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Antitrust at the Agencies Roundup: The Orphan’s Hypothetical Competitor Edition

Daniel J. Gilman —  19 May 2023 — Leave a comment

Some may refer to this as the Roundup Formerly Known as the FTC Roundup. If you recorded yourself while reading out loud, and your name is Dove, that is what it sounds like when doves sigh. 

Maybe He Never Said ‘Never’

The U.S. Justice Department’s (DOJ) Antitrust Division recently agreed to settle its challenge of Swedish conglomerate Assa Abloy’s proposed acquisition of the hardware and home-improvement division of Spectrum Brands.Assa Abloy will divest certain assets as a condition of settling the case and consummating the merger.

That’s of interest to those following residential-door-hardware markets—about which I know very little, although I have purchased such hardware on occasion—but it’s also of interest because Assistant Attorney General Jonathan Kanter, who heads the division, has (like Federal Trade Commission Chair Lina Khan) repeatedly decried settling merger cases. He has said he is “concerned that merger remedies short of blocking a transaction too often miss the mark” and that he believes “[o]ur goal is simple: we must be prepared to try cases to a verdict when we think a violation has taken place.”

More colorfully: “I’m here to declare that we’re not part of the chickenshit club.” À la Groucho Marx, he doesn’t want to belong to any club that will accept him as a member. 

There has, at least sometimes, been a caveat: “[o]ur duty is to litigate, not settle, unless a remedy fully prevents or restrains the violation.” So maybe it was a line in the sand, but not cast in stone. Or maybe it wasn’t exactly a line.

And while I never really followed the “losing is winning” rhetoric (never uttered by a high school coach in any sport anywhere), I do understand that a tie is often preferable to a loss, and that settling can even be a win-win. Perhaps even when you (say, the DOJ, for example) basically agree to the settlement proposed by the other side. 

Of Orphans and Potential Competition

All this reminds me of the “open offer” in the Illumina/Grail matter over at the FTC, which was puzzled over here, there, and nearly everywhere. More recently, the FTC has filed suit to block Amgen’s acquisition of Horizon Therapeutics, which the commission announced with a press release bearing the headline: “FTC Sues to Block Biopharmaceutical Giant Amgen from Acquisition that Would Entrench Monopoly Drugs Used to Treat Two Serious Illnesses.”

Or, as others might call it, “if you think the complaint in Illumina/Grail was speculative, take a look at this.” 

At stake are Horizon’s drugs Tepezza (used to treat thyroid eye disease) and Krystexxa (used to treat chronic refractory gout). Both are designated as “orphan drugs,” which means they treat rare conditions and enjoy various tax and regulatory benefits as a result. And as the FTC correctly notes: “[n]either of these treatments have any competition in the pharmaceutical marketplace.” That is, the patient population for each drug is fairly small, but for those who have thyroid eye disease or chronic refractory gout, there are no substitutes. Patients might well benefit from greater competition.

Given that these are currently monopoly products, the FTC cannot worry about future harm to an otherwise competitive market. Amgen has no drugs in head-to-head competition with either Tepezza or Krystexxa, and neither does any other biologics or pharmaceutical firm. And there’s no allegation of unearned market power—Tepezza and Krystexxa are approved products, and there’s no allegation that their approval or marketing has been anything other than lawful. Market power is not supposed to change with the acquisition. Certainly not on day one, or on any day soon.

Rather, there’s a concern that Amgen will (allegedly) be likely to engage in conduct that harms competition that’s expected to develop, at some time or other. The complaint alleges that Amgen will be likely to leverage its other products in such a way as to “raise… [their] rivals’ barriers to entry or dissuade them from competing as aggressively if and when they gain FDA approval.” The most likely route to this, according to the FTC complaint, would be to exploit bargaining leverage with pharmacy benefit managers (PBMs) to secure favorable placement in the formularies that PBMs design for various health plans.  

Perhaps. The evidence suggests that most vertical mergers are procompetitive, but a vertically integrated firm can have an incentive to foreclose rivals, which may or may not lead to a net loss to competition and consumers, depending on the facts and circumstances.

But then there’s the “if and when” part. We don’t really know what the relevant facts and circumstances are—not from the public documents, at any rate. We are told that the Tepezza and Krystexxa monopolies will “not last forever,” but we’re not told who will enter when. There’s also no clear suggestion as to how a combined Amgen/Horizon could foreclose the development of a would-be competitor. Neither firm controls a critical input, would-be rivals’ clinical trials, or the Food and Drug Administration’s (FDA) approval process.

As for potential future competition, the large PBMs are not unsophisticated bargainers or lacking in leverage of their own. Hence, the FTC’s much-ballyhooed PBM investigations. 
On the one hand, there’s typically some forward-looking aspect to merger analysis: what would competition look like, but for the merger? On the other hand, as Niels Bohr and Yogi Berra have variously observed: “It is hard to make predictions, especially about the future.” Some predictions are harder than others, and some are just shots in the dark. As former FTC Commissioner Joshua Wright observed in his dissent in Nielsen Holdings, grounded…

…predictions about the evolution of a market [are] based upon a fact-intensive analysis …. when assessing whether future entry would counteract a proposed transaction’s competitive concerns, the agencies evaluate a number of facts—such as the history of entry in the relevant market and the costs a future entrant would need to incur to be able to compete effectively—to determine whether entry is “timely, likely, and sufficient.”

That was hard to do in Nielsen. It was hard to do (and the commission failed to do it) in the Meta/Within case. And it’s hard to do when we’re dealing with complex molecule products, when entry must clear significant regulatory hurdles, and when we have no clinical data establishing (or even, based on which, we might estimate) the approval and entry of any particular competing product in some specified timeframe. 

Drugs in late-stage development may be far enough along in the approval process that one can reasonably predict approval and entry in a year or two. Not with any certainty, of course. Things happen. But predictions can be made with some confidence, at least when it comes to simple molecule pharmaceutical drugs (as opposed to biologics) and perhaps with drugs already approved by foreign regulators based on substantial clinical trials. But this is not that. There are potential rivals in the developmental pathway, but there seem to be zero reported results. None. That is, none reported by the FDA, where it reports such things and none mentioned in the FTC’s complaint. So we seem to lack the sort of data that might facilitate a reasonable prediction about the particulars of future entry, should it occur. 

Nobody is poised to enter the market and there is no clear near-term entrant, but for one. As the complaint explains:

Horizon is currently developing a subcutaneously administered version of Tepezza, which it estimates will receive FDA approval. … The planned introduction of this subcutaneous Tepezza formulation promises to further lower Amgen’s logistical and economic barriers to establishing multi-product contracts between its pharmacy benefit products, like Enbrel, and Tepezza. 

Perhaps, but surely that’s a double-edged sword for the FTC’s complaint, at best. Amgen’s stock of blockbusters—the alleged source of their leverage, should push come to shove—would not be affected. And there’s no reason to think (and no allegation) that Amgen would not continue the development of a new form of delivery for Tepezza.

The complaint maintains that “[t]here are no countervailing factors sufficient to offset the likelihood of competitive harm from the Proposed Acquisition.” But we have no idea how to estimate the risk that’s supposed to be offset. Certainly, the complaint doesn’t tell us and the complaint itself hinted at potentially offsetting factors in the very same paragraph: research, development, and marketing efficiencies, as well as the possibility of lower regulatory costs, courtesy of Amgen’s pockets, sophistication, and experience. If the subcutaneous Tepezza product could be brought to market sooner, and/or marketed more effectively, consumers wouldn’t be harmed. They would benefit. 

It seems we really have no idea what future competition might or might not look like two or three years down the road, or four or five. Indeed, it’s not clear when or whether a rival to either drug will be approved for marketing in the United States, whether Amgen (or Horizon) attempts to erect barriers to entry or not. Moreover, there’s no obvious route by which Amgen can impede the development of rival products. Is the FTC estimating a risk of harm to competition or guessing?

Statisticians (and economists) distinguish between Type 1 and Type 2 errors, false positives and false negatives respectively. There’s ongoing debate over the question whether the current state of the law pays too much attention to the risk of false positives, and not enough to the risk of false negatives. Be that as it may, there are very real costs when procompetitive mergers are wrongly identified as anticompetitive and blocked accordingly.

The perfect no-false-negatives strategy of “block all mergers” (or all where there’s a non-zero risk of competitive harm) cannot be adopted for free. That ought to be plain in the case of drug development (and, say, the type of cancer tests at issue in Illumina/Grail). The population of consumers comprises patients and payers; delay the benefits of efficient mergers, and patients are harmed. A complaint is just that, but does the FTC’s complaint show that harm is likely on any particular time frame, or simply possible at some point?

Looking back at the past 25 years, one might view the FTC’s attention to mergers in the health-care sector as a model of research-based enforcement, with important contributions from the Bureau of Economics and the policy shop, in addition to those of enforcers in the Bureau of Competition. That was a nice view; I miss it.

More later, but there was this, too.

In Antitrust & Competition, Antitrust at the Agencies Roundup, Federal Trade Commission, Justice Department, Mergers & Acquisitions, Section 5 , , , , , , , , , , , , ,
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FTC Returns to Section 18 Rulemaking with Impersonation Fraud Hearing

Neil Chilson —  11 May 2023 — Leave a comment

[The following is a guest post from Neil Chilson, a senior research fellow with the Center for Growth and Opportunity at Utah State University and former chief technologist of the Federal Trade Commission.]

The Federal Trade Commission (FTC) last week held its first informal hearing in 20 years on Section 18 rulemaking. The hearing itself had a technical delay, which to us participants felt like another 20 years, but was a mere two hours or so.

At issue is a proposed rule intended to target impersonation fraud. Impersonation fraudsters hold themselves out as government officials or company representatives in order to defraud unsuspecting consumers.

I was one of 13 individuals who requested to speak at the informal hearing. My interest is as a consumer with a stake in efficient and effective fraud enforcement and as a former FTC employee proud of the anti-fraud work I contributed to. What follows is adapted from my remarks.

Imposter Fraud Deserves a Good Rule

As the record clearly shows, imposter fraud is a too-common occurrence and costs consumers and businesses millions of dollars a year. We need a good rule here—one that effectively targets fraud with minimal impact on lawful behavior and that it is legally sustainable.  

To that end, two points. First, the rule as written, unlike every other Section 18 rule, is broader than Section 5 and ought to be narrowed. Second, the FTC caselaw is indefinite on the contours of means and instrumentalities. The record shows that this provision is already being misunderstood. The FTC should correct this misperception.

Together, these issues mean that this proceeding has likely failed to put potentially affected parties on notice, leaving a factual gap in the record and in the agency’s regulatory impact analysis.

The Text of the Rule Is Overly Broad

This proceeding is targeted at addressing impersonation frauds and scams in commerce—acts that clearly violate Section 5.   

Yet the rule as written declares unlawful activities that would not violate Section 5’s prohibition on deceptive acts or practices. The rule does not reference “unfairness” or “deception” or note that prohibited activities must be in commerce.

On its face, the draft rule would prohibit a comedian from impersonating Elon Musk; John Ratzenberger from portraying a mailman; or a kid from dressing up as Abraham Lincoln. With the means and instrumentalities provision, it would appear to be “unlawful” to even provide an Abraham Lincoln costume to said child.

Of course, courts would not permit such overbroad applications of the rule. And it seems unlikely that this FTC would spend its resources pursuing cases that the courts would reject out of hand. But rules should be written assuming that some future leadership might seek to abuse them, perhaps to chill unflattering portrayals of national politicians.

The notice of proposed rulemaking (NPRM) states that Section 5 hems in the broad language of the rule. But that gets the purpose of FTC rulemaking backward. The text of the rule should clearly delimit a subset of practices prohibited by Section 5, not the other way around. Indeed, every one of the six past rules created through Section 18 has been written as a subset of Section 5. Every one of them specifies in text that the prohibited conduct is “in commerce.” Each one also describes the prohibited conduct as either an “unfair act or practice” or a “deceptive act or practice” or both.

For example, the Used Motor Vehicle Trade Regulation Rule states:

It is a deceptive act or practice for any used vehicle dealer, when that dealer sells or offers for sale a used vehicle in or affecting commerce as commerce is defined in the Federal Trade Commission Act … to misrepresent the mechanical condition of a used vehicle…

Adding similar language to the draft impersonation rule would be simple and would still achieve the goals of the proceeding. And it would better match the text of the rule to the NPRM’s description of the rule’s scope, helping to cure some of the notice concerns.

Means and Instrumentalities

The second matter is the “means and instrumentalities” provision. I echo the value of having a knowledge requirement. As former FTC Bureau of Consumer Protection (BCP) Director Jessica Rich has noted, there has been debate over the years about the contours of means and instrumentalities, with some commissioners saying that others are using it as a substitute for “aiding and abetting,” a form of secondary liability not within Section 5.

Indeed, some parties in this record have made this mistake. The FTC must clearly articulate the proper scope of the rule, potentially by putting the standard for means and instrumentalities in the rule itself.

To the extent the standard for applying means and instrumentalities liability under Section 5 is itself unclear, it is not a good candidate for rulemaking.

In Antitrust & Competition, Federal Trade Commission, Section 5 , , , ,
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Biweekly FTC Roundup: Bureau of Let’s-Sue-Meta Edition

Daniel J. Gilman —  5 May 2023 — Leave a comment

The Federal Trade Commission (FTC) might soon be charging rent to Meta Inc. The commission earlier this week issued (bear with me) an “Order to Show Cause why the Commission should not modify its Decision and Order, In the Matter of Facebook, Inc., Docket No. C-4365 (July 27, 2012), as modified by Order Modifying Prior Decision and Order, In the Matter of Facebook, Inc., Docket No. C-4365 (Apr. 27, 2020).”

It’s an odd one (I’ll get to that) and the third distinct Meta matter for the FTC in 2023.

Recall that the FTC and Meta faced off in federal court earlier this year, as the commission sought a preliminary injunction to block the company’s acquisition of virtual-reality studio Within Unlimited. As I wrote in a prior post, U.S. District Court Judge Edward J. Davila denied the FTC’s request in late January. Davila’s order was about more than just the injunction: it was predicated on the finding that the FTC was not likely to prevail in its antitrust case. That was not entirely surprising outside FTC HQ (perhaps not inside either), as I was but one in a long line of observers who had found the FTC’s case to be weak.

No matter for the not-yet-proposed FTC Bureau of Let’s-Sue-Meta, as there’s another FTC antitrust matter pending: the commission also seeks to unwind Facebook’s 2012 acquisition of Instagram and its 2014 acquisition of WhatsApp, even though the FTC reviewed both mergers at the time and allowed them to proceed. Apparently, antitrust apples are never too old for another bite. The FTC’s initial case seeking to unwind the earlier deals was dismissed, but its amended complaint has survived, and the case remains to be heard.

Back to the modification of the 2020 consent order, which famously set a record for privacy remedies: $5 billion, plus substantial behavioral remedies to run for 20 years (with the monetary penalty exceeding the EU’s highest by an order of magnitude). Then-Chair Joe Simons and then-Commissioners Noah Phillips and Christine Wilson accurately claimed that the settlement was “unprecedented, both in terms of the magnitude of the civil penalty and the scope of the conduct relief.” Two commissioners—Rebecca Slaughter and Rohit Chopra—dissented: they thought the unprecedented remedies inadequate.

I commend Chopra’s dissent, if only as an oddity. He rightly pointed out that the commissioners’ analysis of the penalty was “not empirically well grounded.” At no time did the commission produce an estimate of the magnitude of consumer harm, if any, underlying the record-breaking penalty. It never claimed to.

That’s odd enough. But then Chopra opined that “a rigorous analysis of unjust enrichment alone—which, notably, the Commission can seek without the assistance of the Attorney General—would likely yield a figure well above $5 billion.” That subjective likelihood also seemed to lack an empirical basis; certainly, Chopra provided none.

By all accounts, then, the remedies appeared to be wholly untethered from the magnitude of consumer harm wrought by the alleged violations. To be clear, I’m not disputing that Facebook violated the 2012 order, such that a 2019 complaint was warranted, even if I wonder now, as I wondered then, how a remedy that had nothing to do with the magnitude of harm could be an efficient one. 

Now, Commissioner Alvaro Bedoya has issued a statement correctly acknowledging that “[t]here are limits to the Commission’s order modification authority.” Specifically, the commission must “identify a nexus between the original order, the intervening violations, and the modified order.” Bedoya wrote that he has “concerns about whether such a nexus exists” for one of the proposed modifications. He still voted to go ahead with the proposal, as did Slaughter and Chair Lina Khan, voicing no concerns at all.

It’s odder, still. In its heavily redacted order, the commission appears to ground its proposal in conduct alleged to have occurred before the 2020 order that it now seeks to modify. There are no intervening violations there. For example:

From December 2017 to July 2019, Respondent also made misrepresentations relating to its Messenger Kids (“MK”) product, a free messaging and video calling application “specifically intended for users under the age of 13.”

. . . [Facebook] represented that MK users could communicate in MK with only parent-approved contacts. However, [Facebook] made coding errors that resulted in children participating in group text chats and group video calls with unapproved contacts under certain circumstances.

Perhaps, but what circumstances? According to Meta (and the FTC), Meta discovered, corrected, and reported the coding errors to the FTC in 2019. Of course, Meta is bound to comply with the 2020 Consent Order. But were they bound to do so in 2019? They’ve always been subject to the FTC’s “unfair and deceptive acts and practices” (UDAP) authority, but why allege 2019 violations now?

What harm is being remedied? On the one hand, there seems to have been an inaccurate statement about something parents might care about: a representation that users could communicate in Messenger Kids only with parent-approved contacts. On the other hand, there’s no allegation that such communications (with approved contacts of the approved contacts) led to any harm to the kids themselves.

Given all of that, why does the commission seek to impose substantial new requirements on Meta? For example, the commission now seeks restrictions on Meta:

…collecting, using, selling, licensing, transferring, sharing, disclosing, or otherwise benefitting from Covered Information collected from Youth Users for the purposes of developing, training, refining, improving, or otherwise benefitting Algorithms or models; serving targeted advertising, or enriching Respondent’s data on Youth users.

There’s more, but that’s enough to have “concerns about” the existence of a nexus between the since-remedied coding errors and the proposed “modification.” Or to put it another way, I wonder what one has to do with the other.

The only violation alleged to have occurred after the 2020 consent order was finalized has to do with the initial 2021 report of the assessor—an FTC-approved independent monitor of Facebook/Meta’s compliance—covering the period from October 25, 2020 to April 22, 2021. There, the assessor reported that:

 …the key foundational elements necessary for an effective [privacy] program are in place . . . [but] substantial additional work is required, and investments must be made, in order for the program to mature.

We don’t know what this amounts to. The initial assessment reported that the basic elements of the firm’s “comprehensive privacy program” were in place, but that substantial work remained. Did progress lag expectations? What were the failings? Were consumers harmed? Did Facebook/Meta fail to address deficiencies identified in the report? If so, for how long? We’re not told a thing. 

Again, what’s the nexus? And why the requirement that Meta “delete Covered Information collected from a User as a Youth unless [Meta] obtains Affirmative Express Consent from the User within a reasonable time period, not to exceed six (6) months after the User’s eighteenth birthday”? That’s a worry, not because there’s nothing there, but because substantial additional costs are being imposed without any account of their nexus to consumer harm, supposing there is one.

Some might prefer such an opt-in policy—one of two that would be required under the proposed modification—but it’s not part of the 2020 consent agreement and it’s not otherwise part of U.S. law. It does resemble a requirement under the EU’s General Data Protection Regulation. But the GDPR is not U.S. law and there are good reasons for that— see, for example, here, here, here, and here.

For one thing, a required opt-in for all such information, in all the ways that it may live on in the firm’s data and models—can be onerous for users and not just the firm. Will young adults be spared concrete harms because of the requirement? It’s highly likely that they’ll have less access to information (and to less information), but highly unlikely that the reduction will be confined to that to which they (and their parents) would not consent. What will be the net effect?

Requirements “[p]rior to … introducing any new or modified products, services, or features” raise a question about the level of grain anticipated, given that limitations on the use of covered information apply to the training, refining, or improving of any algorithm or model, and that products, services, or features might be modified in various ways daily, or even in real time. Any such modifications require that the most recent independent assessment report find that all the many requirements of the mandated privacy program have been met. If not, then nothing new—including no modifications—is permitted until the assessor provides written confirmation that all material gaps and weaknesses have been “fully” remediated.

Is this supposed to entail independent oversight of every design decision involving information from youth users? Automated modifications? Or that everything come to a halt if any issues are reported? I gather that nobody—not even Meta—proposes to give the company carte blanche with youth information. But carte blanque?

As we’ve been discussing extensively at today’s International Center for Law & Economics event on congressional oversight of the commission, the FTC has a dual competition and consumer-protection enforcement mission. Efficient enforcement of the antitrust laws requires, among other things, that the costs of violations (including remedies) reflect the magnitude of consumer harm. That’s true for privacy, too. There’s no route to coherent—much less complementary—FTC-enforcement programs if consumer protection imposes costs that are wholly untethered from the harms it is supposed to address. 

In Antitrust & Competition, Antitrust at the Agencies Roundup, Data Privacy & Security, Facebook, Federal Trade Commission, Mergers & Acquisitions, Monopolization, Platforms, Truth on the Market , , , , , , , , ,
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UK Blocking of Microsoft-Activision Merger Is Anticompetitive and Anti-Innovation

Alden Abbott —  4 May 2023 — Leave a comment

The United Kingdom’s Competition and Markets Authority (CMA) late last month moved to block Microsoft’s proposed vertical acquisition of Activision Blizzard, a video-game developer that creates and publishes games such as Call of Duty, World of Warcraft, Diablo, and Overwatch. Microsoft summarized this transaction’s substantial benefits to video game players in its January 2022 press release announcing the proposed merger.

The CMA based its decision on speculative future harm in UK cloud-based gaming, neglecting the dramatic and far more likely dynamic competitive benefits the transaction would produce in gaming markets. The FTC announced its own challenge to the merger in December and has scheduled administrative hearings into the matter later in 2023.

If not overturned on appeal, the CMA’s decision is likely to reduce future consumer welfare and innovation in the gaming sector, to the detriment of producers and consumers.

Discussion

In its press release, the CMA stressed harm to future UK consumers of remote-server-based “cloud gaming” services as the basis for opposing the merger:

Microsoft has a strong position in cloud gaming services and the evidence available to the CMA showed that Microsoft would find it commercially beneficial to make Activision’s games exclusive to its own cloud gaming service.

Microsoft already accounts for an estimated 60-70% of global cloud gaming services and has other important strengths in cloud gaming from owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming).

The deal would reinforce Microsoft’s advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch, and World of Warcraft. The evidence available to the CMA indicates that, absent the merger, Activision would start providing games via cloud platforms in the foreseeable future.

The CMA’s discussion ignores a number of salient facts regarding cloud gaming. Cloud gaming has not yet arrived as a major competitor to device-based gaming, as Dirk Auer points out (see also here regarding problems that have constrained the rapid emergence of cloud gaming). Google, for example, discontinued its Stadia cloud-gaming service just over three months ago, “after having failed to gain the traction that the company was expecting” (see here). Although cloud gaming does not require the purchase of specific gaming devices, it does require substantial bandwidth, stable internet connections, and subscriptions to particular services.

What’s more, Microsoft offered the CMA significant concessions to ensure that leading Activision games would remain available on other platforms for at least 10 years (see here, for example). The CMA itself acknowledged this in announcing its opposition to the merger, but rejected Microsoft’s proposals, stating:

Accepting Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA. By contrast, preventing the merger would effectively allow market forces to continue to operate and shape the development of cloud gaming without this regulatory intervention.

Ironically, the real “regulatory intervention” that threatens to hinder market forces is the CMA’s blocking of this transaction, which (as a vertical merger) does not eliminate any direct competition and, to the contrary, promises to reinvigorate direct competition with Sony’s PlayStation. As Aurelien Portuese explains:

Sony is cheering on . . . attempt[s] to block Microsoft’s acquisition of Activision. Why? The proposed merger is a bid to offer a robust platform with high-quality games and provide resources for creators to produce more gaming innovation. That’s great for gamers, but threatening to Japanese industry titans Sony and Nintendo, because it would also create a company capable of competing with them more effectively.

If antitrust officials block the merger, they would be giving Sony and its 70 percent share of the global gaming console market the upper hand while preventing Microsoft and its 30 percent market share from effectively challenging the incumbent. That would be a complete reversal of competition policy.

The Japanese gaming industry dominates the world—and yet, U.S. antitrust officials may very well further cement this already decades-long dominance by blocking the Activision-Microsoft merger. Wielding antitrust to impose a twisted conception of domestic competition at the expense of global competitiveness must end, and the proposed Activision-Microsoft combination exemplifies why.

Furthermore, Portuese debunks the notion that Microsoft would have a future incentive to deny access to Activision’s high-selling Call of Duty franchise, reemphasizing the vigorous nature of gaming competition post-merger:

[T]he very idea that Microsoft would want to foreclose access to “Call of Duty” for PlayStation users is controversial. Microsoft would rationally have little incentive to reduce sales across platforms of a popular game. Moreover, Microsoft’s competitive position is weaker than the FTC seems to think: It faces competition from gaming industry incumbents such as Sony, Nintendo, and Epic Games, and from other large tech companies such as Apple, Amazon, Google, Tencent, and Meta.

In short, there are strong reasons to believe that gaming competition would be enhanced by the Microsoft-Activision merger. What’s more, the merger would likely generate efficiencies of integration, such as the promotion of cross-team collaboration (see here, for example). Notably, in announcing its decision to block the merger, even the CMA acknowledged “the benefit of having Activision’s content available on [Microsoft’s subscription service] Game Pass.” In contrast, theoretical concerns about merger-related potential threats to future cloud-gaming competition are uncertain and not well-grounded.

Conclusion

The CMA should not have blocked the merger. The agency’s opposition to this transaction reflects a blinkered focus on questionable possible future harm in a not-yet developed market, and a failure to properly weigh likely substantial near-term competitive benefits in a thriving existing market.

This is the sort of decision that tends to discourage future procompetitive efficiencies-generating high-tech acquisitions, to the detriment of producers and consumers.

The threat to future vertical mergers that bring together complementary assets to generate attractive new offerings for consumers in dynamically evolving market sectors is particularly unfortunate. Competition agencies should reflect on this reality and rethink their approaches. (FTC, are you paying attention?)

In the meantime, the UK court should carefully assess and, hopefully, side with Microsoft in its appeal of this unfortunate administrative ruling.

In Antitrust & Competition, Federal Trade Commission, Mergers & Acquisitions, Platforms, Truth on the Market, United Kingdom , , ,
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Artificial Intelligence Meets Organic Folly

Daniel J. Gilman —  3 May 2023 — Leave a comment

In a May 3 op-ed in The New York Times, Federal Trade Commission (FTC) Chair Lina Khan declares that “We Must Regulate A.I. Here’s How.” I’m concerned after reading it that I missed both the regulatory issue and the “here’s how” part, although she does tell us that “enforcers and regulators must be vigilant.”

Indeed, enforcers should be vigilant in exercising their established authority, pace not-a-little controversy about the scope of the FTC’s authority. 

Most of the chair’s column reads like a parade of horribles. And there’s nothing wrong with identifying risks, even if not every worry represents a serious risk. As Descartes said—or, at least, sort of implied—feelings are never wrong, qua feelings. If one has a thought, it’s hard to deny that one is having it. 

To be clear, I can think of non-fanciful instantiations of the floats in Khan’s parade. Artificial intelligence (AI) could be used to commit fraud, which is and ought to be unlawful. Enforcers should be on the lookout for new forms of fraud, as well as new instances of it. Antitrust violations, likewise, may occur in the tech sector, just as they’ve been found in the hospital sector, electrical manufacturing, and air travel. 

Tech innovations entail costs as well as benefits, and we ought to be alert to both. But there’s a real point to parsing those harms from benefits—and the actual from the likely from the possible—if one seeks to identify and balance the tradeoffs entailed by conduct that may or may not cause harm on net.  

Doing so can be complicated. AI is not just ChatGPT; it’s not just systems that employ foundational large language learning models; and it’s not just systems that employ one or another form of machine learning. It’s not all (or chiefly) about fraud. The regulatory problem is not just what to do about AI but what to do about…what?

That is, what forms, applications, or consequences do we mean to address, and how and why? If some AI application costs me my job, is that a violation of the FTC Act? Some other law? Abstracting from my own preferences and inflated sense of self-importance, is it a federal issue? 

If one is to enforce the law or engage in regulation, there’s a real need to be specific about one’s subject matter, as well as what one plans to do about it, lest one throw out babies with bathwater. Which reminds me of parts of a famous (for certain people of a certain age) essay in 1970s computer science: Drew McDermott’s, “Artificial Intelligence Meets Natural Stupidity,” which is partly about oversimplification in characterizing AI.  

The cynic in me has three basic worries about Khan’s FTC, if not about AI generally:

  1. Vigilance is not so much a method as a state of mind (or part of a slogan, or a motto, sometimes put in Latin). It’s about being watchful.
  2. The commission’s current instantiation won’t stop at vigilance, and it won’t stick to established principles of antitrust and consumer-protection law, or to its established jurisdiction.
  3. Doing so without being clear on what counts as an actionable harm under Section 5 of the FTC Act risks considerable damage to innovation, and to the consumer benefits produced by such innovation. 

Perhaps I’m not being all that cynical, given the commission’s expansive new statement of enforcement principles regarding unfair methods of competition (UMC), not to mention the raft of new FTC regulatory proposals. For example, the Khan’s op-ed includes a link to the FTC’s proposed commercial surveillance and data security rulemaking, as Khan notes (without specifics) that “innovative services … came at a steep cost. What were initially conceived of as free services were monetized through extensive surveillance of people and businesses that used them.”

That reads like targeted advertising (as opposed to blanket advertising) engaged in cosplay as the Stasi:

I’ll never talk. 

Oh, yes, you’ll talk. You’ll talk or else we’ll charge you for some of your favorite media.

Ok, so maybe I’ll talk a little. 

Here again, it’s not that one couldn’t object to certain acquisitions or applications of consumer data (on some or another definition of “consumer data”). It’s that the concerns purported to motivate regulation read like a laundry list of myriad potential harms with barely a nod to the possibility—much less the fact—of benefits. Surveillance, we’re told in the FTC’s notice of proposed rulemaking, involves:

…the collection, aggregation, retention, analysis, transfer, or monetization of consumer data and the direct derivatives of that information. These data include both information that consumers actively provide—say, when they affirmatively register for a service or make a purchase—as well as personal identifiers and other information that companies collect, for example, when a consumer casually browses the web or opens an app.

That seems to encompass, roughly, anything one might do with data somehow connected to a consumer. For example, there’s the storage of information I voluntarily provide when registering for an airline’s rewards program, because I want the rewards miles. And there’s the information my physician collects, stores, and analyzes in treating me and maintaining medical records, including—but not limited to—things I tell the doctor because I want informed medical treatment.

Anyone might be concerned that personal medical information might be misused. It turns out that there are laws against various forms of misuse, but those laws are imperfect. But are all such practices really “surveillance”? Don’t many have some utility? Incidentally, don’t many consumers—as studies indicate—prefer arrangements whereby they can obtain “content” without a monetary payment? Should all such practices be regulated by the FTC without a new congressional charge, or allocated under a general prohibition of either UMC  or “unfair and deceptive acts or practices” (UDAP)? The commission is, incidentally, considering either or both as grounds. 

By statute, the FTC’s “unfairness” authority extends only to conduct that “causes or is likely to cause substantial injury to consumers which is not reasonably avoided by consumers themselves.” And it does not cover conduct where those costs are “outweighed by countervailing benefits to consumers or competition.” So which ones are those?

Chair Khan tells us that we have “an online economy where access to increasingly essential services is conditioned on widespread hoarding and sale of our personal data.”  “Essential” seems important, if unspecific. And “hoarding” seems bad, if undistinguished from legitimate collection and storage. It sounds as if Google’s servers are like a giant ball of aluminum foil distributed across many cluttered, if virtual, apartments. 

Khan breezily assures readers that the:

…FTC is well equipped with legal jurisdiction to handle the issues brought to the fore by the rapidly evolving A.I. sector, including collusion, monopolization, mergers, price discrimination and unfair methods of competition.

But I wonder whether concerns about AI—both those well-founded and those fanciful—all fit under these rubrics. And there’s really no explanation for how the agency means to parse, say, unlawful mergers (under the Sherman and/or Clayton acts) from lawful ones, whether they are to do with AI or not.

We’re told that a “handful of powerful businesses control the necessary raw materials that start-ups and other companies rely on to develop and deploy A.I. tools.” Perhaps, but why link to a newspaper article about Google and Microsoft for “powerful businesses” without establishing any relevant violations of the law? And why link to an article about Google and Nvidia AI systems—which are not raw materials—in suggesting that some firms control “essential” raw materials (as inputs) to innovation, without any further explanation? Was there an antitrust violation? 

Maybe we already regulate AI in various ways. And maybe we should consider some new ones. But I’m stuck at the headline of Khan’s piece: Must we regulate further? If so, how? And not incidentally, why, and at what cost? 

In Antitrust & Competition, Data Privacy & Security, Federal Trade Commission, Section 5, Truth on the Market , , , , ,
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Four Horsemen of the Bureaucratic Apocalypse Come for AI

Alden Abbott —  28 April 2023

Four prominent horsemen of the Biden administration’s bureaucratic apocalypse—the Federal Trade Commission (FTC), U.S. Justice Department (DOJ) Civil Rights Division (DOJ), Consumer Financial Protection Bureau (CFPB), and the U.S. Equal Employment Opportunity Commission (EEOC)—came together April 25 to issue a joint statement pledging vigorous enforcement against illegal activity perpetrated through the use of artificial intelligence (AI) and automated systems.

AI is, of course, very much in the news these days. And when AI is used to violate the law, it obviously is fully subject to enforcement scrutiny. But why make a big splash announcement merely to state a truism?

One suspects there is more to the story. The language of the joint statement, together with the FTC’s accompanying press release, provide some hints. Those hints point to a campaign by the administration to effectuate de facto bureaucratic regulation of AI through overly expansive interpretations of existing law. The following discussion will focus on the FTC’s role in this initiative.

Discussion

The FTC’s brief press release embodies a broad view of AI-related wrongdoing. It notes that the four agencies “pledged today to uphold America’s commitment to the core principles of fairness, equality, and justice” as emerging automated systems, including AI, “become increasingly common in our daily lives – impacting civil rights, fair competition, consumer protection, and equal opportunity.” The release adds that the agencies have “resolved to vigorously enforce their collective authorities and to monitor the development and use of automated systems.”

The FTC’s references to ”fairness” and “fair competition” by implication allude to the fatally flawed November 2022 FTC Policy Statement on Unfair Methods of Competition (UMC). That policy statement has been roundly criticized (see the thoughtful critiques in the Truth on the Market symposium on the UMC statement) for rejecting the venerable consumer-welfare standard that had long guided FTC competition-enforcement policy, and replacing it with subjective notions of “unfair” conduct that could arbitrarily be invoked by the Commission to attack any conduct it found distasteful. (See then-Commissioner Christine Wilson’s dissenting statement.) Such an approach undermines the rule of law, ignores efficiencies, promotes uncertainty, and thereby harmfully interferes with welfare-promoting business conduct.

The specter of arbitrary FTC challenges to AI-related competitive practices that are misunderstood by the commission is obvious. Arbitrary legal attacks on AI practices on dubious subjective grounds could forestall a substantial amount of welfare-generating innovation in the AI space. This would reduce economic wealth creation and harm American technological progress in AI, in addition to weakening the U.S. efforts to prevent China from becoming dominant in this key realm (see here for a discussion of the U.S.-China AI rivalry).

The statement’s announcement that the agencies intend “to monitor the development and use of automated systems” is likewise troublesome. In the FTC’s case, it suggests a potential interest in deciding what forms of AI “development and use” are appropriate. Although rulemaking is not mentioned, the threat of litigation being brought by one or more of the agencies against certain disfavored AI implementations is real.

In particular, the threat of FTC UMC investigations and prosecutions could shape the nature of AI research by directing it away from innovations that the commission dislikes. This would be a form of “regulation by enforcement oversight” that could substantially slow progress in AI and thereby reduce economic growth.

The joint statement reinforces this problematic reading of the FTC’s press release. It stresses the FTC’s finding that:

AI tools can be inaccurate, biased, and discriminatory by design and incentivize relying on increasingly invasive forms of commercial surveillance.

The FTC, however, lacks a general statutory authority to combat “discrimination,” and its authority to attack forms of commercial surveillance likewise is highly dubious. The FTC’s proposed commercial surveillance and data security rulemaking, for example, flunks cost-benefit analysis and has other flaws that would prevent it from passing legal muster; see more here.

The notion that the FTC may challenge AI innovations it disfavors by bringing new questionable “discrimination” suits, and by concocting legally indefensible rule-based surveillance and data-security obligations, is a source of serious concern. As in the case of the UMC policy statement, the FTC would be taking novel actions beyond the scope of its congressionally granted authorities. Even if the courts eventually rejected such FTC initiatives, the costs reflected in foregone welfare-enhancing improvements in AI capabilities would be considerable.

The joint statement’s discussion of the CFPB, EEOC, and the DOJ Civil Rights Division less obviously supports the proposition that those agencies will be encouraged to act beyond their statutory mandates. It is notable, however, that various commentators have raised concerns about regulatory overreach by these three entities; with regard to the CFPB, for example, see here, here, and here.

Nevertheless, it is concerning that the administration would assign high priority to oversight of AI—an area of enormous technological and economic potential—to agencies that are concerned primarily with civil-rights issues and with consumer protection in the realm of financial services. The potential for regulatory mission creep that would harm American AI development and the dynamic competition it sparks is obvious.

Conclusion

The joint statement on AI and automated systems should be seen as a yellow (if not a red) warning flag that Biden administration efforts to micromanage AI development may be in the works. Particular attention should focus on the FTC, which has the potential to seriously undermine beneficial AI development through ill-conceived litigation and regulatory initiatives.

This is a serious matter. AI is of major consequence in the global political economy, particularly given China’s interest in the field. One can only hope that the FTC and the Biden administration will keep this sober reality in mind before they gin up new misguided forms of regulatory interference in the evolution of AI.

In Federal Trade Commission, Financial Regulation, Truth on the Market , , , ,
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Biweekly FTC Roundup: But Wait, There’s More Edition

Daniel J. Gilman —  21 April 2023

More, and not just about noncompetes, but first, yes (mea culpa/s’lach lanu), more about noncompetes.

Yesterday on Truth on the Market, I provided an overview of comments filed by the International Center for Law & Economics on the Federal Trade Commission’s (FTC) proposed noncompete rule. In addition to ICLE’s Geoffrey Manne, Dirk Auer, Brian Albrecht, Gus Hurwitz, and myself, we were joined in our comments by 25 other leading academics and former agency officials, including former chief economists at the U.S. Justice Department’s (DOJ) Antitrust Division and a former director of the FTC’s Bureau of Economics.

Not to beat a dead horse, but this is important, as it’s the FTC’s second-ever attempt to promulgate a competition rule under a supposed general rulemaking authority, and the first since the unenforced and long-ago rescinded rule on the Men’s and Boys’ Tailored Clothing Industry, initially adopted in 1967. Not incidentally, this would be a foray into regulation of the terms of labor agreements across the entire economy, on questionable authority (and certainly no express charge from Congress).

I’d also like to highlight some other comments of interest. The Global Antitrust Institute submitted a very thorough critique covering both the economic literature and fundamental issues of antitrust law, as did the Mercatus Center. Washington Legal Foundation covered constitutional and jurisdictional questions, as did comments from TechFreedom. Another set of comments from TechFreedom suggested that the FTC might consider regulating some noncompetes under its Magnusson-Moss Act consumer-protection rulemaking authority, at least after development of an appropriate record.

Asheesh Agarwal submitted comments reviewing legal concerns and risks to the FTC’s authority on behalf of a number of FTC alumni, including, among others, two former directors of the FTC’s Bureau of Economics; two former FTC general counsels; a former director of the FTC’s Office of Policy Planning; a former FTC chief technologist; a former acting director of the FTC’s Bureau of Consumer Protection; and me.

American Bar Association comments that critique the use of noncompetes for low-wage workers but stop short of advocating FTC regulation are here. For an academic pro-regulatory perspective, there were comments submitted by professors Mark Lemley and Orly Lobel.

For additional Truth on the Market posts on the rulemaking, I’d point to those by Alden Abbott, Brian Albrecht (and here), Corbin Barthold, Gus Hurwitz, Richard Pierce Jr., and yours truly. Also, a Wall Street Journal op-ed by Eugene Scalia and Svetlana Gans.

That’s a lot, I know, but these really do explore different issues, and there really are quite a few of them. No lie.

Bringing the Axon Down

As a reward for your patience—or your ability to skip ahead—now for the week’s other hot issue: the U.S. Supreme Court’s decision in Axon Enterprise Inc. v. FTC, which represented a 9-0 loss for the commission (and for the U.S. Securities and Exchange Commission). Does anybody remember the days—not so long ago, if not under current leadership—when the commission would win unanimous court decisions? Phoebe Putney, anyone?

A Bloomberg Law overview of Axon quoting my ICLE colleague Gus Hurwitz is here.

The issue in Axon might seem a narrow one at the intersection of administrative and constitutional law, but bear with me. Enforcement of the FTC Act and the SEC Act often follow a familiar pattern: an agency brings a complaint that, if not settled, may be heard by an administrative law judge (ALJ) in a hearing inside the agency itself. In the case of the FTC, a decision by the ALJ can be appealed to the commission itself. Thus, if the commission does not like the ALJ’s decision, it can appeal to itself.

As a general matter, once embroiled in such “agency process,” a defendant must “exhaust” the administrative process before challenging the complaint (or appealing an ALJ or commission decision) in federal court. That’s known as the Doctrine of Exhaustion of Administrative Remedies (see, e.g., McKart v. United States). The doctrine helps to conserve judicial resources, as the courts do not have to consider every challenge (including procedural ones) that arises in the course of administrative enforcement.

The disadvantage, for defendants, is that they may face a long and costly process of agency adjudication before they ever get before a federal judge (some FTC Act complaints initially are brought in federal court, but set that aside). That can exert substantial pressure to settle, even when defendants think the government’s case is a weak one.

At issue in Axon, was the question of whether a defendant had to exhaust agency process on the merits of an agency complaint before bringing a constitutional challenge to the agency’s enforcement action. The agencies said yes, natch. The unanimous Supreme Court said no.

To put the question differently, do the federal district courts have jurisdiction to hear and resolve defendants’ constitutional challenges independent of exhaustion? “The answer is yes,” said the Supreme Court of the United States. According to the court—and reasonably—the agencies don’t have any special expertise on such constitutional questions, even if they have expertise in, say, competition or securities policy. On fundamental constitutional questions, defendants can get their day in court without exhausting agency process.

So, what difference does that make? That remains to be seen, but perhaps more than it might seem. On the one hand, the Axon decision did not repudiate the FTC’s substantive expertise in antitrust (or consumer protection) or its authority to enforce the FTC Act. On the other hand, enforcement is costly for enforcers, and not just defendants, and the FTC is famously—as evidenced by its own recent pleas to Congress for more funding—resource-constrained, to an extent that is said to impair its ability to enforce the FTC Act.

As I noted yesterday, earlier this week, the commission testified that:

While we constantly strive to enforce the law to the best of our capabilities, there is no doubt that—despite the much-needed increased appropriations Congress has provided in recent years—we continue to lack sufficient funding.

The Axon decision means, among other things, that the FTC’s average litigation costs are bound to rise, as we’ll doubtless see more constitutional challenges.

But perhaps there’s more to it than that. At least two of the nine justices—Thomas, in a concurring opinion, and Gorsuch, concurring with the decision—signaled an appetite to further rein-in the agencies. And doing so would be part-and-parcel with a judicial trend against deference to administrative agencies. For example, in AMG Capital Management, the Supreme Court narrowly interpreted the commission’s power to obtain equitable remedies, and specifically monetary remedies, repudiating established commission practice. And in West Virginia v. EPA, the court demonstrated concern with the breadth of the administrative state; specifically, it rejected the proposition that courts defer to agency interpretations of vague grants of statutory authority, where such interpretations are of major economic and political import.

Where this will all end is anybody’s guess. In the near term, Axon will impose extra costs on the FTC. And the commission’s broader bid to extend its reach faces an uphill battle. 

In Administrative Law, Antitrust & Competition, Antitrust at the Agencies Roundup, Antitrust Division, Federal Trade Commission, Justice Department, Section 5, Truth on the Market, Vertical Restraints , , , , , ,
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The FTC’s Noncompete Rule: A Bridge Too Far

Daniel J. Gilman —  20 April 2023

As I noted in January, the Federal Trade Commission’s (FTC) proposal to ban nearly all noncompete agreements raises many questions. To be sure, there are contexts—perhaps many contexts—in which noncompete agreements raise legitimate policy concerns. But there also are contexts in which they can serve a useful procompetitive function. A per se ban across all industries and occupations, as the FTC’s notice of proposed rulemaking (NPRM) contemplates, seems at the least overly broad, and potentially a dubious and costly policy initiative. 

Yesterday was the deadline to submit comments on the noncompete NPRM, and the International Center for Law & Economics and 30 distinguished scholars of law & economics—including leading academics and past FTC officials—did just that. I commend the comments to you, and not just because I drafted a good portion of them.

Still, given that we had about 75 pages of things to say about the proposal, an abridged treatment may be in order. The bottom line:

[W]e cannot recommend that the Commission adopt the proposed Non-compete Clause Rule (‘Proposed Rule’). It is not supported by the Commission’s experience, authority, or resources; neither is it supported by the evidence—empirical and otherwise—that is reviewed in the NPRM.    

In no particular order, I will summarize some of our comments on key issues.

Not All Policy Concerns Are Antitrust Concerns

As the NPRM acknowledges, litigation over noncompetes focuses mostly on state labor and contract-law issues. And the federal and state cases that do consider specific noncompetes under the antitrust laws have nearly all found them to be lawful.

That’s not to say that there cannot be specific noncompetes in specific labor markets that run afoul of the Sherman Act (or the FTC Act). But antitrust is not a Swiss Army Knife, and it shouldn’t be twisted to respond to every possible policy concern.

Will Firms Invest Less in Employees?

While the NPRM amply catalogs potential problems associated with non-competes, [non-competes], like other vertical restrictions in labor agreements, are not necessarily inefficient, anticompetitive, or harmful to either labor or consumer welfare; they can be efficiency-enhancing and pro-competitive . . . [and] can solve a range of potential hold-up problems in labor contracting.

For example, there are circumstances in which both firms and their employees might benefit from additional employee training. But employees may lack the resources needed to acquire the right training on their own. Their employers might be better resourced, but might worry about their returns on investments in employee training.

Labor is alienable; that is, employees can walk out the door, and they can do so before firm-sponsored training has paid adequate dividends. Hence, they might renegotiate their compensation before it has paid for itself; or they might bring their enhanced skills to a competing firm. Knowing this, firms might tend to underinvest in employee training, which would lower their productivity. Noncompetes can mitigate this hold-up problem, and there is empirical evidence that they do just that.

The Available Literature Is Decidedly Mixed

A per se ban under the antitrust laws would seem to require considerable case law and a settled, and relatively comprehensive body of literature demonstrating that noncompetes pose significant harms to competition and consumers in nearly all cases. There isn’t.

First, “there appear to be numerous and broad gaps in the literature.” For example, most policy options, industries, and occupations haven’t been studied at all. And there’s only a single paper looking at downstream price effects in goods and services markets—one that doesn’t appear to be at all generalizable.

In addition, the available results don’t all impugn noncompetes; they’re mixed. For example, while some studies suggest certain classes of workers see increased wages, on average, when noncompete “enforceability” is reduced, others report contexts in which enforcement is associated with rising wages, depending on the occupation (there are studies of physicians, CEOs, and financial advisors) or even the timing with which workers are made aware of noncompetes.

It’s complicated. But as a 2019 working paper from the FTC’s own Bureau of Economics observed, the…

more credible empirical studies tend to be narrow in scope, focusing on a limited number of specific occupations . . . or potentially idiosyncratic policy changes with uncertain and hard-to-quantify generalizability.

So, for example, a study of the effects of an idiosyncratic statutory change regarding noncompetes in certain parts of the tech sector, but not others, in Hawaii (which doesn’t have much of a tech sector) might tell us rather little about our policy options more broadly.

Being the Primary Federal Labor Regulator Requires Resources

There are also reasons to question the FTC’s drive to be the federal regulator of noncompetes and other vertical restraints in labor agreements. For one thing, the commission has very little experience with noncompetes, although it did (rush to?) settle three complaints involving noncompetes the day before they issued the NPRM.

All three (plus a fourth settled since) involved very specific facts and circumstances. Three of the four were situated in a single industry: the glass-container industry. And, as recently resigned Commissioner Christine Wilson explained in dissent, the opinions and orders settling the matters did little to explain how the conduct at issue violated the antitrust laws. In one complaint, the alleged restrictions on security guards seemed excessive and unreasonable (as a state court found them to be, under state law), but that doesn’t mean that they violated the FTC Act.

Moreover, this would be a sweeping regulation involving, based on the commission’s own estimates, some 30 million current labor agreements and several hundred billion dollars in annual wage effects. Just this week, the commission once again testified to Congress that it lacks adequate personnel and other resources to execute the laws it plainly is charged to enforce already. So, for example:

 [w]hile we constantly strive to enforce the law to the best of our capabilities, there is no doubt that—despite the much-needed increased appropriations Congress has provided in recent years—we continue to lack sufficient funding.

Given these limitations, it’s hard to understand the pitch to regulate labor terms across the entire economy without any congressional charge to do so. And that’s leaving aside the FTC’s recent and problematic proposal to issue sweeping regulations for digital privacy, as well. Not incidentally, this is an active area of state policy reform, and an issue that’s currently before Congress. 

A Flimsy Basis for Authority

In the end, the FTC’s claimed authority to issue competition regulations under its general “unfair methods of competition” authority (Section 5 of the FTC Act) and a single clause about regulations (for some purpose) in Section 6(g) of the FTC Act is both contentious and dubious.

While it’s not baseless, administrative-law scholars doubt the FTC’s position, which rests on a dated opinion from the U.S. Circuit Court of Appeals for the D.C. Circuit that’s plainly out of step with recent Supreme Court decisions, which show less deference to agency authority (like the Axon decision just last week, or last year’s West Virginia v. EPA), as well as more general trends in statutory construction.  

All in all, the commission’s proposed rule would be a bridge too far—or several of them. The agency isn’t just risking the economic costs of a spectacularly overbroad rule and its own much-needed agency resources. Court challenges to such a rule are inevitable, and place both the substance of a noncompete rule and the FTC’s own authority at risk.  

In Antitrust & Competition, Federal Trade Commission, Section 5, Truth on the Market, Vertical Restraints , , , , ,
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Biweekly FTC Roundup: Antitrust Woodstock Edition

Daniel J. Gilman —  7 April 2023

Last week’s roundup was postponed because I was kibbitzing at the spring meeting of the American Bar Association (ABA) Antitrust Section. For those outside the antitrust world, the spring meeting is the annual antitrust version of Woodstock. For those inside the antitrust world: Antitrust Woodstock is not really a thing. At the planetary-orbit level, the two events are similar in that they comprise times that are alternately engaging, interesting, fun, odd, and stultifying. There were more than 3,500 competition lawyers and economists in one place, if not one room. Imagine it, then pour yourself a good stiff drink. 

With apologies—this says nothing flattering about me—my spring meeting highlight was a bit of a Freudian slip by Bill Baer, the former head of the U.S. Justice Department’s (DOJ) Antitrust Division. Voicing support for the Biden administration’s antitrust policies and personnel, Baer expressed admiration for the Tim Wu book “The Curse of Business.” A most excellent and fitting title, if not precisely the one on the book’s cover. Your (occasionally) humble antediluvian scribe learnt about antitrust law and economics so long ago that I still imagine that consumer welfare matters (many consumers are actually people, it turns out) and that antitrust is supposed to protect commerce, not curse it.  

As a former enforcer with friends still inside the building, not a few sessions seemed to me very, very enforcement-friendly, as if someone had confused a perspective with the perspective. The enforcers were very much on-message. It’s full speed ahead on enforcement and regulation, some conspicuous setbacks in the courts notwithstanding. 

Curiously, they seem to regard some of the losses as wins. In February, I briefly described U.S. District Court Judge Edward J. Davila’s order denying the Federal Trade Commission’s (FTC) request for a preliminary injunction to block Meta’s proposed acquisition of virtual-reality fitness-app maker Within. The denial was not so preliminary, as it rested on a finding that “the FTC has not demonstrated a likelihood of ultimate success on the merits.” Reading the writing on the wall, and in the order, the FTC then dropped the matter.

At the spring meeting, however, we heard detailed and satisfied reports about the court endorsing the FTC’s theory of the case as a potentially viable theory, but only clipped, sotto voce recognition of the fact that they lost. That is, a federal district court, setting no precedent, recognized that there were such things as viable potential competition cases. Right. And the FTC’s case was not one of them. Is there such a thing as a Pyrrhic loss? 

More FTC Departures Made Public

Everybody rightly notices the appointees—Commissioner Christine S. Wilson’s last day coincided with the last day of the Spring Meeting – but let’s not forget about the staff. Michael Vita, deputy director of the Bureau of Economics, retired, and that’s a loss for the FTC. Some of Mike’s work is still posted here. Note that Mike helped to kick off the FTC’s famous hospital-merger retrospective study program before it was a program. He did rather a lot. Cheers to Mike.

I also learned about the departure of Holly Vedova, Chair Lina Khan’s first director of the Bureau of Competition, and author of the fabled “Vedova letters.” And Elizabeth Kraus, who did a great deal for the FTC’s international program, is also out the door, as was Randy Tritell earlier in the administration. 

A Not Completely Unreasonable Click-to-Cancel Rule

Some version of this could be right, if not this one.

On March 23, the FTC proposed a “click to cancel” amendment to its Negative Option Rule. I’ll discuss this more fully in a later post, but for now, I’d suggest two high-level observations:

  1. The proposed rule is overly broad; but
  2. There is at least a real problem in the area, and one that might be properly amenable to FTC consumer-protection rulemaking.

That is, firms sometimes make it so hard to cancel various types of contracts—such as automatic renewals—that there’s one or another species of fraud at work. The initial offer was deceptive, or they’re imposing an undue (and unforeseen) tax on consumers, or they’re foisting a supposed contract-in-perpetuity on unsuspecting consumers, and collecting funds without real authorization. Or all of the above. All actionable, and perhaps there’s a viable and well-tailored rule in there somewhere.

That doesn’t mean that the FTC has proposed the right or correctly focused regulation, but there is, at least, a there there. I recommend Commissioner Wilson’s final dissent, alas, for more. 

FTC Scores a Win, Against Itself

Spoiler Alert: Having lost its case against the Illumina-Grail merger before the commission’s own administrative law judge (ALJ), the FTC appealed to itself, found itself convincing, and ordered Illumina to divest Grail. In doing so, the commission mirrored last September’s decision from the European Commission.

I wrote about the case here. I won’t pretend to have evaluated all the facts and circumstances of what’s been, after all, a rule-of-reason case. Still, I’ll note again that this was a vertical acquisition with some obvious efficiencies and a not-so-obvious foreclosure argument. The commission’s press release says that bringing the early-cancer-detection test to market is extremely important, and potentially life-saving. We’re also told that:

Illumina has an enormous financial incentive to ensure that Grail wins the innovation race in the U.S. MCED market. Illumina stands to earn substantially more profit on the sale of GRAIL tests than it does by supporting rival test developers.

So . . . that seems like a pretty good argument on behalf of the merger. Rather than recapitulate the whole thing, I’ll point readers to Alden Abbott’s ToTM discussion earlier this week, another by Thom Lambert. an amicus brief by my International Center for Law & Economics colleagues Geoff Manne and Gus Hurwitz (plus a number of other law & economics scholars), and a thorough critique of the FTC’s case by Bruce Kobayashi (former director of the FTC’s Bureau of Economics) and Tim Muris (former FTC chairman).

But Elsewhere, the Commission Won’t Just Take the Win

One more quick note—this one on the now-abandoned Altria-Juul deal—but first a confession of priors: I hate tobacco and I miss my dad, a long-time heavy smoker who did, indeed, fall victim to lung cancer. Too much information, perhaps.

With that said (or typed), this case wasn’t about cigarettes. Tobacco products are lawful, there’s no shortage of information about tobacco risks, and the FTC is not a health and safety regulator.

There’s a lot about the case that’s complicated, but one issue that remains curious is the FTC’s persistence, given that, notwithstanding the loss before its own ALJ, the commission seems to have gotten more or less everything it sought in its notice of contemplated relief(part of the initial complaint):

  • The transaction has been abandoned;
  • Altria has divested itself of its stake in Juul;
  • The parties have agreed to terminate the various challenged agreements associated with the now-abandoned transaction (including a challenged agreement not to compete, in anticipation of the now-abandoned acquisition);
  • The parties have proposed an enforceable (by the FTC) agreement not to enter into any new transaction in the relevant market without prior approval;
  • The parties have proposed to provide prior notice of any other transactions in the relevant market; and
  • The parties have proposed to provide for outside monitoring, at their own expense, for a period of time.

So why aren’t they taking the win? Khan and Assistant Attorney General Jonathan Kanter seem fond of saying that they’re not scared of losing, but they shouldn’t be scared of winning either, should they?

The FTC’s raft of proposed rulemakings seems to suppose that they can enforce rules and orders, with substantial fines at their disposal, and in this matter, they would have been aided in monitoring by interested third parties in the  industry. So, as the young’uns were asking last evening: why is this night different from all other nights?

In Antitrust & Competition, Antitrust at the Agencies Roundup, Antitrust Division, Facebook, Federal Trade Commission, Justice Department, Mergers & Acquisitions , , , ,
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Why Competition Enforcers’ Annual Roundtable Should Focus on Competition Advocacy and Combating Anticompetitive Market Distortions

Alden Abbott —  22 March 2023

Spring is here, and hope springs eternal in the human breast that competition enforcers will focus on welfare-enhancing initiatives, rather than on welfare-reducing interventionism that fails the consumer welfare standard.

Fortuitously, on March 27, the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) are hosting an international antitrust-enforcement summit, featuring senior state and foreign antitrust officials (see here). According to an FTC press release, “FTC Chair Lina M. Khan and DOJ Assistant Attorney General Jonathan Kanter, as well as senior staff from both agencies, will facilitate discussions on complex challenges in merger and unilateral conduct enforcement in digital and transitional markets.”

I suggest that the FTC and DOJ shelve that topic, which is the focus of endless white papers and regular enforcement-oriented conversations among competition-agency staffers from around the world. What is there for officials to learn? (Perhaps they could discuss the value of curbing “novel” digital-market interventions that undermine economic efficiency and innovation, but I doubt that this important topic would appear on the agenda.)

Rather than tread familiar enforcement ground (albeit armed with novel legal theories that are known to their peers), the FTC and DOJ instead should lead an international dialogue on applying agency resources to strengthen competition advocacy and to combat anticompetitive market distortions. Such initiatives, which involve challenging government-generated impediments to competition, would efficiently and effectively promote the Biden administration’s “whole of government” approach to competition policy.

Competition Advocacy

The World Bank and the Organization for Economic Cooperation and Development (OECD) have jointly described the role and importance of competition advocacy:

[C]ompetition may be lessened significantly by various public policies and institutional arrangements as well [as by private restraints]. Indeed, private restrictive business practices are often facilitated by various government interventions in the marketplace. Thus, the mandate of the competition office extends beyond merely enforcing the competition law. It must also participate more broadly in the formulation of its country’s economic policies, which may adversely affect competitive market structure, business conduct, and economic performance. It must assume the role of competition advocate, acting proactively to bring about government policies that lower barriers to entry, promote deregulation and trade liberalization, and otherwise minimize unnecessary government intervention in the marketplace.

The FTC and DOJ have a proud history of competition-advocacy initiatives. In an article exploring the nature and history of FTC advocacy efforts, FTC scholars James Cooper, Paul Pautler, & Todd Zywicki explained:

Competition advocacy, broadly, is the use of FTC expertise in competition, economics, and consumer protection to persuade governmental actors at all levels of the political system and in all branches of government to design policies that further competition and consumer choice. Competition advocacy often takes the form of letters from the FTC staff or the full Commission to an interested regulator, but also consists of formal comments and amicus curiae briefs.

Cooper, Pautler, & Zywicki also provided guidance—derived from an evaluation of FTC public-interest interventions—on how advocacy initiatives can be designed to maximize their effectiveness.

During the Trump administration, the FTC’s Economic Liberty Task Force shone its advocacy spotlight on excessive state occupational-licensing restrictions that create unwarranted entry barriers and distort competition in many lines of work. (The Obama administration in 2016 issued a report on harms to workers that stem from excessive occupational licensing, but it did not accord substantial resources to advocacy efforts in this area.)

Although its initiatives in this area have been overshadowed in recent decades by the FTC, DOJ over the years also has filed a large number of competition-advocacy comments with federal and state entities.

Anticompetitive Market Distortions (ACMDs)

ACMDs refer to government-imposed restrictions on competition. These distortions may take the form of distortions of international competition (trade distortions), distortions of domestic competition, or distortions of property-rights protection (that with which firms compete). Distortions across any of these pillars could have a negative effect on economic growth. (See here.)

Because they enjoy state-backed power and the force of law, ACMDs cannot readily be dislodged by market forces over time, unlike purely private restrictions. What’s worse, given the role that governments play in facilitating them, ACMDs often fall outside the jurisdictional reach of both international trade laws and domestic competition laws.

The OECD’s Competition Assessment Toolkit sets forth four categories of regulatory restrictions that distort competition. Those are provisions that:

  1. limit the number or range of providers;
  2. limit the ability of suppliers to compete;
  3. reduce the incentive of suppliers to compete; and that
  4. limit the choices and information available to consumers.

When those categories explicitly or implicitly favor domestic enterprises over foreign enterprises, they may substantially distort international trade and investment decisions, to the detriment of economic efficiency and consumer welfare in multiple jurisdictions.

Given the non-negligible extraterritorial impact of many ACMDs, directing the attention of foreign competition agencies to the ACMD problem would be a particularly efficient use of time at gatherings of peer competition agencies from around the world. Peer competition agencies could discuss strategies to convince their governments to phase out or limit the scope of ACMDs.

The collective action problem that may prevent any one jurisdiction from acting unilaterally to begin dismantling its ACMDs might be addressed through international trade negotiations (perhaps, initially, plurilateral negotiations) aimed at creating ACMD remedies in trade treaties. (Shanker Singham has written about crafting trade remedies to deal with ACMDs—see here, for example.) Thus, strategies whereby national competition agencies could “pull in” their fellow national trade agencies to combat ACMDs merit exploration. Why not start the ball rolling at next week’s international antitrust-enforcement summit? (Hint, why not pull in a bunch of DOJ and FTC economists, who may feel underappreciated and underutilized at this time, to help out?)

Conclusion

If the Biden administration truly wants to strengthen the U.S. economy by bolstering competitive forces, the best way to do that would be to reallocate a substantial share of antitrust-enforcement resources to competition-advocacy efforts and the dismantling of ACMDs.

In order to have maximum impact, such efforts should be backed by a revised “whole of government” initiative – perhaps embodied in a new executive order. That new order should urge federal agencies (including the “independent” agencies that exercise executive functions) to cooperate with the DOJ and FTC in rooting out and repealing anticompetitive regulations (including ACMDs that undermine competition by distorting trade flows).

The DOJ and FTC should also be encouraged by the executive order to step up their advocacy efforts at the state level. The Office of Management and Budget (OMB) could be pulled in to help identify ACMDs, and the U.S. Trade Representative’s Office (USTR), with DOJ and FTC economic assistance, could start devising an anti-ACMD negotiating strategy.

In addition, the FTC and DOJ should directly urge foreign competition agencies to engage in relatively more competition advocacy. The U.S. agencies should simultaneously push to make competition-advocacy promotion a much higher International Competition Network priority (see here for the ICN Advocacy Working Group’s 2022-2025 Work Plan). The FTC and DOJ could simultaneously encourage their competition-agency peers to work with their fellow trade agencies (USTR’s peer bureaucracies) to devise anti-ACMD negotiating strategies.

These suggestions may not quite be ripe for meetings to be held in a few days. But if the administration truly believes in an all-of-government approach to competition, and is truly committed to multilateralism, these recommendations should be right up its alley. There will be plenty of bilateral and plurilateral trade and competition-agency meetings (not to mention the World Bank, OECD, and other multilateral gatherings) in the next year or so at which these sensible, welfare-enhancing suggestions could be advanced. After all, “hope springs eternal in the human breast.”

In Antitrust & Competition, Antitrust Division, Federal Trade Commission, International, Justice Department, Platforms, Truth on the Market , , , , , , , , ,
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Biweekly FTC Roundup: Throwing Stones in Glass Containers Edition

Daniel J. Gilman —  17 March 2023

In February’s FTC roundup, I noted an op-ed in the Wall Street Journal in which Commissioner Christine Wilson announced her intent to resign from the Federal Trade Commission. Her departure, and her stated reasons therefore, were not encouraging for those of us who would prefer to see the FTC function as a stable, economically grounded, and genuinely bipartisan independent agency. Since then, Wilson has specified her departure date: March 31, two weeks hence. 

With Wilson’s departure, and that of Commissioner Noah Phillips in October 2022 (I wrote about that here, and I recommend Alden Abbott’s post on Noah Phillips’ contribution to the 1-800 Contacts case), we’ll have a strictly partisan commission—one lacking any Republican commissioners or, indeed, anyone who might properly be described as a moderate or mainstream antitrust lawyer or economist. We shall see what the appointment process delivers and when; soon, I hope, but I’m not holding my breath.

Next Comes Exodus

As followers of the FTC—faithful, agnostic, skeptical, or occasional—are all aware, the commissioners have not been alone in their exodus. Not a few staffers have left the building. 

In a Bloomberg column just yesterday, Dan Papscun covers the scope of the departures, “at a pace not seen in at least two decades.” Based on data obtained from a Bloomberg Freedom of Information Act request, Papscun notes the departure of “99 senior-level career attorneys” from 2021-2022, including 71 experienced GS-15 level attorneys and 28 from the senior executive service.

To put those numbers in context, this left the FTC—an agency with dual antitrust and consumer-protection authority ranging over most of domestic commerce—with some 750 attorneys at the end of 2022. That’s a decent size for a law firm that lacks global ambitions, but a little lean for the agency. Papscun quotes Debbie Feinstein, former head of the FTC’s Bureau of Competition during the Obama administration: “You lose a lot of institutional knowledge” with the departure of senior staff and career leaders. Indeed you do.

Onward and Somewhere

The commission continues to scrutinize noncompete terms in employment agreements by bringing cases, even as it entertains comments on its proposal to ban nearly all such terms by regulation (see here, here, here, here, here, here, here, here, and here for “a few” ToTM posts on the proposal). As I noted before, the NPRM cites three recent settlements of Section 5 cases against firms’ use of noncompetes as a means of documenting the commission’s experience with such terms. It’s important to define one’s terms clearly. By “cases,” I mean administrative complaints resolved by consent orders, with no stipulation of any antitrust violation, rather than cases litigated to their conclusion in federal court. And by  “recent,” I mean settlements announced the very day before the publication of the NPRM. 

Also noted was the brevity of the complaints, and the memoranda and orders memorializing the settlements. It’s entirely possible that the FTC’s allegations in one, two, or all of the matters were correct, but based on the public documents, it’s hard to tell how the noncompetes violated Section 5. Commissioner Wilson noted as much in her dissents (here and here).

On March 15, the FTC’s record on noncompete cases grew by a third; that is, the agency announced a fourth settlement (again in an administrative process, and again without a decision on the merits or a stipulation of an antitrust violation). Once again, the public documents are . . . compact, providing little by way of guidance as to how (in the commission’s view), the specific terms of the agreements violated Section 5 (of course, if—as suggested in the NPRM—all such terms violate Section 5, then there you go). Again, Commissioner Wilson noticed. 

Here’s a wrinkle: the staff do seem to be building on their experience regarding the use of noncompete terms in the glass container industry. Of the four noncompete competition matters now settled (all this year), three—including the most recent—deal with firms in the glass-container industry, which, according to the allegations, is highly concentrated (at least in its labor markets). The NPRM asked for input on its sweeping proposed rule, but it also asked for input on possible regulatory alternatives. A smarter aleck than myself might suggest that they consider regulating the use of noncompetes in the glass-container industry, given the commission’s burgeoning experience in this specific labor market (or markets).

Someone Deserves a Break Today

The commission’s foray into labor matters continues, with a request for information  (RFI) on “the means by which franchisors exert control over franchisees and their workers.” On the one hand, the commission has a longstanding consumer-protection interest in the marketing of franchises, enforcing its Franchise Rule, which was first adopted in 1978 and amended in 2007. The rule chiefly requires certain disclosures—23 of them—in marketing franchise opportunities to potential franchisees. Further inquiry into the operation of the rule, and recent market developments, could be part of the normal course of regulatory business. 

But this is not exactly that. The RFI raises a panoply of questions about both competition and consumer-protection issues, well beyond the scope of the rule, that may pertain to franchise businesses. It asks, among other things, how the provisions of franchise agreements “affects franchisees, consumers, workers, and competition, or . . . any justifications for such provision[s].”  Working its way back to noncompetes: 

The FTC is currently seeking public comment on a proposed rule to ban noncompete clauses for workers in some situations. As part of that proposed rulemaking, the FTC is interested in public comments on the question of whether that proposed rule should also apply to noncompete clauses between franchisors and franchisees.

As Alden Abbott observed, franchise businesses represent a considerable engine of economic growth. That’s not to say that a given franchisor cannot run afoul of either antitrust or consumer-protection law, but it does suggest that there are considerable positive aspects to many franchisor/franchisee relationships, and not just potential harms.

If that’s right, one might wonder whether the commission’s litany of questions about “the means by which franchisors exert control over franchisees and their workers” represents a neutral inquiry into a complex class of business models employed in diverse industries. If you’re still wondering, Elizabeth Wilkins, director of the FTC’s Office of Policy Planning (full disclosure, she was my boss for a minute, and, in my opinion, a good manager) issued a spoiler alert: “This RFI will begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.” What could be more neutral than that? 

The RFI also seeks input on the use of intra-franchise no-poach agreements, a relatively narrow but still significant issue for franchise brand development. More about us: a recent amicus brief filed by the International Center for Law & Economics and 20 scholars of antitrust law and economics (including your humble scribe, but also, and not for nothin’, a Nobel laureate), explains some of the pro-competitive potential of such agreements, both generally and with a focus on a specific case, Delandes v. McDonald’s.

It’s here, if you or the commission are interested.

In Antitrust & Competition, Antitrust at the Agencies Roundup, Exclusionary Conduct, Federal Trade Commission, Section 5, Truth on the Market, Vertical Restraints , , , , ,
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Is the FTC Threatening Efficient Franchise Relationships?

Alden Abbott —  14 March 2023

Franchising plays a key role in promoting American job creation and economic growth. As explained in Forbes (hyperlinks omitted):

Franchise businesses help drive growth in local, state and national economies. They are major contributors to small business growth and job creation in nearly every local economy in the United States. On a local level, growth is spurred by a number of successful franchise impacts, including multiple new locations opening in the area and the professional development opportunities they provide for the workforce.

Franchises Create Jobs

What kind of impact do franchises have on national economic data and job growth? All in all, small businesses like franchises generate more than 60 percent of all jobs added annually in the U.S., according to the Bureau of Labor Statistics.

Although it varies widely by state, you will often find that the highest job creation market leaders are heavily influenced by franchising growth. The national impact of franchising, according to the IFA Economic Impact Study conducted by IHS Market Economics in January 2018, is huge.

By the numbers:

  • There are 733,000 franchised establishments in the Unites States
  • Franchising directly creates 7.6 million jobs
  • Franchising indirectly supports 13.3 million jobs
  • Franchising directly accounts for $404.6 billion in GDP
  • Franchising indirectly accounts for $925.9 billion in GDP

Franchises Drive Economic Growth

How do franchises spur economic growth? Successful franchise brands can grow new locations at a faster rate than other types of small businesses. Individual franchise locations create jobs, and franchise networks multiply the jobs they create by replicating in more markets — or often in more locations in a single market if demand allows. The more they succeed, the greater the multiplier.

It’s also a matter of longevity. According to the Small Business Administration (SBA), 50 percent of new businesses fail during the first five years. Franchises can offer greater sustainability than non-franchised businesses. Franchises are much more likely to be operating after five years. This means more jobs being created longer for each location opened.

Successful franchise brands help stack the deck in favor of success by offering substantial administrative and marketing support for individual locations. Success for the brands means success for the overall economy, driving a virtuous cycle of growth.

Franchising as a business institution is oriented toward reducing economic inefficiencies in commercial relationships. Specifically, economic analysis reveals that it is a potential means for dealing with opportunism and cabining transaction costs in vertical-distribution contracts. In a survey article in the Encyclopedia of Law & Economics, Antony Dnes explores capital raising, agency, and transactions-cost-control theories of franchising. He concludes:

Several theories have been constructed to explain franchising, most of which emphasize savings of monitoring costs in an agency framework. Details of the theories show how opportunism on the part of both franchisors and franchisees may be controlled. In separate developments, writers have argued that franchisors recruit franchisees to reduce information-search costs, or that they signal franchise quality by running company stores.

Empirical studies tend to support theories emphasizing opportunism on the part of franchisors and franchisees. Thus, elements of both agency approaches and transactions-cost analysis receive support. The most robust finding is that franchising is encouraged by factors like geographical dispersion of units, which increases monitoring costs. Other key findings are that small units and measures of the importance of the franchisee’s input encourage franchising, whereas increasing the importance of the franchisor’s centralized role encourages the use of company stores. In many key respects, in result although not in principle, transaction-cost analysis and agency analysis are just two different languages describing the same franchising phenomena.

In short, overall, franchising has proven to be an American welfare-enhancement success story.

There is, however, a three-letter regulatory storm cloud on the horizon that could eventually threaten to undermine economically beneficial franchising. In a March 10 press release, the Federal Trade Commission (FTC) “requests [public] comment[s] on franchise agreements and franchisor business practices, including how franchisors may exert control over franchisees and their workers.” The public will have 60 days to submit comments in response to this request for information (RFI).

Language in the FTC’s press release makes it clear that the commission’s priors are to be skeptical of (if not downright hostile toward) the institution of franchising. The director of the FTC’s Bureau of Consumer Protection notes that there is “growing concern around unfair and deceptive practices in the franchise industry.” The director of the FTC Office of Policy Planning states that “[i]t’s clear that, at least in some instances, the promise of franchise agreements as engines of economic mobility and gainful employment is not being fully realized.” She adds that “[t]his RFI will begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.” The references to “unequal bargaining power” and “workers” once again highlight this FTC’s unfortunate fascination with issues that fall outside the proper scope of its competition and consumer-protection mandates.

The FTC’s press release lists representative questions on which it hopes to receive comments, including specifically:

franchisees’ ability to negotiate the terms of franchise agreements before signing, and the ability of franchisors to unilaterally make changes to the franchise system after franchisees join;

franchisors’ enforcement of non-disparagement, goodwill or similar clauses;

the prevalence and justification for certain contract terms in franchise agreements;

franchisors’ control over the wages and working conditions in franchised entities, other than through the terms of franchise agreements;

payments or other consideration franchisors receive from third parties (e.g., suppliers, vendors) related to franchisees’ purchases of goods or services from those third parties;

indirect effects on franchisee labor costs related to franchisor business practices; and

the pervasiveness and rationale for franchisors marketing their franchises using languages other than English.

This litany by implication casts franchisors in a negative light, and suggests a potential FTC interest in micromanaging the terms of franchise contractual agreements. Presumably, this would be accomplished through a new proposed rule to be issued after the RFI responses are received. Such “expert” micromanagement reflects a troublesome FTC pretense of regulatory knowledge.

But hold on, the worst is still to come. To top it all off, the press release closes by asking for comments on whether the commission’s highly problematic proposed rule on noncompete agreements should apply to noncompete clauses between franchisors and franchisees.

Barring noncompetes could severely undermine the incentive of franchisors to create new franchising opportunities in the first place, thereby reducing the use of franchising and denying new business opportunities to potential franchisees. Job creation and economic growth prospects would be harmed. As a result, franchise workers, small businesses, and consumers (who enjoy patronizing franchise outlets because of the quality assurance associated with a franchise trademark) would suffer.

The only saving grace is that a final FTC noncompete rule likely would be struck down in court. Before that happened, however, many rationally risk-averse firms would discontinue using welfare-beneficial noncompetes—including in franchising, assuming franchising was covered by the final rule.

As it is, FTC law and state-consumer protection law already provide more than ample protection for franchisees in their relationship with franchisors. The FTC’s Franchise Rule requires franchisors to make key disclosures upfront before people make a major investment. What’s more, the FTC Act prohibits material misrepresentations about any business opportunity, including franchises.

Moreover, as the FTC itself admits, franchisees may be able to use state statutes that prohibit unfair or deceptive practices to challenge conduct that violates the Franchise Rule or truth-in-advertising standards.  

The FTC should stick with its current consumer-protection approach and ignore  the siren song of micromanaging (and, indeed, discouraging) franchisor-franchisee relationships. If it is truly concerned about the economic welfare of consumers and producers, it should immediately withdraw the RFI.

In Antitrust & Competition, Federal Trade Commission, Truth on the Market ,
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