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

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

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

Maybe He Never Said ‘Never’

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

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

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

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

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

Of Orphans and Potential Competition

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More later, but there was this , too.

Biweekly FTC Roundup: Bureau of Let’s-Sue-Meta Edition

Daniel J. Gilman — 5 May 2023

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Artificial Intelligence Meets Organic Folly

Daniel J. Gilman — 3 May 2023

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

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

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

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

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

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

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

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

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

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

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

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

I’ll never talk.

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

Ok, so maybe I’ll talk a little.

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

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

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

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

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

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

Khan breezily assures readers that the:

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

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

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

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

In Antitrust & Competition, Data Privacy & Security, Federal Trade Commission, Section 5, Truth on the Market artificial intelligence, ftc, FTC Act, Lina Khan, privacy regulation, unfair methods of competition

Why Competition Enforcers’ Annual Roundtable Should Focus on Competition Advocacy and Combating Anticompetitive Market Distortions

Alden Abbott — 22 March 2023

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

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

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

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

Competition Advocacy

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

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

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

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

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

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

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

Anticompetitive Market Distortions (ACMDs)

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

In Antitrust & Competition, Antitrust Division, Federal Trade Commission, International, Justice Department, Platforms, Truth on the Market anticompetitive market distortions, DOJ Antitrust Division, ftc, international competition, Joe Biden, Jonathan Kanter, Lina Khan, occupational licensing, Protectionism, trade

No, Chevron Deference Will Not Save the FTC’s Noncompete Ban

Corbin K. Barthold — 14 February 2023

The Federal Trade Commission (FTC) announced in a notice of proposed rulemaking (NPRM) last month that it intends to ban most noncompete agreements. Is that a good idea? As a matter of policy, the question is debatable. So far as the NPRM is concerned, however, that debate is largely hypothetical. It is unlikely that any rule the FTC issues will ever take effect.

Several formidable legal obstacles stand in the way. The FTC seeks to stand its rule on the authority of Section 5 of the FTC Act, which bars “unfair methods of competition” in commerce. But Section 5 says nothing about rulemaking, as opposed to case-by-case prosecution.

There is a rulemaking provision in Section 6, but for reasons explained elsewhere, it only empowers the FTC to set out its own internal procedures. And if the FTC could craft binding substantive rules—such as a ban on noncompete agreements—that would violate the U.S. Constitution. It would transfer lawmaking power from Congress to an administrative agency, in violation of Article I.

What’s more, the U.S. Supreme Court recently confirmed the existence of a “major questions doctrine,” under which an agency attempting to “make major policy decisions itself” must “point to clear congressional authorization for the power it claims.” The FTC’s proposed rule would sweep aside tens of millions of noncompete clauses; it would very likely alter salaries to the tune of hundreds of billions of dollars a year; and it would preempt dozens of state laws. That’s some “major” policymaking. Nothing in the FTC Act “clear[ly]” authorizes the FTC to undertake it.

But suppose that none of these hurdles existed. Surely, then the FTC would get somewhere—right? In seeking to convince a court to read the statute its way, after all, it could make a bid for Chevron deference. Named for Chevron v. NRDC (1984), that rule (of course) requires a court to defer to an agency’s reasonable construction of a law the agency administers. With the benefit of such judicial obeisance, the FTC would not have to show that noncompete clauses are unlawful under the best reading of Section 5. It could get away with showing merely that they’re unlawful under a plausible reading of Section 5.

But Chevron won’t do the trick.

The Chevron test can be broken down into three phases. A court begins by determining whether the test even applies (often called Chevron “step zero”). If it does, the court next decides whether the statute in question has a clear meaning (Chevron step one). And if it turns out that the statute is unclear—is ambiguous—the court proceeds to ask whether the agency’s interpretation of the statute is reasonable, and if it is, to yield to it (Chevron step two).

Each of these stages poses a problem for the FTC. Not long ago, the Supreme Court showed why this is so. True, Kisor v. Wilkie (2019) is not about Chevron deference. Not directly. But the decision upholds a cognate doctrine, Auer deference (named for Auer v. Robbins (1997)), under which a court typically defers to an agency’s understanding of its own regulations. Kisor leans heavily, in its analysis, both on Chevron itself and on later opinions about the Chevron test, such as United States v. Mead Corp. (2001) and City of Arlington v. FCC (2013). So it is hardly surprising that Kisor makes several points that are salient here.

Start with what Kisor says about when Chevron comes into play at all. Chevron and Auer stand, Kisor reminds us, on a presumption that Congress generally wants expert agencies, not generalist courts, to make the policy judgments needed to fill in the details of a statutory scheme. It follows, Kisor remarks, that if an “agency’s interpretation” does not “in some way implicate its substantive expertise,” there’s no reason to defer to it.

When is an agency not wielding its “substantive expertise”? One example Kisor offers is when the disputed statutory language is derived from the common law. Parsing common-law terms, Kisor notes, “fall[s] more naturally into a judge’s bailiwick.”

This is bad news for the FTC. Think about it. When it put the words “unfair methods of competition” in Section 5, could Congress have meant “unfair” in the cosmic sense? Could it have intended to grant a bunch of unelected administrators a roving power to “do justice”? Of course not. No, the phrase “unfair methods of competition” descends from the narrow, technical, humdrum common-law concept of “unfair competition.”

The FTC has no special insight into what the term “unfair competition” meant at common law. Figuring that out is judges’ work. That Congress fiddled with things a little does not change this conclusion. Adding the words “methods of” does not rip the words “unfair competition” from their common-law roots and launch them into a semantic void.

It remains the case—as Justice Felix Frankfurter put it—that when “a word is obviously transplanted” from the common law, it “brings the old soil with it.” And an agency, Kisor confirms, “has no comparative expertise” at digging around in that particular dirt.

The FTC lacks expertise not only in understanding the common law, but even in understanding noncompete agreements. Dissenting from the issuance of the NPRM, (soon to be former) Commissioner Christine S. Wilson observed that the agency has no experience prosecuting employee noncompete clauses under Section 5.

So the FTC cannot get past Chevron step zero. Nor, if it somehow crawled its way there, could the agency satisfy Chevron step one. Chevron directs a court examining a text for a clear meaning to employ the “traditional tools” of construction. Kisor stresses that a court must exhaust those tools. It must “carefully consider the text, structure, history, and purpose” of the regulation (under Auer) or statute (under Chevron). “Doing so,” Kisor assures us, “will resolve many seeming ambiguities.”

The text, structure, history, and purpose of Section 5 make clear that noncompete agreements are not an unfair method of competition. Certainly not as a species. “‘Unfair competition,’ as known to the common law,” the Supreme Court explained in Schechter Poultry v. United States (1935), was “a limited concept.” It was “predicated of acts which lie outside the ordinary course of business and are tainted by fraud, or coercion, or conduct otherwise prohibited by law.” Under the common law, noncompete agreements were generally legal—so we know that they did not constitute “unfair competition.”

And although Section 5 bars “unfair methods of competition,” the altered wording still doesn’t capture conduct that isn’t unfair. The Court has said that the meaning of the phrase is properly “left to judicial determination as controversies arise.” It is to be fleshed out “in particular instances, upon evidence, in the light of particular competitive conditions.” The clear import of these statements is that the FTC may not impose broad prohibitions that sweep in legitimate business conduct.

Yet a blanket ban on noncompete clauses would inevitably erase at least some agreements that are not only not wrongful, but beneficial. “There is evidence,” the FTC itself concedes, “that non-compete clauses increase employee training and other forms of investment.” Under the plain meaning of Section 5, the FTC can’t condemn a practice altogether just because it is sometimes, or even often, unfair. It must, at the very least, do the work of sorting out, “in particular instances,” when the costs outweigh the benefits.

By definition, failure at Chevron step one entails failure at Chevron step two. It is worth noting, though, that even if the FTC reached the final stage, and even if, once there, it convinced a court to disregard the common law and read the word “unfair” in a colloquial sense, it would still not be home free. “Under Chevron,” Kisor states, “the agency’s reading must fall within the bounds of reasonable interpretation.” This requirement is important in light of the “far-reaching influence of agencies and the opportunities such power carries for abuse.”

Even if one assumes (in the teeth of Article I) that Congress could hand an independent agency unfettered authority to stamp out “unfairness” in the economy, that does not mean that Congress, in fact, did so in Section 5. Why did Congress write Section 5 as it did? Largely because it wanted to give the FTC the flexibility to deal with new and unexpected forms of wrongdoing as they arise. As one congressional report concluded, “it is impossible to frame definitions which embrace all unfair practices” in advance. “The purpose of Congress,” wrote Justice Louis Brandeis (who had a hand in drafting the law), was to ensure that the FTC can “prevent” an emergent “unfair method” from taking hold as a “general practice.”

Noncompete agreements are not some startling innovation. They’ve been around—and allowed—for hundreds of years. If Congress simply wanted to ensure that the FTC can nip new threats to competition in the bud, the NPRM is not a proper use of the FTC’s power under Section 5.

In any event, what Congress almost certainly did not intend was to hand the FTC the capacity (as Chair Lina Khan would have it) to “shape[] the distribution of power and opportunity across our economy.” The FTC’s commissioners are not elected, and they cannot be removed (absent misconduct) by the president. They lack the democratic legitimacy or political accountability to restructure the economy.

All the same, nothing about Section 5 suggests that Congress gave the agency such awesome power. What leeway Chevron might give here, common sense takes away. The more the FTC “seeks to break new ground by enjoining otherwise legitimate practices,” a federal court of appeals once declared, “the closer must be our scrutiny upon judicial review.” It falls to the judiciary to ensure that the agency does not “undu[ly] … interfere[]” with “our country’s competitive system.”

We have come full circle. Article I and the “major questions” principle tell us that the FTC cannot use four words in Section 5 of the FTC Act to issue a rule that disrupts contractual relations, tramples federalism, and shifts around many billions of dollars in wealth. And if we march through the Chevron analysis anyway, we find that, even at Chevron step two, the statute still can’t bear the weight. Chevron deference is not a license for the FTC to ignore the separation of powers and micromanage the economy.

In Antitrust & Competition, Constitutional Law, Federal Trade Commission, Federalism, Section 5, Supreme Court, Truth on the Market Chevron, Christine Wilson, ftc, FTC Act, Labor Law, Lina Khan, noncompete, section 5, unfair methods of competition

Biweekly FTC Roundup: Grail-Shaped Beacon Edition

Daniel J. Gilman — 9 December 2022

The lame duck is not yet dead, and the Federal Trade Commission (FTC) is supposed to be an independent agency. Work continues. The Commission has announced a partly open oral argument in the Illumina-Grail matter. That is, parts of the argument will be open to the public, via webcast, and parts won’t. This is what’s known as translucency in government.

Enquiring minds: I have several questions about Illumina-Grail. First, for anyone reading this column, am I the only one who cannot think of the case without thinking of Monty Python’s grail-shaped beacon? Asking for a friend who worries about me.

Second, why seek to unwind this merger? My ICLE colleagues Geoff Manne and Gus Hurwitz are members of a distinguished group of law & economics scholars who filed a motion for leave to file an amicus brief in the matter. They question the merits of the case on a number of grounds.

Pertinent, not dispositive: this is a vertical merger. Certainly, it’s possible for vertical mergers to harm competition but theory suggests that they entail at least some efficiencies, and the empirical evidence from Francine Lafontaine and others tends to suggest that most have been beneficial for firms and consumers alike. One might wonder about the extent to which this case is built on analysis of the facts and circumstances rather than on Chair Lina Khan’s well-publicized antipathy to vertical mergers.

Recall that the FTC and U.S. Justice Department (DOJ) jointly issued updated vertical-merger guidelines in June 2020. (The Global Antitrust Institute’s 2018 comments are worth review). The FTC—but not DOJ—promptly withdrew them in 2021, with a new majority, a partisan vote, and a questionable rationale for going it alone. Carl Shapiro and Herbert Hovenkamp minced no words, saying that the Commission’s justification rested on “specious economic arguments.”

There’s also a question of whether FTC’s likely foreclosure argument is all that likely. Illumina, which created Grail and had retained a substantial interest in it all along, would have strong commercial incentives against barring Grail’s future competitors from its platform. Moreover, Illumina made an open offer—contractually binding—to continue providing access for 12 years to its NGS platform and other products, on terms substantially similar to those available pre-merger. That would seem to undercut the possibility of foreclosure. Complaint counsel discounts this as a remedy (with behavioral remedies disfavored), but it is relatively straightforward and not really a remedy at all, with terms both private parties and the FTC might enforce. Thom Lambert and Jonathan Barnett both have interesting posts on the matter.

This is about a future market and potential (presumed) competitors. And it’s an area of biologics commerce where the deep pockets and regulatory sophistication necessary for development and approval frequently militate in favor of acquisition of a small innovator by a larger, established firm. As I noted in a prior column, “[p]otential competition cases are viable given the right facts, and in areas where good grounds to predict significant entry are well-established.” It can be hard to second-guess rule-of-reason cases from the outside, but there are reasons to think this is one of those matters where the preconditions to a strong potential competition argument are absent, but merger-related efficiencies real.

What else is going on at the FTC? Law360 reports on a staff brief urging the Commission not to pitch a new standard of review in Altria-Juul on what look to be sensible grounds, independent of the merits of their Section I case. The Commission had asked to be briefed on the possibility of switching to a claim of a per se violation or, in the alternative, quick look, and the staff brief recommends maintaining the rule-of-reason approach that the Commission’s ALJ found unpersuasive in dismissing the Commission’s case, which will now be heard by the Commission itself. I have no non-public information on the matter. There’s a question of whether this signals any real tension between the staff’s analysis and the Commission’s preferred approach or simply the Commission’s interest in asking questions about pushing boundaries and the staff providing good counsel. I don’t know, but it could be business as usual.

And just this week, FTC announced that it is bringing a case to block Microsoft’s acquisition of Activision. More on that to follow.

What’s pressing is not so clear. The Commission announced the agenda for a Dec. 14 open meeting. On it is a vote on regulatory review of the “green guides,” which provide guidance on environmental-marketing claims. But there’s nothing further on the various ANPRs announced in September, or about rulemaking that the Chair has hinted at for noncompete clauses in employment contracts. And, of course, we’re still waiting for merger guidelines to replace the ones that have been withdrawn—likely joint FTC/DOJ guidelines that will likely range over both horizontal and vertical mergers.

There’s the Altria matter, Meta, Meta-Within, the forthcoming Supreme Court opinion in Axon, etc. The FTC’s request for an injunction in Meta-Within will be heard in federal district court in California over the next couple of weeks. It’s a novel (read, speculative) complaint. I had a few paragraphs on Meta-Within in my first roundup column; Gus Hurwitz covered it, as well. We shall see.

Wandering up Pennsylvania Avenue onto the Hill, various bills seem not so much lame ducks as dead ones. But perhaps one or more is not dead yet. The Journalism Competition and Preservation Act (JCPA) might be one such bill, its conspicuous defects notwithstanding. “Might be.” First, a bit of FTC history. Way back in 2010, the FTC held a series of workshops on the Future of Journalism. There were many interesting issues there, if no obvious room for antitrust. I reveal no secrets in saying THOSE WORKSHOPS WERE NOT THE STAFF’S IDEA. We failed to recommend any intervention, although the staff did publish a clarification of its discussion draft:

The FTC has not endorsed the idea of making any policy recommendation or recommended any of the proposals in the discussion draft

My own take at the time: many newspapers were struggling, and that was unfortunate, but much of the struggle had to do with the papers’ loss of local print-advertising monopolies, which tended to offer high advertising prices but not high quality. Remember the price of classified ads? For decades, many of the holders of market power happened to turn large portions of their rents over to their news divisions. Then came the internet, then Craigslist, etc., etc., and down went the rents. Antitrust intervention seemed no answer at all.

Back to the bill. In brief, as currently drafted, the JCPA would permit certain “digital journalism providers” to form cartels to negotiate prices with large online platforms, and to engage in group boycotts, without being liable to the federal antitrust laws, at least for four years. Dirk Auer and Ben Sperry have an overview here.

This would be an exemption for some sources of journalism, but not all, and its benefits would not be equally distributed. I am a paying consumer of digital (and even print) journalism. On the one hand, I enjoy it when others subsidize my preferences. On the other, I’m not sure why they should. As I said in a prior column, “antitrust exemptions help the special interests receiving them but not a living soul besides those special interests. That’s it, full stop.”

Moreover, as Brian Albrecht points out, the bill’s mandatory final arbitration provision is likely to lead to a form of price regulation.

England v. France on Saturday. Allez les bleus or we few, we happy few? Cheers.

The FTC’s UMC Statement Creates a Target for Federal Courts

Josh Wright — 28 November 2022

[The final post in Truth on the Market‘s digital symposium “FTC Rulemaking on Unfair Methods of Competition” comes from Joshua Wright, the executive director of the Global Antitrust Institute at George Mason University and the architect, in his time as a member of the Federal Trade Commission, of the FTC’s prior 2015 UMC statement. You can find all of the posts in this series at the symposium page here.]

The Federal Trade Commission’s (FTC) recently released Policy Statement on unfair methods of competition (UMC) has a number of profound problems, which I will detail below. But first, some praise: if the FTC does indeed plan to bring many lawsuits challenging conduct as a standalone UMC (I am dubious it will), then the public ought to have notice about the change. Providing such notice is good government, and the new Statement surely provides that notice. And providing notice in this way was costly to the FTC: the contents of the statement make surviving judicial review harder, not easier (I will explain my reasons for this view below). Incurring that cost to provide notice deserves some praise.

Now onto the problems. I see four major ones.

First, the Statement seems to exist in a fantasy world; the FTC majority appears to wish away the past problems associated with UMC enforcement. Those problems have not, in fact, gone away and pretending they don’t exist—as this Statement does—is unlikely to help the Commission’s prospects for success in court.

Second, the Statement provides no guidance whatsoever about how a potential respondent might avoid UMC liability, which stands in sharp contrast to other statements and guidance documents issued by the Commission.

Third, the entire foundation of the statement is that, in 1914, Congress intended the FTC Act to have broader coverage than the Sherman Act. Fair enough. But the coverage of the Sherman Act isn’t fixed to what the Supreme Court thought it was in 1914: It’s a moving target that, in fact, has moved dramatically over the last 108 years. Congress in 1914 could not have intended UMC to be broader than how the courts would interpret the Sherman Act in the future (whether that future is 1918, much less 1970 or 2023).

And fourth, Congress has passed other statutes since it passed the FTC Act in 1914, one of which is the Administrative Procedure Act. The APA unambiguously and explicitly directs administrative agencies to engage in reasoned decision making. In a nutshell, this means that the actions of such agencies must be supported by substantial record evidence and can be set aside by a court on judicial review if they are arbitrary and capricious. “Congress intended to give the FTC broad authority in 1914” is not an argument to address the fact that, 32 years later, Congress also intended to limit the FTC’s authority (as well as other agencies’) by requiring reasoned decision making.

Each of these problems on its own would be enough to doom almost any case the Commission might bring to apply the statement. Together, they are a death knell.

A Record of Failure

As I have explained elsewhere, there are a number of reasons the FTC has pursued few standalone UMC cases in recent decades. The late-1970s effort to reinvigorate UMC enforcement via bringing cases was a total failure: the Commission did not lose the game on a last-second buzzer beater; it got blown out by 40 points. According to William Kovacic and Mark Winerman, in each of those UMC cases, “the tribunal recognized that Section 5 allows the FTC to challenge behavior beyond the reach of the other antitrust laws. In each instance, the court found that the Commission had failed to make a compelling case for condemning the conduct in question.”

Since these losses, the Commission hasn’t successfully litigated a UMC case in federal court. This, in my view, is because of a (very plausible) concern that, when presented with such a case, Article III courts would either define the Commission’s UMC authority on their own terms—i.e., restricting the Commission’s authority—or ultimately decide that the space beyond the Sherman Act that Congress in 1914 intended Section 5 to occupy exists only in theory and not in the real world, and declare the two statutes functionally equivalent. Those reasons—and not Chair Lina Khan’s preferred view that the Commission has been feckless, weak, or captured by special interests since 1981—explain why Section 5 has been used so sparingly over the last 40 years (and mostly just to extract settlements from parties under investigation). The majority’s effort to put all its eggs in the “1914 legislative history” basket simply ignores this reality.

Undefined Harms

The second problem is evident when one compares this statement with other policy statements or guidance documents issued by the Commission over the years. On the antitrust side of the house, these include the Horizontal Merger Guidelines, the (now-withdrawn by the FTC) Vertical Merger Guidelines, the Guidelines for Collaboration Among Competitors, the IP Licensing Guidelines, the Health Care Policy Statement, and the Antitrust Guidance for Human Resources Professionals.

Each of these documents is designed (at least in part) to help market participants understand what conduct might or might not violate one or more laws enforced by the FTC, and for that reason, each document provides specific examples of conduct that would violate the law, and conduct that would not.

The new UMC Policy Statement provides no such examples. Instead, we are left with the conclusory statement that, if the Commission can characterize the conduct as “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power” or “otherwise restrictive or exclusionary,” then the conduct can be a UMC.

What does this salad of words mean? I have no idea, and the Commission doesn’t even bother to try and define them. If a lawyer is asked, “based upon the Commission’s new UMC Statement, what conduct might be a violation?” the only defensible advice to give is “anything three Commissioners think.”

Ahistorical Jurisprudence

The third problem is the majority’s fictitious belief that Sherman Act jurisprudence is frozen in 1914—the year Congress passed the FTC Act. The Statement states that “Congress passed the FTC Act to push back against the judiciary’s open-ended rule of reason for analyzing Sherman Act claims” and cites the Supreme Court’s opinion in Standard Oil Co. of New Jersey v. United States from 1911.

It’s easy to understand why Congress in 1914 was dissatisfied with the opinion in Standard Oil; reading Standard Oil in 2022 is also a dissatisfying experience. The opinion takes up 106 pages in the U.S. Reporter, and individual paragraphs are routinely three pages long; it meanders between analyzing Section 1 and Section 2 of the Sherman Act without telling the reader; and is generally inscrutable. I have taught antitrust for almost 20 years and, though we cover Standard Oil because of its historical importance, I don’t teach the opinion, because the opinion does not help modern students understand how to practice antitrust law.

This stands in sharp contrast to Justice Louis Brandeis’s opinion in Chicago Board of Trade (issued four years after Congress passed the FTC Act), which I do teach consistently, because it articulates the beginning of the modern rule of reason. Although the majority of the FTC is on solid ground when it points out that Congress in 1914 intended the FTC’s UMC authority to have broader coverage than the Sherman Act, the coverage of the Sherman Act has changed since 1914.

This point is well-known, of course: Kovacic and Winerman explain that “[p]robably the most important” reason “Section 5 has played so small a role in the development of U.S. competition policy principles” “is that the Sherman Act proved to be a far more flexible tool for setting antitrust rules than Congress expected in the early 20^th century.” The 10 pages in the Statement devoted to century-old legislative history just pretend like Sherman Act jurisprudence hasn’t changed in that same amount of time. The federal courts are going to see right through that.

What About the APA?

The fourth problem with the majority’s trip back to 1914 is that, since then, Congress has passed other statutes limiting the Commission’s authority. The most prominent of these is the Administrative Procedure Act, which was passed in 1946 (for those counting, 1946 is more than 30 years after 1914).

There are hundreds of opinions interpreting the APA, and indeed, an entire body of law has developed pursuant to those cases. These cases produce many lessons, but one of them is that it is not enough for an agency to have the legal authority to act: “Congress gave me this power. I am exercising this power. Therefore, my exercise of this power is lawful,” is, by definition, insufficient justification under the APA. An agency has the obligation to engage in reasoned decision making and must base its actions on substantial evidence. Its enforcement efforts will be set aside on judicial review if they are arbitrary and capricious.

By failing to explain how a company can avoid UMC liability—other than by avoiding conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power” or “otherwise restrictive or exclusionary,” without defining those terms—the majority is basically shouting to the federal courts that its UMC enforcement program is going to be arbitrary and capricious. That’s going to fail for many reasons. A simple one is that 1946 is later in time than 1914, which is why the Commission putting all its eggs in the 1914 legislative history basket is not going to work once its actions are challenged in federal court.

Conclusion

These problems with the majority’s statement are so significant, so obvious, and so unlikely to be overcome, that I don’t anticipate that the Commission will pursue many UMC enforcement actions. Instead, I suspect UMC rulemaking is on the agenda, which has its own set of problems (not to mention the fact that the 1914 legislative history points away from Congress intending that the Commission has legislative rulemaking authority). Rather, I think the value of this statement is symbolic for Chair Khan and her supporters.

When one considers the record of the Khan Commission—many policy statements, few enforcement actions, and even fewer successful enforcement actions—it all makes more sense. The audience for this Statement is Chair Khan’s friends working on Capitol Hill and at think tanks, as well as her followers on Twitter. They might be impressed by it. The audience she should be concerned about is Article III judges, who surely won’t be.

In Administrative Law, Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Section 5, Supreme Court, Symposia, Truth on the Market APA, Brandeis, ftc, FTC Act, joshua wright, Lina Khan, section 5, Sherman Act, unfair methods of competition

FTC Section 5 Statement: Less Guidance Than Meets the Eye

Steven J Cernak — 18 November 2022

[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

On Nov. 10, the Federal Trade Commission (FTC) issued a new statement explaining how it will exercise its standalone FTC Act Section 5 authority. Despite the length of the statement and the accompanying commentaries from most of the commissioners, there is less guidance than one might expect from so many words. One thing is clear, however: Expect more antitrust enforcement from the FTC in ways we have not seen in years, if ever.

The FTC enforces the antitrust laws through Section 5’s prohibition of unfair methods of competition (UMC). Courts and commentators alike have long agreed that Section 5’s prohibition covers everything covered by the other antitrust laws, such as the Sherman and Clayton Act, plus something more.

How far that extra standalone authority extends has been a point of contention for decades. In the early 1980s, several appellate courts admonished the FTC for an expansive interpretation of that authority, leaving parties uncertain of which actions would be challenged. Or, as the 2^nd U.S. Circuit Court of Appeals put it: “the Commission owes a duty to define the conditions under which conduct … would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.”

In recent decades, the FTC has interpreted its authority much more narrowly. In 2015, a bipartisan collection of commissioners approved a short statement saying that the FTC would interpret its standalone authority consistently with the consumer welfare standard of the other antitrust laws and use the well-known rule of reason to judge any actions. Last year, the Democratic majority of commissioners voted to rescind that 2015 statement. Last week’s statement is the replacement.

Antitrust Fun, Little Guidance

The 16 pages of guidance and the accompanying commentary from three commissioners—two Democrats in support, one Republican in opposition—can be a fun read for antitrust geeks. There is plenty of well-written antitrust history. I learned something. Also, there are arguments about old FTC and appellate court cases that I had not read in 30 years.

But that history lesson did not give as much guidance about future enforcement as it should have. Most of the seven pages the guidance spends on its historical review is dedicated to showing that the FTC’s standalone authority extends beyond the Sherman and Clayton Acts. But that contention is in little dispute.

The more helpful historical question for parties today is how this Commission plans to respond to appellate court cases such as Boise Cascade, OAG, and the above-cited Ethyl that criticized the old Commission for, to paraphrase the statement, insufficient facts of unfairness, oppressiveness, or negative effects on the market. Chair Lina Khan’s commentary does mention the “trifecta” of cases, describing them as cases where courts found that the Commission “had not met its factual or evidentiary burden.” What would have been more helpful is some “inkling” of what kinds of facts this Commission will rely on to avoid the same types of “stinging” losses suffered by those earlier Commissions. Instead, we get multiple references to the Commission as a body of experts with the unstated assumption that, in the future, at least three commissioners will offer enough facts of some kind to convince any appellate court.

After the history section, the statement offers plenty of words on what the FTC majority think will be a standalone violation. All of those words add up, however, to much less guidance than the very brief 2015 statement. That prior statement said that the FTC would use its Section 5 standalone authority to pursue a single goal—consumer welfare—and would use a well-known analytical method to pursue it: the rule of reason. While even that statement left some ambiguity for businesses, and freedom for the Commission, at least it pursued only one goal with an analysis used in decades worth of antitrust cases.

The new statement does not list one goal but instead several, namely that it will challenge conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature … that negatively affect[s] competitive conditions [and thereby negatively affects] consumers, workers, or other market participants.”

But mathematically, you cannot maximize more than one variable. Nowhere in this statement is there any attempt to explain the analytical method to be used to balance pursuit of these different goals. What if a challenged action helps workers but harms consumers? What if an action helps workers at some competitors but not others? What if an action helps all competitors but harms workers at some of them? Merely combining all those goals into a single term, “competitive conditions,” does not provide any guidance as to how the FTC will balance all these named (and any unnamed) elements of “competitive conditions.” Again, there is an unstated assumption that three commissioners will expertly balance those competing goals.

Incomplete Lessons from the Past

The new statement does try to provide some guidance at the end of the document when it points to past cases that, perhaps, will be the types of cases that the Commission will now bring under Section 5. One such large category is actions that do not meet the standards for antitrust illegality now but, somehow, violate the “spirit of the antitrust laws.” The statement lists several examples.

To take one, what if a tying case does not meet the standards embodied in Jefferson Parish and its progeny? How will the Commission determine what the statement calls “de facto tying”? Which one or more of the elements expounded in Jefferson Parish will be eased? How? Will the same action by the same parties be subject to different substantive standards if a private plaintiff—or the U.S. Justice Department—is the plaintiff? If so, then parties wanting to avoid any antitrust challenge will need to default to the law of tying laid down by the then-current FTC, not by dozens of court cases over decades. And how will the FTC determine what violates the “spirit” of its own particular law of tying? Again, the unstated assumption is that the decisions of three expert commissioners will set the new law, at least until three new expert commissioners gain control.

Conclusion

To be (slightly) fairer to the new statement, it does confirm what has seemed obvious since the Biden administration started staffing the FTC: this Commission will more aggressively pursue antitrust challenges and will use any tool, including Section 5 standalone authority, to do it. Also, while the statement injects uncertainty into the thinking of businesses, which likely will lead to fewer and less-aggressive business actions, that result would be seen as a feature, not a bug, by the statement’s authors.

Finally, the statement does correctly point out that Section 5 was written at a time when Congress might have thought that the decisions of three expert commissioners would lead to “better” results for the economy, however defined, than decisions of dozens of juries and judges in dozens of cases. That Progressive Era confidence in the decisions of a few government-employed experts has not always worked out for the best, as some would claim from study of the Whiz Kids (Robert McNamara, not Robin Roberts) or recent pandemic policy.

Like it or not, the statement is another step toward a government of men (and women), not laws, and an economy dictated by a handful of experts in Washington, not millions of consumers across the country. Expect aggressive antitrust enforcement from the FTC in ways that many businesses and antitrust practitioners have only read about — about that, the new statement’s guidance is clear.

In Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Section 5, Symposia, Truth on the Market antitrust, ftc, FTC Act, Lina Khan, section 5, unfair methods of competition

Biweekly FTC Roundup: Commissioners Bite Horse Edition

Daniel J. Gilman — 18 November 2022

The massive New Deal sculptures that frame Federal Trade Commission headquarters are both called “Man Controlling Trade.” And according to the Commission’s new Policy Statement Regarding Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, “Three Commissioners Controlling the Economy” appears to now be one of the agency’s guiding principles. The last FTC roundup suggested that winter is coming. This week’s theme: bundle up because, baby, it’s getting cold outside.

By now, you’ve probably seen the statement. Or maybe it’s three statements. There’s the official statement, adopted by a three-to-one vote (Chair Lina Khan and Commissioners Rebecca Slaughter and Alvaro Bedoya, with Commissioner Christine Wilson dissenting); the chair’s statement (joined by Slaughter and Bedoya); and Bedoya’s statement (joined by Khan and Slaughter). Nothing from Slaughter?

As Gus Hurwitz pointed out, the policy statement lacks legal force or precedential value. Its value, if any, is as guidance. There’s probably a point to distinguishing the Commission’s guidance and the separate statements signed by each member of the Commission who voted for the guidance, but I have no idea what it is.

I commend Wilson’s dissenting statement. To cut to the chase: “Unfortunately, instead of providing meaningful guidance to businesses, the Policy Statement announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.” Other than that, Commissioner Wilson, how did you like the play?

Inspired by the current majority’s penchant for self-citation, I’ll begin by pilfering ICLE’s day-after string of tweets about the new statement:

The @FTC, by a 3-1 vote, has published its long-awaited Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act Commission.

If only it had the structural integrity of a house of cards.https://t.co/tgkBMiDefC
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

The well-established “consumer welfare standard” has been replaced by a “somebody’s welfare standard,” with a focus on “competitive conditions” and the question of whether conduct “tends to” affect “consumers, workers, or other market participants.”
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

Supposedly, “consumer welfare” was too imprecise and unwieldy, so now we get the welfare of consumers, workers, or market participants to be named later.
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

And effects need not be “current” or “measurable” or even “actual,” the distinctions between “unmeasurable” and “immeasurable,” and among “actual,” “likely” and “possible” notwithstanding.
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

According to the Commission, conduct can only be deemed unfair if it is, first of all, a “method of competition.”

But a “method of competition” is “conduct undertaken by an actor in the marketplace.”

So conduct can only be unfair if it’s conduct. Ok. That seems right.
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

In addition, the conduct must be “unfair.” What’s that? Something beyond “competition on the merits.” Does the FTC Act or any other law ask the @FTC to define “competition on the merits”?
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

What’s beyond that? Something that conjures the magic words: “coercive, exploitative, collusive, abusive, deceptive, predatory” or acts that “involve the use of economic power of a similar nature.” Or conduct that “may” be “otherwise restrictive or exclusionary."
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

But while some of the magic words appear in dicta in certain Court opinions, none has a clear meaning in modern, U.S. antitrust law. And many of the putatively helpful citations are not just dicta but plainly inapposite. Look at Leegin, for instance.https://t.co/2j8X7tV8xA
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

In addition to the magic words, conduct must “tend to negatively affect competitive conditions.” But that just brings us back to the definition of conduct as commercial conduct, and the question of what is meant by “tends to,” if not the probability of actual harm to consumers.
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

What could justify conduct that falls into this capacious nebula? Perhaps nothing, but plainly not anything like “net efficiencies,” a “numerical cost-benefit” test, or benefits in another market, no matter how inextricably tied to the one in which there are open-ended harms.
— Int'l Ctr Law & Econ (@LawEconCenter) November 11, 2022

But wait, there’s more, and more self-reference, including the ICLE issue “brief” that I wrote with Gus Hurwitz.

To recap, the statement expressly disavows the rule of reason, the consumer welfare standard, actual or likely impact on competition or consumers, measurement (or estimation) of harms, and the potential for countervailing efficiencies, at least in the form of net efficiency or a “numerical cost-benefit analysis.”

It’s all supposed to be grounded in the legislative history and case law, but it’s a highly selective reading of the historical record and case law, with a skew to old cases and a number of citations seeming inapt. It’s supposed to add rigor and predictability to FTC enforcement, but it’s hard to see how it could. If actual or likely impact on competition and consumers is supposed to be unwieldy and unpredictable, how does it help to focus on a “tendency” (not necessarily a likelihood) for analogous conduct to affect “competitive conditions,” and thus “consumers, workers, or other market participants”?

Discussion—including trenchant criticism—continues apace. Themes of an enforcement policy unmoored, overreaching, and unpredictable can be found in additional Truth on the Market posts from Dirk Auer, Jonathan Barnett, and Brian Albrecht.

As Jonathan Barnett puts it:

FTC rejected the applicability of the balancing test set forth in the rule of reason (and with it, several decades of case law, agency guidance, and legal and economic scholarship). … In the statement …the agency has now adopted this “just trust us” approach as a permanent operating principle.

Former Commissioner Maureen Ohlhausen also emphasizes the broad discretion claimed by the Commission, and its failure to provide specific guidance:

While ostensibly intended to provide such guidance, the new Policy Statement contains few specifics about the particular conduct that the Commission might deem to be unfair, and suggests that the FTC has broad discretion to challenge nearly any conduct with which it disagrees.

No doubt there’s more commentary on the way. But because the statement has no legal force, it’s hard to see how it can be challenged in court until it’s cited by the Commission in an enforcement action or rulemaking. Stay tuned.

There’s much more on the horizon. Axon Enterprises, Inc. v. FTC was argued before the U.S. Supreme Court, with questioning from several justices suggesting skepticism about the FTC’s position. As we’ve noted in recent weeks, the Commission has announced a raft of potential competition rulemakings, and new horizontal merger guidelines may be forthcoming. Among other things. We shall see.

Happy Thanksgiving.

In Antitrust & Competition, Antitrust at the Agencies Roundup, Federal Trade Commission, Section 5, Truth on the Market Christine Wilson, ftc, Lina Khan, unfair methods of competition

Lina Khan’s Christmas Wish Is To Have Margrethe Vestager’s Powers

Dirk Auer — 16 November 2022

Federal Trade Commission (FTC) Chair Lina Khan has just sent her holiday wishlist to Santa Claus. It comes in the form of a policy statement on unfair methods of competition (UMC) that the FTC approved last week by a 3-1 vote. If there’s anything to be gleaned from the document, it’s that Khan and the agency’s majority bloc wish they could wield the same powers as Margrethe Vestager does in the European Union. Luckily for consumers, U.S. courts are unlikely to oblige.

Signed by the commission’s three Democratic commissioners, the UMC policy statement contains language that would be completely at home in a decision of the European Commission. It purports to reorient UMC enforcement (under Section 5 of the FTC Act) around typically European concepts, such as “competition on the merits.” This is an unambiguous repudiation of the rule of reason and, with it, the consumer welfare standard.

Unfortunately for its authors, these European-inspired aspirations are likely to fall flat. For a start, the FTC almost certainly does not have the power to enact such sweeping changes. More fundamentally, these concepts have been tried in the EU, where they have proven to be largely unworkable. On the one hand, critics (including the European judiciary) have excoriated the European Commission for its often economically unsound policymaking—enabled by the use of vague standards like “competition on the merits.” On the other hand, the Commission paradoxically believes that its competition powers are insufficient, creating the need for even stronger powers. The recently passed Digital Markets Act (DMA) is designed to fill this need.

As explained below, there is thus every reason to believe the FTC’s UMC statement will ultimately go down as a mistake, brought about by the current leadership’s hubris.

A Statement Is Just That

The first big obstacle to the FTC’s lofty ambitions is that its leadership does not have the power to rewrite either the FTC Act or courts’ interpretation of it. The agency’s leadership understands this much. And with that in mind, they ostensibly couch their statement in the case law of the U.S. Supreme Court:

Consistent with the Supreme Court’s interpretation of the FTC Act in at least twelve decisions, this statement makes clear that Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.

It is telling, however, that the cases cited by the agency—in a naked attempt to do away with economic analysis and the consumer welfare standard—are all at least 40 years old. Antitrust and consumer-protection laws have obviously come a long way since then, but none of that is mentioned in the statement. Inconvenient case law is simply shrugged off. To make matters worse, even the cases the FTC cites provide, at best, exceedingly weak support for its proposed policy.

For instance, as Commissioner Christine Wilson aptly notes in her dissenting statement, “the policy statement ignores precedent regarding the need to demonstrate anticompetitive effects.” Chief among these is the Boise Cascade Corp. v. FTC case, where the 9^th U.S. Circuit Court of Appeals rebuked the FTC for failing to show actual anticompetitive effects:

In truth, the Commission has provided us with little more than a theory of the likely effect of the challenged pricing practices. While this general observation perhaps summarizes all that follows, we offer the following specific points in support of our conclusion.

There is a complete absence of meaningful evidence in the record that price levels in the southern plywood industry reflect an anticompetitive effect.

In short, the FTC’s statement is just that—a statement. Gus Hurwitz summarized this best in his post:

Today’s news that the FTC has adopted a new UMC Policy Statement is just that: mere news. It doesn’t change the law. It is non-precedential and lacks the force of law. It receives the benefit of no deference. It is, to use a term from the consumer-protection lexicon, mere puffery.

Lina’s European Dream

But let us imagine, for a moment, that the FTC has its way and courts go along with its policy statement. Would this be good for the American consumer? In order to answer this question, it is worth looking at competition enforcement in the European Union.

There are, indeed, striking similarities between the FTC’s policy statement and European competition law. Consider the resemblance between the following quotes, drawn from the FTC’s policy statement (“A” in each example) and from the European competition sphere (“B” in each example).

Example 1 – Competition on the merits and the protection of competitors:

A. The method of competition must be unfair, meaning that the conduct goes beyond competition on the merits.… This may include, for example, conduct that tends to foreclose or impair the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers. (here)

B. The emphasis of the Commission’s enforcement activity… is on safeguarding the competitive process… and ensuring that undertakings which hold a dominant position do not exclude their competitors by other means than competing on the merits… (here)

Example 2 – Proof of anticompetitive harm:

A. “Unfair methods of competition” need not require a showing of current anticompetitive harm or anticompetitive intent in every case. … [T]his inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue. (here)

B. The Commission cannot be required… systematically to establish a counterfactual scenario…. That would, moreover, oblige it to demonstrate that the conduct at issue had actual effects, which… is not required in the case of an abuse of a dominant position, where it is sufficient to establish that there are potential effects. (here)

Example 3 – Multiple goals:

A. Given the distinctive goals of Section 5, the inquiry will not focus on the “rule of reason” inquiries more common in cases under the Sherman Act, but will instead focus on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions. (here)

B. In its assessment the Commission should pursue the objectives of preserving and fostering innovation and the quality of digital products and services, the degree to which prices are fair and competitive, and the degree to which quality or choice for business users and for end users is or remains high. (here)

Beyond their cosmetic resemblances, these examples reflect a deeper similarity. The FTC is attempting to introduce three core principles that also undergird European competition enforcement. The first is that enforcers should protect “the competitive process” by ensuring firms compete “on the merits,” rather than a more consequentialist goal like the consumer welfare standard (which essentially asks how a given practice affects economic output). The second is that enforcers should not be required to establish that conduct actually harms consumers. Instead, they need only show that such an outcome is (or will be) possible. The third principle is that competition policies pursue multiple, sometimes conflicting, goals.

In short, the FTC is trying to roll back U.S. enforcement to a bygone era predating the emergence of the consumer welfare standard (which is somewhat ironic for the agency’s progressive leaders). And this vision of enforcement is infused with elements that appear to be drawn directly from European competition law.

Europe Is Not the Land of Milk and Honey

All of this might not be so problematic if the European model of competition enforcement that the FTC now seeks to emulate was an unmitigated success, but that could not be further from the truth. As Geoffrey Manne, Sam Bowman, and I argued in a recently published paper, the European model has several shortcomings that militate against emulating it (the following quotes are drawn from that paper). These problems would almost certainly arise if the FTC’s statement was blessed by courts in the United States.

For a start, the more open-ended nature of European competition law makes it highly vulnerable to political interference. This is notably due to its multiple, vague, and often conflicting goals, such as the protection of the “competitive process”:

Because EU regulators can call upon a large list of justifications for their enforcement decisions, they are free to pursue cases that best fit within a political agenda, rather than focusing on the limited practices that are most injurious to consumers. In other words, there is largely no definable set of metrics to distinguish strong cases from weak ones under the EU model; what stands in its place is political discretion.

Politicized antitrust enforcement might seem like a great idea when your party is in power but, as Milton Friedman wisely observed, the mark of a strong system of government is that it operates well with the wrong person in charge. With this in mind, the FTC’s current leadership would do well to consider what their political opponents might do with these broad powers—such as using Section 5 to prevent online platforms from moderating speech.

A second important problem with the European model is that, because of its competitive-process goal, it does not adequately distinguish between exclusion resulting from superior efficiency and anticompetitive foreclosure:

By pursuing a competitive process goal, European competition authorities regularly conflate desirable and undesirable forms of exclusion precisely on the basis of their effect on competitors. As a result, the Commission routinely sanctions exclusion that stems from an incumbent’s superior efficiency rather than welfare-reducing strategic behavior, and routinely protects inefficient competitors that would otherwise rightly be excluded from a market.

This vastly enlarges the scope of potential antitrust liability, leading to risks of false positives that chill innovative behavior and create nearly unwinnable battles for targeted firms, while increasing compliance costs because of reduced legal certainty. Ultimately, this may hamper technological evolution and protect inefficient firms whose eviction from the market is merely a reflection of consumer preferences.

Finally, the European model results in enforcers having more discretion and enjoying greater deference from the courts:

[T]he EU process is driven by a number of laterally equivalent, and sometimes mutually exclusive, goals.… [A] large problem exists in the discretion that this fluid arrangement of goals yields.

The Microsoft case illustrates this problem well. In Microsoft, the Commission could have chosen to base its decision on a number of potential objectives. It notably chose to base its findings on the fact that Microsoft’s behavior reduced “consumer choice”. The Commission, in fact, discounted arguments that economic efficiency may lead to consumer welfare gains because “consumer choice” among a variety of media players was more important.

In short, the European model sorely lacks limiting principles. This likely explains why the European Court of Justice has started to pare back the commission’s powers in a series of recent cases, including Intel, Post Danmark, Cartes Bancaires, and Servizio Elettrico Nazionale. These rulings appear to be an explicit recognition that overly broad competition enforcement not only fails to benefit consumers but, more fundamentally, is incompatible with the rule of law.

It is unfortunate that the FTC is trying to emulate a model of competition enforcement that—even in the progressively minded European public sphere—is increasingly questioned and cast aside as a result of its multiple shortcomings.

A Policy Statement Is Still Only Worth the Electrons Upon Which It Is Written

Gus Hurwitz — 11 November 2022

[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

Just over a decade ago, in a speech at the spring meeting of the American Bar Association’s Antitrust Law Section, then-recently appointed Commissioner Joshua Wright of the Federal Trade Commission (FTC) announced his hope that the FTC would adopt a policy statement on the use of its unfair methods of competition (UMC) authority:

[The Commission] can and should issue a policy statement clearly setting forth its views on what constitutes an unfair method of competition as we have done with respect to our consumer protection mission … I will soon informally and publicly distribute a proposed Section 5 Unfair Methods Policy Statement more fully articulating my views and perhaps even providing a useful starting point for a fruitful discussion among the enforcement agencies, the antitrust bar, consumer groups, and the business community.

[The Commission] can and should issue a policy statement clearly setting forth its views on what constitutes an unfair method of competition as we have done with respect to our consumer protection mission…. I will soon informally and publicly distribute a proposed Section 5 Unfair Methods Policy Statement more fully articulating my views and perhaps even providing a useful starting point for a fruitful discussion among the enforcement agencies, the antitrust bar, consumer groups, and the business community.

Responding to this, I wrote a post here on Truth on the Market explaining that “a policy statement is not enough.” That post is copied in its entirety below. In it, I explained that: “In a contentious policy environment—that is, one where the prevailing understanding of an ambiguous law changes with the consensus of a three-commissioner majority—policy statements are worth next to nothing.”

Needless to say, that characterization proved apt when Lina Khan took the helm of the current FTC and promptly, unceremoniously, dispatched with the UMC policy statement that Commissioner Wright successfully championed prior to his departure from the FTC in 2015.

Today’s news that the FTC has adopted a new UMC Policy Statement is just that: mere news. It doesn’t change the law. It is non-precedential and lacks the force of law. It receives the benefit of no deference. It is, to use a term from the consumer-protection lexicon, mere puffery.

The greatest difference between this policy statement and the 2015 policy statement will likely not be in how the FTC’s authority is interpreted, but how its interpretations are credited by the courts. The 2015 policy statement encapsulated long-established law and precedent as understood and practiced by the FTC, U.S. Justice Department (DOJ), courts, and enforcers around the world. It was a credibility-enhancing commitment to consistency and stability in the law, along with providing credible, if non-binding, guidance for industry.

Today’s policy statement is the opposite, marking a clear rejection of and departure from decades of established precedent and relying on long-fallow caselaw to do so. When it comes time for this policy to be judicially tested, it will carry no weight. More importantly, it will give the courts pause in crediting the FTC’s interpretations of the law; any benefit of the doubt or inclination toward deference will likely be found in default.

And it seems likely that that judicial fate will, in fact, be met. This FTC adopted the statement not to bind itself to the mast of precedent against the tempting shoals of indiscretion, but rather to chart a course toward the jagged barrier rocks lining the shores of unbounded authority.

Of course, the purpose of this statement—as with so much of Chair Khan’s agenda—is not to use the law effectively. It is quite plainly to make a statement—a political and hortatory one about what she wishes the law to be. With this statement, that statement has been made. It has been made again. And again. It has been heard loudly and clearly. In her treatment of antitrust law, “the lady doth protest too much, methinks.”

Administrative law really is a strange beast. My last post explained this a bit, in the context of Chevron. In this post, I want to make this point in another context, explaining how utterly useless a policy statement can be. Our discussion today has focused on what should go into a policy statement – there seems to be general consensus that one is a good idea. But I’m not sure that we have a good understanding of how little certainty a policy statement offers.

Administrative Stare Decisis?

I alluded in my previous post to the absence of stare decisis in the administrative context. This is one of the greatest differences between judicial and administrative rulemaking: agencies are not bound by either prior judicial interpretations of their statutes, or even by their own prior interpretations. These conclusions follow from relatively recent opinions – Brand-X in 2005 and Fox I in 2007 – and have broad implications for the relationship between courts and agencies.

In Brand-X, the Court explained that a “court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” This conclusion follows from a direct application of Chevron: courts are responsible for determining whether a statute is ambiguous; agencies are responsible for determining the (reasonable) meaning of a statute that is ambiguous.

Not only are agencies not bound by a court’s prior interpretations of an ambiguous statute – they’re not even bound by their own prior interpretations!

In Fox I, the Court held that an agency’s own interpretation of an ambiguous statute impose no special obligations should the agency subsequently change its interpretation.[1] It may be necessary to acknowledge the prior policy; and factual findings upon which the new policy is based that contradict findings upon which the prior policy was based may need to be explained.[2] But where a statute may be interpreted in multiple ways – that is, in any case where the statute is ambiguous – Congress, and by extension its agencies, is free to choose between those alternative interpretations. The fact that an agency previously adopted one interpretation does not necessarily render other possible interpretations any less reasonable; the mere fact that one was previously adopted therefore, on its own, cannot act as a bar to subsequent adoption of a competing interpretation.

What Does This Mean for Policy Statements?

In a contentious policy environment – that is, one where the prevailing understanding of an ambiguous law changes with the consensus of a three-Commissioner majority – policy statements are worth next to nothing. Generally, the value of a policy statement is explaining to a court the agency’s rationale for its preferred construction of an ambiguous statute. Absent such an explanation, a court is likely to find that the construction was not sufficiently reasoned to merit deference. That is: a policy statement makes it easier for an agency to assert a given construction of a statute in litigation.

But a policy statement isn’t necessary to make that assertion, or for an agency to receive deference. Absent a policy statement, the agency needs to demonstrate to the court that its interpretation of the statute is sufficiently reasoned (and not merely a strategic interpretation adopted for the purposes of the present litigation).

And, more important, a policy statement in no way prevents an agency from changing its interpretation. Fox I makes clear that an agency is free to change its interpretations of a given statute. Prior interpretations – including prior policy statements – are not a bar to such changes. Prior interpretations also, therefore, offer little assurance to parties subject to any given interpretation.

Are Policy Statements Entirely Useless?

Policy statements may not be entirely useless. The likely front on which to challenge an unexpected change in agency interpretation of its statute is on Due Process or Notice grounds. The existence of a policy statement may make it easier for a party to argue that a changed interpretation runs afoul of Due Process or Notice requirements. See, e.g., Fox II.

So there is some hope that a policy statement would be useful. But, in the context of Section 5 UMC claims, I’m not sure how much comfort this really affords. Regulatory takings jurisprudence gives agencies broad power to seemingly contravene Due Process and Notice expectations. This is largely because of the nature of relief available to the FTC: injunctive relief, such as barring certain business practices, even if it results in real economic losses, is likely to survive a regulatory takings challenge, and therefore also a Due Process challenge. Generally, the Due Process and Notice lines of argument are best suited against fines and similar retrospective remedies; they offer little comfort against prospective remedies like injunctions.

Conclusion

I’ll conclude the same way that I did my previous post, with what I believe is the most important takeaway from this post: however we proceed, we must do so with an understanding of both antitrust and administrative law. Administrative law is the unique, beautiful, and scary beast that governs the FTC – those who fail to respect its nuances do so at their own peril.

[1] Fox v. FCC, 556 U.S. 502, 514–516 (2007) (“The statute makes no distinction [] between initial agency action and subsequent agency action undoing or revising that action. … And of course the agency must show that there are good reasons for the new policy. But it need not demonstrate to a court’s satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better, which the conscious change of course adequately indicates.”).

[2] Id. (“To be sure, the requirement that an agency provide reasoned explanation for its action would ordinarily demand that it display awareness that it is changing position. … This means that the agency need not always provide a more detailed justification than what would suffice for a new policy created on a blank slate. Sometimes it must—when, for example, its new policy rests upon factual findings that contradict those which underlay its prior policy; or when its prior policy has engendered serious reliance interests that must be taken into account. It would be arbitrary or capricious to ignore such matters. In such cases it is not that further justification is demanded by the mere fact of policy change; but that a reasoned explanation is needed for disregarding facts and circumstances that underlay or were engendered by the prior policy.”).

In Administrative Law, Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Regulation, Section 5, Symposia, Truth on the Market ABA, Chevron, Fox v. FCC, ftc, joshua wright, Lina Khan, Policy Statement, unfair methods of competition

FTC Rejects Economics for ‘Fairness’

Brian Albrecht — 10 November 2022

The current Federal Trade Commission (FTC) appears to have one overarching goal: find more ways to sue companies. The three Democratic commissioners (with the one Republican dissenting) issued a new policy statement earlier today that brings long-abandoned powers back into the FTC’s toolkit. Under Chair Lina Khan’s leadership, the FTC wants to bring challenges against “unfair methods of competition in or affecting commerce.” If that sounds extremely vague, that’s because it is.

For the past few decades, antitrust violations have fallen into two categories. Actions like price-fixing with competitors are assumed to be illegal. Other actions are only considered illegal if they are proven to sufficiently restrain trade. This latter approach is called the “rule of reason.”

The FTC now wants to return to a time when they could also challenge conduct it viewed as unfair. The policy statement says the commission will go after behavior that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature.” Who could argue against stopping coercive behavior? The problem is what it means in practice for actual antitrust cases. No one knows: businesses or courts. It’s up to the whims of the FTC.

This is how antitrust used to be. In 1984, the 2^nd U.S. Circuit Court of Appeals admonished the FTC and argued that “the Commission owes a duty to define the conditions under which conduct … would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.” Fairness, as the Clayton Act puts forward, proved unworkable as an antitrust standard.

The FTC’s movement to clarify what “unfair” means led to a 2015 policy statement, which the new statement supersedes. In the 2015 statement, the Obama-era FTC, with bipartisan support, issued new rules laying out what would qualify as unfair methods of competition. In doing so, they rolled “unfair methods” under the rule of reason. The consequences of the action matter.

The 2015 statement is part of a longer-run trend of incorporating more economic analysis into antitrust. For the past few decades, courts have followed in antitrust law is called the “consumer welfare standard.” The basic idea is that the goal of antitrust decisions should be to choose whatever outcome helps consumers, or as economists would put it, whatever increases “consumer welfare.” Once those are the terms of the dispute, economic analysis can help the courts sort out whether an action is anticompetitive.

Beyond helping to settle particular cases, these features of modern antitrust—like the consumer welfare standard and the rule of reason—give market participants some sense of what is illegal and what is not. That’s necessary for the rule of law to prevail and for markets to function.

The new FTC rules explicitly reject any appeal to consumer benefits or welfare. Efficiency gains from the action—labeled “pecuniary gains” to suggest they are merely about money—do not count as a defense. The FTC makes explicit that parties cannot justify behavior based on efficiencies or cost-benefit analysis.

Instead, as Commissioner Christine S. Wilson points out in her dissent, “the Policy Statement adopts an ‘I know it when I see it’ approach premised on a list of nefarious-sounding adjectives.” If the FTC claims some conduct is unfair, why worry about studying the consequences of the conduct?

The policy statement is an attempt to roll back the clock on antitrust and return to the incoherence of 1950s and 1960s antitrust. The FTC seeks to protect other companies, not competition or consumers. As Khan herself said, “for a lot of businesses it comes down to whether they’re going to be able to sink or swim.”

But President Joe Biden’s antitrust enforcers have struggled to win traditional antitrust cases. On mergers, for example, they have challenged a smaller percentage of mergers and were less successful than the FTC and DOJ under President Donald Trump.

In Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Section 5, Symposia, Truth on the Market antitrust, Clayton Act, consumer welfare standard, economics, Federal Trade Commission, Lina Khan, Rule of reason, unfair methods of competition, Unfairness

Archives For Lina Khan

Maybe He Never Said ‘Never’

Of Orphans and Potential Competition

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Competition Advocacy

Anticompetitive Market Distortions (ACMDs)

Conclusion

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A Record of Failure

Undefined Harms

Ahistorical Jurisprudence

What About the APA?

Conclusion

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Antitrust Fun, Little Guidance

Incomplete Lessons from the Past

Conclusion

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A Statement Is Just That

Lina’s European Dream

Example 1 – Competition on the merits and the protection of competitors:

Example 2 – Proof of anticompetitive harm:

Example 3 – Multiple goals:

Europe Is Not the Land of Milk and Honey

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