The U.S. House this week passed H.R. 2668, the Consumer Protection and Recovery Act (CPRA), which authorizes the Federal Trade Commission (FTC) to seek monetary relief in federal courts for injunctions brought under Section 13(b) of the Federal Trade Commission Act.
Potential relief under the CPRA is comprehensive. It includes “restitution for losses, rescission or reformation of contracts, refund of money, return of property … and disgorgement of any unjust enrichment that a person, partnership, or corporation obtained as a result of the violation that gives rise to the suit.” What’s more, under the CPRA, monetary relief may be obtained for violations that occurred up to 10 years before the filing of the suit in which relief is requested by the FTC.
The Senate should reject the House version of the CPRA. Its monetary-recovery provisions require substantial narrowing if it is to pass cost-benefit muster.
The CPRA is a response to the Supreme Court’s April 22 decision in AMG Capital Management v. FTC, which held that Section 13(b) of the FTC Act does not authorize the commission to obtain court-ordered equitable monetary relief. As I explained in an April 22 Truth on the Market post, Congress’ response to the court’s holding should not be to grant the FTC carte blanche authority to obtain broad monetary exactions for any and all FTC Act violations. I argued that “[i]f Congress adopts a cost-beneficial error-cost framework in shaping targeted legislation, it should limit FTC monetary relief authority (recoupment and disgorgement) to situations of consumer fraud or dishonesty arising under the FTC’s authority to pursue unfair or deceptive acts or practices.”
Error cost and difficulties of calculation counsel against pursuing monetary recovery in FTC unfair methods of competition cases. As I explained in my post:
Consumer redress actions are problematic for a large proportion of FTC antitrust enforcement (“unfair methods of competition”) initiatives. Many of these antitrust cases are “cutting edge” matters involving novel theories and complex fact patterns that pose a significant threat of type I [false positives] error. (In comparison, type I error is low in hardcore collusion cases brought by the U.S. Justice Department where the existence, nature, and effects of cartel activity are plain). What’s more, they generally raise extremely difficult if not impossible problems in estimating the degree of consumer harm. (Even DOJ price-fixing cases raise non-trivial measurement difficulties.)
These error-cost and calculation difficulties became even more pronounced as of July 1. On that date, the FTC unwisely voted 3-2 to withdraw a bipartisan 2015 policy statement providing that the commission would apply consumer welfare and rule-of-reason (weighing efficiencies against anticompetitive harm) considerations in exercising its unfair methods of competition authority (see my commentary here). This means that, going forward, the FTC will arrogate to itself unbounded discretion to decide what competitive practices are “unfair.” Business uncertainty, and the costly risk aversion it engenders, would be expected to grow enormously if the FTC could extract monies from firms due to competitive behavior deemed “unfair,” based on no discernible neutral principle.
Error costs and calculation problems also strongly suggest that monetary relief in FTC consumer-protection matters should be limited to cases of fraud or clear deception. As I noted:
[M]atters involving a higher likelihood of error and severe measurement problems should be the weakest candidates for consumer redress in the consumer protection sphere. For example, cases involve allegedly misleading advertising regarding the nature of goods, or allegedly insufficient advertising substantiation, may generate high false positives and intractable difficulties in estimating consumer harm. As a matter of judgment, given resource constraints, seeking financial recoveries solely in cases of fraud or clear deception where consumer losses are apparent and readily measurable makes the most sense from a cost-benefit perspective.
In short, the Senate should rewrite its Section 13(b) amendments to authorize FTC monetary recoveries only when consumer fraud and dishonesty is shown.
Finally, the Senate would be wise to sharply pare back the House language that allows the FTC to seek monetary exactions based on conduct that is a decade old. Serious problems of making accurate factual determinations of economic effects and specific-damage calculations would arise after such a long period of time. Allowing retroactive determinations based on a shorter “look-back” period prior to the filing of a complaint (three years, perhaps) would appear to strike a better balance in allowing reasonable redress while controlling error costs.
The U.S. Supreme Court’s just-published unanimous decision in AMG Capital Management LLC v. FTC—holding that Section 13(b) of the Federal Trade Commission Act does not authorize the commission to obtain court-ordered equitable monetary relief (such as restitution or disgorgement)—is not surprising. Moreover, by dissipating the cloud of litigation uncertainty that has surrounded the FTC’s recent efforts to seek such relief, the court cleared the way for consideration of targeted congressional legislation to address the issue.
But what should such legislation provide? After briefly summarizing the court’s holding, I will turn to the appropriate standards for optimal FTC consumer redress actions, which inform a welfare-enhancing legislative fix.
The Court’s Opinion
Justice Stephen Breyer’s opinion for the court is straightforward, centering on the structure and history of the FTC Act. Section 13(b) makes no direct reference to monetary relief. Its plain language merely authorizes the FTC to seek a “permanent injunction” in federal court against “any person, partnership, or corporation” that it believes “is violating, or is about to violate, any provision of law” that the commission enforces. In addition, by its terms, Section 13(b) is forward-looking, focusing on relief that is prospective, not retrospective (this cuts against the argument that payments for prior harm may be recouped from wrongdoers).
Furthermore, the FTC Act provisions that specifically authorize conditioned and limited forms of monetary relief (Section 5(l) and Section 19) are in the context of commission cease and desist orders, involving FTC administrative proceedings, unlike Section 13(b) actions that avoid the administrative route. In sum, the court concludes that:
[T]o read §13(b) to mean what it says, as authorizing injunctive but not monetary relief, produces a coherent enforcement scheme: The Commission may obtain monetary relief by first invoking its administrative procedures and then §19’s redress provisions (which include limitations). And the Commission may use §13(b) to obtain injunctive relief while administrative proceedings are foreseen or in progress, or when it seeks only injunctive relief. By contrast, the Commission’s broad reading would allow it to use §13(b) as a substitute for §5 and §19. For the reasons we have just stated, that could not have been Congress’ intent.
The court’s opinion concludes by succinctly rejecting the FTC’s arguments to the contrary.
What Comes Next
The Supreme Court’s decision has been anticipated by informed observers. All four sitting FTC Commissioners have already called for a Section 13(b) “legislative fix,” and in an April 20 hearing of Senate Commerce Committee, Chairwoman Maria Cantwell (D-Wash.) emphasized that, “[w]e have to do everything we can to protect this authority and, if necessary, pass new legislation to do so.”
What, however, should be the contours of such legislation? In considering alternative statutory rules, legislators should keep in mind not only the possible consumer benefits of monetary relief, but the costs of error, as well. Error costs are a ubiquitous element of public law enforcement, and this is particularly true in the case of FTC actions. Ideally, enforcers should seek to minimize the sum of the costs attributable to false positives (type I error), false negatives (type II error), administrative costs, and disincentive costs imposed on third parties, which may also be viewed as a subset of false positives. (See my 2014 piece “A Cost-Benefit Framework for Antitrust Enforcement Policy.”
Monetary relief is most appropriate in cases where error costs are minimal, and the quantum of harm is relatively easy to measure. This suggests a spectrum of FTC enforcement actions that may be candidates for monetary relief. Ideally, selection of targets for FTC consumer redress actions should be calibrated to yield the highest return to scarce enforcement resources, with an eye to optimal enforcement criteria.
Consider consumer protection enforcement. The strongest cases involve hardcore consumer fraud (where fraudulent purpose is clear and error is almost nil); they best satisfy accuracy in measurement and error-cost criteria. Next along the spectrum are cases of non-fraudulent but unfair or deceptive acts or practices that potentially involve some degree of error. In this category, situations involving easily measurable consumer losses (e.g., systematic failure to deliver particular goods requested or poor quality control yielding shipments of ruined goods) would appear to be the best candidates for monetary relief.
Moving along the spectrum, matters involving a higher likelihood of error and severe measurement problems should be the weakest candidates for consumer redress in the consumer protection sphere. For example, cases involve allegedly misleading advertising regarding the nature of goods, or allegedly insufficient advertising substantiation, may generate high false positives and intractable difficulties in estimating consumer harm. As a matter of judgment, given resource constraints, seeking financial recoveries solely in cases of fraud or clear deception where consumer losses are apparent and readily measurable makes the most sense from a cost-benefit perspective.
Consumer redress actions are problematic for a large proportion of FTC antitrust enforcement (“unfair methods of competition”) initiatives. Many of these antitrust cases are “cutting edge” matters involving novel theories and complex fact patterns that pose a significant threat of type I error. (In comparison, type I error is low in hardcore collusion cases brought by the U.S. Justice Department where the existence, nature, and effects of cartel activity are plain). What’s more, they generally raise extremely difficult if not impossible problems in estimating the degree of consumer harm. (Even DOJ price-fixing cases raise non-trivial measurement difficulties.)
For example, consider assigning a consumer welfare loss number to a patent antitrust settlement that may or may not have delayed entry of a generic drug by some length of time (depending upon the strength of the patent) or to a decision by a drug company to modify a drug slightly just before patent expiration in order to obtain a new patent period (raising questions of valuing potential product improvements). These and other examples suggest that only rarely should the FTC pursue requests for disgorgement or restitution in antitrust cases, if error-cost-centric enforcement criteria are to be honored.
Unfortunately, the FTC currently has nothing to say about when it will seek monetary relief in antitrust matters. Commendably, in 2003, the commission issued a Policy Statement on Monetary Equitable Remedies in Competition Cases specifying that it would only seek monetary relief in “exceptional cases” involving a “[c]lear [v]iolation” of the antitrust laws. Regrettably, in 2012, a majority of the FTC (with Commissioner Maureen Ohlhausen dissenting) withdrew that policy statement and the limitations it imposed. As I concluded in a 2012 article:
This action, which was taken without the benefit of advance notice and public comment, raises troubling questions. By increasing business uncertainty, the withdrawal may substantially chill efficient business practices that are not well understood by enforcers. In addition, it raises the specter of substantial error costs in the FTC’s pursuit of monetary sanctions. In short, it appears to represent a move away from, rather than towards, an economically enlightened antitrust enforcement policy.
In a 2013 speech, then-FTC Commissioner Josh Wright also lamented the withdrawal of the 2003 Statement, and stated that he would limit:
… the FTC’s ability to pursue disgorgement only against naked price fixing agreements among competitors or, in the case of single firm conduct, only if the monopolist’s conduct has no plausible efficiency justification. This latter category would include fraudulent or deceptive conduct, or tortious activity such as burning down a competitor’s plant.
As a practical matter, the FTC does not bring cases of this sort. The DOJ brings naked price-fixing cases and the unilateral conduct cases noted are as scarce as unicorns. Given that fact, Wright’s recommendation may rightly be seen as a rejection of monetary relief in FTC antitrust cases. Based on the previously discussed serious error-cost and measurement problems associated with monetary remedies in FTC antitrust cases, one may also conclude that the Wright approach is right on the money.
Finally, a recent article by former FTC Chairman Tim Muris, Howard Beales, and Benjamin Mundel opined that Section 13(b) should be construed to “limit the FTC’s ability to obtain monetary relief to conduct that a reasonable person would know was dishonest or fraudulent.” Although such a statutory reading is now precluded by the Supreme Court’s decision, its incorporation in a new statutory “fix” would appear ideal. It would allow for consumer redress in appropriate cases, while avoiding the likely net welfare losses arising from a more expansive approach to monetary remedies.
The AMG Capital decision is sure to generate legislative proposals to restore the FTC’s ability to secure monetary relief in federal court. If Congress adopts a cost-beneficial error-cost framework in shaping targeted legislation, it should limit FTC monetary relief authority (recoupment and disgorgement) to situations of consumer fraud or dishonesty arising under the FTC’s authority to pursue unfair or deceptive acts or practices. Giving the FTC carte blanche to obtain financial recoveries in the full spectrum of antitrust and consumer protection cases would spawn uncertainty and could chill a great deal of innovative business behavior, to the ultimate detriment of consumer welfare.
A pending case in the U.S. Court of Appeals for the 3rd Circuit has raised several interesting questions about the FTC enforcement approach and patent litigation in the pharmaceutical industry. The case, FTC v. AbbVie, involves allegations that AbbVie (and Besins) filed sham patent infringement cases against generic manufacturer Teva (and Perrigo) for the purpose of preventing or delaying entry into the testosterone gel market in which AbbVie’s AndroGel had a monopoly. The FTC further alleges that AbbVie and Teva settled the testosterone gel litigation in AbbVie’s favor while making a large payment to Teva in an unrelated case, behavior that, considered together, amounted to an illegal reverse payment settlement. The district court dismissed the reverse payment claims, but concluded that the patent infringement cases were sham litigation. It ordered disgorgement damages of $448 million against AbbVie and Besins which was the profit they gained from maintaining the AndroGel monopoly.
3rd Circuit has been asked to review several elements of the
district court’s decision including whether the original patent infringement
cases amounted to sham litigation, whether the payment to Teva in a separate
case amounted to an illegal reverse payment, and whether the
FTC has the authority to seek disgorgement damages. The decision will help to clarify outstanding
issues relating to patent litigation and the FTC’s enforcement abilities, but
it also has the potential to chill pro-competitive behavior in the
pharmaceutical market encouraged under Hatch-Waxman.
the 3rd Circuit will review whether AbbVie’s patent infringement
case was sham litigation by asking whether the district court
applied the right standard and how plaintiffs must prove that lawsuits are
baseless. The district court determined
that the case was a sham because it was objectively baseless (AbbVie couldn’t
reasonably expect to win) and subjectively baseless (AbbVie brought the cases
solely to delay generic entry into the market). AbbVie argues that the district court erred by
not requiring affirmative evidence of bad faith and not requiring the FTC to
present clear and convincing evidence that AbbVie and its attorneys believed
the lawsuits were baseless.
sham litigation should be penalized and deterred, especially when it produces
anticompetitive effects, the 3rd Circuit’s decision, depending on
how it comes out, also has the potential to deter brand drug makers from filing
patent infringement cases in the first place.
This threatens to disrupt the delicate balance that Hatch-Waxman sought to establish
between protecting generic entry while encouraging brand competition.
The 3rd Circuit will also determine whether AbbVie’s payment to Teva in a separate case involving cholesterol medicine was an illegal reverse payment, otherwise known as a “pay-for-delay” settlement. The FTC asserts that the actions in the two cases—one involving testosterone gel and the other involving cholesterol medicine—should be considered together, but the district court disagreed and determined there was no illegal reverse payment. True pay-for-delay settlements are anticompetitive and harm consumers by delaying their access to cheaper generic alternatives. However, an overly-liberal definition of what constitutes an illegal reverse payment will deter legitimate settlements, thereby increasing expenses for all parties that choose to litigate and possibly dissuading generics from bringing patent challenges in the first place. Moreover, FTC’s argument that two settlements occurring in separate cases around the same time is suspicious overlooks the reality that the pharmaceutical industry has become increasingly concentrated and drug companies often have more than one pending litigation matter against another company involving entirely different products and circumstances.
Finally, the 3rd Circuit will
determine whether the FTC has the authority to seek disgorgement damages on past
acts like settled patent litigation.
AbbVie has argued that the agency has no right to disgorgement because
it isn’t enumerated in the FTC Act and because courts can’t order injunctive
relieve, including disgorgement, on completed past acts.
The FTC has sought disgorgement damages only sparingly, but the frequency with which the agency seeks disgorgement and the amount of the damages have increased in recent years. Proponents of the FTC’s approach argue that the threat of large disgorgement damages provides a strong deterrent to anticompetitive behavior. While true, FTC-ordered disgorgement (even if permissible) may go too far and end up chilling economic activity by exposing businesses to exorbitant liability without clear guidance on when disgorgement will be awarded. The 3rd Circuit will determine whether the FTC’s enforcement approach is authorized, a decision that has important implications for whether the agency’s enforcement can deter unfair practices without depressing economic activity.
Some of the most pernicious and welfare-inimical anticompetitive activity stems from the efforts of firms to use governmental regulation to raise rivals’ costs or totally exclude them from the market (see, for example, here). The surest cure to such economic harm is, of course, the elimination or reform of anticompetitive government laws and regulations, but that is hard to do, given the existence of well-entrenched interest groups who have an interest in lobbying to protect their special legally-bestowed privileges.
A somewhat different potential limitation on effective competition associated with government arises from the invocation of governmental processes – in particular, judicial and regulatory filings and petitions – to harm competitors and maintain a protected position in the marketplace. Dealing effectively with this problem presents its own set of difficulties. Protecting the right to seek governmental redress consistent with existing rules is a key part of our system of limited government and the rule of law. Indeed, the First Amendment to the U.S. Constitution specifically protects “the right of the people . . . to petition the Government for a redress of grievances”, indicating that government must tread carefully indeed before taking any action that could be deemed as a curtailment of such petitioning. This has particular salience for antitrust, as Scalia Law School Professor David Bernstein has explained in The Heritage Guide to the Constitution:
[T]he right to petition . . . continues to have some independent weight. Most importantly, under the Noerr-Pennington doctrine, an effort to influence the exercise of government power, even for the purpose of gaining an anticompetitive advantage, does not create liability under the antitrust laws. Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc. (1961);United Mine Workers of America v. Pennington (1965). The Supreme Court initially adopted this doctrine under the guise of freedom of speech, but it more precisely finds its constitutional home in the right to petition. Unlike speech, which can often be punished in the antitrust context, as when corporate officers verbally agree to collude, the right to petition confers absolute immunity on efforts to influence government policy in a noncorrupt way.
The Noerr-Pennington doctrine does not, however, totally preclude antitrust enforcers from scrutinizing filings designed to undermine competition. If a private party is using petitioning as a mere “sham” to impose harm on competitors, without regard to the merits of its claims, Noerr immunity does not apply. In California Motor Transport v. Trucking Unlimited, 404 U.S. 508 (1972), the Supreme Court held that access to the courts and administrative agencies is an aspect of the right to petition, and hence Noerr’s protection generally extends to administrative and judicial proceedings, as well as to efforts to influence legislative and executive action. Nevertheless, in so holding, the California Motor Transport Court determined that Noerr did not shield defendants’ intervention in licensing proceedings involving their competitors, because the intervention did not stem from a good faith effort to enforce the law, but rather was solely aimed at imposing costs on and harassing the competitors. Subsequently, however, in Professional Real Estate Investors v. Columbia Pictures Industries, 508 U.S. 49 (1993) (PRE), the Supreme Court clarified that a high hurdle must be surmounted to demonstrate that petitioning through litigation is a “sham,” namely that (1) the lawsuit in question is “objectively baseless” (“no reasonable litigant could realistically expect success on the merits”) and (2) the suit must reflect a subjective intent to use the governmental process – as opposed to the outcome of that process – as an anticompetitive weapon.
In 2006, the U.S. Federal Trade Commission (FTC) issued a staff report on how to maximize competition values embodied in the antitrust laws while fully respecting the core values identified in Noerr when analyzing three types of conduct: filings that seek only a ministerial government response, material misrepresentations, and repetitive petitioning. More specifically, the report recommended that the FTC seek appropriate opportunities, in litigation or amicus curiae filings, to: (1) clarify that conduct protected by Noerr does not extend to filings, outside of the political arena, that seek no more than a ministerial government act; (2) clarify that conduct protected by Noerr does not extend to misrepresentations, outside of the political arena, that involve material misrepresentations to government bodies in the regulatory context (such as government standard setting and drug approval proceedings, for example); and (3) clarify that conduct protected by Noerr does not extend to patterns of repetitive petitioning, outside of the political arena, filed without regard to merit that employ government processes, rather than the outcome of those processes, to harm competitors in an attempt to suppress competition.
Since the issuance of the 2006 staff report, however, the FTC has not aggressively pursued litigation to narrow the scope of the Noerr doctrine (perhaps reflecting at least in part the difficulties attending the bringing of good cases, in light of PRE’s requirements). Rather, the Commission’s efforts to curb antitrust immunity have centered primarily on constraining the reach of the “state action” doctrine (anticompetitive conduct flying under the color of state authority), an area in which it has achieved some notable successes (see, for example, here).
The FTC’s February 2017 Shire Viropharma Injunctive Action
There is at least one indication, however, that the FTC may be turning anew to the problem of anticompetitive petitioning. On February 7, 2017, the Commission filed a complaint in federal district court charging Shire ViroPharma Inc. (ViroPharma) with violating the antitrust laws by abusing government processes to delay generic competition to its branded prescription drug, Vancocin HCl Capsules. The complaint alleges that because of ViroPharma’s actions, consumers and other purchasers paid hundreds of millions of dollars more for their medication.
Vancocin Capsules are used to treat C.difficile-associated diarrhea, or CDAD, a sometimes life-threatening bacterial infection. According to the complaint, Vancocin Capsules are not reasonably interchangeable with any other medications used to treat CDAD, and no other medication constrained ViroPharma’s pricing of Vancocin Capsules. After ViroPharma acquired the rights to Vancocin Capsules in 2004, it raised the price of the drug significantly and continued to do so through 2011.
The FTC alleges that to maintain its monopoly, ViroPharma waged a campaign of serial, repetitive, and unsupported filings with the U.S. Food and Drug Administration (FDA) and courts to delay the FDA’s approval of generic Vancocin Capsules, and exclude competition. According to the FTC, ViroPharma submitted 43 filings with the FDA and filed three lawsuits against the FDA between 2006 and 2012. The FTC asserts that the number and frequency of ViroPharma’s petitioning at the FDA are many multiples beyond that by any drug company related to any other drug. The FTC further claims that ViroPharma knew that it was the FDA’s practice to refrain from approving any generic applications until it resolved all pending relevant “citizen petition” filings. According to the FTC, Viropharma intended for its serial filings to delay the approval of generics, and thus forestall competition and price reductions.
The FTC seeks a court order permanently prohibiting ViroPharma from submitting repetitive and baseless filings with the FDA and the courts, and from similar and related conduct as well as any other necessary equitable relief, including restitution and disgorgement.
Win or lose, the FTC is to be commended for seeking a federal court clarification of what constitutes “baseless” petitioning for purposes of Noerr. As numerous scholars have pointed out, the Noerr “petitioning” doctrine is riddled with confusion (see, for example, here), and Supreme Court attention to this topic may once again be ripe. The most cost-effective way to reduce the economic burden of anticompetitive petitioning, however, may be not through litigation, which is time-consuming and uncertain (although it may play a useful role), but rather through regulatory reform that reduces the opportunities for manipulating overly complex regulatory systems in an anticompetitive fashion. Stay tuned.
On August 6, the Global Antitrust Institute (the GAI, a division of the Antonin Scalia Law School at George Mason University) submitted a filing (GAI filing or filing) in response to the Japan Fair Trade Commission’s (JFTC’s) consultation on reforms to the Japanese system of administrative surcharges assessed for competition law violations (see here for a link to the GAI’s filing). The GAI’s outstanding filing was authored by GAI Director Koren Wong Ervin and Professors Douglas Ginsburg, Joshua Wright, and Bruce Kobayashi of the Scalia Law School.
The GAI filing’s three sets of major recommendations, set forth in italics, are as follows:
(1) Due Process
While the filing recognizes that the process may vary depending on the jurisdiction, the filing strongly urges the JFTC to adopt the core features of a fair and transparent process, including:
(a) Legal representation for parties under investigation, allowing the participation of local and foreign counsel of the parties’ choosing;
(b) Notifying the parties of the legal and factual bases of an investigation and sharing the evidence on which the agency relies, including any exculpatory evidence and excluding only confidential business information;
(c) Direct and meaningful engagement between the parties and the agency’s investigative staff and decision-makers;
(d) Allowing the parties to present their defense to the ultimate decision-makers; and
(e) Ensuring checks and balances on agency decision-making, including meaningful access to independent courts.
(2) Calculation of Surcharges
The filing agrees with the JFTC that Japan’s current inflexible system of surcharges is unlikely to accurately reflect the degree of economic harm caused by anticompetitive practices. As a general matter, the filing recommends that under Japan’s new surcharge system, surcharges imposed should rely upon economic analysis, rather than using sales volume as a proxy, to determine the harm caused by violations of Japan’s Antimonopoly Act.
In that light, and more specifically, the filing therefore recommends that the JFTC limit punitive surcharges to matters in which:
(a) the antitrust violation is clear (i.e., if considered at the time the conduct is undertaken, and based on existing laws, rules, and regulations, a reasonable party should expect the conduct at issue would likely be illegal) and is without any plausible efficiency justification;
(b) it is feasible to articulate and calculate the harm caused by the violation;
(c) the measure of harm calculated is the basis for any fines or penalties imposed; and
(d) there are no alternative remedies that would adequately deter future violations of the law.
In the alternative, and at the very least, the filing urges the JFTC to expand the circumstances under which it will not seek punitive surcharges to include two types of conduct that are widely recognized as having efficiency justifications:
unilateral conduct, such as refusals to deal and discriminatory dealing; and
vertical restraints, such as exclusive dealing, tying and bundling, and resale price maintenance.
(3) Settlement Process
The filing recommends that the JFTC consider incorporating safeguards that prevent settlement provisions unrelated to the violation and limit the use of extended monitoring programs. The filing notes that consent decrees and commitments extracted to settle a case too often end up imposing abusive remedies that undermine the welfare-enhancing goals of competition policy. An agency’s ability to obtain in terrorem concessions reflects a party’s weighing of the costs and benefits of litigating versus the costs and benefits of acquiescing in the terms sought by the agency. When firms settle merely to avoid the high relative costs of litigation and regulatory procedures, an agency may be able to extract more restrictive terms on firm behavior by entering into an agreement than by litigating its accusations in a court. In addition, while settlements may be a more efficient use of scarce agency resources, the savings may come at the cost of potentially stunting the development of the common law arising through adjudication.
In sum, the latest filing maintains the GAI’s practice of employing law and economics analysis to recommend reforms in the imposition of competition law remedies (see here, here, and here for summaries of prior GAI filings that are in the same vein). The GAI’s dispassionate analysis highlights principles of universal application – principles that may someday point the way toward greater economically-sensible convergence among national antitrust remedial systems.
The Global Antitrust Institute (GAI) at George Mason University Law School (officially the “Antonin Scalia Law School at George Mason University” as of July 1st) is doing an outstanding job at providing sound law and economics-centered advice to foreign governments regarding their proposed antitrust laws and guidelines.
The GAI’s latest inspired filing, released on July 9 (July 9 Comment), concerns guidelines on the disgorgement of illegal gains and punitive fines for antitrust violations proposed by China’s National Development and Reform Commission (NDRC) – a powerful agency that has broad planning and administrative authority over the Chinese economy. With respect to antitrust, the NDRC is charged with investigating price-related anticompetitive behavior and abuses of dominance. (China has two other antitrust agencies, the State Administration of Industry and Commerce (SAIC) that investigates non-price-related monopolistic behavior, and the Ministry of Foreign Commerce (MOFCOM) that reviews mergers.) The July 9 Comment stresses that the NDRC’s proposed Guidelines call for Chinese antitrust enforcers to impose punitive financial sanctions on conduct that is not necessarily anticompetitive and may be efficiency-enhancing – an approach that is contrary to sound economics. In so doing, the July 9 Comment summarizes the economics of penalties, recommends that the NDRD employ economic analysis in considering sanctions, and provides specific suggested changes to the NDRC’s draft. The July 9 Comment provides a helpful summary of its analysis:
We respectfully recommend that the Draft Guidelines be revised to limit the application of disgorgement (or the confiscating of illegal gain) and punitive fines to matters in which: (1) the antitrust violation is clear (i.e., if measured at the time the conduct is undertaken, and based on existing laws, rules, and regulations, a reasonable party should expect that the conduct at issue would likely be found to be illegal) and without any plausible efficiency justifications; (2) it is feasible to articulate and calculate the harm caused by the violation; (3) the measure of harm calculated is the basis for any fines or penalties imposed; and (4) there are no alternative remedies that would adequately deter future violations of the law. In the alternative, and at the very least, we strongly urge the NDRC to expand the circumstances under which the Anti-Monopoly Enforcement Agencies (AMEAs) will not seek punitive sanctions such as disgorgement or fines to include two conduct categories that are widely recognized as having efficiency justifications: unilateral conduct such as refusals to deal and discriminatory dealing and vertical restraints such as exclusive dealing, tying and bundling, and resale price maintenance.
We also urge the NDRC to clarify how the total penalty, including disgorgement and fines, relate to the specific harm at issue and the theoretical optimal penalty. As explained below, the economic analysis determines the total optimal penalties, which includes any disgorgement and fines. When fines are calculated consistent with the optimal penalty framework, disgorgement should be a component of the total fine as opposed to an additional penalty on top of an optimal fine. If disgorgement is an additional penalty, then any fines should be reduced relative to the optimal penalty.
Lastly, we respectfully recommend that the AMEAs rely on economic analysis to determine the harm caused by any violation. When using proxies for the harm caused by the violation, such as using the illegal gains from the violations as the basis for fines or disgorgement, such calculations should be limited to those costs and revenues that are directly attributable to a clear violation. This should be done in order to ensure that the resulting fines or disgorgement track the harms caused by the violation. To that end, we recommend that the Draft Guidelines explicitly state that the AMEAs will use economic analysis to determine the but-for world, and will rely wherever possible on relevant market data. When the calculation of illegal gain is unclear due to a lack of relevant information, we strongly recommend that the AMEAs refrain from seeking disgorgement.
The lack of careful economic analysis of the implications of disgorgement (which is really a financial penalty, viewed through an economic lens) is not confined to Chinese antitrust enforcers. In recent years, the U.S. Federal Trade Commission (FTC) has shown an interest in more broadly employing disgorgement as an antitrust remedy, without fully weighing considerations of error costs and the deterrence of efficient business practices (see, for example, here and here). Relatedly, the U.S. Department of Justice’s Antitrust Division has determined that disgorgement may be invoked as a remedy for a Sherman Antitrust Act violation, a position confirmed by a lower court (see, for example, here). The general principles informing the thoughtful analysis delineated in the July 9 Comment could profitably be consulted by FTC and DOJ policy officials should they choose to reexamine their approach to disgorgement and other financial penalties.
More broadly, emphasizing the importantance of optimal sanctions and the economic analysis of business conduct, the July 9 Comment is in line with a cost-benefit framework for antitrust enforcement policy, rooted in decision theory – an approach that all antitrust agencies (including United States enforcers) should seek to adopt (see also here for an evaluation of the implicit decision-theoretic approach to antitrust employed by the U.S. Supreme Court under Chief Justice John Roberts). Let us hope that DOJ, the FTC, and other government antitrust authorities around the world take to heart the benefits of decision-theoretic antitrust policy in evaluating (and, as appropriate, reforming) their enforcement norms. Doing so would promote beneficial international convergence toward better enforcement policy and redound to the economic benefit of both producers and consumers.
Earlier this week I testified before the U.S. House Subcommittee on Commerce, Manufacturing, and Trade regarding several proposed FTC reform bills.
You can find my written testimony here. That testimony was drawn from a 100 page report, authored by Berin Szoka and me, entitled “The Federal Trade Commission: Restoring Congressional Oversight of the Second National Legislature — An Analysis of Proposed Legislation.” In the report we assess 9 of the 17 proposed reform bills in great detail, and offer a host of suggested amendments or additional reform proposals that, we believe, would help make the FTC more accountable to the courts. As I discuss in my oral remarks, that judicial oversight was part of the original plan for the Commission, and an essential part of ensuring that its immense discretion is effectively directed toward protecting consumers as technology and society evolve around it.
The report is “Report 2.0” of the FTC: Technology & Reform Project, which was convened by the International Center for Law & Economics and TechFreedom with an inaugural conference in 2013. Report 1.0 lays out some background on the FTC and its institutional dynamics, identifies the areas of possible reform at the agency, and suggests the key questions/issues each of them raises.
The text of my oral remarks follow, or, if you prefer, you can watch them here:
Chairman Burgess, Ranking Member Schakowsky, and Members of the Subcommittee, thank you for the opportunity to appear before you today.
I’m Executive Director of the International Center for Law & Economics, a non-profit, non-partisan research center. I’m a former law professor, I used to work at Microsoft, and I had what a colleague once called the most illustrious FTC career ever — because, at approximately 2 weeks, it was probably the shortest.
I’m not typically one to advocate active engagement by Congress in anything (no offense). But the FTC is different.
Despite Congressional reforms, the FTC remains the closest thing we have to a second national legislature. Its jurisdiction covers nearly every company in America. Section 5, at its heart, runs just 20 words — leaving the Commission enormous discretion to make policy decisions that are essentially legislative.
The courts were supposed to keep the agency on course. But they haven’t. As Former Chairman Muris has written, “the agency has… traditionally been beyond judicial control.”
So it’s up to Congress to monitor the FTC’s processes, and tweak them when the FTC goes off course, which is inevitable.
This isn’t a condemnation of the FTC’s dedicated staff. Rather, this one way ratchet of ever-expanding discretion is simply the nature of the beast.
Yet too many people lionize the status quo. They see any effort to change the agency from the outside as an affront. It’s as if Congress was struck by a bolt of lightning in 1914 and the Perfect Platonic Agency sprang forth.
But in the real world, an agency with massive scope and discretion needs oversight — and feedback on how its legal doctrines evolve.
So why don’t the courts play that role? Companies essentially always settle with the FTC because of its exceptionally broad investigatory powers, its relatively weak standard for voting out complaints, and the fact that those decisions effectively aren’t reviewable in federal court.
Then there’s the fact that the FTC sits in judgment of its own prosecutions. So even if a company doesn’t settle and actually wins before the ALJ, FTC staff still wins 100% of the time before the full Commission.
Able though FTC staffers are, this can’t be from sheer skill alone.
Whether by design or by neglect, the FTC has become, as Chairman Muris again described it, “a largely unconstrained agency.”
Please understand: I say this out of love. To paraphrase Churchill, the FTC is the “worst form of regulatory agency — except for all the others.”
Eventually Congress had to course-correct the agency — to fix the disconnect and to apply its own pressure to refocus Section 5 doctrine.
So a heavily Democratic Congress pressured the Commission to adopt the Unfairness Policy Statement in 1980. The FTC promised to restrain itself by balancing the perceived benefits of its unfairness actions against the costs, and not acting when injury is insignificant or consumers could have reasonably avoided injury on their own. It is, inherently, an economic calculus.
But while the Commission pays lip service to the test, you’d be hard-pressed to identify how (or whether) it’s implemented it in practice. Meanwhile, the agency has essentially nullified the “materiality” requirement that it volunteered in its 1983 Deception Policy Statement.
Worst of all, Congress failed to anticipate that the FTC would resume exercising its vast discretion through what it now proudly calls its “common law of consent decrees” in data security cases.
Combined with a flurry of recommended best practices in reports that function as quasi-rulemakings, these settlements have enabled the FTC to circumvent both Congressional rulemaking reforms and meaningful oversight by the courts.
The FTC’s data security settlements aren’t an evolving common law. They’re a static statement of “reasonable” practices, repeated about 55 times over the past 14 years. At this point, it’s reasonable to assume that they apply to all circumstances — much like a rule (which is, more or less, the opposite of the common law).
Congressman Pompeo’s SHIELD Act would help curtail this practice, especially if amended to include consent orders and reports. It would also help focus the Commission on the actual elements of the Unfairness Policy Statement — which should be codified through Congressman Mullins’ SURE Act.
Significantly, only one data security case has actually come before an Article III court. The FTC trumpets Wyndham as an out-and-out win. But it wasn’t. In fact, the court agreed with Wyndham on the crucial point that prior consent orders were of little use in trying to understand the requirements of Section 5.
More recently the FTC suffered another rebuke. While it won its product design suit against Amazon, the Court rejected the Commission’s “fencing in” request to permanently hover over the company and micromanage practices that Amazon had already ended.
As the FTC grapples with such cutting-edge legal issues, it’s drifting away from the balance it promised Congress.
But Congress can’t fix these problems simply by telling the FTC to take its bedrock policy statements more seriously. Instead it must regularly reassess the process that’s allowed the FTC to avoid meaningful judicial scrutiny. The FTC requires significant course correction if its model is to move closer to a true “common law.”
Deleting References to Use of Non-Competition Factors in Competition Analysis. The GAI recommended that references to non-competition goals such as “promoting the healthy development of the socialist market economy,” be deleted, explaining that competition law and policy is most effective when it focuses exclusively upon competition and consumer welfare rather than attempting to achieve simultaneously multiple goals, some of which may be in conflict with others.
Deleting Exemptions for State-Owned Enterprises (SOEs). The GAI recommended that SOEs be fully subject to the AML, including liability and fines, explaining that conferring upon SOEs privileges and immunities that are not available to their privately-owned competitors, or based on superior performance or efficiency, distorts competition in the market between state-owned and privately-owned rivals, and that SOEs generate increased agency problems relative to privately owned firms.
Recognizing that Vertical Restraints are Generally Procompetitive or Benign and As Such Should Be Analyzed Under an Effects-Based Approach. The GAI recommended that, given the state of economic learning regarding the competitive effects of vertical restraints (i.e., that they rarely harm competition and often benefit consumers by reducing price, increasing demand, and/or creating a more efficient distribution channel), reliance on theoretical models alone to infer competitive harm should generally be insufficient to satisfy the heavy burden on the plaintiff to prove that a particular restraint is anticompetitive.
Deleting the Prohibition on Charging “Unfairly High” or Purchasing at “Unfairly Low” Prices. The GAI recommended that this prohibition be deleted in its entirety or, at the very least, revised to explicitly provide an exception for matters involving intellectual property rights. Among other things, the GAI explained that price regulation risks punishing vigorous competition, and that government-imposed prices that are too high or too low encourage misallocation of resources, soften incentives to engage in efficient conduct, reduce incentives to innovate, and distort markets. In addition, excessive pricing cases are considered to be among the most difficult and complex cases for competition authorities in terms of standards for assessment, analysis of data, and the design and implementation of suitable remedies. These difficulties create a substantial risk of both Type I (false positives) and Type II (false negatives) errors.
Limiting the Prohibition on Refusals to Deal to Conduct that Creates or Maintains a Monopoly. The GAI explained that, without such a limitation, the prohibition could be interpreted to impose an antitrust-based duty to deal on firms, to micromanage the terms of trade between firms, and to require courts and agencies to administer a burdensome remedy with substantial risk of causing more harm to competition and to consumers than benefits.
Deleting the Presumptions Concerning Collective Dominance. The GAI explained that such a presumption may harm rather than promote competition and discourages more rigorous effects-based economic analyses in favor of relying upon easier to apply but less accurate forms of analysis.
Clarifying the Definition of Concentration of Undertakings and Exempting Transactions From the Mandatory Premerger Approval Process That Do Not Have a Material Nexus with China. Among other things, the GAI recommended clarification of the terms “control over other undertakings and the ability capable of exerting a decisive influence . . . by virtue of contract or any other means.”
Deleting Provisions That Limit AML Enforcement Against Administrative Agencies or Organizations. The GAI recommended the deletion of the provision that grants “superior government agencies,” as opposed to the AML agencies, the authority to remedy anticompetitive conduct by administrative agencies and seemed to except administrative agencies from fines or other AML remedies. Among other things, the GAI noted the robust economic evidence that regulation often benefits producers and harms consumers and results in efficiency losses from rent-seeking efforts by market participants to influence regulation.
Limiting the Requirement that Disgorgement or a Minimum Fine Be Imposed Upon a Finding of an AML Violation and Limiting Fines to Sales Directly Obtained in the Relevant Product and Geographic Market in China Affected By the Violation.
Limiting Disgorgement to Naked Price-Fixing Agreements Among Competitors or, In the Case of Unilateral Conduct, to Conduct that Has No Plausible Efficiency Justification.
Specifying that the Legitimate Use of Intellectual Property Rights Includes the Right to Exclude.
Much ink will be spilled at this site lauding Commissioner Joshua (Josh) Wright’s many contributions to the Federal Trade Commission (FTC), and justly so. I will focus narrowly on Josh Wright as a law and economics “provocateur,” who used his writings and speeches to “stir the pot” and subject the FTC’s actions to a law and economics spotlight. In particular, Josh highlighted the importance of decision theory, which teaches that bureaucratic agencies (such as the FTC) are inherently subject to error and high administrative costs, and should adopt procedures and rules of decision accordingly. Thus, to maximize welfare, an agency should adopt “optimal” rules, directed at minimizing the sum of false positives, false negatives, and administrative costs. In that regard, the FTC should pay particular attention to empirical evidence of actual harm, and not bring cases based on mere theoretical models of possible harm – models that are inherently likely to generate substantial false positives (predictions of consumer harm) and thereby run counter to a well-run decision-theoretical regime.
Josh became a Commissioner almost three years ago, so there are many of his writings to comment upon. Nevertheless, he is so prolific that a very good understanding of his law and economics approach may be gleaned merely by a perusal of his 2015 contributions. I will selectively focus upon a few representative examples of wisdom drawn from Josh Wright’s (hereinafter JW) 2015 writings, going in reverse chronological order. (A fuller and more detailed exposition of his approach over the years would warrant a long law review article.)
Earlier this month, in commenting on the importance of granting FTC economists (housed in the FTC’s Bureau of Economics (BE)) a greater public role in the framing of FTC decisions, JW honed in on the misuse of consent decrees to impose constraints on private sector behavior without hard evidence of consumer harm:
One [unfortunate] phenomenon is the so‐called “compromise recommendation,” that is, a BE staff economist might recommend the FTC accept a consent decree rather than litigate or challenge a proposed merger when the underlying economic analysis reveals very little actual economic support for liability. In my experience, it is not uncommon for a BE staff analysis to convincingly demonstrate that competitive harm is possible but unlikely, but for BE staff to recommend against litigation on those grounds, but in favor of a consent order. The problem with this compromise approach is, of course, that a recommendation to enter into a consent order must also require economic evidence sufficient to give the Commission reason to believe that competitive harm is likely. . . . [What, then, is the solution?] Requiring BE to make public its economic rationale for supporting or rejecting a consent decree voted out by the Commission could offer a number of benefits at little cost. First, it offers BE a public avenue to communicate its findings to the public. Second, it reinforces the independent nature of the recommendation that BE offers. Third, it breaks the agency monopoly the FTC lawyers currently enjoy in terms of framing a particular matter to the public. The internal leverage BE gains by the ability to publish such a document may increase conflict between bureaus on the margin in close cases, but it will also provide BE a greater role in the consent process and a mechanism to discipline consents that are not supported by sound economics. I believe this would go a long ways towards minimizing the “compromise” recommendation that is most problematic in matters involving consent decrees.
In various writings, JW has cautioned that the FTC should apply an “evidence-based” approach to adjudication, and not lightly presume that particular conduct is anticompetitive – including in the area of patents. JW’s most recent pronouncement regarding an evidence-based approach is found in his July 2015 statement with fellow Commissioner Maureen Ohlhausen filed with the U.S. International Trade Commission (ITC), recommending that the ITC apply an “evidence-based” approach in deciding (on public interest grounds) whether to exclude imports that infringe “standard essential patents” (SEPs):
There is no empirical evidence to support the theory that patent holdup is a common problem in real world markets. The theory that patent holdup is prevalent predicts that the threat of injunction leads to higher prices, reduced output, and lower rates of innovation. These are all testable implications. Contrary to these predictions, the empirical evidence is not consistent with the theory that patent holdup has resulted in a reduction of competition. . . . An evidence-based approach to the public interest inquiry, i.e., one that requires proof that holdup actually occurred in a particular case, protects incentives to participate in standard setting by allowing SEP holders to seek and obtain exclusion orders when permitted by the SSO agreement at issue and in the absence of a showing of any improper use. In contrast, any proposal that would require the ITC to presume the existence of holdup and shift the burden of proof to SEP holders to show unwillingness threatens to deter participation in standard setting, particularly if an accused infringer can prove willingness simply by agreeing to be bound by terms determined by neutral adjudication.
In such matters as Cephalon (May 2015) and Cardinal Health (April 2015), JW teamed up with Commissioner Ohlhausen to caution that disgorgement of profits as an FTC remedy in competition cases should not be lightly pursued, and indeed should be subject to a policy statement that limits FTC discretion, in order to reduce costly business uncertainty and enforcement error.
JW also brought to bear decision-theoretic insights on consumer protection matters. For example, in his April 2015 dissent in Nomi Technologies, he castigated the FTC for entering into a consent decree when the evidence of consumer harm was exceedingly weak (suggesting a high probability of a false positive, in decision-theoretic terms):
The Commission’s decision to issue a complaint and accept a consent order for public comment in this matter is problematic for both legal and policy reasons. Section 5(b) of the FTC Act requires us, before issuing any complaint, to establish “reason to believe that [a violation has occurred]” and that an enforcement action would “be to the interest of the public.” While the Act does not set forth a separate standard for accepting a consent decree, I believe that threshold should be at least as high as for bringing the initial complaint. The Commission has not met the relatively low “reason to believe” bar because its complaint does not meet the basic requirements of the Commission’s 1983 Deception Policy Statement. Further, the complaint and proposed settlement risk significant harm to consumers by deterring industry participants from adopting business practices that benefit consumers.
Consistent with public choice insights, JW stated in an April 2015 speech that greater emphasis should be placed on public advocacy efforts aimed at opposing government-imposed restraints of trade, which have a greater potential for harm than purely private restraints. Thus, welfare would be enhanced by a reallocation of agency resources toward greater advocacy and less private enforcement:
[P]ublic restraints are especially pernicious for consumers and an especially worthy target for antitrust agencies. I am quite confident that a significant shift of agency resources away from enforcement efforts aimed at taming private restraints of trade and instead toward fighting public restraints would improve consumer welfare.
In March 2015 congressional testimony, JW explained his opposition to Federal Communications Commission (FCC) net neutrality regulation, honing in on the low likelihood of harm from private conduct (and thus implicitly the high risk of costly error and unwarranted regulatory costs) in this area:
Today I will discuss my belief that the FCC’s newest regulation does not make sense from an economic perspective. By this I mean that the FCC’s decision to regulate broadband providers as common carriers under Title II of the Communications Act of 1934 will make consumers of broadband internet service worse off, rather than better off. Central to my conclusion that the FCC’s attempts to regulate so-called “net neutrality” in the broadband industry will ultimately do more harm than good for consumers is that the FCC and commentators have failed to identify a problem worthy of regulation, much less cumbersome public-utility-style regulation under Title II.
At the same time, JW’s testimony also explained that in the face of hard evidence of actual consumer harm, the FTC could take – and indeed has taken on several instances – case-specific enforcement action.
Also in March 2015, in his dissent in Par Petroleum, JW further developed the theme that the FTC should not enter into a consent decree unless it has hard evidence of competitive harm – a mere theory does not suffice:
Prior to entering into a consent agreement with the merging parties, the Commission must first find reason to believe that a merger likely will substantially lessen competition under Section 7 of the Clayton Act. The fact that the Commission believes the proposed consent order is costless is not relevant to this determination. A plausible theory may be sufficient to establish the mere possibility of competitive harm, but that theory must be supported by record evidence to establish reason to believe its likelihood. Modern economic analysis supplies a variety of tools to assess rigorously the likelihood of competitive harm. These tools are particularly important where, as here, the conduct underlying the theory of harm – that is, vertical integration – is empirically established to be procompetitive more often than not. Here, to the extent those tools were used, they uncovered evidence that, consistent with the record as a whole, is insufficient to support a reason to believe the proposed transaction is likely to harm competition. Thus, I respectfully dissent and believe the Commission should close the investigation and allow the parties to complete the merger without imposing a remedy.
In a February 2015 speech on the need for greater clarity with respect to “unfair methods of competition” under Section 5 of the FTC Act, JW emphasized the problem of uncertainty generated by the FTC’s failure to adequately define unfair methods of competition:
The lack of institutional commitment to a stable definition of what constitutes an “unfair method of competition” leads to two sources of problematic variation in the agency’s interpretation of Section 5. One is that the agency’s interpretation of the statute in different cases need not be consistent even when the individual Commissioners remain constant. Another is that as the members of the Commission change over time, so does the agency’s Section 5 enforcement policy, leading to wide variations in how the Commission prosecutes “unfair methods of competition” over time. In short, the scope of the Commission’s Section 5 authority today is as broad or as narrow as a majority of commissioners believes it is.
Focusing on the empirical record, JW offered a sharp critique of FTC administrative adjudication (and the value of the FTC’s non-adjudicative research function) in another February 2015 speech:
The data show three things with significant implications for those important questions. The first is that, despite modest but important achievements in administrative adjudication, it can offer in its defense only a mediocre substantive record and a dubious one when it comes to process. The second is that the FTC can and does influence antitrust law and competition policy through its unique research-and-reporting function. The third is, as measured by appeal and reversal rates, generalist courts get a fairly bad wrap relative to the performance of expert agencies like the FTC.
In the same speech, JW endorsed proposed congressional reforms to the FTC’s exercise of jurisdiction over mergers, embodied in the draft “Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act.” Those reforms include harmonizing the FTC and Justice Department’s preliminary injunction standards, and divesting the FTC of its authority to initiate and pursue administrative challenges to unconsummated mergers, thus requiring the agency to challenge those deals in federal court.
[T]he Commission and our staff must actually engage in a rigorous cost-benefit analysis prior to disseminating best practices or legislative recommendations, given the real world consequences for the consumers we are obligated to protect. Acknowledging in passing, as the Workshop Report does, that various courses of actions related to the Internet of Things may well have some potential costs and benefits does not come close to passing muster as cost-benefit analysis. The Workshop Report does not perform any actual analysis whatsoever to ensure that, or even to give a rough sense of the likelihood that the benefits of the staff’s various proposals exceed their attendant costs. Instead, the Workshop Report merely relies upon its own assertions and various surveys that are not necessarily representative and, in any event, do not shed much light on actual consumer preferences as revealed by conduct in the marketplace. This is simply not good enough; there is too much at stake for consumers as the Digital Revolution begins to transform their homes, vehicles, and other aspects of daily life. Paying lip service to the obvious fact that the various best practices and proposals discussed in the Workshop Report might have both costs and benefits, without in fact performing such an analysis, does nothing to inform the recommendations made in the Workshop Report.
To conclude, FTC Commissioner Josh Wright went beyond merely emphasizing the application of economic theory to individual FTC cases, by explaining the need to focus economic thinking on FTC policy formulation – in other words, viewing FTC administrative processes and decision-making from an economics-based, decision-theoretical perspective, with hard facts (not mere theory) a key consideration. If the FTC is to be true to its goal of advancing consumer welfare, it should fully adopt such a perspective on a going-forward basis. One may only hope that current and future FTC Commissioners will heed this teaching.
On April 17, the Federal Trade Commission (FTC) voted three-to-two to enter into a consent agreement In the Matter of Cardinal Health, Inc., requiring Cardinal Health to disgorge funds as part of the settlement in this monopolization case. As ably explained by dissenting Commissioners Josh Wright and Maureen Ohlhausen, the U.S. Federal Trade Commission (FTC) wrongly required the disgorgement of funds in this case. The settlement reflects an overzealous application of antitrust enforcement to unilateral conduct that may well be efficient. It also manifests a highly inappropriate application of antitrust monetary relief that stands to increase private uncertainty, to the detriment of economic welfare.
The basic facts and allegations in this matter, drawn from the FTC’s statement accompanying the settlement, are as follows. Through separate acquisitions in 2003 and 2004, Cardinal Health became the largest operator of radiopharmacies in the United States and the sole radiopharmacy operator in 25 relevant markets addressed by this settlement. Radiopharmacies distribute and sell radiopharmaceuticals, which are drugs containing radioactive isotopes, used by hospitals and clinics to diagnose and treat diseases. Notably, they typically derive at least of 60% of their revenues from the sale of heart perfusion agents (“HPAs”), a type of radiopharmaceutical that healthcare providers use to conduct heart stress tests. A practical consequence is that radiopharmacies cannot operate a financially viable and competitive business without access to an HPA. Between 2003 and 2008, Cardinal allegedly employed various tactics to induce the only two manufacturers of HPAs in the United States, BMS and GEAmersham, to withhold HPA distribution rights from would-be radiopharmacy market entrants in violation of Section 2 of the Sherman Act. Through these tactics Cardinal allegedly maintained exclusive dealing rights, denied its customers the benefits of competition, and profited from the monopoly prices it charged for all radiopharmaceuticals, including HPAs, in the relevant markets. Importantly, according to the FTC, there was no efficiency benefit or legitimate business justification for Cardinal simultaneously maintaining exclusive distribution rights to the only two HPAs then available in the relevant markets.
This settlement raises two types of problems.
First, this was a single firm conduct exclusive dealing case involving (at best) questionable anticompetitive effects. As Josh Wright (citing the economics literature) pointed out in his dissent, “there are numerous plausible efficiency justifications for such [exclusive dealing] restraints.” (Moreover, as Josh Wright and I stressed in an article on tying and exclusive dealing, “[e]xisting empirical evidence of the impact of exclusive dealing is scarce but generally favors the view that exclusive dealing is output‐enhancing”, suggesting that a (rebuttable) presumption of legality would be appropriate in this area.) Indeed, in this case, Commissioner Wright explained that “[t]he tactics the Commission challenges could have been output-enhancing” in various markets. Furthermore, Commissioner Wright emphasized that the data analysis showing that Cardinal charged higher prices in monopoly markets was “very fragile. The data show that the impact of a second competitor on Cardinal’s prices is small, borderline statistically significant, and not robust to minor changes in specification.” Commissioner Ohlhausen’s dissent reinforced Commissioner Wright’s critique of the majority’s exclusive dealing theory. As she put it:
“[E]even if the Commission could establish that Cardinal achieved some type of de facto exclusivity with both Bristol-Myers Squibb and General Electric Co. during the relevant time period (and that is less than clear), it is entirely unclear that such exclusivity – rather than, for example, insufficient demand for more than one radiopharmacy – caused the lack of entry within each of the relevant markets. That alternative explanation seems especially likely in the six relevant markets in which ‘Cardinal remains the sole or dominant radiopharmacy,’ notwithstanding the fact that whatever exclusivity Cardinal may have achieved admittedly expired in early 2008. The complaint provides no basis for the assertion that Cardinal’s conduct during the 2003-2008 period has caused the lack of entry in those six markets during the past seven years.”
Furthermore, Commissioner Ohlhausen underscored Commissioner Wright’s critique of the empirical evidence in this case: “[T]he evidence of anticompetitive effects in the relevant markets at issue is significantly lacking. It is largely based on non-market-specific documentary evidence. The market-specific empirical evidence we do have implies very small (i.e. low single-digit) and often statistically insignificant price increases or no price increases at all.”
Second, the FTC’s requirement that Cardinal Health disgorge $26.8 million into a fund for allegedly injured consumers is unmeritorious and inappropriately chills potentially procompetitive behavior. Commissioner Ohlhausen focused on how this case ran afoul of the FTC’s 2003 Policy Statement on Monetary Equitable Remedies in Competition Cases (Policy Statement) (withdrawn by the FTC in 2012, over Commissioner Ohlhausen’s dissent), which reserves disgorgement for cases in which the underlying violation is clear and there is a reasonable basis for calculating the amount of a remedial payment. As Ohlhausen explained, this case violates those principles because (1) it does not involve a clear violation of the antitrust laws (see above) and, given the lack of anticompetitive effects evidence (see above), (2) there is no reasonable basis for calculating the disgorgement amount (indeed, there is “the real possibility of no ill-gotten gains for Cardinal”). Furthermore:
“The lack of guidance from the Commission on the use of its disgorgement authority [following withdrawal of the Policy Statement] makes any such use inherently unpredictable and thus unfair. . . . The Commission therefore ought to reinstate the Policy Statement – either in its original form or in some modified form that the current Commissioners can agree on – or provide some additional guidance on when it plans to seek the extraordinary remedy of disgorgement in antitrust cases.”
In his critique of disgorgement, Commissioner Wright deployed law and economics analysis (and, in particular, optimal deterrence theory). He explained that regulators should be primarily concerned with over-deterrence in single-firm conduct cases such as this one, which raise the possibility of private treble damage actions. Wright stressed:
“I would . . . pursue disgorgement only against naked price fixing agreements among competitors or, in the case of single-firm conduct, only if the monopolist’s conduct violates the Sherman Act and has no plausible efficiency justification. . . . This case does not belong in that category. Declining to pursue disgorgement in most cases involving vertical restraints has the virtue of taking the remedy off the table – and thus reducing the risk of over-deterrence – in the cases that present the most difficulty in distinguishing between anticompetitive conduct that harms consumers and procompetitive conduct that benefits them, such as the present case.”
In sum, one may hope that in the future the FTC: (1) will be more attentive to the potential efficiencies of exclusive dealing; (2) will proceed far more cautiously before proposing an enforcement action in the exclusive dealing area; (3) will avoid applying disgorgement in exclusive dealing cases; and (4) will promulgate a new disgorgement policy statement that reserves disgorgement for unequivocally illegal antitrust offenses in which economic harm can readily be calculated with a high degree of certainty.
In my just published Heritage Foundation Legal Memorandum, I argue that the U.S. Federal Trade Commission (FTC) should substantially scale back its overly aggressive “advertising substantiation” program, which disincentivizes firms from providing the public with valuable information about the products they sell. As I explain:
“The . . . [FTC] has a long history of vigorously combating false and deceptive advertising under its statutory authorities, but recent efforts by the FTC to impose excessive ‘advertising substantiation’ requirements on companies go far beyond what is needed to combat false advertising. Such actions threaten to discourage companies from providing useful information that consumers value and that improves the workings of the marketplace. They also are in tension with constitutional protection for commercial speech. The FTC should reform its advertising substantiation policy and allow businesses greater flexibility to tailor their advertising practices, which would further the interests of both consumers and businesses. It should also decline to seek ‘disgorgement’ of allegedly ‘ill-gotten gains’ in cases involving advertising substantiation.”
In particular, I recommend that the FTC issue a revised policy statement explaining that it will seek to restrict commercial speech to the minimum extent possible, consistent with fraud prevention, and will not require onerous clinical studies to substantiate non-fraudulent advertising claims. I also urge that the FTC clarify that it will only seek equitable remedies (including injunctions and financial exactions) in court for cases of clear fraud.
The Commission supports its action by citing “legal thinking” in favor of heightened monetary penalties and the Policy Statement’s role in dissuading the Commission from following this thinking:
It has been our experience that the Policy Statement has chilled the pursuit of monetary remedies in the years since the statement’s issuance. At a time when Supreme Court jurisprudence has increased burdens on plaintiffs, and legal thinking has begun to encourage greater seeking of disgorgement, the FTC has sought monetary equitable remedies in only two competition cases since we issued the Policy Statement in 2003.
In this case, “legal thinking” apparently amounts to a single 2009 article by Einer Elhague. But it turns out Einer doesn’t represent the entire current of legal thinking on this issue. As it happens, Josh Wright and Judge Ginsburg looked at the evidence in 2010 and found no evidence of increased deterrence (of price fixing) from larger fines:
If the best way to deter price-fixing is to increase fines, then we should expect the number of cartel cases to decrease as fines increase. At this point, however, we do not have any evidence that a still-higher corporate fine would deter price-fixing more effectively. It may simply be that corporate fines are misdirected, so that increasing the severity of sanctions along this margin is at best irrelevant and might counter-productively impose costs upon consumers in the form of higher prices as firms pass on increased monitoring and compliance expenditures.
Commissioner Ohlhausen points out in her dissent that there is no support for the claim that the Policy Statement has led to sub-optimal deterrence and quite sensibly finds no reason for the Commission to withdraw the Policy Statement. But even more importantly Commissioner Ohlhausen worries about what the Commission’s decision here might portend:
The guidance in the Policy Statement will be replaced by this view: “[T]he Commission withdraws the Policy Statement and will rely instead upon existing law, which provides sufficient guidance on the use of monetary equitable remedies.” This position could be used to justify a decision to refrain from issuing any guidance whatsoever about how this agency will interpret and exercise its statutory authority on any issue. It also runs counter to the goal of transparency, which is an important factor in ensuring ongoing support for the agency’s mission and activities. In essence, we are moving from clear guidance on disgorgement to virtually no guidance on this important policy issue.
An excellent point. If the standard for the FTC issuing policy statements is the sufficiency of the guidance provided by existing law, then arguably the FTC need not offer any guidance whatever.
But as we careen toward a more and more active role on the part of the FTC in regulating the collection, use and dissemination of data (i.e., “privacy”), this sets an ominous precedent. Already the Commission has managed to side-step the courts in establishing its policies on this issue by, well, never going to court. As Berin Szoka noted in recent Congressional testimony:
The problem with the unfairness doctrine is that the FTC has never had to defend its application to privacy in court, nor been forced to prove harm is substantial and outweighs benefits.
This has lead Berin and others to suggest — and the chorus will only grow louder — that the FTC clarify the basis for its enforcement decisions and offer clear guidance on its interpretation of the unfairness and deception standards it applies under the rubric of protecting privacy. Unfortunately, the Commission’s reasoning in this action suggests it might well not see fit to offer any such guidance.