Archives For national security

Though details remain scant (and thus, any final judgment would be premature),  initial word on the new Trans-Atlantic Data Privacy Framework agreed to, in principle, by the White House and the European Commission suggests that it could be a workable successor to the Privacy Shield agreement that was invalidated by the Court of Justice of the European Union (CJEU) in 2020.

This new framework agreement marks the third attempt to create a lasting and stable legal regime to permit the transfer of EU citizens’ data to the United States. In the wake of the 2013 revelations by former National Security Agency contractor Edward Snowden about the extent of the United States’ surveillance of foreign nationals, the CJEU struck down (in its 2015 Schrems decision) the then-extant “safe harbor” agreement that had permitted transatlantic data flows. 

In the 2020 Schrems II decision (both cases were brought by Austrian privacy activist Max Schrems), the CJEU similarly invalidated the Privacy Shield, which had served as the safe harbor’s successor agreement. In Schrems II, the court found that U.S. foreign surveillance laws were not strictly proportional to the intelligence community’s needs and that those laws also did not give EU citizens adequate judicial redress.  

This new “Privacy Shield 2.0” agreement, announced during President Joe Biden’s recent trip to Brussels, is intended to address the issues raised in the Schrems II decision. In relevant part, the joint statement from the White House and European Commission asserts that the new framework will: “[s]trengthen the privacy and civil liberties safeguards governing U.S. signals intelligence activities; Establish a new redress mechanism with independent and binding authority; and Enhance its existing rigorous and layered oversight of signals intelligence activities.”

In short, the parties believe that the new framework will ensure that U.S. intelligence gathering is proportional and that there is an effective forum for EU citizens caught up in U.S. intelligence-gathering to vindicate their rights.

As I and my co-authors (my International Center for Law & Economics colleague Mikołaj Barczentewicz and Michael Mandel of the Progressive Policy Institute) detailed in an issue brief last fall, the stakes are huge. While the issue is often framed in terms of social-media use, transatlantic data transfers are implicated in an incredibly large swath of cross-border trade:

According to one estimate, transatlantic trade generates upward of $5.6 trillion in annual commercial sales, of which at least $333 billion is related to digitally enabled services. Some estimates suggest that moderate increases in data-localization requirements would result in a €116 billion reduction in exports from the EU.

The agreement will be implemented on this side of the Atlantic by a forthcoming executive order from the White House, at which point it will be up to EU courts to determine whether the agreement adequately restricts U.S. intelligence activities and protects EU citizens’ rights. For now, however, it appears at a minimum that the White House took the CJEU’s concerns seriously and made the right kind of concessions to reach agreement.

And now, once the framework is finalized, we just have to sit tight and wait for Mr. Schrems’ next case.

U.S. antitrust policy seeks to promote vigorous marketplace competition in order to enhance consumer welfare. For more than four decades, mainstream antitrust enforcers have taken their cue from the U.S. Supreme Court’s statement in Reiter v. Sonotone (1979) that antitrust is “a consumer welfare prescription.” Recent suggestions (see here and here) by new Biden administration Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) leadership that antitrust should promote goals apart from consumer welfare have yet to be embodied in actual agency actions, and they have not been tested by the courts. (Given Supreme Court case law, judicial abandonment of the consumer welfare standard appears unlikely, unless new legislation that displaces it is enacted.)   

Assuming that the consumer welfare paradigm retains its primacy in U.S. antitrust, how do the goals of antitrust match up with those of national security? Consistent with federal government pronouncements, the “basic objective of U.S. national security policy is to preserve and enhance the security of the United States and its fundamental values and institutions.” Properly applied, antitrust can retain its consumer welfare focus in a manner consistent with national security interests. Indeed, sound antitrust and national-security policies generally go hand-in-hand. The FTC and the DOJ should keep that in mind in formulating their antitrust policies (spoiler alert: they sometimes have failed to do so).

Discussion

At first blush, it would seem odd that enlightened consumer-welfare-oriented antitrust enforcement and national-security policy would be in tension. After all, enlightened antitrust enforcement is concerned with targeting transactions that harmfully reduce output and undermine innovation, such as hard-core collusion and courses of conduct that inefficiently exclude competition and weaken marketplace competition. U.S. national security would seem to be promoted (or, at least, not harmed) by antitrust enforcement directed at supporting stronger, more vibrant American markets.

This initial instinct is correct, if antitrust-enforcement policy indeed reflects economically sound, consumer-welfare-centric principles. But are there examples where antitrust enforcement falls short and thereby is at odds with national security? An evaluation of three areas of interaction between the two American policy interests is instructive.

The degree of congruence between national security and appropriate consumer welfare-enhancing antitrust enforcement is illustrated by a brief discussion of:

  1. defense-industry mergers;
  2. the intellectual property-antitrust interface, with a focus on patent licensing; and
  3. proposed federal antitrust legislation.

The first topic presents an example of clear consistency between consumer-welfare-centric antitrust and national defense. In contrast, the second topic demonstrates that antitrust prosecutions (and policies) that inappropriately weaken intellectual-property protections are inconsistent with national defense interests. The second topic does not manifest a tension between antitrust and national security; rather, it illustrates a tension between national security and unsound antitrust enforcement. In a related vein, the third topic demonstrates how a change in the antitrust statutes that would undermine the consumer welfare paradigm would also threaten U.S. national security.

Defense-Industry Mergers

The consistency between antitrust goals and national security is relatively strong and straightforward in the field of defense-industry-related mergers and joint ventures. The FTC and DOJ traditionally have worked closely with the U.S. Defense Department (DOD) to promote competition and consumer welfare in evaluating business transactions that affect national defense needs.

The DOD has long supported policies to prevent overreliance on a single supplier for critical industrial-defense needs. Such a posture is consistent with the antitrust goal of preventing mergers to monopoly that reduce competition, raise prices, and diminish quality by creating or entrenching a dominant firm. As then-FTC Commissioner William Kovacic commented about an FTC settlement that permitted the United Launch Alliance (an American spacecraft launch service provider established in 2006 as a joint venture between Lockheed Martin and Boeing), “[i]n reviewing defense industry mergers, competition authorities and the DOD generally should apply a presumption that favors the maintenance of at least two suppliers for every weapon system or subsystem.”

Antitrust enforcers have, however, worked with DOD to allow the only two remaining suppliers of a defense-related product or service to combine their operations, subject to appropriate safeguards, when presented with scale economy and quality rationales that advanced national-security interests (see here).

Antitrust enforcers have also consulted and found common cause with DOD in opposing anticompetitive mergers that have national-security overtones. For example, antitrust enforcement actions targeting vertical defense-sector mergers that threaten anticompetitive input foreclosure or facilitate anticompetitive information exchanges are in line with the national-security goal of preserving vibrant markets that offer the federal government competitive, high-quality, innovative, and reasonably priced purchase options for its defense needs.

The FTC’s recent success in convincing Lockheed Martin to drop its proposed acquisition of Aerojet Rocketdyne holdings fits into this category. (I express no view on the merits of this matter; I merely cite it as an example of FTC-DOD cooperation in considering a merger challenge.) In its February 2022 press release announcing the abandonment of this merger, the FTC stated that “[t]he acquisition would have eliminated the country’s last independent supplier of key missile propulsion inputs and given Lockheed the ability to cut off its competitors’ access to these critical components.” The FTC also emphasized the full consistency between its enforcement action and national-security interests:

Simply put, the deal would have resulted in higher prices and diminished quality and innovation for programs that are critical to national security. The FTC’s enforcement action in this matter dovetails with the DoD report released this week recommending stronger merger oversight of the highly concentrated defense industrial base.

Intellectual-Property Licensing

Shifts in government IP-antitrust patent-licensing policy perspectives

Intellectual-property (IP) licensing, particularly involving patents, is highly important to the dynamic and efficient dissemination of new technologies throughout the economy, which, in turn, promotes innovation and increased welfare (consumers’ and producers’ surplus). See generally, for example, Daniel Spulber’s The Case for Patents and Jonathan Barnett’s Innovation, Firms, and Markets. Patents are a property right, and they do not necessarily convey market power, as the federal government has recognized (see 2017 DOJ-FTC Antitrust Guidelines for the Licensing of Intellectual Property).

Standard setting through standard setting organizations (SSOs) has been a particularly important means of spawning valuable benchmarks (standards) that have enabled new patent-backed technologies to drive innovation and enable mass distribution of new high-tech products, such as smartphones. The licensing of patents that cover and make possible valuable standards—“standard-essential patents” or SEPs—has played a crucial role in bringing to market these products and encouraging follow-on innovations that have driven fast-paced welfare-enhancing product and process quality improvements.

The DOJ and FTC have recognized specific efficiency benefits of IP licensing in their 2017 Antitrust Guidelines for the Licensing of Intellectual Property, stating (citations deleted):

Licensing, cross-licensing, or otherwise transferring intellectual property (hereinafter “licensing”) can facilitate integration of the licensed property with complementary factors of production. This integration can lead to more efficient exploitation of the intellectual property, benefiting consumers through the reduction of costs and the introduction of new products. Such arrangements increase the value of intellectual property to consumers and owners. Licensing can allow an innovator to capture returns from its investment in making and developing an invention through royalty payments from those that practice its invention, thus providing an incentive to invest in innovative efforts. …

[L]imitations on intellectual property licenses may serve procompetitive ends by allowing the licensor to exploit its property as efficiently and effectively as possible. These various forms of exclusivity can be used to give a licensee an incentive to invest in the commercialization and distribution of products embodying the licensed intellectual property and to develop additional applications for the licensed property. The restrictions may do so, for example, by protecting the licensee against free riding on the licensee’s investments by other licensees or by the licensor. They may also increase the licensor’s incentive to license, for example, by protecting the licensor from competition in the licensor’s own technology in a market niche that it prefers to keep to itself.

Unfortunately, however, FTC and DOJ antitrust policies over the last 15 years have too often belied this generally favorable view of licensing practices with respect to SEPs. (See generally here, here, and here). Notably, the antitrust agencies have at various times taken policy postures and enforcement actions indicating that SEP holders may face antitrust challenges if:

  1. they fail to license all comers, including competitors, on fair, reasonable, and nondiscriminatory (FRAND) terms; and
  2. seek to obtain injunctions against infringers.

In addition, antitrust policy officials (see 2011 FTC Report) have described FRAND price terms as cabined by the difference between the licensing rates for the first (included in the standard) and second (not included in the standard) best competing patented technologies available prior to the adoption of a standard. This pricing measure—based on the “incremental difference” between first and second-best technologies—has been described as necessary to prevent SEP holders from deriving artificial “monopoly rents” that reflect the market power conferred by a standard. (But see then FTC-Commissioner Joshua Wright’s 2013 essay to the contrary, based on the economics of incomplete contracts.)

This approach to SEPs undervalues them, harming the economy. Limitations on seeking injunctions (which are a classic property-right remedy) encourages opportunistic patent infringements and artificially disfavors SEP holders in bargaining over licensing terms with technology implementers, thereby reducing the value of SEPs. SEP holders are further disadvantaged by the presumption that they must license all comers. They also are harmed by the implication that they must be limited to a relatively low hypothetical “ex ante” licensing rate—a rate that totally fails to take into account the substantial economic welfare value that will accrue to the economy due to their contribution to the standard. Considered individually and as a whole, these negative factors discourage innovators from participating in standardization, to the detriment of standards quality. Lower-quality standards translate into inferior standardized produces and processes and reduced innovation.

Recognizing this problem, in 2018 DOJ, Assistant Attorney General for Antitrust Makan Delrahim announced a “New Madison Approach” (NMA) to SEP licensing, which recognized:

  1. antitrust remedies are inappropriate for patent-licensing disputes between SEP-holders and implementers of a standard;
  2. SSOs should not allow collective actions by standard-implementers to disfavor patent holders;
  3. SSOs and courts should be hesitant to restrict SEP holders’ right to exclude implementers from access to their patents by seeking injunctions; and
  4. unilateral and unconditional decisions not to license a patent should be per se legal. (See, for example, here and here.)

Acceptance of the NMA would have counter-acted the economically harmful degradation of SEPs stemming from prior government policies.

Regrettably, antitrust-enforcement-agency statements during the last year effectively have rejected the NMA. Most recently, in December 2021, the DOJ issued for public comment a Draft Policy Statement on Licensing Negotiations and Remedies, SEPs, which displaces a 2019 statement that had been in line with the NMA. Unless the FTC and Biden DOJ rethink their new position and decide instead to support the NMA, the anti-innovation approach to SEPs will once again prevail, with unfortunate consequences for American innovation.

The “weaker patents” implications of the draft policy statement would also prove detrimental to national security, as explained in a comment on the statement by a group of leading law, economics, and business scholars (including Nobel Laureate Vernon Smith) convened by the International Center for Law & Economics:

China routinely undermines U.S. intellectual property protections through its industrial policy. The government’s stated goal is to promote “fair and reasonable” international rules, but it is clear that China stretches its power over intellectual property around the world by granting “anti-suit injunctions” on behalf of Chinese smartphone makers, designed to curtail enforcement of foreign companies’ patent rights. …

Insufficient protections for intellectual property will hasten China’s objective of dominating collaborative standard development in the medium to long term. Simultaneously, this will engender a switch to greater reliance on proprietary, closed standards rather than collaborative, open standards. These harmful consequences are magnified in the context of the global technology landscape, and in light of China’s strategic effort to shape international technology standards. Chinese companies, directed by their government authorities, will gain significant control of the technologies that will underpin tomorrow’s digital goods and services.

A Center for Security and International Studies submission on the draft policy statement (signed by a former deputy secretary of the DOD, as well as former directors of the U.S. Patent and Trademark Office and the National Institute of Standards and Technology) also raised China-related national-security concerns:

[T]he largest short-term and long-term beneficiaries of the 2021 Draft Policy Statement are firms based in China. Currently, China is the world’s largest consumer of SEP-based technology, so weakening protection of American owned patents directly benefits Chinese manufacturers. The unintended effect of the 2021 Draft Policy Statement will be to support Chinese efforts to dominate critical technology standards and other advanced technologies, such as 5G. Put simply, devaluing U.S. patents is akin to a subsidized tech transfer to China.

Furthermore, in a more general vein, leading innovation economist David Teece also noted the negative national-security implications in his submission on the draft policy statement:

The US government, in reviewing competition policy issues that might impact standards, therefore needs to be aware that the issues at hand have tremendous geopolitical consequences and cannot be looked at in isolation. … Success in this regard will promote competition and is our best chance to maintain technological leadership—and, along with it, long-term economic growth and consumer welfare and national security.

That’s not all. In its public comment warning against precipitous finalization of the draft policy statement, the Innovation Alliance noted that, in recent years, major foreign jurisdictions have rejected the notion that SEP holders should be deprived the opportunity to seek injunctions. The Innovation Alliance opined in detail on the China national-security issues (footnotes omitted):

[T]he proposed shift in policy will undermine the confidence and clarity necessary to incentivize investments in important and risky research and development while simultaneously giving foreign competitors who do not rely on patents to drive investment in key technologies, like China, a distinct advantage. …

The draft policy statement … would devalue SEPs, and undermine the ability of U.S. firms to invest in the research and development needed to maintain global leadership in 5G and other critical technologies.

Without robust American investments, China—which has clear aspirations to control and lead in critical standards and technologies that are essential to our national security—will be left without any competition. Since 2015, President Xi has declared “whoever controls the standards controls the world.” China has rolled out the “China Standards 2035” plan and has outspent the United States by approximately $24 billion in wireless communications infrastructure, while China’s five-year economic plan calls for $400 billion in 5G-related investment.

Simply put, the draft policy statement will give an edge to China in the standards race because, without injunctions, American companies will lose the incentive to invest in the research and development needed to lead in standards setting. Chinese companies, on the other hand, will continue to race forward, funded primarily not by license fees, but by the focused investment of the Chinese government. …

Public hearings are necessary to take into full account the uncertainty of issuing yet another policy on this subject in such a short time period.

A key part of those hearings and further discussions must be the national security implications of a further shift in patent enforceability policy. Our future safety depends on continued U.S. leadership in areas like 5G and artificial intelligence. Policies that undermine the enforceability of patent rights disincentivize the substantial private sector investment necessary for research and development in these areas. Without that investment, development of these key technologies will begin elsewhere—likely China. Before any policy is accepted, key national-security stakeholders in the U.S. government should be asked for their official input.

These are not the only comments that raised the negative national-security ramifications of the draft policy statement (see here and here). For example, current Republican and Democratic senators, prior International Trade Commissioners, and former top DOJ and FTC officials also noted concerns. What’s more, the Patent Protection Society of China, which represents leading Chinese corporate implementers, filed a rather nonanalytic submission in favor of the draft statement. As one leading patent-licensing lawyer explains: “UC Berkley Law Professor Mark Cohen, whose distinguished government service includes serving as the USPTO representative in China, submitted a thoughtful comment explaining how the draft Policy Statement plays into China’s industrial and strategic interests.”

Finally, by weakening patent protection, the draft policy statement is at odds with  the 2021 National Security Commission on Artificial Intelligence Report, which called for the United States to “[d]evelop and implement national IP policies to incentivize, expand, and protect emerging technologies[,]” in response to Chinese “leveraging and exploiting intellectual property (IP) policies as a critical tool within its national strategies for emerging technologies.”

In sum, adoption of the draft policy statement would raise antitrust risks, weaken key property rights protections for SEPs, and undercut U.S. technological innovation efforts vis-à-vis China, thereby undermining U.S. national security.

FTC v. Qualcomm: Misguided enforcement and national security

U.S. national-security interests have been threatened by more than just the recent SEP policy pronouncements. In filing a January 2017 antitrust suit (at the very end of the Obama administration) against Qualcomm’s patent-licensing practices, the FTC (by a partisan 2-1 vote) ignored the economic efficiencies that underpinned this highly successful American technology company’s practices. Had the suit succeeded, U.S. innovation in a critically important technology area would have needlessly suffered, with China as a major beneficiary. A recent Federalist Society Regulatory Transparency Project report on the New Madison Approach underscored the broad policy implications of FTC V. Qualcomm (citations deleted):

The FTC’s Qualcomm complaint reflected the anti-SEP bias present during the Obama administration. If it had been successful, the FTC’s prosecution would have seriously undermined the freedom of the company to engage in efficient licensing of its SEPs.

Qualcomm is perhaps the world’s leading wireless technology innovator. It has developed, patented, and licensed key technologies that power smartphones and other wireless devices, and continues to do so. Many of Qualcomm’s key patents are SEPs subject to FRAND, directed to communications standards adopted by wireless devices makers. Qualcomm also makes computer processors and chips embodied in cutting edge wireless devices. Thanks in large part to Qualcomm technology, those devices have improved dramatically over the last decade, offering consumers a vast array of new services at a lower and lower price, when quality is factored in. Qualcomm thus is the epitome of a high tech American success story that has greatly benefited consumers.

Qualcomm: (1) sells its chips to “downstream” original equipment manufacturers (OEMs, such as Samsung and Apple), on the condition that the OEMs obtain licenses to Qualcomm SEPs; and (2) refuses to license its FRAND-encumbered SEPs to rival chip makers, while allowing those rivals to create and sell chips embodying Qualcomm SEP technologies to those OEMS that have entered a licensing agreement with Qualcomm.

The FTC’s 2017 antitrust complaint, filed in federal district court in San Francisco, charged that Qualcomm’s “no license, no chips” policy allegedly “forced” OEM cell phone manufacturers to pay elevated royalties on products that use a competitor’s baseband processors. The FTC deemed this an illegal “anticompetitive tax” on the use of rivals’ processors, since phone manufacturers “could not run the risk” of declining licenses and thus losing all access to Qualcomm’s processors (which would be needed to sell phones on important cellular networks). The FTC also argued that Qualcomm’s refusal to license its rivals despite its SEP FRAND commitment violated the antitrust laws. Finally, the FTC asserted that a 2011-2016 Qualcomm exclusive dealing contract with Apple (in exchange for reduced patent royalties) had excluded business opportunities for Qualcomm competitors.

The federal district court held for the FTC. It ordered that Qualcomm end these supposedly anticompetitive practices and renegotiate its many contracts. [Among the beneficiaries of new pro-implementer contract terms would have been a leading Chinese licensee of Qualcomm’s, Huawei, the huge Chinese telecommunications company that has been accused by the U.S. government of using technological “back doors” to spy on the United States.]

Qualcomm appealed, and in August 2020 a panel of the Ninth Circuit Court of Appeals reversed the district court, holding for Qualcomm. Some of the key points underlying this holding were: (1) Qualcomm had no antitrust duty to deal with competitors, consistent with established Supreme Court precedent (a very narrow exception to this precedent did not apply); (2) Qualcomm’s rates were chip supplier neutral because all OEMs paid royalties, not just rivals’ customers; (3) the lower court failed to show how the “no license, no chips” policy harmed Qualcomm’s competitors; and (4) Qualcomm’s agreements with Apple did not have the effect of substantially foreclosing the market to competitors. The Ninth Circuit as a whole rejected the FTC’s “en banc” appeal for review of the panel decision.

The appellate decision in Qualcomm largely supports pillar four of the NMA, that unilateral and unconditional decisions not to license a patent should be deemed legal under the antitrust laws. More generally, the decision evinces a refusal to find anticompetitive harm in licensing markets without hard empirical support. The FTC and the lower court’s findings of “harm” had been essentially speculative and anecdotal at best. They had ignored the “big picture” that the markets in which Qualcomm operates had seen vigorous competition and the conferral of enormous and growing welfare benefits on consumers, year-by-year. The lower court and the FTC had also turned a deaf ear to a legitimate efficiency-related business rationale that explained Qualcomm’s “no license, no chips” policy – a fully justifiable desire to obtain a fair return on Qualcomm’s patented technology.

Qualcomm is well reasoned, and in line with sound modern antitrust precedent, but it is only one holding. The extent to which this case’s reasoning proves influential in other courts may in part depend on the policies advanced by DOJ and the FTC going forward. Thus, a preliminary examination of the Biden administration’s emerging patent-antitrust policy is warranted. [Subsequent discussion shows that the Biden administration apparently has rejected pro-consumer policies embodied in the 9th U.S. Circuit’s Qualcomm decision and in the NMA.]

Although the 9th Circuit did not comment on them, national-security-policy concerns weighed powerfully against the FTC v. Qualcomm suit. In a July 2019 Statement of Interest (SOI) filed with the circuit court, DOJ cogently set forth the antitrust flaws in the district court’s decision favoring the FTC. Furthermore, the SOI also explained that “the public interest” favored a stay of the district court holding, due to national-security concerns (described in some detail in statements by the departments of Defense and Energy, appended to the SOI):

[T]he public interest also takes account of national security concerns. Winter v. NRDC, 555 U.S. 7, 23-24 (2008). This case presents such concerns. In the view of the Executive Branch, diminishment of Qualcomm’s competitiveness in 5G innovation and standard-setting would significantly impact U.S. national security. A251-54 (CFIUS); LD ¶¶10-16 (Department of Defense); ED ¶¶9-10 (Department of Energy). Qualcomm is a trusted supplier of mission-critical products and services to the Department of Defense and the Department of Energy. LD ¶¶5-8; ED ¶¶8-9. Accordingly, the Department of Defense “is seriously concerned that any detrimental impact on Qualcomm’s position as global leader would adversely affect its ability to support national security.” LD ¶16.

The [district] court’s remedy [requiring the renegotiation of Qualcomm’s licensing contracts] is intended to deprive, and risks depriving, Qualcomm of substantial licensing revenue that could otherwise fund time-sensitive R&D and that Qualcomm cannot recover later if it prevails. See, e.g., Op. 227-28. To be sure, if Qualcomm ultimately prevails, vacatur of the injunction will limit the severity of Qualcomm’s revenue loss and the consequent impairment of its ability to perform functions critical to national security. The Department of Defense “firmly believes,” however, “that any measure that inappropriately limits Qualcomm’s technological leadership, ability to invest in [R&D], and market competitiveness, even in the short term, could harm national security. The risks to national security include the disruption of [the Department’s] supply chain and unsure U.S. leadership in 5G.” LD ¶3. Consequently, the public interest necessitates a stay pending this Court’s resolution of the merits. In these rare circumstances, the interest in preventing even a risk to national security—“an urgent objective of the highest order”—presents reason enough not to enforce the remedy immediately. Int’l Refugee Assistance Project, 137 S. Ct. at 2088 (internal quotations omitted).

Not all national-security arguments against antitrust enforcement may be well-grounded, of course. The key point is that the interests of national security and consumer-welfare-centric antitrust are fully aligned when antitrust suits would inefficiently undermine the competitive vigor of a firm or firms that play a major role in supporting U.S. national-security interests. Such was the case in FTC v. Qualcomm. More generally, heightened antitrust scrutiny of efficient patent-licensing practices (as threatened by the Biden administration) would tend to diminish innovation by U.S. patentees, particularly in areas covered by standards that are key to leading global technologies. Such a diminution in innovation will tend to weaken American advantages in important industry sectors that are vital to U.S. national-security interests.

Proposed Federal Antitrust Legislation

Proposed federal antitrust legislation being considered by Congress (see here, here, and here for informed critiques) would prescriptively restrict certain large technology companies’ business transactions. If enacted, such legislation would thereby preclude case-specific analysis of potential transaction-specific efficiencies, thereby undermining the consumer welfare standard at the heart of current sound and principled antitrust enforcement. The legislation would also be at odds with our national-security interests, as a recent U.S. Chamber of Commerce paper explains:

Congress is considering new antitrust legislation which, perversely, would weaken leading U.S. technology companies by crafting special purpose regulations under the guise of antitrust to prohibit those firms from engaging in business conduct that is widely acceptable when engaged in by rival competitors.

A series of legislative proposals – some of which already have been approved by relevant Congressional committees – would, among other things: dismantle these companies; prohibit them from engaging in significant new acquisitions or investments; require them to disclose sensitive user data and sensitive IP and trade secrets to competitors, including those that are foreign-owned and controlled; facilitate foreign influence in the United States; and compromise cybersecurity.  These bills would fundamentally undermine American security interests while exempting from scrutiny Chinese and other foreign firms that do not meet arbitrary user and market capitalization thresholds specified in the legislation. …

The United States has never used legislation to punish success. In many industries, scale is important and has resulted in significant gains for the American economy, including small businesses.  U.S. competition law promotes the interests of consumers, not competitors. It should not be used to pick winners and losers in the market or to manage competitive outcomes to benefit select competitors.  Aggressive competition benefits consumers and society, for example by pushing down prices, disrupting existing business models, and introducing innovative products and services.

If enacted, the legislative proposals would drag the United States down in an unfolding global technological competition.  Companies captured by the legislation would be required to compete against integrated foreign rivals with one hand tied behind their backs.  Those firms that are the strongest drivers of U.S. innovation in AI, quantum computing, and other strategic technologies would be hamstrung or even broken apart, while foreign and state-backed producers of these same technologies would remain unscathed and seize the opportunity to increase market share, both in the U.S. and globally. …

Instead of warping antitrust law to punish a discrete group of American companies, the U.S. government should focus instead on vigorous enforcement of current law and on vocally opposing and effectively countering foreign regimes that deploy competition law and other legal and regulatory methods as industrial policy tools to unfairly target U.S. companies.  The U.S. should avoid self-inflicted wounds to our competitiveness and national security that would result from turning antitrust into a weapon against dynamic and successful U.S. firms.      

Consistent with this analysis, former Obama administration Defense Secretary Leon Panetta and former Trump administration Director of National Intelligence Dan Coats argued in a letter to U.S. House leadership (see here) that “imposing severe restrictions solely on U.S. giants will pave the way for a tech landscape dominated by China — echoing a position voiced by the Big Tech companies themselves.”

The national-security arguments against current antitrust legislative proposals, like the critiques of the unfounded FTC v. Qualcomm case, represent an alignment between sound antitrust policy and national-security analysis. Unfounded antitrust attacks on efficient business practices by large firms that help maintain U.S. technological leadership in key areas undermine both principled antitrust and national security.

Conclusion

Enlightened antitrust enforcement, centered on consumer welfare, can and should be read in a manner that is harmonious with national-security interests.

The cooperation between U.S. federal antitrust enforcers and the DOD in assessing defense-industry mergers and joint ventures is, generally speaking, an example of successful harmonization. This success reflects the fact that antitrust enforcers carry out their reviews of those transactions with an eye toward accommodating efficiencies that advance defense goals without sacrificing consumer welfare. Close antitrust-agency consultation with DOD is key to that approach.

Unfortunately, federal enforcement directed toward efficient intellectual-property licensing, as manifested in the Qualcomm case, reflects a disharmony between antitrust and national security. This disharmony could be eliminated if DOJ and the FTC adopted a dynamic view of intellectual property and the substantial economic-welfare benefits that flow from restrictive patent-licensing transactions.

In sum, a dynamic analysis reveals that consumer welfare is enhanced, not harmed, by not subjecting such licensing arrangements to antitrust threat. A more permissive approach to licensing is thus consistent with principled antitrust and with the national security interest of protecting and promoting strong American intellectual property (and, in particular, patent) protection. The DOJ and the FTC should keep this in mind and make appropriate changes to their IP-antitrust policies forthwith.

Finally, proposed federal antitrust legislation would bring about statutory changes that would simultaneously displace consumer welfare considerations and undercut national security interests. As such, national security is supported by rejecting unsound legislation, in order to keep in place consumer-welfare-based antitrust enforcement.

PHOTO: C-Span

Lina Khan’s appointment as chair of the Federal Trade Commission (FTC) is a remarkable accomplishment. At 32 years old, she is the youngest chair ever. Her longstanding criticisms of the Consumer Welfare Standard and alignment with the neo-Brandeisean school of thought make her appointment a significant achievement for proponents of those viewpoints. 

Her appointment also comes as House Democrats are preparing to mark up five bills designed to regulate Big Tech and, in the process, vastly expand the FTC’s powers. This expansion may combine with Khan’s appointment in ways that lawmakers considering the bills have not yet considered.

This is a critical time for the FTC. It has lost a number of high-profile lawsuits and is preparing to expand its rulemaking powers to regulate things like employment contracts and businesses’ use of data. Khan has also argued in favor of additional rulemaking powers around “unfair methods of competition.”

As things stand, the FTC under Khan’s leadership is likely to push for more extensive regulatory powers, akin to those held by the Federal Communications Commission (FCC). But these expansions would be trivial compared to what is proposed by many of the bills currently being prepared for a June 23 mark-up in the House Judiciary Committee. 

The flagship bill—Rep. David Cicilline’s (D-R.I.) American Innovation and Choice Online Act—is described as a platform “non-discrimination” bill. I have already discussed what the real-world effects of this bill would likely be. Briefly, it would restrict platforms’ ability to offer richer, more integrated services at all, since those integrations could be challenged as “discrimination” at the cost of would-be competitors’ offerings. Things like free shipping on Amazon Prime, pre-installed apps on iPhones, or even including links to Gmail and Google Calendar at the top of a Google Search page could be precluded under the bill’s terms; in each case, there is a potential competitor being undermined. 

In fact, the bill’s scope is so broad that some have argued that the FTC simply would not challenge “innocuous self-preferencing” like, say, Apple pre-installing Apple Music on iPhones. Economist Hal Singer has defended the proposals on the grounds that, “Due to limited resources, not all platform integration will be challenged.” 

But this shifts the focus to the FTC itself, and implies that it would have potentially enormous discretionary power under these proposals to enforce the law selectively. 

Companies found guilty of breaching the bill’s terms would be liable for civil penalties of up to 15 percent of annual U.S. revenue, a potentially significant sum. And though the Supreme Court recently ruled unanimously against the FTC’s powers to levy civil fines unilaterally—which the FTC opposed vociferously, and may get restored by other means—there are two scenarios through which it could end up getting extraordinarily extensive control over the platforms covered by the bill.

The first course is through selective enforcement. What Singer above describes as a positive—the fact that enforcers would just let “benign” violations of the law be—would mean that the FTC itself would have tremendous scope to choose which cases it brings, and might do so for idiosyncratic, politicized reasons.

This approach is common in countries with weak rule of law. Anti-corruption laws are frequently used to punish opponents of the regime in China, who probably are also corrupt, but are prosecuted because they have challenged the regime in some way. Hong Kong’s National Security law has also been used to target peaceful protestors and critical media thanks to its vague and overly broad drafting. 

Obviously, that’s far more sinister than what we’re talking about here. But these examples highlight how excessively broad laws applied at the enforcer’s discretion give broad powers to the enforcer to penalize defendants for other, unrelated things. Or, to quote Jay-Z: “Am I under arrest or should I guess some more? / ‘Well, you was doing 55 in a 54.’

The second path would be to use these powers as leverage to get broad consent decrees to govern the conduct of covered platforms. These occur when a lawsuit is settled, with the defendant company agreeing to change its business practices under supervision of the plaintiff agency (in this case, the FTC). The Cambridge Analytica lawsuit ended this way, with Facebook agreeing to change its data-sharing practices under the supervision of the FTC. 

This path would mean the FTC creating bespoke, open-ended regulation for each covered platform. Like the first path, this could create significant scope for discretionary decision-making by the FTC and potentially allow FTC officials to impose their own, non-economic goals on these firms. And it would require costly monitoring of each firm subject to bespoke regulation to ensure that no breaches of that regulation occurred.

Khan, as a critic of the Consumer Welfare Standard, believes that antitrust ought to be used to pursue non-economic objectives, including “the dispersion of political and economic control.” She, and the FTC under her, may wish to use this discretionary power to prosecute firms that she feels are hurting society for unrelated reasons, such as because of political stances they have (or have not) taken.

Khan’s fellow commissioner, Rebecca Kelly Slaughter, has argued that antitrust should be “antiracist”; that “as long as Black-owned businesses and Black consumers are systematically underrepresented and disadvantaged, we know our markets are not fair”; and that the FTC should consider using its existing rulemaking powers to address racist practices. These may be desirable goals, but their application would require contentious value judgements that lawmakers may not want the FTC to make.

Khan herself has been less explicit about the goals she has in mind, but has given some hints. In her essay “The Ideological Roots of America’s Market Power Problem”, Khan highlights approvingly former Associate Justice William O. Douglas’s account of:

“economic power as inextricably political. Power in industry is the power to steer outcomes. It grants outsized control to a few, subjecting the public to unaccountable private power—and thereby threatening democratic order. The account also offers a positive vision of how economic power should be organized (decentralized and dispersed), a recognition that forms of economic power are not inevitable and instead can be restructured.” [italics added]

Though I have focused on Cicilline’s flagship bill, others grant significant new powers to the FTC, as well. The data portability and interoperability bill doesn’t actually define what “data” is; it leaves it to the FTC to “define the term ‘data’ for the purpose of implementing and enforcing this Act.” And, as I’ve written elsewhere, data interoperability needs significant ongoing regulatory oversight to work at all, a responsibility that this bill also hands to the FTC. Even a move as apparently narrow as data portability will involve a significant expansion of the FTC’s powers and give it a greater role as an ongoing economic regulator.

It is concerning enough that this legislative package would prohibit conduct that is good for consumers, and that actually increases the competition faced by Big Tech firms. Congress should understand that it also gives extensive discretionary powers to an agency intent on using them to pursue broad, political goals. If Khan’s appointment as chair was a surprise, what her FTC does with the new powers given to her by Congress should not be.

Economist Josh Hendrickson asserts that the Jones Act is properly understood as a Coasean bargain. In this view, the law serves as a subsidy to the U.S. maritime industry through its restriction of waterborne domestic commerce to vessels that are constructed in U.S. shipyards, U.S.-flagged, and U.S.-crewed. Such protectionism, it is argued, provides the government with ready access to these assets, rather than taking precious time to build them up during times of conflict.

We are skeptical of this characterization.

Although there is an implicit bargain behind the Jones Act, its relationship to the work of Ronald Coase is unclear. Coase is best known for his theorem on the use of bargains and exchanges to reduce negative externalities. But the negative externality is that the Jones Act attempts to address is not apparent. While it may be more efficient or effective than the government building up its own shipbuilding, vessels, and crew in times of war, that’s rather different than addressing an externality. The Jones Act may reflect an implied exchange between the domestic maritime industry and government, but there does not appear to be anything particularly Coasean about it.

Rather, close scrutiny reveals this arrangement between government and industry to be a textbook example of policy failure and rent-seeking run amok. The Jones Act is not a bargain, but a rip-off, with costs and benefits completely out of balance.

The Jones Act and National Defense

For all of the talk of the Jones Act’s critical role in national security, its contributions underwhelm. Ships offer a case in point. In times of conflict, the U.S. military’s primary sources of transport are not Jones Act vessels but government-owned ships in the Military Sealift Command and Ready Reserve Force fleets. These are further supplemented by the 60 non-Jones Act U.S.-flag commercial ships enrolled in the Maritime Security Program, a subsidy arrangement by which ships are provided $5 million per year in exchange for the government’s right to use them in time of need.

In contrast, Jones Act ships are used only sparingly. That’s understandable, as removing these vessels from domestic trade would leave a void in the country’s transportation needs not easily filled.

The law’s contributions to domestic shipbuilding are similarly meager. if not outright counterproductive. A mere two to three large, oceangoing commercial ships are delivered by U.S. shipyards per year. That’s not per shipyard, but all U.S. shipyards combined.

Given the vastly uncompetitive state of domestic shipbuilding—a predictable consequence of handing the industry a captive domestic market via the Jones Act’s U.S.-built requirement—there is a little appetite for what these shipyards produce. As Hendrickson himself points out, the domestic build provision serves to “discourage shipbuilders from innovating and otherwise pursuing cost-saving production methods since American shipbuilders do not face international competition.” We could not agree more.

What keeps U.S. shipyards active and available to meet the military’s needs is not work for the Jones Act commercial fleet but rather government orders. A 2015 Maritime Administration report found that such business accounts for 70 percent of revenue for the shipbuilding and repair industry. A 2019 American Enterprise Institute study concluded that, among U.S. shipbuilders that construct both commercial and military ships, Jones Act vessels accounted for less than 5 percent of all shipbuilding orders.

If the Jones Act makes any contributions of note at all, it is mariners. Of those needed to crew surge sealift ships during times of war, the Jones Act fleet is estimated to account for 29 percent. But here the Jones Act also acts as a double-edged sword. By increasing the cost of ships to four to five times the world price, the law’s U.S.-built requirement results in a smaller fleet with fewer mariners employed than would otherwise be the case. That’s particularly noteworthy given government calculations that there is a deficit of roughly 1,800 mariners to crew its fleet in the event of a sustained sealift operation.

Beyond its ruinous impact on the competitiveness of domestic shipbuilding, the Jones Act has had other deleterious consequences for national security. The increased cost of waterborne transport, or its outright impossibility in the case of liquefied natural gas and propane, results in reduced self-reliance for critical energy supplies. This is a sufficiently significant issue that members of the National Security Council unsuccessfully sought a long-term Jones Act waiver in 2019. The law also means fewer redundancies and less flexibility in the country’s transportation system when responding to crises, both natural and manmade. Waivers of the Jones Act can be issued, but this highly politicized process eats up precious days when time is of the essence. All of these factors merit consideration in the overall national security calculus.

To review, the Jones Act’s opaque and implicit subsidy—doled out via protectionism—results in anemic and uncompetitive shipbuilding, few ships available in time of war, and fewer mariners than would otherwise be the case without its U.S.-built requirement. And it has other consequences for national security that are not only underwhelming but plainly negative. Little wonder that Hendrickson concedes it is unclear whether U.S. maritime policy—of which the Jones Act plays a foundational role—achieves its national security goals.

The toll exacted in exchange for the Jones Act’s limited benefits, meanwhile, is considerable. According to a 2019 OECD study, the law’s repeal would increase domestic value added by $19-$64 billion. Incredibly, that estimate may actually understate matters. Not included in this estimate are related costs such as environmental degradation, increased congestion and highway maintenance, and retaliation from U.S. trade partners during free-trade agreement negotiations due to U.S. unwillingness to liberalize the Jones Act.

Against such critiques, Hendrickson posits that substantial cost savings are illusory due to immigration and other U.S. laws. But how big a barrier such laws would pose is unclear. It’s worth considering, for example, that cruise ships with foreign crews are able to visit multiple U.S. ports so long as a foreign port is also included on the voyage. The granting of Jones Act waivers, meanwhile, has enabled foreign ships to transport cargo between U.S. ports in the past despite U.S. immigration laws.

Would Chinese-flagged and crewed barges be able to engage in purely domestic trade on the Mississippi River absent the Jones Act? Almost certainly not. But it seems perfectly plausible that foreign ships already sailing between U.S. ports as part of international voyages—a frequent occurrence—could engage in cabotage movements without hiring U.S. crews. Take, for example, APL’s Eagle Express X route that stops in Los Angeles, Honolulu, and Dutch Harbor as well as Asian ports. Without the Jones Act, it’s reasonable to believe that ships operating on this route could transport goods from Los Angeles to Honolulu before continuing on to foreign destinations.

But if the Jones Act fails to meet U.S. national security benefits while imposing substantial costs, how to explain its continued survival? Hendrickson avers that the law’s longevity reflects its utility. We believe, however, that the answer lies in the application of public choice theory. Simply put, the law’s costs are both opaque and dispersed across the vast expanse of the U.S. economy while its benefits are highly concentrated. The law’s de facto subsidy is also vastly oversupplied, given that the vast majority of vessels under its protection are smaller craft such as tugboats and barges with trivial value to the country’s sealift capability. This has spawned a lobby aggressively dedicated to the Jones Act’s preservation. Washington, D.C. is home to numerous industry groups and labor organizations that regard the law’s maintenance as critical, but not a single one that views its repeal as a top priority.

It’s instructive in this regard that all four senators from Alaska and Hawaii are strong Jones Act supporters despite their states being disproportionately burdened by the law. This seeming oddity is explained by these states also being disproportionately home to maritime interest groups that support the law. In contrast, Jones Act critics Sen. Mike Lee and the late Sen. John McCain both hailed from land-locked states home to few maritime interest groups.

Disagreements, but also Common Ground

For all of our differences with Hendrickson, however, there is substantial common ground. We are in shared agreement that the Jones Act is suboptimal policy, that its ability to achieve its goals is unclear, and that its U.S.-built requirement is particularly ripe for removal. Where our differences lie is mostly in the scale of gains to be realized from the law’s reform or repeal. As such, there is no reason to maintain the failed status quo. The Jones Act should be repealed and replaced with targeted, transparent, and explicit subsidies to meet the country’s sealift needs. Both the country’s economy and national security would be rewarded—richly so, in our opinion—from such policy change.

Chances are, if you have heard of the Jones Act, you probably think it needs to be repealed. That is, at least, the consensus in the economics profession. However, this consensus seems to be driven by an application of the sort of rules of thumb that one picks up from economics courses, rather than an application of economic theory.

For those who are unaware, the Jones Act requires that any shipping between two U.S. ports is carried by a U.S.-built ship with a crew of U.S. citizens that is U.S.-owned and flies the U.S. flag. When those who have memorized some of the rules of thumb in the field of economics hear that description, they immediately think “this is protectionism and protectionism is bad.” It therefore seems obvious that the Jones Act must be bad. After all, based on this description, it seems like it is designed to protect U.S. shipbuilders, U.S. crews, and U.S.-flagged ships from foreign competition.

Critics seize on this narrative. They point to the higher cost of Jones Act ships in comparison to those ships that fly foreign flags and argue that the current law has costs that are astronomical. Based on that type of criticism, the Jones Act seems so obviously costly that one might wonder how it is possible to defend the law in any way.

I reject this criticism. I do not reject this over some minor quibble with the numbers. In true Hendricksonian fashion, I reject this criticism because it gets the underlying economic theory wrong.

Let’s start by thinking about some critical issues in Coasean terms. During peacetime, the U.S. Navy does not need maintain the sort of capacity that it would have during a time of war. It would not be cost-effective to do so. However, the Navy would like to expand its capacity rapidly in the event of a war or other national emergency. To do so, the country needs shipbuilding capacity. Building ships and training crews to operate those ships, however, takes time. This might be time that the Navy does not have. At the very least, this could leave the United States at a significant disadvantage.

Of course, there are ships and crews available in the form of the U.S. Merchant Marine. Thus, there are gains from trade to be had. The government could pay the Merchant Marine to provide sealift during times of war and other national emergencies. However, this compensation scheme is complicated. For example, if the government waits until a war or a national emergency, this could create a holdup problem. Knowing that the government needs the Merchant Marine immediately, the holdup problem could result in the government paying well-above-market prices to obtain these services. On the other hand, the government could simply requisition the ships and draft the crews into service whenever there is a war or national emergency. Knowing that this is a possibility, the Merchant Marine would tend to underinvest in both physical and human capital.

Given these problems, the solution is to agree to terms ahead of time. The Merchant Marine agrees to provide their services to the government during times of war and other national emergencies in exchange for compensation. The way to structure that compensation in order to avoid holdup problems and underinvestment is to provide this compensation in the form of peacetime subsidies.

Thus, the government provides peacetime subsidies in exchange for the services of the Merchant Marine during wartime. This is a straightforward Coasean bargain.

Now, let’s think about the Jones Act. The Jones Act ships are implicitly subsidized because ships that do not meet the law’s criteria are not allowed to engage in port-to-port shipping in the United States. The requirement that these ships need to be U.S.-owned and fly the U.S. flag gives the government the legal authority to call these ships into service. The requirement that the ships are built in the United States is designed to ensure that the ships meet the needs of the U.S. military and to subsidize shipbuilding in the United States. The requirement to use U.S. crews is designed to provide an incentive for the accumulation of the necessary human capital. Since the law restricts ships with these characteristics for port-to-port shipping within the United States, it provides the firms rents to compensate them for their service during wartime and national emergencies.

Critics, of course, are likely to argue that I have a “just so” theory of the Jones Act. In other words, they might argue that I have simply structured an economic narrative around a set of existing facts. Those critics would be wrong for the following reasons.

First, the Jones Act is not some standalone law when it comes to maritime policy. There is a long history in the United States of trying to determine the optimal way to subsidize the maritime industry. Second, if this type of policy is just a protectionist giveaway, then it should be confined to the maritime industry. However, this isn’t true. The United States has a long history of subsidizing transportation that is crucial for use in the military. This includes subsidies for horse-breeding and the airline industry. Finally, critics would have to explain why wasteful maritime policies have been quickly overturned, while the Jones Act continues to survive.

The critics also dramatically overstate the costs of the Jones Act. This is partly because they do not understand the particularities of the law. For example, to estimate the costs, critics often compare the cost of the Jones Act ships to ships that fly a foreign flag and use foreign crews. The argument here is that the repeal of the Jones Act would result in these foreign-flagged ships with foreign crews taking over U.S. port-to-port shipping.

There are two problems with this argument. One, cabotage restrictions do not originate with the Jones Act. Rather, the law clarifies and closes loopholes in previous laws. Second, the use of foreign crews would be a violation of U.S. immigration law. Furthermore, this type of shipping would still be subject to other U.S. laws to which these foreign-flagged ships are not subject today. Given that the overwhelming majority of the cost differential is explained by differences in labor costs, it therefore seems hard to understand from where, exactly, the cost savings of repeal would actually come.

None of this is to say that the Jones Act is the first-best policy or that the law is sufficient to accomplish the military’s goals. In fact, the one thing that critics and advocates of the law seem to agree on is that the law is not sufficient to accomplish the intended goals. My own work implies a need for direct subsidies (or lower tax rates) on the capital used by the maritime industry. However, the critics need to be honest and admit that, even if the law were repealed, the cost savings are nowhere near what they claim. In addition, this wouldn’t be the end of maritime subsidies (in fact, other subsidies already exist). Instead, the Jones Act would likely be replaced by some other form of subsidy to the maritime industry.

Many defense-based arguments of subsidies are dubious. However, in the case of maritime policy, the Coasean bargain is clear.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Thomas B. Nachbar is a professor of law at the University of Virginia School of Law and a senior fellow at the Center for National Security Law.]

It would be impossible to describe Ajit Pai’s tenure as chair of the Federal Communications Commission as ordinary. Whether or not you thought his regulatory style or his policies were innovative, his relationship with the public has been singular for an FCC chair. His Reese’s mug, alone, has occupied more space in the American media landscape than practically any past FCC chair. From his first day, he has attracted consistent, highly visible criticism from a variety of media outlets, although at least John Oliver didn’t describe him as a dingo. Just today, I read that Ajit Pai single handedly ruined the internet, which when I got up this morning seemed to be working pretty much the same way it was four years ago.

I might be biased in my view of Ajit. I’ve known him since we were law school classmates, when he displayed the same zeal and good-humored delight in confronting hard problems that I’ve seen in him at the commission. So I offer my comments not as an academic and student of FCC regulation, but rather as an observer of the communications regulatory ecosystem that Ajit has dominated since his appointment. And while I do not agree with everything he’s done at the commission, I have admired his single-minded determination to pursue policies that he believes will expand access to advanced telecommunications services. One can disagree with how he’s pursued that goal—and many have—but characterizing his time as chair in any other way simply misses the point. Ajit has kept his eye on expanding access, and he has been unwavering in pursuit of that objective, even when doing so has opened him to criticism, which is the definition of taking political risk.

Thus, while I don’t think it’s going to be the most notable policy he’s participated in at the commission, I would like to look at Ajit’s tenure through the lens of one small part of one fairly specific proceeding: the commission’s decision to include SpaceX as a low-latency provider in the Rural Digital Opportunity Fund (RDOF) Auction.

The decision to include SpaceX is at one level unremarkable. SpaceX proposes to offer broadband internet access through low-Earth-orbit satellites, which is the kind of thing that is completely amazing but is becoming increasingly un-amazing as communications technology advances. SpaceX’s decision to use satellites is particularly valuable for initiatives like the RDOF, which specifically seek to provide services where previous (largely terrestrial) services have not. That is, in fact, the whole point of the RDOF, a point that sparked fiery debate over the FCC’s decision to focus the first phase of the RDOF on areas with no service rather than areas with some service. Indeed, if anything typifies the current tenor of the debate (at the center of which Ajit Pai has resided since his confirmation as chair), it is that a policy decision over which kind of under-served areas should receive more than $16 billion in federal funding should spark such strongly held views. In the end, SpaceX was awarded $885.5 million to participate in the RDOF, almost 10% of the first-round funds awarded.

But on a different level, the decision to include SpaceX is extremely remarkable. Elon Musk, SpaceX’s pot-smoking CEO, does not exactly fit regulatory stereotypes. (Disclaimer: I personally trust Elon Musk enough to drive my children around in one of his cars.) Even more significantly, SpaceX’s Starlink broadband service doesn’t actually exist as a commercial product. If you go to Starlink’s website, you won’t find a set of splashy webpages featuring products, services, testimonials, and a variety of service plans eager for a monthly assignation with your credit card or bank account. You will be greeted with a page asking for your email and service address in case you’d like to participate in Starlink’s beta program. In the case of my address, which is approximately 100 miles from the building where the FCC awarded SpaceX over $885 million to participate in the RDOF, Starlink is not yet available. I will, however, “be notified via email when service becomes available in your area,” which is reassuring but doesn’t get me any closer to watching cat videos.

That is perhaps why Chairman Pai was initially opposed to including SpaceX in the low-latency portion of the RDOF. SpaceX was offering unproven technology and previous satellite offerings had been high-latency, which is good for some uses but not others.

But then, an even more remarkable thing happened, at least in Washington: a regulator at the center of a controversial issue changed his mind and—even more remarkably—admitted his decision might not work out. When the final order was released, SpaceX was allowed to bid for low-latency RDOF funds even though the commission was “skeptical” of SpaceX’s ability to deliver on its low-latency promise. Many doubted that SpaceX would be able to effectively compete for funds, but as we now know, that decision led to SpaceX receiving a large share of the Phase I funds. Of course, that means that if SpaceX doesn’t deliver on its latency promises, a substantial part of the RDOF Phase I funds will fail to achieve their purpose, and the FCC will have backed the wrong horse.

I think we are unlikely to see such regulatory risk-taking, both technically and politically, in what will almost certainly be a more politically attuned commission in the coming years. Even less likely will be acknowledgments of uncertainty in the commission’s policies. Given the political climate and the popular attention policies like network neutrality have attracted, I would expect the next chair’s views about topics like network neutrality to exhibit more unwavering certainty than curiosity and more resolve than risk-taking. The most defining characteristic of modern communications technology and markets is change. We are all better off with a commission in which the other things that can change are minds.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Seth L. Cooper is director of policy studies and a senior fellow at the Free State Foundation.]

During Chairman Ajit Pai’s tenure, the Federal Communications Commission adopted key reforms that improved the agency’s processes. No less important than process reform is process integrity. The commission’s L-Band Order and the process that produced it will be the focus here. In that proceeding, Chairman Pai led a careful and deliberative process that resulted in a clearly reasoned and substantively supportable decision to put unused valuable L-Band spectrum into commercial use for wireless services.

Thanks to one of Chairman Pai’s most successful process reforms, the FCC now publicly posts draft items to be voted on three weeks in advance of the commission’s public meetings. During his chairmanship, the commission adopted reforms to help expedite the regulatory-adjudication process by specifying deadlines and facilitating written administrative law judge (ALJ) decisions rather than in-person hearings. The “Team Telecom” process also was reformed to promote faster agency determinations on matters involving foreign ownership.

Along with his process-reform achievements, Chairman Pai deserves credit for ensuring that the FCC’s proceedings were conducted in a lawful and sound manner. For example, the commission’s courtroom track record was notably better during Chairman Pai’s tenure than during the tenures of his immediate predecessors. Moreover, Chairman Pai deserves high marks for the agency process that preceded the L-Band Order – a process that was perhaps subject to more scrutiny than the process of any other proceeding during his chairmanship. The public record supports the integrity of that process, as well as the order’s merits.

In April 2020, the FCC unanimously approved an order authorizing Ligado Networks to deploy a next-generation mixed mobile-satellite network using licensed spectrum in the L-Band. This action is critical to alleviating the shortage of commercial spectrum in the United States and to ensuring our nation’s economic competitiveness. Ligado’s proposed network will provide industrial Internet-of-Things (IoT) services, and its L-Band spectrum has been identified as capable of pairing with C-Band and other mid-band spectrum for delivering future 5G services. According to the L-Band Order, Ligado plans to invest up to $800 million in network capabilities, which could create over 8,000 jobs. Economist Coleman Bazelon estimated that Ligado’s network could help create up to 3 million jobs and contribute up to $500 billion to the U.S. economy.

Opponents of the L-Band Order have claimed that Ligado’s proposed network would create signal interference with GPS services in adjacent spectrum. Moreover, in attempts to delay or undo implementation of the L-Band Order, several opponents lodged harsh but baseless attacks against the FCC’s process. Some of those process criticisms were made at a May 2020 Senate Armed Services Committee hearing that failed to include any Ligado representatives or any FCC commissioners for their viewpoints. And in a May 2020 floor speech, Sen. James Inhofe (R-Okla.) repeatedly criticized the commission’s process as sudden, hurried, and taking place “in the darkness of a weekend.”

But those process criticisms fail in the face of easily verifiable facts. Under Chairman Pai’s leadership, the FCC acted within its conceded authority, consistent with its lawful procedures, and with careful—even lengthy—deliberation.

The FCC’s proceeding concerning Ligado’s license applications dates back to 2011. It included public notice and comment periods in 2016 and 2018. An August 2019 National Telecommunications and Information Administration (NTIA) report noted the commission’s forthcoming decision. In the fall of 2019, the commission shared a draft of its order with NTIA. Publicly stated opposition to Ligado’s proposed network by GPS operators and Defense Secretary Mark Esper, as well as publicly stated support for the network by Attorney General William Barr and Secretary of State Mike Pompeo, ensured that the proceeding received ongoing attention. Claims of “surprise” when the commission finalized its order in April 2020 are impossible to credit.

Importantly, the result of the deliberative agency process helmed by Chairman Pai was a substantively supportable decision. The FCC applied its experience in adjudicating competing technical claims to make commercial spectrum policy decisions. It was persuaded in part by signal testing conducted by the National Advanced Spectrum and Communications Test Network, as well as testing by technology consultants Roberson and Associates. By contrast, the commission found unpersuasive reports of alleged signal interference involving military devices operating outside of their assigned spectrum band.

The FCC also applied its expertise in addressing potential harmful signal interference to incumbent operations in adjacent spectrum bands by imposing several conditions on Ligado’s operations. For example, the L-Band Order requires Ligado to adhere to its agreements with major GPS equipment manufacturers for resolving signal interference concerns. Ligado must dedicate 23 megahertz of its own licensed spectrum as a guard-band from neighboring spectrum and also reduce its base station power levels 99% compared to what Ligado proposed in 2015. The commission requires Ligado to expeditiously replace or repair any U.S. government GPS devices that experience harmful interference from its network. And Ligado must maintain “stop buzzer” capability to halt its network within 15 minutes of any request by the commission.

From a process standpoint, the L-Band Order is a commendable example of Chairman Pai’s perseverance in leading the FCC to a much-needed decision on an economically momentous matter in the face of conflicting government agency and market provider viewpoints. Following a careful and deliberative process, the commission persevered to make a decision that is amply supported by the record and poised to benefit America’s economic welfare.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Kristian Stout is director of innovation policy for the International Center for Law & Economics.]

Ajit Pai will step down from his position as chairman of the Federal Communications Commission (FCC) effective Jan. 20. Beginning Jan. 15, Truth on the Market will host a symposium exploring Pai’s tenure, with contributions from a range of scholars and practitioners.

As we ponder the changes to FCC policy that may arise with the next administration, it’s also a timely opportunity to reflect on the chairman’s leadership at the agency and his influence on telecommunications policy more broadly. Indeed, the FCC has faced numerous challenges and opportunities over the past four years, with implications for a wide range of federal policy and law. Our symposium will offer insights into numerous legal, economic, and policy matters of ongoing importance.

Under Pai’s leadership, the FCC took on key telecommunications issues involving spectrum policy, net neutrality, 5G, broadband deployment, the digital divide, and media ownership and modernization. Broader issues faced by the commission include agency process reform, including a greater reliance on economic analysis; administrative law; federal preemption of state laws; national security; competition; consumer protection; and innovation, including the encouragement of burgeoning space industries.

This symposium asks contributors for their thoughts on these and related issues. We will explore a rich legacy, with many important improvements that will guide the FCC for some time to come.

Truth on the Market thanks all of these excellent authors for agreeing to participate in this interesting and timely symposium.

Look for the first posts starting Jan. 15.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Ramsi Woodcock, (Assistant Professor of Law, University of Kentucky; Assistant Professor of Management, Gatton College of Business and Economics).]

Specialists know that the antitrust courses taught in law schools and economics departments have an alter ego in business curricula: the course on business strategy. The two courses cover the same material, but from opposite perspectives. Antitrust courses teach how to end monopolies; strategy courses teach how to construct and maintain them.

Strategy students go off and run businesses, and antitrust students go off and make government policy. That is probably the proper arrangement if the policy the antimonopolists make is domestic. We want the domestic economy to run efficiently, and so we want domestic policymakers to think about monopoly—and its allocative inefficiencies—as something to be discouraged.

The coronavirus, and the shortages it has caused, have shown us that putting the antimonopolists in charge of international policy is, by contrast, a very big mistake.

Because we do not yet have a world government. America’s position, in relation to the rest of the world, is therefore more akin to that of a business navigating a free market than it is to a government seeking to promote efficient interactions among the firms that it governs. To flourish, America must engage in international trade with a view to creating and maintaining monopoly positions for itself, rather than eschewing them in the interest of realizing efficiencies in the global economy. Which is to say: we need strategists, not antimonopolists.

For the global economy is not America, and there is no guarantee that competitive efficiencies will redound to America’s benefit, rather than to those of her competitors. Absent a world government, other countries will pursue monopoly regardless what America does, and unless America acts strategically to build and maintain economic power, America will eventually occupy a position of commercial weakness, with all of the consequences for national security that implies.

When Antimonopolists Make Trade Policy

The free traders who have run American economic policy for more than a generation are antimonopolists playing on a bigger stage. Like their counterparts in domestic policy, they are loyal in the first instance only to the efficiency of the market, not to any particular trader. They are content to establish rules of competitive trading—the antitrust laws in the domestic context, the World Trade Organization in the international context—and then to let the chips fall where they may, even if that means allowing present or future adversaries to, through legitimate means, build up competitive advantages that the United States is unable to overcome.

Strategy is consistent with competition when markets are filled with traders of atomic size, for then no amount of strategy can deliver a competitive advantage to any trader. But global markets, more even than domestic markets, are filled with traders of macroscopic size. Strategy then requires that each trader seek to gain and maintain advantages, undermining competition. The only way antimonopolists could induce the trading behemoth that is America to behave competitively, and to let the chips fall where they may, was to convince America voluntarily to give up strategy, to sacrifice self-interest on the altar of efficient markets.

And so they did.

Thus when the question arose whether to permit American corporations to move their manufacturing operations overseas, or to permit foreign companies to leverage their efficiencies to dominate a domestic industry and ensure that 90% of domestic supply would be imported from overseas, the answer the antimonopolists gave was: “yes.” Because it is efficient. Labor abroad is cheaper than labor at home, and transportation costs low, so efficiency requires that production move overseas, and our own resources be reallocated to more competitive uses.

This is the impeccable logic of static efficiency, of general equilibrium models allocating resources optimally. But it is instructive to recall that the men who perfected this model were not trying to describe a free market, much less international trade. They were trying to create a model that a central planner could use to allocate resources to a state’s subjects. What mattered to them in building the model was the good of the whole, not any particular part. And yet it is to a particular part of the global whole that the United States government is dedicated.

The Strategic Trader

Students of strategy would have taken a very different approach to international trade. Strategy teaches that markets are dynamic, and that businesses must make decisions based not only on the market signals that exist today, but on those that can be made to exist in the future. For the successful strategist, unlike the antimonopolist, identifying a product for which consumers are willing to pay the costs of production is not alone enough to justify bringing the product to market. The strategist must be able to secure a source of supply, or a distribution channel, that competitors cannot easily duplicate, before the strategist will enter.

Why? Because without an advantage in supply, or distribution, competitors will duplicate the product, compete away any markups, and leave the strategist no better off than if he had never undertaken the project at all. Indeed, he may be left bankrupt, if he has sunk costs that competition prevents him from recovering. Unlike the economist, the strategist is interested in survival, because he is a partisan of a part of the market—himself—not the market entire. The strategist understands that survival requires power, and all power rests, to a greater or lesser degree, on monopoly.

The strategist is not therefore a free trader in the international arena, at least not as a matter of principle. The strategist understands that trading from a position of strength can enrich, and trading from a position of weakness can impoverish. And to occupy that position of strength, America must, like any monopolist, control supply. Moreover, in the constantly-innovating markets that characterize industrial economies, markets in which innovation emerges from learning by doing, control over physical supply translates into control over the supply of inventions itself.

The strategist does not permit domestic corporations to offshore manufacturing in any market in which the strategist wishes to participate, because that is unsafe: foreign countries could use control over that supply to extract rents from America, to drive domestic firms to bankruptcy, and to gain control over the supply of inventions.

And, as the new trade theorists belatedly discovered, offshoring prevents the development of the dense, geographically-contiguous, supply networks that confer power over whole product categories, such as the electronics hub in Zhengzhou, where iPhone-maker Foxconn is located.

Or the pharmaceutical hub in Hubei.

Coronavirus and the Failure of Free Trade

Today, America is unprepared for the coming wave of coronavirus cases because the antimonopolists running our trade policy do not understand the importance of controlling supply. There is a shortage of masks, because China makes half of the world’s masks, and the Chinese have cut off supply, the state having forbidden even non-Chinese companies that offshored mask production from shipping home masks for which American customers have paid. Not only that, but in January China bought up most of the world’s existing supply of masks, with free-trade-obsessed governments standing idly by as the clock ticked down to their own domestic outbreaks.  

New York State, which lies at the epicenter of the crisis, has agreed to pay five times the market price for foreign supply. That’s not because the cost of making masks has risen, but because sellers are rationing with price. Which is to say: using their control over supply to beggar the state. Moreover, domestic mask makers report that they cannot ramp up production because of a lack of supply of raw materials, some of which are actually made in Wuhan, China. That’s the kind of problem that does not arise when restrictions on offshoring allow manufacturing hubs to develop domestically.

But a shortage of masks is just the beginning. Once a vaccine is developed, the race will be on to manufacture it, and America controls less than 30% of the manufacturing facilities that supply pharmaceuticals to American markets. Indeed, just about the only virus-relevant industries in which we do not have a real capacity shortage today are food and toilet paper, panic buying notwithstanding. Because fortunately for us antimonopolists could not find a way to offshore California and Oregon. If they could have, they surely would have, since both agriculture and timber are labor-intensive industries.

President Trump’s failed attempt to buy a German drug company working on a coronavirus vaccine shows just how damaging free market ideology has been to national security: as Trump should have anticipated given his resistance to the antimonopolists’ approach to trade, the German government nipped the deal in the bud. When an economic agent has market power, the agent can pick its prices, or refuse to sell at all. Only in general equilibrium fantasy is everything for sale, and at a competitive price to boot.

The trouble is: American policymakers, perhaps more than those in any other part of the world, continue to act as though that fantasy were real.

Failures Left and Right

America’s coronavirus predicament is rich with intellectual irony.

Progressives resist free trade ideology, largely out of concern for the effects of trade on American workers. But they seem not to have realized that in doing so they are actually embracing strategy, at least for the benefit of labor.

As a result, progressives simultaneously reject the approach to industrial organization economics that underpins strategic thinking in business: Joseph Schumpeter’s theory of creative destruction, which holds that strategic behavior by firms seeking to achieve and maintain monopolies is ultimately good for society, because it leads to a technological arms race as firms strive to improve supply, distribution, and indeed product quality, in ways that competitors cannot reproduce.

Even if progressives choose to reject Schumpeter’s argument that strategy makes society better off—a proposition that is particularly suspect at the international level, where the availability of tanks ensures that the creative destruction is not always creative—they have much to learn from his focus on the economics of survival.

By the same token, conservatives embrace Schumpeter in arguing for less antitrust enforcement in domestic markets, all the while advocating free trade at the international level and savaging governments for using dumping and tariffs—which is to say, the tools of monopoly—to strengthen their trading positions. It is deeply peculiar to watch the coronavirus expose conservative economists as pie-in-the-sky internationalists. And yet as the global market for coronavirus necessities seizes up, the ideology that urged us to dispense with producing these goods ourselves, out of faith that we might always somehow rely on the support of the rest of the world, provided through the medium of markets, looks pathetically naive.

The cynic might say that inconsistency has snuck up on both progressives and conservatives because each remains too sympathetic to a different domestic constituency.

Dodging a Bullet

America is lucky that a mere virus exposed the bankruptcy of free trade ideology. Because war could have done that instead. It is difficult to imagine how a country that cannot make medical masks—much less a Macbook—would be able to respond effectively to a sustained military attack from one of the many nations that are closing the technological gap long enjoyed by the United States.

The lesson of the coronavirus is: strategy, not antitrust.

[TOTM: The following is the second in a series of posts by TOTM guests and authors on the politicization of antitrust. The entire series of posts is available here.]

This post is authored by Luigi Zingales, Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance, and Charles M. Harper Faculty Fellow, the University of Chicago Booth School of Business. Director, the George J. Stigler Center for the Study of the Economy and the State, and Filippo Maria Lancieri, Fellow, George J. Stigler Center for the Study of the Economy and the State. JSD Candidate, The University of Chicago Law School.

This symposium discusses the “The Politicization of Antitrust.” As the invite itself stated, this is an umbrella topic that encompasses a wide range of subjects: from incorporating environmental or labor concerns in antitrust enforcement, to political pressure in enforcement decision-making, to national security laws (CFIUS-type enforcement), protectionism, federalism, and more. This contribution will focus on the challenges of designing a system that protects the open markets and democracy that are the foundation of modern economic and social development.

The “Chicago School of antitrust” was highly critical of the antitrust doctrine prevailing during the Warren-era Supreme Court. A key objection was that the vague legal standards of the Sherman, Clayton and the Federal Trade Commission Acts allowed for the enforcement of antitrust policy based on what Bork called “inferential analysis from casuistic observations.” That is, without clearly defined goals and without objective standards against which to measure these goals, antitrust enforcement would become arbitrary or even a tool that governments could wield against a political enemy. To address this criticism, Bork and other key members of the Chicago School narrowed the scope of antitrust to a single objective—the maximization of allocative efficiency/total welfare (coined as “consumer welfare”)—and advocated the use of price theory as a method to reduce judicial discretion. It was up to markets and Congress/politics, not judges (and antitrust), to redistribute economic surplus or protect small businesses. Developments in economic theory and econometrics over the next decades increased the number of tools regulators and Courts could rely on to measure the short-term price/output impacts of many specific types of conduct. A more conservative judiciary translated much of the Chicago School’s teaching into policy, including the triumph of Bork’s narrow interpretation of “consumer welfare.”

The Chicago School’s criticism of traditional antitrust struck many correct points. Some of the Warren-era Supreme Court cases are perplexing to say the least (e.g., Brown Shoe, Von’s Grocery, Utah Pie, Schwinn). Antitrust is a very powerful tool that covers almost the entire economy. In the United States, enforcement can be initiated by multiple federal and state regulators and by private parties (for whom treble damages encourage litigation). If used without clear and objective standards, antitrust remedies could easily add an extra layer of uncertainty or could even outright prohibit perfectly legitimate conduct, which would depress competition, investment, and growth. The Chicago School was also right in warning against the creation of what it understood as extensive and potentially unchecked governmental powers to intervene in the economic sphere. At best, such extensive powers can generate rent-seeking and cronyism. At worst, they can become an instrument of political vendettas. While these concerns are always present, they are particularly worrisome now: a time of increased polarization, dysfunctional politics, and constant weakening of many governmental institutions. If “politicizing antitrust” is understood as advocating for a politically driven, uncontrolled enforcement policy, we are similarly concerned about it. Changes to antitrust policy that rely primarily on vague objectives may lead to an unmitigated disaster.

Administrability is certainly a key feature of any regulatory regime hoping to actually increase consumer welfare. Bork’s narrow interpretation of “consumer welfare” unquestionably has three important features: Its objectives are i) clearly defined, ii) clearly ranked, and iii) (somewhat) objectively measurable. Yet, whilst certainly representing some gains over previous definitions, Bork’s “consumer welfare” is not the end of history for antitrust policy. Indeed, even the triumph of “consumer welfare” is somewhat bittersweet. With time, academics challenged many of the doctrine’s key tenets. US antitrust policy also constantly accepts some form of external influences that are antagonistic to this narrow, efficiency-focused “consumer welfare” view—the “post-Chicago” United States has explicit exemptions for export cartels, State Action, the Noerr-Pennington doctrine, and regulated markets (solidified in Trinko), among others. Finally, as one of us has indicated elsewhere, while prevailing in the United States, Chicago School ideas find limited footing around the world. While there certainly are irrational or highly politicized regimes, there is little evidence that antitrust enforcement in mature jurisdictions such as the EU or even Brazil is arbitrary, is employed in political vendettas, or reflects outright protectionist policies.

Governments do not function in a vacuum. As economic, political, and social structures change, so must public policies such as antitrust. It must be possible to develop a well-designed and consistent antitrust policy that focuses on goals other than imperfectly measured short-term price/output effects—one that sits in between a narrow “consumer welfare” and uncontrolled “politicized antitrust.” An example is provided by the Stigler Committee on Digital Platforms Final Report, which defends changes to current US antitrust enforcement as a way to increase competition in digital markets. There are many similarly well-grounded proposals for changes to other specific areas, such as vertical relationships. We have not yet seen an all-encompassing, well-grounded, and generalizable framework to move beyond the “consumer welfare” standard. Nonetheless, this is simply the current state of the art, not an impossibility theorem. Academia contributes the most to society when it provides new ways to tackle hard, important questions. The Chicago School certainly did so a few decades ago. There is no reason why academia and policymakers cannot do it again.   

This is exactly why we are dedicating the 2020 Stigler Center annual antitrust conference to the topic of “monopolies and politics.” Competitive markets and democracy are often (and rightly) celebrated as the most important engines of economic and social development. Still, until recently, the relationship between the two was all but ignored. This topic had been popular in the 1930s and 1940s because many observers linked the rise of Hitler, Mussolini, and the nationalist government in Japan to the industrial concentration in the three Axis countries. Indeed, after WWII, the United States set up a “Decartelization Office” in Germany and passed the Celler-Kefauver Act to prevent gigantic conglomerates from destroying democracies. In 1949, Congressman Emanuel Celler, who sponsored the Act, declared:

“There are two main reasons why l am concerned about concentration of economic power in the United States. One is that concentration of business unavoidably leads to some kind of socialism, which is not the desire of the American people. The other is that a concentrated system is inefficient, compared with a system of free competition.

We have seen what happened in the other industrial countries of the Western World. They allowed a free growth of monopolies and cartels; until these private concentrations grew so strong that either big business would own the government or the government would have to seize control of big business. The most extreme case was in Germany, where the big business men thought they could take over the government by using Adolf Hitler as their puppet. So Germany passed from private monopoly to dictatorship and disaster.”

There are many reasons why these concerns around monopolies and democracy are resurfacing now. A key one is that freedom is in decline worldwide and so is trust in democracy, particularly amongst newer generations. At the same time, there is growing evidence that market concentration is on the rise. Correlation is not causation, thus we cannot jump to hasty conclusions. Yet, the stakes are so high that these coincidences need to be investigated further.  

Moreover, even if the correlation between monopolies and fascism were spurious, the correlation between economic concentration and political dissatisfaction in democracy might not be. The fraction of people who feel their interests are represented in government fell from almost 80% in the 1950s to 20% today. Whilst this dynamic is impacted by many different drivers, one of them could certainly be increased market concentration.

Political capture is a reality, and it seems straightforward to assume that firms’ ability to influence the political system greatly depends not only on their size but also on the degree of concentration of the markets they operate in. The reasons are numerous. In concentrated markets, legislators only hear one version of the story, and there are fewer sophisticated stakeholders to ring the alarm when wrongdoing is present, thus making it easier for the incumbents to have their way. Similarly, in concentrated markets, the one or two incumbent firms represent the main or only source of employment for retiring regulators, ensuring an incumbent’s long-term influence over policy. Concentrated markets also restrict the pool of potential employers/customers for technical experts, making it difficult for them to survive if they are hostile to the incumbent behemoths—an issue particularly concerning in complex markets where talent is both necessary and scarce. Finally, firms with market power can use their increased rents to influence public policy through lobbying or some other legal form of campaign contributions.

In other words, as markets become more concentrated, incumbent firms become better at distorting the political process in their favor. Therefore, an increase in dissatisfaction with democracy might not just be a coincidence, but might partially reflect increases in market concentration that drive politicians and regulators away from the preference of voters and closer to that of behemoths.   

We are well aware that, at the moment, these are just theories—albeit quite plausible ones. For this reason, the first day of the 2020 Stigler Center Antitrust Conference will be dedicated to presenting and critically reviewing the evidence currently available on the connections between market concentration and adverse political outcomes.

If a connection is established, then the question becomes how an antitrust (or other similar) policy aimed at preserving free markets and democracy can be implemented in a rational and consistent manner. The “consumer welfare” standard has generated measures of concentration and measures of possible harm to be used in trial. The “democratic welfare” approach would have to do the same. Fortunately, in the last 50 years political science and political economy have made great progress, so there is a growing number of potential alternative theories, evidence, and methods. For this reason, the second day of the 2020 Stigler Center Antitrust Conference will be dedicated to discussing the pros and cons of these alternatives. We are hoping to use the conference to spur further reflection on how to develop a methodology that is predictable, restricts discretion, and makes a “democratic antitrust” administrable.  As mentioned above, we agree that simply “politicizing” the current antitrust regime would be very dangerous for the economic well-being of nations. Yet, ignoring the political consequences of economic concentration on democracy can be even more dangerous—not just for the economic, but also for the democratic well-being of nations. Progress is not achieved by returning to the past nor by staying religiously fixed on the current status quo, but by moving forward: by laying new bricks on the layers of knowledge accumulated in the past. The Chicago School helped build some important foundations of modern antitrust policy. Those foundations should not become a prison; instead, they should be the base for developing new standards capable of enhancing both economic welfare and democratic values in the spirit of what Senator John Sherman, Congressman Emanuel Celler, and other early antitrust advocates envisioned.

An important but unheralded announcement was made on October 10, 2018: The European Committee for Standardization (CEN) and the European Committee for Electrotechnical Standardization (CENELEC) released a draft CEN CENELAC Workshop Agreement (CWA) on the licensing of Standard Essential Patents (SEPs) for 5G/Internet of Things (IoT) applications. The final agreement, due to be published in early 2019, is likely to have significant implications for the development and roll-out of both 5G and IoT applications.

CEN and CENELAC, which along with the European Telecommunications Standards Institute (ETSI) are the officially recognized standard setting bodies in Europe, are private international non profit organizations with a widespread network consisting of technical experts from industry, public administrations, associations, academia and societal organizations. This first Workshop brought together representatives of the 5G/Internet of Things (IoT) technology user and provider communities to discuss licensing best practices and recommendations for a code of conduct for licensing of SEPs. The aim was to produce a CWA that reflects and balances the needs of both communities.

The final consensus outcome of the Workshop will be published as a CEN-CENELEC Workshop Agreement (CWA). The draft, which is available for public comments, comprises principles and guidelines that prepare a foundation for future licensing of standard essential patents for fifth generation (5G) technologies. The draft also contains a section on Q&A to help aid new implementers and patent holders.

The IoT ecosystem is likely to have over 20 billion interconnected devices by 2020 and represent a market of $17 trillion (about the same as the current GDP of the U.S.). The data collected by one device, such as a smart thermostat that learns what time the consumer is likely to be at home, can be used to increase the performance of another connected device, such as a smart fridge. Cellular technologies are a core component of the IoT ecosystem, alongside applications, devices, software etc., as they provide connectivity within the IoT system. 5G technology, in particular, is expected to play a key role in complex IoT deployments, which will transcend the usage of cellular networks from smart phones to smart home appliances, autonomous vehicles, health care facilities etc. in what has been aptly described as the fourth industrial revolution.

Indeed, the role of 5G to IoT is so significant that the proposed $117 billion takeover bid for U.S. tech giant Qualcomm by Singapore-based Broadcom was blocked by President Trump, citing national security concerns. (A letter sent by the Committee on Foreign Investment in the US suggested that Broadcom might starve Qualcomm of investment, preventing it from competing effectively against foreign competitors–implicitly those in China.)

While commercial roll-out of 5G technology has not yet fully begun, several efforts are being made by innovator companies, standard setting bodies and governments to maximize the benefits from such deployment.

The draft CWA Guidelines (hereinafter “the guidelines”) are consistent with some of the recent jurisprudence on SEPs on various issues. While there is relatively less guidance specifically in relation to 5G SEPs, it provides clarifications on several aspects of SEP licensing which will be useful, particularly, the negotiating process and conduct of both parties.

The guidelines contain 6 principles followed by some questions pertaining to SEP licensing. The principles deal with:

  1. The obligation of SEP holders to license the SEPs on Fair, Reasonable and Non-Discriminatory (FRAND) terms;
  2. The obligation on both parties to conduct negotiations in good faith;
  3. The obligation of both parties to provide necessary information (subject to confidentiality) to facilitate timely conclusion of the licensing negotiation;
  4. Compensation that is “fair and reasonable” and achieves the right balance between incentives to contribute technology and the cost of accessing that technology;
  5. A non-discriminatory obligation on the SEP holder for similarly situated licensees even though they don’t need to be identical; and
  6. Recourse to a third party FRAND determination either by court or arbitration if the negotiations fail to conclude in a timely manner.

There are 22 questions and answers, as well, which define basic terms and touch on issues such as: what amounts as good faith conduct of negotiating parties, global portfolio licensing, FRAND royalty rates, patent pooling, dispute resolution, injunctions, and other issues relevant to FRAND licensing policy in general.

Below are some significant contributions that the draft report makes on issues such as the supply chain level at which licensing is best done, treatment of small and medium enterprises (SMEs), non disclosure agreements, good faith negotiations and alternative dispute resolution.

Typically in the IoT ecosystem, many technologies will be adopted of which several will be standardized. The guidelines offer help to product and service developers in this regard and suggest that one may need to obtain licenses from SEP owners for product or services incorporating communications technology like 3G UMTS, 4G LTE, Wi-Fi, NB-IoT, 31 Cat-M or video codecs such as H.264. The guidelines, however, clarify that with the deployment of IoT, licenses for several other standards may be needed and developers should be mindful of these complexities when starting out in order to avoid potential infringements.

Notably, the guidelines suggest that in order to simplify licensing, reduce costs for all parties and maintain a level playing field between licensees, SEP holders should license at one level. While this may vary between different industries, for communications technology, the licensing point is often at the end-user equipment level. There has been a fair bit of debate on this issue and the recent order by Judge Koh granting FTC’s partial summary motion deals with some of this.

In the judgment delivered on November 6, Judge Koh relied primarily on the 9th circuit decisions in Microsoft v Motorola (2012 and 2015)  to rule on the core issue of the scope of the FRAND commitments–specifically on the question of whether licensing extends to all levels or is confined to the end device level. The court interpreted the pro- competitive principles behind the non-discrimination requirement to mean that such commitments are “sweeping” and essentially that an SEP holder has to license to anyone willing to offer a FRAND rate globally. It also cited Ericsson v D-Link, where the Federal Circuit held that “compliant devices necessarily infringe certain claims in patents that cover technology incorporated into the standard and so practice of the standard is impossible without licenses to all incorporated SEP technology.”

The guidelines speak about the importance of non-disclosure agreements (NDAs) in such licensing agreements given that some of the information exchanged between parties during negotiation, such as claim charts etc., may be sensitive and confidential. Therefore, an undue delay in agreeing to an NDA, without well-founded reasons, might be taken as evidence of a lack of good faith in negotiations rendering such a licensee as unwilling.

They also provide quite a boost for small and medium enterprises (SMEs) in licensing negotiations by addressing the duty of SEP owners to be mindful of SMEs that may be less experienced and therefore lack information from which to draw assurance that proposed terms are FRAND. The guidelines provide that SEP owners should provide whatever information they can under NDA to help the negotiation process. Equally, the same obligation applies on a licensee who is more experienced in dealing with a SEP owner who is an SME.

There is some clarity on time frames for negotiations and the guidelines provide a maximum time that parties should take to respond to offers and counter offers, which could extend up to several months in complex cases involving hundreds of patents. The guidelines also prescribe conduct of potential licensees on receiving an offer and how to make counter-offers in a timely manner.

Furthermore, the guidelines lay down the various ways in which royalty rates may be structured and clarify that there is no one fixed way in which this may be done. Similarly, they offer myriad ways in which potential licensees may be able to determine for themselves if the rates offered to them are fair and reasonable, such as third party patent landscape reports, public announcements, expert advice etc.

Finally, in the case that a negotiation reaches an impasse, the guidelines endorse an alternative dispute mechanism such as mediation or arbitration for the parties to resolve the issue. Bodies such as International Chamber of Commerce and World Intellectual Property Organization may provide useful platforms in this regard.

Almost 20 years have passed since technology pioneer Kevin Ashton first coined the phrase Internet of Things. While companies are gearing up to participate in the market of IoT, regulation and policy in the IoT world seems far from a predictable framework to follow. There are a lot of guesses about how rules and standards are likely to shape up, with little or no guidance for companies on how to prepare themselves for what faces them very soon. Therefore concrete efforts such as these are rather welcome. The draft guidelines do attempt to offer some much needed clarity and are now open for public comments due by December 13. It will be good to see what the final CWA report on licensing of SEPs for 5G and IoT looks like.

 

Although not always front page news, International Trade Commission (“ITC”) decisions can have major impacts on trade policy and antitrust law. Scott Kieff, a former ITC Commissioner, recently published a thoughtful analysis of Certain Carbon and Alloy Steel Products — a potentially important ITC investigation that implicates the intersection of these two policy areas. Scott was on the ITC when the investigation was initiated in 2016, but left in 2017 before the decision was finally issued in March of this year.

Perhaps most important, the case highlights an uncomfortable truth:

Sometimes (often?) Congress writes really bad laws and promotes really bad policies, but administrative agencies can do more harm to the integrity of our legal system by abusing their authority in an effort to override those bad policies.

In this case, that “uncomfortable truth” plays out in the context of the ITC majority’s effort to override Section 337 of the Tariff Act of 1930 by limiting the ability of the ITC to investigate alleged violations of the Act rooted in antitrust.

While we’re all for limiting the ability of competitors to use antitrust claims in order to impede competition (as one of us has noted: “Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions”), it is inappropriate to make an end-run around valid and unambiguous legislation in order to do so — no matter how desirable the end result. (As the other of us has noted: “Attempts to [effect preferred policies] through any means possible are rational actions at an individual level, but writ large they may undermine the legal fabric of our system and should be resisted.”)

Brief background

Under Section 337, the ITC is empowered to, among other things, remedy

Unfair methods of competition and unfair acts in the importation of articles… into the United States… the threat or effect of which is to destroy or substantially injure an industry in the United States… or to restrain or monopolize trade and commerce in the United States.

In Certain Carbon and Alloy Steel Products, the ITC undertook an investigation — at the behest of U.S. Steel Corporation — into alleged violations of Section 337 by the Chinese steel industry. The complaint was based upon a number of claims, including allegations of price fixing.

As ALJ Lord succinctly summarizes in her Initial Determination:

For many years, the United States steel industry has complained of unfair trade practices by manufacturers of Chinese steel. While such practices have resulted in the imposition of high tariffs on certain Chinese steel products, U.S. Steel seeks additional remedies. The complaint by U.S. Steel in this case attempts to use section 337 of the Tariff Act of 1930 to block all Chinese carbon and alloy steel from coming into the United States. One of the grounds that U.S. Steel relies on is the allegation that the Chinese steel industry violates U.S. antitrust laws.

The ALJ dismissed the antitrust claims (alleging violations of the Sherman Act), however, concluding that they failed to allege antitrust injury as required by US courts deciding Sherman Act cases brought by private parties under the Clayton Act’s remedial provisions:

Under federal antitrust law, it is firmly established that a private complainant must show antitrust standing [by demonstrating antitrust injury]. U.S. Steel has not alleged that it has antitrust standing or the facts necessary to establish antitrust standing and erroneously contends it need not have antitrust standing to allege the unfair trade practice of restraining trade….

In its decision earlier this year, a majority of ITC commissioners agreed, and upheld the ALJ’s Initial Determination.

In comments filed with the ITC following the ALJ’s Initial Determination, we argued that the ALJ erred in her analysis:

Because antitrust injury is not an express requirement imposed by Congress, because ITC processes differ substantially from those of Article III courts, and because Section 337 is designed to serve different aims than private antitrust litigation, the Commission should reinstate the price fixing claims and allow the case to proceed.

Unfortunately, in upholding the Initial Determination, the Commission compounded this error, and also failed to properly understand the goals of the Tariff Act, and, by extension, its own role as arbiter of “unfair” trade practices.

A tale of two statutes

The case appears to turn on an arcane issue of adjudicative process in antitrust claims brought under the antitrust laws in federal court, on the one hand, versus antitrust claims brought under the Section 337 of the Tariff Act at the ITC, on the other. But it is actually about much more: the very purposes and structures of those laws.

The ALJ notes that

[The Chinese steel manufacturers contend that] under antitrust law as currently applied in federal courts, it has become very difficult for a private party like U.S. Steel to bring an antitrust suit against its competitors. Steel accepts this but says the law under section 337 should be different than in federal courts.

And as the ALJ further notes, this highlights the differences between the two regimes:

The dispute between U.S. Steel and the Chinese steel industry shows the conflict between section 337, which is intended to protect American industry from unfair competition, and U.S. antitrust laws, which are intended to promote competition for the benefit of consumers, even if such competition harms competitors.

Nevertheless, the ALJ (and the Commission) holds that antitrust laws must be applied in the same way in federal court as under Section 337 at the ITC.

It is this conclusion that is in error.

Judging from his article, it’s clear that Kieff agrees and would have dissented from the Commission’s decision. As he writes:

Unlike the focus in Section 16 of the Clayton Act on harm to the plaintiff, the provisions in the ITC’s statute — Section 337 — explicitly require the ITC to deal directly with harms to the industry or the market (rather than to the particular plaintiff)…. Where the statute protects the market rather than the individual complainant, the antitrust injury doctrine’s own internal logic does not compel the imposition of a burden to show harm to the particular private actor bringing the complaint. (Emphasis added)

Somewhat similar to the antitrust laws, the overall purpose of Section 337 focuses on broader, competitive harm — injury to “an industry in the United States” — not specific competitors. But unlike the Clayton Act, the Tariff Act does not accomplish this by providing a remedy for private parties alleging injury to themselves as a proxy for this broader, competitive harm.

As Kieff writes:

One stark difference between the two statutory regimes relates to the explicit goals that the statutes state for themselves…. [T]he Clayton Act explicitly states it is to remedy harm to only the plaintiff itself. This difference has particular significance for [the Commission’s decision in Certain Carbon and Alloy Steel Products] because the Supreme Court’s source of the private antitrust injury doctrine, its decision in Brunswick, explicitly tied the doctrine to this particular goal.

More particularly, much of the Court’s discussion in Brunswick focuses on the role the [antitrust injury] doctrine plays in mitigating the risk of unjustly enriching the plaintiff with damages awards beyond the amount of the particular antitrust harm that plaintiff actually suffered. The doctrine makes sense in the context of the Clayton Act proceedings in federal court because it keeps the cause of action focused on that statute’s stated goal of protecting a particular litigant only in so far as that party itself is a proxy for the harm to the market.

By contrast, since the goal of the ITC’s statute is to remedy for harm to the industry or to trade and commerce… there is no need to closely tie such broader harms to the market to the precise amounts of harms suffered by the particular complainant. (Emphasis and paragraph breaks added)

The mechanism by which the Clayton Act works is decidedly to remedy injury to competitors (including with treble damages). But because its larger goal is the promotion of competition, it cabins that remedy in order to ensure that it functions as an appropriate proxy for broader harms, and not simply a tool by which competitors may bludgeon each other. As Kieff writes:

The remedy provisions of the Clayton Act benefit much more than just the private plaintiff. They are designed to benefit the public, echoing the view that the private plaintiff is serving, indirectly, as a proxy for the market as a whole.

The larger purpose of Section 337 is somewhat different, and its remedial mechanism is decidedly different:

By contrast, the provisions in Section 337[] are much more direct in that they protect against injury to the industry or to trade and commerce more broadly. Harm to the particular complainant is essentially only relevant in so far as it shows harm to the industry or to trade and commerce more broadly. In turn, the remedies the ITC’s statute provides are more modest and direct in stopping any such broader harm that is determined to exist through a complete investigation.

The distinction between antitrust laws and trade laws is firmly established in the case law. And, in particular, trade laws not only focus on effects on industry rather than consumers or competition, per se, but they also contemplate a different kind of economic injury:

The “injury to industry” causation standard… focuses explicitly upon conditions in the U.S. industry…. In effect, Congress has made a judgment that causally related injury to the domestic industry may be severe enough to justify relief from less than fair value imports even if from another viewpoint the economy could be said to be better served by providing no relief. (Emphasis added)

Importantly, under Section 337 such harms to industry would ultimately have to be shown before a remedy would be imposed. In other words, demonstration of injury to competition is a constituent part of a case under Section 337. By contrast, such a demonstration is brought into an action under the antitrust laws by the antitrust injury doctrine as a function of establishing that the plaintiff has standing to sue as a proxy for broader harm to the market.

Finally, it should be noted, as ITC Commissioner Broadbent points out in her dissent from the Commission’s majority opinion, that U.S. Steel alleged in its complaint a violation of the Sherman Act, not the Clayton Act. Although its ability to enforce the Sherman Act arises from the remedial provisions of the Clayton Act, the substantive analysis of its claims is a Sherman Act matter. And the Sherman Act does not contain any explicit antitrust injury requirement. This is a crucial distinction because, as Commissioner Broadbent notes (quoting the Federal Circuit’s Tianrui case):

The “antitrust injury” standing requirement stems, not from the substantive antitrust statutes like the Sherman Act, but rather from the Supreme Court’s interpretation of the injury elements that must be proven under sections 4 and 16 of the Clayton Act.

* * *

Absent [] express Congressional limitation, restricting the Commission’s consideration of unfair methods of competition and unfair acts in international trade “would be inconsistent with the congressional purpose of protecting domestic commerce from unfair competition in importation….”

* * *

Where, as here, no such express limitation in the Sherman Act has been shown, I find no legal justification for imposing the insurmountable hurdle of demonstrating antitrust injury upon a typical U.S. company that is grappling with imports that benefit from the international unfair methods of competition that have been alleged in this case.

Section 337 is not a stand-in for other federal laws, even where it protects against similar conduct, and its aims diverge in important ways from those of other federal laws. It is, in other words, a trade protection provision, first and foremost, not an antitrust law, patent law, or even precisely a consumer protection statute.

The ITC hamstrings Itself

Kieff lays out a number of compelling points in his paper, including an argument that the ITC was statutorily designed as a convenient forum with broad powers in order to enable trade harms to be remedied without resort to expensive and protracted litigation in federal district court.

But, perhaps even more important, he points to a contradiction in the ITC’s decision that is directly related to its statutory design.

Under the Tariff Act, the Commission is entitled to self-initiate a Section 337 investigation identical to the one in Certain Alloy and Carbon Steel Products. And, as in this case, private parties are also entitled to file complaints with the Commission that can serve as the trigger for an investigation. In both instances, the ITC itself decides whether there is sufficient basis for proceeding, and, although an investigation unfolds much like litigation in federal court, it is, in fact, an investigation (and decision) undertaken by the ITC itself.

Although the Commission is statutorily mandated to initiate an investigation once a complaint is properly filed, this is subject to a provision requiring the Commission to “examine the complaint for sufficiency and compliance with the applicable sections of this Chapter.” Thus, the Commission conducts a preliminary investigation to determine if the complaint provides a sound basis for institution of an investigation, not unlike an assessment of standing and evaluation of the sufficiency of a complaint in federal court — all of which happens before an official investigation is initiated.

Yet despite the fact that, before an investigation begins, the ITC either 1) decides for itself that there is sufficient basis to initiate its own action, or else 2) evaluates the sufficiency of a private complaint to determine if the Commission should initiate an action, the logic of the decision in Certain Alloy and Carbon Steel Products would apply different standards in each case. Writes Kieff:

There appears to be broad consensus that the ITC can self-initiate an antitrust case under Section 337 and in such a proceeding would not be required to apply the antitrust injury doctrine to itself or to anyone else…. [I]t seems odd to make [this] legal distinction… After all, if it turned out there really were harm to a domestic industry or trade and commerce in this case, it would be strange for the ITC to have to dismiss this action and deprive itself of the benefit of the advance work and ongoing work of the private party [just because it was brought to the ITC’s attention by a private party complaint], only to either sit idle or expend the resources to — flying solo that time — reinitiate and proceed to completion.

Odd indeed, because, in the end, what is instituted is an investigation undertaken by the ITC — whether it originates from a private party or from its own initiative. The role of a complaining party before the ITC is quite distinct from that of a plaintiff in an Article III court.

In trade these days, it always comes down to China

We are hesitant to offer justifications for Congress’ decision to grant the ITC a sweeping administrative authority to prohibit the “unfair” importation of articles into the US, but there could be good reasons that Congress enacted the Tariff Act as a protectionist statute.

In a recent Law360 article, Kieff noted that analyzing anticompetitive behavior in the trade context is more complicated than in the domestic context. To take the current example: By limiting the complainant’s ability to initiate an ITC action based on a claim that foreign competitors are conspiring to keep prices artificially low, the ITC majority decision may be short-sighted insofar as keeping prices low might actually be part of a larger industrial and military policy for the Chinese government:

The overlooked problem is that, as the ITC petitioners claim, the Chinese government is using its control over many Chinese steel producers to accomplish full-spectrum coordination on both price and quantity. Mere allegations of course would have to be proven; but it’s not hard to imagine that such coordination could afford the Chinese government effective surveillance and control over  almost the entire worldwide supply chain for steel products.

This access would help the Chinese government run significant intelligence operations…. China is allegedly gaining immense access to practically every bid and ask up and down the supply chain across the global steel market in general, and our domestic market in particular. That much real-time visibility across steel markets can in turn give visibility into defense, critical infrastructure and finance.

Thus, by taking it upon itself to artificially narrow its scope of authority, the ITC could be undermining a valid congressional concern: that trade distortions not be used as a way to allow a foreign government to gain a more pervasive advantage over diplomatic and military operations.

No one seriously doubts that China is, at the very least, a supportive partner to much of its industry in a way that gives that industry some potential advantage over competitors operating in countries that receive relatively less assistance from national governments.

In certain industries — notably semiconductors and patent-intensive industries more broadly — the Chinese government regularly imposes onerous conditions (including mandatory IP licensing and joint ventures with Chinese firms, invasive audits, and obligatory software and hardware “backdoors”) on foreign tech companies doing business in China. It has long been an open secret that these efforts, ostensibly undertaken for the sake of national security, are actually aimed at protecting or bolstering China’s domestic industry.

And China could certainly leverage these partnerships to obtain information on a significant share of important industries and their participants throughout the world. After all, we are well familiar with this business model: cheap or highly subsidized access to a desired good or service in exchange for user data is the basic description of modern tech platform companies.

Only Congress can fix Congress

Stepping back from the ITC context, a key inquiry when examining antitrust through a trade lens is the extent to which countries will use antitrust as a non-tariff barrier to restrain trade. It is certainly the case that a sort of “mutually assured destruction” can arise where every country chooses to enforce its own ambiguously worded competition statute in a way that can favor its domestic producers to the detriment of importers. In the face of that concern, the impetus to try to apply procedural constraints on open-ended competition laws operating in the trade context is understandable.

And as a general matter, it also makes sense to be concerned when producers like U.S. Steel try to use our domestic antitrust laws to disadvantage Chinese competitors or keep them out of the market entirely.

But in this instance the analysis is more complicated. Like it or not, what amounts to injury in the international trade context, even with respect to anticompetitive conduct, is different than what’s contemplated under the antitrust laws. When the Tariff Act of 1922 was passed (which later became Section 337) the Senate Finance Committee Report that accompanied it described the scope of its unfair methods of competition authority as “broad enough to prevent every type and form of unfair practice” involving international trade. At the same time, Congress pretty clearly gave the ITC the discretion to proceed on a much less-constrained basis than that on which Article III courts operate.

If these are problems, Congress needs to fix them, not the ITC acting sua sponte.

Moreover, as Kieff’s paper (and our own comments in the Certain Alloy and Carbon Steel Products investigation) make clear, there are also a number of relevant, practical distinctions between enforcement of the antitrust laws in a federal court in a case brought by a private plaintiff and an investigation of alleged anticompetitive conduct by the ITC under Section 337. Every one of these cuts against importing an antitrust injury requirement from federal court into ITC adjudication.

Instead, understandable as its motivation may be, the ITC majority’s approach in Certain Alloy and Carbon Steel Products requires disregarding Congressional intent, and that’s simply not a tenable interpretive approach for administrative agencies to take.

Protectionism is a terrible idea, but if that’s how Congress wrote the Tariff Act, the ITC is legally obligated to enforce the protectionist law it is given.