In February’s FTC roundup, I noted an op-ed in the Wall Street Journal in which Commissioner Christine Wilson announced her intent to resign from the Federal Trade Commission. Her departure, and her stated reasons therefore, were not encouraging for those of us who would prefer to see the FTC function as a stable, economically grounded, and genuinely bipartisan independent agency. Since then, Wilson has specified her departure date: March 31, two weeks hence.
With Wilson’s departure, and that of Commissioner Noah Phillips in October 2022 (I wrote about that here, and I recommend Alden Abbott’s post on Noah Phillips’ contribution to the 1-800 Contacts case), we’ll have a strictly partisan commission—one lacking any Republican commissioners or, indeed, anyone who might properly be described as a moderate or mainstream antitrust lawyer or economist. We shall see what the appointment process delivers and when; soon, I hope, but I’m not holding my breath.
Next Comes Exodus
As followers of the FTC—faithful, agnostic, skeptical, or occasional—are all aware, the commissioners have not been alone in their exodus. Not a few staffers have left the building.
In a Bloomberg column just yesterday, Dan Papscun covers the scope of the departures, “at a pace not seen in at least two decades.” Based on data obtained from a Bloomberg Freedom of Information Act request, Papscun notes the departure of “99 senior-level career attorneys” from 2021-2022, including 71 experienced GS-15 level attorneys and 28 from the senior executive service.
To put those numbers in context, this left the FTC—an agency with dual antitrust and consumer-protection authority ranging over most of domestic commerce—with some 750 attorneys at the end of 2022. That’s a decent size for a law firm that lacks global ambitions, but a little lean for the agency. Papscun quotes Debbie Feinstein, former head of the FTC’s Bureau of Competition during the Obama administration: “You lose a lot of institutional knowledge” with the departure of senior staff and career leaders. Indeed you do.
Onward and Somewhere
The commission continues to scrutinize noncompete terms in employment agreements by bringing cases, even as it entertains comments on its proposal to ban nearly all such terms by regulation (see here, here, here, here, here, here, here, here, and here for “a few” ToTM posts on the proposal). As I noted before, the NPRM cites three recent settlements of Section 5 cases against firms’ use of noncompetes as a means of documenting the commission’s experience with such terms. It’s important to define one’s terms clearly. By “cases,” I mean administrative complaints resolved by consent orders, with no stipulation of any antitrust violation, rather than cases litigated to their conclusion in federal court. And by “recent,” I mean settlements announced the very day before the publication of the NPRM.
Also noted was the brevity of the complaints, and the memoranda and orders memorializing the settlements.It’s entirely possible that the FTC’s allegations in one, two, or all of the matters were correct, but based on the public documents, it’s hard to tell how the noncompetes violated Section 5. Commissioner Wilson noted as much in her dissents (here and here).
On March 15, the FTC’s record on noncompete cases grew by a third; that is, the agency announced a fourth settlement (again in an administrative process, and again without a decision on the merits or a stipulation of an antitrust violation). Once again, the public documents are . . . compact, providing little by way of guidance as to how (in the commission’s view), the specific terms of the agreements violated Section 5 (of course, if—as suggested in the NPRM—all such terms violate Section 5, then there you go). Again, Commissioner Wilson noticed.
Here’s a wrinkle: the staff do seem to be building on their experience regarding the use of noncompete terms in the glass container industry. Of the four noncompete competition matters now settled (all this year), three—including the most recent—deal with firms in the glass-container industry, which, according to the allegations, is highly concentrated (at least in its labor markets). The NPRM asked for input on its sweeping proposed rule, but it also asked for input on possible regulatory alternatives. A smarter aleck than myself might suggest that they consider regulating the use of noncompetes in the glass-container industry, given the commission’s burgeoning experience in this specific labor market (or markets).
Someone Deserves a Break Today
The commission’s foray into labor matters continues, with a request for information (RFI) on “the means by which franchisors exert control over franchisees and their workers.” On the one hand, the commission has a longstanding consumer-protection interest in the marketing of franchises, enforcing its Franchise Rule, which was first adopted in 1978 and amended in 2007. The rule chiefly requires certain disclosures—23 of them—in marketing franchise opportunities to potential franchisees. Further inquiry into the operation of the rule, and recent market developments, could be part of the normal course of regulatory business.
But this is not exactly that. The RFI raises a panoply of questions about both competition and consumer-protection issues, well beyond the scope of the rule, that may pertain to franchise businesses. It asks, among other things, how the provisions of franchise agreements “affects franchisees, consumers, workers, and competition, or . . . any justifications for such provision[s].” Working its way back to noncompetes:
The FTC is currently seeking public comment on a proposed rule to ban noncompete clauses for workers in some situations. As part of that proposed rulemaking, the FTC is interested in public comments on the question of whether that proposed rule should also apply to noncompete clauses between franchisors and franchisees.
As Alden Abbott observed, franchise businesses represent a considerable engine of economic growth. That’s not to say that a given franchisor cannot run afoul of either antitrust or consumer-protection law, but it does suggest that there are considerable positive aspects to many franchisor/franchisee relationships, and not just potential harms.
If that’s right, one might wonder whether the commission’s litany of questions about “the means by which franchisors exert control over franchisees and their workers” represents a neutral inquiry into a complex class of business models employed in diverse industries. If you’re still wondering, Elizabeth Wilkins, director of the FTC’s Office of Policy Planning (full disclosure, she was my boss for a minute, and, in my opinion, a good manager) issued a spoiler alert: “This RFI will begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.” What could be more neutral than that?
Recently departed Federal Trade Commission (FTC) Commissioner Noah Phillips has been rightly praised as “a powerful voice during his four-year tenure at the FTC, advocating for rational antitrust enforcement and against populist antitrust that derails the fair yet disruptive process of competition.” The FTC will miss his trenchant analysis and collegiality, now that he has departed for the greener pastures of private practice.
A particularly noteworthy example of Phillips’ mastery of his craft is presented by his November 2018 dissent from the FTC’s majority opinion in the 1-800 Contacts case, which presented tricky questions about the proper scope of antitrust intervention in contracts designed to protect intellectual property rights. (For more on the opinion, see Geoffrey A. Manne, Hal Singer, and Joshua D. Wright’s December 2018 piece.)
The 1-800 Business Model and the FTC’s Proceedings
Before describing the 1-800 proceedings, Phillips’ dissent, and the judicial vindication of his position, we begin with a brief assessment of the welfare-enhancing innovative business model employed by 1-800 Contacts. The firm pioneered the online contact-lens sales business. It is an American entrepreneurial success story, which has bestowed great benefits on consumers through trademark-backed competition focusing on price and quality considerations. Phillips’ dissenting opinion explained:
Jonathan Coon started the business that would become 1-800 Contacts in 1992 from his college dormitory room with just $50 to his name, seeking to reduce prices, improve service, and provide a better customer experience for contact lens consumers. … Over the next 26 years he would succeed, building a company (and a brand) from essentially nothing to one of the largest contact lens retailers in the country, while introducing American consumers to mail-order contact lenses (and later ordering contacts online), driving down prices, and attracting competition from small and large companies alike. That growth required a combination of a massive investment in advertising and a constant quest to improve the customer experience. That is the type of conduct that antitrust and trademark law should, and do, encourage. …
As [the FTC administrative law judge] … found in the Initial Decision, “1-800 Contacts’ business objective from the company’s inception was to make the process of buying contact lenses simple and it tries to distinguish itself from other contact lens retailers by making it faster, easier, and more convenient to get contact lenses.” … This contrasts with other online contact lens retailers, which generally do not seek to distinguish themselves on the basis of customer experience, customer service, or simplicity. … 1-800 Contacts did not limit itself to competing on price because it found that many customers valued speed and convenience just as much as price. …
1-800 Contacts’ relentless investment in its brand and in improving its customer service are recognized. Many third parties—including J.D. Power and Associates, StellaService Elite, and Foresee—have recognized or given awards to 1-800 Contacts for its customer service. … But that has not stopped 1-800 Contacts from continuing to invest in improving its service to enhance the customer experience. …
The service and brand investments made by 1-800 Contacts have resulted in millions of consumers purchasing contact lenses from 1-800 Contacts over the phone and online. They are precisely the types of investments that trademark law exists to protect and encourage.
The 2nd Circuit summarized the actions by 1-800 Contacts (“Petitioner”) that prompted an FTC administrative complaint, then presented a brief history of the internal FTC proceedings:
In 2002, Petitioner began filing complaints and sending cease-and-desist letters to its competitors alleging trademark infringement related to its competitors’ online advertisements. Between 2004 and 2013, Petitioner entered into thirteen settlement agreements to resolve most of these disputes. Each of these agreements includes language that prohibits the parties from using each other’s trademarks, URLs, and variations of trademarks as search advertising keywords. The agreements also require the parties to employ negative keywords so that a search including one party’s trademarks will not trigger a display of the other party’s ads. The agreements do not prohibit parties from bidding on generic keywords such as “contacts” or “contact lenses.” Petitioner enforced the agreements when it perceived them to be breached.
Apart from the settlement agreements, in 2013 Petitioner entered into a “sourcing and services agreement” with Luxottica, a company that sells and distributes contacts through its affiliates. That agreement also contains reciprocal online search advertising restrictions prohibiting the use of trademark keywords and requiring both parties to employ negative keywords.
The FTC issued an administrative complaint against Petitioner in August 2016 alleging that the thirteen settlement agreements and the Luxottica agreement, … along with subsequent actions to enforce them, unreasonably restrain truthful, non-misleading advertising as well as price competition in search advertising auctions, all of which constitute a violation of Section 5 of the FTC Act, 15 U.S.C. § 45. The complaint alleges that the Challenged Agreements prevented Petitioner’s competitors from disseminating ads that would have informed consumers that the same contact lenses were available at a cheaper price from other online retailers, thereby reducing competition and making it more difficult for consumers to compare online retail prices. The case was tried before an ALJ, who concluded that a violation had occurred.
As an initial matter, the ALJ rejected Petitioner’s assertion that trademark settlement agreements are not subject to antitrust scrutiny in light of FTC v. Actavis, 570 U.S. 136 (2013). Applying the “rule of reason” and principles of Section 1 of the Sherman Act, 15 U.S.C. § 1, the ALJ determined that “[o]nline sales of contact lenses constitute a relevant product market.” … He found that the agreements constituted a “contract, combination, or conspiracy” as required by the Sherman Act and held that the advertising restrictions in the agreements harmed consumers by reducing the availability of information, in turn making it costlier for consumers to find and compare contact lens prices. …
Having found actual anticompetitive effects, as required under the rule of reason analysis, the ALJ rejected the procompetitive justifications for the agreements offered by Petitioner. He found that while trademark protection is procompetitive, it did not justify the advertising restrictions in the agreements and also that Petitioner failed to show that reduced litigation costs would benefit consumers. The ALJ issued an order that barred Petitioner from entering into an agreement with any marketer or seller of contact lenses to limit participation in search advertising auctions or to prohibit or limit search advertising.
1-800 appealed the ALJ’s order to the Commission. In a split decision, a majority of the Commission agreed with the ALJ that the agreements violated Section 5 of the FTC Act. The majority, however, analyzed the settlement agreements differently from the ALJ. The majority classified the agreements as “inherently suspect” and alternatively found “direct evidence” of anticompetitive effects on consumers and search engines. The majority then analyzed the procompetitive justifications Petitioner offered for the agreements and rejected arguments that the benefits of protecting trademarks and reducing litigation costs outweighed any potential harm to consumers. Finally, the majority identified what it believed to be less anticompetitive alternatives to the advertising restrictions in the agreements. One Commissioner dissented, reasoning both that the majority should not have applied the “inherently suspect” framework and that it failed to give appropriate consideration to Petitioner’s proffered procompetitive justifications. This timely appeal followed.
Commissioner Phillips’ Dissent
Phillips meticulously made the case that 1-800 Contacts’ behavior raised no antitrust concerns.
First, he began by stressing that the settlements in question resolved legitimate trademark-infringement claims. The settlements also were limited in scope. They did not prevent any of the parties from engaging in any form of non-infringing advertising (online or offline), they specifically permitted non-infringing uses like comparative advertising and parodies, and they placed no restrictions on the content that any of the settling parties could include in their ads. In short, the settlements “sought to balance 1-800 Contacts’ legitimate interests in protecting its trademarks with competitors’ (and consumers’) interests in truthful advertising.
Second, he explained in detail why the FTC majority opinion failed to show that the trademark settlements were “inherently suspect.” He noted that the “[s]ettlements do not approximate conduct that the Commission or courts have previously found to be inherently suspect, much less illegal.” FTC complaint counsel had not demonstrated any output effects—the settlements permitted price and quality advertising, and did not affect third-party sellers. The Actavis Supreme Court refused to apply the inherently suspect framework “even though the alleged conduct at issue [reverse payments] was far more harmful to competition than anything at issue here, as well-established economic evidence demonstrated.”
Moreover, the majority opinion’s reliance on the FTC’s Polygram decision was misplaced, because the defendants in that case fixed prices and banned advertising (“[t]here is no price fixing here [n]or is there an advertising ban”). Other cases cited by the majority involving advertising restrictions similarly were inapposite, because they involved far greater restrictions on advertising and did not implicate intellectual property. Furthermore, “[t]he economic studies cited by the majority d[id] not examine paid search advertising, … much less how restraints upon it interact with the trademark policies at issue here.”
Third, he discussed at length why the majority should not have pursued a truncated rule-of-reason analysis. In short:
Applicable precedent makes clear that the Trademark Settlements should be analyzed under the traditional rule of reason. And the cases on which the majority rely fail to provide support for truncating that analysis by applying the “inherently suspect” framework. As noted, those cases do not involve trademarks, or intellectual property of any kind. That is relevant—indeed, decisive—because trademarks often limit advertising in one way or another, and the logic of the majority’s analysis would support a rule that stigmatizes conduct protecting those rights, which is clearly procompetitive, as presumptively unlawful.
Fourth, in addition to the legal infirmities, Phillips skillfully exposed the serious policy shortcomings of the majority’s “inherently suspect” approach:
Treating the Trademark Settlements as “inherently suspect” yields an unclear rule that regardless of interpretation, will, I fear, create uncertainty, dilute trademark rights, and dampen inter-brand competition. The majority couch their holding as a limited one dealing with restraints on the opportunity to make price comparisons, but, by adopting an analytical framework without accounting for the intellectual property at issue, they produce one of the following rules: either all advertising restrictions are inherently suspect, regardless whether they protect intellectual property rights, or the level of scrutiny applied to a particular restraint will depend on the strength of the trademark holder’s underlying infringement claim.
In his policy assessment, Phillips added that the policy favoring litigation settlements (due to the fact that, as a general matter, they promote efficiency) supports application of the traditional rule of reason.
Fifth, turning to the traditional rule of reason, Phillips explicated FTC complaint counsel’s failure to meet its burden of proof (case citations omitted):
If the Trademark Settlements are not “inherently suspect”, which they are not, Complaint Counsel can meet their initial burden of proof under the rule of reason in one of two ways: “an indirect showing based on a demonstration of defendant’s market power” or “direct evidence of ‘actual, sustained adverse effects on competition’” … The majority take only the direct approach; they do not attempt an indirect showing of market power. … To meet the initial burden of direct evidence, a plaintiff must show adverse effects on competition that are actual, sustained, and significant or substantial. … Complaint Counsel have not met that burden with its showing on direct effects.
In dealing with burden-of-proof issues, Phillips demonstrated that, in the context of a trademark-settlement agreement, a restriction on advertising is, by itself, insufficient to show direct effects. Phillips conceded that, “[w]hile restrictions on advertising are not themselves enough, the majority are correct that a showing of actual, sustained, and substantial or significant price effects would suffice.” But Phillips emphasized that the majority failed to show that the trademark settlements were responsible for “the fact that 1-800 Contacts’ prices were higher than some of its competitors’ prices.” Indeed, the record was “clear that that price differential predated the Trademark Settlements.” Furthermore, FTC complaint counsel “put forward no evidence that the price gap increased as a result of the Trademark Settlements.” What’s more, the FTC majority “did not adduce legally sufficient proof” that “1-800 Contacts maintained supracompetitive prices. … [T]he majority d[id] not even attempt to show that 1-800 Contacts’ price cost-margin was abnormally high—either before or after the Trademark Settlements.”
Phillips next focused on the substantial procompetitive justifications for 1-800’s conduct. (This was legally unnecessary, because the initial burden under the inherently suspect framework had not been met, direct effects had not been shown, and there had been no effort to show indirect effects.) These included settlement-related litigation-cost savings and enhanced trademark protections. Phillips stressed “the tremendous amount of investment 1-800 Contacts ha[d] made in building its brand, lowering the price of contact lenses, and offering customers superior service.”
After skillfully refuting the FTC majority’s novel separate theory that the settlements had anticompetitive effects on firms owning search engines (such as Google or Bing), Phillips skewered the FTC majority’s claim that the trademark settlements could have been narrower:
The searches that the Trademark Settlements prohibit[ed] [we[re] precisely those searches that implicate[d] 1-800 Contacts’ trademarks. They [we]re also the searches through which users [we]re most likely attempting to reach the 1-800 Contacts website (i.e., searches for 1-800 Contacts’ trademark). …
The settling parties included a negative keyword provision in response to Google’s explicit encouragement for 1-800 Contacts to resolve its trademark disputes with competitors by having them implement 1-800 Contacts’ trademarked terms as negative keywords. … They did so because, without negative keywords, a settling party’s advertisements could appear in response to searches for the counterparty’s trademarked terms.
Almost all of the Trademark Settlements balanced these restrictions with a provision explicitly permitting a settling party to use the counterparty’s trademarks in the non-internet context, including comparative advertising. …
As a result, … the Trademark Settlements were appropriately tailored to achieve their goal of preventing trademark infringement while balancing the need to permit non-infringing advertising.
Turning to the Luxottica servicing agreement, Phillips explained that the majority opinion mistakenly characterized it as just another inherently suspect settlement. Instead, it was an efficient sourcing and servicing agreement. Under the agreement, 1-800 Contacts shipped contacts for sale to Luxottica brick-and-mortar chain stores, and Luxottica also provided other services. Luxottica benefited by outsourcing its entire contact-lens business—including negotiating with contact-lens suppliers—to 1-800 Contacts. The majority failed to analyze the various procompetitive benefits stemming from this arrangement, which fit squarely within the FTC-U.S. Justice Department (DOJ) Competitor Collaboration Guidelines. In particular, for example, “[a]s a direct result of its decision to outsource much of its contact business to 1-800 Contacts, Luxottica customers could receive lower prices and better services (e.g., faster delivery).”
Phillips closed his dissent by highlighting the ineffectiveness of the FTC majority’s order, which “state[d] that the only agreements that 1-800 Contacts c[ould] enter [we]re those that, in effect, that t[old] the counterparty that they c[ould] [not] violate the trademark laws.” This unhelpful language “w[ould] only lead to more litigation to determine what conduct actually violated the trademark laws in the context of paid search advertising based on trademarked keywords. Because the Order only allow[ed] agreements that d[id] not actually resolve the dispute in trademark infringement litigation, it w[ould] reduce the incentive to settle, which, in turn, w[ould] lead to either less trademark enforcement or more costly litigation”.
Phillips concluding paragraph offered sound general advice about the limits of antitrust and the need to avoid a harmful lack of clarity in enforcement:
The Commission’s mandate is to enforce the antitrust laws, but we cannot do so in a vacuum. We need to consider competing policies, including federal trademark policy, when analyzing allegedly anticompetitive conduct. And we should recognize that unclear rules may do more harm both to that policy and to competition than the alleged conduct here. In the case of the Trademark Settlements, precedent offers a better way: the Commission should analyze such agreements under the full rule of reason, giving appropriate weight to the trademarks at issue and the value they protect. Such a rule will decrease uncertainty in the market, encourage brand investment, and increase competition.
The 2nd Circuit Rejects the FTC Majority’s Position
The 2nd Circuit rejected the FTC majority opinion and vacated commission’s order. First, it rejected the FTC’s reliance on a “quick look” analysis, stating:
Courts do not have sufficient experience with this type of conduct to permit the abbreviated analysis of the Challenged [trademark settlement] Agreements undertaken by the Commission. … When, as here, not only are there cognizable procompetitive justifications but also the type of restraint has not been widely condemned in our “judicial experience,” … more is required. … The Challenged Agreements, therefore, are not so obviously anticompetitive to consumers that someone with only a basic understanding of economics would immediately recognize them to be so. … We are bound, then, to apply the rule of reason.
Turning to full rule-of-reason analysis, the court began by assessing anticompetitive effects. It rejected the FTC’s argument that it had established direct evidence of such effects in the form of increased prices. It emphasized that the government could not show an actual anticompetitive change in prices after the restraint was implemented, “because it did not conduct an empirical analysis of the Challenged Agreements effect on the price of contact lenses in the online market for contacts.” Specifically, because the FTC’s evidence was merely “theoretical and anecdotal,” the evidence was not “direct.” The court also concluded that it need not decide whether an FTC theory of anticompetitive harm due to “disrupted information flow” (due to a reduction in the quantity of advertisements) was viable, because 1-800 Contacts had shown a procompetitive justification.
The court rejected the FTC’s finding that 1-800 Contact’s citation of two procompetitive effects—reduced litigation costs and the protection of trademark rights—had no basis in fact. Citing the 2nd Circuit’s Clorox decision, the court emphasized that “[t]rademarks are by their nature non-exclusionary, and agreements to protect trademark interests are ‘common and favored, under the law.’” The FTC’s doubts about the merits of the trademark-infringement claims were irrelevant, because, consistent with Clorox, “trademark agreements that ‘only marginally advance trademark policies’ can be procompetitive.” And while trademark agreements that were “auxiliary to an underlying illegal agreement between competitors” would not pass legal muster, there was “a lack of evidence here that the Challenged Agreements [we]re the ‘product of anything other than hard-nosed trademark negotiations.’”
Because 1-800 Contacts had “carried its burden of identifying a procompetitive justification, the government [had to] … show that a less-restrictive alternative exist[ed] that achieve[d] the same legitimate competitive benefits.” In that regard, the FTC claimed “that the parties to the Challenged Agreements could have agreed to require clear disclosure in each search advertisement of the identity of the rival seller rather than prohibit all advertising on trademarked issues.”
But, citing Clorox, the court opined that “it is usually unwise for courts to second-guess” trademark agreements between competitors, because “the parties’ determination of the proper scope of needed trademark protection is entitled to substantial weight.” In this matter, the FTC “failed to consider the practical reasons for the parties entering into the Challenged Agreements. … The Commission did not consider, for example, how the parties might enforce such a requirement moving forward or give any weight to how onerous such enforcement efforts would be for private parties.” In short, “[w]hile trademark agreements limit competitors from competing as effectively as they otherwise might, … forcing companies to be less aggressive in enforcing their trademarks is antithetical to the procompetitive goals of trademark policy.”
In sum, the court concluded:
In this case, where the restrictions that arise are born of typical trademark settlement agreements, we cannot overlook the Procompetitive Agreements’ procompetitive goal of promoting trademark policy. In light of the strong procompetitive justification of protecting Petitioner’s trademarks, we conclude the Challenged Agreements “merely regulate and perhaps thereby promote competition.”
While strong intellectual-property protection is key to robust competition, the different types of IP advance competitive interests in different manners. Patents, for example, provide a right to exclude access to well-defined inventions, thereby creating incentives to invent and facilitating contracts that spread patent-based innovations throughout the economy. Trademarks protect brand names and logos, thereby serving as specific indicators of origin and creating incentives to invest in improving the quality of the product or service covered by a trademark. As such, strong trademarks spur competition over quality and reduce uncertainty about the particular attributes of competing goods and services. In short, trademarks tend to promote dynamic competition and benefit consumers.
Properly applied, antitrust law seeks to advance consumer welfare and strengthen the competitive process. In that regard, the policy goals of antitrust and intellectual property are in harmony, and antitrust should be enforced in a manner that complements, and does not undermine, IP policy. Thus, when faced with a competitive restraint covering IP rights, antitrust enforcers should evaluate it carefully. They should be mindful of the procompetitive goals it may serve and avoid focusing solely on theories of competitive harm that ignore IP interests.
The FTC majority in 1-800 Contacts missed this fundamental point. They gave relatively short shrift to the procompetitive aspects of trademark protection and, at the same time, mischaracterized minor restrictions on advertising as akin to significant restraints that chill the provision of price information and product comparisons.
There was no showing that the 1-800 restrictions had stifled price competition or undermined in any manner consumers’ ability to compare contact-lens brands and prices online. In reality, the settlement agreements under scrutiny were rather carefully crafted to protect 1-800 Contacts’ goodwill, reflected in its substantial investments in quality enhancement and the promotion of relatively low-cost online sales. In the absence of the settlements, its online rivals would have been able to free ride on 1-800’s brand investments, diminishing that innovative firm’s incentive to continue to invest in trademark-related product enhancements. The long-term effect would have been to diminish, not enhance, dynamic competition.
More generally, had it prevailed, the FTC majority’s blinkered analytical approach in 1-800 Contacts could have chilled vigorous, welfare-enhancing competition in many other markets where trademarks play an important role. Fortunately, the majority’s holding did not stand for long.
Phillips’ brilliant dissent, which carefully integrated trademark-policy concerns into the application of antitrust principles—in tandem with the subsequent 2nd Circuit decision that properly acknowledged the need to weigh such concerns in antitrust analysis—provide a template for trademark-antitrust assessments that may be looked to by future courts and enforcers. Let us hope that current Biden administration FTC and DOJ Antitrust Division enforcers also take heed.
Faithful and even occasional readers of this roundup might have noticed a certain temporal discontinuity between the last post and this one. The inimitable Gus Hurwitz has passed the scrivener’s pen to me, a recent refugee from the Federal Trade Commission (FTC), and the roundup is back in business. Any errors going forward are mine. Going back, blame Gus.
Commissioner Noah Phillips departed the FTC last Friday, leaving the Commission down a much-needed advocate for consumer welfare and the antitrust laws as they are, if not as some wish they were. I recommend the reflections posted by Commissioner Christine S. Wilson and my fellow former FTC Attorney Advisor Alex Okuliar. Phillips collaborated with his fellow commissioners on matters grounded in the law and evidence, but he wasn’t shy about crying frolic and detour when appropriate.
The FTC without Noah is a lesser place. Still, while it’s not always obvious, many able people remain at the Commission and some good solid work continues. For example, FTC staff filed comments urging New York State to reject a Certificate of Public Advantage (“COPA”) application submitted by SUNY Upstate Health System and Crouse Medical. The staff’s thorough comments reflect investigation of the proposed merger, recent research, and the FTC’s long experience with COPAs. In brief, the staff identified anticompetitive rent-seeking for what it is. Antitrust exemptions for health-care providers tend to make health care worse, but more expensive. Which is a corollary to the evergreen truth that antitrust exemptions help the special interests receiving them but not a living soul besides those special interests. That’s it, full stop.
Now comes October and an amended complaint. The amended complaint is even weaker than the opening salvo. Now, the FTC alleges that the acquisition would eliminate potential competition from Meta in a narrower market, VR-dedicated fitness apps, by “eliminating any probability that Meta would enter the market through alternative means absent the Proposed Acquisition, as well as eliminating the likely and actual beneficial influence on existing competition that results from Meta’s current position, poised on the edge of the market.”
So what if Meta were to abandon the deal—as the FTC wants—but not enter on its own? Same effect, but the FTC cannot seriously suggest that Meta has a positive duty to enter the market. Is there a jurisdiction (or a planet) where a decision to delay or abandon entry would be unlawful unilateral conduct? Suppose instead that Meta enters, with virtual-exercise guns blazing, much to the consternation of firms actually in the market, which might complain about it. Then what? Would the Commission cheer or would it allege harm to nascent competition, or perhaps a novel vertical theory? And by the way, how poised is Meta, given no competing product in late-stage development? Would the FTC prefer that Meta buy a different competitor? Should the overworked staff commence Meta’s due diligence?
Potential competition cases are viable given the right facts, and in areas where good grounds to predict significant entry are well-established. But this is a nascent market in a large, highly dynamic, and innovative industry. The competitive landscape a few years down the road is anyone’s guess. More speculation: the staff was right all along. For more, see Dirk Auer’s or Geoffrey Manne’s threads on the amended complaint.
When It Rains It Pours Regulations
On Aug. 22, the FTC published an advance notice of proposed rulemaking (ANPR) to consider the potential regulation of “commercial surveillance and data security” under its Section 18 authority. Shortly thereafter, they announced an Oct. 20 open meeting with three more ANPRs on the agenda.
First, on the advance notice: I’m not sure what they mean by “commercial surveillance.” The term doesn’t appear in statutory law, or in prior FTC enforcement actions. It sounds sinister and, surely, it’s an intentional nod to Shoshana Zuboff’s anti-tech polemic “The Age of Surveillance Capitalism.” One thing is plain enough: the proffered definition is as dramatically sweeping as it is hopelessly vague. The Commission seems to be contemplating a general data regulation of some sort, but we don’t know what sort. They don’t say or even sketch a possible rule. That’s a problem for the FTC, because the law demands that the Commission state its regulatory objectives, along with regulatory alternatives under consideration, in the ANPR itself. If they get to an NPRM, they are required to describe a proposed rule with specificity.
What’s clear is that the ANPR takes a dim view of much of the digital economy. And while the Commission has considerable experience in certain sorts of privacy and data security matters, the ANPR hints at a project extending well past that experience. Commissioners Phillips and Wilson dissented for good and overlapping reasons. Here’s a bit from the Phillips dissent:
When adopting regulations, clarity is a virtue. But the only thing clear in the ANPR is a rather dystopic view of modern commerce….I cannot support an ANPR that is the first step in a plan to go beyond the Commission’s remit and outside its experience to issue rules that fundamentally alter the internet economy without a clear congressional mandate….It’s a naked power grab.
Be sure to read the bonus material in the Federal Register—supporting statements from Chair Lina Khan and Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya, and dissenting statements from Commissioners Phillips and Wilson. Chair Khan breezily states that “the questions we ask in the ANPR and the rules we are empowered to issue may be consequential, but they do not implicate the ‘major questions doctrine.’” She’s probably half right: the questions do not violate the Constitution. But she’s probably half wrong too.
But wait, there’s more! There were three additional ANPRs on the Commission’s Oct. 20 agenda. So that’s four and counting. Will there be a proposed rule on non-competes? Gig workers? Stay tuned. For now, note that rules are not self-enforcing, and that the chair has testified to Congress that the Commission is strapped for resources and struggling to keep up with its statutory mission. Are more regulations an odd way to ask Congress for money? Thus far, there’s no proposed rule on gig workers, but there was a Policy Statement on Enforcement Related to Gig Workers.. For more on that story, see Alden Abbott’s TOTM post.
Laws, Like People, Have Their Limits
Read Phillips’s parting dissent in Passport Auto Group, where the Commission combined legitimate allegations with an unhealthy dose of overreach:
The language of the unfairness standard has given the FTC the flexibility to combat new threats to consumers that accompany the development of new industries and technologies. Still, there are limits to the Commission’s unfairness authority. Because this complaint includes an unfairness count that aims to transform Section 5 into an undefined discrimination statute, I respectfully dissent.”
Right. Three cheers for effective enforcement of the focused antidiscrimination laws enacted by Congress by the agencies actually charged to enforce those laws. And to equal protection. And three more, at least, for a little regulatory humility, if we find it.