Archives For rule of law

There is little doubt that Federal Trade Commission (FTC) unfair methods of competition rulemaking proceedings are in the offing. Newly named FTC Chair Lina Khan and Commissioner Rohit Chopra both have extolled the benefits of competition rulemaking in a major law review article. What’s more, in May, Commissioner Rebecca Slaughter (during her stint as acting chair) established a rulemaking unit in the commission’s Office of General Counsel empowered to “explore new rulemakings to prohibit unfair or deceptive practices and unfair methods of competition” (emphasis added).

In short, a majority of sitting FTC commissioners apparently endorse competition rulemaking proceedings. As such, it is timely to ask whether FTC competition rules would promote consumer welfare, the paramount goal of competition policy.

In a recently published Mercatus Center research paper, I assess the case for competition rulemaking from a competition perspective and find it wanting. I conclude that, before proceeding, the FTC should carefully consider whether such rulemakings would be cost-beneficial. I explain that any cost-benefit appraisal should weigh both the legal risks and the potential economic policy concerns (error costs and “rule of law” harms). Based on these considerations, competition rulemaking is inappropriate. The FTC should stick with antitrust enforcement as its primary tool for strengthening the competitive process and thereby promoting consumer welfare.

A summary of my paper follows.

Section 6(g) of the original Federal Trade Commission Act authorizes the FTC “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” Section 6(g) rules are enacted pursuant to the “informal rulemaking” requirements of Section 553 of the Administrative Procedures Act (APA), which apply to the vast majority of federal agency rulemaking proceedings.

Before launching Section 6(g) competition rulemakings, however, the FTC would be well-advised first to weigh the legal risks and policy concerns associated with such an endeavor. Rulemakings are resource-intensive proceedings and should not lightly be undertaken without an eye to their feasibility and implications for FTC enforcement policy.

Only one appeals court decision addresses the scope of Section 6(g) rulemaking. In 1971, the FTC enacted a Section 6(g) rule stating that it was both an “unfair method of competition” and an “unfair act or practice” for refiners or others who sell to gasoline retailers “to fail to disclose clearly and conspicuously in a permanent manner on the pumps the minimum octane number or numbers of the motor gasoline being dispensed.” In 1973, in the National Petroleum Refiners case, the U.S. Court of Appeals for the D.C. Circuit upheld the FTC’s authority to promulgate this and other binding substantive rules. The court rejected the argument that Section 6(g) authorized only non-substantive regulations concerning regarding the FTC’s non-adjudicatory, investigative, and informative functions, spelled out elsewhere in Section 6.

In 1975, two years after National Petroleum Refiners was decided, Congress granted the FTC specific consumer-protection rulemaking authority (authorizing enactment of trade regulation rules dealing with unfair or deceptive acts or practices) through Section 202 of the Magnuson-Moss Warranty Act, which added Section 18 to the FTC Act. Magnuson-Moss rulemakings impose adjudicatory-type hearings and other specific requirements on the FTC, unlike more flexible section 6(g) APA informal rulemakings. However, the FTC can obtain civil penalties for violation of Magnuson-Moss rules, something it cannot do if 6(g) rules are violated.

In a recent set of public comments filed with the FTC, the Antitrust Section of the American Bar Association stated:

[T]he Commission’s [6(g)] rulemaking authority is buried in within an enumerated list of investigative powers, such as the power to require reports from corporations and partnerships, for example. Furthermore, the [FTC] Act fails to provide any sanctions for violating any rule adopted pursuant to Section 6(g). These two features strongly suggest that Congress did not intend to give the agency substantive rulemaking powers when it passed the Federal Trade Commission Act.

Rephrased, this argument suggests that the structure of the FTC Act indicates that the rulemaking referenced in Section 6(g) is best understood as an aid to FTC processes and investigations, not a source of substantive policymaking. Although the National Petroleum Refiners decision rejected such a reading, that ruling came at a time of significant judicial deference to federal agency activism, and may be dated.

The U.S. Supreme Court’s April 2021 decision in AMG Capital Management v. FTC further bolsters the “statutory structure” argument that Section 6(g) does not authorize substantive rulemaking. In AMG, the U.S. Supreme Court unanimously held that Section 13(b) of the FTC Act, which empowers the FTC to seek a “permanent injunction” to restrain an FTC Act violation, does not authorize the FTC to seek monetary relief from wrongdoers. The court’s opinion rejected the FTC’s argument that the term “permanent injunction” had historically been understood to include monetary relief. The court explained that the injunctive language was “buried” in a lengthy provision that focuses on injunctive, not monetary relief (note that the term “rules” is similarly “buried” within 6(g) language dealing with unrelated issues). The court also pointed to the structure of the FTC Act, with detailed and specific monetary-relief provisions found in Sections 5(l) and 19, as “confirm[ing] the conclusion” that Section 13(b) does not grant monetary relief.

By analogy, a court could point to Congress’ detailed enumeration of substantive rulemaking provisions in Section 18 (a mere two years after National Petroleum Refiners) as cutting against the claim that Section 6(g) can also be invoked to support substantive rulemaking. Finally, the Supreme Court in AMG flatly rejected several relatively recent appeals court decisions that upheld Section 13(b) monetary-relief authority. It follows that the FTC cannot confidently rely on judicial precedent (stemming from one arguably dated court decision, National Petroleum Refiners) to uphold its competition rulemaking authority.

In sum, the FTC will have to overcome serious fundamental legal challenges to its section 6(g) competition rulemaking authority if it seeks to promulgate competition rules.

Even if the FTC’s 6(g) authority is upheld, it faces three other types of litigation-related risks.

First, applying the nondelegation doctrine, courts might hold that the broad term “unfair methods of competition” does not provide the FTC “an intelligible principle” to guide the FTC’s exercise of discretion in rulemaking. Such a judicial holding would mean the FTC could not issue competition rules.

Second, a reviewing court might strike down individual proposed rules as “arbitrary and capricious” if, say, the court found that the FTC rulemaking record did not sufficiently take into account potentially procompetitive manifestations of a condemned practice.

Third, even if a final competition rule passes initial legal muster, applying its terms to individual businesses charged with rule violations may prove difficult. Individual businesses may seek to structure their conduct to evade the particular strictures of a rule, and changes in commercial practices may render less common the specific acts targeted by a rule’s language.

Economic Policy Concerns Raised by Competition Rulemaking

In addition to legal risks, any cost-benefit appraisal of FTC competition rulemaking should consider the economic policy concerns raised by competition rulemaking. These fall into two broad categories.

First, competition rules would generate higher error costs than adjudications. Adjudications cabin error costs by allowing for case-specific analysis of likely competitive harms and procompetitive benefits. In contrast, competition rules inherently would be overbroad and would suffer from a very high rate of false positives. By characterizing certain practices as inherently anticompetitive without allowing for consideration of case-specific facts bearing on actual competitive effects, findings of rule violations inevitably would condemn some (perhaps many) efficient arrangements.

Second, competition rules would undermine the rule of law and thereby reduce economic welfare. FTC-only competition rules could lead to disparate legal treatment of a firm’s business practices, depending upon whether the FTC or the U.S. Justice Department was the investigating agency. Also, economic efficiency gains could be lost due to the chilling of aggressive efficiency-seeking business arrangements in those sectors subject to rules.

Conclusion

A combination of legal risks and economic policy harms strongly counsels against the FTC’s promulgation of substantive competition rules.

First, litigation issues would consume FTC resources and add to the costly delays inherent in developing competition rules in the first place. The compounding of separate serious litigation risks suggests a significant probability that costs would be incurred in support of rules that ultimately would fail to be applied.

Second, even assuming competition rules were to be upheld, their application would raise serious economic policy questions. The inherent inflexibility of rule-based norms is ill-suited to deal with dynamic evolving market conditions, compared with matter-specific antitrust litigation that flexibly applies the latest economic thinking to particular circumstances. New competition rules would also exacerbate costly policy inconsistencies stemming from the existence of dual federal antitrust enforcement agencies, the FTC and the Justice Department.

In conclusion, an evaluation of rule-related legal risks and economic policy concerns demonstrates that a reallocation of some FTC enforcement resources to the development of competition rules would not be cost-effective. Continued sole reliance on case-by-case antitrust litigation would generate greater economic welfare than a mixture of litigation and competition rules.

The Internet is a modern miracle: from providing all varieties of entertainment, to facilitating life-saving technologies, to keeping us connected with distant loved ones, the scope of the Internet’s contribution to our daily lives is hard to overstate. Moving forward there is undoubtedly much more that we can and will do with the Internet, and part of that innovation will, naturally, require a reconsideration of existing laws and how new Internet-enabled modalities fit into them.

But when undertaking such a reconsideration, the goal should not be simply to promote Internet-enabled goods above all else; rather, it should be to examine the law’s effect on the promotion of new technology within the context of other, competing social goods. In short, there are always trade-offs entailed in changing the legal order. As such, efforts to reform, clarify, or otherwise change the law that affects Internet platforms must be balanced against other desirable social goods, not automatically prioritized above them.

Unfortunately — and frequently with the best of intentions — efforts to promote one good thing (for instance, more online services) inadequately take account of the balance of the larger legal realities at stake. And one of the most important legal realities that is too often readily thrown aside in the rush to protect the Internet is that policy be established through public, (relatively) democratically accountable channels.

Trade deals and domestic policy

Recently a letter was sent by a coalition of civil society groups and law professors asking the NAFTA delegation to incorporate U.S.-style intermediary liability immunity into the trade deal. Such a request is notable for its timing in light of the ongoing policy struggles over SESTA —a bill currently working its way through Congress that seeks to curb human trafficking through online platforms — and the risk that domestic platform companies face of losing (at least in part) the immunity provided by Section 230 of the Communications Decency Act. But this NAFTA push is not merely about a tradeoff between less trafficking and more online services, but between promoting policies in a way that protects the rule of law and doing so in a way that undermines the rule of law.

Indeed, the NAFTA effort appears to be aimed at least as much at sidestepping the ongoing congressional fight over platform regulation as it is aimed at exporting U.S. law to our trading partners. Thus, according to EFF, for example, “[NAFTA renegotiation] comes at a time when Section 230 stands under threat in the United States, currently from the SESTA and FOSTA proposals… baking Section 230 into NAFTA may be the best opportunity we have to protect it domestically.”

It may well be that incorporating Section 230 into NAFTA is the “best opportunity” to protect the law as it currently stands from efforts to reform it to address conflicting priorities. But that doesn’t mean it’s a good idea. In fact, whatever one thinks of the merits of SESTA, it is not obviously a good idea to use a trade agreement as a vehicle to override domestic reforms to Section 230 that Congress might implement. Trade agreements can override domestic law, but that is not the reason we engage in trade negotiations.

In fact, other parts of NAFTA remain controversial precisely for their ability to undermine domestic legal norms, in this case in favor of guaranteeing the expectations of foreign investors. EFF itself is deeply skeptical of this “investor-state” dispute process (“ISDS”), noting that “[t]he latest provisions would enable multinational corporations to undermine public interest rules.” The irony here is that ISDS provides a mechanism for overriding domestic policy that is a close analogy for what EFF advocates for in the Section 230/SESTA context.

ISDS allows foreign investors to sue NAFTA signatories in a tribunal when domestic laws of that signatory have harmed investment expectations. The end result is that the signatory could be responsible for paying large sums to litigants, which in turn would serve as a deterrent for the signatory to continue to administer its laws in a similar fashion.

Stated differently, NAFTA currently contains a mechanism that favors one party (foreign investors) in a way that prevents signatory nations from enacting and enforcing laws approved of by democratically elected representatives. EFF and others disapprove of this.

Yet, at the same time, EFF also promotes the idea that NAFTA should contain a provision that favors one party (Internet platforms) in a way that would prevent signatory nations from enacting and enforcing laws like SESTA that (might be) approved of by democratically elected representatives.

A more principled stance would be skeptical of the domestic law override in both contexts.

Restating Copyright or creating copyright policy?

Take another example: Some have suggested that the American Law Institute (“ALI”) is being used to subvert Congressional will. Since 2013, ALI has taken upon itself the project to “restate” the law of copyright. ALI is well known and respected for its common law restatements, but it may be that something more than mere restatement is going on here. As the NY Bar Association recently observed:

The Restatement as currently drafted appears inconsistent with the ALI’s long-standing goal of promoting clarity in the law: indeed, rather than simply clarifying or restating that law, the draft offers commentary and interpretations beyond the current state of the law that appear intended to shape current and future copyright policy.  

It is certainly odd that ALI (or any other group) would seek to restate a body of law that is already stated in the form of an overarching federal statute. The point of a restatement is to gather together the decisions of disparate common law courts interpreting different laws and precedent in order to synthesize a single, coherent framework approximating an overall consensus. If done correctly, a restatement of a federal statute would, theoretically, end up with the exact statute itself along with some commentary about how judicial decisions have filled in the blanks differently — a state of affairs that already exists with the copious academic literature commenting on federal copyright law.

But it seems that merely restating judicial interpretations was not the only objective behind the copyright restatement effort. In a letter to ALI, one of the scholars responsible for the restatement project noted that:

While congressional efforts to improve the Copyright Act… may be a welcome and beneficial development, it will almost certainly be a long and contentious process… Register Pallante… [has] not[ed] generally that “Congress has moved slowly in the copyright space.”

Reform of copyright law, in other words, and not merely restatement of it, was an important impetus for the project. As an attorney for the Copyright Office observed, “[a]lthough presented as a “Restatement” of copyright law, the project would appear to be more accurately characterized as a rewriting of the law.” But “rewriting” is a job for the legislature. And even if Congress moves slowly, or the process is frustrating, the democratic processes that produce the law should still be respected.

Pyrrhic Policy Victories

Attempts to change copyright or entrench liability immunity through any means possible are rational actions at an individual level, but writ large they may undermine the legal fabric of our system and should be resisted.

It’s no surprise why some may be frustrated and concerned about intermediary liability and copyright issues: On the margin, it’s definitely harder to operate an Internet platform if it faces sweeping liability for the actions of third parties (whether for human trafficking or infringing copyrights). Maybe copyright law needs to be reformed and perhaps intermediary liability must be maintained exactly as it is (or expanded). But the right way to arrive at these policy outcomes is not through backdoors — and it is not to begin with the assertion that such outcomes are required.

Congress and the courts can be frustrating vehicles through which to enact public policy, but they have the virtue of being relatively open to public deliberation, and of having procedural constraints that can circumscribe excesses and idiosyncratic follies. We might get bad policy from Congress. We might get bad cases from the courts. But the theory of our system is that, on net, having a frustratingly long, circumscribed, and public process will tend to weed out most of the bad ideas and impulses that would otherwise result from unconstrained decision making, even if well-intentioned.

We should meet efforts like these to end-run Congress and the courts with significant skepticism. Short term policy “victories” are likely not worth the long-run consequences. These are important, complicated issues. If we surreptitiously adopt idiosyncratic solutions to them, we risk undermining the rule of law itself.

On October 6, the Heritage Foundation released a legal memorandum (authored by me) that recounts the Federal Communications Commission’s (FCC) recent sad history of ignoring the rule of law in its enforcement and regulatory actions.  The memorandum calls for a legislative reform agenda to rectify this problem by reining in the agency.  Key points culled from the memorandum are highlighted below (footnotes omitted).

1.  Background: The Rule of Law

The American concept of the rule of law is embodied in the Due Process Clause of the Fifth Amendment to the U.S. Constitution and in the constitutional principles of separation of powers, an independent judiciary, a government under law, and equality of all before the law.  As the late Friedrich Hayek explained:

[The rule of law] means the government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to see with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.

In other words, the rule of law involves a system of binding rules that have been adopted and applied by a valid government authority and that embody clarity, predictability, and equal applicability.   Practices employed by government agencies that undermine the rule of law ignore a fundamental duty that the government owes its citizens and thereby weaken America’s constitutional system.  It follows, therefore, that close scrutiny of federal administrative agencies’ activities is particularly important in helping to achieve public accountability for an agency’s failure to honor the rule of law standard.

2.  How the FCC Flouts the Rule of Law

Applying such scrutiny to the FCC reveals that it does a poor job in adhering to rule of law principles, both in its procedural practices and in various substantive actions that it has taken.

Opaque procedures that generate uncertainties regarding agency plans undermine the clarity and predictability of agency actions and thereby undermine the effectiveness of rule of law safeguards.  Process-based reforms designed to deal with these problems, to the extent that they succeed, strengthen the rule of law.  Procedural inadequacies at the FCC include inordinate delays and a lack of transparency, including the failure to promptly release the text of proposed and final rules.  The FCC itself has admitted that procedural improvements are needed, and legislative proposals have been advanced to make the Commission more transparent, efficient, and accountable.

Nevertheless, mere procedural reforms would not address the far more serious problem of FCC substantive actions that flout the rule of law.  Examples abound:

  • The FCC imposes a variety of “public interest” conditions on proposed mergers subject to its jurisdiction. Those conditions often are announced after inordinate delays, and typically have no bearing on the mergers’ actual effects.  The unpredictable nature and timing of such impositions generate a lack of certainty for businesses and thereby undermine the rule of law.
  • The FCC’s 2015 Municipal Broadband Order preempted state laws in Tennessee and North Carolina that prevented municipally owned broadband providers from providing broadband service beyond their geographic boundaries. Apart from its substantive inadequacies, this Order went beyond the FCC’s statutory authority and raised grave federalism problems (by interfering with a state’s sovereign right to oversee its municipalities), thereby ignoring the constitutional limitations placed on the exercise of governmental powers that lie at the heart of the rule of law.  The Order was struck down by the U.S. Court of Appeals for the Sixth Circuit in August 2016.
  • The FCC’s 2015 “net neutrality” rule (the Open Internet Order) subjects internet service providers (ISPs) to sweeping “reasonableness-based” FCC regulatory oversight. This “reasonableness” standard gives the FCC virtually unbounded discretion to impose sanctions on ISPs.  It does not provide, in advance, a knowable, predictable rule consistent with due process and rule of law norms.  In the dynamic and fast-changing “Internet ecosystem,” this lack of predictable guidance is a major drag on innovation.  Regrettably, in June 2014, a panel of the U.S. Court of Appeals for the District of Columbia, by a two-to-one vote, rejected a challenge to the order brought by ISPs and their trade association.
  • The FCC’s abrupt 2014 extension of its long-standing rules restricting common ownership of local television broadcast stations, to encompass Joint Sales Agreements (JSAs) likewise undermined the rule of law. JSAs, which allow one television station to sell advertising (but not programming) on another station, have long been used by stations that had no reason to believe that their actions in any way constituted illegal “ownership interests,” especially since many of them were originally approved by the FCC.  The U.S. Court of Appeals for the Third Circuit wisely vacated the television JSA rule in May 2016, stressing that the FCC had violated a statutory command by failing to carry out in a timely fashion the quadrennial review of the television ownership rules on which the JSA rule was based.
  • The FCC’s February 2016 proposed rules that are designed to “open” the market for video set-top boxes, appear to fly in the face of federal laws and treaty language protecting intellectual property rights, by arbitrarily denying protection to intellectual property based solely on a particular mode of information transmission. Such a denial is repugnant to rule of law principles.
  • FCC enforcement practices also show a lack of respect for rule of law principles, by seeking to obtain sanctions against behavior that has never been deemed contrary to law or regulatory edicts. Two examples illustrate this point.
    • In 2014, the FCC’s Enforcement Bureau proposed imposing a $10 million fine on TerraCom, Inc., and YourTelAmerica, Inc., two small telephone companies, for a data breach that exposed certain personally identifiable information to unauthorized access. In so doing, the FCC cited provisions of the Telecommunications Act of 1996 and accompanying regulations that had never been construed to authorize sanctions for failure to adopt “reasonable data security practices” to protect sensitive consumer information.
    • In November 2015, the FCC similarly imposed a $595,000 fine on Cox Communications for failure to prevent a data breach committed by a third-party hacker, although no statutory or regulatory language supported imposing any penalty on a firm that was itself victimized by a hack attack

3.  Legislative Reforms to Rein in the FCC

What is to be done?  One sure way to limit an agency’s ability to flout the rule of law is to restrict the scope of its legal authority.  As a matter of first principles, Congress should therefore examine the FCC’s activities with an eye to eliminating its jurisdiction over areas in which regulation is no longer needed:  For example, residual price regulation may be unnecessary in all markets where competition is effective. Regulation is called for only in the presence of serious market failure, coupled with strong evidence that government intervention will yield a better economic outcome than will a decision not to regulate.

Congress should craft legislation designed to sharply restrict the FCC’s ability to flout the rule of law.  At a minimum, no matter how it decides to pursue broad FCC reform, the following five proposals merit special congressional attention as a means of advancing rule of law principles:

  • Eliminate the FCC’s jurisdiction over all mergers. The federal antitrust agencies are best equipped to handle merger analysis, and this source of costly delay and uncertainty regarding ad hoc restrictive conditions should be eliminated.
  • Eliminate the FCC’s jurisdiction over broadband Internet service. Given the benefits associated with an open and unregulated Internet, Congress should provide clearly and unequivocally that the FCC has no jurisdiction, direct or indirect, in this area.
  • Shift FCC regulatory authority over broadband-related consumer protection (including, for example, deceptive advertising, privacy, and data protection) and competition to the Federal Trade Commission, which has longstanding experience and expertise in the area. This jurisdictional transfer would promote clarity and reduce uncertainty, thereby strengthening the rule of law.
  • Require that before taking regulatory action, the FCC carefully scrutinize regulatory language to seek to avoid the sorts of rule of law problems that have plagued prior commission rulemakings.
  • Require that the FCC not seek fines in an enforcement action unless the alleged infraction involves a violation of the precise language of a regulation or statutory provision.

4.  Conclusion

In recent years, the FCC too often has acted in a manner that undermines the rule of law. Internal agency reforms might be somewhat helpful in rectifying this situation, but they inevitably would be limited in scope and inherently malleable as FCC personnel changes. Accordingly, Congress should weigh major statutory reforms to rein in the FCC—reforms that will advance the rule of law and promote American economic well-being.