[The final post in Truth on the Market‘s digital symposium “FTC Rulemaking on Unfair Methods of Competition” comes from Joshua Wright, the executive director of the Global Antitrust Institute at George Mason University and the architect, in his time as a member of the Federal Trade Commission, of the FTC’s prior 2015 UMC statement. You can find all of the posts in this series at thesymposium page here.]
The Federal Trade Commission’s (FTC) recently released Policy Statement on unfair methods of competition (UMC) has a number of profound problems, which I will detail below. But first, some praise: if the FTC does indeed plan to bring many lawsuits challenging conduct as a standalone UMC (I am dubious it will), then the public ought to have notice about the change. Providing such notice is good government, and the new Statement surely provides that notice. And providing notice in this way was costly to the FTC: the contents of the statement make surviving judicial review harder, not easier (I will explain my reasons for this view below). Incurring that cost to provide notice deserves some praise.
Now onto the problems. I see four major ones.
First, the Statement seems to exist in a fantasy world; the FTC majority appears to wish away the past problems associated with UMC enforcement. Those problems have not, in fact, gone away and pretending they don’t exist—as this Statement does—is unlikely to help the Commission’s prospects for success in court.
Second, the Statement provides no guidance whatsoever about how a potential respondent might avoid UMC liability, which stands in sharp contrast to other statements and guidance documents issued by the Commission.
Third, the entire foundation of the statement is that, in 1914, Congress intended the FTC Act to have broader coverage than the Sherman Act. Fair enough. But the coverage of the Sherman Act isn’t fixed to what the Supreme Court thought it was in 1914: It’s a moving target that, in fact, has moved dramatically over the last 108 years. Congress in 1914 could not have intended UMC to be broader than how the courts would interpret the Sherman Act in the future (whether that future is 1918, much less 1970 or 2023).
And fourth, Congress has passed other statutes since it passed the FTC Act in 1914, one of which is the Administrative Procedure Act. The APA unambiguously and explicitly directs administrative agencies to engage in reasoned decision making. In a nutshell, this means that the actions of such agencies must be supported by substantial record evidence and can be set aside by a court on judicial review if they are arbitrary and capricious. “Congress intended to give the FTC broad authority in 1914” is not an argument to address the fact that, 32 years later, Congress also intended to limit the FTC’s authority (as well as other agencies’) by requiring reasoned decision making.
Each of these problems on its own would be enough to doom almost any case the Commission might bring to apply the statement. Together, they are a death knell.
A Record of Failure
As I have explained elsewhere, there are a number of reasons the FTC has pursued few standalone UMC cases in recent decades. The late-1970s effort to reinvigorate UMC enforcement via bringing cases was a total failure: the Commission did not lose the game on a last-second buzzer beater; it got blown out by 40 points. According to William Kovacic and Mark Winerman, in each of those UMC cases, “the tribunal recognized that Section 5 allows the FTC to challenge behavior beyond the reach of the other antitrust laws. In each instance, the court found that the Commission had failed to make a compelling case for condemning the conduct in question.”
Since these losses, the Commission hasn’t successfully litigated a UMC case in federal court. This, in my view, is because of a (very plausible) concern that, when presented with such a case, Article III courts would either define the Commission’s UMC authority on their own terms—i.e., restricting the Commission’s authority—or ultimately decide that the space beyond the Sherman Act that Congress in 1914 intended Section 5 to occupy exists only in theory and not in the real world, and declare the two statutes functionally equivalent. Those reasons—and not Chair Lina Khan’s preferred view that the Commission has been feckless, weak, or captured by special interests since 1981—explain why Section 5 has been used so sparingly over the last 40 years (and mostly just to extract settlements from parties under investigation). The majority’s effort to put all its eggs in the “1914 legislative history” basket simply ignores this reality.
Each of these documents is designed (at least in part) to help market participants understand what conduct might or might not violate one or more laws enforced by the FTC, and for that reason, each document provides specific examples of conduct that would violate the law, and conduct that would not.
The new UMC Policy Statement provides no such examples. Instead, we are left with the conclusory statement that, if the Commission can characterize the conduct as “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power” or “otherwise restrictive or exclusionary,” then the conduct can be a UMC.
What does this salad of words mean? I have no idea, and the Commission doesn’t even bother to try and define them. If a lawyer is asked, “based upon the Commission’s new UMC Statement, what conduct might be a violation?” the only defensible advice to give is “anything three Commissioners think.”
The third problem is the majority’s fictitious belief that Sherman Act jurisprudence is frozen in 1914—the year Congress passed the FTC Act. The Statement states that “Congress passed the FTC Act to push back against the judiciary’s open-ended rule of reason for analyzing Sherman Act claims” and cites the Supreme Court’s opinion in Standard Oil Co. of New Jersey v. United States from 1911.
It’s easy to understand why Congress in 1914 was dissatisfied with the opinion in Standard Oil; reading Standard Oil in 2022 is also a dissatisfying experience. The opinion takes up 106 pages in the U.S. Reporter, and individualparagraphs are routinely three pages long; it meanders between analyzing Section 1 and Section 2 of the Sherman Act without telling the reader; and is generally inscrutable. I have taught antitrust for almost 20 years and, though we cover Standard Oil because of its historical importance, I don’t teach the opinion, because the opinion does not help modern students understand how to practice antitrust law.
This stands in sharp contrast to Justice Louis Brandeis’s opinion in Chicago Board of Trade (issued four years after Congress passed the FTC Act), which I do teach consistently, because it articulates the beginning of the modern rule of reason. Although the majority of the FTC is on solid ground when it points out that Congress in 1914 intended the FTC’s UMC authority to have broader coverage than the Sherman Act, the coverage of the Sherman Act has changed since 1914.
This point is well-known, of course: Kovacic and Winerman explain that “[p]robably the most important” reason “Section 5 has played so small a role in the development of U.S. competition policy principles” “is that the Sherman Act proved to be a far more flexible tool for setting antitrust rules than Congress expected in the early 20th century.” The 10 pages in the Statement devoted to century-old legislative history just pretend like Sherman Act jurisprudence hasn’t changed in that same amount of time. The federal courts are going to see right through that.
What About the APA?
The fourth problem with the majority’s trip back to 1914 is that, since then, Congress has passed other statutes limiting the Commission’s authority. The most prominent of these is the Administrative Procedure Act, which was passed in 1946 (for those counting, 1946 is more than 30 years after 1914).
There are hundreds of opinions interpreting the APA, and indeed, an entire body of law has developed pursuant to those cases. These cases produce many lessons, but one of them is that it is not enough for an agency to have the legal authority to act: “Congress gave me this power. I am exercising this power. Therefore, my exercise of this power is lawful,” is, by definition, insufficient justification under the APA. An agency has the obligation to engage in reasoned decision making and must base its actions on substantial evidence. Its enforcement efforts will be set aside on judicial review if they are arbitrary and capricious.
By failing to explain how a company can avoid UMC liability—other than by avoiding conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power” or “otherwise restrictive or exclusionary,” without defining those terms—the majority is basically shouting to the federal courts that its UMC enforcement program is going to be arbitrary and capricious. That’s going to fail for many reasons. A simple one is that 1946 is later in time than 1914, which is why the Commission putting all its eggs in the 1914 legislative history basket is not going to work once its actions are challenged in federal court.
These problems with the majority’s statement are so significant, so obvious, and so unlikely to be overcome, that I don’t anticipate that the Commission will pursue many UMC enforcement actions. Instead, I suspect UMC rulemaking is on the agenda, which has its own set of problems (not to mention the fact that the 1914 legislative history points away from Congress intending that the Commission has legislative rulemaking authority). Rather, I think the value of this statement is symbolic for Chair Khan and her supporters.
When one considers the record of the Khan Commission—many policy statements, few enforcement actions, and even fewer successful enforcement actions—it all makes more sense. The audience for this Statement is Chair Khan’s friends working on Capitol Hill and at think tanks, as well as her followers on Twitter. They might be impressed by it. The audience she should be concerned about is Article III judges, who surely won’t be.
[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at thesymposium 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.]
And what is the statement’s aim? As Commissioner Wilson aptly puts it, the statement “announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.” This sweeping claim, which extends far beyond the scope of prior Commission pronouncements, might be viewed as mere puffery with no real substantive effect: “a tale told by an idiot, full of sound and fury, signifying nothing.”
Various scholarly commentators have already explored the legal and policy shortcomings of this misbegotten statement (see, for example, here, here, here, here, here, and here). Suffice it to say there is general agreement that, as Gus Hurwitz explains, the statement “is non-precedential and lacks the force of law.”
The statement’s almost certain lack of legal effect, however, does not mean it is of no consequence. Businesses are harmed by legal risk, even if they are eventually likely to prevail in court. Markets react negatively to antitrust lawsuits, and thus firms may be expected to shy away from efficient profitable behavior that may draw the FTC’s ire. The resources firms redirect to less-efficient conduct impose costs on businesses and ultimately consumers. (And when meritless FTC lawsuits still come, wasteful litigation-related costs will be coupled with unwarranted reputational harm to businesses.)
Moreover, as Wilson points out, uncertainty about what the Commission may characterize as unfair “does not allow businesses to structure their conduct to avoid possible liability. . . . [T]he Policy Statement . . . significantly increases uncertainty for businesses[,] which . . . . are left with no navigational tools to map the boundaries of lawful and unlawful conduct.” This will further disincentivize new and innovative (and easily misunderstood) business initiatives. In the perhaps-vain hope that a Commission majority will take note of these harms and have second thoughts about retention of the statement, I will briefly summarize the legal case against the statement’s effectiveness. The FTC actually would be better able to “push the Section 5 envelope” a bit through some carefully tailored innovative enforcement actions if it could jettison the legal baggage that the statement represents. To understand why, a brief review of FTC competition rulemaking and competition enforcement authority is warranted
FTC Competition Rulemaking
As I and others have written at great length (see, for examples, this compilation of essays on FTC rulemaking published by Concurrences), the case for substantive FTC competition rulemaking under Section 6(g) of the FTC Act is exceedingly weak. In particular (see my July 2022Truth on the Market commentary):
First, the “nondelegation doctrine” suggests that, under section 6(g), Congress did not confer on the FTC the specific statutory authority required to issue rules that address particular competitive practices.
Second, principles of statutory construction strongly indicate that the FTC’s general statutory provision dealing with rulemaking refers to procedural rules of organization, not substantive rules bearing on competition.
Third, even assuming that proposed competition rules survived these initial hurdles, principles of administrative law would raise the risk that competition rules would be struck down as “arbitrary and capricious.”
Fourth, there is a substantial possibility that courts would not defer to the FTC’s construction through rulemaking of its “unfair methods of competition” as authorizing the condemnation of specific competitive practices.
The 2022 statement raises these four problems in spades.
First, the Supreme Court has stated that the non-delegation doctrine requires that a statutory delegation must be supported by an “intelligible principle” guiding its application. There is no such principle that may be drawn from the statement, which emphasizes that unfair business conduct “may be coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature.” The conduct also must tend “to negatively affect competitive conditions – whether by affecting consumers, workers, or other market participants.” Those descriptions are so broad and all-encompassing that they are the antithesis of an “intelligible principle.”
Second, the passing nod to rulemaking referenced in Section 6(g) is best understood as an aid to FTC processes and investigations, not a source of substantive policymaking. The Supreme Court’s unanimous April 2021 decision in AMG Capital Management v. FTC (holding that the FTC could not obtain equitable monetary relief under its authority to seek injunctions) embodies a reluctance to read general non-specific language as conferring broad substantive powers on the FTC. This interpretive approach is in line with other Supreme Court case law that rejects finding “elephants in mouseholes.” While multiple federal courts had upheld the FTC’s authority to obtain injunctive monetary relief prior to its loss in the AMG case, only one nearly 50-year-old decision, National Petroleum Refiners, supports substantive competition-rulemaking authority, and its reasoning is badly dated. Nothing in the 2022 statement makes a convincing case for giving substantive import to Section 6(g).
Third, given the extremely vague terms used to describe unfair method of competition in the 2022 statement (see first point, above), any effort to invoke them to find a source of authority to define new categories of competition-related violations would be sure to raise claims of agency arbitrariness and capriciousness under the Administrative Procedure Act (APA). Admittedly, the “arbitrary and capricious review” standard “has gone through numerous cycles since the enactment of the APA” and currently is subject to some uncertainty. Nevertheless, the statement’s untrammeled breadth and lack of clear definitions for unfair competitive conduct suggests that courts would likely employ a “hard look review,” which would make it relatively easy for novel Section 6(g) rules to be deemed arbitrary (especially in light of the skepticism of broad FTC claims of authority that is implicit in the Supreme Court’s unanimous AMG holding).
Fourth, given the economywide breadth of the phrase “unfair methods of competition,” it is quite possible (in fact, probably quite likely) that the Supreme Court would invoke the “major questions doctrine” and hold that unfair methods of competition rulemaking is “too important” to be left to the FTC. Under this increasingly invoked doctrine, “the Supreme Court has rejected agency claims of regulatory authority when (1) the underlying claim of authority concerns an issue of vast ‘economic and political significance,’ and (2) Congress has not clearly empowered the agency with authority over the issue.”
The fact that the 2022 statement plainly asserts vast authority to condemn a wide range of economically significant practices strengthens the already-strong case for condemning Section 5 competition rulemaking under this doctrine. Application of the doctrine would render moot the question of whether Section 6(g) rules would receive any Chevron deference. In any event, based on the 2022 Statement’s flouting of modern antitrust principles, including such core principles as consumer harm, efficiencies, and economic analysis, it appears unlikely that courts would accord such deference subsequent Section 6(g) rules. As Gus Hurwitz recently explained:
Administrative antitrust is a preferred vehicle for administering antitrust law, not for changing it. Should the FTC use its power aggressively, in ways that disrupt longstanding antitrust principles or seem more grounded in policy better created by Congress, it is likely to find itself on the losing side of the judicial opinion.
FTC Competition-Enforcement Authority
In addition to Section 6(g) competition-rulemaking initiatives, the 2022 statement, of course, aims to inform FTC Act Section 5(a) “unfair methods of competition” (UMC) enforcement actions. The FTC could bring a UMC suit before its own administrative tribunal or, in the alternative, seek to enjoin an alleged unfair method of competition in federal district court, pursuant to its authority under Section 13(b) of the FTC Act. The tenor of the 2022 statement undermines, rather than enhances, the likelihood that the FTC will succeed in “standalone Section 5(a)” lawsuits that challenge conduct falling beyond the boundaries of the Sherman and Clayton Antitrust Acts.
[C]ourts have confirmed that the unilateral exercise of lawfully acquired market power does not violate the antitrust laws. Therefore, the attempted use of standalone Section 5 to address high prices, untethered from accepted theories of antitrust liability under the Sherman Act, is unlikely to find success in the courts.
There have been no jurisprudential changes since 2019 to suggest that a UMC suit challenging the exploitation of lawfully obtained market power by raising prices is likely to find judicial favor. It follows, a fortiori (legalese that I seldom have the opportunity to trot out), that the more “far out” standalone suits implied by the statement’s analysis would likely generate embarrassing FTC judicial losses.
Applying three of the four principles assessed in the analysis of FTC competition rulemaking (the second principle, referring to statutory authority for rulemaking, is inapplicable), the negative influence of the statement on FTC litigation outcomes is laid bare.
First, as is the case with rules, the unconstrained laundry list of “unfair” business practices fails to produce an “intelligible principle” guiding the FTC’s exercise of enforcement discretion. As such, courts could well conclude that, if the statement is to be taken seriously, the non-delegation doctrine applies, and the FTC does not possess delegated UMC authority. Even if such authority were found to have been properly delegated, some courts might separately conclude, on due process grounds, that the UMC prohibition is “void for vagueness” and therefore cannot support an enforcement action. (While the “void for vagueness” doctrine is controversial, related attacks on statutes based on “impossibility of compliance” may have a more solid jurisprudential footing, particularly in the case of civil statutes (see here). The breadth and uncertainty of the statement’s references to disfavored conduct suggests “impossibility of compliance” as a possible alternative critique of novel Section 5 competition cases.) These concerns also apply equally to possible FTC Section 13(b) injunctive actions filed in federal district court.
Second, there is a not insubstantial risk that an appeals court would hold that a final Section 5 competition-enforcement decision by the Commission would be “arbitrary and capricious” if it dealt with behavior far outside the scope of the Sherman or Clayton Acts, based on vague policy pronouncements found in the 2022 statement.
Third, and of greatest risk to FTC litigation prospects, it is likely that appeals courts (and federal district courts in Section 13(b) injunction cases) would give no deference to new far-reaching non-antitrust-based theories alluded to in the statement. As discussed above, this could be based on invocation of the major questions doctrine or, separately, on the (likely) failure to accord Chevron deference to theories that are far removed from recognized antitrust causes of action under modern jurisprudence.
What Should the FTC Do About the Statement?
In sum, the startling breadth and absence of well-defined boundaries that plagues the statement’s discussion of potential Section 5 UMC violations means that the statement’s issuance materially worsens the FTC’s future litigation prospects—both in defending UMC rulemakings and in seeking to affirm case-specific Commission findings of UMC violations.
What, then, should the FTC do?
It should, put simply, withdraw the 2022 statement and craft a new UMC policy statement (NPS) that avoids the major pitfalls inherent in the statement. The NPS should carefully delineate the boundaries of standalone UMC rulemakings and cases, so as (1) to minimize uncertainty in application; and (2) to harmonize UMC actions with the pro-consumer welfare goal (as enunciated by the Supreme Court) of the antitrust laws. In drafting the NPS, the FTC would do well to be mindful of the part of Commissioner Wilson’s dissenting statement that highlights the deficiencies in the 2022 statement that detract from its persuasiveness to courts:
First, . . . the Policy Statement does not provide clear guidance to businesses seeking to comply with the law.
Second, the Policy Statement does not establish an approach for the term “unfair” in the competition context that matches the economic and analytical rigor that Commission policy offers for the same term, “unfair,” in the consumer protection context.
Third, the Policy Statement does not provide a framework that will result in credible enforcement. Instead, Commission actions will be subject to the vicissitudes of prevailing political winds.
Fourth, the Policy Statement does not address the legislative history that both demands economic content for the term “unfair” and cautions against an expansive approach to enforcing Section 5.
Consistent with avoiding these deficiencies, a new PS could carefully identify activities that are beyond the reach of the antitrust laws yet advance the procompetitive consumer-welfare-oriented goal that is the lodestar of antitrust policy. The NPS should also be issued for public comment (as recommended by Commissioner Wilson), an action that could give it additional “due process luster” in the eyes of federal judges.
More specifically, the NPS could state that standalone UMC actions should be directed at private conduct that undermines the competitive process, but is not subject to the reach of the antitrust laws (say, because of the absence of contracts). Such actions might include, for example: (1) invitations to collude; (2) facilitating practices (“activities that tend to promote interdependence by reducing rivals’ uncertainty or diminishing incentives to deviate from a coordinated strategy”—see here); (3) exchanges of competitively sensitive information among competitors that do not qualify as Sherman Act “agreements” (see here); and (4) materially deceptive conduct (lacking efficiency justifications) that likely contributes to obtaining or increasing market power, as in the standard-setting context (see here); and (5) non-compete clauses in labor employment agreements that lack plausible efficiency justifications (say, clauses in contracts made with low-skill, low-salary workers) or otherwise plainly undermine labor-market competition (say, clauses presented to workers only after they have signed an initial contract, creating a “take-it-or-leave-it scenario” based on asymmetric information).
After promulgating a list of examples, the NPS could explain that additional possible standalone UMC actions would be subject to the same philosophical guardrails: They would involve conduct inconsistent with competition on the merits that is likely to harm consumers and that lacks strong efficiency justifications.
A revised NPS along the lines suggested would raise the probability of successful UMC judicial outcomes for the Commission. It would do this by strengthening the FTC’s arguments that there is an intelligible principle underlying congressional delegation; that specificity of notice is sufficient to satisfy due process (arbitrariness and capriciousness) concerns; that the Section 5 delegation is insufficiently broad to trigger the major questions doctrine; and that Chevron deference may be accorded determinations stemming from precise NPS guidance.
In the case of rules, of course, the FTC would still face the substantial risk that a court would deem that Section 6(g) does not apply to substantive rulemakings. And it is far from clear to what extent an NPS along the lines suggested would lead courts to render more FTC-favorable rulings on non-delegation, due process, the major questions doctrine, and Chevron deference. Moreover, even if they entertained UMC suits, the courts could, of course, determine in individual cases that, on the facts, the Commission had failed to show a legal violation. (The FTC has never litigated invitation-to-collude cases, and it lost a variety of facilitating practices cases during the 1980s and 1990s; see here).
Nonetheless, if I were advising the FTC as general counsel, I would tell the commissioners that the choice is between having close to a zero chance of litigation or rulemaking success under the 2022 statement, and some chance of success (greater in the case of litigation than in rulemaking) under the NPS.
The FTC faces a future of total UMC litigation futility if it plows ahead under the 2022 statement. Promulgating an NPS as described would give the FTC at least some chance of success in litigating cases beyond the legal limits of the antitrust laws, assuming suggested principles and guardrails were honored. The outlook for UMC rulemaking (which turns primarily on how the courts view the structure of the FTC Act) remains rather dim, even under a carefully crafted NPS.
If the FTC decides against withdrawing the 2022 statement, it could still show some wisdom by directing more resources to competition advocacy and challenging clearly anticompetitive conduct that falls within the accepted boundaries of the antitrust laws. (Indeed, to my mind, error-cost considerations suggest that the Commission should eschew UMC causes of action that do not also constitute clear antitrust offenses.) It need not undertake almost sure-to-fail UMC initiatives just because it has published the 2022 statement.
In short, treating the 2022 statement as a purely symbolic vehicle to showcase the FTC’s fondest desires—like a new, never-to-be-driven Lamborghini that merely sits in the driveway to win the admiring glances of neighbors—could well be the optimal Commission strategy, given the zeitgeist. That assumes, of course, that the FTC cares about protecting its institutional future and (we also hope) promoting economic well-being.
[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at thesymposium 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 Nov. 10, the Federal Trade Commission (FTC) issued a new statement explaining how it will exercise its standalone FTC Act Section 5 authority. Despite the length of the statement and the accompanying commentaries from most of the commissioners, there is less guidance than one might expect from so many words. One thing is clear, however: Expect more antitrust enforcement from the FTC in ways we have not seen in years, if ever.
The FTC enforces the antitrust laws through Section 5’s prohibition of unfair methods of competition (UMC). Courts and commentators alike have long agreed that Section 5’s prohibition covers everything covered by the other antitrust laws, such as the Sherman and Clayton Act, plus something more.
How far that extra standalone authority extends has been a point of contention for decades. In the early 1980s, several appellate courts admonished the FTC for an expansive interpretation of that authority, leaving parties uncertain of which actions would be challenged. Or, as the 2nd U.S. Circuit Court of Appeals put it: “the Commission owes a duty to define the conditions under which conduct … would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.”
In recent decades, the FTC has interpreted its authority much more narrowly. In 2015, a bipartisan collection of commissioners approved a short statement saying that the FTC would interpret its standalone authority consistently with the consumer welfare standard of the other antitrust laws and use the well-known rule of reason to judge any actions. Last year, the Democratic majority of commissioners voted to rescind that 2015 statement. Last week’s statement is the replacement.
Antitrust Fun, Little Guidance
The 16 pages of guidance and the accompanying commentary from three commissioners—two Democratsin support, one Republican in opposition—can be a fun read for antitrust geeks. There is plenty of well-written antitrust history. I learned something. Also, there are arguments about old FTC and appellate court cases that I had not read in 30 years.
But that history lesson did not give as much guidance about future enforcement as it should have. Most of the seven pages the guidance spends on its historical review is dedicated to showing that the FTC’s standalone authority extends beyond the Sherman and Clayton Acts. But that contention is in little dispute.
The more helpful historical question for parties today is how this Commission plans to respond to appellate court cases such as Boise Cascade, OAG, and the above-cited Ethyl that criticized the old Commission for, to paraphrase the statement, insufficient facts of unfairness, oppressiveness, or negative effects on the market. Chair Lina Khan’s commentary does mention the “trifecta” of cases, describing them as cases where courts found that the Commission “had not met its factual or evidentiary burden.” What would have been more helpful is some “inkling” of what kinds of facts this Commission will rely on to avoid the same types of “stinging” losses suffered by those earlier Commissions. Instead, we get multiple references to the Commission as a body of experts with the unstated assumption that, in the future, at least three commissioners will offer enough facts of some kind to convince any appellate court.
After the history section, the statement offers plenty of words on what the FTC majority think will be a standalone violation. All of those words add up, however, to much less guidance than the very brief 2015 statement. That prior statement said that the FTC would use its Section 5 standalone authority to pursue a single goal—consumer welfare—and would use a well-known analytical method to pursue it: the rule of reason. While even that statement left some ambiguity for businesses, and freedom for the Commission, at least it pursued only one goal with an analysis used in decades worth of antitrust cases.
The new statement does not list one goal but instead several, namely that it will challenge conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature … that negatively affect[s] competitive conditions [and thereby negatively affects] consumers, workers, or other market participants.”
But mathematically, you cannot maximize more than one variable. Nowhere in this statement is there any attempt to explain the analytical method to be used to balance pursuit of these different goals. What if a challenged action helps workers but harms consumers? What if an action helps workers at some competitors but not others? What if an action helps all competitors but harms workers at some of them? Merely combining all those goals into a single term, “competitive conditions,” does not provide any guidance as to how the FTC will balance all these named (and any unnamed) elements of “competitive conditions.” Again, there is an unstated assumption that three commissioners will expertly balance those competing goals.
Incomplete Lessons from the Past
The new statement does try to provide some guidance at the end of the document when it points to past cases that, perhaps, will be the types of cases that the Commission will now bring under Section 5. One such large category is actions that do not meet the standards for antitrust illegality now but, somehow, violate the “spirit of the antitrust laws.” The statement lists several examples.
To take one, what if a tying case does not meet the standards embodied in Jefferson Parish and its progeny? How will the Commission determine what the statement calls “de facto tying”? Which one or more of the elements expounded in Jefferson Parish will be eased? How? Will the same action by the same parties be subject to different substantive standards if a private plaintiff—or the U.S. Justice Department—is the plaintiff? If so, then parties wanting to avoid any antitrust challenge will need to default to the law of tying laid down by the then-current FTC, not by dozens of court cases over decades. And how will the FTC determine what violates the “spirit” of its own particular law of tying? Again, the unstated assumption is that the decisions of three expert commissioners will set the new law, at least until three new expert commissioners gain control.
To be (slightly) fairer to the new statement, it does confirm what has seemed obvious since the Biden administration started staffing the FTC: this Commission will more aggressively pursue antitrust challenges and will use any tool, including Section 5 standalone authority, to do it. Also, while the statement injects uncertainty into the thinking of businesses, which likely will lead to fewer and less-aggressive business actions, that result would be seen as a feature, not a bug, by the statement’s authors.
Finally, the statement does correctly point out that Section 5 was written at a time when Congress might have thought that the decisions of three expert commissioners would lead to “better” results for the economy, however defined, than decisions of dozens of juries and judges in dozens of cases. That Progressive Era confidence in the decisions of a few government-employed experts has not always worked out for the best, as some would claim from study of the Whiz Kids (Robert McNamara, not Robin Roberts) or recent pandemic policy.
Like it or not, the statement is another step toward a government of men (and women), not laws, and an economy dictated by a handful of experts in Washington, not millions of consumers across the country. Expect aggressive antitrust enforcement from the FTC in ways that many businesses and antitrust practitioners have only read about — about that, the new statement’s guidance is clear.
[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at thesymposium 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.]
Federal Trade Commission (FTC) Chair Lina Khan has just sent her holiday wishlist to Santa Claus. It comes in the form of a policy statement on unfair methods of competition (UMC) that the FTC approved last week by a 3-1 vote. If there’s anything to be gleaned from the document, it’s that Khan and the agency’s majority bloc wish they could wield the same powers as Margrethe Vestager does in the European Union. Luckily for consumers, U.S. courts are unlikely to oblige.
Signed by the commission’s three Democratic commissioners, the UMC policy statement contains language that would be completely at home in a decision of the European Commission. It purports to reorient UMC enforcement (under Section 5 of the FTC Act) around typically European concepts, such as “competition on the merits.” This is an unambiguous repudiation of the rule of reason and, with it, the consumer welfare standard.
Unfortunately for its authors, these European-inspired aspirations are likely to fall flat. For a start, the FTC almost certainly does not have the power to enact such sweeping changes. More fundamentally, these concepts have been tried in the EU, where they have proven to be largely unworkable. On the one hand, critics (including the European judiciary) have excoriated the European Commission for its often economically unsound policymaking—enabled by the use of vague standards like “competition on the merits.” On the other hand, the Commission paradoxically believes that its competition powers are insufficient, creating the need for even stronger powers. The recently passed Digital Markets Act (DMA) is designed to fill this need.
As explained below, there is thus every reason to believe the FTC’s UMC statement will ultimately go down as a mistake, brought about by the current leadership’s hubris.
A Statement Is Just That
The first big obstacle to the FTC’s lofty ambitions is that its leadership does not have the power to rewrite either the FTC Act or courts’ interpretation of it. The agency’s leadership understands this much. And with that in mind, they ostensibly couch their statement in the case law of the U.S. Supreme Court:
Consistent with the Supreme Court’s interpretation of the FTC Act in at least twelve decisions, this statement makes clear that Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.
It is telling, however, that the cases cited by the agency—in a naked attempt to do away with economic analysis and the consumer welfare standard—are all at least 40 years old. Antitrust and consumer-protection laws have obviously come a long way since then, but none of that is mentioned in the statement. Inconvenient case law is simply shrugged off. To make matters worse, even the cases the FTC cites provide, at best, exceedingly weak support for its proposed policy.
For instance, as Commissioner Christine Wilson aptly notes in her dissenting statement, “the policy statement ignores precedent regarding the need to demonstrate anticompetitive effects.” Chief among these is the Boise Cascade Corp. v. FTC case, where the 9th U.S. Circuit Court of Appeals rebuked the FTC for failing to show actual anticompetitive effects:
In truth, the Commission has provided us with little more than a theory of the likely effect of the challenged pricing practices. While this general observation perhaps summarizes all that follows, we offer the following specific points in support of our conclusion.
There is a complete absence of meaningful evidence in the record that price levels in the southern plywood industry reflect an anticompetitive effect.
In short, the FTC’s statement is just that—a statement. Gus Hurwitz summarized this best in his post:
Today’s news that the FTC has adopted a new UMC Policy Statement is just that: mere news. It doesn’t change the law. It is non-precedential and lacks the force of law. It receives the benefit of no deference. It is, to use a term from the consumer-protection lexicon, mere puffery.
Lina’s European Dream
But let us imagine, for a moment, that the FTC has its way and courts go along with its policy statement. Would this be good for the American consumer? In order to answer this question, it is worth looking at competition enforcement in the European Union.
There are, indeed, striking similarities between the FTC’s policy statement and European competition law. Consider the resemblance between the following quotes, drawn from the FTC’s policy statement (“A” in each example) and from the European competition sphere (“B” in each example).
Example 1 – Competition on the merits and the protection of competitors:
A. The method of competition must be unfair, meaning that the conduct goes beyond competition on the merits.… This may include, for example, conduct that tends to foreclose or impair the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers. (here)
B. The emphasis of the Commission’s enforcement activity… is on safeguarding the competitive process… and ensuring that undertakings which hold a dominant position do not exclude their competitors by other means than competing on the merits… (here)
Example 2 – Proof of anticompetitive harm:
A. “Unfair methods of competition” need not require a showing of current anticompetitive harm or anticompetitive intent in every case. … [T]his inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue. (here)
B. The Commission cannot be required… systematically to establish a counterfactual scenario…. That would, moreover, oblige it to demonstrate that the conduct at issue had actual effects, which… is not required in the case of an abuse of a dominant position, where it is sufficient to establish that there are potential effects. (here)
Example 3 – Multiple goals:
A. Given the distinctive goals of Section 5, the inquiry will not focus on the “rule of reason” inquiries more common in cases under the Sherman Act, but will instead focus on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions. (here)
B. In its assessment the Commission should pursue the objectives of preserving and fostering innovation and the quality of digital products and services, the degree to which prices are fair and competitive, and the degree to which quality or choice for business users and for end users is or remains high. (here)
Beyond their cosmetic resemblances, these examples reflect a deeper similarity. The FTC is attempting to introduce three core principles that also undergird European competition enforcement. The first is that enforcers should protect “the competitive process” by ensuring firms compete “on the merits,” rather than a more consequentialist goal like the consumer welfare standard (which essentially asks how a given practice affects economic output). The second is that enforcers should not be required to establish that conduct actually harms consumers. Instead, they need only show that such an outcome is (or will be) possible. The third principle is that competition policies pursue multiple, sometimes conflicting, goals.
In short, the FTC is trying to roll back U.S. enforcement to a bygone era predating the emergence of the consumer welfare standard (which is somewhat ironic for the agency’s progressive leaders). And this vision of enforcement is infused with elements that appear to be drawn directly from European competition law.
Europe Is Not the Land of Milk and Honey
All of this might not be so problematic if the European model of competition enforcement that the FTC now seeks to emulate was an unmitigated success, but that could not be further from the truth. As Geoffrey Manne, Sam Bowman, and I argued in a recently published paper, the European model has several shortcomings that militate against emulating it (the following quotes are drawn from that paper). These problems would almost certainly arise if the FTC’s statement was blessed by courts in the United States.
For a start, the more open-ended nature of European competition law makes it highly vulnerable to political interference. This is notably due to its multiple, vague, and often conflicting goals, such as the protection of the “competitive process”:
Because EU regulators can call upon a large list of justifications for their enforcement decisions, they are free to pursue cases that best fit within a political agenda, rather than focusing on the limited practices that are most injurious to consumers. In other words, there is largely no definable set of metrics to distinguish strong cases from weak ones under the EU model; what stands in its place is political discretion.
Politicized antitrust enforcement might seem like a great idea when your party is in power but, as Milton Friedman wisely observed, the mark of a strong system of government is that it operates well with the wrong person in charge. With this in mind, the FTC’s current leadership would do well to consider what their political opponents might do with these broad powers—such as using Section 5 to prevent online platforms from moderating speech.
A second important problem with the European model is that, because of its competitive-process goal, it does not adequately distinguish between exclusion resulting from superior efficiency and anticompetitive foreclosure:
By pursuing a competitive process goal, European competition authorities regularly conflate desirable and undesirable forms of exclusion precisely on the basis of their effect on competitors. As a result, the Commission routinely sanctions exclusion that stems from an incumbent’s superior efficiency rather than welfare-reducing strategic behavior, and routinely protects inefficient competitors that would otherwise rightly be excluded from a market.
This vastly enlarges the scope of potential antitrust liability, leading to risks of false positives that chill innovative behavior and create nearly unwinnable battles for targeted firms, while increasing compliance costs because of reduced legal certainty. Ultimately, this may hamper technological evolution and protect inefficient firms whose eviction from the market is merely a reflection of consumer preferences.
Finally, the European model results in enforcers having more discretion and enjoying greater deference from the courts:
[T]he EU process is driven by a number of laterally equivalent, and sometimes mutually exclusive, goals.… [A] large problem exists in the discretion that this fluid arrangement of goals yields.
The Microsoft case illustrates this problem well. In Microsoft, the Commission could have chosen to base its decision on a number of potential objectives. It notably chose to base its findings on the fact that Microsoft’s behavior reduced “consumer choice”. The Commission, in fact, discounted arguments that economic efficiency may lead to consumer welfare gains because “consumer choice” among a variety of media players was more important.
In short, the European model sorely lacks limiting principles. This likely explains why the European Court of Justice has started to pare back the commission’s powers in a series of recent cases, including Intel, Post Danmark, Cartes Bancaires, and Servizio Elettrico Nazionale. These rulings appear to be an explicit recognition that overly broad competition enforcement not only fails to benefit consumers but, more fundamentally, is incompatible with the rule of law.
It is unfortunate that the FTC is trying to emulate a model of competition enforcement that—even in the progressively minded European public sphere—is increasingly questioned and cast aside as a result of its multiple shortcomings.
[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.”You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
In a 3-2 July 2021 vote, the Federal Trade Commission (FTC) rescinded the nuanced statement it had issued in 2015 concerning the scope of unfair methods of competition under Section 5 of the FTC Act. At the same time, the FTC rejected the applicability of the balancing test set forth in the rule of reason (and with it, several decades of case law, agency guidance, and legal and economic scholarship).
The July 2021 statement not only rejected these long-established guiding principles for Section 5 enforcement but left in its place nothing but regulatory fiat. In the statement the FTC issued Nov. 10, 2022 (again, by a divided 3-1 vote), the agency has now adopted this “just trust us” approach as a permanent operating principle.
The November 2022 statement purports to provide a standard under which the agency will identify unfair methods of competition under Section 5. As Commissioner Christine Wilson explains in her dissent, however, it clearly fails to do so. Rather, it delivers a collection of vaguely described principles and pejorative rhetoric that encompass loosely defined harms to competition, competitors, workers and a catch-all group of “other market participants.”
The methodology for identifying these harms is comparably vague. The agency not only again rejects the rule of reason but asserts the authority to take action against a variety of “non-quantifiable harms,” all of which can be addressed at the most “incipient” stages. Moreover, and perhaps most remarkably, the statement specifically rejects any form of “net efficiencies” or “numerical cost-benefit analysis” to guide its enforcement decisions or provide even a modicum of predictability to the business community.
The November 2022 statement amounts to regulatory fiat on overdrive, presented with a thin veneer of legality derived from a medley of dormant judicial decisions, incomplete characterizations of precedent, and truncated descriptions of legislative history. Under the agency’s dubious understanding of Section 5, Congress in 1914 elected to provide the FTC with the authority to declare any business practice “unfair” subject to no principle other than the agency’s subjective understanding of that term (and, apparently, never to be informed by “numerical cost-benefit analysis”).
Moreover, any enforcement action that targeted a purportedly “unfair” practice would then be adjudicated within the agency and appealable in the first instance to the very same commissioners who authorized the action. This institutional hall of mirrors would establish the FTC as the national “fairness” arbiter subject to virtually no constraining principles under which the exercise of such powers could ever be deemed to have exceeded its scope. The license for abuse is obvious and the departure from due process inherent.
The views reflected in the November 2022 statement would almost certainly lead to a legal dead-end. If the agency takes action under its idiosyncratic understanding of the scope of unfair methods of competition under Section 5, it would elicit a legal challenge that would likely lead to two possible outcomes, both being adverse to the agency.
First, it is likely that a judge would reject the agency’s understanding of Section 5, since it is irreconcilable with a well-developed body of case law requiring that the FTC (just like any other administrative agency) act under principles that provide businesses with, as described by the 2nd U.S. Circuit Court of Appeals, at least “an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.”
Any legally defensible interpretation of the scope of unfair methods of competition under Section 5 must take into account not only legislative intent at the time the FTC Act was enacted but more than a century’s worth of case law that courts have developed to govern the actions of administrative powers. Contrary to suggestions made in the November 2022 statement, neither the statute nor the relevant body of case law mandates unqualified deference by courts to the presumed wisdom of expert regulators.
Second, even if a court accepted the agency’s interpretation of the statute (or did so provisionally), there is a strong likelihood that it would then be compelled to strike down Section 5 as an unconstitutional delegation of lawmaking powers from the legislative to the executive branch. Given the concern that a majority of the Supreme Court has increasingly expressed over actions by regulatory agencies—including the FTC, specifically, inAMG Capital Management LLC v. FTC(2021)and now again in the pending case, Axon Enterprise Inc. v. FTC—that do not clearly fall within the legislatively specified scope of an agency’s authority (as in the AMG decision and other recent Court decisions concerning the U.S. Securities and Exchange Commission, the Occupational Safety and Health Administration, the U.S. Environmental Protection Agency, and the United States Patent and Trademark Office), this would seem to be a high-probability outcome.
In short: any enforcement action taken under the agency’s newly expanded understanding of Section 5 is unlikely to withstand judicial scrutiny, either as a matter of statutory construction or as a matter of constitutional principle. Given this legal forecast, the November 2022 statement could be viewed as mere theatrics that is unlikely to have a long legal life or much practical impact (although, until judicial intervention, it could impose significant costs on firms that must defend against agency-enforcement actions brought under the unilaterally expanded scope of Section 5).
Even if that were the case, however, the November 2022 statement and, in particular, its expanded understanding of the harms that the agency is purportedly empowered to target, is nonetheless significant because it should leave little doubt concerning the lack of any meaningful commitment by agency leadership to the FTC’s historical mission to preserve market competition. Rather, it has become increasingly clear that agency leadership seeks to deploy the powerful remedies of the FTC Act (and the rest of the antitrust-enforcement apparatus) to displace a market-driven economy governed by the free play of competitive forces with an administered economy in which regulators continuously intervene to reengineer economic outcomes on grounds of fairness to favored constituencies, rather than to preserve the competitive process.
Reengineering Section 5 of the FTC Act as a “shadow” antitrust statute that operates outside the rule of reason (or any other constraining objective principle) provides a strategic detour around the inconvenient evidentiary and other legal obstacles that the agency would struggle to overcome when seeking to achieve these policy objectives under the Sherman and Clayton Acts. This intentionally unstructured and inherently politicized approach to antitrust enforcement threatens not only the institutional preconditions for a market economy but ultimately the rule of law itself.
The business press generally describes the gig economy that has sprung up around digital platforms like Uber and TaskRabbit as a beneficial phenomenon, “a glass that is almost full.” The gig economy “is an economy that operates flexibly, involving the exchange of labor and resources through digital platforms that actively facilitate buyer and seller matching.”
From the perspective of businesses, major positive attributes of the gig economy include cost-effectiveness (minimizing costs and expenses); labor-force efficiencies (“directly matching the company to the freelancer”); and flexible output production (individualized work schedules and enhanced employee motivation). Workers also benefit through greater independence, enhanced work flexibility (including hours worked), and the ability to earn extra income.
While there are some disadvantages, as well, (worker-commitment questions, business-ethics issues, lack of worker benefits, limited coverage of personal expenses, and worker isolation), there is no question that the gig economy has contributed substantially to the growth and flexibility of the American economy—a major social good. Indeed, “[i]t is undeniable that the gig economy has become an integral part of the American workforce, a trend that has only been accelerated during the” COVID-19 pandemic.
In marked contrast, however, the Federal Trade Commission’s (FTC) Sept. 15 Policy Statement on Enforcement Related to Gig Work (“gig statement” or “statement”) is the story of a glass that is almost empty. The accompanying press release declaring “FTC to Crack Down on Companies Taking Advantage of Gig Workers” (since when is “taking advantage of workers” an antitrust or consumer-protection offense?) puts an entirely negative spin on the gig economy. And while the gig statement begins by describing the nature and large size of the gig economy, it does so in a dispassionate and bland tone. No mention is made of the substantial benefits for consumers, workers, and the overall economy stemming from gig work. Rather, the gig statement quickly adopts a critical perspective in describing the market for gig workers and then addressing gig-related FTC-enforcement priorities. What’s more, the statement deals in very broad generalities and eschews specifics, rendering it of no real use to gig businesses seeking practical guidance.
Most significantly, the gig statement suggests that the FTC should play a significant enforcement role in gig-industry labor questions that fall outside its statutory authority. As such, the statement is fatally flawed as a policy document. It provides no true guidance and should be substantially rewritten or withdrawn.
Gig Statement Analysis
The gig statement’s substantive analysis begins with a negative assessment of gig-firm conduct. It expresses concern that gig workers are being misclassified as independent contractors and are thus deprived “of critical rights [right to organize, overtime pay, health and safety protections] to which they are entitled under law.” Relatedly, gig workers are said to be “saddled with inordinate risks.” Gig firms also “may use transparent algorithms to capture more revenue from customer payments for workers’ services than customers or workers understand.”
The solution offered by the gig statement is “scrutiny of promises gig platforms make, or information they fail to disclose, about the financial proposition of gig work.” No mention is made of how these promises supposedly made to workers about the financial ramifications of gig employment are related to the FTC’s statutory mission (which centers on unfair or deceptive acts or practices affecting consumers or unfair methods of competition).
The gig statement next complains that a “power imbalance” between gig companies and gig workers “may leave gig workers exposed to harms from unfair, deceptive, and anticompetitive practices and is likely to amplify such harms when they occur. “Power imbalance” along a vertical chain has not been a source of serious antitrust concern for decades (and even in the case of the Robinson-Patman Act, the U.S. Supreme Court most recently stressed, in 2005’s Volvo v. Reeder, that harm to interbrand competition is the key concern). “Power imbalances” between workers and employers bear no necessary relation to consumer welfare promotion, which the Supreme Court teaches is the raison d’etre of antitrust. Moreover, the FTC does not explain why unfair or deceptive conduct likely follows from the mere existence of substantial bargaining power. Such an unsupported assertion is not worthy of being included in a serious agency-policy document.
The gig statement then engages in more idle speculation about a supposed relationship between market concentration and the proliferation of unfair and deceptive practices across the gig economy. The statement claims, without any substantiation, that gig companies in concentrated platform markets will be incentivized to exert anticompetitive market power over gig workers, and thereby “suppress wages below competitive rates, reduce job quality, or impose onerous terms on gig workers.” Relatedly, “unfair and deceptive practices by one platform can proliferate across the labor market, creating a race to the bottom that participants in the gig economy, and especially gig workers, have little ability to avoid.” No empirical or theoretical support is advanced for any of these bald assertions, which give the strong impression that the commission plans to target gig-economy companies for enforcement actions without regard to the actual facts on the ground. (By contrast, the commission has in the past developed detailed factual records of competitive and/or consumer-protection problems in health care and other important industry sectors as a prelude to possible future investigations.)
The statement then launches into a description of the FTC’s gig-economy policy priorities. It notes first that “workers may be deprived of the protections of an employment relationship” when gig firms classify them as independent contractors, leading to firms’ “disclosing [of] pay and costs in an unfair and deceptive manner.” What’s more, the FTC “also recognizes that misleading claims [made to workers] about the costs and benefits of gig work can impair fair competition among companies in the gig economy and elsewhere.”
These extraordinary statements seem to be saying that the FTC plans to closely scrutinize gig-economy-labor contract negotiations, based on its distaste for independent contracting (which it believes should be supplanted by employer-employee relationships, a question of labor law, not FTC law). Nowhere is it explained where such a novel FTC exercise of authority comes from, nor how such FTC actions have any bearing on harms to consumer welfare. The FTC’s apparent desire to force employment relationships upon gig firms is far removed from harm to competition or unfair or deceptive practices directed at consumers. Without more of an explanation, one is left to conclude that the FTC is proposing to take actions that are far beyond its statutory remit.
The gig statement next tries to tie the FTC’s new gig program to violations of the FTC Act (“unsubstantiated claims”); the FTC’s Franchise Rule; and the FTC’s Business Opportunity Rule, violations of which “can trigger civil penalties.” The statement, however, lacks any sort of logical, coherent explanation of how the new enforcement program necessarily follows from these other sources of authority. While a few examples of rules-based enforcement actions that have some connection to certain terms of employment may be pointed to, such special cases are a far cry from any sort of general justification for turning the FTC into a labor-contracts regulator.
The statement then moves on to the alleged misuse of algorithmic tools dealing with gig-worker contracts and supervision that may lead to unlawful gig-worker oversight and termination. Once again, the connection of any of this to consumer-welfare harm (from a competition or consumer-protection perspective) is not made.
The statement further asserts that FTC Act consumer-protection violations may arise from “nonnegotiable” and other unfair contracts. In support of such a novel exercise of authority, however, the FTC cites supposedly analogous “unfair” clauses found in consumer contracts with individuals or small-business consumers. It is highly doubtful that these precedents support any FTC enforcement actions involving labor contracts.
Noncompete clauses with individuals are next on the gig statement’s agenda. It is claimed that “[n]on-compete provisions may undermine free and fair labor markets by restricting workers’ ability to obtain competitive offers for their services from existing companies, resulting in lower wages and degraded working conditions. These provisions may also raise barriers to entry for new companies.” The assertion, however, that such clauses may violate Section 1 of the Sherman Act or Section 5 of the FTC Act’s bar on unfair methods of competition, seems dubious, to say the least. Unless there is coordination among companies, these are essentially unilateral contracting practices that may have robust efficiency explanations. Making out these practices to be federal antitrust violations is bad law and bad policy; they are, in any event, subject to a wide variety of state laws.
Even more problematic is the FTC’s claim that a variety of standard (typically efficiency-seeking) contract limitations, such as nondisclosure agreements and liquidated damages clauses, “may be excessive or overbroad” and subject to FTC scrutiny. This preposterous assertion would make the FTC into a second-guesser of common labor contracts (a federal labor-contract regulator, if you will), a role for which it lacks authority and is entirely unsuited. Turning the FTC into a federal labor-contract regulator would impose unjustifiable uncertainty costs on business and chill a host of efficient arrangements. It is hard to take such a claim of power seriously, given its lack of any credible statutory basis.
The final section of the gig statement dealing with FTC enforcement (“Policing Unfair Methods of Competition That Harm Gig Workers”) is unobjectionable, but not particularly informative. It essentially states that the FTC’s black letter legal authority over anticompetitive conduct also extends to gig companies: the FTC has the authority to investigate and prosecute anticompetitive mergers; agreements among competitors to fix terms of employment; no-poach agreements; and acts of monopolization and attempted monopolization. (Tell us something we did not know!)
The fact that gig-company workers may be harmed by such arrangements is noted. The mere page and a half devoted to this legal summary, however, provides little practical guidance for gig companies as to how to avoid running afoul of the law. Antitrust policy statements may be excused if they provided less detailed guidance than antitrust guidelines, but it would be helpful if they did something more than provide a capsule summary of general American antitrust principles. The gig statement does not pass this simple test.
The gig statement closes with a few glittering generalities. Cooperation with other agencies is highlighted (for example, an information-sharing agreement with the National Labor Relations Board is described). The FTC describes an “Equity Action Plan” calling for a focus on how gig-economy antitrust and consumer-protection abuses harm underserved communities and low-wage workers.
The FTC finishes with a request for input from the public and from gig workers about abusive and potentially illegal gig-sector conduct. No mention is made of the fact that the FTC must, of course, conform itself to the statutory limitations on its jurisdiction in the gig sector, as in all other areas of the economy.
Summing Up the Gig Statement
In sum, the critical flaw of the FTC’s gig statement is its focus on questions of labor law and policy (including the question of independent contractor as opposed to employee status) that are the proper purview of federal and state statutory schemes not administered by the Federal Trade Commission. (A secondary flaw is the statement’s unbalanced portrayal of the gig sector, which ignores its beneficial aspects.) If the FTC decides that gig-economy issues deserve particular enforcement emphasis, it should (and, indeed, must) direct its attention to anticompetitive actions and unfair or deceptive acts or practices that harm consumers.
On the antitrust side, that might include collusion among gig companies on the terms offered to workers or perhaps “mergers to monopoly” between gig companies offering a particular service. On the consumer-protection side, that might include making false or materially misleading statements to consumers about the terms under which they purchase gig-provided services. (It would be conceivable, of course, that some of those statements might be made, unwittingly or not, by gig independent contractors, at the behest of the gig companies.)
The FTC also might carry out gig-industry studies to identify particular prevalent competitive or consumer-protection harms. The FTC should not, however, seek to transform itself into a gig-labor-market enforcer and regulator, in defiance of its lack of statutory authority to play this role.
The FTC does, of course, have a legitimate role to play in challenging unfair methods of competition and unfair acts or practices that undermine consumer welfare wherever they arise, including in the gig economy. But it does a disservice by focusing merely on supposed negative aspects of the gig economy and conjuring up a gig-specific “parade of horribles” worthy of close commission scrutiny and enforcement action.
Many of the “horribles” cited may not even be “bads,” and many of them are, in any event, beyond the proper legal scope of FTC inquiry. There are other federal agencies (for example, the National Labor Relations Board) whose statutes may prove applicable to certain problems noted in the gig statement. In other cases, statutory changes may be required to address certain problems noted in the statement (assuming they actually are problems). The FTC, and its fellow enforcement agencies, should keep in mind, of course, that they are not Congress, and wishing for legal authority to deal with problems does not create it (something the federal judiciary fully understands).
In short, the negative atmospherics that permeate the gig statement are unnecessary and counterproductive; if anything, they are likely to convince at least some judges that the FTC is not the dispassionate finder of fact and enforcer of law that it claims to be. In particular, the judiciary is unlikely to be impressed by the FTC’s apparent effort to insert itself into questions that lie far beyond its statutory mandate.
The FTC should withdraw the gig statement. If, however, it does not, it should revise the statement in a manner that is respectful of the limits on the commission’s legal authority, and that presents a more dispassionate analysis of gig-economy business conduct.
[This post from Jonathan M. Barnett, the Torrey H. Webb Professor of Law at the University of Southern California’s Gould School of Law, is an entry in Truth on the Market’s continuing FTC UMC Rulemaking symposium. You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
In its Advance Notice for Proposed Rulemaking (ANPR) on Commercial Surveillance and Data Security, the Federal Trade Commission (FTC) has requested public comment on an unprecedented initiative to promulgate and implement wide-ranging rules concerning the gathering and use of consumer data in digital markets. In this contribution, I will assume, for the sake of argument, that the commission has the legal authority to exercise its purported rulemaking powers for this purpose without a specific legislative mandate (a question as to which I recognize there is great uncertainty, which is further heightened by the fact that Congress is concurrently considered legislation in the same policy area).
In considering whether to use these powers for the purposes of adopting and implementing privacy-related regulations in digital markets, the commission would be required to undertake a rigorous assessment of the expected costs and benefits of any such regulation. Any such cost-benefit analysis must comprise at least two critical elements that are omitted from, or addressed in highly incomplete form in, the ANPR.
The Hippocratic Oath of Regulatory Intervention
There is a longstanding consensus that regulatory intervention is warranted only if a market failure can be identified with reasonable confidence. This principle is especially relevant in the case of the FTC, which is entrusted with preserving competitive markets and, therefore, should be hesitant about intervening in market transactions without a compelling evidentiary basis. As a corollary to this proposition, it is also widely agreed that implementing any intervention to correct a market failure would only be warranted to the extent that such intervention would be reasonably expected to correct any such failure at a net social gain.
This prudent approach tracks the “economic effect” analysis that the commission must apply in the rulemaking process contemplated under the Federal Trade Commission Act and the analysis of “projected benefits and … adverse economic effects” of proposed and final rules contemplated by the commission’s rules of practice. Consistent with these requirements, the commission has exhibited a longstanding commitment to thorough cost-benefit analysis. As observed by former Commissioner Julie Brill in 2016, “the FTC conducts its rulemakings with the same level of attention to costs and benefits that is required of other agencies.” Former Commissioner Brill also observed that the “FTC combines our broad mandate to protect consumers with a rigorous, empirical approach to enforcement matters.”
This demanding, fact-based protocol enhances the likelihood that regulatory interventions result in a net improvement relative to the status quo, an uncontroversial goal of any rational public policy. Unfortunately, the ANPR does not make clear that the commission remains committed to this methodology.
Assessing Market Failure in the Use of Consumer Data
To even “get off the ground,” any proposed privacy regulation would be required to identify a market failure arising from a particular use of consumer data. This requires a rigorous and comprehensive assessment of the full range of social costs and benefits that can be reasonably attributed to any such practice.
The ANPR’s Oversights
In contrast to the approach described by former Commissioner Brill, several elements of the ANPR raise significant doubts concerning the current commission’s willingness to assess evidence relevant to the potential necessity of privacy-related regulations in a balanced, rigorous, and comprehensive manner.
First, while the ANPR identifies a plethora of social harms attributable to data-collection practices, it merely acknowledges the possibility that consumers enjoy benefits from such practices “in theory.” This skewed perspective is not empirically serious. Focusing almost entirely on the costs of data collection and dismissing as conjecture any possible gains defies market realities, especially given the fact that (as discussed below) those gains are clearly significant and, in some cases, transformative.
Second, the ANPR’s choice of the normatively charged term “data surveillance” to encompass all uses of consumer data conveys the impression that all data collection through digital services is surreptitious or coerced, whereas (as discussed below) some users may knowingly provide such data to enable certain data-reliant functionalities.
Third, there is no mention in the ANPR that online providers widely provide users with notices concerning certain uses of consumer data and often require users to select among different levels of data collection.
Fourth, the ANPR unusually relies substantially on news websites and non-peer-reviewed publications in the style of policy briefs or advocacy papers, rather than the empirical social-science research on which the commission has historically made policy determinations.
This apparent indifference to analytical balance is particularly exhibited in the ANPR’s failure to address the economic gains generated through the use of consumer data in online markets. As was recognized in a 2014 White House report, many valuable digital services could not function effectively without engaging in some significant level of data collection. The examples are numerous and diverse, including traffic-navigation services that rely on data concerning a user’s geographic location (as well as other users’ geographic location); personalized ad delivery, which relies on data concerning a user’s search history and other disclosed characteristics; and search services, which rely on the ability to use user data to offer search services at no charge while offering targeted advertisements to paying advertisers.
There are equally clear gains on the “supply” side of the market. Data-collection practices can expand market access by enabling smaller vendors to leverage digital intermediaries to attract consumers that are most likely to purchase those vendors’ goods or services. The commission has recognized this point in the past, observing in a 2014 report:
Data brokers provide the information they compile to clients, who can use it to benefit consumers … [C]onsumers may benefit from increased and innovative product offerings fueled by increased competition from small businesses that are able to connect with consumers that they may not have otherwise been able to reach.
Given the commission’s statutory mission under the FTC Act to protect consumers’ interests and preserve competitive markets, these observations should be of special relevance.
Data Protection v. Data-Reliant Functionality
Data-reliant services yield social gains by substantially lowering transaction costs and, in the process, enabling services that would not otherwise be feasible, with favorable effects for consumers and vendors. This observation does not exclude the possibility that specific uses of consumer data may constitute a potential market failure that merits regulatory scrutiny and possible intervention (assuming there is sufficient legal authority for the relevant agency to undertake any such intervention). That depends on whether the social costs reasonably attributable to a particular use of consumer data exceed the social gains reasonably attributable to that use. This basic principle seems to be recognized by the ANPR, which states that the commission can only deem a practice “unfair” under the FTC Act if “it causes or is likely to cause substantial injury” and “the injury is not outweighed by benefits to consumers or competition.”
In implementing this principle, it is important to keep in mind that a market failure could only arise if the costs attributable to any particular use of consumer data are not internalized by the parties to the relevant transaction. This requires showing either that a particular use of consumer data imposes harms on third parties (a plausible scenario in circumstances implicating risks to data security) or consumers are not aware of, or do not adequately assess or foresee, the costs they incur as a result of such use (a plausible scenario in circumstances implicating risks to consumer data). For the sake of brevity, I will focus on the latter scenario.
Many scholars have taken the view that consumers do not meaningfully read privacy notices or consider privacy risks, although the academic literature has also recognized efforts by private entities to develop notice methodologies that can improve consumers’ ability to do so. Even accepting this view, however, it does not necessarily follow (as the ANPR appears to assume) that a more thorough assessment of privacy risks would inevitably lead consumers to elect higher levels of data privacy even where that would degrade functionality or require paying a positive price for certain services. That is a tradeoff that will vary across consumers. It is therefore difficult to predict and easy to get wrong.
As the ANPR indirectly acknowledges in questions 26 and 40, interventions that bar certain uses of consumer data may therefore harm consumers by compelling the modification, positive pricing, or removal from the market of popular data-reliant services. For this reason, some scholars and commentators have favored the informed-consent approach that provides users with the option to bar or limit certain uses of their data. This approach minimizes error costs since it avoids overestimating consumer preferences for privacy. Unlike a flat prohibition of certain uses of consumer data, it also can reflect differences in those preferences across consumers. The ANPR appears to dismiss this concern, asking in question 75 whether certain practices should be made illegal “irrespective of whether consumers consent to them” (my emphasis added).
Addressing the still-uncertain body of evidence concerning the tradeoff between privacy protections on the one hand and data-reliant functionalities on the other (as well as the still-unresolved extent to which users can meaningfully make that tradeoff) lies outside the scope of this discussion. However, the critical observation is that any determination of market failure concerning any particular use of consumer data must identify the costs (and specifically, identify non-internalized costs) attributable to any such use and then offset those costs against the gains attributable to that use.
This balancing analysis is critical. As the commission recognized in a 2015 report, it is essential to strike a balance between safeguarding consumer privacy without suppressing the economic gains that arise from data-reliant services that can benefit consumers and vendors alike. This even-handed approach is largely absent from the ANPR—which, as noted above, focuses almost entirely on costs while largely overlooking the gains associated with the uses of consumer data in online markets. This suggests a one-sided approach to privacy regulation that is incompatible with the cost-benefit analysis that the commission recognizes it must follow in the rulemaking process.
Private-Ordering Approaches to Consumer-Data Regulation
Suppose that a rigorous and balanced cost-benefit analysis determines that a particular use of consumer data would likely yield social costs that exceed social gains. It would still remain to be determined whether and howa regulator should intervene to yield a net social gain. As regulators make this determination, it is critical that they consider the full range of possible mechanisms to address a particular market failure in the use of consumer data.
Consistent with this approach, the FTC Act specifically requires that the commission specify in an ANPR “possible regulatory alternatives under consideration,” a requirement that is replicated at each subsequent stage of the rulemaking process, as provided in the rules of practice. The range of alternatives should include the possibility of taking no action, if no feasible intervention can be identified that would likely yield a net gain.
In selecting among those alternatives, it is imperative that the commission consider the possibility of unnecessary or overly burdensome rules that could impede the efficient development and supply of data-reliant services, either degrading the quality or raising the price of those services. In the past, the commission has emphasized this concern, stating in 2011 that “[t]he FTC actively looks for means to reduce burdens while preserving the effectiveness of a rule.”
This consideration (which appears to be acknowledged in question 24 of the ANPR) is of special importance to privacy-related regulation, given that the estimated annual costs to the U.S. economy (as calculated by the Information Technology and Innovation Foundation) of compliance with the most extensive proposed forms of privacy-related regulations would exceed $100 billion dollars. Those costs would be especially burdensome for smaller entities, effectively raising entry barriers and reducing competition in online markets (a concern that appears to be acknowledged in question 27 of the ANPR).
Given the exceptional breadth of the rules that the ANPR appears to contemplate—cover an ambitious range of activities that would typically be the subject of a landmark piece of federal legislation, rather than administrative rulemaking—it is not clear that the commission has seriously considered this vital point of concern.
In the event that the FTC does move forward with any of these proposed rulemakings (which would be required to rest on a factually supported finding of market failure), it would confront a range of possible interventions in markets for consumer data. That range is typically viewed as being bounded, on the least-interventionist side, by notice and consent requirements to facilitate informed user choice, and on the most interventionist side, by prohibitions that specifically bar certain uses of consumer data.
This is well-traveled ground within the academic and policy literature and the relative advantages and disadvantages of each regulatory approach are well-known (and differ depending on the type of consumer data and other factors). Within the scope of this contribution, I wish to address an alternative regulatory approach that lies outside this conventional range of policy options.
Bottom-Up v. Top-Down Regulation
Any cost-benefit analysis concerning potential interventions to modify or bar a particular use of consumer data, or to mandate notice-and-consent requirements in connection with any such use, must contemplate not only government-implemented solutions but also market-implemented solutions, including hybrid mechanisms in which government action facilitates or complements market-implemented solutions.
This is not a merely theoretical proposal (and is referenced indirectly in questions 36, 51, and 87 of the ANPR). As I have discussed in previously published research, the U.S. economy has a long-established record of having adopted, largely without government intervention, collective solutions to the information asymmetries that can threaten the efficient operation of consumer goods and services markets.
Examples abound: Underwriters Laboratories (UL), which establishes product-safety standards in hundreds of markets; large accounting firms, which confirm compliance with Generally Accepted Accounting Principles (GAAP), which are in turn established and updated by the Financial Accounting Standards Board, a private entity subject to oversight by the Securities and Exchange Commission; and intermediaries in other markets, such as consumer credit, business credit, insurance carriers, bond issuers, and content ratings in the entertainment and gaming industries. Collectively, these markets encompass thousands of providers, hundreds of millions of customers, and billions of dollars in value.
A collective solution is often necessary to resolve information asymmetries efficiently because the benefits from establishing an industrywide standard of product or service quality, together with a trusted mechanism for showing compliance with that standard, generates gains that cannot be fully internalized by any single provider.
Jurisdictions outside the United States have tended to address this collective-action problem through the top-down imposition of standards by government mandate and enforcement by regulatory agencies, as illustrated by the jurisdictions referenced by the ANPR that have imposed restrictions on the use of consumer data through direct regulatory intervention. By contrast, the U.S. economy has tended to favor the bottom-up development of voluntary standards, accompanied by certification and audit services, all accomplished by a mix of industry groups and third-party intermediaries. In certain markets, this may be a preferred model to address the information asymmetries between vendors and customers that are the key sources of potential market failure in the use of consumer data.
Privately organized initiatives to set quality standards and monitor compliance benefit the market by supplying a reliable standard that reduces information asymmetries and transaction costs between consumers and vendors. This, in turn, yields economic gains in the form of increased output, since consumers have reduced uncertainty concerning product quality. These quality standards are generally implemented through certification marks (for example, the “UL” certification mark) or ranking mechanisms (for example, consumer-credit or business-credit scores), which induce adoption and compliance through the opportunity to accrue reputational goodwill that, in turn, translates into economic gains.
These market-implemented voluntary mechanisms are a far less costly means to reduce information asymmetries in consumer-goods markets than regulatory interventions, which require significant investments of public funds in rulemaking, detection, investigation, enforcement, and adjudication activities.
Hybrid Policy Approaches
Private-ordering solutions to collective-action failures in markets that suffer from information asymmetries can sometimes benefit from targeted regulatory action, resulting in a hybrid policy approach. In particular, regulators can sometimes play two supplemental functions in this context.
First, regulators can require that providers in certain markets comply with (or can provide a liability safe harbor for providers that comply with) the quality standards developed by private intermediaries that have developed track records of efficiently establishing those standards and reliably confirming compliance. This mechanism is anticipated by the ANPR, which asks in question 51 whether the commission should “require firms to certify that their commercial surveillance practices meet clear standards concerning collection, use, retention, transfer, or monetization of consumer data” and further asks whether those standards should be set by “the Commission, a third-party organization, or some other entity.”
Other regulatory agencies already follow this model. For example, federal and state regulatory agencies in the fields of health care and education rely on accreditation by designated private entities for purposes of assessing compliance with applicable licensing requirements.
Second, regulators can supervise and review the quality standards implemented, adjusted, and enforced by private intermediaries. This is illustrated by the example of securities markets, in which the major exchanges institute and enforce certain governance, disclosure, and reporting requirements for listed companies but are subject to regulatory oversight by the SEC, which must approve all exchange rules and amendments. Similarly, major accounting firms monitor compliance by public companies with GAAP but must register with, and are subject to oversight by, the Public Company Accounting Oversight Board (PCAOB), a nonprofit entity subject to SEC oversight.
These types of hybrid mechanisms shift to private intermediaries most of the costs involved in developing, updating, and enforcing quality standards (in this context, standards for the use of consumer data) and harness private intermediaries’ expertise, capacities, and incentives to execute these functions efficiently and rapidly, while using targeted forms of regulatory oversight as a complementary policy tool.
Certain uses of consumer data in digital markets may impose net social harms that can be mitigated through appropriately crafted regulation. Assuming, for the sake of argument, that the commission has the legal power to enact regulation to address such harms (again, a point as to which there is great doubt), any specific steps must be grounded in rigorous and balanced cost-benefit analysis.
As a matter of law and sound public policy, it is imperative that the commission meaningfully consider the full range of reliable evidence to identify any potential market failures in the use of consumer data and how to formulate rules to rectify or mitigate such failures at a net social gain. Given the extent to which business models in digital environments rely on the use of consumer data, and the substantial value those business models confer on consumers and businesses, the potential “error costs” of regulatory overreach are high. It is therefore critical to engage in a thorough balancing of costs and gains concerning any such use.
Privacy regulation is a complex and economically consequential policy area that demands careful diagnosis and targeted remedies grounded in analysis and evidence, rather than sweeping interventions accompanied by rhetoric and anecdote.
[This post is an entry in Truth on the Market’s continuing FTC UMC Rulemaking symposium.You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
In their dissenting statements opposing ANPRM’s release, Commissioners Noah Phillips and Christine Wilson expertly lay bare the notice’s serious deficiencies. Phillips’ dissent stresses that the ANPRM illegitimately arrogates to the FTC legislative power that properly belongs to Congress:
[The [A]NPRM] recast[s] the Commission as a legislature, with virtually limitless rulemaking authority where personal data are concerned. It contemplates banning or regulating conduct the Commission has never once identified as unfair or deceptive. At the same time, the ANPR virtually ignores the privacy and security concerns that have animated our [FTC] enforcement regime for decades. … [As such, the ANPRM] is the first step in a plan to go beyond the Commission’s remit and outside its experience to issue rules that fundamentally alter the internet economy without a clear congressional mandate. That’s not “democratizing” the FTC or using all “the tools in the FTC’s toolbox.” It’s a naked power grab.
Wilson’s complementary dissent critically notes that the 2021 changes to FTC rules of practice governing consumer-protection rulemaking decrease opportunities for public input and vest significant authority solely with the FTC chair. She also echoed Phillips’ overarching concern with FTC overreach (footnote citations omitted):
Many practices discussed in this ANPRM are presented as clearly deceptive or unfair despite the fact that they stretch far beyond practices with which we are familiar, given our extensive law enforcement experience. Indeed, the ANPRM wanders far afield of areas for which we have clear evidence of a widespread pattern of unfair or deceptive practices. … [R]egulatory and enforcement overreach increasingly has drawn sharp criticism from courts. Recent Supreme Court decisions indicate FTC rulemaking overreach likely will not fare well when subjected to judicial review.
Phillips and Wilson’s warnings are fully warranted. The ANPRM contemplates a possible Magnuson-Moss rulemaking pursuant to Section 18 of the FTC Act, which authorizes the commission to promulgate rules dealing with “unfair or deceptive acts or practices.” The questions that the ANPRM highlights center primarily on concerns of unfairness. Any unfairness-related rulemaking provisions eventually adopted by the commission will have to satisfy a strict statutory cost-benefit test that defines “unfair” acts, found in Section 5(n) of the FTC Act. As explained below, the FTC will be hard-pressed to justify addressing most of the ANPRM’s concerns in Section 5(n) cost-benefit terms.
The requirements imposed by Section 5(n) cost-benefit analysis
Section 5(n) codifies the meaning of unfair practices, and thereby constrains the FTC’s application of rulemakings covering such practices. Section 5(n) states:
The Commission shall have no authority … to declare unlawful an act or practice on the grounds that such an act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.
In other words, a practice may be condemned as unfair only if it causes or is likely to cause “(1) substantial injury to consumers (2) which is not reasonably avoidable by consumers themselves and (3) not outweighed by countervailing benefits to consumers or to competition.”
This is a demanding standard. (For scholarly analyses of the standard’s legal and economic implications authored by former top FTC officials, see here, here, and here.)
First, the FTC must demonstrate that a practice imposes a great deal of harm on consumers, which they could not readily have avoided. This requires detailed analysis of the actual effects of a particular practice, not mere theoretical musings about possible harms that may (or may not) flow from such practice. Actual effects analysis, of course, must be based on empiricism: consideration of hard facts.
Second, assuming that this formidable hurdle is overcome, the FTC must then acknowledge and weigh countervailing welfare benefits that might flow from such a practice. In addition to direct consumer-welfare benefits, other benefits include “benefits to competition.” Those may include business efficiencies that reduce a firm’s costs, because such efficiencies are a driver of vigorous competition and, thus, of long-term consumer welfare. As the Organisation for Economic Co-operation and Development has explained (see OECD Background Note on Efficiencies, 2012, at 14), dynamic and transactional business efficiencies are particularly important in driving welfare enhancement.
In sum, under Section 5(n), the FTC must show actual, fact-based, substantial harm to consumers that they could not have escaped, acting reasonably. The commission must also demonstrate that such harm is not outweighed by consumer and (procompetitive) business-efficiency benefits. What’s more, Section 5(n) makes clear that the FTC cannot “pull a rabbit out of a hat” and interject other “public policy” considerations as key factors in the rulemaking calculus (“[s]uch [other] public policy considerations may not serve as a primary basis for … [a] determination [of unfairness]”).
It ineluctably follows as a matter of law that a Section 18 FTC rulemaking sounding in unfairness must be based on hard empirical cost-benefit assessments, which require data grubbing and detailed evidence-based economic analysis. Mere anecdotal stories of theoretical harm to some consumers that is alleged to have resulted from a practice in certain instances will not suffice.
As such, if an unfairness-based FTC rulemaking fails to adhere to the cost-benefit framework of Section 5(n), it inevitably will be struck down by the courts as beyond the FTC’s statutory authority. This conclusion is buttressed by the tenor of the Supreme Court’s unanimous 2021 opinion in AMG Capital v. FTC, which rejected the FTC’s claim that its statutory injunctive authority included the ability to obtain monetary relief for harmed consumers (see my discussion of this case here).
The ANPRM and Section 5(n)
Regrettably, the tone of the questions posed in the ANPRM indicates a lack of consideration for the constraints imposed by Section 5(n). Accordingly, any future rulemaking that sought to establish “remedies” for many of the theorized abuses found in the ANPRM would stand very little chance of being upheld in litigation.
The Aug. 11 FTC press release cited previously addresses several broad topical sources of harms: harms to consumers; harms to children; regulations; automated systems; discrimination; consumer consent; notice, transparency, and disclosure; remedies; and obsolescence. These categories are chock full of questions that imply the FTC may consider restrictions on business conduct that go far beyond the scope of the commission’s authority under Section 5(n). (The questions are notably silent about the potential consumer benefits and procompetitive efficiencies that may arise from the business practices called here into question.)
A few of the many questions set forth under just four of these topical listings (harms to consumers, harms to children, regulations, and discrimination) are highlighted below, to provide a flavor of the statutory overreach that categorizes all aspects of the ANPRM. Many other examples could be cited. (Phillips’ dissenting statement provides a cogent and critical evaluation of ANPRM questions that embody such overreach.) Furthermore, although there is a short discussion of “costs and benefits” in the ANPRM press release, it is wholly inadequate to the task.
Under the category “harms to consumers,” the ANPRM press release focuses on harm from “lax data security or surveillance practices.” It asks whether FTC enforcement has “adequately addressed indirect pecuniary harms, including potential physical harms, psychological harms, reputational injuries, and unwanted intrusions.” The press release suggests that a rule might consider addressing harms to “different kinds of consumers (e.g., young people, workers, franchisees, small businesses, women, victims of stalking or domestic violence, racial minorities, the elderly) in different sectors (e.g., health, finance, employment) or in different segments or ‘stacks’ of the internet economy.”
These laundry lists invite, at best, anecdotal public responses alleging examples of perceived “harm” falling into the specified categories. Little or no light is likely to be shed on the measurement of such harm, nor on the potential beneficial effects to some consumers from the practices complained of (for example, better targeted ads benefiting certain consumers). As such, a sound Section 5(n) assessment would be infeasible.
Under “harms to children,” the press release suggests possibly extending the limitations of the FTC-administered Children’s Online Privacy Protection Act (COPPA) to older teenagers, thereby in effect rewriting COPPA and usurping the role of Congress (a clear statutory overreach). The press release also asks “[s]hould new rules set out clear limits on personalized advertising to children and teenagers irrespective of parental consent?” It is hard (if not impossible) to understand how this form of overreach, which would displace the supervisory rights of parents (thereby imposing impossible-to-measure harms on them), could be shoe-horned into a defensible Section 5(n) cost-benefit assessment.
Under “regulations,” the press release asks whether “new rules [should] require businesses to implement administrative, technical, and physical data security measures, including encryption techniques, to protect against risks to the security, confidentiality, or integrity of covered data?” Such new regulatory strictures (whose benefits to some consumers appear speculative) would interfere significantly in internal business processes. Specifically, they could substantially diminish the efficiency of business-security measures, diminish business incentives to innovate (for example, in encryption), and reduce dynamic competition among businesses.
Consumers also would be harmed by a related slowdown in innovation. Those costs undoubtedly would be high but hard, if not impossible, to measure. The FTC also asks whether a rule should limit “companies’ collection, use, and retention of consumer data.” This requirement, which would seemingly bypass consumers’ decisions to make their data available, would interfere with companies’ ability to use such data to improve business offerings and thereby enhance consumers’ experiences. Justifying new requirements such as these under Section 5(n) would be well-nigh impossible.
The category “discrimination” is especially problematic. In addressing “algorithmic discrimination,” the ANPRM press release asks whether the FTC should “consider new trade regulation rules that bar or somehow limit the deployment of any system that produces discrimination, irrespective of the data or processes on which those outcomes are based.” In addition, the press release asks “if the Commission [should] consider harms to other underserved groups that current law does not recognize as protected from discrimination (e.g., unhoused people or residents of rural communities)?”
The FTC cites no statutory warrant for the authority to combat such forms of “discrimination.” It is not a civil-rights agency. It clearly is not authorized to issue anti-discrimination rules dealing with “groups that current law does not recognize as protected from discrimination.” Any such rules, if issued, would be summarily struck down in no uncertain terms by the judiciary, even without regard to Section 5(n).
In addition, given the fact that “economic discrimination” often is efficient (and procompetitive) and may be beneficial to consumer welfare (see, for example, here), more limited economic anti-discrimination rules almost certainly would not pass muster under the Section 5(n) cost-benefit framework.
Finally, while the ANPRM press release does contain a very short section entitled “costs and benefits,” that section lacks any specific reference to the required Section 5(n) evaluation framework. Phillips’ dissent points out that the ANPRM:
…simply fail[s] to provide the detail necessary for commenters to prepare constructive responses” on cost-benefit analysis. He stresses that the broad nature of requests for commenters’ view on costs and benefits renders the inquiry “not conducive to stakeholders submitting data and analysis that can be compared and considered in the context of a specific rule. … Without specific questions about [the costs and benefits of] business practices and potential regulations, the Commission cannot hope for tailored responses providing a full picture of particular practices.
In other words, the ANPRM does not provide the guidance needed to prompt the sorts of responses that might assist the FTC in carrying out an adequate Section 5(n) cost-benefit analysis.
The FTC would face almost certain defeat in court if it promulgated a broad rule addressing many of the perceived unfairness-based “ills” alluded to in the ANPRM. Moreover, although its requirements would (I believe) not come into effect, such a rule nevertheless would impose major economic costs on society.
Prior to final judicial resolution of its status, the rule would disincentivize businesses from engaging in a variety of data-related practices that enhance business efficiency and benefit many consumers. Furthermore, the FTC resources devoted to developing and defending the rule would not be applied to alternative welfare-enhancing FTC activities—a substantial opportunity cost.
The FTC should take heed of these realities and opt not to carry out a rulemaking based on the ANPRM. It should instead devote its scarce consumer protection resources to prosecuting hard core consumer fraud and deception—and, perhaps, to launching empirical studies into the economic-welfare effects of data security and commercial surveillance practices. Such studies, if carried out, should focus on dispassionate economic analysis and avoid policy preconceptions. (For example, studies involving digital platforms should take note of the existing economic literature, such as a paper indicating that digital platforms have generated enormous consumer-welfare benefits not accounted for in gross domestic product.)
One can only hope that a majority of FTC commissioners will apply common sense and realize that far-flung rulemaking exercises lacking in statutory support are bad for the rule of law, bad for the commission’s reputation, bad for the economy, and bad for American consumers.
 Deceptive practices that might be addressed in a Section 18 trade regulation rule would be subject to the “FTC Policy Statement on Deception,” which states that “the Commission will find deception if there is a representation, omission or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer’s detriment.” A court reviewing an FTC Section 18 rule focused on “deceptive acts or practices” undoubtedly would consult this Statement, although it is not clear, in light of recent jurisprudential trends, that the court would defer to the Statement’s analysis in rendering an opinion. In any event, questions of deception, which focus on acts or practices that mislead consumers, would in all likelihood have little relevance to the evaluation of any rule that might be promulgated in light of the ANPRM.
[On Monday, June 27, Concurrenceshosted a conference on the Rulemaking Authority of the Federal Trade Commission.This conference featured the work of contributors to a new book on the subject edited by Professor Dan Crane. Several of these authors have previously contributed to the Truth on the Market FTC UMC Symposium. We are pleased to be able to share with you excerpts or condensed versions of chapters from this book prepared by authors of of those chapters. Our thanks and compliments to Dan and Concurrences for bringing together an outstanding event and set of contributors and for supporting our sharing them with you here.]
[The post below was authored by former Federal Trade Commission Acting Chair Maureen K. Ohlhausen and former FTC Senior Attorney Ben Rossen.]
The Federal Trade Commission (FTC) has long steered the direction of competition law by engaging in case-by-case enforcement of the FTC Act’s prohibition on unfair methods of competition (UMC). Recently, some have argued that the FTC’s exclusive reliance on case-by-case adjudication is too long and arduous a route and have urged the commission to take a shortcut by invoking its purported authority to promulgate UMC rules under Section 6(g) of the Federal Trade Commission Act.
Proponents of UMC rulemaking rely on National Petroleum Refiners Association v. FTC, a 1973 decision by the U.S. Court of Appeals for the D.C. Circuit that upheld the commission’s authority to issue broad legislative rules under the FTC Act. They argue that the case provides a clear path to UMC rules and that Congress effectively ratified the D.C. Circuit’s decision when it enacted detailed rulemaking procedures governing unfair or deceptive acts or practices (UDAP) in the Magnuson Moss Warranty-Federal Trade Commission Improvement Act of 1975 (Magnuson-Moss).
The premise of this argument is fundamentally incorrect, because modern courts reject the type of permissive statutory analysis applied in National Petroleum Refiners. Moreover, contemporaneous congressional reaction to National Petroleum Refiners was not to embrace broad FTC rulemaking, but rather to put in strong guardrails on FTC UDAP rulemaking. Further, the congressional history of the particular FTC rule at issue—the Octane Ratings Rule—also points in the direction of a lack of broad UMC rulemaking, as Congress eventually adopted the rule solely as a UDAP provision, with heightened restrictions on FTC rulemaking.
Thus, the road to UMC rulemaking, which the agency wisely never tried to travel down in the almost 50 years since National Petroleum Refiners, is essentially a dead end. If the agency tries to go that route, it will be an unfortunate detour from its clear statutory direction to engage in case-by-case enforcement of Section 5.
Broad UMC-Rulemaking Authority Contradicts the History and Evolution of the FTC’s Authority
The FTC Act grants the commission broad authority to investigate unfair methods of competition and unfair and deceptive acts or practices across much of the American economy. The FTC’s administrative adjudicative authority under “Part 3” is central to the FTC’s mission of preserving fair competition and protecting consumers, as reflected by the comprehensive adjudicative framework established in Section 5 of the FTC Act. Section 6, meanwhile, details the commission’s investigative powers to collect confidential business information and conduct industry studies.
The original FTC Act contained only one sentence describing the agency’s ability to make rules, buried inconspicuously among various other provisions. Section 6(g) provided that the FTC would have authority “[f]rom time to time [to] classify corporations and . . . to make rules and regulations for the purpose of carrying out the provisions of this [Act].”Unlike the detailed administrative scheme in Section 5, the FTC Act fails to provide for any sanctions for violations of rules promulgated under Section 6 or to otherwise specify that such rules would carry the force of law. This minimal delegation of power arguably conferred the right to issue procedural but not substantive rules.
Consistent with the understanding that Congress did not authorize substantive rulemaking, the FTC made no attempt to promulgate rules with the force of law for nearly 50 years after it was created, and at various times indicated that it lacked the authority to do so.
In 1962, the agency for the first time began to promulgate consumer-protection trade-regulation rules (TRRs), citing its authority under Section 6(g). Although these early TRRs plainly addressed consumer-protection matters, the agency frequently described violations of the rule as both an unfair method of competition and an unfair or deceptive trade practice. As the commission itself has observed, “[n]early all of the rules that the Commission actually promulgated under Section 6(g) were consumer protection rules.”
In fact, in the more than 100 years of the FTC Act, the agency has only once issued a solely competition rule. In 1967, the commission promulgated the Men and Boys’ Tailored Clothing Rule pursuant to authority under the Clayton Act, which prohibited apparel suppliers from granting discriminatory-advertising allowances that limited small retailers’ ability to compete. However, the rule was never enforced or subject to challenge and was subsequently repealed.
Soon after, the FTC promulgated the octane-ratings rule at issue in National Petroleum Refiners. Proponents of UMC rulemaking, such as former FTC Commissioner Rohit Chopra and current Chair Lina Khan, point to the case as evidence that the commission retains the power to promulgate substantive competition rules, governed only by the Administrative Procedure Act (APA) and, with respect to interpretations of UMC, entitled to Chevron deference. They argue that UMC rulemaking would provide significant benefits by providing clear notice to market participants about what the law requires, relieving the steep expert costs and prolonged trials common to antitrust adjudications, and fostering a “transparent and participatory process” that would provide meaningful public participation.
With Khan at the helm of the FTC, the agency has already begun to pave the way for new UMC rulemakings. For example, President Joe Biden’s Executive Order on promoting competition called on the commission to promulgate UMC rules to address noncompete clauses and pay-for-delay settlements, among other issues. Further, as one of Khan’s first actions as chair, the commission rescinded—without replacing—its bipartisan Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act. More recently, the commission’s Statement of Regulatory Priorities stated that the FTC “will consider developing both unfair-methods-of-competition rulemakings as well as rulemakings to define with specificity unfair or deceptive acts or practices.” This foray into UMC rulemaking is likely to take the FTC down a dead-end road.
The Signs Are Clear: National Petroleum Refiners Does Not Comport with Modern Principles of Statutory Interpretation
The FTC’s authority to conduct rulemaking under Section 6(g) has been tested in court only once, in National Petroleum Refiners, where the D.C. Circuit upheld the commission’s authority to promulgate a UDAP and UMC rule requiring the disclosure of octane ratings on gasoline pumps. The court found that Section 6(g) “clearly states that the Commission ‘may’ make rules and regulations for the purpose of carrying out the provisions of Section 5” and liberally construed the term ‘rules and regulations’ based on the background and purpose of the FTC Act.” The court’s opinion rested, in part, on pragmatic concerns about the benefits that rulemaking provides to fulfilling the agency’s mission, emphasizing the “invaluable resource-saving flexibility” it provides and extolling the benefits of rulemaking over case-by-case adjudication when developing agency policy.
National Petroleum Refiners reads today like an anachronism. Few modern courts would agree that an ambiguous grant of rulemaking authority should be construed to give agencies the broadest possible powers so that they will have flexibility in determining how to effectuate their statutory mandates. The Supreme Court has never adopted this approach and recent decisions strongly suggest it would decline to do so if presented the opportunity.
The D.C. Circuit’s opinion is in clear tension with the “elephants-in-mouseholes” doctrine first described by the U.S. Supreme Court in Whitman v. Am. Trucking Ass’n, because it largely ignored the significance of the FTC Act’s detailed adjudicative framework. The D.C. Circuit’s reasoning—that Congress buried sweeping legislative-rulemaking authority in a vague, ancillary provision, alongside the ability to “classify corporations”—stands in direct conflict with the Supreme Court’s admonition in Whitman.
Modern courts would also look to interpret the structure of the FTC Act to produce a coherent enforcement scheme. For instance, in AMG Capital Management v. FTC, the Supreme Court struck down the FTC’s use of Section 13(b) to obtain equitable monetary relief, in part, because the FTC Act elsewhere imposes specific limitations on the commission’s authority to obtain monetary relief. Unlike National Petroleum Refiners, which lauded the benefits and efficiencies of rulemaking for the agency’s mission, the AMG court reasoned: “Our task here is not to decide whether [the FTC’s] substitution of § 13(b) for the administrative procedure contained in § 5 and the consumer redress available under § 19 is desirable. Rather, it is to answer a more purely legal question” of whether Congress granted authority or not. The same rationale applies to UMC rulemaking.
The unanimous AMG decision was no judicial detour, and the Supreme Court has routinelyposted clear road signs that Congress is expected “to speak clearly when authorizing an agency to exercise powers of vast economic and political significance,” as UMC rulemaking would do. Since 2000, the Court has increasingly applied the “major questions doctrine” to limit the scope of congressional delegation to the administrative state in areas of major political or economic importance. For example, in FDA v. Brown & Williamson, the Supreme Court declined to grant Chevron deference to an FDA rule permitting the agency to regulate nicotine and cigarettes. Crucial to the Court’s analysis was that the FDA’s rule contradicted the agency’s own view of its authority dating back to 1914, while asserting jurisdiction over a significant portion of the American economy. In Utility Air Regulatory Group v. EPA, the Court invoked the major questions doctrine to strike down the Environmental Protection Agency’s greenhouse-gas emissions standards as an impermissible interpretation of the Clean Air Act, finding that “EPA’s interpretation is  unreasonable because it would bring about an enormous and transformative expansion in [the] EPA’s regulatory authority without clear congressional authorization.”
Most recently, in West Virginia v. EPAthe Court relied on the major questions doctrine to strike down EPA emissions rules that would have imposed billions of dollars in compliance costs on power plants, concluding that Congress had not provided “clear congressional authorization” for the rules despite explicitly authorizing the agency to set emissions levels for existing plants. Because broad UMC-rulemaking authority under Section 6(g) is similarly a question of potentially “vast economic and political significance,” and would also represent a significant departure from past agency precedent, the FTC’s efforts to promulgate such rules would likely be met by a flashing red light.
Finally, while National Petroleum Refiners lauded the benefits of rulemaking authority and emphasized its usefulness for carrying out the FTC’s mission, the Supreme Court has since clarified that “[h]owever sensible (or not)” an interpretation may be, “a reviewing court’s task is to apply the text of the statute, not to improve upon it.” Whatever benefits rulemaking authority may confer on the FTC, they cannot justify departure from the text of the FTC Act.
The Road Not Taken: Congress Did Not Ratify UMC-Rulemaking Authority and the FTC Did Not Assert It
Two years after National Petroleum Refiners, Congress enacted the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act of 1975 (Magnuson-Moss). Section 202(a) of Magnuson-Moss amended the FTC Act to add a new Section 18 that, for the first time, gave the FTC express authority to issue UDAP rules, while imposing heightened procedural requirements for such rulemaking. Magnuson-Moss does not expressly address UMC rulemaking. Instead, it says only that Section 18 “shall not affect any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce.” Section 6(g) currently authorizes the FTC “(except as provided in [section 18] of this title) to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”
UMC-rulemaking proponents argue Magnuson-Moss effectively ratified National Petroleum Refiners and affirmed the commission’s authority with respect to substantive UMC rules. This revisionist interpretation is incorrect. The savings provision in Section 18(a)(2) that preserves “any authority” (as opposed to “the” authority) of the commission to prescribe UMC rules reflects, at most, an agnostic view on whether the FTC, in fact, possesses such authority. Rather, it suggests that whatever authority may exist for UMC rulemaking was unchanged by Section 18 and that Congress left the question open for the courts to resolve. The FTC itself appears to have recognized this uncertainty, as evidenced by the fact that it has never even attempted to promulgate a UMC rule in the nearly 50 years following the enactment of Magnuson-Moss.
Congressional silence on UMC hardly endorses the commission’s authority and is not likely to persuade an appellate court today. To rely on congressional acquiescence to a judicial interpretation, there must be “overwhelming evidence” that Congress considered and rejected the “precise issue” before the court. Although Congress considered adopting National Petroleum Refiners, it ultimately took no action on the FTC’s UMC-rulemaking authority. Hardly the “overwhelming evidence” required to read National Petroleum Refiners into the law.
The Forgotten Journey: The History of the Octane-Ratings Rule Reinforces the FTC’s Lack of UMC Rulemaking Authority
Those who argue that National Petroleum Refiners is still good law and that Congress silently endorsed UMC rulemaking have shown no interest in how the journey of the octane-ratings rule eventually ended. The FTC’s 1971 octane-ratings rule declared the failure to post octane disclosures on gasoline pumps both an unfair method of competition and an unfair or deceptive practice. But what has remained unexplored in the debate over FTC UMC rulemaking is what happened to the rule after the D.C. Circuit’s decision upheld rulemaking under Section 6(g), and what that tells us about congressional and agency views on UMC authority.
The octane-ratings rule upheld by the D.C. Circuit never took effect and was ultimately replaced when Congress enacted the Petroleum Marketing Practices Act (PMPA), Title II of which addressed octane-disclosure requirements and directed the FTC to issue new rules under the PMPA. But despite previous claims by the FTC that the rule drew on both UDAP and UMC authority, Congress declined to provide any authority beyond UDAP. While it is impossible to say whether Congress concluded that UMC rulemaking was unwise, illegal, or simply unnecessary, the PMPA—passed just two years after Magnuson-Moss—suggests that UMC rulemaking did not survive the enactment of Section 18. A brief summary of the rule’s meandering journey follows.
After the D.C. Circuit remanded National Petroleum Refiners, the district court ordered the FTC to complete an environmental-impact statement. While that analysis was pending, Congress began consideration of the PMPA. After its enactment, the commission understood Congress to have intended the requirements of Title II of the PMPA to replace those of the original octane-ratings rule. The FTC treated the enactment of the PMPA as effectively repealing the rule.
Section 203(a) of the PMPA gave the FTC rulemaking power to enforce compliance with Title II of the PMPA. Testimony in House subcommittee hearings centered on whether the legislation should direct the FTC to enact a TRR on octane ratings under expedited procedures that would be authorized by the legislation, or whether Congress should enact its own statutory requirements. Ultimately, Congress adopted a statutory definition of octane ratings (identical to the method adopted by the FTC in its 1971 rule) and granted the FTC rulemaking authority under the APA to update definitions and prescribe different procedures for determining fuel-octane ratings. Congress also specified that certain rules—such as those requiring manufacturers to display octane requirements on motor vehicles—would have heightened rulemaking procedures, such as rulemaking on the record after a hearing.
Notably, the PMPA specifically provides that violations of the statute, or any rule promulgated under the statute, “shall be an unfair or deceptive act or practice in or affecting commerce.” Although Section 203(d)(3) of the PMPA specifically exempts the FTC from the procedural requirements under Section 18, it does not simply revert to Section 6(g) or otherwise leave open a path for UMC rulemaking.
The record makes clear, however, that Congress was aware of FTC’s desire to claim UMC authority in connection with the octane-ratings rule, as FTC officials testified in legislative hearings that UMC authority was necessary to regulate octane ratings. After Magnuson-Moss was enacted, however, neither Congress nor the FTC tried to include UMC rulemaking in the PMPA. In a written statement reflecting the FTC’s views on the PMPA incorporated in the House report, the FTC described its original octane-ratings rule as UDAP only. While not dispositive, the FTC’s apparent abandonment of its request for UMC authority after Magnuson-Moss, and Congress’ decision to limit the PMPA exclusively to UDAP, certainly suggests that UMC did not survive National Petroleum Refiners and that Congress did not endorse FTC UMC rulemaking.
The FTC appears poised to embark on a journey of broad, legislative-style competition rulemaking under Section 6(g) of the FTC Act. This would be a dead end. UMC rulemaking, rather than advancing clarity and certainty about what types of conduct constitute unfair methods of competition, would very likely be viewed by the courts as an illegal left turn. It would also be a detour for the agency from its core mission of case-by-case expert adjudication of the FTC Act—which, given limited agency resources, could result in a years-long escapade that significantly detracts from overall enforcement. The FTC should instead seek to build on the considerable success it has seen in recent years with administrative adjudications, both in terms of winning on appeal and in shaping the development of antitrust law overall by creating citable precedent in key areas.
 H. Rep. No. 95-161, at 45, Appendix II, Federal Trade Commission—Agency Views, Statement of Federal Trade Commission by Christian S. White, Asst. Director for Special Statutes (Feb. 23, 1977).
 38 Stat. 722 § 6(g), codified as amended at 15 U.S.C. § 46(g).
[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 thesymposium 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.
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.
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.
[Today’s second guest post, the sixth in our FTC UMC Rulemaking symposium, comes from Andrew K. Magloughlin and Randolph J. May of the Free State Foundation. See also the related post we published today from Richard J. Pierce Jr. of the George Washington University Law School. 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.]
The Federal Trade Commission’s (FTC) current leadership appears likely to issue substantive rules concerning “unfair methods of competition” (UMC) at some point. FTC Chair Lina Khan, in an article with former FTC Commissioner Rohit Chopra, argued that the commission has the authority to issue UMC rules pursuant to the Federal Trade Commission Act based on Petroleum Refiners Association v. FTC and a subsequently enacted provision in 1975. But Petroleum Refiners is a nearly 50-year-old, untested, and heavily criticized opinion that predates the major questions doctrine and widespread adoption of textualism in the courts. Application of the major questions doctrine and modern, textualist methods of statutory interpretation almost certainly would lead to a determination that the commission lacks UMC rulemaking authority.
Our submission to this Truth on the Market symposium argues that today’s Supreme Court would find that the FTC lacks authority to issue UMC rules under the major questions doctrine. Part I reviews the provisions of the FTC Act relevant to UMC rulemaking and scholarly commentary on the issue. Part II argues that, applying the major questions doctrine as the Court has done in recent opinions such as NFIB v. OSHA, the Supreme Court would find that the FTC lacks UMC rulemaking authority because Congress could not have intended such a cryptic delegation to authorize sweeping rules of such economic significance.
Text, Structure, and Interpretation of the FTC Act
The FTC Act establishes the FTC and its authority. Section 5 of the FTC Act declares unlawful “unfair methods of competition in or affecting commerce” and empowers the commission to stop them. The law provides specific procedures for an administrative adjudicatory process that the commission “shall” use to stop unfair methods of competition when it identifies them and believes stopping them is in the public interest. The remainder of Section 5 involves provisions related to available remedies and jurisdiction for appeal of final decisions from FTC adjudications. This is the extent of explicit authority the FTC Act contains related to UMC.
In the next portion of the same subchapter, Section 6(g) states: “The Commission shall also have power . . . to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” In 1973’s Petroleum Refiners Association v. FTC, the U.S. Court of Appeals for the D.C. Circuit interpreted this provision to grant the commission substantive rulemaking authority to implement Section 5. While Petroleum Refiners involved rules regarding “unfair or deceptive acts or practices” under Section 5, rather than UMC rules, its reasoning, if still valid today, seemingly could authorize the commission to issue UMC rules. But the FTC has never issued UMC rules to date.
Congress responded to Petroleum Refiners by enacting laws in 1975 and 1980 that imposed significant procedural burdens on the FTC’s rulemaking process for unfair or deceptive acts. These burdens, known as the “Magnuson-Moss procedures,” are far more exacting than the Administrative Procedure Act’s notice-and-comment rulemaking process and, since adopted, they have had the effect of stopping the FTC from issuing rules for governing unfair or deceptive acts.
FTC Chair Khan believes that, in adopting the Magnuson-Moss procedures, Congress has implicitly codified Petroleum Refiners‘ holding that the FTC has authority to issue UMC rules. She argues that legislative history for the 1975 amendments show that Congress rejected a version of the bill that applied Magnuson-Moss procedures to all FTC rulemaking, rather than just unfair or deceptive acts rulemaking. And the enacted statute, as well as the conference report for the adopted law, stated that Magnuson-Moss procedures “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.” Khan believes that this provision implicitly recognized that, in accord with the holding of Petroleum Refiners, that Section 6(g) grants the commission authority to issue substantive UMC rules. Moreover, in her view, if the FTC adopted her position as its official interpretation of the statute, it would be entitled to Chevron deference.
Other commentators disagree persuasively. Richard Pierce notes that the provision Khan points to as implicitly adopting Petroleum Refiners just as easily could be interpreted to clarify that Magnuson-Moss procedures do not apply to interpretative rules and policy statements for UMC adjudications. This argument, though, does not completely eliminate ambiguity, because the statute used the non-exclusive word including in the phrase “rules (including interpretative rules) and general statements of policy” rather than expressly limiting the exemption to those two types of rules.
But Pierce, more forcefully, argues that Khan’s interpretation depends on the Petroleum Refiners interpretation of the FTC Act remaining good law, and this is doubtful. Petroleum Refiners employed a non-textualist method of statutory interpretation that courts do not apply today. That case held that an ambiguous grant “to make rules and regulations for the purpose of carrying out the provisions of this subchapter” should be construed to favor the agency’s interpretation of its authority under that provision. This holding appears to conflict with the Supreme Court’s more searching review for identifying congressional delegations to agencies to issue substantive rules in Untied States v. Mead Corp., a case decided more than two decades after Petroleum Refiners. Mead Corp. explained that agencies are entitled to Chevron deference for their application of their authorizing statutes when “Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority.”
The D.C. Circuit itself may have already implicitly overruled Petroleum Refiners while applying Mead Corp. in more recent cases. In American Library Association v. FCC, the D.C. Circuit adopted a far more skeptical reading of a similar general grant of authority—the Federal Communications Commission’s (FCC) general grant in Title I of the Communications Act, which reads: “The Commission may perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions.” The FCC had issued its Broadcast Flag Order relying solely on its general grant of authority in Title I.
But the D.C. Circuit, applying Mead Corp., held that the FCC could only issue substantive rules pursuant to its general grant of authority when: “(1) the Commission’s general jurisdictional grant under Title I covers the subject of the regulations and (2) the regulations are reasonably ancillary to the Commission’s effective performance of its statutorily mandated responsibilities.” In other words, only when the substantive rules reasonably relate to explicit authority contained in the Communications Act. Petroleum Refiners is inconsistent with this subsequent holding of the D.C. Circuit.
Further, William Kovacic—a former FTC chair, commissioner, and general counsel—explains that the unanimous Supreme Court opinion in AMG Capital Management LLC v. FTC implicitly refutes Petroleum Refiners. In AMG, the Court rejected the FTC’s interpretation of Section 13(b) of the FTC Act, which states that the commission “may bring suit in a district court of the United States to enjoin” violations of the law that the FTC enforces. The FTC argued that Section 13(b) empowered it to seek equitable monetary relief, despite the provision’s circumscribed focus on injunctions. But the court explained that this focus on injunctions, as well as the structure of the act as a whole, counseled otherwise. And unlike Section 13(b), other FTC Act provisions expressly empower the commission to seek “other forms of relief” in addition to injunctions, demonstrating that Congress would have explicitly authorized equitable monetary relief if it intended Section 13(b) to provide it.
As Kovacic explains, the AMG opinion was “not so generous” to the FTC’s interpretation of the FTC Act, refuting the deferential approach of Petroleum Refiners. It seems unlikely, given the above criticisms of Petroleum Refiners, that the Court would be any more deferential to an attempt by Khan or a future FTC chair to issue substantive UMC rules. This is especially true because, as explained below, the major questions doctrine likely would resolve the question of the FTC’s UMC authority against the commission.
Today’s Major Questions Doctrine Most Likely Would Slam the Door Shut on FTC UMC Rulemaking
Under current jurisprudence, the Supreme Court’s application of the major questions doctrine most likely would slam the door shut on the FTC’s supposed authority to issue UMC rules. The major questions doctrine is a canon of statutory interpretation that the Court developed as an exception or limitation to application of Chevron deference, even if the Court appears to now apply it independently of Chevron. It applies to judicial review of agency interpretations of statutory authority to issue substantive rules. Put simply, the major questions doctrine is a linguistic canon that requires “Congress to speak clearly when authorizing an agency to exercise powers of vast economic and political significance,” or put more colloquially, that prevents Congress from “hiding elephants in mouseholes.”
The underlying purpose of the major questions doctrine is the protection of separation of powers. However, the context in which it protects separation of powers is not entirely clear because the Court’s views appear to be, at present, unsettled. The “clear statement” version of the major questions doctrine protects separation of powers by preventing the executive branch from relying on strained interpretations of delegated statutory authority. But multiple Supreme Court justices have at times argued for a substantive major questions doctrine—one that would bar certain “major” delegations altogether, regardless of the clarity of the congressional delegation. For our purposes, in this piece, we apply the major questions doctrine as a clear-statement rule, which at present is the controlling law.
There are several factors that the Court has identified as warranting application of the major questions doctrine. The two most common factors can be thought of as (1) claims of sweeping authority, or massive elephants, enabled through (2) cryptic statutory texts, or tiny mouseholes. For example, in Alabama Association of Realtors v. HHS, the Supreme Court applied the major questions doctrine, in part, because the “sheer scope” of the rule in that case was dramatic—affecting 80% of the country’s population and superseding a traditional area of state regulation. In other words, a massive elephant. An example of a tiny mousehole is, in NFIB v. OSHA, the Occupational Safety and Health Administration’s (OSHA) reliance on statutory authority for “workplace safety” regulations to require broad public-health mandates like compulsory vaccination, which affects people far beyond the confines of the workplace.
Other relevant factors include assertions of authority despite long-held contrary indications from Congress and the agency itself, or a history of failure to assert similar authority. For example, in Brown & Williamson Tobacco Corp. v. FDA, the Court found it relevant that the Food and Drug Administration (FDA) asserted regulatory authority over tobacco products, despite Congress’ creation of a distinct regulatory structure for tobacco outside the purview of the FDA and decades of assertions by Congress and FDA leadership that the FDA lacked authority to regulate tobacco. In NFIB, the Court noted that OSHA’s vaccine mandate was its first sweeping public-health measure under the Occupational Health and Safety Act in its more than 50 years of existence.
Applying the major questions doctrine to the FTC’s supposed UMC rulemaking authority would mean that the commission almost certainly lacks such authority. First, many of the relevant factors for the major questions doctrine are present. The scope of potential UMC rulemaking is sweeping, covering most of our nation’s economy—a big elephant. And the provision supposedly enabling the commission’s rulemaking authority—Section 6(g), which contains general language, rather than an explicit delegation of authority to the commission—amounts to a tiny mousehole. The FTC Act provision Khan points to as implicitly codifying Petroleum Refiners is even less specific; it simply asserts that Section 18a of the FTC Act will have no effect on the FTC’s UMC rulemaking authority. But if the commission never had such rulemaking authority in the first place under Section 6(g), then this provision is irrelevant and provides no implicit codification, let alone the clear statement required by the major questions doctrine. Thus, an even tinier mousehole.
Analysis of the statutory text and legislative history Khan identifies shows precisely how tiny that mousehole is. As mentioned above, Khan believes that Congress’ rejection of a draft bill that applied Magnuson-Moss procedures to UMC rulemaking proves that Congress implicitly endorsed Petroleum Refiners. Not so. Instead, by clarifying that Section 18a “shall not affect any authority of the Commission to prescribe rules … with respect to unfair methods of competition in or affecting commerce,” Congress likely was rejectingPetroleum Refiners as applied to UMC rulemaking. Congress did indeed codify the Petroleum Refiners holding that the FTC has authority to issue rules for unfair or deceptive acts or practices by subjecting them to the rigorous Magnuson-Moss procedures. But by stating that those procedures did not affect the FTC’s authority for UMC rules, any authority for the commission to issue such rules depends solely on interpretation of Section 6(g)—or the continued vitality of Petroleum Refiners. A provision that says nothing about the issue at hand is among the tiniest imaginable mouseholes.
Further, the FTC, since its creation in 1914, has failed to issue any UMC rulemakings over the past 108 years. As Richard Pierce explains, between 1914 and 1962, when the unfair or deceptive practice rules under review in Petroleum Refiners were first introduced, “the FTC, Congress, courts, and scholars were unanimous in their belief that the FTC did not have the power to issue legislative rules.” An assertion claiming such authority to issue rules now would be a bureaucratic power-grabbing bridge too far, if not to nowhere.
Should the occasion arise, for all the reasons discussed, we predict the Supreme Court will slam the door shut on FTC UMC rulemaking authority.
 It is also possible that any UMC rules issued would be determined to violate the nondelegation doctrine, aside from whether reviewing courts considered the major questions doctrine part and parcel of the nondelegation doctrine. In this essay, we are focusing on current major questions doctrine jurisprudence that often is not tied, at least explicitly, to traditional nondelegation doctrine analysis.
 See, for example, Justice Neil Gorsuch’s dissent in Gundy v. United States, joined by Chief Justice John Roberts and Justice Clarence Thomas, which argued that the major questions doctrine should step in to replace the Court’s failure to enforce the nondelegation doctrine.
[This guest post from Corbin K. Barthold of TechFreedom —the fourth post in our FTC UMC Rulemaking symposium—is adapted from his and Berin Szoka’s chapter “The Constitutional Revolution That Wasn’t: Why the FTC Isn’t a Second National Legislature,” in the forthcoming book FTC’s Rulemaking Authority, which will be published by Concurrences later this year.It is the second of two contributions to the symposium posted today, along with this related post from Yale Law Schoolstudent Leah Samuel. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
In 1972, a case came before the Hon. Aubrey E. Robinson, Jr., a federal trial judge in the District of Columbia, involving the scope of the Federal Trade Commission’s (FTC) regulatory authority. Section 5(a)(1) of the Federal Trade Commission Act outlaws “unfair methods of competition.” Section 6(g) says that the FTC may “make rules and regulations for the purposes of carrying out” the FTC Act.
What is a “rule or regulation” that helps “carry out” a statute? Does Section 6(g) simply permit the FTC to make “procedural” or “housekeeping” rules that set forth how the agency will conduct itself? Or does it instead empower the FTC to make “substantive” or “legislative” rules—precepts, binding on the public, that flesh out which methods of competition are “unfair”? This was the question before Judge Robinson.
Robinson kept his eye squarely on the FTC Act’s text and structure. What stood out to him, when he examined the statute, is the glaring structural distinction between Section 5 and Section 6. Section 5 enables the agency to file complaints, hold hearings, make findings of fact, and issue cease-and-desist orders. Section 6 permits the agency to gather and publish information about corporate practices. Each section is closely concerned with its assigned topic: Section 5 explains, in detail, how the FTC shall exercise quasi-judicial powers; Section 6 explains, in detail, how the FTC shall exercise investigative powers. The two sections have little to say to each other. This, concluded Robinson, was a strong signal that Section 6(g) does not leap its fence, progress to Section 5(a)(1), and enable the creation of rules that define “unfair methods of competition.”
That was just the beginning. Why would Congress pair a vague and open-ended rulemaking power with an elaborate and strictly circumscribed quasi-judicial power? If the FTC could make whole categories of conduct unlawful by diktat, why would it endure the rigmarole of Section 5 adjudication? More to the point, why would Congress bother to spell out that process, knowing that the FTC would go around it? In full, moreover, Section 6(g) gives the FTC the power “[f]rom time to time to classify corporations and to make rules and regulations for the purposes of carrying out the provisions of [the Act].” What is the part about “classify[ing]” companies doing there? Read as a whole, Section 6(g) seems merely to equip the FTC to conduct investigations, including, as Robinson put it, by ensuring that the agency has “the power to require reports from all corporations.”
Nor did the clues end there. Other statutes expressly grant the FTC the power to issue discrete consumer-protection rules, such as rules governing the labels of wool products. Congress knew how to grant legislative rulemaking power when it wanted to do so. And the limited grants of such power, in the other statutes, would be superfluous if the FTC already possessed a general “unfair methods” rulemaking authority in Section 6(g).
(Although Robinson did not mention it, a further sign of Section 6(g)’s narrow scope is the absence of statutory penalties for violating an FTC-issued rule. In the era when the FTC Act was passed, Congress never granted the power to make substantive rules without also specifying the price of noncompliance.)
In short, the FTC Act’s text and structure show that Section 6(g) has no intention of helping Section 5(a)(1). And when he checked his work against the FTC Act’s legislative history, Robinson found out why that is so. Section 6(g), he discovered, was originally in a House bill “that conferred only investigative powers on the Commission.” A competing bill in the Senate, meanwhile, contained quasi-judicial powers and the “unfair methods” standard but “made no provision whatever for the promulgation of rules and regulations in any context.” The investigations-only House bill and the no-rulemaking-power Senate bill were eventually stitched together. No wonder Section 6(g) does not seem to support the creation of legislative rules about the meaning of Section 5(a)(1); the two provisions were born into different bills.
If more support were needed, added Robinson, the FTC’s conduct would provide it. It had taken the FTC 50 years to “notice” a vast store of authority hiding in Section 6(g)—yet another revealing indication, Robinson wrote, “that the FTC knew it was not originally granted this rulemaking authority.” Over the years, the agency had even “repeatedly admitted that it has no power to promulgate substantive rules of law.”
Life is not fair. Judge Robinson’s well-crafted order is not good law. It was reversed. And in its place stands an appellate opinion that is longer, more repetitive, less rigorous, less disciplined, and altogether less convincing than the decision it overturns.
“Our duty,” U.S. Court of Appeals for the D.C. Circuit Judge J. Skelly Wright pronounced at the outset of his 1973 opinion in National Petroleum Refiners v. FTC, “is not simply to make a policy judgment.” The FTC, after all, “is a creation of Congress, not a creation of judges’ contemporary notions of what is wise policy.” He might then have said: We therefore adopt the careful opinion of Judge Robinson as our own—affirmed.
He did not say that. In opening with a pious renunciation of judicial policymaking, in fact, he protested too much.
Wright’s treatment of the FTC Act’s text is brusque and general. Construing Section 6(g) to allow substantive rulemaking, Wright submitted, would “not in any formal sense circumvent” the quasi-judicial enforcement mechanism of Section 5. Congress, he went on, had not explicitly told the FTC it could only proceed case-by-case. He then discussed a pair of Supreme Court cases that, though concededly not on point, suggest the FTC Act should be read “broad[ly]” and as a “whole.” And he recited Section 6(g) itself, as though its support for his position were self-evident.
This casual nod to text complete, Wright moved on to his true preoccupation—policy considerations. Over and over, he praised the “invaluable resource-saving flexibility” of rulemaking. According to Wright:
“[U]se of substantive rule-making is increasingly felt to yield significant benefits. … Increasingly, courts are recognizing that use of rule-making to make innovations in agency policy may actually be fairer to regulated parties than total reliance on case-by-case adjudication.”
“[C]ontemporary considerations of practicality and fairness … certainly support the Commission’s position here.”
“Such benefits are especially obvious in cases involving the initiation of rules of the sort the FTC has promulgated here.”
“[T]he policy innovation involved in this case underscores the need for increased reliance on rule-making rather than adjudication alone.”
“[The FTC] has remained hobbled in its task by the delay inherent in repetitious, lengthy litigation[.] … To the extent substantive rule-making … is likely to deal with these problems … [it] should be upheld as [allowed under the FTC Act].”
“[T]he Commission will be able to proceed more expeditiously, … and … more efficiently with a mixed system of rule-making and adjudication[.]”
“[C]ourts have stressed the advantages of efficiency and expedition which inhere in reliance on rule-making instead of adjudication alone.”
So much for eschewing “judges’ contemporary notions of what is wise policy”! Rulemaking was the wave of the future, as all fashionable and enlightened judges understood. Wright seemed to believe, therefore, that he should insert into the FTC Act the power to make substantive rules. Whether the helpless text could bear such a reading was a secondary concern at best.
When not providing his personal endorsement of the benefits of rulemaking, Wright repeatedly invoked the FTC Act’s “purpose”:
“[R]ejecting the claim of rule-making power would run counter to the broad policies … that clearly motivated Congress in 1914.”
“[T]he broad, undisputed policies which clearly motivated the framers of the [FTC] Act of 1914 would indeed be furthered by our view[.]”
“[R]ule-making is not only consistent with the original framers’ broad purposes, but appears to be a particularly apt means of carrying them out.”
The FTC needs rulemaking power “to do the job assigned by Congress.”
But a judge may not appeal to a statute’s “purpose” on the false cry that he is divining what the legislators “really” meant. The Supreme Court in more recent years has explained that “no legislation pursues its purposes at all costs,” and that “it frustrates rather than effectuates legislative intent simplistically to assume that whatever furthers the statute’s primary objective must be the law.”The missing ingredient in Wright’s long document—what should have been the main ingredient—is obedience to the statutory text and structure.
Wright’s opinion in National Petroleum Refiners is a museum piece. It is a fossilized remnant of an extinct species of statutory interpretation. For a court trying to understand the FTC Act today, it is next to useless. Judges may not let their rulings be driven by their sense of “policy,” by their intuitions about statutory “purpose,” or by their desire for a personally satisfying result. The Supreme Court has shut the door on these factors. The judiciary possesses “no roving license,” it has said, to rewrite a statute on the assumption that “Congress ‘must have intended’ something broader.” Judges are “expounders of what the law is,” not “policymakers choosing what the law should be.”