Federal Trade Commission (FTC) Chair Lina Khan recently joined with FTC Commissioner Rebecca Slaughter to file a “written submission on the public interest” in the U.S. International Trade Commission (ITC) Section 337 proceeding concerning imports of certain cellular-telecommunications equipment covered by standard essential patents (SEPs). SEPs are patents that “read on” technology adopted for inclusion in a standard. Regrettably, the commissioners’ filing embodies advice that, if followed, would effectively preclude Section 337 relief to SEP holders. Such a result would substantially reduce the value of U.S. SEPs and thereby discourage investments in standards that help drive American innovation.
Section 337 of the Tariff Act authorizes the ITC to issue “exclusion orders” blocking the importation of products that infringe U.S. patents, subject to certain “public interest” exceptions. Specifically, before issuing an exclusion order, the ITC must consider:
the public health and welfare;
competitive conditions in the U.S. economy;
production of like or directly competitive articles in the United States; and
U.S. consumers.
The Khan-Slaughter filing urges the ITC to consider the impact that issuing an exclusion order against a willing licensee implementing a standard would have on competition and consumers in the United States. The filing concludes that “where a complainant seeks to license and can be made whole through remedies in a different U.S. forum [a federal district court], an exclusion order barring standardized products from the United States will harm consumers and other market participants without providing commensurate benefits.”
Khan and Slaughter’s filing takes a one-dimensional view of the competitive effects of SEP rights. In short, it emphasizes that:
standardization empowers SEP owners to “hold up” licensees by demanding more for a technology than it would have been worth, absent the standard;
“hold ups” lead to higher prices and may discourage standard-setting activities and collaboration, which can delay innovation;
many standard-setting organizations require FRAND (fair, reasonable, and non-discriminatory) licensing commitments from SEP holders to preclude hold-up and encourage standards adoption;
FRAND commitments ensure that SEP licenses will be available at rates limited to the SEP’s “true” value;
the threat of ITC exclusion orders would empower SEP holders to coerce licensees into paying “anticompetitively high” supra-FRAND licensing rates, discouraging investments in standard-compliant products;
inappropriate exclusion orders harm consumers in the short term by depriving them of desired products and, in the longer run, through reduced innovation, competition, quality, and choice;
thus, where the standard implementer is a “willing licensee,” an exclusion order would be contrary to the public interest; and
as a general matter, exclusionary relief is incongruent and against the public interest where a court has been asked to resolve FRAND terms and can make the SEP holder whole.
In essence, Khan and Slaughter recite a parade of theoretical horribles, centered on anticompetitive hold-ups, to call-for denying exclusion orders to SEP owners on public-interest grounds. Their filing’s analysis, however, fails as a matter of empirics, law, and sound economics.
First, the filing fails to note that there is a lack of empirical support for anticompetitive hold-up being a problem at all (see, for example, here, here, and here). Indeed, a far more serious threat is “hold-out,” whereby the ability of implementers to infringe SEPs without facing serious consequences leads to an inefficient undervaluation of SEP rights (see, for example, here). (At worst, implementers will have to pay at some future time a “reasonable” licensing fee if held to be infringers in court, since U.S. case law (unlike foreign case law) has essentially eliminated SEP holders’ ability to obtain an injunction.)
Second, as a legal matter, the filing’s logic would undercut the central statutory purpose of Section 337, which is to provide all U.S. patent holders a right to exclude infringing imports. Section 337 does not distinguish between SEPs and other patents—all are entitled to full statutory protection. Former ITC Chair Deanna Tanner Okun, in critiquing a draft administration policy statement that would severely curtail the rights of SEP holders, assessed the denigration of Section 337 statutory protections in a manner that is equally applicable to the Khan-Slaughter filing:
The Draft Policy Statement also circumvents Congress by upending the statutory framework and purpose of Section 337, which includes the ITC’s practice of evaluating all unfair acts equally. Although the draft disclaims any “unique set of legal rules for SEPs,” it does, in fact, create a special and unequal analysis for SEPs. The draft also implies that the ITC should focus on whether the patents asserted are SEPs when judging whether an exclusion order would adversely affect the public interest. The draft fundamentally misunderstands the ITC’s purpose, statutory mandates, and overriding consideration of safeguarding the U.S. public interest and would — again, without statutory approval — elevate SEP status of a single patent over other weighty public interest considerations. The draft also overlooks Presidential review requirements, agency consultation opportunities and the ITC’s ability to issue no remedies at all.
[Notable,] Section 337’s statutory language does not distinguish the types of relief available to patentees when SEPs are asserted.
Third, Khan and Slaughter not only assert theoretical competitive harms from hold-ups that have not been shown to exist (while ignoring the far more real threat of hold-out), they also ignore the foregone dynamic economic gains that would stem from limitations on SEP rights (see, generally, here). Denying SEP holders the right to obtain a Section 337 exclusion order, as advocated by the filing, deprives them of a key property right. It thereby establishes an SEP “liability rule” (SEP holder relegated to seeking damages), as opposed to a “property rule” (SEP holder may seek injunctive relief) as the SEP holder’s sole means to obtain recompense for patent infringement. As my colleague Andrew Mercado and I have explained, a liability-rule approach denies society the substantial economic benefits achievable through an SEP property rule:
[U]nder a property rule, as contrasted to a liability rule, innovation will rise and drive an increase in social surplus, to the benefit of innovators, implementers, and consumers.
Innovators’ welfare will rise. … First, innovators already in the market will be able to receive higher licensing fees due to their improved negotiating position. Second, new innovators enticed into the market by the “demonstration effect” of incumbent innovators’ success will in turn engage in profitable R&D (to them) that brings forth new cycles of innovation.
Implementers will experience welfare gains as the flood of new innovations enhances their commercial opportunities. New technologies will enable implementers to expand their product offerings and decrease their marginal cost of production. Additionally, new implementers will enter the market as innovation accelerates. Seeing the opportunity to earn high returns, new implementers will be willing to pay innovators a high licensing fee in order to produce novel and improved products.
Finally, consumers will benefit from expanded product offerings and lower quality-adjusted prices. Initial high prices for new goods and services entering the market will fall as companies compete for customers and scale economies are realized. As such, more consumers will have access to new and better products, raising consumers’ surplus.
In conclusion, the ITC should accord zero weight to Khan and Slaughter’s fundamentally flawed filing in determining whether ITC exclusion orders should be available to SEP holders. Denying SEP holders a statutorily provided right to exclude would tend to undermine the value of their property, diminish investment in improved standards, reduce innovation, and ultimately harm consumers—all to the detriment, not the benefit, of the public interest.
Welcome to the FTC UMC Roundup, our new weekly update of news and events relating to antitrust and, more specifically, to the Federal Trade Commission’s (FTC) newfound interest in “revitalizing” the field. Each week we will bring you a brief recap of the week that was and a preview of the week to come. All with a bit of commentary and news of interest to regular readers of Truth on the Market mixed in.
This week’s headline? Of course it’s that Alvaro Bedoya has been confirmed as the FTC’s fifth commissioner—notably breaking the commission’s 2-2 tie between Democrats and Republicans and giving FTC Chair Lina Khan the majority she has been lacking. Politico and Gibson Dunn both offer some thoughts on what to expect next—though none of the predictions are surprising: more aggressive merger review and litigation; UMC rulemakings on a range of topics, including labor, right-to-repair, and pharmaceuticals; and privacy-related consumer protection. The real question is how quickly and aggressively the FTC will implement this agenda. Will we see a flurry of rulemakings in the next week, or will they be rolled out over a period of months or years? Will the FTC risk major litigation questions with a “go big or go home” attitude, or will it take a more incrementalist approach to boiling the frog?
Much of the rest of this week’s action happened on the Hill. Khan, joined by Securities and Exchange Commission (SEC) Chair Gary Gensler, made the regular trip to Congress to ask for a bigger budget to support more hires. (FTC, Law360) Sen. Mike Lee (R-Utah) asked for unanimous consent on his State Antitrust Enforcement Venue Act, but met resistance from Sen. Amy Klobuchar (D-Minn.), who wants that bill paired with her own American Innovation and Choice Online Act. This follows reports that Senate Majority Leader Chuck Schumer (D-N.Y.) is pushing Klobuchar to get support in line for both AICOA and the Open App Markets Act to be brought to the Senate floor. Of course, if they had the needed support, we probably wouldn’t be talking so much about whether they have the needed support.
Questions about the climate at the FTC continue following release of the Office of Personnel Management’s (OPM) Federal Employee Viewpoint Survey. Sen. Roger Wicker (R-Miss.) wants to know what has caused staff satisfaction at the agency to fall precipitously. And former senior FTC staffer Eileen Harrington issued a stern rebuke of the agency at this week’s open meeting, saying of the relationship between leadership and staff that: “The FTC is not a failed agency but it’s on the road to becoming one. This is a crisis.”
Perhaps the only thing experiencing greater inflation than the dollar is interest in the FTC doing something about inflation. Alden Abbott and Andrew Mercado remind us that these calls are misplaced. But that won’t stop politicians from demanding the FTC do something about high gas prices. Or beef production. Or utilities. Or baby formula.
A little further afield, the 5th U.S. Circuit Court of Appealsissued an opinion this week in a case involving SEC administrative-law judges that took broad issue with them on delegation, due process, and “take care” grounds. It may come as a surprise that this has led to much overwroughtconsternation that the opinion would dismantle the administrative state. But given that it is often the case that the SEC and FTC face similar constitutional issues (recall that Kokesh v. SEC was the precursor to AMG Capital), the 5th Circuit case could portend future problems for FTC adjudication. Add this to the queue with the Supreme Court’s pending review of whether federal district courts can consider constitutional challenges to an agency’s structure. The court was already scheduled to consider this question with respect to the FTC this next term in Axon, and agreed this week to hear a similar SEC-focused case next term as well.
Some Navel-Gazing News!
Congratulations to recent University of Michigan Law School graduate Kacyn Fujii, winner of our New Voices competition for contributions to our recent symposium on FTC UMC Rulemaking (hey, this post is actually part of that symposium, as well!). Kacyn’s contribution looked at the statutory basis for FTC UMC rulemaking authority and evaluated the use of such authority as a way to address problematic use of non-compete clauses.
And, one for the academics (and others who enjoy writing academic articles): you might be interested in this call for proposals for a research roundtable on Market Structuring Regulation that the International Center for Law & Economics will host in September. If you are interested in writing on topics that include conglomerate business models, market-structuring regulation, vertical integration, or other topics relating to the regulation and economics of contemporary markets, we hope to hear from you!
Federal Trade Commission (FTC) Chair Lina Khan missed the mark once again in her May 6 speech on merger policy, delivered at the annual meeting of the International Competition Network (ICN). At a time when the FTC and U.S. Justice Department (DOJ) are presumably evaluating responses to the agencies’ “request for information” on possible merger-guideline revisions (see here, for example), Khan’s recent remarks suggest a predetermination that merger policy must be “toughened” significantly to disincentivize a larger portion of mergers than under present guidance. A brief discussion of Khan’s substantively flawed remarks follows.
Discussion
Khan’s remarks begin with a favorable reference to the tendentious statement from President Joe Biden’s executive order on competition that “broad government inaction has allowed far too many markets to become uncompetitive, with consolidation and concentration now widespread across our economy, resulting in higher prices, lower wages, declining entrepreneurship, growing inequality, and a less vibrant democracy.” The claim that “government inaction” has enabled increased market concentration and reduced competition has been shown to be inaccurate, and therefore cannot serve as a defensible justification for a substantive change in antitrust policy. Accordingly, Khan’s statement that the executive order “underscores a deep mandate for change and a commitment to creating the enabling environment for reform” rests on foundations of sand.
Khan then shifts her narrative to a consideration of merger policy, stating:
Merger investigations invite us to make a set of predictive assessments, and for decades we have relied on models that generally assumed markets are self-correcting and that erroneous enforcement is more costly than erroneous non-enforcement. Both the experience of the U.S. antitrust agencies and a growing set of empirical research is showing that these assumptions appear to have been at odds with market realities.
Digital Markets
Khan argues, without explanation, that “the guidelines must better account for certain features of digital markets—including zero-price dynamics, the competitive significance of data, and the network externalities that can swiftly lead markets to tip.” She fails to make any showing that consumer welfare has been harmed by mergers involving digital markets, or that the “zero-price” feature is somehow troublesome. Moreover, the reference to “data” as being particularly significant to antitrust analysis appears to ignore research (see here) indicating there is an insufficient basis for having an antitrust presumption involving big data, and that big data (like R&D) may be associated with innovation, which enhances competitive vibrancy.
Khan also fails to note that network externalities are beneficial; when users are added to a digital platform, the platform’s value to other users increases (see here, for example). What’s more (see here), “gateways and multihoming can dissipate any monopoly power enjoyed by large networks[,] … provid[ing] another reason” why network effects may not raise competitive problems. In addition, the implicit notion that “tipping” is a particular problem is belied by the ability of new competitors to “knock off” supposed entrenched digital monopolists (think, for example, of Yahoo being displaced by Google, and Myspace being displaced by Facebook). Finally, a bit of regulatory humility is in order. Given the huge amount of consumer surplus generated by digital platforms (see here, for example), enforcers should be particularly cautious about avoiding more aggressive merger (and antitrust in general) policies that could detract from, rather than enhance, welfare.
Labor Markets
Khan argues that guidelines drafters should “incorporate new learning” embodied in “empirical research [that] has shown that labor markets are highly concentrated” and a “U.S. Treasury [report] recently estimating that a lack of competition may be costing workers up to 20% of their wages.” Unfortunately for Khan’s argument, these claims have been convincingly debunked (see here) in a new study by former FTC economist Julie Carlson (see here). As Carlson carefully explains, labor markets are not highly concentrated and labor-market power is largely due to market frictions (such as occupational licensing), rather than concentration. In a similar vein, a recent article by Richard Epstein stresses that heightened antitrust enforcement in labor markets would involve “high administrative and compliance costs to deal with a largely nonexistent threat.” Epstein points out:
[T]raditional forms of antitrust analysis can perfectly deal with labor markets. … What is truly needed is a close examination of the other impediments to labor, including the full range of anticompetitive laws dealing with minimum wage, overtime, family leave, anti-discrimination, and the panoply of labor union protections, where the gains to deregulation should be both immediate and large.
Nonhorizontal Mergers
Khan notes:
[W]e are looking to sharpen our insights on non-horizontal mergers, including deals that might be described as ecosystem-driven, concentric, or conglomerate. While the U.S. antitrust agencies energetically grappled with some of these dynamics during the era of industrial-era conglomerates in the 1960s and 70s, we must update that thinking for the current economy. We must examine how a range of strategies and effects, including extension strategies and portfolio effects, may warrant enforcement action.
Khan’s statement on non-horizontal mergers once again is fatally flawed.
With regard to vertical mergers (not specifically mentioned by Khan), the FTC abruptly withdrew, without explanation, its approval of the carefully crafted 2020 vertical-merger guidelines. That action offends the rule of law, creating unwarranted and costly business-sector confusion. Khan’s lack of specific reference to vertical mergers does nothing to solve this problem.
With regard to other nonhorizontal mergers, there is no sound economic basis to oppose mergers involving unrelated products. Threatening to do so would have no procompetitive rationale and would threaten to reduce welfare by preventing the potential realization of efficiencies. In a 2020 OECD paper drafted principally by DOJ and FTC economists, the U.S. government meticulously assessed the case for challenging such mergers and rejected it on economic grounds. The OECD paper is noteworthy in its entirely negative assessment of 1960s and 1970s conglomerate cases which Khan implicitly praises in suggesting they merely should be “updated” to deal with the current economy (citations omitted):
Today, the United States is firmly committed to the core values that antitrust law protect competition, efficiency, and consumer welfare rather than individual competitors. During the ten-year period from 1965 to 1975, however, the Agencies challenged several mergers of unrelated products under theories that were antithetical to those values. The “entrenchment” doctrine, in particular, condemned mergers if they strengthened an already dominant firm through greater efficiencies, or gave the acquired firm access to a broader line of products or greater financial resources, thereby making life harder for smaller rivals. This approach is no longer viewed as valid under U.S. law or economic theory. …
These cases stimulated a critical examination, and ultimate rejection, of the theory by legal and economic scholars and the Agencies. In their Antitrust Law treatise, Phillip Areeda and Donald Turner showed that to condemn conglomerate mergers because they might enable the merged firm to capture cost savings and other efficiencies, thus giving it a competitive advantage over other firms, is contrary to sound antitrust policy, because cost savings are socially desirable. It is now recognized that efficiency and aggressive competition benefit consumers, even if rivals that fail to offer an equally “good deal” suffer loss of sales or market share. Mergers are one means by which firms can improve their ability to compete. It would be illogical, then, to prohibit mergers because they facilitate efficiency or innovation in production. Unless a merger creates or enhances market power or facilitates its exercise through the elimination of competition—in which case it is prohibited under Section 7—it will not harm, and more likely will benefit, consumers.
Given the well-reasoned rejection of conglomerate theories by leading antitrust scholars and modern jurisprudence, it would be highly wasteful for the FTC and DOJ to consider covering purely conglomerate (nonhorizontal and nonvertical) mergers in new guidelines. Absent new legislation, challenges of such mergers could be expected to fail in court. Regrettably, Khan appears oblivious to that reality.
Khan’s speech ends with a hat tip to internationalism and the ICN:
The U.S., of course, is far from alone in seeing the need for a course correction, and in certain regards our reforms may bring us in closer alignment with other jurisdictions. Given that we are here at ICN, it is worth considering how we, as an international community, can or should react to the shifting consensus.
Antitrust laws have been adopted worldwide, in large part at the urging of the United States (see here). They remain, however, national laws. One would hope that the United States, which in the past was the world leader in developing antitrust economics and enforcement policy, would continue to seek to retain this role, rather than merely emulate other jurisdictions to join an “international community” consensus. Regrettably, this does not appear to be the case. (Indeed, European Commissioner for Competition Margrethe Vestager made specific reference to a “coordinated approach” and convergence between U.S. and European antitrust norms in a widely heralded October 2021 speech at the annual Fordham Antitrust Conference in New York. And Vestager specifically touted European ex ante regulation as well as enforcement in a May 5 ICN speech that emphasized multinational antitrust convergence.)
Conclusion
Lina Khan’s recent ICN speech on merger policy sends all the wrong signals on merger guidelines revisions. It strongly hints that new guidelines will embody pre-conceived interventionist notions at odds with sound economics. By calling for a dramatically new direction in merger policy, it interjects uncertainty into merger planning. Due to its interventionist bent, Khan’s remarks, combined with prior statements by U.S. Assistant Attorney General Jonathan Kanter (see here) may further serve to deter potentially welfare-enhancing consolidations. Whether the federal courts will be willing to defer to a drastically different approach to mergers by the agencies (one at odds with several decades of a careful evolutionary approach, rooted in consumer welfare-oriented economics) is, of course, another story. Stay tuned.
[This post wraps the initial run of Truth on the Market‘s digital symposium “FTC Rulemaking on Unfair Methods of Competition.”You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
Over the past three weeks, we have shared contributions from more than a dozen antitrust commentators—including academics, practitioners, students, and a commissioner of the Federal Trade Commission—discussing the potential for the FTC to develop substantive rules using its unfair methods of competition (UMC) authority. This post offers a recap of where we have been so far in this discussion and also discusses what comes next for this symposium and our coverage of these issues.
First, I must express a deep thank you to all who have contributed. Having helped to solicit, review, and edit many of these pieces, it has been a pleasure to engage with and learn from our authors. And second, I am happy to say to everyone: stay tuned! The big news this week is that, after a long wait, Alvaro Bedoya has been confirmed to the commission, likely creating a majority who will support Chair Lina Khan’s agenda. The ideas that we have been discussing as possibilities are likely to be translated into action over the coming weeks and months—and we will be here to continue sharing expert commentary and analysis.
The Symposium Goes On: An Open Call for Contributions
We will continue to run this symposium for the foreseeable future. We will not have daily posts, but we will have regular content: a weekly recap of relevant news, summaries of important FTC activity and new articles and scholarship, and other original content.
In addition, in the spirit of the symposium, we have an open call for contributions: if you would like to submit a piece for publication, please e-mail it to me or Keith Fierro. Submissions should be 1,500-4,000 words and may approach these issues from any perspective. They should be your original work, but may include short-form summaries of longer works published elsewhere, or expanded treatments of shorter publications (e.g., op-eds).
The Symposium So Far
We have covered a lot of ground these past three weeks. Contributors to the symposium have delved deeply into substantive areas where the FTC might try to use its UMC authority; they have engaged with one another over the scope and limits of the FTC’s authority; and they have looked at the FTC’s history, both ancient and recent, to better understand what the FTC may try to do, where it may be successful, and where it may run into a judicial wall.
Over 50,000 words of posts cannot be summarized in a few paragraphs, so I will not try to provide such a summary. The list of contributions to the symposium to date is below and each contribution is worth reading both on its own and in conjunction with others. Instead, I will pull out some themes that have come up across these posts:
Scope of FTC Authority
Unsurprisingly, several authors engaged with the potential scope of FTC UMC-rulemaking authority, with much of the discussion focused on whether the courts are likely to continue to abide the U.S. Court of Appeals for the D.C. Circuit’s 1973 Petroleum Refiners opinion. It is fair to say that “opinions varied.” Discussion included everything from modern trends of judicial interpretation and how they differ from those used in 1973, to close readings of the Magnuson-Moss legislation (adopted in the immediate wake of the Petroleum Refiners opinion), and consideration of how more recent cases such as AMG and the D.C. Circuit’s American Library Association case affect our thinking about Petroleum Refiners.
Likely Judicial Responses
Several contributors also considered how the courts might respond to FTC rulemaking, allowing that the commission may have some level of substantive-rulemaking authority. Several authors invoked the Court’s recent “major questions” jurisprudence. Dick Pierce captures the general sentiment that any broad UMC rulemaking “would be a perfect candidate for application of the major questions doctrine.” But as with any discussion of the “major” questions doctrine, the implicit question is when a question is “major.” There seems to be some comfort with the idea that the FTC can do some rulemaking, assuming that the courts find that it has substantive-rulemaking authority under Section 6(g), but that the Commission faces an uncertain path if it tries to use that authority for more than incremental changes to antitrust law.
Virtues and Vices of Rulemaking
A couple of contributors picked up on themes of the virtues and vices of developing legal norms through rulemaking, as opposed to case-by-case adjudication. Aaron Neilson, for instance, argues that the FTC likely most needs to use rules to make bigger changes to antitrust law than are possible through adjudication, but that such big changes are the ones most likely to face resistance from the courts. And FTC Commissioner Noah Phillips looks at the Court’s move away from per se rules in antitrust cases over the past 50 years, arguing that the same logic that has pushed the courts to embrace a case-by-case approach to antitrust law is likely to create judicial resistance to any effort by the FTC to tack an opposite course.
The Substance of Substantive Rules
Several contributors addressed specific substantive issues that the FTC may seek to address with rules. In some cases, these issues formed the heart of the post; in others, they were used as examples along the way. For instance, Josh Sarnoff evaluated whether the FTC should develop rules around aftermarket parts and to address right-to-repair concerns. Dick Pierce also looked at that issue, along with several others (potential rules to address reverse-payment settlements in the pharmaceutical industry, below-cost pricing, and non-compete clauses involving low-wage workers).
Gaining Perspective
And last, but far from least, several contributors asked questions that help to put any thinking about the FTC into perspective. Jonathan Barnett, for instance, looks at the changes the FTC has made over the past year to its public statements of mission and priorities, alongside its potential rulemaking activity, to discuss the commission’s changing thinking about free markets. Ramsi Woodcock juxtaposes the FTC, the statutory framing of its regulatory authority, with the FOMC and its statutory power to directly affect the value of the dollar. And Bill MacLeod takes us back to 1935 and the National Industrial Recovery Act, reflecting on how the history of rules of “fair competition” might inform our thinking about the FTC’s authority today.
That’s a lot of ground to have covered in three weeks. Of course, the FTC will keep moving, and the ground will keep shifting. We look forward to your continued engagement with Truth on the Market and the authors who have contributed to this discussion.
[The 15th entry in our FTC UMC Rulemaking symposium is a guest post from DePaul University College of Law‘s Josh Sarnoff, a former Thomas A. Edison Distinguished Scholar at the U.S. Patent and Trademark Office.You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
We used to have a robust aftermarket for non-original equipment manufacturer (OEM) automobile repair parts and “independent” repair services, but car companies have increasingly resorted to design-patent protection to prevent competition in the supply of cosmetic repair parts such as bumpers, hoods, panels, and mirrors. The predictable and intended consequence has been to raise prices and reduce options for consumers, effectively monopolizing the separate repair parts and services markets through federal intellectual-property control over needed repair products or inputs to service markets.
Because this is a federal legal right, moreover, it preempts state “right to repair” laws that would authorize such products and services, either as a matter of consumer rights or as a remedy for anti-competitive conduct or “unfair or deceptive” acts and practices resulting from tying a monopoly over the original sales market for specific automobiles (protected by those intellectual-property rights) into a monopoly in the repair markets for those automobiles. Existing law under Section 102(c) of the 1975 Magnuson-Moss Warranty Act does not explicitly prohibit such supply-restriction anti-competitive conduct when protecting against warranty requirements that would void warranties based on “tie-in sales” requirements that would void warranties if third-party repair parts or independent repair services are used by consumers.
Unlike for functional parts of “machines,” which have always been subject to utility-patent rights, non-functional parts of machines were not (and still are not) statutorily authorized as the subject of design-patent rights. However, in 1980, the U.S. Court of Appeals for the Federal Circuit—in an opinion by Judge Giles Rich—held that design patents can protect parts or fragments of “articles of manufacture,” the class of statutory subject matter for which ornamental design-patent rights can be provided.
By reducing the “size” of the thing to which the design-patent right applies—here, a part rather than an entire automobile (leaving aside the question of how machines get protection in the first place, when Congress hasn’t authorized it for design patents)—the historic right to repair a purchased machine without reconstructing it can be effectively overridden. This is because the third-party parts supplier is now constructing an entire part (e.g., a headlight) subject to design-patent rights, whereas they would have been authorized to make a part for use in repairing the entire car (and note that designs are supposed to be understood as a whole, not by assessing only parts of the objects to be protected—the article of manufacture).
In 2019, the Federal Circuit held that consumer desires to purchase and use replacement cosmetic auto parts to repair cars to their original appearance is not a “functional” requirement for which ornamental design-patent rights cannot be provided, and thus design patents protect against competition to supply such ornamental repair parts. As the court stated:
Our precedent gives weight to this language, holding that a de-sign patent must claim an “ornamental” design, not one ‘dictated by function.’… We hold that, even in this context of a consumer preference for a particular design to match other parts of a whole, the aesthetic appeal of a design to consumers is inadequate to render that design functional.
This decision assures that design patents override both consumers’ “right” to restore the appearance of their products to the original condition and state or insurance-policy requirements that require the use of “must-match” aftermarket parts to do so. If the manufacture or import of aftermarket parts is prohibited by design-patent law, then obviously consumers and independent repair shops cannot use them to repair their vehicles, and insurers cannot control costs by paying for the use such aftermarket parts. This is true even when those aftermarket parts are superior in quality to the OEM parts, at lower prices.
The Federal Trade Commission (FTC) in theory could address the over-extension by the judiciary of design-patent protection for cosmetic auto parts, by finding such repair-restricting practices relying on design-patent protection to be either anticompetitive or unfair to consumers. The FTC has already recognized the need to protect the right to repair products. In 2013, the Supreme Court held in FTC v. Actavis that conduct within the scope of granted patent rights may still constitute an antitrust violation. Using patent rights to tie repair parts and services to the original purchase market may violate either Section 1 or Section 2 of the Sherman Act.
The FTC might also, in theory, extend antitrust principles beyond what is prohibited under the Sherman Act, using its adjudicatory “unfair methods of competition” (UMC) authority under Section 5(a)(2) & (b) or its rulemaking authority under Section 6(g). Some have argued that the FTC cannot or should not adopt prohibitions on anticompetitive conduct that does not violate other statutory antitrust laws, and that Section 6(g) rulemaking authority is limited to procedural rules and does not authorize substantive antitrust rulemaking, even though the U.S. Court of Appeals for the D.C. Circuit upheld such substantive rulemaking in 1973 (which would now be overruled if the issue reached the Supreme Court). I’ll leave that issue aside for now, even though it is often difficult to distinguish UMC from unfair commercial practices.
Instead, I’ll focus on the clearer and undisputed authority of the FTC to issue (admittedly procedurally burdensome) rules to prohibit “unfair or deceptive commercial practices” (UDCP) using rulemaking authority under Section 18 of the FTC Act. Under that section, subsection (a)(1)(B), the FTC can “prescribe … rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce.” But the rulemaking authority does not define what “practices are unfair, except to refer to Section 5(a)(1)’s legislative declaration that “unfair … commercial practices” are “unlawful.”
In turn, Section 5(n) of the FTC Act defines an “unfair” act or practice as one that must “cause[] or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”
For the reasons described above, use of design-patent rights (even if they may result in lower upfront sales prices of cars, because manufacturers may obtain additional profits through leveraging those rights to prevent an aftermarket in repair parts) should clearly qualify as “unfair” under this definition, even if Congress (at least according to the Federal Circuit, even if the statutory text doesn’t support that and only activist judicial interpretation is the proximate cause of the authority) is the source of the patent right that is being used “unfairly.”
“Common wisdom,” however, suggests that the FTC will not choose to exercise its “unfairness” authority beyond recognized categories of specifically and legislatively prohibited acts, just like with its antitrust UMC authority, without further legislative enactment. This common wisdom may be belied by the fact that the FTC updated its Section 18 rulemaking procedures in July 2021, and recently requested that the public bring complaints over illegal repair restriction practices to its attention and indicated that it would “prioritize investigations into unlawful repair restrictions under … Section 5….”
More importantly, “common wisdom” suggests that Congress restricted the FTC’s authority to impose broad new rules defining unfair commercial practices when it adopted the Section 18 rules in response to purported overreach by the FTC in the late 1970s under the Carter administration, as well as temporarily defunded the agency. But Section 18 does not substantively modify the FTC’s Section 5(a) authority (to which Section 18 rulemaking applies), and the common wisdom is likely incorrect that the FTC lacks the power to issue such rules (even if it lacks the willpower).
Since the 1980 legislative change to FTC’s UDCP rulemaking requirements, the FTC has been reluctant to engage in broad rulemaking to define unfairness in commercial contexts, although it has continued to enforce more vigorously prohibitions against deception against consumers, including through deceptive advertisements. The FTC has not issued any similar, generally applicable principles as to what constitutes “unfairness” in commercial practices.
Nevertheless, it should be clear that the FTC has the power to do so. But in the current judicial-review context, the FTC may be even more reluctant than during the past four decades to exercise such authority, as it may lead to judicial invalidation of its Section 5(a)&(b) authority to declare what practices are “unfair.”
As many administrative law scholars have noted, the Supreme Court has recently adopted a much more aggressive “major questions” doctrine for refusing deference to agency interpretations of the scope of their regulatory authority. Instead of lack of deference, the Court has imposed a new and restrictive “clear statement” rule, requiring greater legislative specificity before finding that an agency possesses regulatory authority to take challenged actions. Accordingly, should the FTC issue a new, broad unfair commercial practices rule under Section 18 prohibiting the use of design patents to prevent aftermarket parts from being manufactured—on grounds that it is “unfair” to consumers and adversely affects their “right” of repair—then absent significant change to the Court’s composition, that rule will likely be invalidated because Congress did not define “unfairness” with sufficient specificity.
Even more importantly, such a rule would provide a very “good” test case for a Supreme Court itching to revive the non-delegation doctrine and to hamstring the administrative regulatory apparatus. Thus, the FTC might rightly fear outright repeal of its Section 5(a) as well as its Section 18 (and Section 6g substantive rulemaking) authority should it adopt an aggressive consumer-protection approach.
In conclusion, given the likely lack of political will on the FTC—in light of the likely response of the Supreme Court should the FTC exercise its legislatively conferred power in a consumer-friendly fashion—the use of design patents to restrict the right to repair is a problem that Congress should and must fix. Congress should do so both by adopting a right-to-repair law (such as the Fair Repair Act) and by amending the design-patent act to ensure that the consumer right to repair can be effectuated.
Since broad legislation to accomplish this in a general right-to-repair law or in a modification of the design-patent law that overturns partial and fragment protection for machines directly is likely to face significant opposition, Congress should at least act swiftly to pass the pending SMART Act, which provides that manufacture, import, and offer for sale of design-patented cosmetic automobile repair parts is not an act of infringement, and permits sale and use of those parts after a limited period of exclusivity (30 months) that assures more than sufficient returns on investment in such parts-design development. That way, consumers will be protected in regard to the second most valuable purchase they can make (the first being their home) and the one that is most likely to need repair given the continuing, widespread problem of traffic accidents (the subject of different consumer protection measures that are needed).
[The 14th entry in our FTC UMC Rulemaking symposium is a guest post from Bill MacLeod, a former Federal Trade Commission bureau director and currently a partner with Kelley Drye & Warren LLP, where he chairs the firm’s antitrust practice and co-chairs its consumer protection practice. Bill gratefully acknowledges the research and analysis of Jacob Hopkins in preparing this article, which does not represent the views of any firm or client. You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
Introduction
In November 2021, the Federal Trade Commission (FTC) published a draft strategic plan for fiscal years 2022-2026 that previewed its vision for enforcement without the rule of reason guiding the analysis and without consumer welfare defining the objective. The draft plan dropped a longstanding commitment from the FTC’s previous strategic plans to foster “vigorous competition” and replaced it with a pledge to police “fair competition.”
The commission also broadened its focus beyond consumers. Instead of dedicating competition enforcement to them, the FTC would see to it that competition would serve the general public. Clues as to the nature of the public interest appeared among the plan’s more specific objectives. For example, to advance “all forms of equity, and support underserved and marginalized communities through the FTC’s competition mission.” The draft plan emphasized an objective to protect employees from unfair competition. Gone from the draft entirely was a previous vow to avoid “unduly burdening legitimate business activity.”
Additional details of the agenda emerged in December 2021, when the commission announced a statement of regulatory priorities describing plans to develop unfair-methods-of-competition (UMC) rulemakings. The annual regulatory plan, also released in December 2021, reiterated the list of practices that could be targeted for competition rules, prompting a dissent from Commissioner Christine S. Wilson, who saw in the plan “the foundation for an avalanche of problematic rulemakings.” Referring to the now-defunct Interstate Commerce Commission and Civil Aeronautics Board, she noted “the disastrous regulatory frameworks in the transportation industry teach the attentive student that rules stifle innovation, increase costs, raise prices, limit choice, and decrease output, frequently harming the very parties they are intended to benefit, and the benefits that flowed to consumers when competition replaced regulation in transportation.”
The Courts on Competition Rulemaking Authority
Whether the FTC has the authority to promulgate the rules it now contemplates has been a 50-year-old debate among legal scholars. Section 6(g) of the FTC Act authorizes the commission: “From time to time to classify corporations and to make rules and regulations for the purpose of carrying out the provisions of sections 41 to 46 and 47 to 58 of this title.”[1] Before 1964, this rulemaking power was directed to the FTC’s administrative functions. Since then, rulemaking has typically addressed consumer-protection concerns, the authority for which was codified in Magnuson-Moss Warranty Act in 1975, incorporated in Section 18 of the FTC Act.
Only once has the commission’s power to promulgate a competition rule under Section 6(g) been tested in the courts. That test played out in 1972 and 1973 in a case involving a rule the FTC issued requiring the posting of octane ratings on pumps at gas stations.[2] Failure to post was declared a UMC and an unfair or deceptive practice (UDAP). Petroleum refiners and retailers challenged various aspects of the rules, including the commission’s authority to issue them, and the case came to Judge Aubrey Robinson in the U.S. District Court for Washington, D.C. He held that the FTC lacked such authority.
The opinion began with a review of the legislative history, which was “clear” to the court.[3] Section 6(g) was intended “only as an authorization for internal rules of organization, practice, and procedure [and] to insure that the FTC had the power to require reports from all corporations.”[4] Buttressing the history were subsequent occasions in which Congress had explicitly granted FTC authority for regulations confined to specific practices, which would have been unnecessary if the power already resided in Section 6(g). That section had not changed since 1914, and the FTC for approximately 50 years had not asserted rulemaking authority under it.
The commission urged the court to apply the definitions of regulation in the Administrative Procedure Act (APA) to the FTC Act. The proposition that words written in 1946 had the same meaning as words written in 1914 was “inconceivable” without any indication that they were related. Further undermining the commission’s argument were amendments to other legislation after APA to authorize rulemaking at other agencies. The absence of a similar amendment to the FTC Act implied that the “rulemaking power in Section 6(g) of the FTCA remains unchanged by Congress to date, and conveys only the authority to make such rules and regulations in connection with its housekeeping chore and investigative responsibilities.”[5] Indeed, Congress considered an amendment that would have authorized the commission to “make, alter, or repeal regulations further defining more particularly unfair trade practices or unfair or oppressive competition.”[6] That legislation died.
Also rejected was the argument that the FTC’s authority under Section 5 to “prevent” UMC includes the power to regulate. The proposition ignored “the very next paragraph of the statute that requires the Commission to conduct adjudicative proceedings.”[7] Until recently, the court noted, the commission itself had repeatedly admitted it possessed no power to promulgate substantive rules,[8] and that the Supreme Court had impliedly rejected the existence of such power.[9] In his conclusion, Judge Robinson quoted Justice Louis Brandeis:
What the Government asks is not a construction of the statute, but, in effect, an enlargement of it by the court, so that what was omitted, presumably by inadvertence, may be included within its scope. To supply omissions transcends the judicial function.[10]
The FTC appealed, and the U.S. Court of Appeals for the D.C. Circuit reversed.[11] In an opinion by Judge J. Skelly Wright, the court cautioned:
Our duty here is not simply to make a policy judgment as to what mode of procedure…best accommodates the need for effective enforcement of the Commission’s mandate…. The extent of its powers can be decided only by considering the powers Congress specifically granted it in the light of the statutory language and background.[12]
But the legislative history that was clear to the lower court became opaque on appeal. Judge Wright acknowledged that Rep. J. Harry Covington (D-Md)—the floor manager of the bill that became the FTC Act—assured his colleagues that Congress was not granting the FTC the power for legislative rulemaking. That would have been unconstitutional, in Covington’s view, although a delegation of administrative rulemaking was not.[13] As he assured his colleagues:
The Federal trade commission will have no power to prescribe the methods of competition to be used in future. In issuing its orders it will not be exercising power of a legislative nature….
The function of the Federal trade commission will be to determine whether an existing method of competition is unfair, and, if it finds it to be unfair, to order the discontinuance of its use. In doing this it will exercise power of a judicial nature….[14]
Supporting Covington was a colloquy between two other congressmen, also quoted by the court:
Mr. SHERLEY. If the gentleman will permit, the Federal trade commission differs from the Interstate Commerce Commission in that it has no affirmative power to say what shall be done in the future?
Mr. STEVENS of Minnesota. Certainly.
Mr. SHERLEY. In other words, it exercises in no sense a legislative function such as is exercised by the Interstate Commerce Commission?
Mr. STEVENS of Minnesota. Yes. The gentleman is entirely right. We desired clearly to exclude that authority from the power of the commission. We did not know as we could grant it anyway. But the time has not arrived to consider or discuss such a question.[15]
But this legislative history, which concededly “carefully differentiated” the FTC’s power from the ICC’s power[16] was “utterly unhelpful” to Judge Wright, who somehow could not square synonymous assurances that the FTC would have “no power to prescribe methods of competition” and would exercise “in no sense a legislative function.” The judge found an easier approach:
If one ignores the “legislative” — “administrative” technical distinction which influenced Covington and utilizes a more practical, broader conception of “legislative” type activity prevalent today, they can be read to support substantive rule-making of the kind asserted by the [FTC].
Freed from the background of the 1914 act, the judge adopted a judicial philosophy popular in the early 1970s. Notions of practicality and fairness allowed courts to realize unexpressed purposes, which in the case of FTC rulemaking meant “specifically the advisability of utilizing the Administrative Procedure Act’s rule-making procedures to provide an agency about to embark on legal innovation with all relevant arguments and information.” Similar decisions supporting rulemaking powers “indisputably flesh out the contemporary legal framework in which both the FTC and this court operate and which we must recognize.”[17] For example, if the National Labor Relations Board (NLRB) could regulate, the FTC should be able to do so, as well. It did not bother the judge that the NLRB and other agencies had received explicit rulemaking authority, or that commission officials had often admitted that they lacked that power.
The Supreme Court declined to review the Petroleum Refiners holdings, but its interpretation of the FTC Act last year casts serious doubt on the validity of Judge Wright’s decision today. In AMG Capital Management LLC v. Federal Trade Commission, the FTC used many of the same arguments that had worked in 1972. This time, however, the agency was unable to persuade a single justice that the act conferred an unexpressed power.
The question in AMG concerned whether the agency could bypass administrative adjudication and bring a cause of action directly in federal court for monetary relief. Section 13(b) of the FTC Act authorizes the agency to seek injunctions without administrative proceedings, but a different section of the act creates a cause of action for redress. Section 19(b) prescribes the procedure whereby the commission can seek money. An action to do so may commence only after the agency has concluded an administrative proceeding that finds a violation of Section 5. For decades, the commission shunned the cumbersome two-step procedure and resorted almost exclusively to consolidated Section 13(b) actions to obtain monetary relief. And for decades, courts affirmed these cases, but the Supreme Court had never weighed in.
Writing for a unanimous court, Justice Stephen Breyer found it highly unlikely “that Congress, without mentioning the matter, would have granted the Commission authority so readily to circumvent its traditional §5 administrative proceedings.”[18] Other statutes might merit broader construction, but not when the powers granted were as clearly expressed as in the FTC Act. The court rejected the commission’s arguments that Congress had intended to allow the commission to choose between alternative enforcement avenues. Congress had not acquiesced in the commission’s use of both approaches (even though Section 19 preserved “any authority of the Commission under any other provision of law”). Addressing the arguments that violators would keep billions of dollars in ill-gotten gains if the commission had to adjudicate first and litigate afterward, the court responded that the agency could ask Congress for the more efficient power. It appeared nowhere in the text of the FTC Act, and “Congress…does not…hide elephants in mouseholes.”[19]
Rules of Fair Competition Fail in the Supreme Court
Long before AMG, the Supreme Court had addressed the limits of the FTC’s authority. Judge Robinson in Petroleum Refiners cited five decisions dating from 1920 to 1965 supporting his conclusion that the court had impliedly rejected rulemaking power. One of those decisions came on May 27, 1935, when the Supreme Court used the limitations of FTC authority to deal a fatal blow to the National Industrial Recovery Act (NIRA). The centerpiece of the New Deal, NIRA authorized the federal government to adopt regulations intended to achieve “fair competition.” Those regulations normalized working conditions, wages, products, and prices in many trades. Their purpose was to stem the forces that were depressing wages and prices in the early years of the Great Depression. Vigorous competition was regarded as one of those forces.
Appeals of convictions for violating one of the codes gave the Supreme Court the opportunity to opine on the meaning of “fair competition” and the appropriate process by which competition should be assessed.[20] The court sought to reconcile fair competition and unfair methods of competition, as the terms were respectively defined in NIRA and the FTC Act. A provision in NIRA deemed a violation of “fair competition” to constitute an “unfair method of competition” under the FTC Act, but the dichotomy made no sense to the Court. The difference between the concepts “lies not only in procedure, but in subject matter.”
On substance, the court held:
We cannot regard the “fair competition” of the codes as antithetical to the “unfair methods of competition” of the FTCA. The “fair competition” of the codes has a much broader range, and a “new significance….for the protection of consumers, competitors, employees, and others, and in furtherance of the public interest… [21]
Such power was the province of Congress, not a regulatory agency.
The court then examined the procedures prescribed for rulemaking under NIRA and adjudicating under FTC Act. Fair competition codes were proposed by industry associations, reviewed by agencies, and adopted by executive orders. By contrast, the FTC had to prove violations in adjudicatory proceedings:
What are “unfair methods of competition” are thus to be determined in particular instances, upon evidence, in the light of particular competitive conditions and of what is found to be a specific and substantial public interest.…To make this possible, Congress set up a special procedure. A Commission, a quasi-judicial body, was created. Provision was made [for] formal complaint, for notice and hearing, for appropriate findings of fact supported by adequate evidence, and for judicial review to give assurance that the action of the Commission is taken within its statutory authority.[22]
In 1935, Congress could not constitutionally delegate the power to issue rules advancing undefined interests of consumers, competitors, employees, and the public to an agency of general jurisdiction. The Congress that passed the FTC Act was well aware of that constraint. That was why the bill’s floor manager assured his colleagues the FTC “will have no power to prescribe the methods of competition to be used in future [or] power of a legislative nature…it will exercise power of a judicial nature.”
Conclusion
A regulatory regime intended to replace vigorous competition with fair competition, to benefit interest groups other than customers, to be implemented while giving short shrift to costs and benefits is unprecedented (at least since NIRA). The mission that the FTC has previewed anticipates rules that can be expected to impose undue costs on legitimate businesses in markets far larger than the sectors once regulated by the ICC and CAB. If history is any guide, the commission’s agenda could cost U.S. consumers hundreds of billions of dollars.
But first, the agency will have to persuade the courts that Congress gave it the power to do so, and if precedent is any guide, the commission will fail. After AMG, courts will be reluctant to extract a phrase in Section 6(g) from the framework of the FTC Act. The power to prevent UMC is specified in the Act, and adjudication is the sole procedure described to exercise that power. If the commission argues that “rules and regulations for the purpose of carrying out the provisions of” the act include vast powers outside those provisions, the agency will end up asking the courts to find another elephant hiding in a mousehole.
[1] 15 U.S.C. §46 (An amendment excepted section 57a(a)(2) from its scope. The amendment specifically authorized consumer protection rules but declined to “affect any authority” the FTC to promulgate other rules.)
[2] National Petroleum Refiners Association v. FTC, 340 F. Supp. 1343 (D.D.C. 1972) (rev’d National Petroleum Refiners v. FTC, 482 F.2d 672 (D.C. Cir., 1973); cert. denied, 415 U.S. 915 (1974).
[13] Id. at 708 (stating, “This view of Congressman Covington’s remarks is buttressed by a reading of one of the cases on which he relied to rebut arguments that the grant of power to the commission to enforce and elaborate the standard of illegality was an unconstitutional delegation of legislative power. United States v. Grimaud, 220 U.S. 506, 55 L. Ed. 563, 31 S.C.t. 480 (1911).”)
[18] Id. (citing D. FitzGerald, The Genesis of Consumer Protection Remedies Under Section 13(b) of the FTC Act 1–2, Paper at FTC 90th Anniversary Symposium, Sept. 23, 2004, arguing that, in the mid-1970s, “no one imagined that Section 13(b) of the [FTC] Act would become an important part of the Commission’s consumer protection program”).
[19] Id. (citing Whitman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2001)).
[20] Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935).
[21] Id at 534 (Citing Title I) (of no help was that the codes could “provide such exceptions to and exemptions from the provisions of such code as the President in his discretion deems necessary to effectuate the policy herein declared.” (quotation marks omitted).)
[22] Id. at 533-344 (citing Federal Trade Comm’n v. Beech-Nut Packing Co., 257 U. S. 441, 257 U. S. 453; Federal Trade Comm’n v. Klesner, 280 U. S. 19, 280 U. S. 27, 280 U. S. 28; Federal Trade Comm’n v. Raladam Co., supra; Federal Trade Comm’n v. Keppel & Bro., supra; Federal Trade Comm’n v. Algoma Lumber Co., 291 U. S. 67, 291 U. S. 73.) Federal Trade Comm’n v. Klesner, supra.)
[Closing out Week Two of our FTC UMC Rulemaking symposium is a contribution from a very special guest: Commissioner Noah J. Phillips of the Federal Trade Commission. You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
In his July Executive Order, President Joe Biden called on the Federal Trade Commission (FTC) to consider making a series of rules under its purported authority to regulate “unfair methods of competition.”[1] Chair Lina Khan has previously voiced her support for doing so.[2] My view is that the Commission has no such rulemaking powers, and that the scope of the authority asserted would amount to an unconstitutional delegation of power by the Congress.[3] Others have written about those issues, and we can leave them for another day.[4] Professors Richard Pierce and Gus Hurwitz have each written that, if FTC rulemaking is to survive judicial scrutiny, it must apply to conduct that is covered by the antitrust laws.[5]
That idea raises an inherent tension between the concept of rulemaking and the underlying law. Proponents of rulemaking advocate “clear” rules to, in their view, reduce ambiguity, ensure predictability, promote administrability, and conserve resources otherwise spent on ex post, case-by-case adjudication.[6] To the extent they mean administrative adoption of per se illegality standards by rulemaking, it flies in the face of contemporary antitrust jurisprudence, which has been moving from per se standards back to the historical “rule of reason.”
Recognizing that the Sherman Act could be read to bar all contracts, federal courts for over a century have interpreted the 1890 antitrust law only to apply to “unreasonable” restraints of trade.[7] The Supreme Court first adopted this concept in its landmark 1911 decision in Standard Oil, upholding the lower court’s dissolution of John D. Rockefeller’s Standard Oil Company.[8] Just four years after the Federal Trade Commission Act was enacted, the Supreme Courtestablished the “the prevailing standard of analysis” for determining whether an agreement constitutes an unreasonable restraint of trade under Section 1 of the Sherman Act.[9] Justice Louis Brandeis, who as an adviser to President Woodrow Wilson was instrumental in creating the FTC, described the scope of this “rule of reason” inquiry in the Chicago Board of Trade case:
The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.[10]
The rule of reason was and remains today a fact-specific inquiry, but the Court also determined from early on that certain restraints invited a different analytical approach: per se prohibitions. The per se rule involves no weighing of the restraint’s procompetitive effects. Once proven, a restraint subject to the per se rule is presumed to be unreasonable and illegal.In the 1911 Dr. Miles case, the Court held that resale minimum price fixing was illegal per se under Section 1.[11] It found horizontal price-fixing agreements to be per se illegal in Socony Vacuum.[12] Since Socony Vacuum, the Court has limited the application of per se illegality to bid rigging (a form of horizontal price fixing),[13] horizontal market divisions,[14] tying,[15] and group boycotts[16].
Starting in the 1970s, especially following research demonstrating the benefits to consumers of a number of business arrangements and contracts previously condemned by courts as per se illegal, the Court began to limit the categories of conduct that received per se treatment. In 1977, in GTE Sylvania, the Courtheld that vertical customer and territorial restraints should be judged under the rule of reason.[17] In 1979, in BMI, it held that a blanket license issued by a clearinghouse of copyright owners that set a uniform price and prevented individual negotiation with licensees was a necessary precondition for the product and was thus subject to the rule of reason.[18] In 1984, in Jefferson Parish, the Court rejected automatic application of the per se rule to tying.[19] A year later, the Court held that the per se rule did not apply to all group boycotts.[20] In 1997, in State Oil Company v. Khan, it held that maximum resale price fixing is not per se illegal.[21] And, in 2007, the Court held that minimum resale price fixing should also be assessed under the rule of reason. In Leegin, the Court made clear that the per se rule is not the norm for analyzing the reasonableness of restraints; rather, the rule of reason is the “accepted standard for testing” whether a practice is unreasonable.[22]
More recent Court decisions reflect the Court’s refusal to expand the scope of “quick look” analysis, an application of the rule of reason that nonetheless truncates the necessary fact-finding for liability where “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.”[23] In 2013, the Supreme Court rejected an FTC request to require courts to apply the “quick look” approach to reverse-payment settlement agreements.[24]The Court has also backed away from presumptive rules of legality. In American Needle, the Court stripped the National Football League of Section 1 immunity by holding that the NFL is not entitled to the single entity defense under Copperweld and instead, its conduct must be analyzed under the “flexible” rule of reason.[25] And last year, in NCAA v. Alston, the Court rejected the National Collegiate Athletic Association’s argument that it should have benefited from a “quick look”, restating that “most restraints challenged under the Sherman Act” are subject to the rule of reason.[26]
The message from the Court is clear: rules are the exception, not the norm. It “presumptively applies rule of reason analysis”[27] and applies the per se rule only to restraints that “lack any redeeming virtue.”[28] Per se rules are reserved for “conduct that is manifestly anticompetitive” and that “would always or almost always tend to restrict competition and decrease output.”[29] And that’s a short list. What is more, the Leegin Court made clear that administrative convenience—part of the justification for administrative rules[30]—cannot in and of itself be sufficient to justify application of the per se rule.[31]
The Court’s warnings about per se rules ring just as true for rules that could be promulgated under the Commission’s purported UMC rulemaking authority, which would function just as a per se rule would. Proof of the conduct ends the inquiry. No need to demonstrate anticompetitive effects. No procompetitive justifications. No efficiencies. No balancing.
But if the Commission attempts administratively to adopt per se rules, it will run up against precedents making clear that the antitrust laws do not abide such rules. This is not simply a matter of the—already controversial[32]—historical attempts by the agency to define under Section 5 conduct that goes outside the Sherman Act. Rather, establishing per se rules about conduct covered under the rule of reason effectively overrules Supreme Court precedent. For example, the Executive Order contemplates the FTC promulgating a rule concerning pay-for-delay settlements.[33] But, to the extent it can fashion rules, the agency can only prohibit by rule that which is illegal. To adopt a per se ban on conduct covered by the rule of reason is to take out of the analysis the justifications for and benefits of the conduct in question. And while the FTC Act enables the agency some authority to prohibit conduct outside the scope of the Sherman Act,[34] it does not do away with consideration of justifications or benefits when determining whether a practice is an “unfair method of competition.” As a result, the FTC cannot condemn categorically via rulemaking conduct that the courts have refused to condemn as per se illegal, and instead have analyzed under the rule of reason.[35] Last year, the FTC docketed a petition filed by the Open Markets Institute and others to ban “exclusionary contracts” by monopolists and other “dominant firms” under the agency’s unfair methods of competition authority.[36] The precise scope is not entirely clear from the filing, but courts have held consistently that some conduct clearly covered (e.g., exclusive dealing) is properly evaluated under the rule of reason.[37]
The Supreme Court has been loath to bless per se rules by courts. Rules are blunt instruments and not appropriately applied to conduct that the effect of which is not so clearly negative. Except for the “obvious,” an analysis of whether a restraint is unreasonable is not a “simple matter” and “easy labels do not always supply ready answers.” [38] Over the decades, the Court has rebuked lower courts attempting to apply rules to conduct properly evaluated under the rule of reason.[39] Should the Commission attempt the same administratively, or if it attempts administratively to rewrite judicial precedents, it would be rewriting the antitrust law itself and tempting a similar fate.
[7]See e.g., Bd. of Trade v. United States, 246 U.S. 231, 238 (1918) (explaining that “the legality of an agreement . . . cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade … restrains. To bind, to restrain, is of their very essence”); Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 687-88 (1978) (“restraint is the very essence of every contract; read literally, § 1 would outlaw the entire body of private contract law”).
[8] Standard Oil Co., v. United States, 221 U.S. 1 (1911).
[9]See Continental T.V. v. GTE Sylvania, 433 U.S. 36, 49 (1977) (“Since the early years of this century a judicial gloss on this statutory language has established the “rule of reason” as the prevailing standard of analysis…”). See also State Oil Co. v. Khan, 522 U.S. 3, 10 (1997) (“most antitrust claims are analyzed under a ‘rule of reason’ ”); Arizona v. Maricopa Cty. Med. Soc’y, 457 U.S. 332, 343 (1982) (“we have analyzed most restraints under the so-called ‘rule of reason’ ”).
[10] Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918).
[11] Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
[12] United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).
[13] See e.g., United States v. Joyce, 895 F.3d 673, 677 (9th Cir. 2018); United States v. Bensinger, 430 F.2d 584, 589 (8th Cir. 1970).
[14] United States v. Sealy, Inc., 388 U.S. 350 (1967).
[15] Northern P. R. Co. v. United States, 356 U.S. 1 (1958).
[16] NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998).
[17] Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977).
[18] Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. 441 U.S. 1 (1979).
[19] Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).
[20] Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985).
[21] State Oil Company v. Khan, 522 U.S. 3 (1997).
[22] Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 885 (2007).
[23] California Dental Association v. FTC, 526 U.S. 756, 770 (1999).
[28] Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 885 (2007).
[29] Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988).
[30] Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. Chi. L. Rev. 357 (2020).
[31] Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 886-87 (2007).
[32] The FTC’s attempts to bring cases condemning conduct as a standalone Section 5 violation were not successful. See e.g., Boise Cascade Corp. v. FTC, 637 F.2d 573 (9th Cir. 1980); Airline Guides, Inc. v. FTC, 630 F.2d 920 (2d Cir. 1980); E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984).
[34] Supreme Court precedent confirms that Section 5 of the FTC Act does not limit “unfair methods of competition” to practices that violate other antitrust laws (i.e., Sherman Act, Clayton Act). See e.g., FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 454 (1986); FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972); FTC v. Brown Shoe Co., 384 U.S. 316, 321 (1966); FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 394-95 (1953); FTC v. R.F. Keppel & Bros., Inc., 291 U.S. 304, 309-310 (1934).
[35] The agency also has recognized recently that such agreements are subject to the Rule of Reason under the FTC Act, which decisions was upheld by the U.S. Court of Appeals for the Fifth Circuit. Impax Labs., Inc. v. FTC, No. 19-60394 (5th Cir. 2021).
[37] OMI Petition at 71 (“Given the real evidence of harm from certain exclusionary contracts and the specious justifications presented in their favor, the FTC should ban exclusivity with customers, distributors, or suppliers that results in substantial market foreclosure as per se illegal under the FTC Act. The present rule of reason governing exclusive dealing by all firms is infirm on multiple grounds.”) But see e.g., ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 271 (3d Cir. 2012) (“Due to the potentially procompetitive benefits of exclusive dealing agreements, their legality is judged under the rule of reason.”).
[38] Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. 441 U.S. 1, 8-9 (1979).
[39]See e.g., Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977) (holding that nonprice vertical restraints have redeeming value and potential procompetitive justification and therefore are unsuitable for per se review); United States Steel Corp. v. Fortner Enters., Inc., 429 U.S. 610 (1977) (rejecting the assumption that tying lacked any purpose other than suppressing competition and recognized tying could be procompetitive); FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) (declining to apply the per se rule even though the conduct at issue resembled a group boycott).
Biden administration enforcers at the U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) have prioritized labor-market monopsony issues for antitrust scrutiny (see, for example, here and here). This heightened interest comes in light of claims that labor markets are highly concentrated and are rife with largely neglected competitive problems that depress workers’ income. Such concerns are reflected in a March 2022 U.S. Treasury Department report on “The State of Labor Market Competition.”
Monopsony is the “flip side” of monopoly and U.S. antitrust law clearly condemns agreements designed to undermine the “buyer side” competitive process (see, for example, this U.S. government submission to the OECD). But is a special new emphasis on labor markets warranted, given that antitrust enforcers ideally should seek to allocate their scarce resources to the most pressing (highest valued) areas of competitive concern?
A May 2022 Information Technology & Innovation (ITIF) study from ITIF Associate Director (and former FTC economist) Julie Carlson indicates that the degree of emphasis the administration’s antitrust enforcers are placing on labor issues may be misplaced. In particular, the ITIF study debunks the Treasury report’s findings of high levels of labor-market concentration and the claim that workers face a “decrease in wages [due to labor market power] at roughly 20 percent relative to the level in a fully competitive market.” Furthermore, while noting the importance of DOJ antitrust prosecutions of hard-core anticompetitive agreements among employers (wage-fixing and no-poach agreements), the ITIF report emphasizes policy reforms unrelated to antitrust as key to improving workers’ lot.
Key takeaways from the ITIF report include:
Labor markets are not highly concentrated. Local labor-market concentration has been declining for decades, with the most concentrated markets seeing the largest declines.
Labor-market power is largely due to labor-market frictions, such as worker preferences, search costs, bargaining, and occupational licensing, rather than concentration.
As a case study, changes in concentration in the labor market for nurses have little to no effect on wages, whereas nurses’ preferences over job location are estimated to lead to wage markdowns of 50%.
Firms are not profiting at the expense of workers. The decline in the labor share of national income is primarily due to rising home values, not increased labor-market concentration.
Policy reform should focus on reducing labor-market frictions and strengthening workers’ ability to collectively bargain. Policies targeting concentration are misguided and will be ineffective at improving outcomes for workers.
The ITIF report also throws cold water on the notion of emphasizing labor-market issues in merger reviews, which was teed up in the January 2022 joint DOJ/FTC request for information (RFI) on merger enforcement. The ITIF report explains:
Introducing the evaluation of labor market effects unnecessarily complicates merger review and needlessly ties up agency resources at a time when the agencies are facing severe resource constraints.48 As discussed previously, labor markets are not highly concentrated, nor is labor market concentration a key factor driving down wages.
A proposed merger that is reportable to the agencies under the Hart-Scott-Rodino Act and likely to have an anticompetitive effect in a relevant labor market is also likely to have an anticompetitive effect in a relevant product market. … Evaluating mergers for labor market effects is unnecessary and costly for both firms and the agencies. The current merger guidelines adequately address competition concerns in input markets, so any contemplated revision to the guidelines should not incorporate a “framework to analyze mergers that may lessen competition in labor markets.” [Citation to Request for Information on Merger Enforcement omitted.]
In sum, the administration’s recent pronouncements about highly anticompetitive labor markets that have resulted in severely underpaid workers—used as the basis to justify heightened antitrust emphasis on labor issues—appear to be based on false premises. As such, they are a species of government misinformation, which, if acted upon, threatens to misallocate scarce enforcement resources and thereby undermine efficient government antitrust enforcement. What’s more, an unnecessary overemphasis on labor-market antitrust questions could impose unwarranted investigative costs on companies and chill potentially efficient business transactions. (Think of a proposed merger that would reduce production costs and benefit consumers but result in a workforce reduction by the merged firm.)
Perhaps the administration will take heed of the ITIF report and rethink its plans to ramp up labor-market antitrust-enforcement initiatives. Promoting pro-market regulatory reforms that benefit both labor and consumers (for instance, excessive occupational-licensing restrictions) would be a welfare-superior and cheaper alternative to misbegotten antitrust actions.
[The 12th entry in our FTC UMC Rulemaking symposium is from guest contributor Steven J. Cernak, a partner in the antitrust and competition practice of BonaLaw in Detroit, Michigan. You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
The Federal Trade Commission (FTC) has been in the antitrust-enforcement business for more than 100 years. Its new leadership is considering some of the biggest changes ever in its enforcement methods. Instead of a detailed analysis of each case on its own merits, some FTC leaders now want its unelected bureaucrats to write competition rules for the entire economy under its power to stop unfair methods of competition. Such a move would be bad for competition and the economy—and for the FTC itself.
The FTC enforces the antitrust laws through its statutory authority to police unfair methods of competition (UMC). Like all antitrust challengers, the FTC now must conduct a detailed analysis of the specific actions of particular competitors. Whether the FTC decides to challenge actions initially in its own administrative courts or in federal courts, eventually it must convince independent judges that the challenged conduct really does harm competition. When finalized, those decisions set precedent. Future parties can argue their particular details are different or otherwise require a different outcome. As a result, the antitrust laws slowly evolve in ways understandable to all.
Some members of FTC’s new leadership have argued that the agency should skip the hard work of individual cases and instead issue blanket rules to cover competitive situations across the economy. Since taking over in the new administration, they have taken steps that seem to make it easier for the FTC to issue such broad competition rules. Doing so would be a mistake for several reasons.
First, it is far from clear that Congress gave the FTC the authority to issue such rules. Also, any such grant of quasi-legislative power to this independent agency might be unconstitutional. The FTC already gets to play prosecutor and judge in many cases. Becoming a legislature might be going too far. Other commentators, both in this symposium and elsewhere, have detailed those arguments. But however those arguments shake out, the FTC will need to take the time and resources to fight off the inevitable challenges.
But even if it can, the FTC should not. The case-by-case approach allows for detailed analysis, making it more likely to be correct. If there are any mistakes, they only affect those parties.
If it turns to competition rulemaking, how will the FTC gain the knowledge and develop the wisdom to develop rules that apply across large swaths of the economy for an unlimited time? Will it apply the same rules to companies with 8% and 80% market share? And to companies making software or automobiles or flying passengers across the country? And will it apply those rules today and next year, no matter the innovations that occur in between? The hubris to think that some all-knowing Washington wizards can get all that right, all the time, is staggering.
Yes, there are some general antitrust rules, like price-fixing agreements being illegal because they harm consumers. But those rules were developed by many lawyers, economists, judges, and witnesses through decades of case-by-case analyses and, even today, parties can argue to a court that they don’t apply to their particular facts. A one-size-fits-all rule won’t have even that flexibility.
For example, what if the FTC develops a rule based on, say, an investigation of toilet-bowl manufacturers that all price-fixing, even if the fixed price is reasonable, is automatically illegal. How would such a rigid rule handle, say, a joint license with a single price issued by competing music composers? Or could a single rule that anticipates the very different facts of Trenton Potteriesand Broadcast Musicbe written in a way that is both short enough to be understood but broad enough to anticipate all potential future facts? Perhaps the rule inspired by Trenton Potteries could be adjusted when the Broadcast Music facts become known. But then, that is just back to the detailed, case-by-case, analysis that we have now, except with the FTC rule-makers changing the rules rather than an independent judge.
Any new FTC rules could conflict with the court opinions generated by antitrust cases brought by the U.S. Justice Department’s (DOJ) Antitrust Division, state attorneys general, or private parties. For instance, the FTC and the Division generally divide up the industries that make up the economy based on expertise and experience. Should the competitive rules differ by enforcer? By industry?
As an example, consider, say, a hypothetical automatic-transmission company whose smallest products can be used in light-duty pickup trucks while the bulk of its product line is used in the largest heavy-duty trucks and equipment. Traditionally, the FTC has reviewed antitrust issues in the light-duty industry while the Division has taken heavy-duty. Should the antitrust rules affecting this hypothetical company’s light-duty sales be different than those affecting the heavy-duty sales based solely on the enforcer and not the applicable competitive facts?
Antitrust is a law-enforcement regime with rules that have changed slowly over decades through individual cases, as economic understandings have evolved. It could have been a regulatory regime, but elected officials did not make that choice. Antitrust could be changed now to a regulatory regime. Individual rules could be changed. Such monumental changes, however, should only be made by Congress, as is being debated now, not by three unelected FTC officials.
In the 1970s, the FTC overreached on rules about deceptive marketing and was slapped down by Congress, the courts, and the public. The Washington Post criticized it as “the national nanny.” Its reputation and authority suffered. We did not need a national nanny then. We don’t need one today, hectoring us to follow overbroad, ill-fitting rules designed by insulated “experts” and not subject to review.
The FTC has very important roles to play regarding understanding and protecting competition in the U.S. economy (before even getting to its crucial consumer-protection mission.) Even with potential increases in its budget, the FTC, like all of us, will have limited resources, time, expertise, and reputation. It should not squander any of that on an ill-fated, quixotic, and hubristic effort to tell everyone how to compete. Instead, the FTC should focus on what it does best: challenging the bad actions of bad actors and convincing a court that it got it right. That is how the FTC can best protect America’s consumers, as its (nicely redesigned) website proclaims.
[Today’s guest post—the 11th entry in our FTC UMC Rulemaking symposium—comes from Ramsi A. Woodcock of the University of Kentucky’s Rosenberg College of Law. You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
In an effort to fight inflation, the Federal Open Market Committee raised interest rates to 20% over the course of 1980 and 1981, triggering a recession that threw more than 4 million Americans, many in well-paying manufacturing jobs, out of work.
As it continues to do today, the committee met in secret and explained its rate decisions in a handful of paragraphs.
None of the millions of Americans thrown out of work—or the many businesses driven to bankruptcy—sued the FOMC. No one argued that the FOMC’s power to disrupt the American economy was an unconstitutional delegation of legislative authority. No one argued that, in adopting its rate decisions, the FOMC had failed to comply with any of the notice-and-comment procedures required by the Administrative Procedure Act (APA).
They were wise not to sue, because they would havelost.
There have been only five lawsuits against the FOMC since it was created in 1933. All have failed; none has challenged a FOMC rate decision.
As Judge Augustus Hand put it in a related case: “it would be an unthinkable burden upon any banking system if its open market sales and discount rates were to be subject to judicial review.”
Even if everything Frank Easterbrook has had to say about antitrust is correct, it is unlikely that the Federal Trade Commission (FTC) could ever trigger a recession, much less one as severe as the one the FOMC created 40 years ago. And yet, no FTC commissioner can dream of the agency enjoying anything like the level of deference from the courts enjoyed by the FOMC.
The reality of FTC practice is just too depressing.
The FTC Act of 1914 is an expression of profound ambivalence about the administrative project, denying to the FTC even the authority to carry out internal deliberations other than through an adjudicative process. The FTC must bring an administrative complaint; firms have the right to a hearing; and so on. A Congress that would do that to an agency would certainly subject the agency’s final decisions to review by the federal courts—which, of course, Congress did.
Unlike their francophone peers on the European Court of Justice (ECJ), who have leveraged a culture of judicial deference to administrative action—as well as the fact that the ECJ’s language of business is their native tongue—to give the European Union’s antitrust agency something like carte blanche, American judges have delighted at using their powers to humiliate the FTC.
Take pay-for-delay. The FTC—informed by a staff of 80 PhD economists, not all Democrats—declared the practice to be bad for consumers in the late 1990s. But severalcourts actually decided that the practice was so good for consumers that it should be per se legal instead. It took more than a decade of litigation before the FTC was able to make a dent in the rate of accumulation of these agreements.
So whipped is the FTC by the courts that even when it dreams of a better life, the commission seems unable to imagine one without judicial review. During a period when bipartisan groups of legislators are seeking to reform the antitrust laws, one might have hoped that the FTC would ask for some of the discretion enjoyed by the FOMC.
Instead, the FTC’s current leadership appears intent to strap the FTC into the straightjacket of notice-and-comment rulemaking under the APA, which will only extend the FTC’s subjugation to the courts.
Indeed, progressives understood the passage of the APA in 1946 to be a signal defeat, clawing back power for the courts that progressives had fought for two generations to lodge in administrative agencies. The act was literally adopted over FDR’s dead body—he vetoed its forerunner in 1940 and died in 1945. It is consistent with contemporary progressives’ habit of mistaking counterproductive, middle-of-the-road policies for radical interventions (the original progressives of a century ago didn’t think much of the entire antitrust enterprise, either), that they should mistake the APA’s notice-and-comment rulemaking for a recipe for FTC invigoration.
To be sure, the issuance of competition regulations would be a new thing for the FTC. Rather than just enforce existing antitrust rules (and fantasizing that, one day, a court might read the FTC’s power to condemn “unfair methods of competition” more broadly), the FTC would be able actually to make new antitrust law.
But law is a double-edged sword for an administrative agency. It binds the public, but it also binds the agency. Any rule the FTC seeks to adopt, the FTC itself must follow; if a defendant can show that the firm complied, the FTC loses its case.
And that’s after the FTC has made it through the hell of the rulemaking process itself—the notice-and-comment periods, the court challenges to the agency’s interpretation of every point of process, along with the substantive basis for the rule—for every single rule the agency wishes to adopt. Or to repeal.
The FOMC suffers no such indignities.
Although Congress calls the FOMC’s decisions “regulations,” they are not subject to the APA. The FOMC can make a rate decision and then change its mind whenever and however it wishes. The FOMC does not need to provide the public with notice and an opportunity to comment—indeed, the FOMC waits five years to release transcripts of its deliberations—and its decisions are never reviewed, even for caprice.
If the FTC wanted real power—if it wanted to get something done—it would want discretion. Discretion has made the FOMC nimble and being nimble has made the FOMC effective. Economists agree that the FOMC’s rate decisions slew inflation in the early 1980s; it could not have done that if, like the FTC and pay-for-delay, it had had to wait a decade for the courts’ approval.
As Judge Hand put it, “the correction of discount rates by judicial decree seems almost grotesque, when we remember that conditions in the money market often change from hour to hour, and the disease would ordinarily be over long before a judicial diagnosis could be made.”
How strange it is to read this as an antitrust scholar and reflect that the single most important attack on antitrust enforcement has always been, in Judge Hand’s words, that “the disease [is] ordinarily … over long before a judicial diagnosis [is] made.”
Is that not the lesson drawn by antitrust’s critics from the Microsoft litigation? Microsoft may well have monopolized operating systems in 1992 or 1994. But by the time the case settled in 2001, Windows’ dominance could not be rolled back. America was already used to a single operating system, a single Office suite, and so on. And mobile, which Microsoft did not dominate, was on the horizon. If there had been a time when antitrust enforcers could have done something to promote competition, it had passed.
Or AT&T. Antitrust managed to break the company up just in time for the cell-phone revolution to render its decades-old landline monopoly irrelevant.
If, as Judge Hand observed, “conditions in the money market change from hour to hour,” so too do conditions in virtually every market—including the markets that the FTC regulates. If that is the argument for FOMC discretion, it is an equally potent argument for FTC discretion.
But to get power, you have to want it, and the current leadership cries out instead only for a more varied servitude.
The case for instead making the FTC more like the FOMC is strong. (Even the name fits.)
Both institutions are charged with using indirect methods to get prices right in fluid market environments—the FOMC by using the purchase and sale of securities to get interest rates right; the FTC by tweaking market structure to get market prices to competitive levels. As has already been observed, this can be done effectively only through the unfettered exercise of administrative discretion.
Independence from all three branches of government (including the courts) is essential to both. Just as an accountable FOMC would probably not have had the will to throw millions out of work and drive many businesses into bankruptcy in order to fight inflation—even though that was ultimately best for the economy—an accountable FTC cannot embark on a campaign of economy-wide deconcentration when that is the right thing for the economy (which is not to say that it always is).
The sort of systemic regulation of the preconditions for a successful capitalism in which both the FOMC and the FTC are engaged creates too many powerful winners and losers for either institution to be able to do its job without complete and utter discretion to act as it sees fit—something the FTC lacks.
Indeed, the last time the FTC tried to flex its muscles, it was smacked down by all three branches of government—attacked by both Jimmy Carter and Ronald Reagan from the campaign trail, threatened with defunding by Congress, and rejected by the courts.
One can distinguish the FOMC from the FTC on the grounds that the FOMC paints with a broader brush than does the FTC. To get interest rates right, the FOMC directs the purchase and sale of securities, often in great volumes, whereas the FTC may need to tell a single, identifiable company how to do a particular, identifiable thing, such as to distribute a particular input on reasonable terms or to excise a particular provision from its contracts. Because of the potential for abuse of the individual that might result from such individualized action, the argument goes, the courts must keep the FTC on a tighter leash.
There is a fictional premise here. The FTC rarely deals with individuals—flesh-and-blood humans—but instead with corporations, often so large that they have thousands of workers and managers, and still more shareholders. The potential for abuse of actual individuals, as opposed to the fictive corporate individual, is low.
But even if we accept this fiction—as, alas, the courts have done—the FTC differs from the FOMC here only because it has so far adhered to an adjudicatory model of decisionmaking. The FTC could, for example, decide instead to target competitive prices by ordering every firm in the economy having an accounting profit in excess of 15% to be broken up, along the lines of the Industrial Reorganization Act considered by Congress in the 1970s.
That would paint with a brush of FOMCian breadth. Indeed, by varying the triggering profit percentage, the FTC would be able to vary, in a rough way, the level of competition and hence the level of prices in the economy, just as, by varying its target interest rate, the FOMC varies, in a rough way, the level of inflation in the economy.
(I do not mean to suggest an equivalence between monopoly pricing and inflation; monopoly pricing is a problem of levels whereas inflation is a problem of ratesof change; they are two different problems with two different causes, two different institutions to mind them, and two different fixes.)
And although such a broad approach would surely send copious “good” firms that have engaged in no monopolizing activities to their fates, the FOMC’s rate increases doubtless also send to their fates plenty of “good” firms that have not inflated their prices but cannot survive at a 20% cost of capital. The FOMC does that because it is more expedient to discipline every firm than to identify the inflators and coax them into altering their behavior on a case-by-case basis.
We tolerate this sacrifice of innocents because we believe that low inflation confers long-term gains on everyone. If we believe that competitive pricing confers long-term gains on everyone—and that is the premise of competition policy—surely we must tolerate the same from the FTC.
If anything, the case for a broad-brush FTC is stronger than that for the FOMC, because, as already noted, no matter how overzealous the deconcentration program, it is hard to imagine deconcentration plunging the economy into recession and throwing millions of Americans out of work, at least in the short run.
If anything, deconcentration should raise employment, because competition is wasteful and duplicative; all those shards of big firms need their own independent support staffs. And, of course, it is a staple of antitrust theory that when competition increases, output goes up, not down.
One might also seek to distinguish between the FOMC and the FTC on the grounds that what the FTC must do is more complicated, and hence more prone to error, than what the FOMC must do, making oversight more appropriate for the FTC. Both inflation and monopoly power are bad for growth, the argument might go, but the connection between inflation and growth is clear whereas that between monopoly power and growth—not so much.
Indeed, too much inflation prevents firms from planning and, so, from innovating. But while the adversity associated with competition is the mother of invention, many innovations—such as social networks—can be delivered only at scale, suggesting that too much competition can be as bad for growth as too little. It would seem to follow that getting monetary policy right is easy, whereas getting competition policy right is hard.
Except that the FOMC must strike a balance between too much inflation and too little, just as the FTC must strike a balance between too much competition and too little.
Deflation can be just as bad for growth—just as hard on business planning—as inflation, as any Japanese central banker of the previous generation can tell you. The FOMC must, therefore, find the interest rates that produce neither too much nor too little inflation, just as the FTC must find the level of concentration that produces neither too much nor too little competition.
Both the FOMC and the FTC have hard jobs. Why do we trust one to handle its job better than the other?
One reason might be that the FOMC is a friend to big business whereas the FTC is a natural enemy thereof. Inflation, when unexpected, levels, because it reduces the real value of debts. If firms tend to be creditors and consumers debtors, and firms’ shareholders tend to be richer than consumers, the wealth gap narrows.
It follows that, in preventing inflation, the FOMC tilts, and so big business wants the FOMC healthy and free. The FTC, by contrast, levels, because it eliminates monopoly profits, benefiting consumers at the expense of shareholders. So, big business prefers the FTC shackled.
If that is right, then the FOMC enjoys a level of discretion that the FTC never can, because the power behind government never will give the FTC so loose a leash. Congress has authorized both the FOMC and the FTC to create regulations. But the courts would never interpret this language consistently; for the FOMC, to “adopt” a “regulation” means to do whatever you like whereas for the FTC to “make” a “regulation” means either nothing at all or, at best, notice-and-comment rulemaking under the APA.
But I rather think there is a better explanation for the divergent experiences of the FOMC and the FTC, one that does not turn on class conflict and which has been staring us in the face all along.
Just as competition policy probably cannot cause a recession or throw millions of Americans out of work, it probably cannot much increase growth or employ many more Americans either. The future of an economy may be decided by the variance of an interest rate between 0% and 20%; this is not so for the variance of a market price between the competitive level and the monopoly level. The FOMC is simply more important to the success of the capitalist system than is the FTC.
And both are probably not that important for economic inequality. While unexpected inflation does tend to make debts go away, firms rewrite contracts to account for expected inflation, so inflation’s contribution to equality is blip-like.
The contribution of monopoly profits to inequality is also likely to be small; scarcity profits, which firms generate even in competitive markets, are likely to play a more important role. At least, that’s what Thomas Piketty, the dean of inequality studies, happens to think.
And maybe also what the rich think: there is conservative support for more competition policy, but none for more tax policy, which tells us something about which is likely to have a more radical impact on the distribution of wealth.
So, it is because the FTC is not dangerous, rather than because it is dangerous, that we feel free to hobble it with process. And because the FOMC is dangerous that we want it free and maximally effective.
Just so, there is no due process in wartime because there is so much at stake, whereas in peacetime you can’t kill a statue without multiple appeals.
Which takes us back to the real deficit in progressive radicalism. Yes, rulemaking for the FTC is a cop out.
[The tenth entry in our FTC UMC Rulemaking symposium comes from guest contributor Kacyn H. Fujii, a 2022 J.D. Candidate at the University of Michigan Law School. Kacyn’s entry comes via Truth on the Market‘s “New Voices” competition, open to untenured or aspiring academics (including students and fellows). You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
On July 9, 2021, President Joe Biden issued an executive order asking the Federal Trade Commission (FTC) to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” This executive order raises two questions. First, does the FTC have the authority to issue such a rule? And second, is FTC rulemaking a better solution than adjudication to solve the widespread use of noncompetes? This post contends that the FTC possesses rulemaking authority and that FTC rulemaking is a better solution than adjudication for the problem of noncompete use, especially for low-wage workers.
FTC’s Rulemaking Authority
In 1973, the U.S. Court of Appeals for the D.C. Circuit in National Petroleum Refiners Association v. FTC held that the Federal Trade Commission Act permitted the FTC to promulgate rules under its unfair methods of competition (UMC) authority. Specifically, it interpreted Section 6(g), which gives the FTC the authority “to make rules and regulations for the purpose of carrying out the provisions in this subchapter,” to allow rulemaking to carry out the FTC’s Section 5 authority. In his remarks at the 2020 FTC workshop on noncompetes, Richard Pierce of George Washington University School of Law argued that no court today would follow National Petroleum’s reasoning, even going so far as to call its logic “preposterous.” BYU Law’s Aaron Nielson agreed that some of National Petroleum’s reasoning was outdated but conceded that its judgment might have been correct. Meanwhile, FTC Chair Lina Khan and former FTC Commissioner Rohit Chopra have spoken in favor of the FTC’s competition-rulemaking authority, both from a legal and policy perspective.
National Petroleum’s focus on text is consistent with the approaches that courts today take. The court first addressed appellees’ argument that the FTC may carry out Section 5 only through adjudication, because adjudication was the only form of implementation explicitly mentioned in Section 5. The D.C. Circuit noted that, although Section 5(b) granted the FTC adjudicative authority, nothing in the text limited the FTC only to adjudication as a means to implement Section 5’s substantive protections. It dismissed the appellee’s argument that expressio unius meant that adjudication was the only mechanism the agency had available to implement Section 5. The D.C. Circuit also rejected the district court’s interpretation of the legislative history, because it was too ambiguous to find Congress’s “specific intent.” Similar to the approach courts take today, National Petroleum gave the text primacy over legislative history, putting significant weight on the fact that the language of Sections 5 and 6(g) is broad.
It is true that, as Nielson notes, courts today would not so readily dismiss employing canons like expressio unius. But courts today would not necessarily employ expressio unius either. The language of Section 6(g) authorizing FTC use of rulemaking is clear and broad, expressly including Section 5 among the sections the FTC may implement through rulemaking, so Congress may have not thought it necessary to explicitly mention rulemaking in Section 5. Given how clear the language is, it also does not seem so farfetched that a court today would decide to not apply the expressio unius canon to imply an exception to the language. As the Court has commented in rejecting the expressio unius canon’s implications, “the force of any negative implication [from this canon] depends on context,” and can be negated by indications that an enactment was “not meant to signal any exclusion.”
Others argue that National Petroleum’s interpretation of Sections 5 and 6(g) would not hold up in light of newer interpretive moves deployed by courts. For example, former FTC Commissioner Maureen Ohlhausen and former Assistant Attorney General James Rill contend that the FTC should not have broad competition-rulemaking authority because of the “elephants-in-mouseholes” doctrine articulated in Whitman v. American Trucking. They invoke AMG Capital Management v. FTC as evidence that the Court is wary about “allow[ing] a small statutory tail to wag a very large dog.” The Court in AMG considered whether Section 13(b) of the FTC Act, which expressly authorized the FTC to seek injunctive relief from the federal courts, also permitted the agency to seek monetary damages. The Court concluded that the FTC could not seek monetary damages from courts. Permitting this would allow the FTC to bypass its administrative process altogether, thus contravening Congress’ goals by failing to “produce[] a coherent enforcement scheme.” However, Sections 5 and 6(g) are distinguishable from the statutory provision at issue in AMG. Unlike Section 13(b), which did not explicitly grant the FTC authority to seek monetary damages, Section 6(g) does explicitly give the FTC rulemaking authority to carry out the other provisions of the Act with no limitations on this broad language. Meanwhile, there is no “coherent enforcement scheme” that would be served by limiting Section 6 only to methods to carry out Section 5’s adjudicative authority. Rulemaking authority does not detract from the FTC’s ability to adjudicate.
One could also argue that, according to the “specific over the general” canon, adjudication should be the FTC’s primary implementation method: Section 5(b), which is very specific in its description of the FTC’s adjudicative authority, should govern over Section 6(g), which discusses rulemaking only in general language. But there is no inherent conflict between the general and specific provisions here. Even if adjudication was intended as the primary implementation method, Section 5 does not explicitly preclude rulemaking as an option in its text. There may be valid functional reasons that Congress would want an agency that acts primarily through adjudication to also have substantive rulemaking authority. National Petroleum itself observed that “the evolution of bright-line rules [through adjudication] is often a slow process” and that “legislative-type” rulemaking procedures allow the agency to consider “broad range of data and argument from all those potentially affected.” In addition, as Emily Bremer of Notre Dame Law School observes, Congress consistently sets more specific guidelines for adjudication to meet individual agency and program needs, resulting in “extraordinary procedural diversity” across adjudication regimes. The greater level of specificity with respect to adjudication in Section 5(b) of the FTC Act may simply reflect Congress’ perceived need to delineate adjudication regimes in further detail than it does for rulemaking.
In addition, some who are doubtful about the FTC’s rulemaking authority have cited legislative context. Specifically, Ohlhausen and Rill argue that the Magnuson-Moss Warranty Act demonstrates Congress’ concern with the FTC having expansive rulemaking power. Thus, broad competition-rulemaking authority would be inconsistent with the approach Congress took in Magnuson-Moss. However, the passage of Magnuson-Moss also implies that Congress thought the FTC had existing rulemaking power that Congress could limit—thus validating National Petroleum’s overall holding that the FTC did have rulemaking authority. In addition, Congress could have also extended Magnuson-Moss’s limits on rulemakings to competition-rulemaking authority but decided to apply it only to the FTC’s consumer-protection authority. This interpretation is supported by the text as well. The Magnuson-Moss provision expressly states that its changes “shall not affect any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce.” Congress specifically exempted competition rulemaking from Magnuson-Moss’s additional procedural requirements. If anything, this demonstrates that Congress did not want to interfere with the FTC’s competition authority.
The history of the FTC Act also supports that Congress would not have wanted to create an expert agency limited only to adjudicative authority. The FTC Act was passed during a time of unprecedented business growth, in spite of the passage of the Sherman Act in 1890. More specifically, Congress enacted the FTC Act in response to Standard Oil. Standard Oil established rule-of-reason analysis that some decried as a judicial “power grab.” Even though members of Congress disagreed about the proper scope of the FTC’s authority, all of the proposed plans for the FTC reflected Congress’ deep objections to the existing common law approach to antitrust enforcement. Congress was concerned that the existing approach was “yielding a body of law that was inconsistent, unpredictable, and unmoored from congressional intent.” Its solution was to create the FTC. The legislative context supports interpreting the statute to give the FTC all of the tools—including rulemaking—to respond effectively to nascent antitrust threats.
Finally, the FTC’s historical reliance on adjudication does not mean that it lacks the authority to promulgate rules. Assuming the relevance of historical practice—an assumption AMG cast doubt upon when it spurned the FTC’s longstanding interpretation of the FTC Act—there are reasons that an agency may choose adjudication over rulemaking that have nothing to do with its views of its statutory authority. The FTC’s preference for adjudication may simply have reflected the policy-focused views of its leadership. For example, James Miller, who chaired the FTC from 1981 to 1985, had “fundamental objections to marketplace regulation through rulemaking” because he thought Congress would exert too much pressure on rulemaking efforts. He attempted to thwart ongoing rulemaking efforts and instead vowed to take an “aggressive” approach to enforcement through adjudication. But this does not mean he thought the FTC lacked the authority to promulgate rules at all. Over the past several decades, the courts and federal antitrust enforcers have taken a non-interventionist or laissez-faire approach to enforcement. The FTC’s history of not relying on rulemaking may simply be indicators of the agency’s policy preferences and not its views of its authority.
In short, National Petroleum’s interpretive moves are sound and its conclusion that the FTC possesses UMC-rulemaking authority should stand the test of time.
Benefits of FTC Rulemaking for Curbing Non-Compete Use
President Biden’s executive order also raised the question of whether FTC rulemaking is the right tool to address the problem of liberal noncompete use. This post argues that FTC rulemaking would have tangible benefits over adjudication, especially for noncompetes that bind low-wage workers.
The Problem with Noncompetes
Noncompete clauses, which restrict where an employee may work after they leave their employer, have been used widely even in contexts divorced from the justifications for noncompetes. Typical justifications for noncompetes include protecting trade secrets and goodwill, increasing employers’ incentives to invest in training, and improving employers’ leverage in negotiations with employees. Despite these justifications, noncompetes are used for workers who have no access to trade secrets or customer lists. According to a survey conducted in 2014, 13.3% of workers that made $40,000 per-year or less were subject to a noncompete, and 33% of those workers reported being subject to a noncompete at some point in the past. Noncompete use reduces worker mobility, even for those workers not themselves bound by noncompetes. It also results in lower wages for those bound by noncompetes. Interestingly, these effects on worker mobility and wages are present even in states where noncompetes are unenforceable.
Although noncompetes are typically governed on the state level, the magnitude of noncompete use could pose an antitrust problem. Noncompetes help employers maintain “high levels of market concentration,” which “reduce[s] competition rather than spur[ring] innovation.” However, it can be very difficult for private parties and state enforcers to challenge noncompete use under antitrust law. One employer’s use of noncompetes is unlikely to have an appreciable difference on the labor market. The harm to labor markets is only detectable in aggregate, making it virtually impossible to succeed on an antitrust challenge against an employer’s use of noncompetes. Indeed, University of Chicago Law’s Eric Posner has observed that, as of 2020, there were “a grand total of zero cases in which an employee noncompete was successfully challenged under the antitrust laws.” According to Posner, courts either claim that noncompetes involve “de minimis” effects on competition or do not create “public” injuries for antitrust law to address.
And while there have been a handful of settlements between state attorneys general and companies that use noncompetes—like the settlement between then-New York Attorney General Barbara D. Underwood and WeWork in 2018—these settlements capture only the most egregious uses of noncompetes. There are likely many other companies who use noncompetes in anticompetitive ways, but they do not operate at such scale as to warrant an investigation. State attorneys general have resource constraints that limit them to challenge only the most harmful restraints on workers. Even if these cases went to trial, instead of settling, their precedential effect would thus set only the upper bound for what is an anticompetitive use of noncompete agreements.
Further, the FTC’s current approach of relying on adjudication is unlikely to be effective in curbing widespread noncompete use. Scholars have critiqued the FTC’s historical reliance on adjudication, saying that it has failed to generate “any meaningful guidance as to what constitutes an unfair method of competition.” Part of this is because antitrust law largely relies on rule-of-reason analysis, which involves a “broad and open-ended inquiry” into the competitive effects of particular conduct. Given the highly fact-specific nature of rule-of-reason analysis, the holding of one case can be difficult to extend to another and thus leads to problems in administrability and efficiency. Even judges “have criticized antitrust standards for being highly difficult to administer.” Reliance on the rule of reason also leads to a lack of predictability, which means that market participants and the public have less notice about what the law is.
In addition, private parties cannot litigate UMC claims under Section 5 of the FTC Act; the agency itself must determine what counts as an unfair method of competition. Perhaps because of resource constraints, the FTC has only brought a “modest number” of cases that “provide an insufficient basis from which to attempt to generate substantive rules defining the Commission’s Section 5 authority.”
Benefits of Rulemaking
FTC rulemaking under its UMC authority would avoid many of the problems of a case-by-case approach. First, rulemaking would provide clarity and efficiency. For example, a rule could declare it illegal for employers to use noncompetes for employees making under the median national income. Such a rule clearly articulates the FTC’s policy and is easy to apply. This demonstrates how rulemaking can be more efficient than adjudication. In order to implement a similar policy through adjudication, the FTC may have to bring many cases covering various industries and defendants that employ low-wage workers, given the nature of rule-of-reason analysis.
Rulemaking is also more participatory than adjudication. Interested parties and the general public can weigh in on proposed rules through the notice-and-comment process. Adjudication involves only those who are party to the suit, leaving “broad swaths of market participants watching from the sidelines, lacking an opportunity to contribute their perspective, their analysis, or their expertise, except through one-off amicus briefs.” However, low-wage workers are unlikely to have the resources required to prepare and submit an amicus brief and may not even be aware of the litigation in the first place. In contrast, it is much easier for low-wage workers or their future employers to participate in the notice-and-comment process, which only requires submitting a comment through an online form. Unions or employee-rights organizations can help to facilitate worker participating in rulemaking as well.
A uniform approach through rulemaking means that more workers will be on notice of the FTC’s policy. Worker education is an important factor in solving the problem. Even in states where noncompetes are not enforceable, employers still use and threaten to enforce noncompetes, which reduces worker mobility. A clear policy articulated by the FTC may help workers to understand their rights, perhaps because a national rule will get more media attention than individual adjudications.
Although it may be true that rulemaking is, in general, less adaptable than adjudication, there may be a category of cases where our understanding is unlikely to change over time. For example, agreements to fix prices are so clearly anticompetitive that they are per se illegal under the antitrust laws. Our understanding of the anticompetitive nature of price fixing is highly unlikely to change over time.
Noncompetes for low-wage workers should be in this category of cases. This use of noncompetes is divorced from traditional justifications for noncompetes. The nature of the work for low-wage workers—say, for janitors or cashiers—is unlikely to ever require significant employer resources for training or disclosure of customer lists or trade secrets. Given the negative effects that noncompetes can have on mobility and wages, even in states where they are not enforceable, they clearly do more harm than good to the labor market. It is difficult to imagine that market conditions or economic understanding would change this.
Further, even though rulemaking can take time, the FTC’s adjudicative process is not necessarily much better. In 2015, adjudications through the FTC’s administrative process typically took two years. Former FTC Commissioner Philip Elman once observed that case-by-case adjudication “may simply be too slow and cumbersome to produce specific and clear standards adequate to the needs of businessmen, the private bar, and the government agencies.” Even if rulemaking takes longer, it may still be more efficient because of a rule’s ability to apply across the board to different industries and types of workers. It may also be more efficient because it is better able to capture all of the relevant considerations through the notice-and-comment process.
It is true that some states already have a bright-line rule against noncompetes by making noncompetes unenforceable. Even so, there is value in establishing a bright-line rule through rulemaking at a federal level: this provides greater uniformity across states. In addition, rulemaking could have some value if it is used to establish notice requirements—for example, the FTC could promulgate a rule requiring employers to notify employees of the relevant noncompete laws. Notice requirements are one example where case-by-case adjudication would be especially ineffective.
Conclusion
In certain contexts, rulemaking is a better alternative to adjudication. Noncompete use for low-wage workers is one such example. Rulemaking provides more uniformity, notice, and opportunity to participate for low-wage workers than adjudication does. And given that both state noncompete law and federal antitrust law require such fact-specific inquiries, rulemaking is also more efficient than adjudication. Thus, the FTC should use its competition-rulemaking authority to ban noncompete use for low-wage workers instead of relying only on adjudication.
[The ninth entry in our FTC UMC Rulemaking symposium comes from guest contributor Aaron Nielsen of BYU Law. It is the second post we are publishing today; see also this related post from Jonathan M. Barnett of USC Gould School of Law. Like that post, it adapts a paper that will appear as a chapter in the forthcoming book FTC’s Rulemaking Authority, which will be published by Concurrences later this year. You can find other posts at thesymposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
For obvious reasons, many scholars, lawyers, and policymakers are thinking hard about whether the Federal Trade Commission (FTC) has authority to promulgate substantive “unfair methods of competition” (UMC) regulations. I first approached this issue a couple of years ago when the FTC asked me to present on the agency’s rulemaking powers. For my presentation, I focused on 1973’s National Petroleum Refiners Association v. FTC and, in particular, whether the U.S. Court of Appeals for the D.C. Circuit correctly held that the FTC has authority to promulgate such rules. I ventured that relying on National Petroleum Refiners would present “litigation risk” for the FTC because the method of statutory interpretation used by the D.C. Circuit is out of step with how courts read statutes today. Richard Pierce, who presented at the same event, was even more blunt:
Let me just express my complete agreement with Aaron’s analysis of the extraordinary fragility of the FTC position that National Petroleum Refiners is going to protect them. I teach National Petroleum Refiners every year. And I teach it as an object lesson in what no court, modern court, would ever do today. The reasoning is, by today’s standards, preposterous. … [T]he interpretive method that was used in that case was fairly commonly used on the DC Circuit at that time. There is no justice today—not just Gorsuch, but Kagan, Breyer—there is no justice today that would [use that method].
That was a fun academic discussion—with emphasis on the word academic. After all, for decades, this issue has only been an academic question because the FTC has not attempted to use such authority. That academic question, however, may soon become a concrete dispute.
Pierce and others have advanced the anti-National Petroleum Refiners position. Recently, Kacyn H. Fujii has advanced the pro-National Petroleum Refiners position. Should the FTC promulgate a substantive UMC rule, the federal courts will decide which position is right. As that day approaches, many more experts will offer thoughts on this important question.
Here, however, I want to focus on a different question. What would happen if the FTC can promulgate broad high-profile UMC rules, including new antitrust tests?
I’ve just posted to SSRN a new essay that addresses that question: “What Happens If the FTC Becomes a Serious Rulemaker?” This essay will be published in the forthcoming book FTC’s Rulemaking Authority. Here is the abstract:
The Federal Trade Commission (FTC) is no one’s idea of a serious rulemaker. To the contrary, the FTC is in many respects a law enforcement agency that operates through litigation and consent decrees. There are understandable reasons for this absence of FTC rulemaking. Not only has Congress imposed heightened procedural obligations on the FTC’s ability to promulgate consumer protection rules, but also it is far from clear that the FTC even has statutory authority to promulgate substantive rules relating to unfair methods of competition (UMC). Yet things may be changing. It appears that the FTC is preparing to begin using rulemaking more aggressively, including for substantive UMC regulations. The FTC’s ability to use rulemaking this way will undoubtedly prompt sharp and important legal challenges.
This short essay, however, considers the question of FTC rulemaking from a different angle: What if the FTC has broad rulemaking authority? And what if the FTC begins to use that authority for controversial policies? Traditionally, the FTC operates in a case-by-case fashion that attempts to apply familiar principles to the facts of individual matters. Should the FTC begin making broader policy choices through rulemaking, however, it should be prepared for at least three unintended consequences: (i) more ossification, including more judicial challenges and perhaps White House oversight; (ii) more zigzagging policy as new FTC leadership, in response to changes in presidential control, moves to undo what the agency has just done; and (iii) to more often be the target of what has been called “administrative law as blood sport,” by which political actors make it more difficult for the agency to function, for example by delaying the confirmation process. The upshot would be an agency that could in theory (and sometimes no doubt in fact) regulate more broadly than the FTC does now, but also one with a different character. In short, the more the FTC becomes a serious rulemaker, the more the FTC will change as an institution.
Here, I will summarize some of the thoughts from my essay. Please read the full essay, however, if you’re looking for citations and a more complete explanation.
At the outset, my essay is not an attack on rulemaking. There are good reasons to prefer agencies to make policy through rulemaking rather than, say, case-by-case adjudication or threats. In fact, Kristin Hickman and I have written an entire article explaining why rulemaking (generally) should be favored over adjudication. That said, I am concerned about the idea that the FTC has substantive rulemaking authority to promulgate broad UMC rules under Section 5 of the FTC Act. Rulemaking has many advantages, but it does not follow that rulemaking under this very open-ended statute makes sense, especially if the goal is broad policy change. Indeed, if the FTC were to use rulemaking authority for small issues, presumably some of the concerns I sketch out would not apply (though the legal question, of course, still would).
As I explain in my essay, when agencies attempt to use rulemaking for significant policies—which, not by coincidence, disproportionately tend to be controversial policies—at least three unintended consequences may result: ossification, zigzagging policy, and blood-sport tactics.
First, ossification. For decades, many administrative law scholars have lamented how ossified the rulemaking process has become. Notice-and-comment rulemaking may not look all that difficult. The process has become challenging, at least for the most significant rules. (There is an empirical dispute about how ossified the process is, but part of that debate may be explained by the nature of the rules at issue; agencies perhaps can promulgate lower-profile rules without much trouble, while struggling with the more significant ones.) Agencies looking to make important policy changes through notice-and-comment rulemaking, for example, often receive mountains of comments from the public. Indeed, agencies may receive millions of comments. Because agencies have to respond to material comments, rules that prompt that volume of commentary aren’t so easy to do. Likewise, the most consequential rules almost invariably prompt litigation, and as part of so-called “hard look” review, the agency will have to persuade a court that it has considered the important aspects of the problem. Preparing for that sort of review can require a great deal of upfront work. And although its domain does not extend to independent agencies, the Office of Information and Regulatory Affairs (OIRA) also requires agencies to do a great deal of analysis before promulgating the most significant rules.
If the FTC begins promulgating significant rules, it should be prepared for an ossified process that requires reallocating resources within the agency and engaging in more “admin law” litigation. Because rulemaking can be labor intensive, moreover, the FTC may not be able to pursue as many policies as some no doubt wish. Furthermore, the U.S. Justice Department has concluded that the White House has the authority to subject independent agencies to the OIRA process. If the FTC begins promulgating significant rules—especially regulations of the sort that may be improved by inter-agency coordination and external evaluation, two hallmarks of the OIRA process—the White House may decide that the time has come to put the FTC within OIRA’s tent. Such developments would change how the FTC functions.
Second, zigzagging policy. It turns out that when agencies use regulatory power for significant policies, agencies sometimes find themselves using that same power to undo those policies when control of the White House shifts. Elsewhere, I’ve written about the Federal Communications Commission and so-called “net neutrality” rules. For decades, the FCC has flip-flopped on this significant issue; when Republicans control the White House, the FCC does one thing, but when Democrats take over, it does something else. Flip-flopping, however, is not limited to the FCC. As Pierce has put it, “[t]he same analysis applies in each of the hundreds of contexts in which Democrats and Republicans have opposing and uncompromising preferences with respect to policy issues. …” Zigzagging policy is bad for business because it makes it harder to invest, and for that same reason, is bad for consumers who do not gain the benefits of foregone investment. It is also bad for regulators, who must spend time and effort to undo the agency’s own prior actions. To be sure, agencies don’t always flip-flop; indeed, the ossification of the rulemaking process may limit it, at the margins. But especially for the most consequential policies, zigzagging sometimes happens.
Accordingly, if the FTC begins promulgating significant policies through rulemaking, it should expect some zigzagging policy when the White House changes hands. As my essay explains:
In this current age of polarization, regulatory efforts to address divisive issues may not work well because what an agency does under one administration can be undone in the next administration. Thus, the end result may be policy that exists under some administrations but not others. Indeed, the FTC’s recent slew of party-line votes suggests that if the FTC begins using rulemaking for controversial policies, the FTC will look to undo those rules when the political balance flips. Of course, not all FTC rules will vacillate—there are not enough resources to undo everything, especially as agencies confront new issues. But if the FTC becomes a serious rulemaker, some zigzagging should occur.
Finally, consider “administrative law as blood sport”—an evocative phrase that comes from Thomas McGarity. The idea is that agencies engaged in rulemaking are increasingly subject to political opposition across several dimensions, including “strategies aimed at indirectly disrupting the implementation of regulatory programs by blocking Senate confirmation of new agency leaders, cutting off promised funding for agencies, introducing rifle-shot riders aimed at undoing ongoing agency action, and subjecting agency heads to contentious oversight hearings.” In other words, an opponent of a proposed regulation may try to stop it through the rulemaking process (for example, by filing comment and then going to court), but may also try to stop it outside of the rulemaking process through political means.
As my essay explains, if the FTC begins using rulemaking for controversial policies, blood-sport tactics presumably will follow. Similarly, the FTC should also expect litigation of a more fundamental character. The U.S. Supreme Court is increasingly wary of independent agencies; to the extent that the FTC begins making significant policy choices without presidential control, the likelihood that the Supreme Court will say “enough” increases.
In short, if the FTC engages in significant rulemaking, its character will change. No doubt, some proponents of FTC rulemaking would accept that cost, but in assessing FTC rulemaking, it is important to remember unintended consequences, too.
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