[Continuing our FTC UMC Rulemaking symposium, today’s first guest post is from Richard J. Pierce Jr., the Lyle T. Alverson Professor of Law at George Washington University Law School. We are also publishing a related post today from Andrew K. Magloughlin and Randolph J. May of the Free State Foundation. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]
FTC Rulemaking Power
In 2021, President Joe Biden appointed a prolific young scholar, Lina Khan, to chair the Federal Trade Commission (FTC). Khan strongly dislikes almost every element of antitrust law. She has stated her intention to use notice and comment rulemaking to change antitrust law in many ways. She was unable to begin this process for almost a year because the FTC was evenly divided between Democratic and Republican appointees, and she has not been able to elicit any support for her agenda from the Republican members. She will finally get the majority she needs to act in the next few days, as the U.S. Senate appears set to confirm Alvaro Bedoya to the fifth spot on the commission.
Chair Khan has argued that the FTC has the power to use notice-and-comment rulemaking to define the term “unfair methods of competition” as that term is used in Section 5 of the Federal Trade Commission Act. Section 5 authorizes the FTC to define and to prohibit both “unfair acts” and “unfair methods of competition.” For more than 50 years after the 1914 enactment of the statute, the FTC, Congress, courts, and scholars interpreted it to empower the FTC to use adjudication to implement Section 5, but not to use rulemaking for that purpose.
In 1973, the U.S. Court of Appeals for the D.C. Circuit held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. Congress responded by amending the statute in 1975 and 1980 to add many time-consuming and burdensome procedures to the notice-and-comment process. Those added procedures had the effect of making the rulemaking process so long that the FTC gave up on its attempts to use rulemaking to implement Section 5.
Khan claims that the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it must use the extremely burdensome procedures that Congress added in 1975 and 1980 to define “unfair acts.” Her claim is based on a combination of her belief that the current U.S. Supreme Court would uphold the 1973 D.C. Circuit decision that held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5 and her belief that a peculiarly worded provision of the 1975 amendment to the FTC Act allows the FTC to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it requires the FTC to use the extremely burdensome procedure to issue rules that define “unfair acts.” The FTC has not attempted to use notice-and-comment rulemaking to define “unfair methods of competition” since Congress amended the statute in 1975.
I am skeptical of Khan’s argument. I doubt that the Supreme Court would uphold the 1973 D.C. Circuit opinion, because the D.C. Circuit used a method of statutory interpretation that no modern court uses and that is inconsistent with the methods of statutory interpretation that the Supreme Court uses today. I also doubt that the Supreme Court would interpret the 1975 statutory amendment to distinguish between “unfair acts” and “unfair methods of competition” for purposes of the procedures that the FTC is required to use to issue rules to implement Section 5.
Even if the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” I am confident that the Supreme Court would not uphold an exercise of that power that has the effect of making a significant change in antitrust law. That would be a perfect candidate for application of the major questions doctrine. The court will not uphold an “unprecedented” action of “vast economic or political significance” unless it has “unmistakable legislative support.” I will now describe four hypothetical exercises of the rulemaking power that Khan believes that the FTC possesses to illustrate my point.
Hypothetical Exercises of FTC Rulemaking Power
Creation of a Right to Repair
President Biden has urged the FTC to create a right for an owner of any product to repair the product or to have it repaired by an independent service organization (ISO). The Supreme Court’s 1992 opinion in Eastman Kodak v. Image Technical Services tells us all we need to know about the likelihood that it would uphold a rule that confers a right to repair. When Kodak took actions that made it impossible for ISOs to repair Kodak photocopiers, the ISOs argued that Kodak’s action violated both Section 1 and Section 2 of the Sherman Act. The Court held that Kodak could prevail only if it could persuade a jury that its view of the facts was accurate. The Court remanded the case for a jury trial to address three contested issues of fact.
The Court’s reasoning in Kodak is inconsistent with any version of a right to repair that the FTC might attempt to create through rulemaking. The Court expressed its view that allowing an ISO to repair a product sometimes has good effects and sometimes has bad effects. It concluded that it could not decide whether Kodak’s new policy was good or bad without first resolving the three issues of fact on which the parties disagreed. In a 2021 report to Congress, the FTC agreed with the Supreme Court. It identified seven factual contingencies that can cause a prohibition on repair of a product by an ISO to have good effects or bad effects. It is naïve to expect the Supreme Court to change its approach to repair rights in response to a rule in which the FTC attempts to create a right to repair, particularly when the FTC told Congress that it agrees with the Court’s approach immediately prior to Khan’s arrival at the agency.
Prohibition of Reverse-Payment Settlements of Patent Disputes Involving Prescription Drugs
Some people believe that settlements of patent-infringement disputes in which the manufacturer of a generic drug agrees not to market the drug in return for a cash payment from the manufacturer of the brand-name drug are thinly disguised agreements to create a monopoly and to share the monopoly rents. Khan has argued that the FTC could issue a rule that prohibits such reverse-payment settlements. Her belief that a court would uphold such a rule is contradicted by the Supreme Court’s 2013 opinion in FTC v. Actavis. The Court unanimously rejected the FTC’s argument in support of a rebuttable presumption that reverse payments are illegal. Four justices argued that reverse-payment settlements can never be illegal if they are within the scope of the patent. The five-justice majority held that a court can determine that a reverse-payment settlement is illegal only after a hearing in which it applies the rule of reason to determine whether the payment was reasonable.
A Prohibition on Below-Cost Pricing When the Firm Cannot Recoup Its Losses
Khan believes that illegal predatory pricing by dominant firms is widespread and extremely harmful to competition. She particularly dislikes the Supreme Court’s test for identifying predatory pricing. That test requires proof that a firm that engages in below-cost pricing has a reasonable prospect of recouping its losses. She wants the FTC to issue a rule in which it defines predatory pricing as below-cost pricing without any prospect that the firm will be able to recoup its losses.
The history of the Court’s predatory-pricing test shows how unrealistic it is to expect the Court to uphold such a rule. The Court first announced the test in a Sherman Act case in 1986. Plaintiffs attempted to avoid the precedential effect of that decision by filing complaints based on predatory pricing under the Robinson-Patman Act. The Court rejected that attempt in a 1993 opinion. The Court made it clear that the test for determining whether a firm is engaged in illegal predatory pricing is the same no matter whether the case arises under the Sherman Act or the Robinson-Patman Act. The Court undoubtedly would reject the FTC’s effort to change the definition of predatory pricing by relying on the FTC Act instead of the Sherman Act or the Robinson-Patman Act.
A Prohibition of Noncompete Clauses in Contracts to Employ Low-Wage Employees
President Biden has expressed concern about the increasing prevalence of noncompete clauses in employment contracts applicable to low wage employees. He wants the FTC to issue a rule that prohibits inclusion of noncompete clauses in contracts to employ low-wage employees. The Supreme Court would be likely to uphold such a rule.
A rule that prohibits inclusion of noncompete clauses in employment contracts applicable to low-wage employees would differ from the other three rules I discussed in many respects. First, it has long been the law that noncompete clauses can be included in employment contracts only in narrow circumstances, none of which have any conceivable application to low-wage contracts. The only reason that competition authorities did not bring actions against firms that include noncompete clauses in low-wage employment contracts was their belief that state labor law would be effective in deterring firms from engaging in that practice. Thus, the rule would be entirely consistent with existing antitrust law.
Second, there are many studies that have found that state labor law has not been effective in deterring firms from including noncompete clauses in low-wage employment contracts and many studies that have found that the increasing use of noncompete clauses in low-wage contracts is causing a lot of damage to the performance of labor markets. Thus, the FTC would be able to support its rule with high-quality evidence.
Third, the Supreme Court’s unanimous 2021 opinion in NCAA v. Alstom indicates that the Court is receptive to claims that a practice that harms the performance of labor markets is illegal. Thus, I predict that the Court would uphold a rule that prohibits noncompete clauses in employment contracts applicable to low-wage employees if it holds that the FTC can use notice-and-comment rulemaking to define “unfair methods of competition,” as that term is used in Section 5 of the FTC Act. That caveat is important, however. As I indicated at the beginning of this essay, I doubt that the FTC has that power.
I would urge the FTC not to use notice-and comment rulemaking to address the problems that are caused by the increasing use of noncompete clauses in low-wage contracts. There is no reason for the FTC to put a lot of time and effort into a notice-and-comment rulemaking in the hope that the Court will conclude that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. The FTC can implement an effective prohibition on the inclusion of noncompete clauses in employment contracts applicable to low-wage employees by using a combination of legal tools that it has long used and that it clearly has the power to use—issuance of interpretive rules and policy statements coupled with a few well-chosen enforcement actions.
Alternative Ways to Improve Antitrust Law
There are many other ways in which Khan can move antitrust law in the directions that she prefers. She can make common cause with the many mainstream antitrust scholars who have urged incremental changes in antitrust law and who have conducted the studies needed to support those proposed changes. Thus, for instance, she can move aggressively against other practices that harm the performance of labor markets, change the criteria that the FTC uses to decide whether to challenge proposed mergers and acquisitions, and initiate actions against large platform firms that favor their products over the products of third parties that they sell on their platforms.