This demonstrates how rulemaking can be more efficient than adjudication. In order to implement a similar policy through adjudication, the FTC may have to bring many cases covering various industries and defendants that employ low-wage workers, given the nature of rule-of-reason analysis.

Rulemaking is also more participatory than adjudication. Interested parties and the general public can weigh in on proposed rules through the notice-and-comment process. Adjudication involves only those who are party to the suit, leaving “broad swaths of market participants watching from the sidelines, lacking an opportunity to contribute their perspective, their analysis, or their expertise, except through one-off amicus briefs.” However, low-wage workers are unlikely to have the resources required to prepare and submit an amicus brief and may not even be aware of the litigation in the first place. In contrast, it is much easier for low-wage workers or their future employers to participate in the notice-and-comment process, which only requires submitting a comment through an online form. Unions or employee-rights organizations can help to facilitate worker participating in rulemaking as well.

A uniform approach through rulemaking means that more workers will be on notice of the FTC’s policy. Worker education is an important factor in solving the problem. Even in states where noncompetes are not enforceable, employers still use and threaten to enforce noncompetes, which reduces worker mobility. A clear policy articulated by the FTC may help workers to understand their rights, perhaps because a national rule will get more media attention than individual adjudications.

Although it may be true that rulemaking is, in general, less adaptable than adjudication, there may be a category of cases where our understanding is unlikely to change over time. For example, agreements to fix prices are so clearly anticompetitive that they are per se illegal under the antitrust laws. Our understanding of the anticompetitive nature of price fixing is highly unlikely to change over time. 

Noncompetes for low-wage workers should be in this category of cases. This use of noncompetes is divorced from traditional justifications for noncompetes. The nature of the work for low-wage workers—say, for janitors or cashiers—is unlikely to ever require significant employer resources for training or disclosure of customer lists or trade secrets. Given the negative effects that noncompetes can have on mobility and wages, even in states where they are not enforceable, they clearly do more harm than good to the labor market. It is difficult to imagine that market conditions or economic understanding would change this.

Further, even though rulemaking can take time, the FTC’s adjudicative process is not necessarily much better. In 2015, adjudications through the FTC’s administrative process typically took two years. Former FTC Commissioner Philip Elman once observed that case-by-case adjudication “may simply be too slow and cumbersome to produce specific and clear standards adequate to the needs of businessmen, the private bar, and the government agencies.” Even if rulemaking takes longer, it may still be more efficient because of a rule’s ability to apply across the board to different industries and types of workers. It may also be more efficient because it is better able to capture all of the relevant considerations through the notice-and-comment process.

It is true that some states already have a bright-line rule against noncompetes by making noncompetes unenforceable. Even so, there is value in establishing a bright-line rule through rulemaking at a federal level: this provides greater uniformity across states. In addition, rulemaking could have some value if it is used to establish notice requirements—for example, the FTC could promulgate a rule requiring employers to notify employees of the relevant noncompete laws. Notice requirements are one example where case-by-case adjudication would be especially ineffective.

Conclusion

In certain contexts, rulemaking is a better alternative to adjudication. Noncompete use for low-wage workers is one such example. Rulemaking provides more uniformity, notice, and opportunity to participate for low-wage workers than adjudication does. And given that both state noncompete law and federal antitrust law require such fact-specific inquiries, rulemaking is also more efficient than adjudication. Thus, the FTC should use its competition-rulemaking authority to ban noncompete use for low-wage workers instead of relying only on adjudication.

In Administrative Law, Antitrust & Competition, Exclusionary Conduct, Federal Trade Commission, FTC UMC Rulemaking, Regulation, Section 5, Symposia, Truth on the Market , , , , , , , ,
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Can the FTC Use Rulemaking to Change Antitrust Law?

Richard J. Pierce Jr. —  28 April 2022

[Continuing our FTC UMC Rulemaking symposium, today’s first guest post is from Richard J. Pierce Jr., the Lyle T. Alverson Professor of Law at George Washington University Law School. We are also publishing a related post today from Andrew K. Magloughlin and Randolph J. May of the Free State Foundation. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

FTC Rulemaking Power

In 2021, President Joe Biden appointed a prolific young scholar, Lina Khan, to chair the Federal Trade Commission (FTC). Khan strongly dislikes almost every element of antitrust law. She has stated her intention to use notice and comment rulemaking to change antitrust law in many ways. She was unable to begin this process for almost a year because the FTC was evenly divided between Democratic and Republican appointees, and she has not been able to elicit any support for her agenda from the Republican members. She will finally get the majority she needs to act in the next few days, as the U.S. Senate appears set to confirm Alvaro Bedoya to the fifth spot on the commission.   

Chair Khan has argued that the FTC has the power to use notice-and-comment rulemaking to define the term “unfair methods of competition” as that term is used in Section 5 of the Federal Trade Commission Act. Section 5 authorizes the FTC to define and to prohibit both “unfair acts” and “unfair methods of competition.” For more than 50 years after the 1914 enactment of the statute, the FTC, Congress, courts, and scholars interpreted it to empower the FTC to use adjudication to implement Section 5, but not to use rulemaking for that purpose.

In 1973, the U.S. Court of Appeals for the D.C. Circuit held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. Congress responded by amending the statute in 1975 and 1980 to add many time-consuming and burdensome procedures to the notice-and-comment process. Those added procedures had the effect of making the rulemaking process so long that the FTC gave up on its attempts to use rulemaking to implement Section 5.

Khan claims that the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it must use the extremely burdensome procedures that Congress added in 1975 and 1980 to define “unfair acts.” Her claim is based on a combination of her belief that the current U.S. Supreme Court would uphold the 1973 D.C. Circuit decision that held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5 and her belief that a peculiarly worded provision of the 1975 amendment to the FTC Act allows the FTC to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it requires the FTC to use the extremely burdensome procedure to issue rules that define “unfair acts.” The FTC has not attempted to use notice-and-comment rulemaking to define “unfair methods of competition” since Congress amended the statute in 1975. 

I am skeptical of Khan’s argument. I doubt that the Supreme Court would uphold the 1973 D.C. Circuit opinion, because the D.C. Circuit used a method of statutory interpretation that no modern court uses and that is inconsistent with the methods of statutory interpretation that the Supreme Court uses today. I also doubt that the Supreme Court would interpret the 1975 statutory amendment to distinguish between “unfair acts” and “unfair methods of competition” for purposes of the procedures that the FTC is required to use to issue rules to implement Section 5.

Even if the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” I am confident that the Supreme Court would not uphold an exercise of that power that has the effect of making a significant change in antitrust law. That would be a perfect candidate for application of the major questions doctrine. The court will not uphold an “unprecedented” action of “vast economic or political significance” unless it has “unmistakable legislative support.” I will now describe four hypothetical exercises of the rulemaking power that Khan believes that the FTC possesses to illustrate my point.

Hypothetical Exercises of FTC Rulemaking Power

Creation of a Right to Repair

President Biden has urged the FTC to create a right for an owner of any product to repair the product or to have it repaired by an independent service organization (ISO). The Supreme Court’s 1992 opinion in Eastman Kodak v. Image Technical Services tells us all we need to know about the likelihood that it would uphold a rule that confers a right to repair. When Kodak took actions that made it impossible for ISOs to repair Kodak photocopiers, the ISOs argued that Kodak’s action violated both Section 1 and Section 2 of the Sherman Act. The Court held that Kodak could prevail only if it could persuade a jury that its view of the facts was accurate. The Court remanded the case for a jury trial to address three contested issues of fact.

The Court’s reasoning in Kodak is inconsistent with any version of a right to repair that the FTC might attempt to create through rulemaking. The Court expressed its view that allowing an ISO to repair a product sometimes has good effects and sometimes has bad effects. It concluded that it could not decide whether Kodak’s new policy was good or bad without first resolving the three issues of fact on which the parties disagreed. In a 2021 report to Congress, the FTC agreed with the Supreme Court. It identified seven factual contingencies that can cause a prohibition on repair of a product by an ISO to have good effects or bad effects. It is naïve to expect the Supreme Court to change its approach to repair rights in response to a rule in which the FTC attempts to create a right to repair, particularly when the FTC told Congress that it agrees with the Court’s approach immediately prior to Khan’s arrival at the agency.

Prohibition of Reverse-Payment Settlements of Patent Disputes Involving Prescription Drugs

Some people believe that settlements of patent-infringement disputes in which the manufacturer of a generic drug agrees not to market the drug in return for a cash payment from the manufacturer of the brand-name drug are thinly disguised agreements to create a monopoly and to share the monopoly rents. Khan has argued that the FTC could issue a rule that prohibits such reverse-payment settlements. Her belief that a court would uphold such a rule is contradicted by the Supreme Court’s 2013 opinion in FTC v. Actavis. The Court unanimously rejected the FTC’s argument in support of a rebuttable presumption that reverse payments are illegal. Four justices argued that reverse-payment settlements can never be illegal if they are within the scope of the patent. The five-justice majority held that a court can determine that a reverse-payment settlement is illegal only after a hearing in which it applies the rule of reason to determine whether the payment was reasonable.

A Prohibition on Below-Cost Pricing When the Firm Cannot Recoup Its Losses

Khan believes that illegal predatory pricing by dominant firms is widespread and extremely harmful to competition. She particularly dislikes the Supreme Court’s test for identifying predatory pricing. That test requires proof that a firm that engages in below-cost pricing has a reasonable prospect of recouping its losses. She wants the FTC to issue a rule in which it defines predatory pricing as below-cost pricing without any prospect that the firm will be able to recoup its losses.

The history of the Court’s predatory-pricing test shows how unrealistic it is to expect the Court to uphold such a rule. The Court first announced the test in a Sherman Act case in 1986. Plaintiffs attempted to avoid the precedential effect of that decision by filing complaints based on predatory pricing under the Robinson-Patman Act. The Court rejected that attempt in a 1993 opinion. The Court made it clear that the test for determining whether a firm is engaged in illegal predatory pricing is the same no matter whether the case arises under the Sherman Act or the Robinson-Patman Act. The Court undoubtedly would reject the FTC’s effort to change the definition of predatory pricing by relying on the FTC Act instead of the Sherman Act or the Robinson-Patman Act.

A Prohibition of Noncompete Clauses in Contracts to Employ Low-Wage Employees

President Biden has expressed concern about the increasing prevalence of noncompete clauses in employment contracts applicable to low wage employees. He wants the FTC to issue a rule that prohibits inclusion of noncompete clauses in contracts to employ low-wage employees. The Supreme Court would be likely to uphold such a rule.

A rule that prohibits inclusion of noncompete clauses in employment contracts applicable to low-wage employees would differ from the other three rules I discussed in many respects. First, it has long been the law that noncompete clauses can be included in employment contracts only in narrow circumstances, none of which have any conceivable application to low-wage contracts. The only reason that competition authorities did not bring actions against firms that include noncompete clauses in low-wage employment contracts was their belief that state labor law would be effective in deterring firms from engaging in that practice. Thus, the rule would be entirely consistent with existing antitrust law.

Second, there are many studies that have found that state labor law has not been effective in deterring firms from including noncompete clauses in low-wage employment contracts and many studies that have found that the increasing use of noncompete clauses in low-wage contracts is causing a lot of damage to the performance of labor markets. Thus, the FTC would be able to support its rule with high-quality evidence.

Third, the Supreme Court’s unanimous 2021 opinion in NCAA v. Alstom indicates that the Court is receptive to claims that a practice that harms the performance of labor markets is illegal. Thus, I predict that the Court would uphold a rule that prohibits noncompete clauses in employment contracts applicable to low-wage employees if it holds that the FTC can use notice-and-comment rulemaking to define “unfair methods of competition,” as that term is used in Section 5 of the FTC Act. That caveat is important, however. As I indicated at the beginning of this essay, I doubt that the FTC has that power.

I would urge the FTC not to use notice-and comment rulemaking to address the problems that are caused by the increasing use of noncompete clauses in low-wage contracts. There is no reason for the FTC to put a lot of time and effort into a notice-and-comment rulemaking in the hope that the Court will conclude that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. The FTC can implement an effective prohibition on the inclusion of noncompete clauses in employment contracts applicable to low-wage employees by using a combination of legal tools that it has long used and that it clearly has the power to use—issuance of interpretive rules and policy statements coupled with a few well-chosen enforcement actions.

Alternative Ways to Improve Antitrust Law       

There are many other ways in which Khan can move antitrust law in the directions that she prefers. She can make common cause with the many mainstream antitrust scholars who have urged incremental changes in antitrust law and who have conducted the studies needed to support those proposed changes. Thus, for instance, she can move aggressively against other practices that harm the performance of labor markets, change the criteria that the FTC uses to decide whether to challenge proposed mergers and acquisitions, and initiate actions against large platform firms that favor their products over the products of third parties that they sell on their platforms.     

In Administrative Law, Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Intellectual Property, Monopolization, Patent, Pharmaceuticals, Regulation, Section 5, Supreme Court, Symposia, Truth on the Market, Vertical Restraints , , , , , , , , , , , , , , , ,
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UMC Rulemaking After Magnuson-Moss: A Textualist Approach

Leah Samuel —  27 April 2022

[This guest post from Yale Law School student Leah Samuel—the third post in our FTC UMC Rulemaking symposium—is a condensed version of a full-length paper. Please reach out to Leah at leah.samuel@yale.edu if you would like a copy of the full draft. It is the first of two contributions to the symposium posted today, along with this related post from Corbin K. Barthold of TechFreedom. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

Introduction

The Federal Trade Commission’s (FTC) ability to conduct substantive rulemaking under both its “unfair methods of competition” (UMC) and “unfair and deceptive practices” (UDAP) mandates was upheld by the U.S. Court of Appeals for the D.C. Circuit in 1973’s National Petroleum Refiners Association v. FTC. Nonetheless, the FTC has seldom exercised this authority with respect to UMC—its antitrust authority. And various scholars and commentators have suggested that such an attempt would quickly be rejected by the U.S. Supreme Court.

I argue that the plain text and procedural history of the 1975 Magnuson–Moss Warranty Act demonstrate that Congress implicitly ratified the National Petroleum decision as it applied to UMC rulemaking. The scholarly focus on the intentions of the framers of the 1914 Federal Trade Commission Act with respect to substantive rulemaking is therefore misplaced—whether the FTC has exercised its UMC rulemaking powers in recent decades, its ability to do so was affirmed by Congress in 1974.

When the FTC first began to promulgate substantive rules under Section 5, neither the agency nor reviewing courts readily distinguished between UMC and UDAP authority. In 1973, the D.C. Circuit determined that the FTC was empowered to promulgate a legally binding trade regulation rule that required the posting of octane numbers at gas stations as a valid legislative rule under both UMC and UDAP. The given trade regulation rule was not clearly categorized as consumer protection or antitrust by the court. In 1975, Congress passed the Magnuson-Moss Act, which added procedural requirements to UDAP rulemaking without changing the processes applicable to UMC rulemaking as it stood after National Petroleum. In 1980, Congress added additional cumbersome procedural hurdles, as well as certain outright prohibitions to so-called Magnuson-Moss rulemaking with the Federal Trade Commission Improvements Act (FTCIA), still leaving UMC untouched.

Interpretative Method

A textualist reading of the Magnuson-Moss Act should lead to the conclusion that the FTC has the power to conduct substantive UMC rulemaking. Because Congress was actively aware of and responding to the National Petroleum decision and the FTC’s Octane Rule, the Magnuson-Moss Act should be read to leave UMC rulemaking intact under the Administrative Procedure Act (APA).

Interpreting Magnuson-Moss to acknowledge the existence of, and therefore validate, UMC rulemaking does the least violence to the text, in keeping with the supremacy-of-text principle, as described by Justice Antonin Scalia and Bryan A. Garner in “Reading Law: The Interpretation of Legal Texts.” Absent any express statement eliminating or bracketing that authority, the contextual meaning of Magnuson-Moss § 202(a)(2)—“[t]he preceding sentence shall not affect any authority of the Commission to prescribe rules…with respect to unfair methods of competition”—is most clearly understood as protecting the existence of UMC rulemaking as it existed in law at the moment of the bill’s passage. In his famous concurrence in Green v. Bock Laundry Machine Co., Justice Scalia explained that:

The meaning of terms on the statute books ought to be determined, not on the basis of which meaning can be shown to have been understood by a larger handful of the Members of Congress; but rather on the basis of which meaning is . . . most compatible with the surrounding body of law into which the provision must be integrated—a compatibility which, by a benign fiction, we assume Congress always has in mind.

In Branch v. Smith, Scalia applied this method to the Voting Rights Act, reasoning that Congress has a constructive awareness of lower-court decisions when it amends a statute. While that constructive awareness, and the statutory meaning that it implies, cannot trump the plain text of the amended statute, it is an important aid to interpretation. Here, the benign fiction of constructive awareness is actually a demonstrable fact: Congress was aware of National Petroleum and took it to be the legal default. Where the lower court decision-making process and the legislative process were closely intertwined, the presumption that Congress knew and adopted the D.C. Circuit’s reasoning is more defensible from a textualist perspective than any other reading of Section 202.

This is not an argument derived from legislative silence or inaction, canons disfavored by today’s textualists. Here, Congress definitively acted, amending the FTC Act multiple times over the decade. To read into the text of the Magnuson-Moss Act a provision stripping the FTC of its UMC rulemaking authority and overturning National Petroleum would be to violate the omitted case canon, as Scalia and Garner put it: “The absent provision cannot be supplied by the courts. What the legislature ‘would have wanted’ it did not provide, and that is the end of the matter.” In sum, the Congresses of 1974 and 1980 affirmed the existence of UMC rulemaking under APA procedures.

FTC Rulemaking Before the Octane Rule

During its first 50 years, the FTC carried out its mandate exclusively through nonbinding recommendations called “trade practice rules” (TPRs), alongside case-by-case adjudications. TPRs emerged from FTC-facilitated “trade practice conferences,” where industry participants formulated rules around what constituted unfair practices within their industry. In the early 1960s, Kennedy-appointed FTC Chair Phil Elman began to push the agency to shift away from a reactive “mailbag approach” based on individual complaints and toward a systematic approach based on binding agency rules. The result was the promulgation of “trade regulation rules” (TRRs) through notice-and-comment rulemaking, which the FTC initiated by amending its procedural rules to permit binding rulemaking in 1962. The FTC’s first TRR, promulgated in 1964, explicitly relied upon the agency’s UDAP authority. However, its statement of basis and purpose contained a full-throated defense of FTC rulemaking in general, including UMC rulemaking. The history of these early rulemaking efforts has been documented comprehensively by Luke Herrine.

Of the TRRs that the FTC promulgated before the Octane Rule, only one appears to have been explicitly identified as an exercise of antitrust rulemaking under Section 6(g) of the FTC Act. That rule, promulgated in 1968, identified its authority as sections 2(d) and 2(e) of the Clayton Act, rather than UMC under Section 5 of the FTC Act. The agency itself, upon repealing the rule, found that no enforcement actions were ever brought under it. Given the existence, however underutilized, of the 1968 rule—alongside the 1971 Octane Rule described below—it is clear that FTC personnel during the 1960s and 1970s did not understand TRRs to mean only consumer protection rules under UDAP. Furthermore, the Congress that enacted the Magnuson-Moss Act was aware of and legislating against the background fact that the FTC had already promulgated two final rules drawing on antitrust authority.

The National Petroleum Decision

In December 1971, the FTC promulgated a TRR through APA notice-and-comment rulemaking declaring that the failure to post octane ratings on gas pumps constituted a violation of Section 5 of the FTC Act, citing both UMC and UDAP as its authorizing provisions. Quoting from the statement of base and purpose of the 1964 Cigarette Rule, the FTC declared that it was empowered to promulgate the TRR under the “general grant of rulemaking authority in section 6(g) (of the Federal Trade Commission Act), and authority to promulgate it is in any event, implicit in section 5(a) (6) (of the Act) and in the purpose and design of the Trade Commission Act as a whole.”

Like the Octane Rule itself, Judge J. Skelly Wright’s 1973 National Petroleum decision affirming the FTC’s authority to promulgate the rule did not distinguish between UMC and UDAP rulemaking and did not limit its holding to one or the other.

Wright’s opinion rested first on a plain language reading of 15 U.S.C. § 46(g), which provides that the FTC may “[f]rom time to time … classify corporations and … make rules and regulations for the purpose of carrying out the provisions of sections 41 to 46 and 47 to 58 of this title.” He rejected appellees’ claim that the placement of § 6(g) in the section of the FTC Act that empowers the commission to systematically investigate and collect industry reports (colloquially referred to as 6(b) orders) manifests Congress’s intent to limit 6(g) rulemaking to the FTC’s “nonadjudicatory, investigative and informative functions.” As he pointed out, the text of 6(g) as adopted applied to section 45, which corresponds to § 5 of the FTC Act.

Wright acknowledged, however, that in theory 6(g) could be limited to rules of procedure and practice—such was the holding of the district court. Wright declined to follow the district court, holding instead that, “while the legislative history of Section 5 and Section 6(g) is ambiguous, it certainly does not compel the conclusion that the Commission was not meant to exercise the power to make substantive rules with binding effect in Section 5(a) adjudications. We also believe that the plain language of Section 6(g)…confirms the framers’ intent to allow exercise of the power claimed here.”Finding the legislative history “cryptic” and inconclusive, Wright argued that “the need to rely on the section’s language is obvious.”

He resolved the matter in the FTC’s favor by focusing on the agency’s need for effective tools to carry out its mandate; to force the agency to proceed solely by adjudication “would render the Commission ineffective to do the job assigned it by Congress. Such a result is not required by the legislative history of the Act.”

While contemporary skeptics of the administrative state might take issue with Wright’s statutory interpretation, it is difficult to argue with his textualist premise: nothing in the text of 6(g) limits the provision to procedural rulemaking.

More importantly, the Magnuson-Moss Act was passed Dec. 19, 1974, only a year and a half after the National Petroleum decision. The text and history of the Magnuson-Moss Act evinces an awareness of and attentiveness to the National Petroleum decision—the proposed legislation and the National Petroleum case were both pending during the early 1970s. The text of Magnuson-Moss canonizes Wright’s authorization of FTC rulemaking powers under both UMC and UDAP, while specifying a more rigorous set of procedural hurdles for UDAP rulemaking.

Legislative History of the Magnuson-Moss Act

Some commentators have suggested that the general purpose of Magnuson-Moss with respect to FTC rulemaking must have been to bog down the rule-promulgation process, because the act added procedural requirements like cross-examination to UDAP rulemaking. From that premise, it may be argued that a Congress hostile to FTC rulemaking would not have simultaneously sandbagged UDAP rulemaking while validating UMC rulemaking under the APA. That logical jump oversimplifies the process of negotiation and compromise that typifies any legislative process, and here it leads to the wrong conclusion. Magnuson-Moss was the result of consumer-protection advocates’ painstaking efforts to strengthen the FTC across many dimensions. The addition of trial-type procedures was a concession that they ultimately offered to business interests to move the bill out of the hostile U.S. House Commerce and Finance Subcommittee. However, the bill moved out of conference committee and to the President Gerald Ford’s desk only after its champions were assured that, in the immediate aftermath of National Petroleum, UMC rulemaking would be unimpaired.

Sen. Warren Magnuson’s (D-Wash.) strategy from the beginning was to marry together the popular and relatively easy-to-understand warranty provisions with a revitalization of the FTC. As early as 1971, President Richard Nixon publicized his support for a watered-down version of a warranty-FTC bill. Notwithstanding the political cover from Nixon, House Republicans were reluctant to move any bill forward. Michael Lemov, counsel to Rep. John E. Moss (D-Calif.) during this period, wrote that the House Commerce Committee in the early 70s was increasingly attentive to business interests and hostile to consumer-protection legislation. It ultimately took Moss’ deal-brokering to make Magnuson’s consumer-protection legacy a reality by unsticking multiple consumer-protection bills from the House “graveyard of consumer bills.” While Magnuson succeeded in passing the Magnuson-Moss draft to a full Senate vote three times in between 1970 and 1974, Moss spent years (and 12 full days of hearings) trying to get the bill out of his Commerce and Finance Subcommittee.

What finally unstuck the bill on the House side, according to Lemov, was the participation of the Nixon-appointed but surprisingly vigorous FTC Chair Lewis Engman. Engman testified before the subcommittee on March 19, 1973, that if the cross-examination provisions couldn’t be cut out of the bill, then all of the rulemaking provisions of the bill should be stripped out. By this time, the National Petroleum Refiners decision was pending, and Engman evidently felt that the FTC could do better with the rulemaking authority that might be left to it by Wright’s decision, rather than the burdensome procedure set out in the House draft. The National Petroleum decision came down June 28, 1973, and by Feb. 25, 1974, the U.S. Supreme Court had denied certiorari, such that Congress could and did consider Wright’s decision to be the state of the law. According to Lemov, Moss was upset that Engman blindsided him with his demand to leave the entirety of Section 5 rulemaking under the National Petroleum standard. In response, he doubled down and brokered a deal with key Republican committee member Rep. Jim Broyhill (R-N.C.), which would keep cross-examination but limit it to material issues of fact, not policy or minutia. After being further weakened in the full House Commerce Committee, the bill made it to a floor vote and along to the conference committee on Sept. 19, 1974, to be reconciled with the stronger Senate version.

In conference, the bill was somewhat resuscitated. It made it out of the House and Senate in December 1974 and was signed by Ford in January 1975. The House’s industry-influenced version of cross-examination made it into law, since the Senate version would have left the entirety of FTC rulemaking power under the National Petroleum holding. In short, the burdensome procedures included in the Magnuson-Moss Act, particularly cross-examination, were either devised by or advocated for by industry-friendly interests intending to tie the FTC’s hands. However, at the urging of Engman, both the Senate and House were attentive to the progress of the National Petroleum decision, and ultimately conferred on a bill that deliberately left UMC rulemaking under the simpler APA process permitted by that decision’s precedent.

The Plain Meaning of Magnuson-Moss

The text of the critical passage of the Magnuson-Moss Act, as codified at 15 U.S.C. § 57a, has not been substantially changed since 1975, though two modifications appear in italics:

(a) Authority of Commission to prescribe rules and general statements of policy

(1) Except as provided in subsection (h), the Commission may prescribe–

(A) interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices […] and

(B) rules which define with specificity acts or practices which are unfair or deceptive acts or practices […], except that the Commission shall not develop or promulgate any trade rule or regulation with regard to the regulation of the development and utilization of the standards and certification activities pursuant to this section.Rules under this subparagraph may include requirements prescribed for the purpose of preventing such acts or practices.

(2) The Commission shall have no authority under this subchapter, other than its authority under this section, to prescribe any rule with respect to unfair or deceptive acts or practices […]. The preceding sentence shall not affect any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition…

Both of the two changes in italics were the result of the 1980 FTCIA, which is discussed in more depth below. An uncodified section of the bill, labeled “15 USC 57a Note,” reads as follows:

(C)(1) The amendment made by subsections (a) and (b) of this section shall not affect the validity of any rule which was promulgated under section 6(g) of the Federal Trade Commission act prior to the date of enactment of this section. Any proposed rule under section 6(g) of such act with respect to which presentation of data, views, and arguments was substantially completed before such date may be promulgated in the same manner and with the same validity as such rule could have been promulgated had this section not been enacted.

Taken together, the language of Section 202 and 202(c) display a consciousness of the FTC’s prior norms of rulemaking authorized by Section 6(g), and an intent to bifurcate the treatment of UDAP and UMC rulemaking. Section 202 (a)(2) limits UDAP rulemaking, whether interpretive or legislative, to the new boundaries established in the bill, while explicitly leaving UMC rulemaking, including, but not limited to, interpretative rules and statements of policy, outside the new constraints and tethered to Section 6(g).

Clearly UMC is subject to the residual of FTC rulemaking authority—but the interpreter is left to determine whether that residual:

  1. eliminates UMC rulemaking altogether;
  2. leaves UMC rulemaking viable under 6(g) and the APA procedures as established in National Petroleum; or
  3. is agnostic to UMC rulemaking but repudiates National Petroleum, thereby leaving UMC rulemaking open to interpretation based on the meaning of the 1914 FTCA.

Without reference to legislative history, a textualist approach to determining which of the three possibilities is most plausible is to ask what an enacting Congress with a clear preference would have done (see, e.g., Scalia’s majority opinion in Edmond v. United States). Congress could, with even greater parsimony and clarity in drafting, have limited all rulemaking to the Magnuson-Moss procedures by simply referencing Section 5 in the first sentence of (a)(2), or in the first sentences of (a)(1)(A) and (B). Alternately, if the objective was to prohibit UMC rulemaking while allowing a more procedurally limited form of UDAP rulemaking, Congress could have written the second sentence of (a)(2) as: “The preceding sentence shall not authorize the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce” or “The preceding sentence shall not authorize the Commission to prescribe rules, except interpretive rules and general statements of policy, with respect to unfair methods of competition in or affecting commerce.”

We presume that Congress enacted the Magnuson-Moss Act with, as Scalia put it in Bock Laundry, a meaning “most compatible with the surrounding body of law into which the provision must be integrated—a compatibility which, by a benign fiction, we assume Congress always has in mind.” Therefore, while a textualist would not admit the legislative history and administrative history of the FTC to this interpretation, the history is relevant inasmuch as we presume that Congress legislates against the existing state of the law as it understands it. The foregoing history demonstrates conclusively that Congress was aware of and accounting for the National Petroleum decision at multiple stages of the legislative process. The FTC’s UMC rulemaking history further lends support to the fact that Congress and the agency understood UMC rulemaking power to exist before and after the enactment of Magnuson-Moss.

Rulemaking After the Magnuson-Moss Act and the 1980 FTCIA

Returning to the current statutory text, both of the changes in italics were the result of the 1980 FTCIA, which was designed to rein in perceived FTC overreach in the consumer-protection space. The reference to Subsection (h) incorporates an explicit halt to the FTC’s then-pending consumer-protection rulemaking relating to advertising directed at children. The exception codified at (a)(1)(B) targeted the FTC’s ongoing rulemaking in standards and certification.

The Standards and Certifications Rule was the most significant attempt at competition rulemaking after the Octane Rule, although it was never finalized. Two staff reports indicate that FTC staff in both 1978 and 1983 believed that the agency’s authority to make rules under UMC authority was not abrogated by Magnuson-Moss, nor by the FTCIA. The proposed rule would have authorized the FTC to define situations in which the process of developing standards and certifications for a wide variety of industries may give rise to competitive injuries in violation of Section 5. The 1978 proposed rule and staff teport drew on both UMC and UDAP authority, noting that, in the years since National Petroleum, Magnuson-Moss had codified the FTC’s rulemaking authority and added procedural requirements, but that the act, by its own terms, applied only to UDAP rulemaking. Accordingly, the FTC’s “authority to promulgate rules relating to unfair methods of competition was expressly left unchanged by the Act.” Because of the bifurcation in UMC and UDAP rulemaking procedures, Bureau of Consumer Protection (BCP) staff opted to proceed with the standards and certification rulemaking under the new Magnuson-Moss procedures, on the understanding that meeting the higher procedural bar of Magnuson-Moss would also satisfy the requirements of § 553 of the APA.

By 1983, however, BCP staff had shifted gears. The standards and certification final staff report of April 1983, which would have been delivered to the FTC commissioners for a vote on whether to promulgate the rule or not, recommended UMC rulemaking under 6(g). In drawing on its 6(g) authority, BCP staff acknowledged that the 1980 FTCIA had explicitly removed commission authority to promulgate a standards and certification rule under Section 18 of the FTC Act, referring to the new UDAP section.

Clearly, the 1980 FTCIA was intended as a rebuke to the FTC’s efforts at consumer-protection rulemaking. However, the fact that earlier House and Senate drafts contemplated removing all FTC rulemaking authority, or removing standards and certification rulemaking authority for both UMC and UDAP, strongly suggests that Congress understood that the two rulemaking powers existed, had been affirmed by Magnuson-Moss, and continued to be legally viable, even as their exercise became politically infeasible.

BCP staff was bolstered in this interpretation by the D.C. District Court, which granted summary judgment in February 1982 against the American National Standards Institute, which brought suit against the commission claiming that the proposed Standards and Certification Rule proceeding under 6(g) violated the FTCIA of 1980.In an unpublished opinion, the court held that “the text and legislative history of the FTCIA belie Plaintiffs’ claims,” while also defending the continuing dispositivity of National Petroleum on the question of § 6(g) rulemaking. ANSI did not appeal the district court’s decision.

BCP staff forged ahead with the final report in April 1983, acknowledging that, to the extent that certain substantive requirements around disclosures from the 1978 proposed rule were directed at preventing “deception,” the FTC was no longer able to proceed with such rules. To the extent that such disclosures “would have alleviated unfair methods of competition,” the final rule could “provide similar relief.” The Standards and Certifications Rule was never adopted, however, because by 1983, FTC leadership was actively hostile to regulation. The only mentions of “unfair methods of competition” in the rulemaking context in the Federal Register after the Standards and Certification Rule appears to be in the context of repeals.

Conclusion

The Magnuson-Moss Act explicitly left UMC rulemaking unchanged when establishing an additional set of procedural hurdles for UDAP rulemaking. Congress in 1974 both constructively and demonstrably knew that the legal default against which these changes were made was Judge Wright’s National Petroleum decision, as well as the final agency action embodied in the Octane Rule. A textualist reading of the Magnuson-Moss Act must begin with this background legal context to avoid doing violence to the text of the statute. This interpretation is further reinforced by the FTCIA, which also left UMC rulemaking intact, while banning specific instances of UDAP rulemaking. In short, the FTC has substantive UMC rulemaking authority under FTC Act Section 5.

In Administrative Law, Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Regulation, Section 5, Supreme Court, Symposia, Truth on the Market , , , , , , , , ,
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How the FCC Will Lose on Net Neutrality

Ben Sperry —  9 September 2013

With Matt Starr, Berin Szoka and Geoffrey Manne

Today’s oral argument in the D.C Circuit over the FCC’s Net Neutrality rules suggests that the case — Verizon v. FCC — is likely to turn on whether the Order impermissibly imposes common carrier regulation on broadband ISPs. If so, the FCC will lose, no matter what the court thinks of the Commission’s sharply contested claims of authority under the Telecommunications Act.

The FCC won last year before the same court when Verizon challenged its order mandating that carriers provide data roaming services to their competitors’ customers. But Judge Tatel, who wrote the Cellco decision is likely to write the court’s opinion overturning the Net neutrality rules — just as he wrote the court’s 2010 Comcast v. FCC opinion, thwarting the FCC’s first attempt at informal net neutrality regulation.

Over an extraordinary two-hour session, Judges Tatel and Silberman asked a barrage of questions that suggest they’ll apply the same test used to uphold the data roaming rule to strike down at least the non-discrimination rule at the heart of the Open Internet Order — and probably, the entire Order.

Common Carrier Analysis

The Communications Act explicitly prohibits treating services that are not regulated under Title II as common carriers. Title II regulates “telecommunications services,” such as landline telephone service, but broadband is an “information service” regulated under Title I of the Act, while wireless is regulated under Title III of the Act (as a “radio transmission”).

In Cellco, the court ruled that the FCC’s data roaming rule did not impermissibly classify mobile providers as common carriers even though it compelled wireless carriers to let other companies’ subscribers roam on their networks. Here, the Open Internet Order effectively forces ISPs to carry traffic of all “edge” providers in an equal, non-discriminatory manner. While these might seem similar, the two mandates differ significantly, and Tatel’s analysis in the data roaming case may lead to precisely the opposite result here.

Tatel’s data roaming opinion rested on a test, derived from decades of case law, for determining what level of regulation constitutes an impermissible imposition of common carrier status:

  1. “If a carrier is forced to offer service indiscriminately and on general terms, then that carrier is being relegated to common carrier status”;

  2. “[T]he Commission has significant latitude to determine the bounds of common carriage in particular cases”;

  3. “[C]ommon carriage is not all or nothing—there is a gray area [between common carrier status and private carrier status] in which although a given regulation might be applied to common carriers, the obligations imposed are not common carriage per se” because they permit carriers to retain sufficient decisionmaking authority over their networks (by retaining programming control and/or the authority to negotiate terms, for example); and

  4. In this gray area, “[the FCC’s] determination that a regulation does or does not confer common carrier status warrants deference” under the Supreme Court’s Chevron decision.

In Cellco, the court determined that the data roaming rule fell into the gray area, and thus deferred to the FCC’s determination that the regulation did not impose common carrier status. The essential distinction, according to the court, was that carriers remained free to “negotiate the terms of their roaming arrangements on an individualized basis,” provided their terms were “commercially reasonable.” Rather than impose a “presumption of reasonableness,” the Commission offered “considerable flexibility for providers to respond to the competitive forces at play in the mobile-data market.” Thus, the court held, the data roaming rule “leaves substantial room for individualized bargaining and discrimination in terms,” and thus “does not amount to a duty to hold out facilities indifferently for public use.”

The Open Internet rules, by contrast, impose a much harsher restriction on what ISPs may do with their broadband networks, barring them from blocking any legal content and prohibiting “unreasonable” discrimination. Judges Tatel and Silberman repeatedly asked questions that suggested that the Order’s reasonable discrimination rule removed the kind of “flexibility” that justified upholding the data roaming rule. By requiring carriers to “offer service indiscriminately and on general terms” and to “hold out facilities indifferently for public use” (to quote the D.C. Circuit’s test), the rule would go beyond the “gray area” in which the FCC gets deference, and fall into the D.C. Circuit’s definition of common carriage. If that’s indeed ultimately where the two judges wind up, it’s game over for the FCC.

The Open Internet Order requires broadband ISPs to make their networks available, and to do so on equal terms that remove pricing flexibility, to any edge provider that wishes to have its content available on an ISP’s network. This seems to be Judge Tatel’s interpretation of ¶ 76 of the Order, which goes on at length about the reasons why “pay for priority” arrangements would “raise significant cause for concern” and then concludes: “In light of each of these concerns, as a general matter, it’s unlikely that pay for priority would satisfy the ‘no unreasonable discrimination’ standard.” So… legal in principle, but effectively banned in practice — a per se rule dressed up as a rule of reason.

If that isn’t, in effect, a requirement that ISPs hold out their networks “indifferently for public use,” it’s hard to imagine what is — as Tatel certainly seemed to think today. Tatel’s use of the term “indiscriminately” in Cellco almost hints that the test was written with the FCC’s “no discrimination” rule in mind.

The FCC tried, but failed, to address such concerns in the Open Internet Order, by arguing that broadband providers remained free to “make individualized decisions” with the only customers that matter: their subscribers. Today, the agency again insisted that restricting, however heavily, a broadband provider’s ability to negotiate with an edge provider (or the backbone providers in between) is irrelevant to the analysis of whether the FCC has illegally imposed common carriage. But if that argument worked, the D.C. Circuit would not have had to analyze whether the data roaming rule afforded sufficient flexibility to carriers in contracting with other carriers to provide data roaming services to their customers.

Similarly, the FCC failed today, and in its briefs, to effectively distinguish this case from Midwest Video II, which was critical to the Cellco decision. here, the Supreme Court court struck down public-access rules imposed on cable companies as impermissible common carrier regulation because they “prohibited [cable operators] from determining or influencing the content of access programming,” and “delimit[ed] what [they could] charge for access and use of equipment.” In other words, the FCC’s rule left no flexibility for negotiations between companies — the same problem as in the Open Internet Order. The FCC attempted to distinguish the two cases by arguing that the FCC was restricting an existing wholesale market for channel carriage, while no such market exists today for prioritized Internet services. But this misses the key point made, emphatically, by Judge Silberman: it is the FCC’s relentless attempt to regulate Net Neutrality that has prevented the development of this market. Nothing better reveals the stasis mentality behind the FCC’s Order

Perhaps the most damning moment of today’s arguments occurred when Verizon’s lawyer responded to questions about what room for negotiation was left under the unreasonable discrimination rule — by pointing to what the FCC itself said in Footnote 240 of the Order. There the FCC quotes, approvingly, comments filed by Sprint: “The unreasonable discrimination standard contained in Section 202(a) of the Act contains the very flexibility the Commission needs to distinguish desirable from improper discrimination.” In other words, the only room for “commercially reasonable negotiation” recognized by the FCC under the nondiscrimination rule is found in the limited discretion traditionally available to common carriers under Section 202(a). Oops. This #LawyerFail will doubtless feature prominently in the court’s discussion of this issue, as the FCC’s perhaps accidental concession that, whatever the agency claims, it’s really imposing common carrier status — analogous to Title II, no less!

Judges Tatel and Silberman seemed to disagree only as to whether the no-blocking rule would also fail under Cellco’s reasoning. Tatel suggested that if the non-discrimination rule didn’t exist, the blocking rule, standing alone, would “leave substantial room for individualized bargaining and discrimination in terms” just as the data roaming rule did. Tatel spent perhaps fifteen minutes trying to draw clear answers from all counsel on this point, but seemed convinced that, at most, the no-blocking rule simply imposed a duty on the broadband provider to allow an edge provider to reach its customers, while still allowing the broadband provider to negotiate for faster carriage on “commercially reasonable terms.” Silberman disagreed, insisting that the blocking rule still imposed a common carrier duty to carry traffic at a zero price.

Severability

Ultimately the distinction between these two rules under Cellco’s common carriage test may not matter. If the court decides that the order is not severable, striking down the nondiscrimination rule as common carriage would cause the entire Order to fall.

The judges got into an interesting, though relatively short, discussion of this point. Verizon’s counsel repeatedly noted that the FCC had never stated any intention that the order should be read as severable either in the Order, in its briefs or even at oral argument. Unlike in MD/DC/DE Broadaster’s Assoc. v. FCC, the Commission did not state in the adopting regulation that it intended to treat the regulation as severable. And, as the DC Circuit has stated, “[s]everance and affirmance of a portion of an administrative regulation is improper if there is ‘substantial doubt’ that the agency would have adopted the severed portion on its own.”

The question, as the Supreme Court held in K Mart Corp. v. Cartier, Inc., is whether the remainder of the regulation could function sensibly without the stricken provision. This isn’t clear. While Judge Tatel seems to suggest that the rule against blocking could function without the nondiscrimination rule, Judge Silberman seems convinced that the two were intended as necessary complements by the FCC. The determination of the no-blocking rule’s severability may come down to Judge Rogers, who didn’t telegraph her view.

So what’s next?

The prediction made by Fred Campbell shortly after the Cellco decision seems like the most likely outcome: Tatel, joined by at least Silberman, could strike down the entire Order as imposing common carriage — while offering the FCC a roadmap to try its hand at Net Neutrality yet again by rewriting the discrimination rule to allow for prioritized or accelerated carriage on commercially reasonable terms.

Or, if the the court decides the order is severable, it could strike down just the nondiscrimination rule — assuming the court could find either direct or ancillary jurisdiction for both the transparency rule and the non-discrimination rule.

Either way, an FCC loss will mean that negotiated arrangements for priority carriage will be governed under something more like a rule of reason. The FCC could try to create its own rule.  Or the matter could simply be left to the antitrust and consumer protection laws enforced by the Department of Justice, the Federal Trade Commission, the states and private plaintiffs. We think the latter’s definitely the best approach. But whether it is or not, it will be the controlling legal authority on the ground the day the FCC loses — unless and until the FCC issues revised rules (or Congress passes a law) that can survive judicial review.

Ultimately, we suspect the FCC will have a hard time letting go. After 79 years, it’s clearly in denial about its growing obsolescence.

In Broadband, Federal Communications Commission, Federal Trade Commission, Google, Net Neutrality, Platforms, Regulation, Telecommunications, Wireless , , , , , , , , , , ,
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