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Noah Phillips’ Major Contribution to IP-Antitrust Law: The 1-800 Contacts Case

Alden Abbott —  8 November 2022

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.)

Phillips’ dissent—vindicated by a June 2021 decision by the 2nd U.S. Circuit Court of Appeals vacating the commission’s order—merits close attention. (The circuit court also denied the FTC’s petition for a rehearing en banc in August 2021.)

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.”

Conclusion

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. 

In Antitrust & Competition, Federal Trade Commission, Intellectual Property, Monopolization, Section 5, Truth on the Market , , , , , , , , , , ,
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FTC Biweekly UMC Roundup – Mountain of Puffery Edition

Daniel J. Gilman —  4 November 2022

Research still matters, so I recommend video from the Federal Trade Commission’s 15th Annual Microeconomics Conference, if you’ve not already seen it. It’s a valuable event, and it’s part of the FTC’s still important statutory-research mission. It also reminds me that the FTC’s excellent, if somewhat diminished, Bureau of Economics still has no director; Marta Woskinska concluded her very short tenure in February. Eight-plus months of hiring and appointments (and many departures) later, she’s not been replaced. Priorities.

The UMC Watch Continues: In 2015, the FTC issued a Statement of Enforcement Principles Regarding “Unfair Methods of Competition.” On July 1, 2021, the Commission withdrew the statement on a 3-2 vote, sternly rebuking its predecessors: “the 2015 Statement …abrogates the Commission’s congressionally mandated duty to use its expertise to identify and combat unfair methods of competition even if they do not violate a separate antitrust statute.”

That was surprising. First, it actually presaged a downturn in enforcement. Second, while the 2015 statement was not empty, many agreed with Commissioner Maureen Ohlhausen’s 2015 dissent that it offered relatively little new guidance on UMC enforcement. In other words, stating that conduct “will be evaluated under a framework similar to the rule of reason” seemed not much of a limiting principle to some, if far too much of one to others. Eye of the beholder. 

Third, as Commissioners Noah Phillips and Christine S. Wilson noted in their dissent, given that there was no replacement, it was “[h]inting at the prospect of dramatic new liability without any guide regarding what the law permits or proscribes.” The business and antitrust communities were put on watch: winter is coming. Winter is still coming. In September, Chair Lina Khan stated that one of her top priorities “has been the preparation of a policy statement on Section 5 that reflects the statutory text, our institutional structure, the history of the statute, and the case law.” Indeed. More recently, she said she was hopeful that the statement would be released in “the coming weeks.”  Stay tuned. 

There was September success, and a little mission creep at the DOJ Antitrust Division: Congrats to the U.S. Justice Department for some uncharacteristic success, and not a little creativity. In U.S. v. Nathan Nephi Zito, the defendant pleaded guilty to illegal monopolization for proposing that he and a competitor allocate markets for highway-crack-sealing services.  

The odd part, and an FTC connection that was noted by Pallavi Guniganti and Gus Hurwitz: at issue was a single charge of monopolization in violation of Section 2 of the Sherman Act. There’s long been widespread agreement that the bounds of Section 5 UMC authority exceed those of the Sherman Act, along with widespread disagreement on the extent to which that’s true, but there was consensus on invitations to collude. Agreements to fix prices or allocate markets are per se violations of Section 1. Refused invitations to collude are not, or were not. But as the FTC stated in its now-withdrawn Statement of Enforcement Principles, UMC authority extends to conduct “that, if allowed to mature or complete, could violate the Sherman or Clayton Act.” But the FTC didn’t bring the case against Zito, the competitor rejected the invitation, and nobody alleged a violation of either Sherman Section 1 or FTC Section 5. 

The admitted conduct seems indefensible, under Section 5, so perhaps there’s no harm ex post, but I wonder where this is going.     

DOJ also had a Halloween win when Judge Florence Y. Pan of the U.S. Court of Appeals for the District of Columbia, sitting by designation in the U.S. District Court for the District of Columbia, issued an order blocking the proposed merger of Penguin Random House and Simon & Schuster. The opinion is still sealed. But based on the complaint, it was a relatively straightforward monopsony case, albeit one with a very narrow market definition: two market definitions, but with most of the complaint and the more convincing story about “the market for acquisition of publishing rights to anticipated top-selling books.” Steven King, Oprah Winfrey, etc. 

Maybe they got it right, although Assistant Attorney General Jonathan Kanter’s description seems a bit of puffery, if not a mountain of it: “The proposed merger would have reduced competition, decreased author compensation, diminished the breadth, depth, and diversity of our stories and ideas, and ultimately impoverished our democracy.”

At the margin? The Division did not need to prove harm to consumers downstream, although it alleged such harm. Here’s a policy question: suppose the deal would have lowered advances paid to top-selling authors—those cited in the complaint are mostly in the millions of dollars—but suppose DOJ was wrong about the larger market and downstream effects. If publisher savings were accompanied by a slight reduction in book prices, not output, would that have been a bad result?    

And you thought entry was procompetitive? For some, Halloween fright does not abate with daylight. On Nov. 1, Sen. Elizabeth Warren (D-Mass.) sent a letter to Lina Khan and Jonathan Kanter, writing “with serious concern about emerging competition and consumer protection issues that Big Tech’s expansion into the automotive industry poses.” I gather that “emerging” is a term of art in legal French meaning “possible, maybe.” The senator writes with great imagination and not a little drama, cataloging numerous allegations about such worrisome conduct as bundling.

Of course, some tying arrangements are anticompetitive, but bundling is not necessarily or even typically anticompetitive. As an article still posted on the DOJ website explains, the “pervasiveness of tying in the economy shows that it is generally beneficial,” For instance, in the automotive industry, most consumers seem to prefer buying their cars whole rather than in parts.

It’s impossible to know that none of Warren’s myriad purported harms will come to pass in any market, but nobody has argued that the agencies ought to stop screening Hart-Scott-Rodino submissions. The need to act “quickly and decisively” on so many issues seems dubious. Perhaps there might be advantages to having technically sophisticated, data-rich, well-financed firms enter into product R&D and competition in new areas, including nascent product markets that might want more of such things for the technology that goes into vehicles that hurtle us down the highway.        

The Oct. 21 Roundup highlighted the FTC’s recent flood of regulatory proposals, including the “commercial surveillance” ANPR. Three new ANPRs were mentioned that week: one regarding “Junk Fees,” one regarding “Fake Reviews and Endorsements,” and one regarding potential updates to the FTC’s “Funeral Rule.” Periodic rule review is a requirement, so a potential update is not unusual. On the others, I recommend Commissioner Wilson’s dissents for an overview of legitimate concerns. In sum, the junk-ees ANPR is “sweeping in its breadth; may duplicate, or contradict, existing laws and rules; is untethered from a solid foundation of FTC enforcement; relies on flawed assumptions and vague definitions; ignores impacts on competition; and diverts scarce agency resources from important law enforcement efforts.” And if some “junk fees” are the result of deceptive or unfair practices under established standards, the ANPR also seems to refer to potentially useful and efficient unbundling. Wilson finds the “fake reviews and endorsements” ANPR clearer and better focused, but another bridge too far, contemplating a burdensome regulatory scheme while active enforcement and guidance initiatives are underway, and may adequately address material and deceptive advertising practices.

As Wilson notes, the costs of regulating are substantial, too. New proposals spring forth while overdue projects founder. For instance, the long, long overdue “10-year” review of the FTC’s Eyeglass Rule last saw an ANPR in 2015, following a 2004 decision to leave an earlier version of the rule in place. The Contact Lens Rule, implementing the Fairness to Contact Lens Consumers Act, was initially adopted in 2004 and amended 16 years later, partly because the central provision of the rule had proved unenforceable, resulting in chronic noncompliance. The chair is also considering rulemaking on noncompete clauses. Again, there are worries that some anticompetitive conduct might prompt considerably overbroad regulation, given legitimate applications, a developing and mixed body of empirical literature, and recent activity in the states. It’s another area to wonder whether the FTC has either congressional authorization or the resources, experience, and expertise to regulate the conduct at issue–potentially, every employment agreement in the United States.

In Administrative Law, Antitrust & Competition, Antitrust at the Agencies Roundup, Antitrust Division, Cartels, Federal Trade Commission, Justice Department, Section 5, Tying , , , , , , , , , , ,
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FTC Biweekly UMC Roundup – Refugee from the FTC Edition

Daniel J. Gilman —  21 October 2022

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.

More Good News from the Commission

On Sept. 30, a unanimous Commission announced that an independent physician association in New Mexico had settled allegations that it violated a 2005 consent order. The allegations? Roughly 400 physicians—independent competitors—had engaged in price fixing, violating both the 2005 order and the Sherman Act. As the concurring statement of Commissioners Phillips and Wilson put it, the new order “will prevent a group of doctors from allegedly getting together to negotiate… higher incomes for themselves and higher costs for their patients.” Oddly, some have chastised the FTC for bringing the action as anti-labor. But the IPA is a regional “must-have” for health plans and a dominant provider to consumers, including patients, who might face tighter budget constraints than the median physician

Peering over the rims of the rose-colored glasses, my gaze turns to Meta. In July, the FTC sued to block Meta’s proposed acquisition of Within Unlimited (and its virtual-reality exercise app, Supernatural). Gus wrote about it with wonder, noting reports that the staff had recommended against filing, only to be overruled by the chair.

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.

For more, see ICLE’s Oct. 20 panel discussion and the executive summary to our forthcoming comments to the Commission.

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.

In Administrative Law, Antitrust & Competition, Antitrust at the Agencies Roundup, Data Privacy & Security, Exemptions, Facebook, Federal Trade Commission, Mergers & Acquisitions, Platforms, Regulation, Section 5, Truth on the Market , , , , , , , , , , , , , , , , , , , ,
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The Bitter Fruits of Federal Antitrust ‘Reform’ Legislation

Alden Abbott —  25 July 2022

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Much ink has been spilled regarding the potential harm to the economy and to the rule of law that could stem from enactment of the primary federal antitrust legislative proposal, the American Innovation and Choice Online Act (AICOA) (see here). AICOA proponents, of course, would beg to differ, emphasizing the purported procompetitive benefits of limiting the business freedom of “Big Tech monopolists.”

There is, however, one inescapable reality—as night follows day, passage of AICOA would usher in an extended period of costly litigation over the meaning of a host of AICOA terms. As we will see, this would generate business uncertainty and dampen innovative conduct that might be covered by new AICOA statutory terms. 

The history of antitrust illustrates the difficulties inherent in clarifying the meaning of novel federal statutory language. It was not until 21 years after passage of the Sherman Antitrust Act that the Supreme Court held that Section 1 of the act’s prohibition on contracts, combinations, and conspiracies “in restraint of trade” only covered unreasonable restraints of trade (see Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911)). Furthermore, courts took decades to clarify that certain types of restraints (for example, hardcore price fixing and horizontal market division) were inherently unreasonable and thus per se illegal, while others would be evaluated on a case-by-case basis under a “rule of reason.”

In addition, even far more specific terms related to exclusive dealing, tying, and price discrimination found within the Clayton Antitrust Act gave rise to uncertainty over the scope of their application. This uncertainty had to be sorted out through judicial case-law tests developed over many decades.

Even today, there is no simple, easily applicable test to determine whether conduct in the abstract constitutes illegal monopolization under Section 2 of the Sherman Act. Rather, whether Section 2 has been violated in any particular instance depends upon the application of economic analysis and certain case-law principles to matter-specific facts.

As is the case with current antitrust law, the precise meaning and scope of AICOA’s terms will have to be fleshed out over many years. Scholarly critiques of AICOA’s language underscore the seriousness of this problem.

In its April 2022 public comment on AICOA, the American Bar Association (ABA)  Antitrust Law Section explains in some detail the significant ambiguities inherent in specific AICOA language that the courts will have to address. These include “ambiguous terminology … regarding fairness, preferencing, materiality, and harm to competition on covered platforms”; and “specific language establishing affirmative defenses [that] creates significant uncertainty”. The ABA comment further stresses that AICOA’s failure to include harm to the competitive process as a prerequisite for a statutory violation departs from a broad-based consensus understanding within the antitrust community and could have the unintended consequence of disincentivizing efficient conduct. This departure would, of course, create additional interpretive difficulties for federal judges, further complicating the task of developing coherent case-law principles for the new statute.

Lending support to the ABA’s concerns, Northwestern University professor of economics Dan Spulber notes that AICOA “may have adverse effects on innovation and competition because of imprecise concepts and terminology.”

In a somewhat similar vein, Stanford Law School Professor (and former acting assistant attorney general for antitrust during the Clinton administration) Douglas Melamed complains that:

[AICOA] does not include the normal antitrust language (e.g., “competition in the market as a whole,” “market power”) that gives meaning to the idea of harm to competition, nor does it say that the imprecise language it does use is to be construed as that language is construed by the antitrust laws. … The bill could be very harmful if it is construed to require, not increased market power, but simply harm to rivals.

In sum, ambiguities inherent in AICOA’s new terminology will generate substantial uncertainty among affected businesses. This uncertainty will play out in the courts over a period of years. Moreover, the likelihood that judicial statutory constructions of AICOA language will support “efficiency-promoting” interpretations of behavior is diminished by the fact that AICOA’s structural scheme (which focuses on harm to rivals) does not harmonize with traditional antitrust concerns about promoting a vibrant competitive process.

Knowing this, the large high-tech firms covered by AICOA will become risk averse and less likely to innovate. (For example, they will be reluctant to improve algorithms in a manner that would increase efficiency and benefit consumers, but that might be seen as disadvantaging rivals.) As such, American innovation will slow, and consumers will suffer. (See here for an estimate of the enormous consumer-welfare gains generated by high tech platforms—gains of a type that AICOA’s enactment may be expected to jeopardize.) It is to be hoped that Congress will take note and consign AICOA to the rubbish heap of disastrous legislative policy proposals.

In Antitrust & Competition, Antitrust’s Uncertain Future, Cartels, Exclusive Dealing, Monopolization, Platforms, Price Discrimination, Supreme Court, Symposia, Truth on the Market, Tying, Vertical Restraints , , , , , , , , , , , , ,
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Hunting for Labor-Market Monopsonies (and Giffen Goods)

Eric Fruits —  11 May 2022

If you wander into an undergraduate economics class on the right day at the right time, you might catch the lecturer talking about Giffen goods: the rare case where demand curves can slope upward. The Irish potato famine is often used as an example. As the story goes, potatoes were a huge part of the Irish diet and consumed a large part of Irish family budgets. A failure of the potato crop reduced the supply of potatoes and potato prices soared. Because families had to spend so much on potatoes, they couldn’t afford much else, so spending on potatoes increased despite rising prices.

It’s a great story of injustice with a nugget of economics: Demand curves can slope upward!

Follow the students around for a few days, and they’ll be looking for Giffen goods everywhere. Surely, packaged ramen and boxed macaroni and cheese are Giffen goods. So are white bread and rice. Maybe even low-end apartments.

While it’s a fun concept to consider, the potato famine story is likely apocryphal. In truth, it’s nearly impossible to find a Giffen good in the real world. My version of Greg Mankiw’s massive “Principles of Economics” textbook devotes five paragraphs to Giffen goods, but it’s not especially relevant, which is perhaps why it’s only five paragraphs.

Wander into another economics class, and you might catch the lecturer talking about monopsony—that is, a market in which a small number of buyers control the price of inputs such as labor. I say “might” because—like Giffen goods—monopsony is an interesting concept to consider, but very hard to find a clear example of in the real world. Mankiw’s textbook devotes only four paragraphs to monopsony, explaining that the book “does not present a formal model of monopsony because, in the world, monopsonies are rare.”

Even so, monopsony is a hot topic these days. It seems that monopsonies are everywhere. Walmart and Amazon are monopsonist employers. So are poultry, pork, and beef companies. Local hospitals monopsonize the market for nurses and physicians. The National Collegiate Athletic Association is a monopsony employer of college athletes. Ultimate Fighting Championship has a monopsony over mixed-martial-arts fighters.

In 1994, David Card and Alan Krueger’s earthshaking study found a minimum wage increase had no measurable effect on fast-food employment and retail prices. They investigated monopsony power as one explanation but concluded that a monopsony model was not supported by their findings. They note:

[W]e find that prices of fast-food meals increased in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to consumers. Within New Jersey, however, we find no evidence that prices increased more in stores that were most affected by the minimum-wage rise. Taken as a whole, these findings are difficult to explain with the standard competitive model or with models in which employers face supply constraints (e.g., monopsony or equilibrium search models). [Emphasis added]

Even so, the monopsony hunt was on and it intensified during President Barack Obama’s administration. During his term, the U.S. Justice Department (DOJ) brought suit against several major Silicon Valley employers for anticompetitively entering into agreements not to “poach” programmers and engineers from each other. The administration also brought suit against a hospital association for an agreement to set uniform billing rates for certain nurses. Both cases settled but the Silicon Valley allegations led to a private class-action lawsuit.

In 2016, Obama’s Council of Economic Advisers published an issue brief on labor-market monopsony. The brief concluded that “evidence suggest[s] that firms may have wage-setting power in a broad range of settings.”

Around the same time, the Obama administration announced that it intended to “criminally investigate naked no-poaching or wage-fixing agreements that are unrelated or unnecessary to a larger legitimate collaboration between the employers.” The DOJ argued that no-poach agreements that allocate employees between companies are per se unlawful restraints of trade that violate Section 1 of the Sherman Act.

If one believes that monopsony power is stifling workers’ wages and benefits, then this would be a good first step to build up a body of evidence and precedence. Go after the low-hanging fruit of a conspiracy that is a per se violation of the Sherman Act, secure some wins, and then start probing the more challenging cases.

After several matters that resulted in settlements, the DOJ brought its first criminal wage-fixing case in late 2020. In United States v. Jindal, the government charged two employees of a Texas health-care staffing company of colluding with another staffing company to decrease pay rates for physical therapists and physical-therapist assistants.

The defense in Jindal conceded that that price-fixing was per se illegal under the Sherman Act but argued that prices and wages are two different concepts. Therefore, the defense claimed that, even if it was engaged in wage-fixing, the conduct would not be per se illegal. That was a stretch, and the district court judge was having none of that in ruling that: “The antitrust laws fully apply to the labor markets, and price-fixing agreements among buyers … are prohibited by the Sherman Act.”

Nevertheless, the jury in Jindal found the defendants not guilty of wage-fixing in violation of the Sherman Act, and also not guilty of a related conspiracy charge.

The DOJ also brought criminal no-poach cases against three other health-care companies and their employees: United States v. Surgical Care Affiliates LLC; United States v. Hee; and United States v. DaVita Inc. Each of the indictments alleged no-poach agreements in which defendants conspired with competitors not to recruit each other’s employees. Hee also included wage-fixing allegations.

Before trial, the defense in DaVita filed a motion to dismiss, arguing that no-poach agreements did not amount to illegal market-allocation agreements. Instead, the defense claimed that no-poach agreements were something less restrictive. Rather than a flat-out refusal to hire competitors’ employees, they were more akin to agreeing not to seek out competitors’ employees. As with Jindal, this was too much of a stretch for the judge who ruled that no-poach agreements could be an illegal market-allocation agreement.

A day after the Jindal verdict, the jury in DaVita acquitted the kidney-dialysis provider and its former CEO of charges that they conspired with competitors to suppress competition for employees through no-poach agreements.

The DaVita jurors appeared to be hung up on the definition of “meaningful competition” in the relevant market. The defense presented information showing that, despite any agreements, employees frequently changed jobs among the companies. Thus, it was argued that any agreement did not amount to an allocation of the market for employees.

The prosecution called several corporate executives who testified that the non-solicitation agreements merely required DaVita employees to tell their bosses they were looking for another job before they could be considered for positions at the three alleged co-conspirator companies. Some witnesses indicated that, by informing their bosses, they were able to obtain promotions and/or increased compensation. This was supported by expert testimony concluding that DaVita salaries changed during the alleged conspiracy period at a rate higher than the health-care industry as a whole. This finding is at-odds with a theory that the non-solicitation agreement was designed to stabilize or suppress compensation.

The Jindal and DaVita cases highlight some of the enormous challenges in mounting a labor-monopsonization case. Even if agencies can “win” or get concessions on defining the relevant markets, they still face challenges in establishing that no-poach agreements amount to a “meaningful” restraint of trade. DaVita suggests that a showing of job turnover and/or increased compensation during an alleged conspiracy period may be sufficient to convince a jury that a no-poach agreement may not be anticompetitive and—under certain circumstances—may even be pro-competitive.

For now, the hunt for a monopsony labor market continues its quest, along with the hunt for the ever-elusive Giffen good.

In Antitrust & Competition, Antitrust Division, Cartels, Health Care, Justice Department, Platforms, Price Discrimination, Truth on the Market , , , , , , , ,
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Rules Without Reason

Noah J. Phillips —  6 May 2022

[Closing out Week Two of our FTC UMC Rulemaking symposium is a contribution from a very special guest: Commissioner Noah J. Phillips of the Federal Trade Commission. You can find other posts at 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.]

In his July Executive Order, President Joe Biden called on the Federal Trade Commission (FTC) to consider making a series of rules under its purported authority to regulate “unfair methods of competition.”[1] Chair Lina Khan has previously voiced her support for doing so.[2] My view is that the Commission has no such rulemaking powers, and that the scope of the authority asserted would amount to an unconstitutional delegation of power by the Congress.[3] Others have written about those issues, and we can leave them for another day.[4] Professors Richard Pierce and Gus Hurwitz have each written that, if FTC rulemaking is to survive judicial scrutiny, it must apply to conduct that is covered by the antitrust laws.[5]

That idea raises an inherent tension between the concept of rulemaking and the underlying law. Proponents of rulemaking advocate “clear” rules to, in their view, reduce ambiguity, ensure predictability, promote administrability, and conserve resources otherwise spent on ex post, case-by-case adjudication.[6] To the extent they mean administrative adoption of per se illegality standards by rulemaking, it flies in the face of contemporary antitrust jurisprudence, which has been moving from per se standards back to the historical “rule of reason.”

Recognizing that the Sherman Act could be read to bar all contracts, federal courts for over a century have interpreted the 1890 antitrust law only to apply to “unreasonable” restraints of trade.[7] The Supreme Court first adopted this concept in its landmark 1911 decision in Standard Oil, upholding the lower court’s dissolution of John D. Rockefeller’s Standard Oil Company.[8] Just four years after the Federal Trade Commission Act was enacted, the Supreme Courtestablished the “the prevailing standard of analysis” for determining whether an agreement constitutes an unreasonable restraint of trade under Section 1 of the Sherman Act.[9] Justice Louis Brandeis, who as an adviser to President Woodrow Wilson was instrumental in creating the FTC, described the scope of this “rule of reason” inquiry in the Chicago Board of Trade case:

The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.[10]

The rule of reason was and remains today a fact-specific inquiry, but the Court also determined from early on that certain restraints invited a different analytical approach: per se prohibitions. The per se rule involves no weighing of the restraint’s procompetitive effects. Once proven, a restraint subject to the per se rule is presumed to be unreasonable and illegal.In the 1911 Dr. Miles case, the Court held that resale minimum price fixing was illegal per se under Section 1.[11] It found horizontal price-fixing agreements to be per se illegal in Socony Vacuum.[12] Since Socony Vacuum, the Court has limited the application of per se illegality to bid rigging (a form of horizontal price fixing),[13] horizontal market divisions,[14] tying,[15] and group boycotts[16].

Starting in the 1970s, especially following research demonstrating the benefits to consumers of a number of business arrangements and contracts previously condemned by courts as per se illegal, the Court began to limit the categories of conduct that received per se treatment. In 1977, in GTE Sylvania, the Courtheld that vertical customer and territorial restraints should be judged under the rule of reason.[17] In 1979, in BMI, it held that a blanket license issued by a clearinghouse of copyright owners that set a uniform price and prevented individual negotiation with licensees was a necessary precondition for the product and was thus subject to the rule of reason.[18] In 1984, in Jefferson Parish, the Court rejected automatic application of the per se rule to tying.[19] A year later, the Court held that the per se rule did not apply to all group boycotts.[20] In 1997, in State Oil Company v. Khan, it held that maximum resale price fixing is not per se illegal.[21] And, in 2007, the Court held that minimum resale price fixing should also be assessed under the rule of reason. In Leegin, the Court made clear that the per se rule is not the norm for analyzing the reasonableness of restraints; rather, the rule of reason is the “accepted standard for testing” whether a practice is unreasonable.[22]

More recent Court decisions reflect the Court’s refusal to expand the scope of “quick look” analysis, an application of the rule of reason that nonetheless truncates the necessary fact-finding for liability where “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.”[23] In 2013, the Supreme Court rejected an FTC request to require courts to apply the “quick look” approach to reverse-payment settlement agreements.[24] The Court has also backed away from presumptive rules of legality. In American Needle, the Court stripped the National Football League of Section 1 immunity by holding that the NFL is not entitled to the single entity defense under Copperweld and instead, its conduct must be analyzed under the “flexible” rule of reason.[25] And last year, in NCAA v. Alston, the Court rejected the National Collegiate Athletic Association’s argument that it should have benefited from a “quick look”, restating that “most restraints challenged under the Sherman Act” are subject to the rule of reason.[26]

The message from the Court is clear: rules are the exception, not the norm. It “presumptively applies rule of reason analysis”[27] and applies the per se rule only to restraints that “lack any redeeming virtue.”[28] Per se rules are reserved for “conduct that is manifestly anticompetitive” and that “would always or almost always tend to restrict competition and decrease output.”[29] And that’s a short list.  What is more, the Leegin Court made clear that administrative convenience—part of the justification for administrative rules[30]—cannot in and of itself be sufficient to justify application of the per se rule.[31]

The Court’s warnings about per se rules ring just as true for rules that could be promulgated under the Commission’s purported UMC rulemaking authority, which would function just as a per se rule would. Proof of the conduct ends the inquiry. No need to demonstrate anticompetitive effects. No procompetitive justifications. No efficiencies. No balancing.

But if the Commission attempts administratively to adopt per se rules, it will run up against precedents making clear that the antitrust laws do not abide such rules. This is not simply a matter of the—already controversial[32]—historical attempts by the agency to define under Section 5 conduct that goes outside the Sherman Act. Rather, establishing per se rules about conduct covered under the rule of reason effectively overrules Supreme Court precedent. For example, the Executive Order contemplates the FTC promulgating a rule concerning pay-for-delay settlements.[33] But, to the extent it can fashion rules, the agency can only prohibit by rule that which is illegal. To adopt a per se ban on conduct covered by the rule of reason is to take out of the analysis the justifications for and benefits of the conduct in question. And while the FTC Act enables the agency some authority to prohibit conduct outside the scope of the Sherman Act,[34] it does not do away with consideration of justifications or benefits when determining whether a practice is an “unfair method of competition.” As a result, the FTC cannot condemn categorically via rulemaking conduct that the courts have refused to condemn as per se illegal, and instead have analyzed under the rule of reason.[35] Last year, the FTC docketed a petition filed by the Open Markets Institute and others to ban “exclusionary contracts” by monopolists and other “dominant firms” under the agency’s unfair methods of competition authority.[36] The precise scope is not entirely clear from the filing, but courts have held consistently that some conduct clearly covered (e.g., exclusive dealing) is properly evaluated under the rule of reason.[37]

The Supreme Court has been loath to bless per se rules by courts. Rules are blunt instruments and not appropriately applied to conduct that the effect of which is not so clearly negative. Except for the “obvious,” an analysis of whether a restraint is unreasonable is not a “simple matter” and “easy labels do not always supply ready answers.” [38] Over the decades, the Court has rebuked lower courts attempting to apply rules to conduct properly evaluated under the rule of reason.[39] Should the Commission attempt the same administratively, or if it attempts administratively to rewrite judicial precedents, it would be rewriting the antitrust law itself and tempting a similar fate.

[1] Promoting Competition in the American Economy, Exec. Order No. 14036, 86 Fed. Reg. 36987, 36993 (July 9, 2021), https://www.govinfo.gov/content/pkg/FR-2021-07-14/pdf/2021-15069.pdf (hereinafter “Biden Executive Order”).

[2]  Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. Chi. L. Rev. 357 (2020) (hereinafter “Chopra & Khan”).

[3]  Prepared Remarks of Commissioner Noah Joshua Phillips at FTC Non-Compete Clauses in the Workplace Workshop (Jan. 9, 2020, https://www.ftc.gov/system/files/documents/public_statements/1561697/phillips_-_remarks_at_ftc_nca_workshop_1-9-20.pdf).

[4] See e.g., Maureen K. Ohlhausen & James Rill, Pushing the Limits? A Primer on FTC Competition Rulemaking, U.S. Chamber of Commerce (Aug. 12, 2021), https://www.uschamber.com/assets/archived/images/ftc_rulemaking_white_paper_aug12.pdf.

[5]  Richard J. Pierce Jr., Can the FTC Use Rulemaking to Change Antitrust Law?, Truth on the Market FTC UMC Rulemaking Symposium (April 28, 2022), https://truthonthemarket.com/2022/04/28/can-the-ftc-use-rulemaking-to-change-antitrust-law; Gus Hurwitz, Chevron and Administrative Antitrust, Redux, Truth on the Market FTC UMC Rulemaking Symposium (April 29, 2022), https://truthonthemarket.com/2022/04/29/chevron-and-administrative-antitrust-redux.

[6] See Chopra & Khan, supra n. 2, at 368.

[7] See e.g., Bd. of Trade v. United States, 246 U.S. 231, 238 (1918) (explaining that “the legality of an agreement . . . cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade … restrains. To bind, to restrain, is of their very essence”); Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 687-88 (1978) (“restraint is the very essence of every contract; read literally, § 1 would outlaw the entire body of private contract law”).

[8] Standard Oil Co., v. United States, 221 U.S. 1 (1911).

[9] See Continental T.V. v. GTE Sylvania, 433 U.S. 36, 49 (1977) (“Since the early years of this century a judicial gloss on this statutory language has established the “rule of reason” as the prevailing standard of analysis…”). See also State Oil Co. v. Khan, 522 U.S. 3, 10 (1997) (“most antitrust claims are analyzed under a ‘rule of reason’ ”); Arizona v. Maricopa Cty. Med. Soc’y, 457 U.S. 332, 343 (1982) (“we have analyzed most restraints under the so-called ‘rule of reason’ ”).

[10] Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918).

[11] Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

[12]  United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).

[13]  See e.g., United States v. Joyce, 895 F.3d 673, 677 (9th Cir. 2018); United States v. Bensinger, 430 F.2d 584, 589 (8th Cir. 1970).

[14]  United States v. Sealy, Inc., 388 U.S. 350 (1967).

[15]  Northern P. R. Co. v. United States, 356 U.S. 1 (1958).

[16]  NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998).

[17]  Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977).

[18]  Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. 441 U.S. 1 (1979).

[19] Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).

[20]  Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985).

[21] State Oil Company v. Khan, 522 U.S. 3 (1997).

[22] Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 885 (2007).

[23]  California Dental Association v. FTC, 526 U.S. 756, 770 (1999).

[24]  FTC v. Actavis, Inc., 570 U.S. 136 (2013).

[25] Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 187 (2010).

[26] Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2155, 2021 WL 2519036 (2021).

[27] Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006).

[28]  Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 885 (2007).

[29] Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988).

[30]  Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. Chi. L. Rev. 357 (2020).

[31]  Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 551 U.S. 877, 886-87 (2007).

[32] The FTC’s attempts to bring cases condemning conduct as a standalone Section 5 violation were not successful. See e.g., Boise Cascade Corp. v. FTC, 637 F.2d 573 (9th Cir. 1980); Airline Guides, Inc. v. FTC, 630 F.2d 920 (2d Cir. 1980); E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984).

[33] Biden Executive order, Section 5(h)(iii).

[34] Supreme Court precedent confirms that Section 5 of the FTC Act does not limit “unfair methods of competition” to practices that violate other antitrust laws (i.e., Sherman Act, Clayton Act). See e.g., FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 454 (1986); FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972); FTC v. Brown Shoe Co., 384 U.S. 316, 321 (1966); FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 394-95 (1953); FTC v. R.F. Keppel & Bros., Inc., 291 U.S. 304, 309-310 (1934).

[35] The agency also has recognized recently that such agreements are subject to the Rule of Reason under the FTC Act, which decisions was upheld by the U.S. Court of Appeals for the Fifth Circuit. Impax Labs., Inc. v. FTC, No. 19-60394 (5th Cir. 2021).

[36] Petition for Rulemaking to Prohibit Exclusionary Contracts by Open Market Institute et al., (July 21, 2021), https://www.regulations.gov/document/FTC-2021-0036-0002 (hereinafter “OMI Petition). 

[37] OMI Petition at 71 (“Given the real evidence of harm from certain exclusionary contracts and the specious justifications presented in their favor, the FTC should ban exclusivity with customers, distributors, or suppliers that results in substantial market foreclosure as per se illegal under the FTC Act. The present rule of reason governing exclusive dealing by all firms is infirm on multiple grounds.”) But see e.g., ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 271 (3d Cir. 2012) (“Due to the potentially procompetitive benefits of exclusive dealing agreements, their legality is judged under the rule of reason.”).

[38]  Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. 441 U.S. 1, 8-9 (1979).

[39] See e.g., Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977) (holding that nonprice vertical restraints have redeeming value and potential procompetitive justification and therefore are unsuitable for per se review); United States Steel Corp. v. Fortner Enters., Inc., 429 U.S. 610 (1977) (rejecting the assumption that tying lacked any purpose other than suppressing competition and recognized tying could be procompetitive); FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) (declining to apply the per se rule even though the conduct at issue resembled a group boycott).

In Administrative Law, Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Regulation, Resale Price Maintenance, Section 5, Symposia, Truth on the Market, Vertical Restraints , , , , , , ,
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FTC Rulemaking Under UMC Could Mean Return of the National Nanny

Steven J Cernak —  5 May 2022

[The 12th entry in our FTC UMC Rulemaking symposium is from guest contributor Steven J. Cernak, a partner in the antitrust and competition practice of BonaLaw in Detroit, Michigan. You can find other posts at 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.]

The Federal Trade Commission (FTC) has been in the antitrust-enforcement business for more than 100 years. Its new leadership is considering some of the biggest changes ever in its enforcement methods. Instead of a detailed analysis of each case on its own merits, some FTC leaders now want its unelected bureaucrats to write competition rules for the entire economy under its power to stop unfair methods of competition. Such a move would be bad for competition and the economy—and for the FTC itself.

The FTC enforces the antitrust laws through its statutory authority to police unfair methods of competition (UMC). Like all antitrust challengers, the FTC now must conduct a detailed analysis of the specific actions of particular competitors. Whether the FTC decides to challenge actions initially in its own administrative courts or in federal courts, eventually it must convince independent judges that the challenged conduct really does harm competition. When finalized, those decisions set precedent. Future parties can argue their particular details are different or otherwise require a different outcome. As a result, the antitrust laws slowly evolve in ways understandable to all.

Some members of FTC’s new leadership have argued that the agency should skip the hard work of individual cases and instead issue blanket rules to cover competitive situations across the economy. Since taking over in the new administration, they have taken steps that seem to make it easier for the FTC to issue such broad competition rules. Doing so would be a mistake for several reasons.

First, it is far from clear that Congress gave the FTC the authority to issue such rules. Also, any such grant of quasi-legislative power to this independent agency might be unconstitutional. The FTC already gets to play prosecutor and judge in many cases. Becoming a legislature might be going too far. Other commentators, both in this symposium and elsewhere, have detailed those arguments. But however those arguments shake out, the FTC will need to take the time and resources to fight off the inevitable challenges.

But even if it can, the FTC should not. The case-by-case approach allows for detailed analysis, making it more likely to be correct. If there are any mistakes, they only affect those parties.

If it turns to competition rulemaking, how will the FTC gain the knowledge and develop the wisdom to develop rules that apply across large swaths of the economy for an unlimited time? Will it apply the same rules to companies with 8% and 80% market share? And to companies making software or automobiles or flying passengers across the country? And will it apply those rules today and next year, no matter the innovations that occur in between? The hubris to think that some all-knowing Washington wizards can get all that right, all the time, is staggering.

Yes, there are some general antitrust rules, like price-fixing agreements being illegal because they harm consumers. But those rules were developed by many lawyers, economists, judges, and witnesses through decades of case-by-case analyses and, even today, parties can argue to a court that they don’t apply to their particular facts. A one-size-fits-all rule won’t have even that flexibility.

For example, what if the FTC develops a rule based on, say, an investigation of toilet-bowl manufacturers that all price-fixing, even if the fixed price is reasonable, is automatically illegal. How would such a rigid rule handle, say, a joint license with a single price issued by competing music composers? Or could a single rule that anticipates the very different facts of Trenton Potteriesand Broadcast Musicbe written in a way that is both short enough to be understood but broad enough to anticipate all potential future facts? Perhaps the rule inspired by Trenton Potteries could be adjusted when the Broadcast Music facts become known. But then, that is just back to the detailed, case-by-case, analysis that we have now, except with the FTC rule-makers changing the rules rather than an independent judge.

Any new FTC rules could conflict with the court opinions generated by antitrust cases brought by the U.S. Justice Department’s (DOJ) Antitrust Division, state attorneys general, or private parties. For instance, the FTC and the Division generally divide up the industries that make up the economy based on expertise and experience. Should the competitive rules differ by enforcer? By industry?

As an example, consider, say, a hypothetical automatic-transmission company whose smallest products can be used in light-duty pickup trucks while the bulk of its product line is used in the largest heavy-duty trucks and equipment. Traditionally, the FTC has reviewed antitrust issues in the light-duty industry while the Division has taken heavy-duty. Should the antitrust rules affecting this hypothetical company’s light-duty sales be different than those affecting the heavy-duty sales based solely on the enforcer and not the applicable competitive facts?

Antitrust is a law-enforcement regime with rules that have changed slowly over decades through individual cases, as economic understandings have evolved. It could have been a regulatory regime, but elected officials did not make that choice. Antitrust could be changed now to a regulatory regime. Individual rules could be changed. Such monumental changes, however, should only be made by Congress, as is being debated now, not by three unelected FTC officials.

In the 1970s, the FTC overreached on rules about deceptive marketing and was slapped down by Congress, the courts, and the public. The Washington Post criticized it as “the national nanny.” Its reputation and authority suffered. We did not need a national nanny then. We don’t need one today, hectoring us to follow overbroad, ill-fitting rules designed by insulated “experts” and not subject to review.

The FTC has very important roles to play regarding understanding and protecting competition in the U.S. economy (before even getting to its crucial consumer-protection mission.) Even with potential increases in its budget, the FTC, like all of us, will have limited resources, time, expertise, and reputation. It should not squander any of that on an ill-fated, quixotic, and hubristic effort to tell everyone how to compete. Instead, the FTC should focus on what it does best: challenging the bad actions of bad actors and convincing a court that it got it right. That is how the FTC can best protect America’s consumers, as its (nicely redesigned) website proclaims.

In Administrative Law, Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Regulation, Section 5, Symposia, Truth on the Market , , ,
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What is the Appropriate Role for State Antitrust Enforcement?

Alden Abbott —  8 November 2021

In the U.S. system of dual federal and state sovereigns, a normative analysis reveals principles that could guide state antitrust-enforcement priorities, to promote complementarity in federal and state antitrust policy, and thereby advance consumer welfare.

Discussion

Positive analysis reveals that state antitrust enforcement is a firmly entrenched feature of American antitrust policy. The U.S. Supreme Court (1) has consistently held that federal antitrust law does not displace state antitrust law (see, for example, California v. ARC America Corp. (U.S., 1989) (“Congress intended the federal antitrust laws to supplement, not displace, state antitrust remedies”)); and (2) has upheld state antitrust laws even when they have some impact on interstate commerce (see, for example, Exxon Corp. v. Governor of Maryland (U.S., 1978)).

The normative question remains, however, as to what the appropriate relationship between federal and state antitrust enforcement should be. Should federal and state antitrust regimes be complementary, with state law enforcement enhancing the effectiveness of federal enforcement? Or should state antitrust enforcement compete with federal enforcement, providing an alternative “vision” of appropriate antitrust standards?

The generally accepted (until very recently) modern American consumer-welfare-centric antitrust paradigm (see here) points to the complementary approach as most appropriate. In other words, if antitrust is indeed the “magna carta” of American free enterprise (see United States v. Topco Associates, Inc., U.S. (U.S. 1972), and if consumer welfare is the paramount goal of antitrust (a position consistently held by the Supreme Court since Reiter v. Sonotone Corp., (U.S., 1979)), it follows that federal and state antitrust enforcement coexist best as complements, directed jointly at maximizing consumer-welfare enhancement. In recent decades it also generally has made sense for state enforcers to defer to U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) matter-specific consumer-welfare assessments. This conclusion follows from the federal agencies’ specialized resource advantage, reflected in large staffs of economic experts and attorneys with substantial industry knowledge.

The reality, nevertheless, is that while state enforcers often have cooperated with their federal colleagues on joint enforcement, state enforcement approaches historically have been imperfectly aligned with federal policy. That imperfect alignment has been at odds with consumer welfare in key instances. Certain state antitrust schemes, for example, continue to treat resale price maintenance (RPM)  as per se illegal (see, for example, here), a position inconsistent with the federal consumer welfare-centric rule of reason approach (see Leegin Creative Leather Products, Inc. v. PSKS, Inc. (U.S., 2007)). The disparate treatment of RPM has a substantial national impact on business conduct, because commercially important states such as California and New York are among those that continue to flatly condemn RPM.

State enforcers also have from time to time sought to oppose major transactions that received federal antitrust clearance, such as several states’ unsuccessful opposition to the merger of Sprint and T-Mobile merger (see here). Although the states failed to block the merger, they did extract settlement concessions that imposed burdens on the merging parties, in addition to the divestiture requirements impose by the DOJ in settling the matter (see here). Inconsistencies between federal and state antitrust-enforcement decisions on cases of nationwide significance generate litigation waste and may detract from final resolutions that optimize consumer welfare.

If consumer-welfare optimization is their goal (which I believe it should be in an ideal world), state attorneys general should seek to direct their limited antitrust resources to their highest valued uses, rather than seeking to second guess federal antitrust policy and enforcement decisions.

An optimal approach might focus first and foremost on allocating state resources to combat primarily intrastate competitive harms that are clear and unequivocal (such as intrastate bid rigging, hard core price fixing, and horizontal market division). This could free up federal resources to focus on matters that are primarily interstate in nature, consistent with federalism. (In this regard, see a thoughtful proposal by D. Bruce Johnsen and Moin A. Yaha.)

Second, state enforcers could also devote some resources to assist federal enforcers in developing state-specific evidence in support of major national cases. (This would allow state attorneys general to publicize their “big case” involvement in a productive manner.)

Third, but not least, competition advocacy directed at the removal of anticompetitive state laws and regulations could prove an effective means of seeking to improve the competitive climate within individual states (see, for example, here). State antitrust enforcers could advance advocacy through amicus curiae briefs, and (where politically feasible) through interventions (perhaps informal) with peer officials who oversee regulation. Subject to this general guidance, the nature of state antitrust resource allocations would depend upon the specific competitive problems particular to each state.

Of course, in the real world, public choice considerations and rent seeking may at times influence antitrust enforcement decision-making by state (and federal) officials. Nonetheless, the capsule idealized normative summary of a suggested ideal state antitrust-enforcement protocol is useful in that it highlights how state enforcers could usefully complement (assumed) sound federal antitrust initiatives.

Great minds think alike. A well-crafted and much more detailed normative exploration of ideal state antitrust enforcement is found in a recently released Pelican Institute policy brief by Ted Bolema and Eric Peterson. Entitled The Proper Role for States in Antitrust Lawsuits, the brief concludes (in a manner consistent with my observations):

This review of cases and leading commentaries shows that states should focus their involvement in antitrust cases on instances where:

· they have unique interests, such as local price-fixing

· play a unique role, such as where they can develop evidence about how alleged anticompetitive behavior uniquely affects local markets

· they can bring additional resources to bear on existing federal litigation.

States can also provide a useful check on overly aggressive federal enforcement by providing courts with a traditional perspective on antitrust law — a role that could become even more important as federal agencies aggressively seek to expand their powers. All of these are important roles for states to play in antitrust enforcement, and translate into positive outcomes that directly benefit consumers.

Conversely, when states bring significant, novel antitrust lawsuits on their own, they don’t tend to benefit either consumers or constituents. These novel cases often move resources away from where they might be used more effectively, and states usually lose (as with the recent dismissal with prejudice of a state case against Facebook). Through more strategic antitrust engagement, with a focus on what states can do well and where they can make a positive difference antitrust enforcement, states would best serve the interests of their consumers, constituents, and taxpayers.

Conclusion

Under a consumer-welfare-centric regime, an appropriate role can be identified for state antitrust enforcement that would helpfully complement federal efforts in an optimal fashion. Unfortunately, in this tumultuous period of federal antitrust policy shifts, in which the central role of the consumer welfare standard has been called into question, it might appear fatuous to speculate on the ideal melding of federal and state approaches to antitrust administration. One should, however, prepare for the time when a more enlightened, economically informed approach will be reinstituted. In anticipation of that day, serious thinking about antitrust federalism should not be neglected.

In Antitrust & Competition, Federal Trade Commission, Federalism, Justice Department, Merger Guidelines, Resale Price Maintenance, Truth on the Market, Wireless , , , , , , , , , , ,
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The Future of FTC Equitable Monetary Relief after AMG Capital Management

Alden Abbott —  22 April 2021

The U.S. Supreme Court’s just-published unanimous decision in AMG Capital Management LLC v. FTC—holding that Section 13(b) of the Federal Trade Commission Act does not authorize the commission to obtain court-ordered equitable monetary relief (such as restitution or disgorgement)—is not surprising. Moreover, by dissipating the cloud of litigation uncertainty that has surrounded the FTC’s recent efforts to seek such relief, the court cleared the way for consideration of targeted congressional legislation to address the issue.

But what should such legislation provide? After briefly summarizing the court’s holding, I will turn to the appropriate standards for optimal FTC consumer redress actions, which inform a welfare-enhancing legislative fix.

The Court’s Opinion

Justice Stephen Breyer’s opinion for the court is straightforward, centering on the structure and history of the FTC Act. Section 13(b) makes no direct reference to monetary relief. Its plain language merely authorizes the FTC to seek a “permanent injunction” in federal court against “any person, partnership, or corporation” that it believes “is violating, or is about to violate, any provision of law” that the commission enforces. In addition, by its terms, Section 13(b) is forward-looking, focusing on relief that is prospective, not retrospective (this cuts against the argument that payments for prior harm may be recouped from wrongdoers).

Furthermore, the FTC Act provisions that specifically authorize conditioned and limited forms of monetary relief (Section 5(l) and Section 19) are in the context of commission cease and desist orders, involving FTC administrative proceedings, unlike Section 13(b) actions that avoid the administrative route. In sum, the court concludes that:

[T]o read §13(b) to mean what it says, as authorizing injunctive but not monetary relief, produces a coherent enforcement scheme: The Commission may obtain monetary relief by first invoking its administrative procedures and then §19’s redress provisions (which include limitations). And the Commission may use §13(b) to obtain injunctive relief while administrative proceedings are foreseen or in progress, or when it seeks only injunctive relief. By contrast, the Commission’s broad reading would allow it to use §13(b) as a substitute for §5 and §19. For the reasons we have just stated, that could not have been Congress’ intent.

The court’s opinion concludes by succinctly rejecting the FTC’s arguments to the contrary.

What Comes Next

The Supreme Court’s decision has been anticipated by informed observers. All four sitting FTC Commissioners have already called for a Section 13(b) “legislative fix,” and in an April 20 hearing of Senate Commerce Committee, Chairwoman Maria Cantwell (D-Wash.) emphasized that, “[w]e have to do everything we can to protect this authority and, if necessary, pass new legislation to do so.”

What, however, should be the contours of such legislation? In considering alternative statutory rules, legislators should keep in mind not only the possible consumer benefits of monetary relief, but the costs of error, as well. Error costs are a ubiquitous element of public law enforcement, and this is particularly true in the case of FTC actions. Ideally, enforcers should seek to minimize the sum of the costs attributable to false positives (type I error), false negatives (type II error), administrative costs, and disincentive costs imposed on third parties, which may also be viewed as a subset of false positives. (See my 2014 piece “A Cost-Benefit Framework for Antitrust Enforcement Policy.”

Monetary relief is most appropriate in cases where error costs are minimal, and the quantum of harm is relatively easy to measure. This suggests a spectrum of FTC enforcement actions that may be candidates for monetary relief. Ideally, selection of targets for FTC consumer redress actions should be calibrated to yield the highest return to scarce enforcement resources, with an eye to optimal enforcement criteria.

Consider consumer protection enforcement. The strongest cases involve hardcore consumer fraud (where fraudulent purpose is clear and error is almost nil); they best satisfy accuracy in measurement and error-cost criteria. Next along the spectrum are cases of non-fraudulent but unfair or deceptive acts or practices that potentially involve some degree of error. In this category, situations involving easily measurable consumer losses (e.g., systematic failure to deliver particular goods requested or poor quality control yielding shipments of ruined goods) would appear to be the best candidates for monetary relief.

Moving along the spectrum, matters involving a higher likelihood of error and severe measurement problems should be the weakest candidates for consumer redress in the consumer protection sphere. For example, cases involve allegedly misleading advertising regarding the nature of goods, or allegedly insufficient advertising substantiation, may generate high false positives and intractable difficulties in estimating consumer harm. As a matter of judgment, given resource constraints, seeking financial recoveries solely in cases of fraud or clear deception where consumer losses are apparent and readily measurable makes the most sense from a cost-benefit perspective.

Consumer redress actions are problematic for a large proportion of FTC antitrust enforcement (“unfair methods of competition”) initiatives. Many of these antitrust cases are “cutting edge” matters involving novel theories and complex fact patterns that pose a significant threat of type I error. (In comparison, type I error is low in hardcore collusion cases brought by the U.S. Justice Department where the existence, nature, and effects of cartel activity are plain). What’s more, they generally raise extremely difficult if not impossible problems in estimating the degree of consumer harm. (Even DOJ price-fixing cases raise non-trivial measurement difficulties.)

For example, consider assigning a consumer welfare loss number to a patent antitrust settlement that may or may not have delayed entry of a generic drug by some length of time (depending upon the strength of the patent) or to a decision by a drug company to modify a drug slightly just before patent expiration in order to obtain a new patent period (raising questions of valuing potential product improvements). These and other examples suggest that only rarely should the FTC pursue requests for disgorgement or restitution in antitrust cases, if error-cost-centric enforcement criteria are to be honored.

Unfortunately, the FTC currently has nothing to say about when it will seek monetary relief in antitrust matters. Commendably, in 2003, the commission issued a Policy Statement on Monetary Equitable Remedies in Competition Cases specifying that it would only seek monetary relief in “exceptional cases” involving a “[c]lear [v]iolation” of the antitrust laws. Regrettably, in 2012, a majority of the FTC (with Commissioner Maureen Ohlhausen dissenting) withdrew that policy statement and the limitations it imposed. As I concluded in a 2012 article:

This action, which was taken without the benefit of advance notice and public comment, raises troubling questions. By increasing business uncertainty, the withdrawal may substantially chill efficient business practices that are not well understood by enforcers. In addition, it raises the specter of substantial error costs in the FTC’s pursuit of monetary sanctions. In short, it appears to represent a move away from, rather than towards, an economically enlightened antitrust enforcement policy.

In a 2013 speech, then-FTC Commissioner Josh Wright also lamented the withdrawal of the 2003 Statement, and stated that he would limit:

… the FTC’s ability to pursue disgorgement only against naked price fixing agreements among competitors or, in the case of single firm conduct, only if the monopolist’s conduct has no plausible efficiency justification. This latter category would include fraudulent or deceptive conduct, or tortious activity such as burning down a competitor’s plant.

As a practical matter, the FTC does not bring cases of this sort. The DOJ brings naked price-fixing cases and the unilateral conduct cases noted are as scarce as unicorns. Given that fact, Wright’s recommendation may rightly be seen as a rejection of monetary relief in FTC antitrust cases. Based on the previously discussed serious error-cost and measurement problems associated with monetary remedies in FTC antitrust cases, one may also conclude that the Wright approach is right on the money.

Finally, a recent article by former FTC Chairman Tim Muris, Howard Beales, and Benjamin Mundel opined that Section 13(b) should be construed to “limit[] the FTC’s ability to obtain monetary relief to conduct that a reasonable person would know was dishonest or fraudulent.” Although such a statutory reading is now precluded by the Supreme Court’s decision, its incorporation in a new statutory “fix” would appear ideal. It would allow for consumer redress in appropriate cases, while avoiding the likely net welfare losses arising from a more expansive approach to monetary remedies.

 Conclusion

The AMG Capital decision is sure to generate legislative proposals to restore the FTC’s ability to secure monetary relief in federal court. If Congress adopts a cost-beneficial error-cost framework in shaping targeted legislation, it should limit FTC monetary relief authority (recoupment and disgorgement) to situations of consumer fraud or dishonesty arising under the FTC’s authority to pursue unfair or deceptive acts or practices. Giving the FTC carte blanche to obtain financial recoveries in the full spectrum of antitrust and consumer protection cases would spawn uncertainty and could chill a great deal of innovative business behavior, to the ultimate detriment of consumer welfare.


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In Antitrust & Competition, Antitrust Division, Error Costs, Federal Trade Commission, Intellectual Property, Justice Department, Patent, Section 5, Supreme Court, Truth on the Market , , , , , , , , , , , , , , ,
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Is it time for a new approach to generic drugs?

Joanna Shepherd —  4 March 2020

We don’t yet know how bad the coronavirus outbreak will be in America.  But we do know that the virus is likely to have a major impact on Americans’ access to medication.  Currently, 80% of the active ingredients found in the drugs Americans take are made in China, and the virus has disrupted China’s ability to manufacture and supply those ingredients.  Generic drugs, which comprise 90% of America’s drugs, are likely to be particularly impacted because most generics are made in India, and Indian drug makers rely heavily on Chinese-made ingredients.  Indeed, on Tuesday, March 3, India decided to restrict exports of 26 drugs and drug ingredients because of reductions in China’s supply.  This disruption to the generic supply chain could mean that millions of Americans will not get the drugs they need to stay alive and healthy.

Coronavirus-related shortages are only the latest in a series of problems recently afflicting the generic drug industry.  In the last few years, there have been many reports of safety issues affecting generic drug quality at both domestic and overseas manufacturing facilities.  Numerous studies have uncovered shady practices and quality defects, including generics contaminated with carcinogens, drugs in which the active ingredients were switched for ineffective or unsafe alternatives, and manufacturing facilities that falsify or destroy documents to conceal their misdeeds.

We’ve also been inundated with stories of generic drug makers hiking prices for their products.  Although, as a whole, generic drugs are much cheaper than innovative brand products, the prices for many generic drugs are on the increase.  For some generics – Martin Shkreli’s Daraprim, heart medication Digoxin, antibiotic Doxycycline, insulin, and many others – prices have increased by several hundred percent. It turns out that many of the price increases are the result of anticompetitive behavior in the generic market. For others, the price increases are due to the increasing difficulty of generic drug makers to earn profits selling low-priced drugs.

Even before the coronavirus outbreak, there were numerous instances of shortages for critical generic drugs.  These shortages often result from drug makers’ lack of incentive to manufacture low-priced drugs that don’t earn much profit. The shortages have been growing in frequency and duration in recent years.  As a result of the shortages, 90 percent of U.S. hospitals report having to find alternative drug therapies, costing patients and hospitals over $400 million last year.  In other unfortunate situations, reasonable alternatives simply are not available and patients suffer.

With generic drug makers’ growing list of problems, many policy makers have called for significant changes to America’s approach to the generic drug industry. Perhaps the FDA needs to increase its inspection of overseas facilities?  Perhaps the FTC and state and federal prosecutors should step up their investigations and enforcement actions against anticompetitive behavior in the industry? Perhaps FDA should do even more to promote generic competition by expediting generic approvals? 

While these actions and other proposals could certainly help, none are aimed at resolving more than one or two of the significant problems vexing the industry. Senator Elizabeth Warren has proposed a more substantial overhaul that would bring the U.S. government into the generic-drug-making business. Under Warren’s plan, the Department of Health and Human Services (HHS) would manufacture or contract for the manufacture of drugs to be sold at lower prices.  Nationalizing the generic drug industry in this way would make the inspection of manufacturing facilities much easier and could ideally eliminate drug shortages.  In January, California’s governor proposed a similar system under which the state would begin manufacturing or contracting to manufacture generic drugs.

However, critics of public manufacturing argue that manufacturing and distribution infrastructure would be extremely costly to set up, with taxpayers footing the bill.  And even after the initial set-up, market dynamics that affect costs, such as increasing raw material costs or supply chain disruptions, would also mean greater costs for taxpayers.  Moreover, by removing the profit incentive created under the Hatch-Waxman Act to develop and manufacture generic drugs, it’s not clear that governments could develop or manufacture a sufficient supply of generics (consider the difference in efficiency between the U.S. Postal Service and either UPS or FedEx).

Another approach might be to treat the generic drug industry as a regulated industry. This model has been applied to utilities in the past when unregulated private ownership of utility infrastructure could not provide sufficient supply to meet consumer need, address market failures, or prevent the abuse of monopoly power.  Similarly, consumers’ need for safe and affordable medicines, market failures inherent throughout the industry, and industry consolidation that could give rise to market power suggest the regulated model might work well for generic drugs.   

Under this approach, Hatch-Waxman incentives could remain in place, granting the first generic drug an exclusivity period during which it could earn significant profits for the generic drug maker.  But when the exclusivity period ends, an agency like HHS would assign manufacturing responsibility for a particular drug to a handful of generic drug makers wishing to market in the U.S.  These companies would be guaranteed a profit based on a set rate of return on the costs of high-quality domestic manufacturing.  In order to maintain their manufacturing rights, facilities would have to meet strict FDA guidelines to ensure high quality drugs. 

Like the Warren and California proposals, this approach would tackle several problems at once.  Prices would be kept under control and facilities would face frequent inspections to ensure quality.  A guaranteed profit would eliminate generic companies’ financial risk, reducing their incentive to use cheap (and often unsafe) drug ingredients or to engage in illegal anticompetitive behavior.  It would also encourage steady production to reduce instances of drug shortages.  Unlike the Warren and California proposals, this approach would build on the existing generic infrastructure so that taxpayers don’t have to foot the bill to set up public manufacturing.  It would also continue to incentivize the development of generic alternatives by maintaining the Hatch-Waxman exclusivity period, and it would motivate the manufacture of generic drugs by companies seeking a reliable rate of return.

Several issues would need to be worked out with a regulated generic industry approach to prevent manipulation of rates of return, regulatory capture, and political appointees without the incentives or knowledge to regulate the drug makers. However, the recurring crises affecting generic drugs indicate the industry is rife with market failures.  Perhaps only a radical new approach will achieve lasting and necessary change.

In China, Health Care, Intellectual Property, International, Patent, Pharmaceuticals, Regulation, Truth on the Market , , , , , , , , ,
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Kolasky (2) on the Apple e-books case: Coordination, even horizontal coordination, isn’t per se illegal

William J. Kolasky —  16 February 2016

By William Kolasky

Jon Jacobson in his initial posting claims that it would be “hard to find an easier case” than Apple e-Books, and David Balto and Chris Sagers seem to agree. I suppose that would be true if, as Richard Epstein claims, “the general view is that horizontal arrangements are per se unlawful.”

That, however, is not the law, and has not been since William Howard Taft’s 1898 opinion in Addyston Pipe. In his opinion, borrowing from an earlier dissenting opinion by Justice Edward Douglas White in Trans-Missouri Freight Ass’n, Taft surveyed the common law of restraints of trade. He showed that it was already well established in 1898 that even horizontal restraints of trade were not necessarily unlawful if they were ancillary to some legitimate business transaction or arrangement.

Building on that opinion, the Supreme Court, in what is now a long series of decisions beginning with BMI and continuing through Actavis, has made it perfectly clear that even a horizontal restraint cannot be condemned as per se unlawful unless it is a “naked” restraint that, on its face, could not serve any “plausible” procompetitive business purpose. That there are many horizontal arrangements that are not per se unlawful is shown by the DOJ’s own Competitor Collaboration Guidelines, which provide many examples, including joint sales agents.

As I suggested in my initial posting, Apple may have dug its own grave by devoting so much effort to denying the obvious—namely, that it had helped facilitate a horizontal agreement among the publishers, just as the lower courts found. Apple might have had more success had it instead spent more time explaining why it needed a horizontal agreement among the publishers as to the terms on which they would designate Apple as their common sales agent in order for it to successfully enter the e-book market, and why those terms did not amount to a naked horizontal price fixing agreement. Had it done so, Apple likely could have made a stronger case for why a rule of reason review was necessary than it did by trying to fit a square peg into a round hole by insisting that its agreements were purely vertical.

In Antitrust & Competition, Apple, Justice Department, Monopolization, Platforms, Symposium on the Apple E-Books Antitrust Case: Implications for Antitrust and for the Economy, Vertical Restraints , , , , , , , , , , , , , , , , , ,
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Hazlett on the Apple e-books case: The Apple case is a throwback to Dr. Miles, and that’s not a good thing

totmauthor —  16 February 2016

By Thomas Hazlett

The Apple e-books case is throwback to Dr. Miles, the 1911 Supreme Court decision that managed to misinterpret the economics of competition and so thwart productive activity for over a century. The active debate here at TOTM reveals why.

The District Court and Second Circuit have employed a per se rule to find that the Apple e-books agreement with five major publishers constituted a violation of Section 1 of the Sherman Act. Citing the active cooperation in contract negotiations involving multiple horizontal competitors (publishers) and the Apple offer, which appears to have raised prices paid for e-books, the conclusion that this is a case of horizontal collusion appears a slam dunk to some. “Try as one may,” writes Jonathan Jacobson, “it is hard to find an easier antitrust case than United States v. Apple.”

I’m guessing that that is what Charles Evans Hughes thought about the Dr. Miles case in 1911.

Upon scrutiny, the apparent simplicity in either instance evaporates. Dr. Miles has been revised as per GTE Sylvania, Leegin, and (thanks, Keith Hylton) Business Electronics v. Sharp Electronics. Let’s here look at the pending Apple dispute.

First, the Second Circuit verdict was not only a split decision on application of the per se rule, the dissent ably stated a case for why the Apple e-books deal should be regarded as pro-competitive and, thus, legal.

Second, the price increase cited as determinative occurred in a two-sided market; the fact asserted does not establish a monopolistic restriction of output. Further analysis, as called for under the rule of reason, is needed to flesh out the totality of the circumstances and the net impact of the Apple-publisher agreement on consumer welfare. That includes evidence regarding what happens to total revenues as market structure and prices change.

Third, a new entrant emerged as per the actions undertaken — the agreements pointedly did not “lack…. any redeeming virtue” (Northwest Wholesale Stationers, 1985), the justification for per se illegality. The fact that a new platform — Apple challenging Amazon’s e-book dominance — was both cause and effect of the alleged anti-competitive behavior is a textbook example of ancillarity. The “naked restraints” that publishers might have imposed had Apple not brought new products and alternative content distribution channels into the mix thus dressed up. It is argued by some that the clothes were skimpy. But that fashion statement is what a rule of reason analysis is needed to determine.

Fourth, the successful market foray that came about in the two-sided e-book market is a competitive victory not to be trifled. As the Supreme Court determined in Leegin: A “per se rule cannot be justified by the possibility of higher prices absent a further showing of anticompetitive conduct. The antitrust laws are designed to protect interbrand competition from which lower prices can later result.” The Supreme Court need here overturn U.S. v. Apple as decided by the Second Circuit in order that the “later result” be reasonably examined.

Fifth, lock-in is avoided with a rule of reason. As the Supreme Court said in Leegin:

As courts gain experience considering the effects of these restraints by applying the rule of reason… they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints….

The lock-in, conversely, comes with per se rules that nip the analysis in the bud, assuming simplicity where complexity obtains.

Sixth, Judge Denise Cote, who issued the District Court ruling against Apple, shows why the rule of reason is needed to counter her per se approach:

Here we have every necessary component: with Apple’s active encouragement and assistance, the Publisher Defendants agreed to work together to eliminate retail price competition and raise e-book prices, and again with Apple’s knowing and active participation, they brought their scheme to fruition.

But that cannot be “every necessary component.” It is not in Apple’s interest to raise prices, but to lower prices paid. Something more has to be going on. Indeed, in raising prices the judge unwittingly cites an unarguable pro-competitive aspect of Apple’s foray: It is competing with Amazon and bidding resources from a rival. Indeed, the rival is, arguably, an incumbent with market power. This cannot be the end of the analysis. That it is constitutes a throwback to the anti-competitive per se rule of Dr. Miles.

Seventh, in oral arguments at the Second Circuit, Judge Raymond J. Lohier, Jr. directed a question to Justice Department counsel, asking how Apple and the publishers “could have broken Amazon’s monopoly of the e-book market without violating antitrust laws.” The DOJ attorney responded, according to an article in The New Yorker, by advising that

Apple could have let the competition among companies play out naturally without pursuing explicit strategies to push prices higher—or it could have sued, or complained to the Justice Department and to federal regulatory authorities.

But the DOJ itself brought no complaint against Amazon — it, instead, sued Apple. And the admonition that an aggressive innovator should sit back and let things “play out naturally” is exactly what will kill efficiency enhancing “creative destruction.” Moreover, the government’s view that Apple “pursued an explicit strategy to push prices higher” fails to acknowledge that Apple was the buyer. Such as it was, Apple’s effort was to compete, luring content suppliers from a rival. The response of the government is to recommend, on the one hand, litigation it will not itself pursue and, on the other, passive acceptance that avoids market disruption. It displays the error, as Judge Jacobs’ Second Circuit dissent puts it, “That antitrust law is offended by gloves off competition.” Why might innovation not be well served by this policy?

Eighth, the choice of rule of reason does not let Apple escape scrutiny, but applies it to both sides of the argument. It adds important policy symmetry. Dr. Miles impeded efficient market activity for nearly a century. The creation of new platforms in Internet markets ought not to have such handicaps. It should be recalled that, in introducing its iTunes platform and its vertically linked iPod music players, circa 2002, the innovative Apple likewise faced attack from competition policy makers (more in Europe, indeed, than the U.S.). Happily, progress in the law had loosened barriers to business model innovation, and the revolutionary ecosystem was allowed to launch. Key to that progressive step was the bulk bargain struck with music labels. Richard Epstein thinks that such industry-wide dealing now endangers Apple’s more recent platform launch. Perhaps. But there is no reason to jump to that conclusion, and much to find out before we embrace it.

In Amazon, Antitrust & Competition, Apple, Justice Department, Law & Economics, Monopolization, Platforms, Resale Price Maintenance, Symposium on the Apple E-Books Antitrust Case: Implications for Antitrust and for the Economy, Vertical Restraints , , , , , , , , , , , , , , , , , , , ,
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